Friedrich: Downgraded ZTE's target price to HKD 25.71, third-quarter performance far below expectations

Credit Suisse released a research report stating that ZTE's valuation is too high, maintaining a "Underperform" rating. After the stock price rose by 100%, ZTE is now trading at a forecasted price-to-earnings ratio of 24 times for 2025, corresponding to a compound annual growth rate of negative 6.5% in earnings per share. The bank's net profit forecasts for 2026 and 2027 are 35% and 48% lower than market consensus, respectively. The bank believes there is a risk of valuation downgrades as investors' optimistic expectations for new businesses are difficult to realize. The target price has been lowered from HKD 27.27 to HKD 25.71. Credit Suisse pointed out that ZTE reported a year-on-year revenue growth of 5%, a core operating profit decline of 115%, and a net profit decline of 88% for the third quarter of 2025, significantly below market expectations. The gross margin fell from 40% to 26% year-on-year, leading to a 33% decline in gross profit. This was due to delays in the delivery of telecommunications equipment, causing some operators' revenues to be deferred from the third quarter to the fourth quarter, as well as weak telecommunications demand. Therefore, the bank expects an improvement in gross margin in the fourth quarter. However, overall, as Chinese telecommunications companies further cut capital expenditures, high-margin telecommunications revenues may see a double-digit decline in 2025. The bank does not see new business areas (servers, switches) providing sufficient offset