Both A-shares and H-shares fell, why is ZTE's performance under pressure?
On October 22, $ZTE(00763.HK), a company that once made it to the "Top 100 Hong Kong Stocks" list, saw its H-shares drop by more than 8%. At the same time, $ZTE(000063.SZ)'s A-shares also faced similar pressure, with the stock price falling by more than 5%.
Amid the sharp decline in ZTE Corporation's stock price, other Hong Kong-listed communication equipment concept stocks such as China Tower, Comba Telecom, and China Communications Services also performed poorly.
The significant decline in ZTE Corporation's H-shares and A-shares is closely related to its latest earnings report.
Q3 Earnings Fall Short of Market Expectations
After the market closed on October 21, ZTE Corporation released its Q3 2024 earnings report.
The report showed that in the first three quarters, ZTE Corporation achieved revenue of 90.04 billion yuan, a year-on-year increase of 0.73%; net profit attributable to shareholders was 7.91 billion yuan, a year-on-year increase of 0.83%.
In the third quarter, ZTE Corporation's revenue was 27.56 billion yuan (RMB, same below), a year-on-year decrease of 3.94%, and a quarter-on-quarter decrease of 14%; net profit attributable to shareholders was 2.17 billion yuan, a year-on-year decrease of 8%, and a quarter-on-quarter decrease of 27%.
According to institutional analysis, ZTE Corporation's Q3 performance fell short of expectations, mainly due to pressure on revenue from the operator segment and fluctuations in profitability.
On October 22, BOC International released a report stating that ZTE Corporation's Q3 revenue decreased by 3.9% year-on-year, and net profit decreased by 8.2% year-on-year, falling short of the bank's expectations.
Citigroup's report pointed out that ZTE Corporation's Q3 revenue fell 4% year-on-year to 27.6 billion yuan, 16% lower than market consensus. This was mainly dragged down by the domestic telecom network business, as telecom operators reduced capital expenditures, even though the international telecom operator network business may maintain double-digit year-on-year growth, and the enterprise and consumer businesses may maintain strong year-on-year growth.
The pressure on the operator business was due to the decline in capital expenditures by operators.
As the peak of 5G investment passed, $CHINA MOBILE(00941.HK)'s capital expenditures continued to shrink. In the first half of 2022, 2023, and 2024, capital expenditures were 92 billion yuan, 81.4 billion yuan, and 64 billion yuan, respectively. The full-year capital expenditure plan for 2024 is 173 billion yuan, a year-on-year decrease of 4%.
In addition, in the first half of 2024, China Telecom (00728.HK) and China Unicom (00762.HK) had capital expenditures of 47.2 billion yuan and 23.9 billion yuan, respectively, compared to 41.6 billion yuan and 27.59 billion yuan in the same period last year.
Overall, the capital expenditures of the three major operators have been shrinking in recent years, which will undoubtedly negatively impact the performance of communication equipment solution providers.
Similar to ZTE Corporation, $CHINACOMSERVICE(00552.HK) and $CHINA TOWER(00788.HK) also saw their performance affected by the decline in operator capital expenditures.
Looking Ahead, Investment Banks and Brokerages Remain Optimistic
Notably, investment banks and brokerages remain relatively optimistic about the future development of communication equipment companies, including ZTE Corporation and China Tower.
After the earnings release, Huatai Securities published a research report stating that it is optimistic about ZTE Corporation's ability to maintain competitiveness in its first-curve business (wireless and wired products) while accelerating the expansion of its second-curve business (represented by computing power).
The report highlighted three key points: 1) In the operator network sector, as domestic 5G construction enters a stable phase, ZTE Corporation will focus on innovative directions such as 5G-A, integrated sensing and communication, and all-optical networks to explore new growth points; 2) In the enterprise sector, the company will deepen cooperation with leading clients and continue to expand the market for computing power products such as servers, storage, and switching chips and equipment; 3) In the consumer business sector, ZTE Corporation is expected to build an AI-driven multi-terminal intelligent interconnection ecosystem.
BOC International revealed in its research report that China Telecom recently announced ZTE Corporation as the top supplier of AI/general-purpose servers, reaffirming the company's future growth.
Regarding other communication equipment operators, Nomura believes that although the telecom industry is in a capital expenditure downturn, China Tower's core business remains stable, and profit growth may rise due to lower depreciation costs, as the company's depreciation period may gradually expire starting from Q4 2025.
Major List to Be Released Soon: Will ZTE Corporation Make the Cut Again?
Although ZTE Corporation's current performance has not fully met market expectations, its overall strength and future development prospects remain promising.
Currently, ZTE Corporation is one of the world's leading comprehensive communication manufacturers and solution providers. It has repeatedly made it to the "Top 100 Hong Kong Stocks" list and achieved excellent results in such evaluations, demonstrating its strong competitiveness and high market recognition.
The 2024 Hong Kong Listed Companies Development Summit Forum and the 11th "Top 100 Hong Kong Stocks" Awards Ceremony, hosted by the Top 100 Hong Kong Stocks Research Center and co-organized by Caijinghua and Futu An'e, with support from media institutions such as Hong Kong Ta Kung Wen Wei Media Group, will be held at the Hong Kong Convention and Exhibition Center on the afternoon of November 11, 2024.
Given ZTE Corporation's long-standing stable operating performance, the company is expected to join other outstanding industry players such as China Tower and China Communications Services to represent the Hong Kong-listed communication equipment and solution provider sector in the 11th "Top 100 Hong Kong Stocks" list and achieve outstanding performance.
It is reported that the Top 100 Hong Kong Stocks Research Center, based in the Greater Bay Area, has been committed to promoting financial innovation and development. The "Top 100 Hong Kong Stocks" list has become one of the value benchmarks and investment indicators in the Hong Kong capital market. The event annually selects Hong Kong-listed companies with good development and investment value through accurate data and a series of scientific evaluation criteria, releasing the list and presenting awards.
The "Top 100 Hong Kong Stocks" Awards Ceremony has become an important platform for communication in the Hong Kong capital market, witnessing the deep integration and prosperous development of Hong Kong and mainland economies. It will continue to promote the healthy development of the Hong Kong capital market and maintain Hong Kong's status as an international financial center.
Author: Ming Xi
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