UBS downgraded China Communications Services to "Neutral," citing challenges in operational outlook

UBS published a research report indicating that China Communications Services (00552.HK) faced challenges in its operating outlook as reflected in its performance in the first half of the year, with profit margins declining due to macro headwinds and changes in revenue structure. Telecom operators reduced spending, but China Communications Services maintained stable revenue and net profit by expanding non-telecom customer bases and controlling costs.

However, UBS believes that the adoption of artificial intelligence by clients is driving a shift in its business structure from outsourcing to application development, which means that China Communications Services' short-term profit margins will be under pressure. Due to its lower business outlook resilience and relatively high valuation, UBS downgraded its investment rating from "Buy" to "Neutral." UBS currently still prefers Chinese telecom stocks and China Tower (00788.HK), raising its revenue forecasts for China Communications Services for 2025 to 2027 by 1% to 2% to reflect expectations for growth in non-operator business, but lowering its profit forecasts by up to 2%. The target price was raised from 5 yuan to 5.3 yuan