We maintain the TP at HK$23.80 and the investment rating as "Buy". Considering strong demand in the server and storage market brought about by strong demand for computing power of artificial intelligence (AI), as well as ZTE's (the "Company") in-depth expansion in various fields of the second curve business, we maintain the TP at HK$23.80 and the investment rating as "Buy". The TP represents 10.5x/ 9.5x/ 8.2x 2024-2026 PER.
ZTE's 1QFY2024 results were in line with our expectations. According to PRC Accounting Standards for Business Enterprises (ASBEs), operating revenue in 1QFY2024 increased by 4.9% yoy to RMB30,578 million. Gross profit margin of the Company decreased by 2.5 ppts yoy to 42.0%. Shareholders' net profit increased by 3.7% yoy to RMB2,741 million, while shareholders' net profit after extraordinary items increased by 7.9% yoy. R&D expenses to total revenue increased by 0.5 ppt yoy to 20.9%. We believe that strong R&D investment may ensure the Company's leading-edge advantage in the ICT technology and equipment market.
Taking connectivity as the foundation, the Company continues to innovate and expand. Relying on its strong underlying capabilities with chips, algorithms, and architecture, the Company is in a leading position in both wireless and fixed networks, and is expected to maintain a leading position in next generation ICT technologies such as 5G-A, all-optical networks, and 6G.
? The Company is expected to expand the field of intelligent computing continuously. ZTE expands the market in second curve fields such as general computing, intelligent computing, and large models. The Company has launched general computing and intelligent computing servers, high-performance storage, AiCube training and inference integrated cabinet, 400G/ 800G high-performance data center switches, Nebulas large models, etc. The Company's continuous R&D investment and integration of AI with its product ecosystem are expected to promote the development of its computing power business.
? Catalysts: Quicker-than-expected growth within different business areas in the second curve; the explosion of AI demand on the mobile user side.
? Risks: Risk of Sino-US trade friction; weaker-than-expected demand from government and corporate customers.