Incidents:

ZTE released its report for the first quarter of 2024. The report shows that from January to January 2024, the company achieved operating income of 30.58 billion yuan, an increase of 4.9% year on year; net profit to mother of 2.74 billion yuan, up 3.7% year on year; net profit after deducting non-return to mother of 2.65 billion yuan, an increase of 7.9% year on year.

Steady growth in revenue and profit in a single quarter

The company had a steady start in 2024, achieving a 4.9% year-on-year increase in revenue in a single quarter. Looking at the three major markets, in the operator market, domestic companies are speeding up the shift from full connectivity to “connection+computing power”, and overseas companies are actively expanding their customers; in the consumer and government enterprise markets, the company's active expansion is accompanied by a gradual recovery in demand, and both business revenues have returned to a rapid growth trajectory.

Resilient management and continuous improvement of financial statements

In 24Q1, the company achieved a 3.7% year-on-year increase in net profit and a 7.9% year-on-year increase after deducting non-net profit. At the same time, in terms of profitability, gross margin remained stable, with a gross profit margin of 42.02% in Q1, a marked increase from month to month; at the same time, net profit margin achieved 9.03%, a slight increase of 0.06 pct year over year, a significant month-on-month improvement, and achieved good results in terms of cost control (sales expense ratio and management expense ratio both decreased 0.80 pct year on year).

In terms of cash flow, the company's net operating cash flow in Q1 reached 2.98 billion yuan, an increase of 28.3% over the previous year.

The company's operations are resilient, and the quality of reports is constantly improving.

Continue to increase research and development, and seize the connection+computing power industry opportunities

The company spent 6.38 billion yuan on R&D in the first quarter, accounting for 20.9% of revenue, and continued to provide strong impetus for business innovation and product competitiveness. 1) Under the wave of AI, ZTE is seizing opportunities in the computing power industry and has released products such as serial servers compatible with mainstream chips at home and abroad, 100G and 200G network cards produced nationwide, high-performance storage, training and promotion of all-in-one computers, and 400G/800G high-performance data center switches. At the same time, the company launched the Nebula Big Model, which combines self-research and ecological cooperation. It uses the “1+N+X” strategy to improve the efficiency of internal R&D and accelerate the digital transformation of the industry externally. 2) In terms of connectivity, the company continues to evolve around next-generation ICT technologies such as 5G-A, all-optical networks, and 6G.

We are deeply involved in algorithms and chips in 5G-A, and are deeply involved in the formulation of global 5G-A standards; at the same time, we also seize market opportunities such as optical access gigabit upgrades and 400G OTN optical transmission. We believe that the company has outstanding product competitiveness, continues to increase R&D, deepens the “connection+computing power” business layout, and has the ability to develop self-developed chips, enabling the company to continue to maintain strong competitiveness and inject steady growth momentum.

Profit forecasting and investment advice

Overall, ZTE's overall operations have remained steady, profits continued to grow rapidly, and 5G share remained leading. At the same time, it ushered in huge changes in AI technology, connection+computing power opened up room for long-term growth. Affected by the overall international situation, we adjusted net profit to mother for 24-26 to be 103/114/125 billion yuan (previous value was 107/120/13.4 billion yuan), corresponding to the current 24-26 PE of 13/12/11 times, respectively. Maintain a “buy” rating.

Risk warning: macropolitical risk, risk of impairment, risk of computing power development falling short of expectations, risk of operator base station construction pace, country risk and intellectual property risk, etc.