Morgan Stanley's report indicates that the second-quarter revenue of mainland telecommunications stocks is weak but profitable, while revenue and profits of Zhongxing (00763.HK) and Iron Tower (00788.HK) may remain steady.
The bank believes that due to the pressure caused by the weak macro economy on new digital businesses (such as cloud and datacenter(IDC) businesses), the service revenue growth of China Mobile (00941.HK), China Telecom (00728.HK) and China Unicom (00762.HK), the three major telecom operators in mainland China, is expected to slow down. From the first quarter's YoY growth of 5%, 4%, and 3%, it slowed down to 2%, 3%, and 3% in the second quarter. It is expected that telecom operators will offset revenue growth pressure through strict cost control, and the bank expects that the profit growth of China Mobile and China Unicom will remain at 5% and 10% YoY, respectively. However, it is expected that China Telecom's net profit will slow down from 8% YoY in the first quarter to 6% YoY in the second quarter.
The bank reiterated its "buy" rating (target price in another table) on the three major telecom stocks in mainland China. China Mobile is the first choice, followed by China Unicom, and finally China Telecom. The bank is bullish on China Mobile's yield reaching 7% and its average annual compound dividend growth rate reaching 7%; it has high defensive capabilities in fluctuating markets. Compared with China Telecom and China Unicom, China Mobile's stock price has underperformed, and has the potential for catch-up.
In addition, the bank upgraded Zhongxing H shares from "shareholding" to "neutral", believing that the company's performance in government, enterprise, and consumer business may exceed expectations or offset the weakness of mainland base station business, thereby promoting stable growth in revenue and profit in the second quarter. As for Iron Tower, the bank expects its second-quarter performance to remain steady, and the management's financial arrangements after 2026 are expected to be minimal. The bank maintains its "neutral" rating on it.