Incident: The company released the “Report for the Third Quarter of 2024” on October 21. From January to September 2024, the company achieved operating income of 90.045 billion yuan, up 0.73% year on year; net profit attributable to shareholders of listed companies was 7.906 billion yuan, up 0.83% year on year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 6.898 billion yuan, a decrease of 2.86% year on year.

Accurate, pragmatic and steady management to accelerate technological and market innovation. In the first three quarters of 2024, the company's overall operations remained steady. The domestic operators' network business was under overall pressure due to the impact of the investment environment. The international market continued to break through the Big Power's T and maintain double-digit growth. At the same time, the company's consumer and government business have both achieved rapid growth. The company's gross sales margin for the first three quarters was 40.43%, down 3.24 percentage points year on year. This is expected to be due to changes in revenue structure. The company spent 18.64 billion yuan on R&D in the first three quarters, accounting for 20.7% of revenue. It promoted technological innovations such as 5G-A, all-optical networking, and full-stack intelligent computing, accelerated deep integration and application implementation with thousands of industries, and provided strong support for accelerating the development of new quality productivity.

Deepening “connection+computing power” helps AI become realistic. In the field of connectivity, ZTE continues to lead the way in key products in the wireless and wired markets. In the field of computing power, the company determines intelligent computing as the company's long-term strategic main channel, provides full-stack, full-scenario intelligent computing solutions, and creates an open, inclusive and prosperous intelligent computing ecosystem. In terms of intelligent computing infrastructure and platform technology, a “one-machine, multi-core” open architecture AI server was launched, compatible with mainstream GPUs, and 2*200G network cards were launched based on self-developed chips; promoted the OLink high-speed bus interconnection standard, and developed high-capacity switching chips to conduct research in forward-looking technology such as ultra-10,000 card cluster core technology, native computing power, long-distance interconnection of intelligent computing centers, and intelligent distribution of inference tasks. According to the “Announcement of Winning Candidates for the China Telecom Server (2024-2025) Centralized Procurement Project” announced recently, the company was one of the winning candidates for Bid Package 1 (5th), Standard Package 2 (1st), Standard Package 3 (4th), and Standard Package 7 (1st). The computing power business has become a new driving force for the company's revenue growth.

Investment advice: ZTE adheres to its ecological position as a “road builder for the digital economy”, continuously consolidating the first curve business represented by traditional wireless and wired products, and rapidly boosting the second curve business represented by servers, storage, terminals, digital energy, automotive electronics, etc. ZTE is a scarce ICT technology giant in the world that can provide a full range of end-to-end solutions from low-level technologies such as microelectronics, databases, and operating systems to equipment products such as telecommunications, digital communication, computing power, storage, modules, and terminals. We expect the company's net profit to be 9.466 billion yuan/9.974 billion/ 10.612 billion yuan respectively in 2024-2026, with corresponding growth rates of 2%/5%/6%, corresponding to PE 16.0X/15.2X/14.3X, respectively, maintaining a “highly recommended” investment rating.

Risk warning: Downstream capital expenditure fluctuation risk, macroeconomic cycle risk, international environmental change risk.