Incident: The company released its 2024 three-quarter report. From January to September 2024, the company achieved operating income of 90.045 billion yuan, up 0.73% year on year; net profit to mother of 7.906 billion yuan, up 0.83% year on year; net profit after deducting non-return to mother of 6.898 billion yuan, down 2.86% year on year.

Comment:

The quarterly results for Q3 '24 fell short of expectations: the company achieved revenue of 27.557 billion yuan, down 3.94% year on year; net profit to mother was 2.174 billion yuan, down 8.23% year on year; net profit after deducting back to mother was 1.935 billion yuan, down 11.73% year on year; gross margin was 40.35%, down 4.28 pct year on year. The year-on-year decline in revenue and profit is mainly due to operator business being pressured by the decline in operators' capital expenditure.

In the connectivity sector, the company continues to lead key products in the wireless and wired markets. According to the latest data from telecom consulting agencies, the company has the highest cumulative delivery volume of 5G base stations and 5G core networks in the world, the market share of fixed network products is second in the world, and RAN products, 5G core networks, and 5G optical transmission have been rated by industry leaders. Regarding the commercial deployment and implementation of 5G-A, ZTE and operators have carried out full-scenario technological innovation and cooperation to jointly build a “space-space integrated” 5G-A global three-dimensional network, stimulate new business vitality on terrestrial, low-altitude and high-altitude tracks, and promote the new development of satellite Internet. Among them, joint partners in the field of low-altitude economy have verified the application of 5G-A sensing integration in various scenarios such as logistics distribution and low-altitude safety in more than 80 pilots in 25 provinces and cities, including Beijing, Nanjing, and Shenzhen. In addition, the company launched an 800G OTN pluggable solution to achieve a transmission distance of 2,000 km, and released a new generation of intelligent optical access products based on 50G PON technology to provide users with a 10 gigabit access experience and help the industry enter the 10 gigabit optical network era.

In the field of computing power, the company determines intelligent computing as the main channel for long-term strategy, providing full-stack, full-scenario intelligent computing solutions.

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. The company focuses on integrated infrastructure delivery and engineering services for large-scale model training and application, and promotes the implementation of multi-industry intelligent computing infrastructure construction projects in many places.

Profit forecast, valuation and rating: Taking into account the decline in operator business sentiment and the company's performance in the first three quarters of 24, the company's net profit for 24-25 was lowered to 9.529 billion (-22%, same below) /10.224 billion yuan (-30%), and the net profit forecast for 26 years was added to 11.43 billion yuan, and the corresponding PE for 24-26 was 15X/14X/13X. We continue to be optimistic about the company's market prospects as one of the world's top four major equipment vendors against the backdrop of digital China construction and high demand for AI computing power, maintaining the company's “buy” rating.

Risk warning: risk of falling operators' capital expenditure, AI computing power demand falling short of expectations, Sino-US technology game.