Investment summary

The connection to the basic disk is stable, and the expansion of the computing power business is accelerated. The company has complete, end-to-end solutions for the ICT industry, and its products cover the fields of “high-speed networks, computing power infrastructure, digital energy, terminals”, etc. At present, the communications network equipment vendor industry has formed an oligopoly pattern, and overall competition is stabilizing. As of 2023, ZTE's global market share reached 13.9%, ranking fourth in the world and second in China. In recent years, the company has established a second-curve development strategy and actively expanded second-curve products such as servers, data centers, switches, and 5G industry applications. 24H1 government business and consumer business revenue increased 56.09% and 14.28% year-on-year respectively, mainly due to the increase in revenue from servers, storage, home terminals and mobile phone products. The two major sectors are showing significant strength.

The replacement of 5G-A equipment brings incremental space, and the pace of high-speed optical network recruitment is expected to accelerate. The company's traditional network leadership position is stable. It has been rooted in the domestic operator market for many years, and is expected to seize structural opportunities in the connectivity business. 1) The 5G-A standard version is frozen, and the first year of commercialization has arrived. The promotion of 5G-A will bring room for replacement of high-performance devices. For example, 5G-A integrated sensing antennas have doubled the number of antenna units compared to traditional 5G antennas; network devices such as BBU need to increase corresponding processing capacity and RF interfaces. Currently, the unit price of a base station that supports integrated sensing is three times that of an ordinary 5G base station. 2) In order to meet the high bandwidth requirements of DC connectivity, 400G OTN all-optical networks are imperative. The operator will be deployed in stages, gradually extending from the backbone network to the regional network. China Mobile plans to fully realize 400G high-speed interconnection of the eight “East Digital and Western Computing” national hub clusters by 2024, and fully deploy all computing power hub nodes in 2025. Referring to the mobile 100G OPN procurement pace, we believe that procurement volume will gradually increase.

Demand for high computing power continues to seize industrial opportunities. 1) Domestic intelligent computing centers are being implemented at an accelerated pace, operators' capital expenditure is skewed towards computing power, and the industry remains booming. ZTE provides a full range of server products. It has the highest X86 server market share and the leading telecom market share. At the same time, the products are widely used in the financial industry and mainstream domestic Internet companies on a large scale. 2) The subsidiary ZTE Micro products cover all fields of “cloud, pipeline, and terminal” in the ICT industry to support the group's business. In 2020, ZTE stated that its 7-nanometer chips have achieved large-scale mass production, and 5-nanometer chips are being introduced into the technology; ZTE Everest hashrate chips successfully entered China Mobile's 2024 PC server product collection project (standard package 22). The 22nd package has a total of 6173 servers, amounting to 0.381 billion. We believe that the company has stable customer resources, has been deeply involved in the chip industry for many years, and is expected to seize opportunities in the computing power industry and achieve a new round of growth.

Investment advice

ZTE is the world's leading provider of integrated communication and information solutions. Based on the connectivity business, it is expanding the computing power product market, and its performance is expected to grow steadily. The company's 2024-2026 revenue is expected to be 126.953/133.57/142.918 billion yuan, and net profit to mother is 9.632/10.003/10.502 billion yuan. First coverage, giving a “buy” rating.

[? Ta BLE Wind _ RIS Insurance KW Tear Arn Shing]

The international situation is turbulent; industry competition intensifies; gross margin exceeds expectations; market share is declining.