Big models empower the smartphone business and create personalized AI products and services. On October 14, 2024, ZTE and China Mobile jointly released the first 1,000 yuan mobile phone supporting the “Nine Days · Zhongqing Dock Big Model” — the ZTE Comfort 60 Plus. Users can use the AI voice assistant to use the “Nine Days · Zhongjing Dock Big Model” to bring users a series of AI experiences, including text generation, translation assistant, image generation, text summary, etc. On November 21, 2024, ZTE and China Telecom collaborated deeply to officially release the Nubia Z70 Ultra phone. The cloud integrated China Telecom Star AI model has a 100 billion cloud side large model and a 3 billion terminal side model, forming a matrix of multiple large models such as natural language, voice, video, vision, performance, and multi-modality. The integration of artificial intelligence technology into smartphones has become a new hot spot for technological innovation in the mobile phone industry. Adhering to the strategy of differentiated innovation and cost leadership, ZTE proposed “AI for All” and laid out a full range of AI terminals, which is expected to benefit the core.

Deepening “connection+computing power” helps AI become realistic. 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. ZTE has launched self-developed box switches, frame switches, and switching chips of various capacities. It supports flexible networking of various types of switch products, and can build intelligent computing center networks of any size of 100 cards, kilocalories, and over 10,000 cards to flexibly meet 100GE, 200GE, and 400GE networking requirements. According to the “Announcement on Winning Candidates for the China Telecom Server (2024-2025) Centralized Procurement Project” announced recently, the company is 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%, and corresponding PE 17.5X/16.6X/15.6X respectively, maintaining a “highly recommended” investment rating.

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