For the full year of 2023, ZTE achieved revenue of 124.25 billion yuan (+1.1% YoY), net profit to mother of 9.33 billion yuan (+15.4% YoY), after deducting non-net profit of 7.40 billion yuan (+20.0% YoY). 2023 Q4 revenue was $34.86 billion (YoY +14.7%), and net profit to mother was $1.49 billion (+17.8% YoY).
Looking at the main business, the operator business is developing steadily, and the government, enterprise, and consumer businesses are facing challenges. The company's operator network business accounted for 66.6% of revenue in 2023. The revenue from this business increased 3.4% year on year. The company continues to consolidate its leading position in technology, and the market pattern in this field is steadily improving. Government and enterprise business accounted for 10.9% of revenue. This business decreased by 7.1% year on year, mainly due to reduced revenue from domestic integrated projects, data centers, and international markets. The consumer business accounted for 22.5% of revenue. This business decreased by 1.3% year on year, mainly due to a decrease in revenue from international home terminals and international mobile phone products. Furthermore, the share of domestic and international business in revenue remained essentially the same as compared to the same period last year.
In terms of cost, gross margin has been rising steadily, and investment in R&D is still high. The company's comprehensive gross margin in 2023 was 41.53%, up 4.34pct year on year, mainly due to significant optimization and improvement in gross margin from government business (gross margin increased by 9.59 pct year on year) and consumer business (gross margin increased 4.50 pct year over year). In terms of expenses, the company's R&D, sales and management expenses in 2023 were 20.4%, 4.5%, and 8.2%, respectively. Among them, the management cost rate and sales expense ratio were basically the same year on year, and the management efficiency was stable; R&D expenses increased 17% year over year, and the R&D cost rate increased by 2.78 pct year on year, focusing on technical fields such as 5G-related products, chips, servers and storage, and innovative businesses.
The company positions maintaining growth in 2024 as its top priority, and continues to strengthen the “connection+computing power” strategic direction.
(1) In the first curve business, which mainly focuses on “connectivity,” it maintains its core competitiveness in the wireless and wired fields. According to the Dell'Oro Group report, the company's 5G base station shipments rank second in the world for four consecutive years. In 2024, the company plans to continue to strengthen the evolution of 5G-A/6G technology, deepen cooperation with leading customers in the Internet and financial industries, seize the reconstruction window period of Xinchuang and power communication networks in the power industry, and seize the opportunity to upgrade gigabit optical network terminals. (2) In the second curve business represented by “computing power,” based on software and hardware research and development capabilities in the communication field accumulated over many years, investment was increased in the fields of computing power infrastructure, software platforms, large models and applications, etc., and a three-dimensional layout was carried out to strengthen product and solution innovation around servers, data center switches, data centers, distributed databases, etc., and accelerate the deepening expansion from connectivity to computing power. The company's full range of servers support liquid cooling and heterogeneous acceleration. The next-generation switches support 400G/800G and have single-slot 14.4T capability.
Risk warning: 5G development falls short of expectations; industrial digital demand is slowing down; computing network deployment falls short of expectations.
Investment advice: The company will accelerate its expansion to computing power in 2024, and the overall operation is steady and resilient. The company's net profit for 2024-2026 is estimated to be 103/110/11.5 billion yuan, respectively. The PE corresponding to the current stock price is 14/13/13X, respectively, maintaining a “buy” rating.