ZTE announced FY20 preliminary results with revenue/net profit growth of +11.7% /-15.3% YoY, largely in-line with our/consensus estimates, thanks to solid growth across all segments, share gain in China and improving profitability overseas. By 4Q20, revenue/net profit grew 3%/62% YoY to RMB27.3bn/1.66bn. In a mixed backdrop of global 5G deployment and macro uncertainties, we believe ZTE is well positioned to seize the opportunities from “New Infrastructure” initiative and 5G network upgrade amid Huawei uncertainties. We slightly revised our forecasts and raised our TP to RMB41.7 based on same 31.2x FY21E P/E. Catalysts include 5G BTS tenders and 2021 operator capex budget.
- FY20 largely in-line; Solid growth across all segments. Despite challenges from COVID-19 and macro uncertainties, ZTE achieved sales growth of 11.7% YoY in FY20E, driven by solid growth from both domestic and overseas markets and all three business segments (carrier’s network, consumer business and government/corporate business). Net profit declined 15.3% YoY in FY20, mainly due to one-time asset disposal gain in 3Q19.
- Improving operating and financial metrics. ZTE reported record-high operating cashflow of RMB10.23bn in FY20E, up 37.4% YoY, while gearing ratio improved to 69.5% from 73.1% in FY19. We believe ZTE will continue to improve its working capital and optimize balance sheet structure.
- Major beneficiary of global 5G deployment. As we believe Chinese operators will kick off next 5G BTS tender in 1Q21E, we expect 5G BTS net-adds to reach 800k/1mn (including CBN) in FY21E/22E and ZTE’s 5G market share in China will gradually ramp to 35% (vs 30% in FY20). Thanks to global economic recovery and resumption of 5G BTS rollout post COVID-19, we expect domestic/overseas revenue from carrier’s network to grow at 9%/18% CAGR during FY21-23E.
- Reiterate BUY; Lift TP to RMB41.7. We adjusted our forecasts to reflect better operating leverage and new FX assumptions. We slightly raised our target price to RMB41.7 based on same 31.2x FY21E P/E, in line with 2-year historical forward P/E. Trading at 25.5x FY21E P/E (1-sd below 2-year avg.), we think the stock is attractive, vs 26% EPS FY21-23E CAGR. Risks include US-China disputes, component restriction and 5G deployment delays.
