ZTE reported in-line FY20 results and a strong 1Q21 earnings guidance of 130-208% YoY. 1Q21 NP mid-point of RMB2.1bn is 34%/36% of our/consensus 2021 NP estimates. Excluding one-off gain of RMB774mn, 1Q net profit would grow 70% YoY, mainly driven by solid telco revenue and GPM recovery. Following discussion with mgmt., we continue to like ZTE for global share gain and margin recovery, given Huawei uncertainties and Nokia’s continued share loss. Reiterate BUY with TP HK$28.1 (17.5x FY21E P/E). Upcoming catalysts include 3rd batch of 5G BTS tenders and overseas share gain.
- FY20 in-line; Expect 15% revenue growth with GPM recovery in FY21E. Despite challenges from COVID-19 and macro uncertainties, ZTE delivered solid revenue growth of 11.8% YoY in FY20 and a strong 1Q21 earnings guidance of 130-208% YoY. For 2021, we believe ZTE will continue to benefit from share gain/5G rollout in China, 4G upgrade in Asia and optical network upgrade in Europe. We expect 5G BTS ASP is likely to remain stable for 3.5GHz/2.6GHz BTS but will be slightly lower for CM/CBN’s 700MHz network. We expect revenue to grow at 15% YoY in FY21E, mainly driven by domestic carrier business (+16%) and gov./enterprise business (+24%). We also expect GPM to improve to 33.9% vs. 31.6% in FY20, thanks to improving cost structure and self-developed chips from Sanechip.
- Major beneficiary of global 5G deployment. We expect next batch of 5G BTS tender to kick off in late March/April, and we estimate China telco capex in 2021 will grow at mid-to-low single digit. Total 5G BTS net-add will reach 700k-800k in 2021 (vs. 600k in 2020), as CU/CT announced 320k net-add and CM/CBN will add 400k unit for 700MHz network. We think ZTE’s 5G market share in China will expand to 35% in 2021/22 (vs 31% in 2020), given ZTE’s stronger product positioning and cost advantage for 5G network rollout in 2nd/3rd tier cities in 2021.
- Reiterate BUY with TP of HK$28.1. We maintain our target price at HK$28.1 based on 17.4x FY21E P/E, in line with 2-year historical forward P/E. The stock is now trading at 13.5x FY21E P/E (1-sd below 2-year avg.). We think the stock is attractive, compared to 20% EPS FY21-23E CAGR. Near-term catalysts are 3rd batch of 5G BTS tenders in China. Risks include US-China disputes, component restriction and 5G deployment delays.
