April 29, 216 ZTE Corporation [763.HK] Q1 216 results weakness on US export ban. ZTE Corporation (ZTE) reported decent Q1 216 results despite the impa

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1 中兴通讯 [763.HK] 第一季业绩受累美国出口禁令尽管受到出口禁令的影响, 中兴通讯的 216 年第一季业绩良好我们预期公司的经营业绩将逐步改善, 这是由于 : 一 ) 美国出口禁令带来的影响下降 ; 二 ) 手机出货量回升 ; 三 ) 成本控制得更好相对市场谨慎的看法, 我们对中兴通讯的看法较为正面, 因为市场消息指出美国政府不太可能对中兴通讯采取极端措施, 因为这同时会对美国的组件和软件供货商产生负面影响另一方面, 中国广电作出的投资将有助缓解三大电信运营商削减资本支出带来的影响, 这对电信设备供货商如中兴通讯是为正面我们预计, 中兴通讯将最终与美国政府达成有规范性的协议, 以避免美国再次实施贸易保护措施我们也相信, 中兴通讯将多样化其采购网络, 并采用更多非美国的供应商我们认为, 中兴通讯的股价在短期内将维持波动, 因为市场情绪仍然反复, 而市场亦对增长前景感到忧虑股价催化剂包括 (1) 公司与美国政府签订最终协议 ;(2) 有更多关于中国广电作出投资的消息 ;(3) 公司在发达市场取得突破我们维持股份买入评级, 目标价为 1.6 港元 ( 基于 14. 倍 216 年市盈率, 低于历史平均水平 22 倍 ) 投资亮点 216 年第一季业绩摘要 : 中兴通讯 216 年第一季收入为 218 亿元人民币, 同比增长 4%, 净利润为 9. 亿元人民币, 同比增长 16% 毛利率为 34.7%, 较 21 年第一季下降.6%, 主要受累于消费者业务和政企业务的利润率下跌运营商网络分部收入同比增长 1%, 国内和海外的运营商均实现增长, 主要是受到 4G 网络和光纤网络的持续投资所驱动消费者业务收入同比下跌 1%, 主要是受累于手机销量同比下滑 2%, 这是部分由于公司并无在 216 年第一季推出新款智能手机其他产品 ( 如调制解调器和设定机顶盒 ) 的销售继续同比强劲增长 ( 超过 4%) 政企业务收入录得单位数的同比跌幅, 这主要是受累于海外市场销售同比下滑 2% 中兴通讯第一季净利润为市场对全年预期的 23%, 并是我们对全年预测的 24%, 符合过往趋势我们维持 216/217 年净利润预测新产品的推出将推动增长中兴通讯将在 216 年集中于开放销售渠道, 管理层看好第二季消费品分部的经营业绩将会改善, 尤其公司旗下努比亚和 Axon 将分别在 4 月和月推出公司的其他产品如调制解调器和机顶盒将继续增长, 这是由于全球市场的需求增长中兴通讯与美国政府就最终解决方案进行沟通美国政府在 216 年 3 月 24 日向中兴通讯发出临时一般许可证, 让公司可在美国采购零部件, 其后公司的零部件供应将恢复正常中兴通讯管理有信心在 216 年 6 月更新牌照, 并尽快与美国政府合作达成最终协议市场估计, 中国广电将在 216 年投资 2 亿元人民币推出一个核心传输网络, 相当于三大电信运营商电信支出的 4-% 中国广电的投资将有助于缓解三大电信运营商削减资本支出带来的影响, 这对电信设备供应商如中兴通讯是为正面 TMT 行业硬件买入收盘价 :12.2 港元 (216 年 4 月 28 日 ) 目标价 :1.6 港元 (+28.3%) 股价表现 216 年 4 月 29 日 (HK$) (HK$ million) Apr1 Jun1 Aug1 Oct1 Dec1 Feb16 Turnover (RHS) Price (LHS) 市值 8.68 亿美元已发行股数 412. 亿股核数师 Ernst & Young 自由流通量 1% 2 周交易区间港元三个月日均成交量 1,32 万美元主要股东深圳市中兴新通讯设备有限公司 (3.8%) 布家杰, CFA 高级分析员 Key Financials 主要财务指标 ( 百万元人民币 ) E 217E (in RMBm) Revenue 收入 7, , , , ,234. Change 变动 ( 同比 %) (YoY %) (1.7) Gross 毛利润 Profit 2, , , , ,783. Gross 毛利润率 (%) Margin % Net 净利润 Profit , ,28.1 3, ,721.7 净利润率 (%) Net Margin % 每股收益 ( 基本 ) EPS (Basic) 变动 ( 同比 %) Change (YoY %) (112.2) 每股股息 DPS $.3 $.2 $.2 $.189 $.228 ROE 净资产收益率 (%)(%) Dividend 股息收益率 (%) Yield (%) 市盈率 ( 倍 ) PER (x) 市净率 ( 倍 ) PBR (x) 自由现金流收益率 (%) FCF Yield (%) -.77% 2.1% 1.4% 7.29% 8.61% (82) markpo@chinastock.com.hk 王志文,CFA 研究部主管 (82) cmwong@chinastock.com.hk 资本开支 ( 百万元 ) Capex (m) (1,48.) (1,77.1) (1,696.3) (1,86.9) (2,2.) 每股自由现金流 Free cash flow per share (.1) 净负债比率 (%) Net Gearing (%) 信息来源 : 彭博中国银河国际证券 1

2 April 29, 216 ZTE Corporation [763.HK] Q1 216 results weakness on US export ban. ZTE Corporation (ZTE) reported decent Q1 216 results despite the impact of an export ban. We expect ZTE s operating performance to improve sequentially given: a) the minimal impact of the US export ban, b) a pick-up in handset shipments, and c) better cost control. We are taking a more positive stance on ZTE vs. the market s cautious view as the recent news flow suggests that the US Government is unlikely to take extreme measures against ZTE because it would also have a negative impact on US component and software suppliers. The investment by China Radio & TV Network (CRTN) will help to alleviate the impact of the CAPEX cut by the three telecom operators, which is positive for telecom equipment vendors such as ZTE. We expect ZTE to finally negotiate an abiding agreement with the US government to prevent the export restrictions issue from resurfacing again. We also believe ZTE will diversify its sourcing network to use more non-us suppliers. ZTE s share price will remain volatile in the near term in our view because of market sentiment and concerns about the growth outlook. Share price catalysts include a final agreement with the US government, a breakthrough in developed markets and news flow on CRTN s investment. We maintain our BUY rating with a target price of HK$1.6 (based on 14.x 216E PER, lower than the historical average of 22x). Investment Highlights Q1 216 results highlights. ZTE reported Q1 216 turnover of RMB21.8bn, up 4% YoY and net profit of RMB9m, up 16% YoY. Gross margin was 34.7% in Q1 216, down.6% from Q1 21, mainly on lower margins from the Consumer, and Government & Enterprises segments. Turnover of the Carrier Networks segment was up 1% YoY, with growth in domestic and overseas operators, which was driven by continuous investment in 4G networks and optical networks. Turnover in the Consumer segment dropped 1%-2% YoY mainly because of a 2% YoY decline in handset sales, which was due partly to the lack of new smartphone launches in Q Sales of other products, such as modems and set-top boxes, continued to see strong growth of over 4% YoY in Q Turnover of the Government & Corporate segment reported a single-digit YoY decline, which was dragged down by a 2% YoY decline in sales in overseas markets. ZTE s Q1 net profit was 23% of market consensus and 24% of our forecast for FY216, which is in line with the historical trend. We maintain our net profit forecasts for 216/217. New products launch to drive growth. ZTE will focus on open channels in 216, and management is optimistic about a pick-up in operating performance in the Consumer segment in Q2 with the Nubia launch in April and Axon launch in May. Other products, such as modems and set-top-boxes, will continue to grow, given the increasing global market. ZTE communicating with the US government for a final resolution. The US government issued a temporary general licence to ZTE on 24 Mar 216 to maintain its components procurement from the US, after which the Company s components supply generally returned to normal. ZTE management is confident in renewing the license in Jun 216 and is cooperating with the US government to reach a final agreement as soon as possible. The market estimates that CRTN will invest RMB2bn in 216 to roll out a core transmission network, which is equivalent to 4-% of China s telecom spending by the three telecom operators. The investment by CRTN will help to alleviate the impact of the CAPEX cut by the three telecom operators, which is positive for telecom equipment vendors such as ZTE. Key Financials (in RMBm) E 217E Revenue 7, , , , ,234. Change (YoY %) (1.7) Gross Profit 2, , , , ,783. Gross Margin % Net Profit , ,28.1 3, ,721.7 Net Margin % EPS (Basic) Change (YoY %) (112.2) DPS $.3 $.2 $.2 $.189 $.228 Mark Po, CFA Senior Analyst (82) markpo@chinastock.com.hk Wong Chi Man, CFA Head of Research (82) TMT Sector Hardware BUY Close: HK$12.2 (Apr 28, 216) Target Price: HK$1.6 Share Price Performance (HK$) Apr1 Jun1 Aug1 Oct1 Dec1 Feb16 Turnover (RHS) Price (LHS) Market Cap cmwong@chinastock.com.hk US$8,68m Shares Outstanding 41,2m Auditor Ernst & Young Free Float-H Shares 1% 2W range 3M average daily T/O Major Shareholding (HK$ million) HK$ US$13.2m Zhongxingxin (3.8%) ROE (%) Dividend Yield (%) PER (x) PBR (x) FCF Yield (%) -.77% 2.1% 1.4% 7.29% 8.61% Capex (m) (1,48.) (1,77.1) (1,696.3) (1,86.9) (2,2.) Free cash flow per share (.1) Net Gearing (%) Source: Bloomberg, CGIS Research, 2

3 Oct-9 Feb-1 May-1 Aug-1 Nov-1 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Dec-14 Apr-1 Jul-1 Oct-1 Jan-16 Figure 1: Key assumptions for ZTE F 217F Turnover (RMBm) Wireless system 21, ,43.2 1, , ,9.7 37, ,67.2 Wired system 7, ,92.4 6,37.2 6,16. 7, ,32.3 9,17.8 Other products and services 17, ,7.1 18,39.6 8, ,96. 12, ,899. Handset 26,933. 2, ,7. 2, , , ,371.1 Software and data 12, , ,83.9 8,883. 1, , ,739.4 Total 86,24. 84, , , , , ,234. YoY Change (%) Wireless system (2.1) (2.7) Wired system (14.6) 3. (2.4) Other products and services 9.3 (3.6) (.) Handset (4.1) (16.) Software and data 31.1 (23.) (3.8) Total (2.4) (1.7) Gross margin (%) Carrier business Handset Software and data Net margin (%) 1.2 (4.8) Cost (RMBm) S,G&A (13,717.8) (13,79.1) (12,417.3) (12,29.7) (14,4.1) (1,91.6) (17,88.7) R&D (8,492.6) (8,829.2) (7,383.9) (9,8.) (12,2.) (13,433.2) (14,88.) Financial Expenses (1,374.2) (1,888.) (1,6.4) (1,61.7) (1,269.1) (1,48.4) (1,81.4) YoY Change (%) S,G&A. (1.) R&D 4. (16.4) Financial Expenses 37.4 (12.6) (.4) (18.7) CAPEX (RMBm) n.a. n.a. 1,48. 1,77.1 1, ,86.9 2,2. Net Gearing (%) Source: Company, CGIS Research Figure 2: ZTE PER trend HKD x 27x 21x 16x 1x Sources: Bloomberg, CGIS Research 3

4 Figure 3: Earnings projection Income Statement (RMBm) FY213 FY214 FY21 FY216F FY217F Cash Flow Statement (RMBm) FY213 FY214 FY21 FY216F FY217F Revenue 7,232 81,471 1,186 11,39 122,234 Net Income 3,66 4,719 4,839,946 7, Growth yoy% (1.7%) 8.3% 23.% 1.1% 1.8% Depreciation & Amort ,61 1,14 1,26 Gross Profit 2,49 23,712 29,93 32,18 3,783 Change in Working Capital (3,36) (3,6) 1, (1,41) (1,91) Growth yoy% 9.6% 1.9% 22.7% 1.6% 11.2% Cash from Ops ,13 6,9,9 6,41 Selling General & Admin Exp. (19,81) (21,38) (26,66) (29,349) (32,766) Capital Expenditure (1,49) (1,77) (1,696) (1,866) (2,3) Others Operating Expenses/Items 1,41 2,4 2,42 3,11 4,38 Sale of Property, Plant, and Equipment Operating Income 2,199 4,719 4,839,946 7, Change in Investing Acitivities (122) (94) 1,37 (3,8) (2,98) Growth yoy% n.a % 2.% 22.9% 18.6% Cash from Investing (1,171) (2,22) (321) (4,946) (,38) Interest Expense (1,6) (1,62) (1,269) (1,48) (1,81) Net increase in bank borrowings (1,82) (1,31) 2,64 1,99 2,38 Interest and Invest. Income Income/(Loss) from Affiliates (3.) Issuance of Common Stock Other Non-Operating Inc. (Exp.) Common Dividends Paid (18) (138) (688) (1,38) (786) Impairment of Goodwill Special Dividend Paid Gain (Loss) On Sale Of Invest Other Financing Activities (1,773) (1,61) (1,139) (1,42) (1,9) Gain (Loss) On Sale Of Assets Cash from Financing (3,12) (3,99) 814 (481) (68) Income Tax Expense (394) (81) (63) (68) (818) Minority Int. in Earnings (76) (94) (32) (61) (782) Net Change in Cash (3,46) (2,991) 7, ,3 Net Income 2,721 3,92 3,928 4,717 Growth yoy% (112%) 436.4% 21.8% 22.6% 2.1% Balance Sheet (RMBm) FY213 FY214 FY21 FY216F FY217F Ratios FY213 FY214 FY21 FY216F FY217F ASSETS Sources: Company, CGIS Research Profitability Cash And Equivalents 2,118 17,23 26,617 28,119 3,811 Return on Assets %.% 2.% 2.7% 3.% 3.% Receivables 29,768 34,123 36,19 39,68 43,946 Return on Capital % 3.9% 7.9% 8.1% 9.% 1.7% Inventory 12,434 19,92 19,732 21,72 24,74 Return on Equity % 2.2% 11.1% 11.8% 12.6% 14.% Other Current Assets 16,2 1,34 16,646 18,199 19,982 Total Current Assets 78,822 86,29 99,14 17,71 118,813 Margin Analysis Net Property, Plant & Equipment 7,698 7,664 8,3 9,12 9,88 Gross Margin % 27.2% 29.1% 29.% 29.2% 29.3% Long-term Investments SG&A Margin % 16.% 1.4% 14.4% 14.4% 14.6% Other Intangibles EBIT Margin % 3.4% 6.3%.% 6.% 6.4% Deferred Tax Assets, LT EBITDA Margin % 4.7% 7.% 6.6% 7.1% 7.4% Other Long-Term Assets 1,93 16,3 17,274 17,767 18,29 Net Income Margin %.7% 3.2% 3.2% 3.6% 3.9% Goodwill Accounts Receivable Long-Term Asset Turnover Total Long Term Assets 23,61 23,964 2,74 26,779 28,98 Total Asset Turnover.7x.7x.8x.8x.8x Total Assets 12,473 11,2 124,88 134,48 146,911 Fixed Asset Turnover 3.2x 3.4x 3.9x 4.1x 4.4x Accounts Receivable Turnover 2.x 2.6x 2.9x 2.9x 2.9x LIABILITIES & EQUITY Inventory Turnover 6.1x 4.2x.1x.1x.1x Accounts Payable 4,32 4,224 48,99 3,9 9,294 Accrued Exp Liquidity Short-term Borrowings 18,72 2,348 17,799 19,97 21,71 Current Ratio 1.2x 1.2x 1.4x 1.4x 1.4x Curr. Port. of LT Debt Quick Ratio.7x.6x.8x.8x.8x Curr. Income Taxes Payable Avg. Days Sales Out Unearned Revenue, Current Avg. Days Inventory Out Other Current Liabilities 4,342 4,393 4,93 4,228 4,9 Avg. Days Payable Out Total Current Liabilities 63,364 69,96 71,332 77,334 8,64 Avg. Cash Conversion Cycle Long-Term Debt 11, 1,4 6,16 6,16 6,16 Net Debt to Equity 4% 3% 22% 21% 18% Def. Tax Liability, Non-Curr. Other Non-Current Liabilities 3,978 3,97 3,891 4,236 4,624 Growth Over Prior Year Total Liabilities 78,847 83,962 81,239 87,86 96,24 Total Revenue (1.7%) 8.3% 23.% 1.1% 1.8% Common Stock 3,438 3,438 4,11 4,11 4,11 Net Income (112.2%) 436.4% 21.8% 22.6% 2.1% Additional Paid In Capital Payout Ratio % 21.% 26.1% 32.1% 2.% 2.% Retained Earnings 19,9 21,441 2,9 28,44 31,39 Treasury Stock Comprehensive Inc. and Other Minority Interest 1,93. 1, , , ,121.1 Total Equity 23,626 26,293 43,349 46,894,667 Total Liabilities And Equity 12,473 11,2 124,88 134,48 146,911 4

5 Figure 4: Peer comparison Ticker Company PE EV/EBITDA Sources: Bloomberg, CGIS Research P/B ROE ROA Div yield Price Market Cap 216F 217F 218F 216F 217F 218F F F F F Lcy US$m x x x x x x x x % % % % % % 763 HK ZTE Corp , n.a HK Comba Telecom Systems Holdin n.a. n.a. n.a. n.a. n.a. n.a..8 n.a. n.a n.a n.a. 2 HK China Communications Servi-H , n.a HK Yangtze Optical Fibre And-H HK China U-Ton Holdings Ltd n.a. n.a. n.a n.a HK China Fiber Optic Network Sy n.a. n.a. n.a. n.a. n.a. n.a.. n.a. n.a. n.a. 9. n.a.. n.a. 877 HK O-Net Technologies Group Ltd n.a. n.a. n.a. 1.3 n.a. n.a n.a HK Trigiant Group Ltd n.a..7.4 n.a..7.6 n.a HK China Mobile Ltd , HK China Unicom Hong Kong Ltd , n.a HK China Telecom Corp Ltd-H 3.8 4, HK Citic Telecom International , Average CH Zte Corp-A , CH Dr Peng Telcom & Media Gr-A , n.a CH Shenzhen Tat Fook Technolo-A ,318 n.a. n.a. n.a. n.a. n.a. n.a. 6. n.a. 3.8 n.a. 2. n.a..87 n.a CH Datang Telecom Tech Co-A ,347 n.a. n.a. n.a. n.a. n.a. n.a. 3.9 n.a. n.a. n.a..2 n.a.. n.a CH Fiberhome Telecom Tech Co-A , n.a CH Fujian Star-Net Communicat-A 2.6 1, n.a. n.a. n.a n.a CH Accelink Technologies Co -A , CH Hengtong Optic-Electric Co-A , n.a CH Tongding Interconnection I-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a. n.a. 622 CH Jiangsu Zhongtian Technolo-A , n.a CH Shenzhen Sdg Info Co Ltd-A , n.a. n.a. n.a. n.a..9 n.a. n.a n.a CH Fuchun Communications Co L-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. n.a. Average PRY IM Prysmian Spa 2.66, n.a JNPR US Juniper Networks Inc , JP Shin-Etsu Chemical Co Ltd , n.a JP Fujikura Ltd 43. 1, n.a. n.a MSI US Motorola Solutions Inc , n.a. n.a. n.a CSCO US Cisco Systems Inc , ALU FP Alcatel-Lucent Sa , n.a n.a. n.a..4 ERICB SS Ericsson Lm-B Shs , n.a..8 Average

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