ZTE reported 1Q21 results with revenue of RMB26.2bn (22% YoY) and net profit of RMB2.2bn (180% YoY), largely in-line with our/consensus estimates. Excluding one-time gain from sale of asset, net profit grew at 80% YoY, which accounted for 22.8%/23.9% of our/consensus estimates. GPM improved 5.2ppt QoQ to 35.4% in 1Q21 (vs 30.2% in 4Q20), driven by better product mix and improving cost structure. We remain positive on ZTE’s outlook with global share gain and GPM recovery, and reiterate BUY with TP of HK$28.1 (17.4x FY21E P/E). Upcoming catalysts include 3rd batch of 5G BTS tenders, stabilized ASP and share gain.
- Positive 1Q21 backed by healthy telco’s capex outlook. ZTE delivered 22% YoY revenue growth, driven by solid Carrier business and strong Consumer and Gov./Enterprises business. We believe ZTE will remain the major beneficiary of global 5G deployment in China, and deliver 15% YoY revenue growth in FY21E, backed by ~10% YoY growth in China telco’s FY21E capex for 44k traditional 5G BTS and 400k 700MHz 5G BTS (2-year plan by CM/CBN).
- Expect further share gain and GPM recovery in FY21E. As China 5G deployment focuses on 2nd/3rd tier cities this year, we expect ZTE to enjoy share gain in upcoming 3rd batch of 5G BTS tender (3.5GHz/2.6GHz BTS), given ZTE’s stronger presence in these markets. We think ZTE’s China market share will expand to 33%/35% in FY21/22E. GPM recovered to 35.4% (vs. 31.6% FY20), thanks to higher utilization of self-developed chips. We expected FY21E revenue to grow 15% YoY and GPM will reach 34% in FY21E. We expect ASP pressure will ease this year, which will be slightly offset by increasing material costs from suppliers.
- 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. Trading at 12x FY21E P/E (1-sd below 2-year avg.), the stock is extremely attractive, in our view, 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.
