Investment Rating - The communication industry is rated positively with a significant increase in fund holdings, indicating strong investor interest and confidence in growth potential [1][5][31]. Core Insights - The communication sector's fund holdings increased to 7.76% in Q3 2025, up by 3.90 percentage points, ranking it among the top five sectors [1][5][31]. - The sector's overall valuation is above historical averages, with a PE-TTM of 43x, positioned at the 67th percentile, suggesting room for growth despite high expectations [23][31]. - The AI industry chain remains a focal point, with key companies like ZhongJi InnoLight, Eoptolink Technology, and Suzhou Tfc Optical Communication leading in fund holdings [22][32]. Summary by Sections Fund Holdings Overview - In Q3 2025, the communication sector's fund holdings accounted for 7.76%, ranking fourth among 31 primary industries, with notable increases in holdings for electronic and power equipment sectors [1][5][31]. - The top three companies in fund holdings within the communication sector are ZhongJi InnoLight (RMB 1114.46 billion, +62.53%), Eoptolink Technology (RMB 1101.72 billion, +60.81%), and Suzhou Tfc Optical Communication (RMB 145.44 billion, +14.90%) [13][22][32]. Investment Recommendations - Key investment targets include: 1. Optical modules: ZhongJi InnoLight, Eoptolink Technology, and others 2. CPO/Silicon Photonics: Suzhou Tfc Optical Communication and others 3. PCB: Wus Printed Circuit and others 4. Terminal: ZTE 5. IDC/Liquid Cooling: Wangsu Science & Technology and others 6. Network: ZTE, Ruijie Networks, and others 7. High-speed Copper Cable: Zhaolong Interconnect 8. Operators: China Mobile, China Telecom, China Unicom 9. Military Communication: Guangzhou Haige Communications and others 10. U.S. stocks: Credo, MaxLinear, and others [22][30]. Valuation and Growth Potential - The communication sector's valuation is above historical averages, with expectations of sustained growth driven by AI infrastructure and new connectivity developments [23][31]. - The sector is expected to gradually absorb its valuation while maintaining significant growth potential [23][31].

Core Viewpoint - ZTE Corporation's Q3 2025 financial report reveals a significant decline in net profit despite a modest revenue increase, raising concerns about its future performance and market sentiment [1][4][10]. Revenue Performance - In Q3 2025, ZTE achieved revenue of 28.97 billion yuan, a year-on-year increase of 5.1%, but below market expectations; cumulative revenue for the first three quarters reached 100.52 billion yuan, up 11.6% [1][2]. - The company's revenue breakdown shows network, government enterprise, and consumer businesses contributing 50%, 25%, and 25% respectively [2]. Business Transition - ZTE is undergoing a strategic transformation focusing on AI servers, data centers, and consumer electronics, shifting from a "connectivity" model to a "connectivity + computing" model [3]. - The government enterprise business has seen rapid growth, with a 130% increase in the first three quarters, while computing business revenue grew by 180% [3]. Profitability Concerns - The net profit for Q3 2025 was only 260 million yuan, a drastic decline of 87.8%, with a non-recurring net profit dropping to -230 million yuan [4][5]. - The decline in profitability is attributed to a shift in business structure leading to lower overall gross margins, with computing business margins around 8% compared to over 50% for traditional operator business [5][6]. Market Reaction - Following the disappointing earnings report, ZTE's stock price fell by 6.5% on October 29 and continued to decline by 3% the next day, reflecting negative market sentiment [1][10]. - The stock had previously surged over 40% since August, driven by significant orders and strategic shifts, but the recent earnings drop has led to a reevaluation of its valuation [9][10]. Future Outlook - The company's ability to maintain its AI narrative hinges on technological breakthroughs and commercialization in its chip subsidiary, which are crucial for overcoming current profitability challenges [11][12]. - The market is increasingly focused on short-term performance and profitability, moving away from speculative narratives, which places additional pressure on ZTE's AI transition [11][13].

Core Viewpoint - ZTE Corporation's stock has declined nearly 5% following the release of its Q3 earnings report, indicating significant challenges in profitability despite revenue growth [1] Financial Performance - For the first three quarters, ZTE reported revenue of 100.52 billion yuan, an increase of 11.63% year-on-year [1] - Net profit for the same period was 5.322 billion yuan, a decrease of 32.69% year-on-year [1] - In Q3 alone, the company achieved revenue of 28.97 billion yuan, up 5% year-on-year, but net profit dropped to 264 million yuan, down 88% year-on-year [1] Market Analysis - Huatai Securities attributes the profit decline primarily to a decrease in high-margin operator business revenue, which has reduced its proportion in the overall revenue structure, shifting towards lower-margin computing services [1] - Jefferies' report indicates that ZTE's projected revenue, core operating profit, and net profit for Q3 2025 are expected to grow by 5%, but with declines of 115% and 88% respectively, significantly below market expectations [1] - The gross margin has decreased from 40% to 26% year-on-year, leading to a 33% decline in gross profit, attributed to delays in telecom equipment delivery and weak telecom demand [1] Future Outlook - Jefferies anticipates an improvement in gross margin for Q4, but overall, with Chinese telecom operators further cutting capital expenditures, high-margin telecom revenue may see a double-digit decline in 2025 [1] - There is no indication that new business areas, such as servers and switches, will provide sufficient offset to these declines [1]

Core Viewpoint - ZTE Corporation's stock has declined nearly 5% following the release of its Q3 earnings report, indicating market concerns over profitability and revenue structure [1] Financial Performance - For the first three quarters, ZTE reported revenue of 100.52 billion yuan, an increase of 11.63% year-on-year [1] - Net profit for the same period was 5.322 billion yuan, a decrease of 32.69% year-on-year [1] - In Q3 alone, ZTE achieved revenue of 28.97 billion yuan, up 5% year-on-year, but the net profit attributable to shareholders was only 264 million yuan, down 88% year-on-year [1] Market Analysis - Huatai Securities attributes the profit decline primarily to a drop in high-margin operator business revenue, which has decreased in proportion, while the revenue structure has shifted towards lower-margin computing services [1] - Jefferies' report indicates that ZTE's projected revenue, core operating profit, and net profit for Q3 2025 are expected to grow by 5%, but with declines of 115% and 88% respectively, significantly below market expectations [1] - The gross margin has fallen from 40% to 26% year-on-year, leading to a 33% decline in gross profit, attributed to delays in telecom equipment delivery and weak telecom demand [1] Future Outlook - Jefferies anticipates an improvement in gross margin for Q4, but overall, with Chinese telecom operators further cutting capital expenditures, high-margin telecom revenue may see a double-digit decline in 2025 [1] - The report suggests that new business areas such as servers and switches are unlikely to provide sufficient offset to these declines [1]

Core Viewpoint - ZTE Corporation's Q3 2025 performance significantly underperformed market consensus expectations in terms of revenue, profit margins, and earnings due to changes in product structure and weak telecom capital expenditures [1] Group 1: Financial Performance - ZTE's revenue and profit margins were notably lower than market expectations for Q3 2025 [1] - The operator network business, which typically has high profit margins, performed much worse than anticipated due to weak telecom capital spending [1] - Issues related to revenue recognition timing further exacerbated the situation [1] Group 2: Future Outlook - ZTE is expected to start recognizing related revenues in Q4, which should lead to a significant recovery in the operator network business [1] - The target price for ZTE's stock has been lowered from HKD 40 to HKD 35.8, while maintaining a "Hold" rating [1]

Core Viewpoint - ZTE Corporation's Q3 performance significantly underperformed market consensus expectations in terms of revenue, profit margins, and earnings, primarily due to changes in product mix and weak telecom capital expenditures affecting the high-margin operator network business [1] Revenue Performance - The operator network business's performance was far below expectations due to weak telecom capital expenditures [1] - Revenue recognition timing issues further exacerbated the situation [1] Future Outlook - As ZTE begins to recognize related revenues in Q4, a significant recovery in the operator network business is anticipated [1] Analyst Rating - The firm maintains a "Hold" rating and has lowered the target price from HKD 40 to HKD 35.8 [1]

Core Viewpoint - ZTE Corporation is experiencing a significant transformation period, with its third-quarter financial results showing a sharp decline in net profit despite revenue growth, indicating challenges in maintaining profitability during its transition to new business areas [2][3]. Financial Performance - In the first three quarters of the year, ZTE's revenue exceeded 100 billion yuan, growing by 11.63% to 100.52 billion yuan, while net profit dropped by 32.69% to 5.322 billion yuan, reflecting a situation of increasing revenue but decreasing profit [2]. - For the third quarter alone, ZTE reported revenue of 28.967 billion yuan, a year-on-year increase of 5.11%, but net profit plummeted by 87.84% to only 264 million yuan, with a non-recurring net profit of -225 million yuan, indicating a shift from profit to loss [2][3]. Business Segments - ZTE's operations are divided into three main segments: carrier networks, government and enterprise business, and consumer business, with the carrier networks segment historically being the primary revenue and profit driver [2]. - The carrier networks segment's revenue for the first three quarters was 35.064 billion yuan, down 5.99% year-on-year, marking the first time its revenue share fell below 50% in a decade [3]. Transition Challenges - The decline in capital expenditure from major telecom operators in China has pressured ZTE's carrier networks business, with a reported 16.5% decrease in capital spending expected by mid-2025 [3]. - ZTE is currently undergoing a critical transformation phase, with a projected decline in both revenue and profit for the 2024 annual report, forecasting a revenue of 121.299 billion yuan, down 2.38%, and a net profit of 8.425 billion yuan, down 9.66% [3]. Leadership Change - In March, ZTE appointed its first female chairperson, Fang Rong, following the resignation of former chairman Li Zixue, who had led the company through significant growth during the 5G construction boom [4][5]. New Business Focus - Under Fang Rong's leadership, ZTE aims to pivot towards new business opportunities in the AI-driven industry, emphasizing the importance of transitioning from a connectivity-focused model to one that integrates computing power [5]. - The company's computing power segment has shown substantial growth, with revenue increasing by 180% year-on-year, although it still only accounts for 25% of total revenue [5]. Profitability Concerns - ZTE's overall gross margin has decreased to 32.45%, down 7.99 percentage points year-on-year, with the carrier networks segment maintaining a higher margin of 52.94%, while the consumer business and government enterprise business have significantly lower margins [6][8]. - The third-quarter gross margin further declined to 25.85%, highlighting the need for ZTE to enhance the profitability of its expanding computing power business [8]. Cost Management - In response to the ongoing transformation pressures, ZTE has implemented cost-cutting measures, reducing management expenses by 10.77% to 2.884 billion yuan, while sales and R&D expenses also saw declines [8].

Core Viewpoint - ZTE Corporation achieved a net profit attributable to shareholders of 5.322 billion yuan in the first three quarters of 2025, with 264 million yuan in Q3 2025, indicating strong performance in the domestic intelligent computing market and increasing overseas market share in the operator sector [1] Segment Summaries Network Segment - The network segment accounted for 50% of total revenue in the first three quarters of 2025, with ongoing advancements in integrated technologies such as space-ground integration and sensing integration [1] - The commercial rollout of 5G-A is ongoing, and efforts are being made to promote the evolution towards 6G [1] Computing Power Segment - The computing power segment saw a year-on-year revenue growth of 180%, contributing 25% to total revenue [1] - Revenue from servers and storage increased by 250%, while data center products grew by 120% [1] - ZTE's intelligent computing servers have entered partnerships with major domestic internet and financial companies such as BBAT, JD.com, and Meituan, and are expanding overseas collaborations [1] - The company has secured multiple core node projects in domestic data centers and is actively expanding into Latin America, North Africa, and Central Asia [1] Home and Personal Segment - The home and personal segment also contributed 25% to total revenue, with personal business revenue experiencing double-digit growth [1] - Overseas mobile phone sales increased by over 25%, with the launch of new models such as the Red Magic 11 Pro series and Nubia Z80 Ultra, which integrate the Doubao AI large model [1] AI and Infrastructure - The company is fully invested in AI, establishing a robust foundation for intelligent computing through self-developed chips, super-node servers, and high-speed switches [1] - With the commercial rollout of 5G-A and ongoing construction of computing power, the long-term development of the second curve business is viewed positively, maintaining a "buy" rating [1]

Core Viewpoint - ZTE Corporation is experiencing a significant transformation period, with its third-quarter financial results showing a sharp decline in net profit despite revenue growth, indicating challenges in maintaining profitability amidst changing market conditions [1][3]. Financial Performance - In the first three quarters of the year, ZTE's revenue exceeded 100 billion yuan, reaching 1005.2 billion yuan, a year-on-year increase of 11.63%, while net profit attributable to shareholders fell by 32.69% to 53.22 billion yuan [1]. - For the third quarter alone, ZTE reported revenue of 289.67 billion yuan, a year-on-year increase of 5.11%, but net profit dropped dramatically by 87.84% to only 2.64 billion yuan, with a non-recurring net profit of -2.25 billion yuan, indicating a shift from profit to loss [1][3]. Business Segments - ZTE's business is divided into three main segments: carrier networks, government and enterprise business, and consumer business, with the carrier networks segment historically being the primary revenue and profit driver [3]. - The carrier networks segment's revenue for the first three quarters was 350.64 billion yuan, a year-on-year decline of 5.99%, marking the first time its revenue share fell below 50% in nearly a decade [3][4]. Transition and Strategic Focus - ZTE is currently undergoing a critical transformation, with a focus on expanding into AI-driven and digital solutions as traditional telecom infrastructure investments decline [4]. - The newly appointed chairperson, Fang Yong, emphasized the urgency of transitioning from a "connectivity" model to a "connectivity + computing power" model in her inaugural address [4]. Growth in New Business Areas - ZTE's computing power business has shown substantial growth, with revenue increasing by 180% year-on-year, including a 250% increase in server and storage revenue and a 120% increase in data center product revenue [4]. - Despite this growth, the computing power segment only accounts for 25% of total revenue, indicating that it is not yet sufficient to offset declines in traditional high-margin businesses [4][5]. Profitability Challenges - The overall gross margin for ZTE decreased to 25.85% in the third quarter, reflecting ongoing profitability pressures as the company expands its computing power business while facing declining margins in traditional segments [7]. - The company has been implementing cost-cutting measures, with reductions in sales, management, and R&D expenses, although R&D spending remains high at nearly 18% of revenue [7].

Core Viewpoint - The report from Jefferies indicates that ZTE Corporation (00763) is overvalued, maintaining a "Underperform" rating after a 100% increase in stock price, with a projected P/E ratio of 24 times for 2025 and a negative CAGR of -6.5% for earnings per share [1] Financial Performance - ZTE's Q3 2025 revenue, core operating profit, and net profit showed year-on-year growth of 5%, but declines of 115% and 88% respectively, significantly missing market expectations [1] - Gross margin fell from 40% to 26% year-on-year, leading to a 33% decline in gross profit, attributed to delays in telecom equipment delivery and weak telecom demand [1] Market Consensus and Projections - Jefferies' net profit forecasts for 2026 and 2027 are 35% and 48% lower than market consensus, respectively [1] - The firm anticipates that high-margin telecom revenues may experience double-digit declines in 2025 due to further capital expenditure cuts by Chinese telecom operators [1] Valuation Adjustments - The target price for ZTE has been reduced from HKD 27.27 to HKD 25.71 [1] - There is a risk of valuation downgrades as investor optimism regarding new business ventures is unlikely to materialize [1]