ZTE(000063)2025-03-13 02:23Investment Rating - The report upgrades ZTE Corporation (H/A) to Buy from Neutral with new price objectives of HK$32 for H shares and CNY45 for A shares [1][15][17]. Core Insights - ZTE's server business is expected to see robust expansion in 2024, driven by increased orders from Chinese telecom companies and cloud service providers (CSPs) [1][12][43]. - Despite potential near-term earnings pressure due to a soft carrier business, ZTE is positioned for a re-rating based on a positive outlook for China's Internet Data Centers (IDCs), share gain potential amid rising server demand, and its in-house CPU capabilities [1][12][15]. - The valuation of ZTE is supported by a re-rating of China IDC names, reflecting the market's growing confidence in server demand, particularly with the acceleration of AI applications [16][17]. Summary by Sections Investment Rating Changes - ZTE-H's price objective is raised to HK$32 from HK$21, and ZTE-A's price objective is lifted to CNY45 from CNY31 [3][17]. - The report reflects a change in earnings estimates for 2025-26, with a reduction of 12-17% due to margin pressures [17][18]. Financial Performance - ZTE's server sales nearly doubled year-on-year to CNY10 billion in 2024, representing an 8% mix, primarily due to breakthroughs with major CSPs [2][43]. - The company is expected to maintain robust growth into 2025-26, supported by strong capital expenditures from CSPs and a focus on data centers by Chinese telecoms [2][43]. Valuation Metrics - The report indicates that ZTE-H/ZTE-A trades at a discount compared to other Chinese server peers, with a current P/E of 13x for 2026E [1][32]. - The valuation gap between ZTE-A and ZTE-H has become volatile, suggesting that historical valuation trends may be more suitable for assessing ZTE-A's value [17][32].