Accelerating compute power but decelerating margins

Accelerating compute powerbut deceleratingmargins Target PriceHK$38.60(Previous TPHK$42.00)Up/Downside51.8%Current PriceHK$25.42 ZTE reported FY25 results with revenue up 10.4% YoY to RMB134bn, 7.7%below our estimate and 3.9% belowBloombergconsensus, while net profit fell33.3% YoY to RMB5.6bn, 30% below our estimate and 24% belowBloombergconsensus. GPM declined sharply to 30.3%, down 7.7ppts from 37.9% in FY24,mainly due to a higher mix of Enterprise & Government (E&G) sales. In 4Q25,revenue rose 6.8% YoY and 15.2% QoQ to RMB33.3bn, while net profit fell42.9% YoY but increased 11.9% QoQ to RMB296mn. Looking ahead, weremain positive on top-line growth as server sales to E&G clients continue toexpand, while Carrier revenue should stay broadly flat amid weaker domestictelco spending. That said, the changing revenue mix is likely to keep marginsunder pressure.Maintain BUY on ZTE with arevised TP ofHK$38.6(fromHK$42), based on the same 25.0x 2026E P/E. China SemiconductorsKevin ZHANG(852) 3761 8727kevinzhang@cmbi.com.hk Revenue mix transition continues to weigh on margins.Carrier revenuedeclined 10.6% YoY in FY25 (vs.-15% in FY24) as domestic telcos furtherreduced capex following the 5G investment cycle. Overseas carrier revenueremained resilient, posting double-digit growth supported by strong demandin Southeast Asia and Africa. Segment margin declined to 48.1% from50.9% in FY24 amid a more competitive pricing environment. We expectcarrier revenue to grow bylow single-digitin FY26E on a low base. E&G has emerged as the second growth engine,although marginpressure persists.E&G revenue more than doubled to RMB37bn in FY25(vs. RMB19bn in FY24). AI compute revenue grew 150% YoY, supportedby server partnerships with several major domestic hyperscalers, with E&Gcontributing over 90% of total AI server sales. Segment margin declined to11.0% from 15.3% in FY24. Looking ahead, we expect ZTE to continuegaining share in the domestic AI server market,althoughmargins mayremain under pressure as costs across the AI supply chain (e.g., memory)continue to rise. We forecast E&G revenue growth of~30% in FY26E. Consumer remained broadly stable in FY25 and should stay so inFY26.Consumer revenue grew 4.4% YoY to RMB34bnin FY25, supportedby handset sales, which accounted for roughly half of segment revenue.Family Network faced intensifying competition,sendingsegment margindown to 18.3% from 22.7% in FY24. We expect the consumer segment togrow modestly bymid-single-digitin FY26E, driven by handsets while familynetwork remains largely flat. Source: FactSet Maintain BUY with TP adjustedtoHK$38.6(fromHK$42), based on25.0x 2026E P/E.Peers are trading at~24.0x 2026E P/E. We forecastrevenue to growby11.3% in 2026E, while margin may decline further to~29% as E&Gsegment salescontinueto expand. The Company remainsin a transitionalphaseas its revenue mix evolves. Source: Company data, CMBIGM estimates Source: Company data, CMBIGM estimates MinorityinterestTotal equity and liabilities Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for thecontent of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securitiesor issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issue of this report; (2) willdeal in or tradein the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark over next 12 months:Industry expected to perform in-line with the relevant broad market benchmark over next 12 months:Industry expected to underperform the relevant broad market benchmark over next 12 months Address: 45/F, Champion Tower, 3 Garden Road, HongKong, Tel: (852) 3900 0888 Fax: (852) 3900 0800CMB InternationalGlobal MarketsLimited (“CMBIGM”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly ownedsubsidiary of China Merchants Bank) Important DisclosuresTh