Improved margins in 2023

　　中兴通讯(000063)

　　ZTE released its FY23results.Revenue grew by1.1%YoY to RMB124bn,in linewith consensus and3%higher than our forecast.Net profit increased by15.4%YoY to RMB9.3bn,5%lower than consensus and in line with our forecasts.Grossmargin for2023was41.5%,representing a434bps increase from FY22.NPMshowed a similar trend,reaching7.5%in FY23from4.2%/5.9%/6.6%in FY20-22.ZTE’s profitability improved steadily as a result of the company’s continued effortsin operation optimization and cost reduction(i.e.,self-developed components).

　　For4Q23,the company's revenue grew by14.7%YoY and21.5%QoQ,whileits net profit grew by17.8%YoY and fell by37.3%QoQ,respectively.Thesequential decline was mainly due to1)a lower GPM(36.0%in Q4vs.44.6%in Q3)on a less favorable revenue mix,which was partially offset by costoptimization with in-house designed components in Consumer/Governmentand Enterprise segments,2)a42.5%increase in SG&A in Q4on higheremployee benefits and marketing.

　　By segment,1)revenue from Carrier segment increased by3.4%YoY ondomestic market share gains in RAN and non-RAN businesses and overseasprogress.2)Consumer segment sales declined by1.3%YoY on overseasinventory digestion and intensified competition,partially offset by domesticgrowth in family network business.3)Enterprise&gov't segment salesdeclined by7.1%YoY in2023due to a slowdown in investment.

　　Looking ahead to2024,we believe ZTE is poised to capitalize on emergingtrends in the telecom industry,focusing on the evolution towards5.5G/6G andAI compute power.Maintain BUY on ZTE(000063CH)with adjusted TP atRMB34.2,based on15x2024E P/E,which is close to its3-year avg.(vs.previous16.5x,considering potential downside risk from continued industryheadwinds and slower-than-expected development in AI).Next catalyst maybe telecom operators'capex outlook.