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ZTE shares slump after profit growth slows, revenue falls

Shares of ZTE slumped in both Shenzhen and Hong Kong after the Chinese tech company’s profit growth slowed and revenue fell in the latest quarter.

ZTE stock shed as much 13% in early Hong Kong trading, hitting its lowest intraday level since January, according to FactSet. The stock was recently down 8.8% at HK$18.66, on track for its biggest one-day percentage drop since March 2022.

China-listed shares fell as much as 8.6% in the morning session to a near 10-month low and were last down about 6% at CNY26.29.

The Shenzhen-based telecommunications equipment maker said Monday after market close that its third-quarter net profit rose 5.3% on year, slowing from the 20% on-year growth recorded in the first half. Revenue in the third quarter fell 12% on year.

ZTE’s “sluggish growth” arose partly from the delayed recognition of revenue from 5G equipment deliveries, Citi analyst Louis Tsang said in a research note. The company also missed out on telecom operators’ demand for artificial-intelligence servers, with its AI server product not likely to launch until the fourth quarter, Tsang added.

On the upside, the company’s gross profit margin hit a record high of 44.6% on cost controls, an improved product mix and easing price competition, Tsang said. He added that heading into the fourth quarter “we believe the AI server launch could be a positive catalyst,” and that sales in the final quarter of 2023 and first quarter of 2024 could get a boost from the completion of delayed 5G equipment deliveries and the recovery of overseas demand.

Citi has a HK$29.30 price target on the company’s H-shares.

Nomura analysts Bing Duan, Joel Ying and Ethan Zhang kept a buy rating and a HK$32.50 target price on the stock, but said estimates are under review in the wake of what they described as a topline miss.

“We think ZTE’s telecom equipment business may still likely recover in [the fourth quarter], while its enterprise and consumer business still lacks visibility due to macro headwinds,” they wrote in a research note. The U.S. tightening of export controls on advanced chips to China may create “some uncertainties in the near term” for ZTE’s AI server shipments, they added. MarketWatch

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