Shares in ZTE Corp. (763.HK) tumbled almost 6% on Thursday after the Chinese telecom equipment and networking company reported slower third quarter revenue growth.
The company has guided for a 36.58% increase in net profit for the nine months ended 30 September 2017. Net profit was RMB 3.905 billion, based on the preliminary financial statement. Revenue in the first nine months increased to RMB76.580 billion, 7% higher than last year.
Jefferies analyst Edison Lee calculates that the results imply a 5% year-on-fall in third quarter revenue, which the broker attributes to a’historically weak quarter’. However, Lee remains bullish on the stock and suggests the dip in the shares could be a buying opportunity:
Despite occasional quarter-on-quarter volatility in its results, we firmly believe ZTE’s long-term growth story, driven by large 5G capex in China, rising market share globally and improving margin, remains intact. Its current valuation of 20.9x 2017 PE and 10.2x EV/EBITDA falling to 12.8x and 7.8x by 2019, respectively, is not demanding on both an absolute basis and in a historical context (one-year forward PE of 24x during 3G rollout and 19x during 4G rollout). Ongoing newsflow about 5G standard finalization, spectrum allocation and potential win of small pre 5G contracts with tier-one or two operators would be major catalysts going forward.
Lee has a buy rating on the stock and target price of HKD40 a share, impying upside of 44% based on the current price of around HKD27.80 a share.
The shares have gained 106% so far this year.
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