On Monday, ZTE Corp (HK:0763). (763:HK) (OTC: ZTCOF (OTC:ZTCOF)) stock received an upgrade in its rating from "Underperform" to "Hold" by an analyst at Jefferies, with the price target also being increased to HK$15.03 from the previous HK$10.30.
This revision follows ZTE's second quarter financial performance, where the company reported revenue growth of only 1%, which was below the limited consensus by 2%. However, the firm's net profit growth of 9% exceeded expectations by the same margin.
Despite the lower-than-expected gross margin and core operating profit, which were 3.5 percentage points and 38% below consensus respectively, ZTE saw a significant rise in its profit.
This was attributed to the company's aggressive cost control measures, particularly in sales and marketing and research and development expenses, which fell by 9% in the second quarter. The analyst noted that these efforts led to a profit upgrade even though there was a slight reduction in revenue.
The report also highlighted that ZTE's revenue from carriers dropped by 9% in the first half of 2024, which was due to reduced telecommunications spending. On the other hand, both the government and consumer sectors of the business experienced double-digit growth.
The analyst's perspective suggests that the stock price may find support given its price-to-earnings ratio of approximately 10 times, a dividend yield of around 4%, and a net cash position of HK$3.7 per share.
In conclusion, while Jefferies' estimates remain more than 20% below consensus, the firm acknowledges the potential for stock price support, leading to the upgrade to a "Hold" rating for ZTE Corp.
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