ZTE's 1Q26 revenue met expectations, with computing business ramping up but gross margin under pressure

Overview

This report is Goldman Sachs' review of ZTE's 1Q26 results. Quarterly revenue was Rmb35.0bn, broadly in line with Goldman Sachs expectations; net profit was Rmb1.3bn, recovering sharply QoQ but down 47% YoY and 41% below Goldman Sachs expectations. The core tension in the report is that revenue growth and computing business expansion are still being delivered, but changes in product mix have led to clear pressure on gross margin.

Core views

Goldman Sachs believes ZTE faces near-term margin pressure, mainly because declining domestic telecom capex has reduced the revenue contribution from higher-margin domestic network products, while the revenue contribution from lower-margin server and storage products has increased. However, Goldman Sachs remains positive on the improvement in profitability of the computing business as scale expands, and believes the rapid development of the second-curve business will help the company achieve sustainable growth. On valuation, Goldman Sachs sees the current valuation as relatively fair and therefore maintains a Neutral rating.

Analysis framework

The report starts from 1Q26 actual results versus Goldman Sachs expectations, as well as YoY and QoQ performance, focusing on the breakdown of deviations in revenue, gross margin, expense ratios, operating profit, and net profit; it then adjusts 2026-2028 earnings forecasts based on gross margin and expense assumptions, and derives 12-month target prices for A-shares and H-shares using 2027E target P/E multiples.

Methodology notes

• Valuation methods2027E P/E

  Target price valuation based on forward P/E

  The H-share target price is based on 18.2x 2027E P/E, with the target multiple referencing the relationship between 2026-2027E average earnings growth and 2026E P/E among comparable telecom industry companies.

• Valuation methodsA-H P/E premium

  A-share valuation premium relative to H-shares

  The A-share target price is based on 30.8x 2027E P/E, assuming a 69% A-H valuation premium relative to H-shares and using an RMB/HKD exchange rate of 1.09.

• Risk assessmentGS Factor Profile

  Goldman Sachs factor profile

  This framework compares the stock's relative characteristics versus the market and industry peers from the perspectives of growth, financial returns, valuation multiples, and composite factors.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 0763.HK

  ZTE's H-shares, one of the main covered targets in this report.

  Strengths

  Higher revenue share from the computing business, increasing contribution from non-telecom business, and 12-month target price still implies upside versus the current price.

  Weaknesses

  Gross margin is significantly below the level of the same period last year, and net profit declined YoY and missed expectations.

  Comparison

  The H-share target price implies 18.2x 2027E P/E, with the valuation framework referencing the relationship between peer earnings growth and P/E in the telecom industry.

  Risks

  Domestic 5G and telecom infrastructure demand, market share changes, the pace of gross margin improvement, and fluctuations in non-operating gains and losses.

• 000063.SZ

  ZTE's A-shares, the A-share security of the same company covered in this report.

  Strengths

  Shares the same computing business growth and second-curve development logic as the H-shares, and the target price implies relatively high upside versus the current price.

  Weaknesses

  Earnings forecasts are affected by lower gross margin assumptions, and short-term margins remain under pressure.

  Comparison

  The A-share target price is based on 30.8x 2027E P/E and adopts a 69% A-H valuation premium relative to H-shares.

  Risks

  Changes in the A-H valuation premium, RMB/HKD exchange rate changes, gross margin recovery falling short of expectations, and fluctuations in non-operating gains and losses.

Key data

• 1Q26 revenueRmb35.0bnUp 6% YoY and 5% QoQ, 1% above Goldman Sachs expectations.
• 1Q26 gross margin28.3%Below 29.4% in 4Q25 and 34.3% in 1Q25, and 3.3ppt below Goldman Sachs expectations.
• 1Q26 net profitRmb1.3bnUp 343% QoQ, down 47% YoY, and 41% below Goldman Sachs expectations.
• Revenue share of computing-related business27%Above the full-year 2025 level of 24.6%, indicating rising contribution from non-telecom business.
• 2026-2028E earnings revision-8% / -7% / -6%Mainly due to lower gross margin assumptions.
• 12-month H-share target priceHK$37.5Cut 7% from HK$40.4, based on 18.2x 2027E P/E.
• 12-month A-share target priceRmb58.2Cut 7% from Rmb62.6, based on 30.8x 2027E P/E.

Impact & implications

The report's investment implication for ZTE is broadly neutral: revenue and computing business growth provide support, but the short-term decline in gross margin weakens earnings elasticity, leading to cuts in earnings forecasts and target prices. If margins improve after server, storage, and other computing businesses scale up, the company's second growth curve may continue to contribute growth; if domestic telecom infrastructure demand or margin recovery is slower than expected, valuation upside may be limited.

Risks

• China's telecom infrastructure and 5G base station construction demand may be faster or slower than expected.
• ZTE's market share gains in China may be faster or slower than expected.
• Gross margin improvement may be faster or slower than expected.
• Future non-operating gains or losses may cause upside or downside deviations in earnings forecasts; historically, non-operating items have ranged from a loss of Rmb11.0bn to a gain of Rmb1.9bn.

What to watch

• Whether gross margin improves after the server and storage businesses scale up.
• Changes in domestic telecom capex and their impact on the revenue share of higher-margin network products.
• Whether the revenue share of computing-related business continues to increase.
• Whether 2026-2028 gross margin, expense ratio, and net profit forecasts continue to be revised.
• Changes in the valuation premium between A-shares and H-shares and in FX assumptions.