1

ZTE Corporation [763.HK]

ZTE Corporation (ZTE) develops and markets switches, access servers, video confer-

encing systems, mobile communication devices and optical communications devices.

ZTE is one of China's top-two networking hardware companies, with products ranging

from wireless, wireline, data/optical equipment and handsets, to services and soft-

ware. Top line growth will be supported by continuous investment in wired network,

overseas expansion and development of new business. ZTE should deliver solid net

profit growth of 38.5%/22.5%/23.6% in 2015E/2016E/2017E. Breakthrough in devel-

oped markets, meaningful contribution from new business and increasing market at-

tention are share price catalysts. ZTE share price performance was capped due to

concerns on growth outlook which we believe concerns are overdone. We believe the

current valuation of 16.5x 2015E offers a re-visit point. Initiate with BUY for a target

price of HK$21.95 (based on 21.0x 2015E PER, in line with historical average of 22x).

Wired equipment & overseas sales are growth drivers. There were market

concerns on growth outlook for ZTE after China telecom operators had reached

the peak of investment in 4G networks in 2015. However, demand for broadband equipment is expected to remain robust due to government policy. We also ex-pect ZTE to report breakthrough in developed markets. We forecasts 23% YoY sales growth for ZTE’s networking products in 2016. The networking products segment is expected to report steady growth in medium to long term partly driven by networking products such as servers and routers.

Smartphones segment is no longer a drag. Strong handset shipment in the

US offset the weakness in China market. ZTE’s handset sales percentage from China dropped to below 40% in 2015 from 50% in 2014.

YoY improvement on margins in 2015-16. ZTE management reaffirmed our

view that margins on network equipment (59% of sales in 2015E) are improving based on better product mix and operating expenses control, and we believe

these should be sustained into 2016.

Intact long-term outlook. ZTE’s long-term growth catalysts include: 1) rising 4G-

LTE equipment demand from overseas; and 2) increasing contribution from other IT services and 3) new business such as wireless charging business for electron-ic cars/buses in China. Although these sales contribution in 2015-16 of wireless charging remains small, ZTE’s strong leading position should support current

valuation.

Risks: (1) increasing competition, (2) lower than expected sales of network

equipment and (3) substantial forex losses . Mark Po, CFA — Senior Analyst

(852) 3698-6318

markpo@chinastock.com.hk

Wong Chi Man, CFA —Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

TMT Sector

Hardware

Concerns on growth outlook overdone. Initiate with BUY

BUY

Close: HK$17.26 (Dec 08, 2015)

Target Price: HK$21.95 (+27%)

Share Price Performance

Market Cap US$10,871m

Shares Outstanding 41,250m

Auditor Ernst & Young

Free Float-H Shares 100%

52W range HK$13.5-23.7

3M average daily T/O US$10.9m

Major Shareholding Zhongxingxin

(30.8%)

December 09, 2015

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(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Key Financials

(in RMBm)2013 2014 2015E 2016E 2017E

Revenue 75,232.2 81,471.4 91,372.6 100,816.6 111,629.7

Change (YoY %) (10.7) 8.3 12.2 10.3 10.7

Gross Profit 20,458.6 23,712.3 27,617.9 30,688.9 34,264.4

Gross Margin % 27.2 29.1 30.2 30.4 30.7

Net Profit 490.9 2,633.6 3,653.7 4,474.8 5,532.9

Net Margin % 0.7 3.2 4.0 4.4 5.0

EPS (Basic) 0.14 0.77 0.89 1.08 1.34

Change (YoY %) (112.2) 436.4 15.6 22.5 23.6

DPS $0.030 $0.200 $0.133 $0.217 $0.268

ROE (%) 2.2 11.1 13.9 15.0 17.5

Dividend Yield (%) 0.21 1.37 0.91 1.48 1.83

PER (x) 102.4 19.1 16.5 13.5 10.9

PBR (x) 2.2 2.0 2.2 1.9 1.7

FCF Yield (%) -0.89% 2.92% 8.14% 10.87% 13.49%

Capex (m) (1,048.5) (1,077.1) (1,696.3) (1,865.9) (2,052.5)

Free cash flow per share (0.1) 0.3 0.9 1.1 1.4

Net Gearing (%) 44.9 52.9 50.6 41.2 36.3

2

1) Beneficiary of continuous investment in telecommunication network

According to the China Internet Network Information Center (CNNIC), the number of Chi-nese Internet users reached 668m as of Jun 2015, an increase of 18.9m vs. 649m as of Dec 2014. The penetration rate increased to 48.8% of China's total population, up from 47.9% at end of 2014. Total number of users accessing the internet through mobile devic-es reached 594m for a penetration rate of 88.9% as of Jun 2015, up from 85.8% as of Dec 2014. Meanwhile, total number of internet users via desktop PCs came in at 458m for a 68.4% penetration rate of all users vs 459m and 70.8% as of end of 2014. Total number of Internet users via laptops reached 284m for a 42.5% penetration rate vs. 43.3% as of end of 2014.

The wireless CAPEX by Chinese telecom operators including China Mobile, China Tele-com and China Unicom is unlikely to see significant downside in near future given signifi-cant increase in mobile data usage. The DOU (monthly data usage per subscriber) only hit 197MB, much lower than an average of 1GB in mature markets. Chinese telecom op-erators have to invest for expanding mobile data capacity which creates replacement de-mand. The Chinese telecom operators’ CAPEX remains as ZTE's main turnover driver in 2015 and 2016. Due to continuous investment in wireless and wired network, the industry capex is expected to remain at high level in coming years. We forecast overall telecom CAPEX in China to grow by 12.1% YoY to RMB421bn in 2015 (after +11.2% in 2014) driven by LTE roll-outs by China Telecom and stable investment by China Mobile. In 2016, we expect wireless CAPEX to decline due to slow down in CAEPX by China Mobile while China Unicom and China Telecom will continue to roll out 4G network and close the gap between China Mobile. Moreover, potential cut in CAPEX by Chinese telecom opera-tors is more related to civil works and infrastructure which has less impact on equipment procurement. China Unicom kicked off 4G investment late under new management and 4G CAPEX may accelerate in 2016. Strong mobile data traffic growth due to cut in tariff will trigger demand for capacity expansion which result in continuous network upgrade by Chinese telecom operators.

Despite slow growth in industry CAPEX, ZTE also benefitted from increasing market share. According to ZTE’s management, the group’s market share in China Mobile’s 4G Phase III market share has increased from 34% to 38%, market share in China Unicom’s biddings has increased to 32-35% (up form 23-35% in 3G era) and maintained at over 40% in China Telecom’s biddings. There has been some smoothing of CAPEX as equip-ment is likely to be received in 2015 but payment and CAPEX not recognized until 2016.

Apart from China market, ZTE is also well-positioned from capturing the growth potential from overseas markets which should partly offset the impact of potential decline in mobile CAPEX by Chinese telecom operators. European telecom operators just came out of a three-year frame 4G contracts with other vendors, and now starting to deploy 4G more aggressively. ZTE is being invited to bid for new 4G tenders in continental Europe. We believe that ZTE will have a major breakthrough in developed markets in 2015 and 2016 which should create growth opportunity to the company. Sales from other regions includ-ing Europe and Americas, as percentage of total turnover, increased from 21.0% in 2010 to 27.7% in 2014. ZTE will be the beneficiary of industry consolidation as operating envi-ronment turns more favorable in the 4G era. Nokia’s acquisition of Alcatel-Lucent enables Nokia to build up its telecom equipment business to compete with market leader Ericsson. The deal is expected to help Nokia defend itself from pressure from Chinese equipment makers including Huawei and ZTE. ZTE’s positioning in the global market has become stronger as it proves capability in China’s 4G market and competition has reduced further with the merger of Nokia and Alcatel-Lucent. Apart from Europe, ZTE’s management saw opportunities with upcoming 4G deployment in emerging markets such as Indonesia and India. ZTE started strategic cooperation in 5G business with several top carriers in Korea and Germany in 1H 2015.

High portion of mobile internet user

Telecommunications industry CAPEX to remain high

Market share gain to support growth

Investment positives

3

The government policy of Broadband China will create demand for increasing opportuni-

ties in FTTx/broadband access in China in the next few years. China’s Premier Li Keqiang

publicly mentioned that speed of data transmission in China was relatively slow with high

tariff in Apr 2015. State Council and MITT jointly issued various guidelines on 16 May

2015 aimed at strengthening infrastructure build-out and lowering tariffs.

The key points of the guidelines are:

By the end of 2015:

100Mbps optical fibre coverage ratio in big cities should reach 80%,

Over 50% municipal-level cities should be fully covered by optical fibre,

Average broadband speed should be faster than 20Mbps in major municipal cities and

provincial capitals, and faster than 10Mbps in remaining cities

To improve telecom universal services, increase government fiscal support for rural net-

work upgrades and the broadband network (wireless or fixed line) should cover over 95%

of administrative village

4G base station should reach 1.3m and 4G subscribers should reach 300m

To push for the opening of broadband access market and fair competition, and to issue

broadband access licenses to >100 companies;

To enhance government supervision to protect consumer interests.

By end of 2017:

100Mbps optical fibre should cover all municipal-level cities and most non-municipal-level

cities.

Average broadband speed should be faster than 30Mbps/20Mbps in major/non-major

cities, respectively.

Other cities to reach average speed of 20Mbps

Optical fibre should cover over 80% of administrative villages

4G network should cover all cities and villages and mobile broadband penetration to reach

75% (the level at medium developed countries);

As the government pushes for broadband penetration and fiber deployment, telecom

equipment companies including ZTE will be the beneficiaries. Broadband household pen-

etration is only 42% in China and the government targets to reach 70% of the households

by 2020. Average broadband internet speed is still low in China: only 14% of broadband

subscribers in China use more than 20Mbps speed, and 38% of board band subscribers

use fiber access.

Broadband China policy create growth opportunities

Government is keen to improve optical fibre network coverage

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Stabilization of ARPU

Figure 2: ARPU Trend of Telecom Operators in China

Sources: WIND, CGIS Research

Figure 1: Number of Mobile Internet and Broadband Users in China

Sources: WIND, CGIS Research

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No. of China Mobile Internet Users (10000 units) No. of China Internet Broadband Users (10000 units) RHS

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China Unicom: Average Revenue Per User (ARPU): Mobile Business:RMB/unit/month

China Telecom: Average Revenue Per User (ARPU): Mobile Services: RMB/unit/month

China Mobile: Average Revenue per User per Month (ARPU): RMB/unit/month

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Further room for optical fiber network coverage

Figure 4: Coverage of Optical Fiber Network in China

Sources: MIIT, WIND, CGIS Research

Figure 3: Fixed-Line Broadband Subscribers and Penetration Rate

Sources: MIIT, CGIS Research

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Fixed-Line BB subs (m) HH penetration (%)

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FTTx covered HH (m) As % of total BB covered HH

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Room for improvement in con-nection of optical fibre net-work.

Figure 6: Total Fiber Length in China

Sources: MIIT, WIND, CGIS Research

Figure 5: Lower Usage of Optical Fiber Connection

Sources: MIIT, CGIS Research

65%

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2012A 2013A 2014A 2015 - Mar

>4Mbps >5Mbps >20Mbps FTTx

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Total fiber length (m km) % for longhaul backbone

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Slight drop in industry CAPEX in 2016 and 2017

Figure 7: Total Telecommunications Industry CAPEX

Sources: MIIT, CGIS Research

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2) Expanding geographical coverage and enhancing product mix

There are concerns about outlook for ZTE regarding peaking of wireless CAPEX by Chi-

nese telecom operators in 2016 and beyond. The telecom industry as a whole has seen

slow growth, putting heavy pressure on equipment suppliers. ZTE's management recog-

nised this challenge and proposed a strategic target of "rebuilding ZTE in emerging indus-

tries" in early 2014. After a year of effort, ZTE made some progress in the government and

enterprise network, smart city and automobile battery charging businesses. With the 2015

R&D spending to total revenue ratio increasing to 12% from 9.5% previously, ZTE broke

into several high margin industries including video conferencing solution and high-end core

routers in the enterprise sector.

News flow suggested that China government had requested financial institution to increase

localization rate from 10%-15% now to over 75% in three years time starting 2015. The

increase in localization rate of IT products and software by mainland financial sector cre-

ates growth opportunity to local IT hardware and software suppliers including ZTE. In FY14,

revenue from non-carrier was RMB3.5bn, or ~4% of total turnover. ZTE has already se-

cured contracts from financial institutions for providing total solutions including networking

products, database software, storage and application. Management noted increasing de-

mand in cloud computing equipment, more enterprise building data centers and increasing

market share in servers and high end routers.

According to management, ZTE's self-developed chips and operating systems differentiat-ed in doing government related business in China. ZTE has been deploying more than 110 smart cities, and over 40 countries worldwide. ZTE "wisdom Yinchuan" enables one-stop approval of 432 business processes of government departments, shortening the approval period by 78% and reducing the enterprise registration period from five days to one day. ZTE’s Yinchuan won the TM Forum's president issued a particularly large Awards, IDG awarded the "Global Smart City Innovation Award". Apart from government related seg-ment, ZTE’s IT solution can be applied in sectors such as energy, transportation, public utilities, financial and internet.

Concentrating on fast growing market

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3) Networking products to support growth

Cisco forecasts global content delivery network (CDN) traffic to grow rapidly, at a five-year

CAGR of 39% through 2019, and faster than the 22.9% CAGR for Internet traffic. For Asia

Pacific, Cisco forecasts a CDN traffic CAGR of 39.2% vs. an Internet traffic CAGR of

21.3%. As Asia Pacific’s CDN/Internet traffic ratio (20.3% in 2014) remains significantly

below that in large mature regions such as North America (36.5%) and Western Europe

(40%), we believe growth in CDN demand in Asia Pacific will remain above the global aver-

age in the foreseeable future. Within China, however, due to concerns over data security,

foreign CDN service providers are prohibited to provide CDN services in China. Increased

usage of both cloud computing and data transmission has stimulated global demand for

data centres over the past decade. In China, leading Internet companies, such as Baidu,

Alibaba and Tencent, tended to build up their own data centres to meet long-term demand,

as have their US peers. A data center normally hosts key components like servers, hard

drives, memory and Ethernet switches. As such, the global and China server markets have

continued to grow. Notably, the China market represented less than 20% of the global mar-

ket in 2014-2015 and we expect the China market to grow faster than the global market in

the next few years. The China server market will grow at a 6.5% CAGR in 2014-2019, fast-

er than the global server market, according to Gartner. We attribute the better China server

market growth to 1) continued economic growth momentum, 2) the pick-up in China Inter-

net companies, and 3) a smaller base of data centres compared to other countries. We

expect the China server market to play a more important role in global platforms. According

to Gartner, the China server market will represent 21% of global server market revenues in

2019, up from 16% in 2014.

China server market has been dominated by overseas brands such as HP, Dell and IBM.

Chinese vendors enjoyed strong market share gain from 14% in 2011 to 42% in 2014. We

think the increase in market share was stimulated by increased national security concerns

as Chinese clients increasingly worried about information leakage, especially since key

server makers are all from the US. Lenovo’s acquisition of x86 server business from IBM

was one reason why market share of local vendors jumped substantially. ZTE launched its

server products in 2014 and the company will benefit from government policy of localization

of IT products.

Strong demand for cloud relat-ed services

Local brands are gaining mar-ket share in China

10

Cloud based services is driv-ing the demand

Figure 8: China IDC market Sources: Company Data, CGISResearch

Figure 9: China’s CDN market size Sources: Company Data, CGIS Research

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3) Smartphone division is not a drag and wireless charging equip-

ment offers upside potential

China smartphone market has entered an ex-growth period and the growth rate is ex-

pected to decelerated from over 30% last years to about 10% in coming years. The

market environment is challenging for handset makers. Despite a slow volume growth,

average selling price per device could be increasing in China as Chinese consumers

are growing richer and more sophisticated and they are asking for better products. The

China smartphone market is likely to undergo an industry consolidation as the market

is in mature stage. Leading players are likely to gain market share as they focus on

product quality and user experience instead of the just competing on pricing. The

smaller brands without strong R&D capability and good line up with content providers

will be gradually squeezed out.

Given competitive environment in China, Chinese domestic brands are targeting over-

seas markets including both developed and emerging countries. The leading Chinese

brands have higher chance to gain high market share in emerging countries given their

products are offering higher price/value ratio.

ZTE will focus smartphone sales in overseas markets such as the US, EU and Japan and pay less attention in China market. ZTE’s strong handset shipment in the US offset the soft China market. ZTE’s handset sales percentage from China dropped to below 40% in 2015 from 50% in 2014. ZTE expects 45-50m smartphone shipments in 2015, and expects total handset revenue could decline by low single-digit rate YoY in 2015. ZTE’s gross profit margin of smartphone is about 15% even in emerging markets, high-er than minus 10% in China market where sees tough competition.

NEA released the guidance on charging infrastructure for electric vehicles which will unify the standard for charging plugs. China government targets to install 12,000 charg-ing stations and 4.8m charging posts by end of 2020.

NEA will focus on four areas regarding the standard for charging infrastructure:

a) release standard for charging plugs as soon as possible,

b) upgrade the existing charging equipment,

c) formulate wireless charging technology & standard,

d) release regulations on metering, billing, settlement & other operational services management practices.

ZTE is one of the first movers in wireless charging technology and one of the benefi-

ciaries of development of wireless charging technology by China government. ZTE has

started to ship its EV wireless charging system since Sep 2015, although sales are

insignificant in the beginning. For its strategic alliance with Kandi (the Chinese EV mak-

er) announced on 11 Nov with Uber China and Alibaba, we see no major sales contri-

bution in the near term.

Focusing on overseas markets

First mover in wireless charg-ing

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4) Beneficiary of government policy of building local IC supply chain

ZTE announced earlier that its 90%-owned subsidiary ZTE Microelectronics, will issue new shares to the National Integrated Circuit Industry Investment Fund Cor-poration (National IC Fund) for RMB2.4 bn. Following the transaction, the National IC Fund will own 24% of ZTE Microelectronics and ZTE's holding will be diluted to 68.4%.

ZTE Microelectronics was founded in 2003 with now 18 years of experience in semiconductor/chip design. ZTE Microelectronics is one of the leading IC design houses in China. Currently ZTE Microelectronics is mostly providing chip solutions to other business units under ZTE including advanced multiple-mode 2G/3G/4G baseband chips for its base stations and handsets.

According to ZTE’s management, investment from the National IC Fund should help strengthen ZTE Microelectronics' R&D capabilities, further develop its core patents, and improve corporate governance. Introduction of National IF fund as shareholder could also offer more opportunities for ZTE Microelectronics for further development. National IC fund made investment in some of the leading players in the local IC industries such as SMIC, STATS ChipPAC, APEXMIC, Guoke and San’an Optoelectronics.

ZTE and ZTE Microelectronics also target for continued top line growth from 2015 to 2017 and aims for over RMB6.48bn revenue by 2017. Apart from servicing ZTE, ZTE Microelectronics will also provide ASIC services to other customers which focus on smart home, wearable devices, and etc. Nevertheless, it currently does not plan to enter smartphone SoC. ZTE will need to place compensatory orders to ZTE Microelectronics to meet the performance targets if necessary. ZTE Microelectronics grew rapidly in 2012-2014 with turnover of RMB160m, RMB293m and RMB3.1bn in 2012-2014 and net profit of RMB26m, RMB128m and RMB459m respectively. According to the announcement, ZTE Microelectron-ics is valued at RMB7.6bn, implying a 16.6x 2014 PER or 7.6x 1H15 PBR. ZTE’s management does not exclude the possibility of ZTE Microelectronics might seek for IPO in the future.

As world's largest IC consumer with over 20% growth in output value for local IC design sector, China still suffers from relatively low IC self-sufficiency, less com-petitiveness for local foundries and bottlenecks for local fabless firms in capability improvement. In this regard, China has aggressively pushed its IC self-sufficiency through sustained policy and funding support on overseas expansion ambitions of domestic players. Its recently published "Made in China 2025" clearly outlined that China aimed at lifting IC self-sufficiency rate to 40% in 2020, and further to 70% in 2025. It also released high-level national semiconductor framework in 2014 and set up the National IC Industry Investment Fund to steer substantial investment (RMB120bn over 2014~2017), while provincial government would collaborate with private equity to invest ~RMB600bn in strategic overseas M&A. ZTE through ZTE Microelectronics is one of the beneficiaries of government polices of building up local ecosystem.

A leading IC design house

Potential spin-off

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Figure 10: China IC industry development target

Figure 11: China IC imports

Sources: Wind info , CGIS Research

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Volume of Imports: Ic: YTD (MLN) Volume of Imports: Ic: YTD: YoY (RHS)

2015 2020

Total Revenue > RMB350 bn > RMB870 bn (CAGR > 20%) IC Manufacture 32/28nm mass production 16/14nm mass production

IC Design

Part of key area technologies approach international first

class level

(e.g. mobile smart terminal, network communication)

Key area technologies achieve international leading edge.

(e.g. mobile smart terminal, network communication, cloud

computing, IOT, big data, etc)Packaging & Test Mid- to high-end revenue > 30% revenue Technology to achieve international leading edgeMaterial 12 inch silicon wafer into production line. Enter global supply chain Equipment 65-45nm key equipment into production line. Enter global supply chain Sources: www.semi.org, CGIS Research

14

Figure 12: Major semiconductor M&A deals in China since 2014

Sources: Internet, CGIS Research

Figure 13: China IC supply chain

Sources: Bloomberg , CGIS Research

Time Acquirer Target Amount (USD mn)

2014-06 PDSTI Montage 693

2014-07 Tsinghua Unigroup RDA 907

2014-08 CDB Capital and Tsinghua Unigroup TCL 407

2014-11 Huatian FlipChip 42

2014-12 JCET, SMIC, National IC Fund STATS ChipPAC 520

2015-01 National IC Fund AMEC 79

2015-02 National IC Fund SMIC 398

2015-03 Summitview Cpaital, Hua Capital ISSI 640

2015-05 Hua Capital, Citic Capital Omnivision 1900

2015-05 National IC Fund APEXMIC 82

2015-05 JAC Capital NXP RF Power 1,800

2015-06 National IC Fund Guoke 66

2015-06 National IC Fund San'an Optoelectronics 787

2015-08 Yangzhou Yangjie Electronic Caswell Industries 13.6

2015-09 Tsinghua Unigroup Western Digital  3,775

Downstream

Lenovo [992.HK]

ZTE [763.HK]

TCLM [1070.HK]

Coolpad [2369.HK]

Skyworth [751.HK]

TCLC [2618 HK]

Goldpac [3315.HK]

Huawei

Foundry

Hua Hong [1347.HK] SMIC [981 HK] ASMC [3355 HK]

FablessSPRD/RDA (Under Qinghua Unigroup)

Hisilicon (Under

Huawei)ZTE [763.HK]

Fudan Micro [1385.HK]

Nationz [300077.CH]

Datang [600198.CH]

San’an Optoelec

[600703 CH]

Equipment

ASM Pacific [522.HK]Grinm Semi Material [600206.CH]Shanghai Sinyang [300236.CH]

15

Figure 14: Key Assumptions for ZTE Sources: Company, CGIHK Research

2011 2012 2013 2014 2015F 2016F 2017F

Turnover (RMBm)

Wireless system 21,930.8 16,435.2 15,998.5 32,436.0 36,595.7 37,960.1 39,067.2

Wired system 7,132.1 6,092.4 6,307.2 6,156.0 7,239.4 8,325.3 9,157.8

Other products and services 17,459.1 19,075.1 18,390.6 8,176.3 10,096.5 12,415.8 14,899.0

Handset 26,933.5 25,838.8 21,700.0 23,117.2 21,800.0 21,000.0 20,000.0

Software and data 12,798.9 16,777.9 12,835.9 11,586.0 15,641.0 21,115.4 28,505.8

Total 86,254.5 84,219.4 75,232.2 81,471.4 91,372.6 100,816.6 111,629.7

YoY Change (%)

Wireless system (25.1) (2.7) 102.7 12.8 3.7 2.9

Wired system (14.6) 3.5 (2.4) 17.6 15.0 10.0

Other products and services 9.3 (3.6) (55.5) 23.5 23.0 20.0

Handset (4.1) (16.0) 6.5 (5.7) (3.7) (4.8)

Software and data 31.1 (23.5) (9.7) 35.0 35.0 35.0

Total (2.4) (10.7) 8.3 12.2 10.3 10.7

Gross margin (%) 28.0 22.2 27.2 29.1 30.2 30.4 30.7

Carrier business 35.9 26.5 34.6 35.6 36.4 36.2 36.1

Handset 15.0 16.6 14.6 15.2 15.0 14.9 14.9

Software and data 20.3 26.1 24.9 30.8 30.3 30.0 30.0

Net margin (%) 1.2 (4.8) 0.7 3.2 4.0 4.4 5.0

Cost (RMBm)

S,G&A (13,717.8) (13,790.1) (12,417.3) (12,529.7) (14,053.1) (15,303.9) (17,168.6)

R&D (8,492.6) (8,829.2) (7,383.9) (9,008.5) (10,286.1) (11,349.2) (12,566.5)

Financial Expenses (1,374.2) (1,888.5) (1,650.4) (1,561.7) (1,587.6) (1,698.4) (1,825.2)

YoY Change (%)

S,G&A 0.5 (10.0) 0.9 12.2 8.9 12.2

R&D 4.0 (16.4) 22.0 14.2 10.3 10.7

Financial Expenses 37.4 (12.6) (5.4) 1.7 7.0 7.5

CAPEX (RMBm) n.a. n.a. 1,048.5 1,077.1 1,696.3 1,865.9 2,052.5

Net Gearing (%) 24.1 51.4 44.9 52.9 50.6 41.2 36.3

16

Steady turnover growth in 2015E-2017E.

IT services segment to grow faster

Gross margin to improve

Earnings forecast

ZTE is projected to deliver a net profit growth of 38.5%/22.5%/23.6% in

2015E/ 2016E/ 2017E, supported by steady turnover growth and margin im-

provement.

Overall CAPEX of the Chinese telecom operators is expected to drop YoY in 2016.

However, it is expected that they will use capex savings in infrastructure for more

equipment procurement to speed up 4G network deployment, and hence equipment

CAPEX as % of total CAPEX will increase over the next two years. Wireline CAPEX of

the telecom operators will report growth in 2016, mainly driven by broadband CAPEX.

The market share gain also supports ZTE’s top line growth. ZTE currently has about

35% market in China telecom equipment market in 2015, up from about 32% in 2014.

Non-telecommunications related businesses currently contribute to 13% of total reve-

nues, of which around half come from security or IT services projects for vertical indus-

tries. There are big opportunities from the banking & financial industry CAPEX, similar

to the scale of telecom CAPEX in China. ZTE started to grab market share from over-

seas suppliers like Cisco, IBM and HP in banking projects from 2H 2014. The trend

should continue as regulators encourage supplier migration to domestic vendors from

overseas vendors, on security concerns. Smart City projects is another major growth

driver of ZTE’s non-telecommunications related businesses, which currently accounts

for 15-20% of non-telecommunications revenues, 70% of revenues from software &

services business segment are from non-telecommunications businesses. We expect

ZTE to report a turnover growth of 12.2% YoY, 10.3% YoY and 10.7% YoY respective-

ly in 2015E, 2016E and 2017E.

We expect ZTE’s blended overall gross profit margin to report YoY improvement in

2016E. Gross profit margin of ZTE’s China equipment sales declined 2ppts YoY in Jan

-Sep 2015, due to competition in initial big 4G tenders. Gross profit margin of equip-

ment sales in China could be stable YoY at around 30% in 2016, and will increase

from 2017, driven by higher margin network upgrade projects. Overseas equipment

sales saw a 3-5ppt gross margin improvement in Jan-Sep 2015, and the margin recov-

ery could continue in the next two years due to a low base and solid sales growth in

EU and Asia, which could help stabilize overall equipment gross profit margin in 2016.

There is no major price competition in markets like EU, due to industry consolidation

and pricing discipline from other leading vendors. Gross profit margin in EU wireless

equipment sales is as high as 40%, compared with the average of about 38% of Asia

excl. China market. Gross profit margin of non-telecommunications related business is

currently at about 30%. Gross profit margin of banking IT projects is close to 50%, and

gross margin for Smart City projects is about 30%.

ZTE overseas sales growth in Asia ex-China should continue to grow fast in 2016,

driven by low-cost smartphones that lead to network upgrade of telecom operators in

India, Indonesia and Thailand. The “One Belt, One Road” government projects should

help ZTE to develop overseas businesses. Overseas sales contributed to about 50%

of ZTE’s total revenues. 80% of overseas sales are US$ dominated sales, and 10%

are in Euro. Over 80% of ZTE’s debts are RMB-based. Management expects debts will

go down a little in the next year due to good cash flow trends. ZTE is clearly a benefi-

ciary of weak RMB.

17

Figure 15: Earnings projection

Sources: Company, CGIS Research

Income Statement (RMBm) FY2013 FY2014 FY2015F FY2016F FY2017F Cash Flow Statement (RMBm) FY2013 FY2014 FY2015F FY2016F FY2017F

Revenue 75,232 81,471 91,373 100,817 111,630 Net Income 3,066 4,719 6,196 7,340 8,831

Growth yoy% (10.7%) 8.3% 12.2% 10.3% 10.7% Depreciation & Amort. 968 976 1,061 1,154 1,256

Gross Profit 20,459 23,712 27,618 30,689 34,264 Change in Working Capital (3,306) (3,565) (2,043) (1,931) (2,204)

Growth yoy% 9.6% 15.9% 16.5% 11.1% 11.7% Cash from Ops. 727 2,130 5,213 6,563 7,884

Selling General & Admin Exp. (19,801) (21,538) (24,339) (26,653) (29,735) Capital Expenditure (1,049) (1,077) (1,696) (1,866) (2,053)

Others Operating Expenses/Items 1,541 2,545 2,917 3,305 4,302 Sale of Property, Plant, and Equipment - - - - -

Operating Income 2,199 4,719 6,196 7,340 8,831 Change in Investing Acitivities (122) (945) (3,604) (2,122) (3,325)

Growth yoy% n.a. 114.6% 31.3% 18.5% 20.3% Cash from Investing (1,171) (2,022) (5,300) (3,988) (5,378)

Interest Expense (1,650) (1,562) (1,588) (1,698) (1,825) Net increase in bank borrowings (1,082) (1,310) (1,197) 2,155 2,468

Interest and Invest. Income 378.2 433.6 374.8 449.4 512.4

Income/(Loss) from Affiliates 48.1 34.5 (53.0) (56.8) (60.7) Issuance of Common Stock 0 0 0 0 0

Other Non-Operating Inc. (Exp.) 0 0 0 0 0 Common Dividends Paid (158) (138) (688) (548) (895)

Impairment of Goodwill - - - - - Special Dividend Paid - - - - -

Gain (Loss) On Sale Of Invest. - - - - - Other Financing Activities (1,773) (1,651) (2,306) (2,586) (2,963)

Gain (Loss) On Sale Of Assets - - - - - Cash from Financing (3,012) (3,099) (4,190) (978) (1,390)

Income Tax Expense (394) (810) (1,141) (1,395) (1,722)

Minority Int. in Earnings (76) (94) (131) (160) (198) Net Change in Cash (3,456) (2,991) (4,277) 1,597 1,116

Net Income 505 2,721 3,657 4,479 5,537

Growth yoy% (112%) 436.4% 38.7% 22.5% 23.6%

Balance Sheet (RMBm) FY2013 FY2014 FY2015F FY2016F FY2017F Ratios FY2013 FY2014 FY2015F FY2016F FY2017F

ASSETS Profitability

Cash And Equivalents 20,118 17,230 14,892 17,858 20,361 Return on Assets % 0.5% 2.5% 3.2% 3.6% 4.3%

Receivables 29,768 34,123 38,270 42,225 46,754 Return on Capital % 3.9% 7.9% 9.5% 10.4% 11.8%

Inventory 12,434 19,592 21,973 24,244 26,845 Return on Equity % 2.2% 11.1% 13.9% 15.0% 17.5%

Other Current Assets 16,502 15,345 17,090 18,771 20,582

Total Current Assets 78,822 86,290 92,226 103,099 114,542 Margin Analysis

Net Property, Plant & Equipment 7,698 7,664 8,300 9,012 9,808 Gross Margin % 27.2% 29.1% 30.2% 30.4% 30.7%

Long-term Investments - - - - - SG&A Margin % 16.5% 15.4% 15.4% 15.2% 15.4%

Other Intangibles - - - - - EBIT Margin % 3.4% 6.3% 7.2% 7.7% 8.4%

Deferred Tax Assets, LT - - - - - EBITDA Margin % 4.7% 7.5% 8.4% 8.9% 9.5%

Other Long-Term Assets 15,953 16,300 16,783 17,295 17,839 Net Income Margin % 0.7% 3.2% 4.0% 4.4% 5.0%

Goodwill - - - - -

Accounts Receivable Long-Term - - - - - Asset Turnover

Total Long Term Assets 23,651 23,964 25,083 26,307 27,647 Total Asset Turnover 0.7x 0.7x 0.8x 0.8x 0.8x

Total Assets 102,473 110,255 117,308 129,406 142,189 Fixed Asset Turnover 3.2x 3.4x 3.6x 3.8x 4.0x

Accounts Receivable Turnover 2.5x 2.6x 2.5x 2.5x 2.5x

LIABILITIES & EQUITY Inventory Turnover 6.1x 4.2x 4.2x 4.2x 4.2x

Accounts Payable 40,302 45,224 50,721 55,963 61,965

Accrued Exp. - - - - - Liquidity

Short-term Borrowings 18,720 20,348 18,944 20,902 23,144 Current Ratio 1.2x 1.2x 1.3x 1.3x 1.3x

Curr. Port. of LT Debt - - - - - Quick Ratio 0.7x 0.6x 0.6x 0.6x 0.7x

Curr. Income Taxes Payable - - - - - Avg. Days Sales Out. 144.4 152.9 152.9 152.9 152.9

Unearned Revenue, Current - - - - - Avg. Days Inventory Out. 60.3 87.8 87.8 87.8 87.8

Other Current Liabilities 4,342 4,393 3,870 4,287 4,660 Avg. Days Payable Out. 282.3 270.2 274.6 277.6 278.2

Total Current Liabilities 63,364 69,965 73,534 81,153 89,770 Avg. Cash Conversion Cycle 31.8 74.1 76.1 76.5 76.9

Long-Term Debt 11,505 10,040 10,040 10,040 10,040 Net Debt to Equity 45% 53% 51% 41% 36%

Def. Tax Liability, Non-Curr. 0 0 0 0 0

Other Non-Current Liabilities 3,978 3,957 4,345 4,737 5,173 Growth Over Prior Year

Total Liabilities 78,847 83,962 87,919 95,929 104,983 Total Revenue (10.7%) 8.3% 12.2% 10.3% 10.7%

Common Stock 3,438 3,438 3,438 3,438 3,438 Net Income (112.2%) 436.4% 38.7% 22.5% 23.6%

Additional Paid In Capital - - - - - Payout Ratio % 21.0% 26.1% 15.0% 20.0% 20.0%

Retained Earnings 19,095 21,441 24,407 28,334 31,865

Treasury Stock

Comprehensive Inc. and Other - - - - -

Minority Interest 1,093.0 1,413.9 1,545.0 1,705.5 1,903.9

Total Equity 23,626 26,293 29,390 33,477 37,207

18

A premium to HK listed peers

Valuation

ZTE is trading at 16.5x 2015E PER, a discount to the average of HK-listed & A-share

listed peers.

ZTE is a good proxy to benefit from China’s mobile data traffic growth. New business

segments such as smart city project, wireless charging and IC design should help ZTE

to report sustainable net profit growth of 22.5% in 2016 and & 23.6% in 2017 despite

the peak of China telecommunications industry’s CAPEX in 2015.

The upside catalyst would be faster than expected growth of new businesses such as

government and enterprise business, automobile battery charging, big data and cloud

computing and overseas business. If the new business and globalization strategy re-

port faster growth and ZTE should deserve higher valuation.

We initiate coverage on ZTE with a BUY rating and a target price of HK$21.95 based

on 21x 2015E PER. Our target PER is higher than its peers’ (including Hong Kong-

listed peers within the telecommunications supply chain including telecom operators

and telecommunications equipment makers) average of 2015 PER of 11.5x. But our

target PER is lower than historical mean of 22x and also lower than average of the A

share listed peers. Share price catalysts come from more news flow on industry

CAPEX, strong operating performance, breakthrough in IT services segment and news

flow IC design business.

Figure 16: ZTE PER trend

Sources: Bloomberg, CGISResearch estimates

0

5

10

15

20

25

30

35

40

45

Oct-09

Feb-10

May-10

Aug-10

Nov-10

Mar-11

Jun-11

Sep-11

Dec-11

Apr-12

Jul-12

Oct-12

Jan-13

May-13

Aug-13

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Mar-14

Jun-14

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Dec-14

Apr-15

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HKD

33x

28x

22x

17x

11x

19

Figure 17: Peer Comparison

Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks

Ticker Company

Price Market Cap 2015F 2016F 2017F 2015F 2016F 2017F 2014 2015F 2014 2015F 2014 2015F 2014 2015F

Lcy US$m x x x x x x x x % % % % % %

763 HK ZTE Corp-H 17.26 10,873 16.5 13.5 10.9 8.6 7.3 6.1 2.0 2.2 11.1 13.9 2.5 3.2 1.4 0.92342 HK Comba Telecom Systems 1.40 367 8.4 7.0 6.4 5.3 4.7 4.4 0.8 0.7 4.1 8.9 1.8 2.8 1.7 3.1552 HK China Communications Service 3.09 2,761 7.3 6.8 6.2 3.8 3.6 3.2 0.7 0.7 9.6 10.2 4.1 4.7 3.6 4.36869 HK YOFC 8.35 689 8.0 6.5 5.0 7.0 5.7 4.5 1.6 2.0 21.6 21.2 8.0 8.1 2.4 2.86168 HK China U-Ton Holdings Ltd 1.21 274 18.6 14.3 11.6 n.a. n.a. n.a. 4.0 2.7 15.9 15.8 13.0 8.4 0.0 0.83777 HK China Fiber Optic Network Sy 0.79 219 2.7 2.5 2.1 1.6 1.4 1.3 0.4 0.4 17.1 15.6 9.0 10.3 0.0 6.1877 HK O-Net Communications Group 2.15 203 17.9 11.9 9.0 n.a. n.a. n.a. 1.1 n.a. 3.2 5.9 3.8 n.a. 0.0 n.a.1300 HK Trigiant Group Ltd 1.56 315 6.0 5.5 5.2 6.2 5.7 5.3 0.8 0.8 21.3 14.8 9.4 7.7 8.8 7.2941 HK China Mobile Ltd 89.65 236,852 13.2 12.6 11.5 4.3 4.0 3.7 1.7 1.6 13.3 13.4 8.4 8.7 3.1 3.3762 HK China Unicom Hong Kong Ltd 9.26 28,613 14.4 14.7 12.8 3.2 3.1 2.9 0.8 0.8 5.4 5.4 1.8 2.7 2.6 2.5728 HK China Telecom Corp Ltd-H 3.58 37,385 12.2 11.5 10.4 3.2 3.0 2.8 0.8 0.8 6.2 6.5 3.1 3.8 2.6 2.81883 HK Citic Telecom International 2.98 1,301 13.2 13.2 12.2 8.3 8.0 7.7 1.5 1.5 11.4 11.3 4.4 4.8 3.8 3.9Average 11.5 10.1 8.7 5.6 5.1 4.7 1.3 1.3 11.7 11.8 5.8 5.9 2.6 3.5000063 CH Zte Corp-A 17.50 10,873 20.0 16.7 14.9 11.8 10.3 9.5 2.7 2.4 11.1 12.9 3.0 3.5 0.8 1.2600804 CH Dr Peng Telcom & Media Gr-A 22.12 4,828 40.2 30.2 22.7 10.9 9.0 7.7 5.6 5.6 11.6 14.1 4.6 4.3 n.a. 0.8300134 CH Shenzhen Tat Fook Technolo-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 22.5 n.a. 5.7 n.a. n.a. n.a.600198 CH Datang Telecom Tech Co-A 21.89 3,010 27.4 21.9 n.a. n.a. n.a. n.a. 5.3 n.a. 6.8 n.a. -0.5 n.a. 0.0 n.a.600498 CH Fiberhome Telecom Tech Co-A 26.30 4,291 36.5 29.1 24.3 31.5 25.8 21.6 4.1 3.7 9.1 10.1 3.7 4.3 n.a. 0.9002396 CH Fujian Star-Net Communicat-A 24.03 2,019 42.2 35.4 25.2 n.a. n.a. n.a. 5.2 4.9 11.6 17.4 6.4 14.9 n.a. 1.1002281 CH Accelink Technologies Co -A 57.41 1,878 58.1 39.2 28.0 31.2 21.9 18.3 4.9 4.5 7.1 8.3 4.6 5.3 0.9 0.5600487 CH Hengtong Optic-Electric Co-A 13.78 2,666 34.2 27.3 21.9 n.a. n.a. n.a. 3.9 2.2 10.1 10.6 3.6 4.1 n.a. 0.6002491 CH Tongding Interconnection I-A 18.24 3,409 96.0 41.5 13.2 49.4 42.8 37.4 8.1 8.4 8.9 10.9 3.1 n.a. 0.2 n.a.600522 CH Jiangsu Zhongtian Technolo-A 21.58 3,421 25.9 21.2 17.5 16.2 11.9 n.a. 2.3 2.5 8.6 9.9 5.0 6.4 n.a. 0.8000070 CH Shenzhen Sdg Info Co Ltd-A 26.13 1,104 74.7 53.3 44.7 32.3 25.6 22.4 6.4 6.8 5.3 9.0 2.4 1.9 n.a. 0.2300299 CH Fuchun Communications Co L-A 43.71 2,589 n.a. n.a. n.a. n.a. n.a. n.a. 29.3 n.a. 3.7 n.a. 2.9 n.a. 0.2 n.a.Average 45.5 31.6 23.6 26.2 21.0 19.5 7.1 4.6 9.7 11.5 3.7 5.6 0.4 0.8PRY IM Prysmian Spa 19.85 4,673 16.9 14.4 12.5 8.7 8.0 7.6 3.6 3.4 10.0 19.5 2.1 3.7 n.a. 2.3JNPR US Juniper Networks Inc 29.83 11,510 15.0 13.5 12.7 8.3 8.0 7.6 2.6 2.6 -5.5 15.8 -3.7 8.3 1.3 1.34063 JP Shin-Etsu Chemical Co Ltd 6775.00 23,782 19.7 18.4 16.9 7.0 6.5 6.1 1.4 1.4 6.8 7.3 5.8 7.9 n.a. 1.65803 JP Fujikura Ltd 704.00 2,064 14.1 12.6 11.6 7.0 6.8 6.6 1.0 1.0 1.7 7.2 2.7 3.7 n.a. 1.1MSI US Motorola Solutions Inc 70.38 12,426 21.3 17.4 16.0 11.4 10.5 10.1 n.a. n.a. 40.6 60.1 5.2 7.3 1.9 2.0CSCO US Cisco Systems Inc 27.49 139,541 12.2 11.5 10.7 6.2 6.0 5.9 2.3 2.2 13.6 17.6 8.9 9.7 3.0 3.0ALU FP Alcatel-Lucent 3.69 11,393 28.6 15.2 12.4 7.9 6.8 6.1 5.7 4.3 -4.9 13.9 -0.3 -0.9 n.a. 0.0ERICB SS Ericsson Lm-B Shs 82.00 31,672 16.9 13.6 12.4 8.0 6.8 6.2 1.9 1.8 8.1 9.5 3.9 5.4 n.a. 4.4NOK1V FH Nokia Oyj n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 45.9 13.0 5.4 6.9 n.a. n.a.Average 18.1 14.6 13.1 8.1 7.4 7.0 2.7 2.4 12.9 18.2 3.3 5.8 2.1 2.0

PE EV/EBITDA P/B ROE ROA Div yield

20

Major risk factors

Lower-than-expected CAPEX into mobile stations/FTTH by China’s major telecom

operators. Telecom operators in China are major users of telecom equipment including

base stations and networking equipment. With nearly 60% of total sales in 2015E generat-

ed from networks sales and close to 70% of those sales from China and other emerging

markets, any major reduction or delays in telecom operators’ CAPEX (especially from Chi-

na Mobile or China Telecom) would hurt both top and bottom line growth.

Global smartphone shipment slowdown on weaker-than-expected demand, especially in the US and China and that will put pressure on ZTE. Increased competition and/or smartphone margin contraction, on the back of faster erosion of pricing, could lead to market share loss of smartphone volumes in its major markets especially China and US.

Slower-than-expected revenue growth from new businesses and markets. New busi-

ness segment such as IT services and networking products are the company’s growth driv-

ers. If ZTE’s new business fail to report satisfactory growth or overall growth slow down,

ZTE’s overall turnover growth could be negatively affected.

Historically, ZTE suffered from huge exchange losses given high exposure to the emerging

markets. ZTE has successfully entered some developed markets and currency risks will be

reduced. The company is a clear beneficiary of RMB depreciation.

21

Company background

ZTE Corporation is a globally-leading provider of telecommunications equipment and net-

work solutions. With operations in 160 countries, the company is a leader in technology

innovation, delivering superior products and business solutions to clients all over the world.

Founded in 1985, ZTE is listed on both the Hong Kong and Shenzhen Stock Exchanges

and is China’s largest listed telecoms equipment company.

Offering the industry’s most comprehensive product range and end-to-end solutions, ZTE

delivers cutting-edge technology to telecommunications clients in wireless, access & bear-

er, value-added services, terminals, managed network services, and ICT solutions for en-

terprises and government agencies The company’s expertise and flexibility in these areas

enables telecommunications operators and enterprises globally to achieve business objec-

tives and attain increased competitiveness. ZTE’s technology is deployed by leading inter-

national operators and Fortune-500 enterprises globally. The company is the world’s fourth-

largest handset maker, offering stylish and intelligent devices for consumers around the

world.

ZTE believes in technology innovation as a core value of the company, investing more than

10% of turnover in R&D each year. The company has established 18 state-of-the-art R&D

centers in the China, France, India and employs over 30,000 research professionals. With

107 subsidiaries devoted to innovation globally, ZTE was the world’s biggest originator of

technology patents in each of the past two years, according to data from the World Intellec-

tual Property Organization.

As a member of the UN Global Compact, ZTE is committed to a vision of balanced, sustain-

able development in the social, environmental and economic arenas. Promoting freedom of

communications around the world, the company has incorporated innovation, technological

convergence and the concept of "going green" into the product life cycle. This includes

R&D, production, logistics and customer service. The company also is committed to maxim-

izing energy efficiency and minimizing the CO2 emissions.

Active in community programs, ZTE participated in relief efforts related to the 2004 tsunami

in Indonesia, the 2008 earthquake in Sichuan, China, and the 2010 earthquake in Haiti.

ZTE also established the ZTE Special Children Care Fund, the largest charity fund in Chi-

na.

Looking forward, ZTE will continue to shape the global telecommunications industry, work-

ing with our customers and partners to stay on top of shifts in technology, business models

and market needs.

22

Appendix Selected management profile

Mr Hou Weigui, Chairman and Non-executive Director, worked with China Aerospace Fac-

tory No. 691 as head of the technology division prior to 1984. In 1984, he went to Shenzhen

to establish Shenzhen Zhongxing Semiconductor Co., Ltd., serving as general manager of

the company. He was President of the Company from Oct 1997 to Feb 2004 and has been

Chairman and Non-executive Director of ZTE since Feb 2004. Mr Hou has extensive in the

telecommunications sector and in corporate and business management.

Mr Zhang Jianhneg, Vice Chairman and Non-Executive Director, graduated from Dailian

institute of Technology in 1982 majoring in Chemical Machinery and currently holds the title

of senior engineer. Mr Zhang worked with the No.1 Film Factory under the Ministry of

Chemical Industry from 1982 to 1989 and with No.1 Film Factory of China Lucky Film Cor-

poration from 1989 to 1996. Mr Zhang was appointed director of China Lucky Film Corpora-

tion in 1996, and went to serve as deputy general manager and general manager of that

company unitl 2011. Since Nov 2012, Mr Zhang has been Vice Chairman and Non-

executive Director of ZTE since Apr 2012.

Mr. Xie Weiliang, Vice Chairman and Non-executive Director. graduated from the Faculty of

Politics, National University of Defense Technology in 1982 and currently holds the title of

professor. Mr. Xie served as the head of Nanjing Aerospace Management Cadres Institute

from 2001 to 2003, and as director and general manager of Shenzhen Aerospace Guangyu

Industrial Company Limited since 2003. From 2003 to January 2014 he was director and

general manager of CASIC Shenzhen (Group) Company, Limited. From January 2014 to

September 2014 he was chairman and CPC committee secretary of CASIC Shenzhen

(Group) Company, Limited. Since October 2014 he has been inspector (bureau-level) of

CASIC Shenzhen (Group) Company, Limited. Mr Xie has been Vice Chairman and Non-

executive Director of ZTE since February 2004.

Mr. Wang Zhanchen, Non-executive Director. graduated from Xi’an Artillery Engineering

Institute in 1976 and currently holds the title of senior engineer. Mr. Wang served as factory

manager of Beijing Xinghua Machinery Factory of China Academy of Launch Vehicle Tech-

nology during 1997 to 2001. He has been the Non-executive Director of ZTE since March

2010

Mr. Zhang Junchao, Non-executive Director. Mr. Zhang graduated from Department (I) of

Electronic and Wireless Engineering, Xi’an Jiaotong University in 1977 and currently holds

the title of researcher. Mr. Zhang served as the deputy head of Foundational Electronic

Technology Institute of China Aerospace Science and Technology Corporation from 2000

to March 2003, head of Shaanxi Management Division of China Aerospace Times Electron-

ics Corporation (renamed as “China Academy of Aerospace Electronics Technology”) and

head of Xi’an Microelectronics Technology Institute from May 2003 to January 2014 and

deputy head of China Academy of Aerospace Electronic Technology from September 2010

to January 2014. Mr Zhang has been Non-executive Director of ZTE since February 2004.

23

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One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) men-tioned in this report.

China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transac-tions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto.

China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or invest-ment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report.

Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies).

Analyst Certification

The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report.

Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies cov-ered in this report.

Explanation on Equity Ratings

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China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :