1H26 revenue/net profit declined 3.2%/7.5% YoY as weaker domestic non-operator TIS and ACO outweighed operator and overseas growth, while BPO remained resilient. AI+ revenue rose 62% to RMB7.42bn, accounting for 10% of revenue, supported by AIDC full-stack delivery capabilities and growing AI-driven computing infrastructure demand. Reiterate BUY with TP of HK$4.55 based on 7.5x FY27E P/E, supported by the higher payout ratio from 40% in FY22 to 43% in FY25 and management’s target of at least 46% by FY28.
Key Factors for Rating
Net profit declined 7.5% YoY to RMB1.97bn in 1H26, alongside a 3.2% YoY revenue decline to RMB74.48bn, below BOCI estimates and market consensus. Domestic non-operator revenue fell 9.1% YoY to RMB33.25bn amid softer investment and project delivery, with declines in TIS and ACO partly cushioned by resilient BPO. Operator revenue grew 1.9% YoY despite lower traditional network investment, while overseas revenue increased 7.4% YoY.
AI+ revenue rose 62% YoY to RMB7.42bn, accounting for 10% of revenue, led by 63% YoY AIDC growth. AI+ growth mitigated lower traditional network investment, while China Telecom revenue increased 3.6% YoY.
Gross margin declined 0.3ppt to 10.0%. Material costs rose 8.7% YoY on higher AIDC and general contracting projects, partly offset by lower subcontracting and personnel costs. SG&A declined 7.7% YoY, supporting a 1.2% YoY increase in operating profit to RMB1.73bn.
Free cash flow remained broadly stable at negative RMB7.71bn in 1H26, versus negative RMB7.63bn in 1H25, as higher upfront investment in major projects such as intelligent computing centres weighed on cash flow.
Looking into FY26, management aims for gross margin stabilisation and recovery over the medium to long term.
Key Risks for Rating
Macro economy headwind may slow down IT spending from enterprises and municipal government.
Valuation
Reiterate BUY, with TP revised to HK$4.55 based on 7.5x FY27E P/E, or +1SD above the three-year average. AIDC growth and improving shareholder returns support valuation, with the payout ratio rising from 40% in FY22 to 43% in FY25 and targeted at no less than 46% by FY28.