Highlights

• 3Q26 revenue rose 34% yoy to Rmb38.8b and reported net profit surged 395% yoy to Rmb1.3b, 6%/30% above consensus, but operating profit missed by 79% on higher operating expenses.
   
• 4Q26 should remain flattish qoq as weak domestic telco offsets renewed sequential growth in compute; 2027 looks like another year of moderate growth, led by overseas telco and compute businesses.
   
• Maintain HOLD and cut target price to HK$19.20 as we lower our 2026-28 net profit estimates by 6.3%/13.8%/4.8% respectively.
   

Analysis

• Revenue beat but operating profit missed. Revenue grew 34.0% yoy but fell 9.8% qoq to Rmb38,813m, beating consensus by 5.8%. Gross margin remained low at 24.6% (-1.3ppt yoy, +1.3ppt qoq), in line with consensus. Operating profit dropped 87.3% qoq to Rmb88m, missing consensus by 79.3% due to higher-than-expected operating expenses. Reported net profit rose 394.5% yoy but fell 9.4% qoq to Rmb1,307m, beating consensus by 30.2%, supported by Rmb501m in fair-value gains on trading financial assets. This translates to a core net profit of RMB593m, down 53.8% qoq, although it turned positive versus the same period last year.
   
• Compute-related revenue moderated sequentially by around 5.2% qoq to Rmb17b in 3Q26, due to a high-base effect, as 2Q26’s delivery also included orders from 1Q26 that were pushed back into the quarter amid memory supply shortages. Note that ZTE Corporation (ZTE) has stocked up on ample memory supplies as seen in the Rmb18b sequential increase in inventory in 3Q26, as the company expects further price hikes going forward. This also means that order deliveries should be much smoother going forward.