CICC: Maintain CHINACOMSERVICE (00552) at outperform rating with a target price of HK$5.50.

CICC released a research report stating that due to the decline in capital spending by telecom operators, it has lowered the 2026 revenue of CHINACOMSERVICE (00552) by 3.7% to 152.2 billion RMB, taking into account the company's efforts to improve quality and reduce costs, it has slightly lowered the 2026 net profit by 1.5% to 3.705 billion RMB; for the first time, it has introduced revenue and net profit forecasts for 2027, which are 154.1 billion RMB and 37.9 billion RMB respectively. The current stock price corresponds to a 2026/27 P/E ratio of 6.7/6.5 times. Considering the company's diversified business development and seizing the opportunity of AI, the bank maintains an outperform industry rating and a target price of 5.50 Hong Kong dollars, corresponding to a 2026/27 P/E ratio of 9.2/8.8 times, with 35.8% upside potential from the current stock price. Key points of CICC's analysis are as follows: Revenue and profit in 2025 basically meet market expectations The company announced its 2025 performance: operating revenue of 150.1 billion RMB, a year-on-year increase of 0.1%; net profit attributable to shareholders of 36.1 billion RMB, a year-on-year increase of 0.1%, basically meeting market expectations. Actively responding to the impact of declining capital spending by telecom operators, diversifying business structure By segment, the market revenue from telecom operators in 2025 was 80.2 billion RMB, a year-on-year decrease of 4.1%, with new contracts totaling 109.5 billion RMB, a year-on-year decrease of 2%, mainly due to the decrease in customer capital spending. The market revenue from enterprise customers was 65.6 billion RMB, a year-on-year increase of 5.5%; new contracts with enterprise customers were 89.7 billion RMB, a year-on-year decrease of 4%, with smart city and digital infrastructure new contracts increasing by 18% and 40% respectively, driven by the growth in demand for AI, IDC, and other services. Revenue from overseas markets was 4.3 billion RMB, a year-on-year increase of 1.0%. The bank believes that the company is actively responding to the impact of declining capital spending by telecom operators, and its revenue is becoming more diversified and stable. Significant improvement in free cash flow in 2H25; dividend payout ratio exceeds the bank's expectations In 2025, the company's gross profit margin was 11.3%, a decrease of 0.4 percentage points year-on-year, mainly due to pressure on the revenue side. The company's net cash flow from operating activities for the whole year was 9.38 billion RMB (compared to 62.2 billion RMB in 2024), with the decrease mainly resulting from faster external payment settlements by the company, while accounts receivable and contract assets increased year-on-year; however, the company aggressively managed collections in 2H25, leading to a year-on-year increase of 14.1% in free cash flow in 2H25, showing a significant improvement. The company declared a dividend of 0.2241 RMB per share for the full year of 2025, with a payout ratio of 43%, an increase of 1 percentage point year-on-year, surpassing the bank's expectations. Looking ahead to 2026, the company seizes the strategic AI opportunities In 2025, the total contract amount driven by AI exceeded 5 billion RMB, accounting for over 25%, with over 3,700 contracts. The company has a competitive advantage in the field of smart computing center, offering full life-cycle services (consulting, construction, green energy-saving renovation, intelligent operation and maintenance) while strengthening AI applications in key areas such as urban transportation, smart campuses, etc., actively exploring opportunities in the artificial intelligence business. Risks: Income conversion in new areas falls short of expectations; downstream collection period risk.