ZTE (0763.HK): Enterprise and government business in expansion; Product mix weighing on GM; Neutral

ZTE's 2Q26 revenue was up 12% YoY / 23% QoQ to Rmb43bn, or 8% above our estimate, which we attribute to strong growth in the enterprise and government business (+44% YoY in 1H26). 2Q26 GM was down YoY and QoQ, below our estimate, mainly on the GM decline of the operator network business, which fell 15ppts YoY in 1H26 mainly on product mix change, while opex ratio was better than our estimate. Overall, 2Q26 net income was -45% YoY / +10% QoQ, or 11% lower than our estimate. Despite slow telecom capex in China, ZTE is expanding into cutting-edge technologies, such as 6G, T-bit optical networks, and 200G POND, and AI computing infrastructure business. In overseas markets, ZTE is prompting 5G upgrades of mobile networks and fiber-optic transformation of broadband networks, while deepening cooperation in areas such as wireless communications and fiber-optic broadband. We maintain a positive view on ZTE's growth in the long run, driven by computing business growth, which will achieve better