Z.AI (2513 HK): Hold: Growth upside depends on next GLM launch

Cut estimates and DCF-based TP to reflect keener competition, higher R&D cost and geopolitical risk. ARR upside hinges on GLM-5.5 launch. Maintain Hold, cut TP to HKD500 from HKD1,375. We cut our 2027e-28e forecasts for Annualised Revenue Run Rate (ARR) and the top line by 7-27%, and our non-IFRS OPM forecasts by 15-19ppts, given more intense competition (e.g. price cuts from Anthropic and OpenAI), higher R&D costs as well as a longer-than-expected timeframe to develop new models as US frontier labs step up anti-distillation measures. This is partially offset by higher GPM from the Open platform and API segment stemming from the mix shift to high-margin revenue shared from collaboration with cloud service providers (CSPs). We now expect non-IFRS net profit to breakeven in 2029e instead of 2027e. We have also added a 1.0% regulatory risk premium (now 1.5% in total) to the WACC owing to higher geopolitical risks from the US. Hence, our TP moves down to HKD500 from HKD1,375.