Key Takeaways:
Morgan Stanley upgraded ZTE H-shares to overweight from equalweight, raising the price target to HKD39 from HKD31.50 on AI catalysts tied to its ByteDance partnership.
"The collaboration with ByteDance around the Doubao AI assistant integrates agent-based, multimodal and system-level AI capabilities into smartphones," the Morgan Stanley analysts wrote in a note dated June 3.
The broker also raised its A-share rating to equalweight from underweight, lifting the target to RMB34.30 from RMB29.44. Early demand indicators, including the first batch of Doubao-integrated products selling out, suggest strong market interest, the analysts said. ZTE H-shares rose 6.8% on the upgrade, with short selling volume reaching HKD37.7 million, or 3.2% of turnover.
The upgrade comes as ZTE's near-term earnings risks appear largely priced in after a weak first quarter. Morgan Stanley expects a return to positive earnings growth in the second half of 2026, when a low base effect will support the inflection. The deepening partnership with ByteDance paves the way for broader commercialization of AI smartphones, which could become an important driver for sentiment and valuation.
The Doubao AI assistant, developed with ByteDance's Volcengine unit, represents a push into edge-device AI that embeds agent-based capabilities directly into the smartphone operating system. The collaboration mirrors ByteDance's broader AI push through its partnership with Seres' Saidou Technology, where the Doubao large model is being integrated into vehicles.
Short-term earnings remain under pressure after a weak first quarter, driven by gross margin compression, rising operating expenses, foreign exchange losses and increased impairment provisions. The broker said the impact will largely be reflected in subdued second-quarter performance before the recovery begins in the second half.
The new HKD39 target implies roughly 35% upside from the stock's pre-upgrade level. The upgrade positions ZTE as a key beneficiary of the AI-on-device theme, with the ByteDance partnership providing a differentiated edge in China's competitive smartphone market. Investors will watch for further product launches and sales data from the Doubao-integrated lineup as potential drivers through the second half of 2026.
This article is for informational purposes only and does not constitute investment advice.
