China Telecom Sector: 1Q26 Preview Incorporating VAT Impact
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Morgan Stanley published a 1Q26 preview for the Chinese telecom sector, explicitly modeling the financial impact of recent value-added tax (VAT) adjustments. The firm projects industry service revenue to decline 1.4% year-over-year, aligning with January and February MIIT data. Analysts forecast net profit declines of 10–12% for China Telecom (CT) and China Unicom (CU), alongside an approximate 10% drop for China Mobile (CM). Conversely, China Tower (CTC) is expected to post a 30% net profit surge to RMB 3.9 billion, driven by depreciation savings.
The VAT adjustments have prompted analysts to reduce revenue forecasts by 1–2%, translating to roughly 20% downward revisions in net profit predictions for CT and CU, and about 10% for CM. This cascaded into 6–13% target price cuts across major listings. For H-shares, CT was lowered to HK$5.00, CM to HK$80.00, and CU to HK$7.00. A-share targets were similarly trimmed, with CT cut to RMB 5.80, CM to RMB 95.00, and CU to RMB 3.70.
Despite the earnings headwinds, Morgan Stanley maintains Equal-weight ratings across the board. The firm notes that a lower base in 4Q25 should enable sequential growth improvement by 2Q and 3Q26. Furthermore, attractive dividend yields of 5–6% provide substantial downside protection for the sector, justifying the balanced investment stance amid policy-driven top-line pressures.