UBS: Upgrading the three major telecom operators in the mainland to “buy” AI upside is undervalued

The Zhitong Finance App learned that UBS released a research report saying that it raised the ratings of China Telecom (00728), China Mobile (00941), and China Unicom (00762) from “neutral” to “buy” because the downside risk of dividends is already reflected in stock prices, and the upward space for AI is underestimated. China Telecom's target price increased from HK$5.1 to HK$5.6, China Mobile's target price increased from HK$83 to HK$95, and China Unicom's target price decreased from HK$7.5 to HK$7.1.

According to the report, China Telecom operators are currently trading with an expected dividend yield of about 7% in 2026, which is 1 standard deviation higher than the historical average, and a clear premium compared to regional telecom peers and the existence of other high dividend targets in China. The bank believes that this valuation discount reflects investors' concerns about AI-related capital expenditure requirements and future dividend sustainability.

However, the bank believes that the market has underestimated the return potential of AI investments, and it is expected that these investments will optimize operators' business structures and enhance overall ROIC. Furthermore, with stable free cash flow generation capacity, China Telecom operators will be able to maintain sustainable dividend distribution even after adjustments due to VAT in 2026.

The bank believes that as AI cloud and IDC revenue growth accelerates and capital expenditure intensity remains manageable, it will support the further expansion of ROIC and strengthen dividend sustainability, and the industry is expected to usher in a revaluation. The target price is based on China Telecom's expected dividend yield of 5% in 2026, which is expected to balance significant AI business exposure with a solid balance sheet supporting dividends, and China Mobile and China Unicom's target dividend ratio of 5.5%-6%.