Morgan Stanley: Affected by the increase in value-added tax, it is expected that Chinese telecom stocks will face risks of declining earnings and dividends this year

Morgan Stanley published a report stating that the Ministry of Finance and the State Administration of Taxation of China jointly announced a new classification of value-added tax, which includes mobile data, broadband access, and SMS/MMS as basic telecommunications services, with the tax rate raised from the original 6% to 9%. Following the announcement, the three major Chinese telecommunications operators indicated that their revenue and profits would be negatively impacted.

The bank believes the extent of the impact depends on two factors: (1) the proportion of affected revenue and (2) the net profit margin. According to the bank's estimates, China Telecom (00728.HK) and China Unicom (00762.HK) may see their earnings per share affected by 14.1% and 15.2% this year, while China Mobile (00941.HK), due to its higher profit margin, is expected to be impacted by 7.8%.

Morgan Stanley pointed out that the current earnings per share and dividend forecasts for Chinese telecommunications stocks have not yet accounted for this tax rate adjustment. If the dividend payout ratios are not increased (estimated at 77% for China Mobile, 78% for China Telecom, and 65% for China Unicom), the three major operators may experience declines in earnings per share and dividends per share by 2026. The bank believes this tax rate increase is a one-time adjustment, and growth rates should return to normal starting in 2027. If mainland operators can pass the tax rate increase onto users through price hikes, growth may improve after 2027, but the bank remains cautious in the current moderate macro environment.

The bank indicated that in its recent outlook for mainland telecommunications stocks for 2026, it had previously downgraded the industry rating to "neutral" and lowered the ratings of the three major telecommunications H-shares to "in line with the market."