UBS has issued a research report announcing an upgrade of its ratings for China Telecom (00728), China Mobile (00941), and China Unicom (00762) from "Neutral" to "Buy," citing that dividend downside risks are now reflected in share prices while the upside potential from artificial intelligence remains underappreciated.

The firm has adjusted its price targets accordingly, raising the target for China Telecom from HK$5.1 to HK$5.6, lifting China Mobile's target from HK$83 to HK$95, and trimming China Unicom's target from HK$7.5 to HK$7.1.

UBS notes that mainland telecom operators are currently trading at approximately a 7% projected dividend yield for 2026, a level that stands one standard deviation above their historical average. This represents a notable premium when compared to regional telecom peers and other high-dividend stocks in the broader Chinese market.

The bank attributes this valuation discount to investor concerns regarding AI-related capital expenditure requirements and the long-term sustainability of future dividends. However, UBS believes the market is underestimating the potential returns from these AI investments, anticipating that such spending will optimize the operators' business structures and enhance their overall return on invested capital.

Furthermore, supported by stable free cash flow generation, the Chinese telecom operators are expected to maintain sustainable dividend distributions even after adjustments related to the value-added tax impact in 2026.

UBS contends that with accelerating revenue growth in AI cloud and IDC segments, alongside manageable capital expenditure intensity, the industry is poised for a re-rating. These factors are expected to support further ROIC expansion and reinforce the sustainability of dividends.

The revised price targets are derived from a projected dividend yield of 5% for China Telecom in 2026, reflecting a balance between its considerable AI business exposure and a solid balance sheet capable of supporting shareholder returns. For China Mobile and China Unicom, the targets assume dividend yields ranging between 5.5% and 6%.