UBS has issued a research report maintaining its "Neutral" rating on CHINA MOBILE (00941), CHINA TELECOM (00728), and CHINA UNICOM (00762), with CHINA MOBILE's H-shares remaining the preferred choice. This preference is attributed to CHINA MOBILE's higher net profit margin compared to its peers, resulting in a lesser impact from value-added tax (VAT) on its earnings, coupled with its strong cash flow position which is expected to support a higher dividend payout ratio.

The report noted that the fourth-quarter earnings of all three major mainland Chinese telecommunications operators fell short of expectations. Net profit growth was below forecasts, influenced by macroeconomic headwinds and ongoing investments in artificial intelligence (AI).

The outlook for the current year remains challenging as the telecommunications sector faces significant pressure from multiple objectives. These include improving the return on equity or cash recovery rate as assessed by the State-owned Assets Supervision and Administration Commission (SASAC), fulfilling social responsibilities by shortening accounts payable days to upstream suppliers, and managing pressure on revenue and profit from traditional telecom services due to VAT policy changes while accelerating the transition to non-traditional telecom businesses. Additionally, the competitive landscape is dynamically shifting with the rapid development of AI technology, and new business initiatives such as satellite and quantum communications are emerging.

UBS believes there is limited room for dividend growth in telecom stocks. The negative impact of VAT is likely already reflected in share prices, which have declined by 5% to 15% year-to-date. The report also indicated that the forecasted dividend yields for the H-shares of the three major telecom operators range from 6% to 7%, which remains above the 4% to 5% after-tax target return for insurance investors, suggesting this should provide some support for share prices.

UBS has revised down its net profit forecasts for the three major telecom operators by 10% to 20% for the current year to account for the impact of VAT, assuming subsequent net profit growth will only be in the low single-digit percentages.