Morgan Stanley has released a research report stating that the industry beta for Greater China telecom operators has largely passed, leading to a downgrade of the sector's rating from "Attractive" to "Neutral" (In-Line). The prospects for internet data centers remain strong, with potential supply-side relief emerging in the future. Based on forecasts from its economics team, mainland China will continue to face deflation in 2026, with the 10-year government bond yield bottoming out and the Renminbi strengthening. With the U.S. expected to implement further interest rate cuts in the first half of 2026, the firm has downgraded its rating on Greater China telecom operators to "Neutral". The report indicates that the fundamental drivers behind the Chinese telecom operators' multi-year upcycle—including regulatory easing, reduced competition, increased cloud business market share, and shareholder returns—have now concluded. The macro environment and persistent deflationary pressures are impacting the mobile business, while artificial intelligence is not yet sufficient to drive revenue growth. The bank has downgraded its rating on the H-shares of Chinese telecom stocks to "Equal-Weight" (EW), expressing a preference for fixed-line services over mobile and favoring H-shares over A-shares due to a stronger Renminbi and potential narrowing of the A-share premium. Morgan Stanley notes that the mainland's deflationary trend is a major headwind for traditional telecom ARPU growth, and the emphasis on corporate profits and cash flow may inhibit revenue growth from new businesses, a trend already evident in 2025 and expected to continue similarly into 2026. Despite the emergence of DeepSeek in the first quarter of 2025, the bank believes the upside for Chinese telecom operators' revenue is limited due to the scale of revenue and slower adoption on the government side. The bank forecasts industry service revenue to grow by 1.7% in 2026 (slightly higher than the 0.9% in 2025), with total net profit growing by 3%, primarily driven by efficiency improvements. The report suggests that AI adoption by state-owned enterprises/government entities could serve as a potential upside catalyst for the three major telecom operators (CHINA MOBILE (00941), CHINA TELECOM (00728), and CHINA UNICOM (00762)). The bank states that the drivers for a re-rating of Chinese telecom stocks are limited: (1) Chinese yields are unlikely to decline further; (2) growth has significantly slowed to low single-digit profit increases, and the room for further dividend payout ratio improvements has narrowed. Morgan Stanley expects the target dividend yield for Chinese telecom H-shares to be 6-7% in 2026 and maintains its preference ranking: CHINA TELECOM > CHINA UNICOM > CHINA MOBILE.