A report from Morgan Stanley indicates that China's Ministry of Finance and the State Taxation Administration have jointly announced a new VAT classification, which reclassifies mobile data, broadband access, and SMS/MMS as basic telecommunications services, increasing the applicable tax rate from the original 6% to 9%. Following the announcement, the three major Chinese telecom operators have all stated that their revenue and profits will be negatively impacted. The extent of this impact, according to the firm, depends on two primary factors: (1) the proportion of revenue affected, and (2) net profit margins. Based on their calculations, China Telecom (00728) and China Unicom (00762) could see their current-year earnings per share (EPS) affected by 14.1% and 15.2%, respectively, while China Mobile (00941), due to its higher profit margin, is expected to face a lesser impact of 7.8%. Morgan Stanley noted that its current EPS and dividend per share (DPS) forecasts for Chinese telecom stocks do not yet incorporate this tax rate adjustment. Should the dividend payout ratios remain unchanged (estimated at 77% for China Mobile, 78% for China Telecom, and 65% for China Unicom), the three major operators could potentially experience a decline in both EPS and DPS by 2026. The firm views this tax rate increase as a one-time adjustment, with growth rates expected to normalize starting in 2027. If domestic operators can pass the tax hike on to consumers through price increases, post-2027 growth could see some improvement; however, the firm maintains a cautious stance on this possibility given the current moderate macroeconomic environment. In its recent outlook for Chinese telecom stocks through 2026, Morgan Stanley had already downgraded the sector rating to "Neutral" and lowered its rating on the H-shares of the three major telecom companies to "In-Line with the Market."