Cloud business revenue proportion is higher than Alibaba! AI infrastructure cannot forget the three major telecom operators, Goldman Sachs raises target prices across the board

According to Goldman Sachs, the three major telecom operators are quietly becoming the core beneficiaries of the AI wave in China.

Goldman Sachs believes that telecom operators not only directly participate in cloud computing businesses but also indirectly share in the AI feast by providing infrastructure services to other cloud companies, such as Alibaba. Analysts have revised the 12-month target prices for the three major operators, with increases ranging from 8% to 14% to reflect the additional growth potential brought by AI.

Cloud Business Profitability: Significant Cost Advantages

Goldman Sachs analyst Jin Guo stated in a report on February 25 that the three major operators, China Mobile, China Telecom, and China Unicom, are benefiting from two key areas.

The deployment of AI applications by customers will directly drive the growth of operators' cloud businesses.

Investments by cloud computing companies like Alibaba in AI infrastructure will increase demand for operators' IDC and dedicated line services.

Currently, investors are generally concerned that the profitability of operators' cloud businesses is relatively low, which may drag down overall profit margins. However, analysts believe that telecom operators have significant cost advantages in their cloud businesses compared to other cloud companies.

First, in terms of IDC (data centers), operators have their own IDC and do not rely on external IDC service providers, even providing IDC services for other cloud companies like Alibaba, resulting in lower IDC expenses for their cloud businesses.

Second, the bandwidth costs of operators' cloud businesses are significantly lower than those of other cloud companies, because operators use their own network infrastructure, while other cloud enterprises need to pay operators for bandwidth and dedicated network fees to connect different data centers.

For IaaS businesses, if external IDC and bandwidth are used, the data center costs (IDC services and bandwidth) will account for a considerable proportion of the total costs of cloud companies. Goldman Sachs cites QingCloud as an example, where its data center costs (including cabinets, bandwidth, etc.) account for 50%-60% of its total costs.

State-Owned Enterprises First to Deploy Deepseek, New Opportunities for Operators

Goldman Sachs believes that the state-owned characteristics of the three major operators enable them to be the first to benefit from the government's Deepseek deployment wave.

In the past two weeks, the three major operators have begun assisting key clients in deploying Deepseek models. China Mobile supports China National Petroleum Corporation in deploying a full-stack Deepseek model; China Telecom provides the same service for China Petroleum & Chemical Corporation; and China Unicom collaborates with the Foshan Municipal Bureau of Industry and Information Technology.

More importantly, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) launched the "AI+" action plan on February 21, encouraging Chinese state-owned enterprises to accelerate AI development and commercialization.

According to Goldman Sachs' research, government-related clients account for about 30% of telecom operators' cloud revenue. Therefore, the deployment of AI/Deepseek by government agencies and state-owned enterprises will significantly benefit telecom operators.

Valuation Not Fully Reflecting AI Potential

Although the stock prices of China Mobile (H shares), China Telecom (H shares), and China Unicom (H shares) have risen by 4%, 27%, and 36% respectively since the beginning of this year, Goldman Sachs believes that the current valuation levels are still not high. The enterprise value multiples (EV/EBITDA) and price-to-earnings ratios (P/E) of the operators are only at historical average levels

Compared to Alibaba's approximately 12% contribution from cloud business revenue in 2024, the cloud business revenue contributions of China Telecom, China Unicom, and China Mobile are 23%, 18%, and 11%, respectively.

However, in terms of valuation, the expected price-to-earnings ratio for the three major operators is 12-17 times for 2025 and 11-15 times for 2026, with a dividend yield of 5%-6%, while Alibaba's corresponding figures are 14 times/12 times and 1%-2%, essentially at the same level