Huatai Securities: The VAT adjustment for the three major telecommunications operators may have a profit impact lower than the direct estimate

Huatai Securities Research Report states that on February 1, 2026, the three major telecommunications operators announced that starting from January 1, 2026, the business activities involving fixed-line, mobile, satellite, and internet services providing mobile data, SMS, MMS, and internet broadband access will have their tax category adjusted from Value-Added Telecommunication Services to Basic Telecommunication Services. Correspondingly, the VAT rate will be adjusted from 6% to 9%. Huatai Securities believes that although this tax category adjustment will have a short-term impact on the company’s revenue and profits, on one hand, operators are actively promoting technological transformation and upgrades including computing power services and intelligent services, which is expected to further optimize the revenue structure; on the other hand, with the popularization of AI operations and maintenance, costs and expenses are expected to continue to decline. In summary, Huatai Securities believes that the ultimate profit impact on operators may be lower than the direct estimated value.

Full Text Below

Huatai | Communications: How to View the Impact of the Operator VAT Adjustment?

On February 1, 2026, the three major telecommunications operators announced that starting from January 1, 2026, the business activities involving fixed-line, mobile, satellite, and internet services providing mobile data, SMS, MMS, and internet broadband access will have their tax category adjusted from Value-Added Telecommunication Services to Basic Telecommunication Services. The corresponding VAT rate will be adjusted from 6% to 9%. We believe that although this tax category adjustment will impact the company’s short-term revenue and profits: 1) on one hand, operators are actively promoting technological transformation and upgrades including computing power services and intelligent services, which is expected to further optimize the revenue structure; 2) on the other hand, with the popularization of AI operations and maintenance, costs and expenses are expected to continue to decline. In summary, we believe that the final profit impact on operators may be lower than the direct estimated value.

Key Points

Revenue Side: We estimate that the impact of the VAT adjustment on total revenue is approximately 1.3%-1.4%

According to the Ministry of Finance’s “Announcement on the Specific Scope of VAT Taxation,” the businesses involved in the VAT category adjustment mainly include “SMS and MMS services,” “Mobile Data Services,” and “Internet Broadband Access Services.” We estimate the proportion of these businesses involved in VAT adjustments for China Mobile, China Telecom, and China Unicom relative to total revenue, and assuming the tax-inclusive price remains unchanged, the VAT rate change from 6% to 9% will reduce the pre-tax income from these services by about 2.75%. Under unchanged other conditions, the overall revenue impact on China Mobile, China Telecom, and China Unicom is estimated to be approximately 1.3%-1.4%.

Profit Side: Multiple optimization measures can be adopted, and the final impact may be lower than the direct estimate

If we perform a direct linear projection, we have estimated the absolute impact on the 2026 revenue of China Mobile, China Telecom, and China Unicom, and their proportion relative to total profit (2026E). However, we believe the actual profit impact on these operators may be lower than these direct estimates. The main reasons are: 1) the tax rate adjustment for telecom services is not the first time; in 2014, the telecom industry also faced a “business tax to VAT” policy change, and the final profit impact was less than 10%, lower than the previous estimate of 18%-30%; 2) telecom operators are accelerating their transformation into technology companies, with emerging businesses such as IDC, computing power services, and big data increasing their revenue share, which may mitigate the impact of VAT in the long term; 3) AI-driven network operations and maintenance process optimization can further reduce costs and expenses; 4) telecom operators are expected to partially offset the impact of VAT through improved pricing mechanisms, marketing models, and package designs.

Investment Conclusion

Overall, we believe that although the VAT category adjustment will have some short-term impact on the performance of each company, the profitability and cash flow stability of telecom operators, their attractive dividend prospects, and the long-term logic that their digital businesses will benefit from the domestic AI application industry development remain unchanged. They continue to be scarce investment assets with both dividend and technological attributes.

Risk Tips: ARPU improvement slower than expected; 5G capital expenditure higher than expected; increasing competition.

(Source: People’s Financial News)