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—such as mobile data services, SMS and MMS services, 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 increased 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 declining. In summary, Huatai Securities believes that the ultimate profit impact on operators may be lower than the direct estimated value.

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

On February 1, 2026, the three major telecom operators announced that starting from January 1, 2026, the business activities involving fixed-line, mobile, satellite, and internet services—such as mobile data services, SMS and MMS services, and internet broadband access—will have their tax category adjusted from Value-Added Telecommunication Services to Basic Telecommunication Services. The applicable VAT rate will be increased 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 widespread adoption of AI operations and maintenance, costs and expenses are expected to continue decreasing. 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 affected by the VAT category adjustment mainly include “SMS and MMS services,” “Mobile data services,” and “Internet broadband access services.” By estimating 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 pre-tax income from these services will decrease by 2.75% after the VAT rate increases from 6% to 9%. Under other unchanged conditions, the estimated impact of this adjustment on the total revenue of China Mobile, China Telecom, and China Unicom is 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 calculated the absolute impact on the 2026 revenue of China Mobile, China Telecom, and China Unicom, as well as the proportion relative to their total profits (2026E). However, we believe that the actual profit impact on these operators may be less than these direct estimates. The main reasons are: 1) this is not the first time the telecom industry has faced a tax rate adjustment—back in 2014, the telecom industry also experienced a “business tax to VAT” policy change, with the final profit impact being less than 10%, lower than the earlier 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 effects on the performance of these companies, the profitability and cash flow stability of telecom operators, as well as their attractive dividend policies, remain intact. Their digital business is expected to benefit from the long-term growth of the domestic AI application industry, and the long-term logic remains unchanged. They continue to be scarce investment opportunities 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)