UBS has issued a research report raising its ratings for China Telecom (00728), China Mobile (00941), and China Unicom (00762) from "Neutral" to "Buy," citing that dividend downside risks are already reflected in current share prices and that the upside from AI remains undervalued.

The broker has adjusted its target prices, lifting China Telecom to HK$5.6 from HK$5.1, raising China Mobile to HK$95 from HK$83, but trimming China Unicom to HK$7.1 from HK$7.5.

The report highlights that Chinese telecom operators currently trade at approximately a 7% projected dividend yield for 2026, which is one standard deviation above their historical average and represents a notable premium compared with regional telecom peers and other high-dividend Chinese stocks.

UBS attributes this valuation discount to investor concerns over AI-related capital expenditure requirements and future dividend sustainability. However, the firm believes the market is underestimating the return potential from AI investments, which are expected to optimize operators' business structures and enhance overall return on invested capital.

Additionally, thanks to stable free cash flow generation, Chinese telecom operators can maintain sustainable dividend payouts even after accounting for the impact of value-added tax adjustments in 2026.

The bank argues that with accelerating growth in AI cloud and IDC revenue alongside manageable capital expenditure intensity, the industry is positioned to support further ROIC expansion and reinforce dividend sustainability, paving the way for a sector re-rating.

The target prices are derived from a projected 5% dividend yield for China Telecom in 2026, balancing its meaningful AI business exposure with a solid balance sheet that underpins dividends, while China Mobile and China Unicom are assigned target dividend yields of 5.5% to 6%.