20150804-法国巴黎银行-Facing_stiff_mobile_competition_11页_478kb

China Telecom (728 HK) Summary

Core Content

China Telecom (CT) is an integrated information service provider in China, offering a wide range of telecommunications services, including wireline and mobile voice, internet access, and value-added services. The document outlines the current financial outlook, investment thesis, and valuation for the company, with a focus on the impact of mobile broadband competition and the effect of price cuts on earnings.

Key Points

Target Price and Rating

• Target Price: HKD4.50 (from HKD6.10)
• Rating: HOLD
• Reason: The stock is considered fairly valued, and the company's ability to regain market share is uncertain due to the competitive landscape.

Earnings Estimate Revision

• 2015E: Net profit estimated at RMB19,185 million (down from RMB20,092 million)
• 2016E: Net profit estimated at RMB21,322 million (down from RMB23,069 million)
• 2017E: Net profit estimated at RMB24,219 million (down from RMB26,561 million)
• Change in EPS: 2015E: -4.5%, 2016E: -7.6%, 2017E: -8.8%

Revenue and Profitability

• 2015E Revenue: RMB329,750 million
• 2016E Revenue: RMB348,557 million
• 2017E Revenue: RMB364,734 million
• Recurring EPS: 2015E: RMB0.24, 2016E: RMB0.26, 2017E: RMB0.30
• Operating Margin: 2015E: 9.4%, 2016E: 9.8%
• Net Margin: 2015E: 5.8%, 2016E: 6.1%

Valuation Metrics

• Recurring P/E (2015E): 14.5x
• Recurring P/E (2016E): 13.0x
• EV/EBITDA (2015E): 3.8x
• EV/EBITDA (2016E): 3.6x
• Price/Book (2015E): 0.9x
• Price/Tangible Book (2015E): 1.0x
• Net Debt/Equity (2015E): 35.3%

Investment Thesis

• CT is expected to focus on regaining competitiveness in mobile broadband by accelerating its 4G upgrade plan.
• The 4G investment cycle is anticipated to last two to three years, with potential for sustained ARPU growth once 4G services reach critical mass.
• CT's share price may remain range-bound during the investment cycle due to the competitive gap with China Mobile (CM).

Catalysts

• The resurgence of mobile subscriber growth and mobile ARPU growth are key catalysts for CT.

Risks

• Downside Risks:
  • Greater competitive intensity in mobile broadband.
  • Rapidly decelerating momentum in fixed-line broadband.
• Upside Risks:
  • More rational industry competition leading to lower marketing expenses.
  • Accelerated progress in national tower companies, allowing CT to utilise competitors' assets.

Competitive Landscape

• Mobile Subscriber Growth: CT lowered its 2H15 estimate to 11.14 million, with total subscribers at 196.8 million.
• China Mobile (CM): Dominates the mobile broadband market with 75% of net additions.
• China Unicom (CU): Competes with CT, but CT's growth is expected to remain stable.

Price Cuts

• Despite publicized price cuts, there is little evidence of meaningful reductions in mobile broadband plans.
• Price changes are expected to have a gradual impact on revenues and earnings.

Key Assumptions

Mobile Subscriber and ARPU

• Mobile Subscriber (2015E): 197 million
• Mobile ARPU (2015E): RMB55.4
• Mobile ARPU (2016E): RMB59.6

Operating Margin

• 2015E: 9.4%
• 2016E: 9.8%

Earnings Sensitivity

• A 5% increase in mobile ARPU would result in a 2.8% increase in 2015E EPS and a 3.0% increase in 2016E EPS.
• A 1ppt increase in operating margin would lead to a 12.9% increase in 2015E EPS and a 12.3% increase in 2016E EPS.

Financial Highlights

Revenue by Division

• Wireline Revenue (2015E): RMB174,348 million (53.3% of total)
• Mobile Revenue (2015E): RMB155,402 million (46.7% of total)

Operating Performance

• Operating EBITDA Margin (2015E): 30.0%
• Operating EBIT Margin (2015E): 9.4%
• ROE (2015E): 6.5%
• ROA (2015E): 4.1%

Valuation Metrics (Continued)

DCF-Based Valuation

• WACC: 13.4%
• Terminal Growth Rate: 2%
• Average Growth Rate: 4.3%
• DCF Value (2015E): RMB304.2 billion

Free Cash Flow

• FCF to Equity (2015E): RMB-13,044 million
• FCF to Equity (2016E): RMB3,573 million
• FCF to Equity (2017E): RMB14,151 million

Balance Sheet Highlights

• Net Debt (2015E): RMB106,759 million
• Book Value per Share (2015E): RMB3.73
• Tangible Book Value per Share (2015E): RMB3.29
• Net Debt/Total Assets (2015E): 18.5%

Key Executives

Conclusion

The document outlines a revised financial outlook for China Telecom, with a lowered target price due to adjusted earnings estimates and a higher WACC assumption. Despite the competitive pressures from China Mobile and China Unicom, CT is expected to maintain its position through strategic 4G upgrades and cost management. The stock is currently fairly valued, and the investment thesis suggests a HOLD rating, with a focus on the gradual impact of price cuts and the potential for long-term growth in ARPU and market share.