20150804-法国巴黎银行-Weakness_seems_priced_in_12页_540kb

China Unicom (762 HK) Summary

Core Content

China Unicom (CU) has been reassessed by BNP Paribas, leading to a change in its investment rating and target price. The report indicates that while CU faces ongoing challenges in the mobile broadband market, its current valuation reflects these concerns, and further downside is expected to be limited.

Main Points

• Investment Rating: The stock has been upgraded to HOLD from Reduce, as the current price reflects the weaker earnings outlook and the downward pressure on the stock seems to be priced in.
• Target Price: The target price has been revised down to HKD10.00 from HKD12.00, reflecting lower earnings estimates and a higher WACC assumption (from 11.0% to 11.9%).
• Market Position: CU has a weaker position in mobile broadband compared to China Mobile (CM), which continues to dominate the 4G market. This is expected to continue to have a lingering effect on subscriber growth and earnings.
• Subscriber Trends:
  • CU's mobile broadband subscriber base has shown a decline compared to the previous year.
  • The subscriber loss is expected to moderate in the coming months due to 4G network upgrades and a broader handset portfolio.
  • The competitive gap with CM is expected to stabilize, though regaining market leadership is unlikely in the near term.
• Price Cuts:
  • While price cuts have been announced, actual changes in mobile broadband pricing are minimal.
  • The impact of these cuts on earnings is expected to be limited and gradual.
• Earnings Sensitivity:
  • A 5% change in mobile subscribers could move 2015E/2016E EPS by 1.7%/3.4%.
  • A 5% change in mobile ARPU could move 2015E/2016E EPS by 3.4%/3.4%.
• Financial Metrics:
  • Revenue is expected to remain relatively flat or slightly decline in 2015 and 2016, with a slight recovery in 2017.
  • Recurring EPS is projected to grow from 0.52 in 2015 to 0.70 in 2017.
  • Recurring P/E is expected to decline from 16.6 in 2015 to 12.3 in 2017.
  • EV/EBITDA is expected to remain stable, ranging from 3.4 to 3.2.
  • Net debt/equity is projected to increase from 48.9% in 2015 to 62.7% in 2017.

Key Information

• Subscriber Base:
  • In June 2015, CU's mobile broadband subscriber base was redefined, leading to a one-time adjustment in numbers.
  • The actual number of mobile broadband subscribers is estimated to be 1.7 million (vs. 5 million reported), suggesting the decline is more significant than initially reflected.
• Competitive Landscape:
  • China Mobile has a commanding lead in 4G subscriber additions.
  • China Telecom has managed to maintain a relatively stable monthly net addition.
• Catalyst: Continued weakness in subscriber statistics is seen as a leading indicator of ongoing revenue challenges.
• Risks:
  • Upside risks include improved subscriber momentum, increased mobile data consumption, and effective expense control.
  • Downside risks include more severe subscriber loss and intense price cut pressure from authorities.

Financial Highlights

Key Assumptions and Impact

• 4G Investments: CU's 4G network upgrades and broader handset offerings are expected to stabilize the competitive gap with CM.
• Earnings Impact: The impact of price cuts is limited and gradual, with no significant changes in mobile broadband pricing observed in practice.
• Valuation: The DCF-based target price is HKD10.00, reflecting a higher WACC and revised earnings.

Summary

China Unicom's investment grade has been upgraded to HOLD, reflecting that the current share price has already incorporated the worst-case scenarios related to its weaker market position and lower earnings growth. The target price has been reduced due to lower earnings expectations and higher WACC assumptions. While the company is unlikely to regain market leadership in mobile broadband, it is expected to stabilize its competitive position and see a moderation in subscriber loss. The impact of price cuts is expected to be minimal, and revenue growth is projected to remain modest. The stock is now fairly valued, and further downside appears limited.