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Hong Kong Telecommunications Industry Update - March 6, 2018

Core Content

This report provides an update on the Hong Kong telecommunications industry, with a focus on the market dynamics, pricing trends, and financial performance of key operators such as HK Telecom Trust, SmarTone, China Mobile HK, and Hutchison. The analysis suggests that while pricing has stabilized, the market remains competitive and challenging.

Main Points

Market Overview

• Pricing Trends: The telecommunications industry in Hong Kong has seen a stabilization in pricing, with broadband pricing starting to rise and mobile pricing remaining flat for a year.
• Competition: The market has become more competitive, with operators focusing on value-added services rather than price competition.
• Subsidiary Brands: The low-end market is increasingly dominated by multiple brands, including HKBN, Birdy (SmarTone), Sun, Hutchison, and China Mobile HK, which has created deflationary pressure even for higher-end brands.

Financial Performance

• HK Telecom Trust:

  • Reported a 5% increase in AFFO (Adjusted Funds From Operations).
  • Service revenue rose by 2%.
  • Net profit has been gradually increasing from 2016 to 2020E.
  • The company is well-positioned in the enterprise market, allowing it to increase IT services budgets.
  • Free cash flow has been stable, with a slight increase in recent years.
  • The payout ratio is high, around 96%, indicating a strong dividend policy.

• SmarTone:

  • Customer base increased by 10% to 2.2 million.
  • Postpaid ARPU fell by 13%, leading to a 6% decrease in service revenue.
  • Despite this, the company is investing in technology, such as massive MIMO, to increase network capacity.
  • The company is focusing on tech leadership and innovation.

• China Mobile HK:

  • Has a contract with HKBN, which has led to a 17% profit decline in its half-year results.
  • The contract is set to expire in 3Q19, potentially leading to increased wholesale fees.

• Hutchison:

  • Experienced a 2% contraction in service revenue.
  • Leveraged roaming partnerships to offer attractive packages.
  • Marketed HK/China/Macau plans, which had a "very encouraging response".
  • Focused on 10GB+ plans and digital content and services to increase ARPU.
  • Has HK$10bn in net cash and is considering options for its use.

Valuation and Investment Outlook

• Valuation Metrics:

  • P/E ratio is around 14-16.7x.
  • EV/EBITDA ratio has decreased from 9.2 to 6.9x.
  • FCF Yield is around 4.1% to 5.9%.
  • Dividend Yield is between 5.7% and 7.1%.
  • Net debt/equity is around 88.9% to 90.8%.

• Recommendations:

  • HK Telecom Trust is recommended as a "Buy" with a target price of HKD 11.50.
  • The report suggests that investors may prefer to invest in China Mobile (Buy, HK$70.70) or Singtel (Buy, S$3.34) for higher yield opportunities.
  • The report notes that the current sector disequilibrium needs to be resolved before investors are more interested in the market.

Key Information

• Industry Dynamics: The industry is facing intense competition, with operators shifting focus to value-added services.
• Pricing Trends: Mobile pricing has been flat, while broadband pricing has started to rise.
• Financial Health: HK Telecom Trust has a stable financial position with a strong dividend yield and good solvency ratios.
• Strategic Moves: Companies are investing in technology and digital services to drive growth and stickiness.
• Investor Outlook: While the market is not optimistic for a rebound, there are opportunities for long-term growth through new services and improved financial performance.

Summary

The Hong Kong telecommunications industry is experiencing a mixed market environment, with pricing seemingly stabilized but competition fierce. HK Telecom Trust has shown resilience with a 5% increase in AFFO and a focus on enterprise IT services. SmarTone and China Mobile HK are facing challenges due to low-end pricing and contract-related issues. Hutchison has leveraged roaming partnerships and digital services to maintain its position. The report recommends a "Buy" for HK Telecom Trust, with a target price of HKD 11.50, while suggesting alternatives for higher yield. The market remains challenging, and long-term growth is expected through new services and strategic investments.