20150727-DBS_Group-Hong_Kong_Telecom_Sector_Be_wary_of_1H15_results_13页_393kb

Summary of DBS Group Research: Hong Kong Telecom Operators (27 July 2015)

Core Content

This report from DBS Group Research provides an analysis of the performance and outlook for Hong Kong telecom operators, focusing on Smartone (SMT, 315 HK), Hutchison Telecom (HT, 215 HK), and HKT Trust (6823 HK), with an emphasis on their 1H15 results and medium-term prospects. The report highlights potential earnings risks due to over-optimism following strong 2H14 performance, particularly driven by iPhone 6 handset sales. It also discusses the tariff hike and its gradual impact, as well as residential broadband market dynamics.

Main Points

• Earnings Risk for 1H15: The market may be overly optimistic about the 1H15 results of Hong Kong telecom operators after strong 2H14 performance. The report anticipates a possible earnings disappointment for SMT and HT due to the normalization of handset sales and lower profit margins after the initial surge from iPhone 6 sales in 4Q14.

• Handset Sales Normalization: SMT and HT benefited from strong handset distribution in 2H14, with SMT generating an estimated HK$200m+ profit from handset sales. However, in 1H15, as the iPhone 6 becomes available in other channels, demand is expected to normalize, leading to a decline in handset sales revenue and profit margins.

• Tariff Hike Progress: The industry-wide tariff hike, which began in 4Q14, is expected to take time to fully materialize. Operators are replacing old contracts with more expensive handset-bundled plans, and SMT has increased the price of its speed-capped unlimited data plan by HK$10 to HK$106. The next round of tariff hikes is expected during the iPhone 6S launch in 4Q15.

• Residential Broadband Market: A price war is not anticipated as operators offer various promotions. HKT and HKBN are the main players, with HKT offering free mobile broadband data to selected residential broadband customers. HT has cancelled the speed-capped unlimited plan, but still offers it selectively.

• Recommendation: DBS Vickers recommends BUY for Smartone due to its positive medium-term outlook, particularly its exposure to high-end customers and high mobile revenue contribution. For HT and HKT, HOLD is recommended due to valuation concerns.

Key Information

• Smartone (SMT):

  • Price: HK$15.34
  • Target Price: HK$16.00 (4% upside)
  • Recommendation: Buy
  • Market Cap: US$2,095 million
  • FY15F PE: 20.3x
  • Expected 1H15 Earnings: Normalization expected, leading to potential 30% h-o-h decline in earnings to HK$320m, but 42% y-o-y growth.
  • Mobile Revenue Contribution: High, making it the key beneficiary of the tariff hike.
  • Handset Sales: A major contributor to earnings in 2H14, which may not repeat in 1H15.

• Hutchison Telecom (HT):

  • Price: HK$3.43
  • Target Price: HK$3.40
  • Recommendation: Hold
  • Market Cap: US$2,132 million
  • FY15F PE: 18.0x
  • Residential Broadband Revenue: Accounts for ~7% of total service revenue, with a stable sub base of around 200k.
  • Focus: More on the corporate segment than residential.

• HKT Trust (6823 HK):

  • Price: HK$9.52
  • Target Price: HK$9.50
  • Recommendation: Hold
  • Market Cap: US$9,300 million
  • FY15F PE: 21.0x
  • Residential Broadband Revenue: Accounts for ~30% of total revenue, with increasing mobile contribution after the CSL acquisition.
  • Promotions: Offers 6-12 months of free mobile broadband data to selected residential broadband customers.

Valuation Table

Financial Highlights (Smartone)

• Turnover (FY Jun): HK$15,155 million (up 14.4% from 2015F)
• EBITDA (FY Jun): HK$2,830 million (up 15.3% from 2015F)
• Net Profit (FY Jun): HK$786 million (up 46.3% from 2015F)
• EPS (HK$): 0.76 (up 46.3% from 2015F)
• Dividend Yield (FY15F): 3.5%
• Net Profit Margin (FY Jun): 5.2%
• ROAE (FY Jun): 23.3%
• Free CFPS (HK$): 1.81

Market Cap and Valuation Comparison

Analysts

• Tsz Wang TAM CFA: +852 2971 1772 | tw_tam@hk.dbsvickers.com
• Chris Ko: chris_ko@hk.dbsvickers.com

Conclusion

The report advises caution regarding the 1H15 results of Hong Kong telecom operators, citing the normalization of handset sales and the gradual materialization of tariff hikes. While Smartone is recommended as a BUY due to its positive medium-term outlook, Hutchison Telecom and HKT Trust are advised to HOLD due to valuation concerns. The tariff hike is expected to continue and materialize in the coming quarters, particularly with the iPhone 6S launch in 4Q15.