20131108-巴黎银行证券-Another_difficult_year_ahead_19页_848kb

SMARTONE 315 HK Summary

Core Content

SmarTone Telecommunications Holdings Limited is a leading communications provider in Hong Kong, offering voice, multimedia, and broadband services in both mobile and fixed markets. The document outlines the company's financial outlook, key challenges, and investment considerations for the upcoming fiscal years.

Main Points

• Local Mobile Business Weakening:
  The local mobile business is expected to continue weakening due to challenges in data monetization, despite rising data traffic. The growth in data traffic is largely driven by top users, limiting the upside for the operator. SmarTone's high-end subscriber base, with a significant portion on premium plans, is no longer growing rapidly, leading to lower revenue growth.

• Roaming Revenue Decline:
  Roaming revenue has been a key contributor to profitability, but its decline is significantly impacting margins. The absence of operating leverage and the shift in customer behavior have reduced the effectiveness of roaming as a revenue driver.

• Impact of Mobile Tariff Increase:
  The recent mobile tariff increase is estimated to add HKD105 million in FY14 and HKD256 million in FY15. However, this incremental revenue is not enough to reverse the overall earnings trend. The next interim result is expected to show a 24% year-over-year (y-y) decline in net profit for 1HFY14, with full-year declines of 13.6% and 8.7% for FY14 and FY15, respectively.

• Declining Profitability and ROE:
  Net profit margins are expected to continue declining, which will result in a drop in return on equity (ROE). The ROE for FY13 was 27.7%, and it is projected to fall to 16.8% in FY15.

• Valuation and Target Price:
  The document initiates with a REDUCE rating and a DCF-based target price of HKD8.50, which implies a 15% downside from the current price. The P/E ratios for FY14 and FY15 are estimated at 12.1x and 13.3x, respectively.

Key Information

Financial Projections (FY14 & FY15)

Key Assumptions

• Mobile Subscribers:
  Estimated at 1,928,000 in FY14 and 2,063,000 in FY15.
• Mobile ARPU (HKD):
  Estimated at 246.2 in FY14 and 217.7 in FY15.
• Tariff Increase Impact:
  The estimated incremental revenue from the tariff increase is HKD2.10 million per month, leading to total incremental revenue of HKD105 million for FY14 and HKD256 million for FY15.
• Migration Rate:
  Theoretical migration rate is 4.2% per month, with potential upside or downside based on market competition and customer behavior.

Investment Thesis

• SmarTone's local mobile business is expected to continue declining due to poor data monetization.
• Roaming revenue is a key factor in profitability, but its decline is significantly affecting margins.
• The upcoming 3G spectrum re-assignment poses a regulatory risk.
• The recent tariff increase is a one-off positive but not enough to reverse the earnings trend.

Catalysts

1. Continued weakening of the local mobile business.
2. Further declines in roaming revenue.
3. 3G spectrum auction risk.

Risks to the Call

• Upside Risks:
  1. Better than estimated impact of the recent mobile tariff increase.
  2. Another round of mobile tariff increases.
  3. Removal of 3G spectrum auction risk, leading to positive sentiment.
• Downside Risks:
  The tariff increase may not be enforced post-contract expiry, and the net new smartphone plan subscribers may not be as high as expected.

Conclusion

SmarTone is facing a challenging environment in its local mobile business due to data monetization difficulties and the decline in high-margin roaming revenue. While the recent mobile tariff increase provides a short-term revenue boost, it is not enough to reverse the long-term earnings trend. The company's valuation, though historically cheap, is not considered attractive given the declining profitability and lower dividend yield. The target price of HKD8.50 is based on a DCF model with a WACC of 11.2%, assuming a medium-term growth rate of 12% and a terminal growth rate of 6%.