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Smartone (315 HK) Company Report Summary

Core Content

Smartone is the third-largest mobile service operator in Hong Kong and is expected to benefit from the acquisition of CSL by HKT, which reduces the number of mobile operators in the market and alleviates price competition. This is anticipated to improve profitability and earnings visibility. The report initiates a "Buy" rating with a target price of HK$14.4, which represents a 31% upside potential from the current share price of HK$11.0 as of 21 July 2014.

Main Points

• Market Competition: The acquisition of CSL by HKT reduces the number of mobile operators to four, leading to a less competitive environment and potential for improved profitability.
• Data Service Demand: The popularity of smartphones and the expansion of 3G and 4G services in Hong Kong are driving a robust demand for mobile data services. By 2017, mobile apps are expected to be downloaded over 268 billion times globally.
• Subscriber Growth: Hong Kong has one of the highest mobile subscriber penetration rates in the world at 238%. As of April 2014, there were 17.2 million mobile subscribers, with 7.9 million post-paid and 9.3 million pre-paid.
• Technology and Consumer Trends: The increasing number of 3G and 4G subscribers and the popularity of smartphones indicate a growing demand for data services.
• Profitability Improvement: Smartone is expected to improve its operating margin by 2.3ppts YoY in FY2015E after a decrease of 2.9ppts YoY in FY2014E. This is attributed to reduced depreciation and amortization expenses and effective cost control.
• Earnings Growth: The report forecasts a CAGR of 4.6% for operating profit and 2.8% for net profit from FY2013 to FY2016E.
• Valuation: The target price of HK$14.4 corresponds to a 17.1x forward PE, which is not demanding compared to its peers' average of 15.9-17.6x forward PE.

Key Financial Information

Financial Performance

Key Risks

• Technological Changes: Rapid changes in technology and consumer preferences could impact Smartone's ability to compete effectively.
• Market Competition: Although competition is expected to ease, there is a risk of it intensifying in the future, which could negatively affect profitability.

Company Description

Smartone provides voice, multimedia, and broadband services through its extensive 4G and 3G HSPA+ networks. It is a key player in Hong Kong's wireless communications sector.

Financial Highlights

• Subscriber Mix: Approximately 70% of Smartone's customers are post-paid, which is higher than the industry average of 46%.
• Capital Expenditure: The capex cycle is expected to stabilize, leading to a decrease in depreciation and amortization expenses.
• Operating Costs: Effective cost control measures are expected to stabilize operating expenses as a percentage of service revenue.
• Dividend Payout: The payout ratio is expected to remain stable at 60% from FY2014E onwards.

Valuation Comparison

Analyst Rating System

• Buy: Expected to outperform the benchmark index by >15% over the next six months.
• Accumulate: Expected to outperform the benchmark index by 5-15% over the next six months.
• Hold: Expected to outperform or underperform the benchmark index by <5% over the next six months.
• Reduce: Expected to underperform the benchmark index by 5-15% over the next six months.
• Sell: Expected to underperform the benchmark index by >15% over the next six months.

Analyst Certification

The research analyst(s) certifying this report confirm that:

1. All views reflect their personal opinions.
2. No compensation is tied to the recommendations.
3. They are not supervised by investment banking functions.
4. They have not breached any quiet period restrictions.
5. They are not officers or directors of the companies discussed.

Disclosure

• The firm has no financial interests equal to or greater than 1% of the market cap of the listed company.
• No investment banking relationship with the company within the past 12 months.
• No market-making activities in the stock.

Disclaimer

China Everbright Research Limited does not guarantee the completeness, reliability, or accuracy of the report's contents and does not accept any liability for the information provided.