20151019-招商证券_香港_-3Q15_Preview__Strong_CM_on_solid_4G_momentum__Switch_to_CU_from_CT_on_accelerated_turnaround_23页_1003kb

China Telecom Sector Summary

Core Content

This report provides an analysis of the China telecom sector, focusing on the performance and outlook of China Mobile (CM), China Unicom (CU), and China Telecom (CT) for the 3Q15 period and beyond. It highlights the key factors influencing their financials, market share, and valuation, with a particular emphasis on 4G adoption, ARPU trends, and cost management.

Main Points and Key Insights

1. Sector Outlook for 3Q15

• Industry Service Revenue: Expected to grow 7% YoY, driven by higher ARPU from 4G adoption and no VAT impact.
• EBITDA Margin: Slightly declines 0.4ppt YoY to 38.2% due to increased 4G expenses, but is offset by cost savings and tariff reductions.
• Company Performance:
  • CM: Expected to grow service revenue +9% YoY and EBITDA +11% YoY.
  • CU: Expected to grow service revenue +1% YoY and EBITDA +4% YoY.
  • CT: Expected to grow service revenue +7% YoY and EBITDA +2% YoY.

2. Rating and Target Price

• CM: Maintained BUY rating, with a target price of HK$117.5, implying 7.4x EV/EBITDA and 16.9x P/E for FY15E/FY16E.
• CU: Upgraded to BUY, with a target price of HK$12.2, implying 3.7x EV/EBITDA and 18.5x P/E.
• CT: Downgraded to NEUTRAL, with a target price of HK$4.4, implying 4.0x EV/EBITDA and 14.9x P/E.

3. Key Drivers

• Mobile ARPU: Expected to rebound in 2H15 due to higher 3G/4G penetration and data usage.
• 4G Penetration: Continues to grow, with CM maintaining leadership in network coverage and quality.
• Tariff Reductions: May boost data traffic and ARPU, but also increase cost pressures.
• TowerCo Benefits: Potential for cost savings and revenue growth, though details are pending.

4. Market Share

• CM: Maintains 63% of total mobile subscribers, with 71% 3G/4G penetration.
• CU: Holds 22% of total mobile subscribers, with 19% 3G/4G penetration.
• CT: Has 15% of total mobile subscribers, with 10% 3G/4G penetration.

5. Financial Performance (3Q15E)

• Service Revenue: CM +9% YoY, CU +1% YoY, CT +7% YoY.
• EBITDA: CM +11% YoY, CU +4% YoY, CT +2% YoY.
• Net Profit: CM +17.4% YoY, CU -12.7% YoY, CT -12.4% YoY.
• Margin Trends: EBITDA margin slightly declines for the industry, but CM retains strong fundamentals.

Valuation and Investment Implications

1. Valuation Metrics

• CM: Trading at 5.9x EV/EBITDA and 13.6x P/E for FY15E, with a 3.2% dividend yield.
• CU: Trading at 3.4x EV/EBITDA and 16.0x P/E for FY15E.
• CT: Trading at 3.7x EV/EBITDA and 13.7x P/E for FY15E.

2. Catalysts and Risks

• Catalysts:
  • Continued 4G momentum.
  • ARPU rebound.
  • TowerCo cost savings.
• Risks:
  • Intensified competition.
  • Strategy and execution uncertainties post management changes.
  • Potential share loss from CU's aggressive 4G rollout.
  • Competitive pressure from CM's broadband business.

3. DCF Valuation

• Based on a 10-year DCF model, assuming a WACC of 8.6%.
• Terminal growth rate assumed at 1%.
• The target price of HK$117.5 reflects the firm's intrinsic value.

Comparative Valuation (Asia and Global)

1. Asia Peers

• HUTCHTEL HK, SMARTONE TELECOM, PCCW LTD, and HKT-SS are compared, showing varying valuations and growth prospects.
• CM is highlighted as the top pick due to strong fundamentals and leadership in 4G.

2. Global Peers

• CHUNGHWA TELECOM, TAIWAN MOBILE CO, KT CORP, SK TELECOM, LG UPLUS, NTT DOCOMO, and KDDI CORP are analyzed for valuation and performance.
• CM is compared with CHUNGHWA TELECOM and SK TELECOM, showing similar valuation metrics but different growth trajectories.

Conclusion

The report underscores CM's strong position in the sector due to its leadership in 4G and solid financials, while CU shows potential for growth with improved 4G execution and TowerCo benefits. CT, however, faces rising uncertainties and is downgraded to NEUTRAL. The analysis suggests that CM remains the top recommendation with a BUY rating, while CU is also upgraded to BUY and CT to NEUTRAL. Investors should monitor 4G adoption, tariff changes, and management strategies for future performance.