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1H15 Results Summary: Telecom Operators and Infrastructure Providers

Core Content

The document provides an analysis of the performance and outlook for Chinese telecom operators and infrastructure providers in the first half of 2015 (1H15). It outlines the impact of the VAT reform, the focus on tower asset sales, and the performance of key players such as China Mobile (CM), China Telecom (CT), and China Unicom (CU). Additionally, it discusses the mixed results among infrastructure providers and the valuation and recommendation for various companies.

Main Points

Telecom Operators: Limited Positive Surprise

• VAT Reform Impact: The VAT reform, implemented on 1 June 2014, negatively affected telecom operators in 1H15. This impact was partially offset by cost-cutting initiatives, particularly in marketing expenses.
• ARPU Decline: The reduction in handset subsidies led to a decline in ARPU (Average Revenue Per User).
• Performance Outlook: 1Q15 showed a decline in earnings for CM and CT, while CU saw growth. 2Q15 is expected to show a slight improvement in y-o-y momentum.
• Market Share: CM led in 3G/4G net adds with a 76% market share, while CT and CU had 14% and 10% respectively. CM's first-mover advantage in the 2G segment supports its 4G upgrade strategy.
• Recommendations:
  • China Mobile (941 HK): BUY with a target price of HK$129.00 (28% upside), based on 18x FY16 PE.
  • China Telecom (728 HK): BUY with a target price of HK$5.00 (17% upside), based on 15x FY16 PE.
  • China Unicom (762 HK): HOLD with a target price of HK$10.60, based on 15x FY16 PE.

Tower Asset Sales

• Market Expectations: Investors are anticipating tower asset injections from telecom operators into the state-owned Towerco in 3Q15.
• Asset Size: Estimated at c.Rmb300bn, with c.1m towers from CM, CT, and CU.
• Valuation and Consideration: The consideration is expected to be based on both replacement costs and future leasing fees. The one-off gain as a % of market cap is likely highest for CU at c.36%, followed by CM at 10% and CT at 11%.
• Equity Consideration: The market now believes that the consideration will primarily be paid in equity (stake in Towerco), with CM, CT, and CU maintaining their relative stakes at 40.0%, 29.9%, and 30.1% respectively.

Telecom Infrastructure Providers: Mixed Performance

• ZTE: Recorded a 43% y-o-y earnings growth in 1H15, attributed to strong 4G investment and margin recovery. Recommended as a BUY with a target price of HK$24.00 (44% upside).
• Comba (2342 HK): Anticipated 40%+ net profit growth in 1H15, but rated as HOLD due to potential recovery already priced in.
• CCS (552 HK): Expected to benefit from Towerco's new demand but faces pricing pressure and uncertain demand.
• Trigiant (1300 HK): Suffered from a 12% y-o-y decline in copper prices, negatively impacting ASP and revenue. Recommended as a BUY with a target price of HK$2.90 (55% upside).

Key Information

• VAT Reform: Continued to negatively impact telecom operators in 1H15, but cost-cutting measures helped improve profitability.
• ARPU: Declined due to reduced handset subsidies, but the market is expected to stabilize.
• 4G Growth: CM and CT outperformed in 3G/4G sub growth, with CM leading in market share.
• Towerco Injections: Expected to provide a one-off gain, with CM, CT, and CU maintaining their stakes.
• Valuation Method: PE multiples are used for valuation due to reduced earnings volatility from high capex and depreciation.
• Tariff Cuts: Premier Li Keqiang's call for tariff cuts and speed upgrades may impact unit pricing but operators are expected to upsell data and bandwidth to maintain ARPU.

Summary Table

Conclusion

The report highlights that while the VAT reform negatively impacted telecom operators in 1H15, cost control and 4G investment helped mitigate some of these effects. China Mobile and ZTE are recommended as BUY due to their strong market positions and growth potential, while China Unicom is rated as HOLD. The market is closely watching for updates on tower asset sales and their impact on profitability and valuation.