20180316-兴业金融证券-中国联通-00762.HK-Profitability_Ramping_Up_With_Good_Capex_Discipline_16页_402kb

China Unicom Summary

Core Content

China Unicom, the second-largest mobile and fixed broadband network operator in China, is experiencing improved profitability and good capital expenditure (capex) discipline in FY18F. The company's recurring earnings are expected to rebound and grow by 1.3x in FY18F, driven by healthy revenue growth and effective cost controls. Despite the cancellation of mobile data roaming charges starting from 1 July 2018, the impact is expected to be manageable due to existing data plans that allow nationwide usage and increased subscriber data consumption.

Main Points

• Service Revenue Growth: China Unicom's service revenue and reported net profit grew by 8.2% and 2.9x YoY in Jan-Feb 2018, surpassing the previous full-year forecasts.
• Mobile Segment: Mobile service revenue is expected to grow by 5.6% in FY18F, driven by rising 4G adoption (projected to reach 80% by year-end from 62% in FY17). Data usage (DOU) reached 2.4GB in FY17, with significant room for growth compared to neighboring regions.
• Fixed Segment: Fixed service revenue is expected to grow by 2.6% YoY, remaining relatively stable.
• Cost Control: The company is maintaining good cost control through initiatives such as 212C with Internet giants, reducing handset subsidies, and securing better terms from China Tower, helping to manage network-related costs.
• Capex Management: Capex is expected to increase to no more than CNY50bn in FY18F, below market expectations of CNY55bn, due to targeted network upgrades in high data usage regions.
• Dividend Resumption: China Unicom resumed dividend payout, with a final DPS of CNY0.052, implying a 40% payout ratio on recurring earnings.
• Valuation: The target price is HKD13.00, based on a DCF valuation, implying a 3.8x FY18F EV/EBITDA, which is 0.5SD above its 3-year forward mean. The current trading price is at 2.7x EV/EBITDA, 1.5SD below the 3-year forward mean, considered attractive.

Key Metrics

Financial Highlights

• EBITDA Margin: Expected to expand by 2.7ppts YoY to 32.3% in FY18F.
• Net Profit Margin: Improved to 3.3% in FY17, with a projected 4.3% in FY18F.
• Recurring Net Profit: Grew significantly, with a 131.1% increase in FY18F.
• Cash Flow: Improved, with cash flow from operations growing to CNY74,196m in FY18F.
• Balance Sheet: Improved, with net debt decreasing to 3.4% of equity in FY18F.

Key Risks

• Unfavourable changes in regulations or policies.
• Stiffer-than-expected competition.
• Faster-than-expected decline in voice and SMS revenue due to substitution by instant messaging apps like Weixin.

FY18 Outlook

• Revenue Growth: Expected to grow by 2.2% YoY.
• Service Revenue Growth: Expected to grow by 4.5% YoY.
• Mobile ARPU: Rose to CNY47.80 in FY17 from CNY44.20 in FY16.
• Data Revenue: Expected to remain a major growth driver, contributing 60% of mobile service revenue in FY17.

Analyst Opinion

• Rating: Maintain BUY.
• Target Price: HKD13.00.
• Current Price: HKD9.54.
• Market Cap: USD37,226m.
• Dividend Yield: Expected to rise to 2.6% in FY20F.

Summary

China Unicom is showing signs of recovery with healthy revenue growth, effective cost control, and disciplined capex management. The company is expected to maintain a BUY rating with a slightly reduced target price due to lower capex and NP forecasts in FY18-19. The impact of the mobile data roaming fee cancellation is anticipated to be manageable, with the company implementing additional cost control measures. The company's financial metrics are improving, with increased EBITDA margins and better net profit performance.