china telecom (762 hk) 3.78 5.20 buy 39,199 china / hong ... china telecom sector 6 page 3 overview...

ed-TH / sa- DL / CS

2018 outlook: It's payback time

Expect carriers’ cash flow improvement,

supporting dividend hike in the long term Cautious on the over-excitement about 5G

network spending Continuous shift from mobile capex to fixed-line

capex China Unicom is top pick among operators; YOFC

is top pick among equipment suppliers

Expect cash flow improvement; Towerco listing a key event

The market will focus on the IPO of Towerco in 1Q18. We

estimate Towerco's valuation to be c.Rmb270bn and account

for 10-20% of China Telecom’s (CT, 728.HK) and China

Unicom’s (CU, 762.HK) valuations. We forecast overall capex to

decline after the peak of 4G capex cycle and 5G capex should

be moderate. We expect carriers’ free cash flow to improve by

c.30%+, supporting potential div idend hikes.

Ov er-excitement on 5G capex; fixed-line capex rising. The

market is expecting higher 5G capex, vs. 4G capex, and is

excited about the benefit to telecom equipment suppliers.

However, we believe that telecom operators will manage the

capex at a prolonged and gradual pace so that the network

spending will match the revenue to maintain a reasonable

return. We forecast the overall capex on telecom infrastructure

to decrease by c.4% in FY18, with the budget allocation

shifting from mobile to fixed-line segment.

CU is our top pick with c.70% earnings CAGR achievable. CU

has gone through the pilot scheme of mixed-ownership reform

(MOR) in China. It set out a set of financial performance

indicators which translate into c.70% earnings CAGR for FY17-

20. This is achievable, in our v iew, given management’s strong

execution capability and track record. We upgrade CU from

HOLD to BUY, our top pick in the sector. We maintain our BUY

ratings on CM and CT with steady earnings and div idend

growth.

YOFC is our top pick among the equipment suppliers. We are

more selective on equipment suppliers due to slight capex

reduction and budget shift from mobile to fixed-line network.

We like YOFC (6869.HK) as it benefits from the rising demand

for optical fibre cables. We estimate the industry cable demand

to grow by 20% in 2018, supported by fixed-line investments

from China Mobile (CM, 941.HK), China Broadband Network

(CBN) and the private sector. We have downgraded ZTE

(763.HK) from BUY to HOLD on valuation grounds.

HSI : 29,624

ANALYST Tsz Wang TAM CFA, +852 2971 1772

[email protected] Chris KO CFA, +852 2971 1707

[email protected]

Recommendation & valuation

Price as of 29 Nov 2017

Source: Thomson Reuters, DBS Vickers, Bloomberg Finance L.P.

Company Price Target

Price

Rec Mkt

Cap

HK$ HK$ US$m

China Unicom

(762 HK)

11.52 15.60 BUY 35,348

China Telecom

(728 HK)

3.78 5.20 BUY 39,199

China Mobile

(941 HK)

80.05 104.00 BUY 210,018

Yangtze Optical F ibre & Cable

(6869 HK)

38.60 46.50 BUY 3,374

Fiberhome Telecom

(600498 CH)

30.86 43.00 BUY 4,887

China Comms.Svs.

(552 HK)

4.95 5.80 BUY 4,393

ZTE 'H'

(763 HK)

28.65 28.30 HOLD 20,562

ZTE 'A'

(000063 CH)

34.22 29.60 FV 20,562

DBS Group Research . Equity

China / Hong Kong Industry Focus

China Telecom Sector

1 Dec 2017

Refer to important disclosures at the end of this report

Industry Focus


Table of Contents

Overview 3

Expect steady revenue with healthier cash flow 3

Competition remains intense in fixed-line market 4

Re-visiting Tower’s financials 5

Mixed-ownership reform of CU 7

Capex focusing on fixed-line network investment 9

Excitement on 5G capex - rational or irrational? 10

Recommendations and valuations 10

Chartbook 12

Stock Profiles 33

China Unicom 33

China Telecom 41

China Mobile 49

Yangtze Optical F ibre and Cable 57

F iberhome Telecom 65

China Communication Serv ices 73

ZTE 81

Industry Focus


Overview

In 2018, the market will focus on the IPO of Towerco whose

valuation is expected to account for 10-20% of CT's and CU’s

valuations. On the other hand, we expect mobile business to

register steady serv ice revenue growth, driven by increasing

data consumption and sub upgrade from 3G to 4G. We expect

continuous earnings and efficiency enhancement in the sector

after CU's mixed-ownership reform. Moreover, we anticipate

improving free cash flow after the peak of 4G capex cycle. This

sets hope for mobile operators to increase div idend

distribution.

Expect steady revenue with healthier cash flow

Data consumption supported by 2I2C initiatives and dual-SIM.

We expect aggregate mobile sub base to expand by a single-

digit rate in 2018. Mobile operators are working with internet

companies to sell mobile data at discounts, i.e. 2I2C initiatives

to new subs. For example, CU co-operates with Tencent while

CT co-operates with Alibaba to sell mobile data plans. Mobile

subs are encouraged to use more data at lower incremental

costs. Note that mobile number portability (MNP) is not

available in China; handsets with dual SIM slots allow

customers to add additional mobile data plans at a low price

without changing SIM cards and mobile numbers. The second-

SIM market becomes a new driver to increase sub growth and

data consumption. The momentum of sub growth has been

accelerating since the launch of 2I2C initiatives in 4Q16.

China mobile subscriber market share (Oct 2017)

China Mobile60%

China Unicom21%

China Telecom

19%

Source: Companies, DBS Vickers

Aggregated mobile subscriber net-adds in China

-2

0

2

4

6

8

10

12

14

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17

million


Stable mobile ARPU supported by 4G upgrade. We expect

stable mobile ARPU in 2018. We believe that the respective 2G

and 3G/4G ARPUs are on a declining trend due to market

competition. 4G upgrades will be positive to overall ARPU as

4G serv ices generate higher ARPUs than 2G serv ices. Currently ,

overall 4G penetration is around 68.8% (as at end-October

2017). We forecast the penetration to increase to 71% and

81% by the end of 2017 and 2018 respectively .

Expect less policy uncertainties . China's Telecom sector has

been facing various policy risks in the past few years, including

VAT reform as well as “speed upgrade and tariff reduction”,

etc. In 2017, telecom operators have (1) cancelled domestic

long-distance and roaming tariffs from 1 October 2017

onwards, (2) reduced the dedicated internet access tariff for

SMEs, and (3) reduced international long-distance call tariffs.

These policies will have a full-year impact in 2018, vs. 3-month

impact in 2017. We expect less government intervention and

policy risks going forward following CU's mixed ownership

reform, as fair market competition is expected by CU's

strategic investors from the private sector.

Industry Focus


Cashf low enhancement points to div idend hikes. We expect

operators’ earnings and operating cashflow to improve

through efficiency enhancement, for example, increase in

tower-sharing ratio and more effective staff incentive

compensation. We forecast the total capex of the three major

operators to decrease by 4% in 2018 after the peak of 4G

capex cycle. We believe that telecom operators will manage

the capex at a prolonged and gradual pace so that the network


return. We accordingly expect the free cash flow to grow by

30%+ in 2018 and continue to improve the following years.

This will allow operators to increase their div idend payout

ratios.

Capex-to-EBITDA ratio

0%

50%

100%

150%

200%

250%

FY09A FY11A FY13A FY15A FY17F FY19F

China Mobile China TelecomChina Unicom

Source: MIIT, companies, DBS Vickers

Competition remains intense in fixed-line market

In 2018, we believe the fixed-line market will continue to be

competitive due to CM’s aggressive pricing to take market

share. CM's ARPU was Rmb34.9 in 1H17 which was c.30%

below CT’s Rmb52.0 and CU’s Rmb47.0. We believe this was

also partly due to its lower network quality . Moreover, China

broadband network (CBN), which has consolidated various

local cable TV operators in China, was also established in 2016.

It obtained a telecom licence from the regulator and has

become a threat to existing players. Despite intense

competition, we expect the fixed-line market to continue to

grow at a low single-digit rate through (1) customer upgrades

to higher bandwidth serv ices, and (2) more value-added

serv ices such as IPTV.

China fixed-line broadband subscriber market share (Oct

2017)

China Telecom

42%

China Mobile34%

China Unicom24%

Source: MIIT, companies, DBS Vickers

Industry Focus


Re-visiting Tower’s financials

Looking forward to year 2018, we believe that the market will

focus on the development of Towerco (also known as China

Tower, which was established in 2014 by the three telecom

operators in China), including its profitability and valuation, as

well as telecom operators’ cost sav ings from tower sharing. We

expect the market to start pricing in Towerco’s value separately

due to (i) more operational and financial disclosure through

operators, as well as (ii) more market news on the potential

Towerco IPO. Note that CM, CT and CU have 38%, 28% and

28% stakes in Towerco respectively .

Expect rising tower-sharing ratio. The demand for towers was

around 2.5m in 1H17. CM, CT, and CU used 1.2m, 640,000

and 700,000 towers with sharing ratios of 40%, 68% and

64% respectively . This implies single-tenant tower (unshared)

number of 1.2m. Given the total number of towers was

around 1.9m, the number of two-tenant towers is around

700,000, assuming only a small number of three-tenant towers

at early stage. We estimate that the leasing discounts for two-

tenant towers and three-tenant towers are 25% and 35%

respectively . But Towerco will enjoy 50% and 95% higher

revenue from the same physical site for two-tenant and three-

tenant towers respectively . EBITDA margins for two-tenant and

three-tenant towers are c.20% and 30% higher than single-

tenant towers as the operating costs are more or less than

same. An increase in sharing ratio will be critical to overall

profitability .

Tower sharing

1H16 F Y16 1H17

Number of towers utilised (k)

China Mobile 990 1,080 1,186

China Telecom 550 600 640

China Unicom 600 600 700

Total 2,140 2,280 2,526

Sharing ratio

China Mobile 30% 35% 40%

China Telecom 55% 65% 68%

China Unicom 50% 65% 64%

Number of unshared towers (k)

China Mobile 693 702 712



Total 1,241 1,122 1,168

Number of shared towers (k)

China Mobile 297 378 474



Total 900 1,158 1,358

Number of towers available (k) 1,490 1,700 1,900


Industry Focus


Steady revenue growth. We estimate Towerco’s FY17 and

FY18 full-year revenue to be Rmb64.8bn and Rmb68.8bn

respectively . We estimate EBITDA margin to improve from

54.9% in FY16 to 57.3% and 58.2% in FY17 and FY18

respectively , through increasing tower-sharing ratio from

FY16’s 35-65% to FY18’s 45-75%. We forecast EBITDA of

Rmb37.2bn and Rmb40.1bn for FY17 and FY18 respectively .

Thanks to operating leverage, we forecast earnings to be

Rmb3.3bn for FY17 and Rmb4.7bn for FY18.

V aluation. We value Towerco at c.Rmb270bn, based on 10x

FY18 EV/EBITDA and net debt of Rmb130bn. Our target

multiple is in line with other tower companies in the region.

After apply ing a holding discount of 30%, we estimate the

value per share of Towerco for CM, CT and CU to be HK$4.0,

HK$0.8 and HK$2.0 respectively . They account for 3.8%,

15.4% and 12.8% of CM’s, CT’s and CU’s valuations

respectively . We expect the IPO to take place in 1Q18.

Towerco’s valuation

(Rmb m) F Y16 F Y17 F Y18 F Y19

Revenue 54,688 64,818 68,839 72,186

EBITDA 30,000 37,168 40,082 42,567

EBITDA margin 54.9% 57.3% 58.2% 59.0%

Net profit 750 3,312 4,747 6,611

Towerco's v aluat ion (F Y18)

FY18 EBITDA 40,082

EV/EBITDA Multiple (x) 10

EV (Rmb m) 400,821

Net Debt (Rmb m) 130,000

Equity (Rmb m) 270,821

% of

interest

Towerco

v alue no. of shrs

v alue per

share

v alue per

share

@30%

discount

China Mobile 38.0% 102,912 20,475 5.8 4.0

China Telecom 27.9% 75,559 80,932 1.1 0.8

China Unicom 28.1% 76,101 30,598 2.9 2.0


Industry Focus


Mixed-ownership reform of CU

CU's mixed-ownership reform (MOR) plan involves Unicom A

Share Company (Unicom-A, 600050.CH) issuing new shares

and transferring existing shares to strategic investors and core

employees. Strategic investors include (1) large internet

companies (Baidu, Alibaba, Tencent [collectively , BAT] and

JD.com), (2) leading vertical companies in the industry (e.g.

Yonyou and Wangsu), (3) financial companies (e.g. China Life)

and (4) domestic industrial funds. They will purchase 9.0bn

new shares and 1.9bn existing shares, collectively representing

35.2% of Unicom-A’s enlarged share capital, at Rmb6.83 per

share. Restrictive shares of 0.85bn will be issued to core

employees at Rmb3.79 per share.

Unicom Group, strategic investors, core employees and public

shareholders will hold 36.7%, 35.2%, 2.7% and 25.4% of

equity interest in Unicom-A after the reform. China Life,

Tencent, Baidu, JD.com and Alibaba will hold 10.22%, 5.18%,

3.3% and 2.36% of the equity interests in Unicom-A

respectively . Currently , Unicom Group and Unicom-A holds

62.0% and 33.3% of CU respectively .

The exercise has raised total proceeds of Rmb78bn and

Unicom-A has injected the proceeds into CU by subscribing for

6,651m new shares which represent 21.7% of CU’s enlarged

issued capital, at HK$13.24 per share.

Total proceeds of HK$88bn or c.Rmb75bn will be raised from

the share placement. The utilisation of proceeds are as follows:

(a) c.HK$47bn for upgrading the 4G network capabilities, (b)

c.HK$23bn for technology validation, enablement and launch

of trial programmes in relation to the 5G network, (c)

c.HK$3bn for developing innovative businesses, and (d)

c.HK$16bn for the repayment of bank loans.

China Unicom shareholding structure after MOR and share placement


100%

Unicom Group (BVI)

Public shareholders

Unicom Group

Unicom A Share Company (600050.CH)

Unicom (BVI)

Strategic investors

Employee Incentive Shares

Public shareholders

Unicom Red Chip Company (762.HK)

36.7% 35.2% 2.7% 25.4%

82.1%

53.5%

17.9%

26.4 20.1%

Industry Focus


70%+ earnings CA GR achievable. The employees’ share

incentive scheme has set clear key performance indicators (KPI)

for the management. We estimate that this implies the net

profit targets for CU to be Rmb4.1bn, Rmb7.0bn, Rmb13.8bn

and Rmb20.2bn for FY17/18/19/20 respectively . This represents

c.70% CAGR for CU’s FY17-20 earnings. We believe Unicom-A

(and CU) will try to achieve the KPIs through (1) cost-sav ing

measures, and (2) co-operation with internet companies to

expand new revenue streams.

CU has announced a restructuring plan to re-allocate its

human resources to enhance efficiency. We believe more

management restructuring plans will be deployed to enhance

the company's productiv ity . The company has also started to

co-operate with Alibaba to offer hybrid cloud serv ices, which

will enhance the competitiveness of its IDC serv ices and cloud

products. We expect more such tie-ups with its strategic

investors in the future.

Employees’ share incentive scheme target for Unicom-A

2018F 2019F 2020F

Service revenue growth vs 2017 ≥ 4.4% ≥ 11.7% ≥ 20.9%

Profit before tax growth vs 2017 ≥ 65.4% ≥ 224.8% ≥ 378.2%

Retur on Equity ≥ 2.0% ≥ 3.9% ≥ 5.4%

Note:

The service revenue for 2017 of Unicom A Share Company will be set based on at least 4.5% growth vs 2016

The profit before tax for 2017 of Unicom A Share company will be set based on an increase of at least RMb4.72bn vs 2016


Implied financial target for Unicom-A and China Unicom

Rmb m 2016 2017F 2018F 2019F 2020F

Service revenue (Unicom-A) 240,982 251,826 262,906 281,289 304,457

Profit before tax (Unicom-A) 581 5,301 8,768 17,219 25,351

Net profit (Unicom-A) 154 3,976 6,576 12,914 19,013

Implied net profit target for CU 4,126 6,726 13,064 19,163


Who is next? The market also wonders which telecom operator

will be the next candidate for MOR. We believe CM is more

likely to be next as it is a red-chip enterprise, making it

technically easier to have new share issuance and shareholding

change. Moreover, CT has implemented its transformation

which is in substance similar to an MOR. Therefore, it has less

impetus to carry out the reform.

Industry Focus


Capex focusing on fixed-line network investment

In 2018, we expect the overall capex on telecom infrastructure

to decrease by c.4%, with decline in mobile capex partly offset

by increasing fixed-line capex. We expect the capex from the

three major operators to decrease by 5% in 2018 as major

investments in 4G network have been completed. We also

expect the investment from Towerco to shrink as towers for 4G

network will decrease. However, the investments from CBN

and the private sector will continue to increase and partly

offset the decline from the three major operators. As CBN and

private capital will mainly focus on the fixed-line network

investment, we expect the mix of capex to shift to fixed-line

networks. In addition, operators are investing more in fixed-line

networks to prepare for 5G which will demand more

bandwidth for backhaul.

Telecom sector capex breakdown

Source: MIIT, Companies, DBS Vickers

Capex of CM, CT and CU

0

50

100

150

200

250

300

350

400

450

500

FY09A

FY10A

FY11A

FY12A

FY13A

FY14A

FY15A

FY16F

FY17F

FY18F

FY19F

China Mobile China Telecom China Unicom

RMB bn


Increasing investments from the private sector. In 2018, we

expect the investment from private capital to increase as MIIT

continues to open up new cities for private sector investment

in the last-mile broadband business. The policy was

implemented in March 2015 with 61 trial cities as the first

batch. More than Rmb10bn had been invested into the

broadband network in 2015. In October 2016, MIIT added

c.100 trial cities for the same purpose. In September 2017, the

government further added 27 trial cities. We reckon that more

cities will be included for private capital investment going

forward. We estimate the investment to be more than Rmb25-

30bn in 2018.

CBN to raise funds in capital market for network build-outs.

We believe CBN will increase the fixed-line network investment

from an estimated Rmb10-20bn in 2017 to Rmb20-30bn in

2018. It received its telecom licence in May 2016, making it the

nation’s fourth telecom operator. According to local news, it

plans to complete its broadband network by 2020. We

estimate the total budget to be Rmb100bn, i.e. Rmb20bn p.a.

The market believes CBN has limited financial resources to

meet the target. However, we notice that CBN is tapping into

the capital market to raise funds for network build-outs and

consolidation. For example, it has established a company,

namely “CBN Broadband” (中国广电宽带运营有限公司), with

five other cable TV companies (including Beijing Gehua CATV

[600037.CH]) to build a nationwide broadband network. Our

channel checks with optical fibre cable manufacturers also

confirmed that CBN has started to purchase optical fibre cables

for network build-outs and the volume is similar to CU's.

Cont inuous fixed-line network investment by CM. The fixed-

line market used to be dominated by CT and CU with the focus

on Southern and Northern parts of China respectively . One

could v iew them as monopolies in their respective territories.

CM started providing fixed-line serv ices more aggressively after

acquiring Tietong in 2015. Note that CM’s fixed-line ARPU is at

a 30-40% discount to CT's due to lower network quality . For

CM’s broadband serv ice to be competitive in the market, we

expect the company to continue to invest in the fixed-line

market. The optical fibre and cable industry now expects CM’s

optical fibre cable demand to be 200m fkm, which is c.50%

higher than the tender size in 2017. For 2018, we forecast the

demand for optical fibre cables to increase by 20% to 350m

fkm.

Rmb bn 2015 2016 2017 2018 2019

China Mobile 196 187 176 160 160

China Telecom 109 97 89 75 75

China Unicom 134 72 45 60 70

China Broadcast Network 0 0-10 10-20 20-30 20-30

Private sector for last-mile

broadband business

0-10 10-20 20-25 25-30 25-30

Towerco and others 20-40 60-70 50-60 40-50 40-50

Total 454 435 405 390 400

Industry Focus


Excitement on 5G capex - rational or irrational?

The market is expecting higher 5G capex, vs. 4G capex, and is

excited about the benefit to telecom equipment suppliers.

However, we believe that telecom operators will manage the

capex at a prolonged and gradual pace so that the network


return. We highlight below the risks of possible

disappointment on 5G capex:

Smaller scale of deployment than market expectations. GSMA

Intelligence estimated that major 4G network construction was

completed in around four years. The investment was intense as

4G applications, such as v ideo streaming, were matured. For

5G capex, GSMA expects it to take seven years for major 5G

network investment and the capex-to-revenue ratio to not

exceed 25% before 2020 (vs 31% of 4G capex-to-revenue

ratio in 2015). According to CT’s Science and Technology

Committee, 5G network is expected to be commercialised in

2020, and will be available in hundreds of hot spots in

different cities. CM and CU have planned to construct only

10,000 and 1,000 of 5G base stations respectively by the end

of 2020. These shows that the scale of deployment of 5G

network will not be large at the initial stage and may be

smaller than market expectations.

5G network sharing to save on capex. We believe that telecom

operators will consider 5G network sharing especially in

suburban areas with low profitability for telecom operations.

This will make the network cost effective for the country by

sav ing on both capex and opex. Note that CT and CU had

started 4G network sharing in selective areas in 2016.

Recommendations and valuations

China Unicom (CU). CU has gone through the pilot scheme of

MOR in China. It set out a set of financial performance

indicators which translates into c.70% earnings CAGR for

FY17-20. This is achievable, in our v iew, given management’s

strong execution capability and track record. We upgrade CU

from HOLD to BUY with a higher TP of HK$15.6. It is our top

pick in the sector for its strong earnings growth profile and

potential benefit from Towerco IPO. We have rev ised down our

earnings estimates for FY17-18 by 13% and 9% respectively

partly due to higher sales and marketing costs. We have

rev ised up our earnings estimates for FY19 by 27% as we

believe the company will achieve its earnings target set in the

MOR. We derive our TP based on SOTP method: (i) telecom

operations at HK$13.6 per share based on 20x FY20 PE

(excluding Towerco earnings) (vs 20x FY18 PE), and (ii) Towerco

value of HK$2.0 per share.

China Mobile (CM). We have rev ised up our earnings estimates

for FY18 and FY19 by 2% and 5% respectively partly due to

higher sub growth assumptions. We expect higher mobile sub

growth of 36m and 18m (vs prev ious 30m and 16m) in FY17

and FY18 respectively . CM should remain the winner in the 4G

era, thanks to its strong network quality and market

positioning. Maintain BUY with a lower TP of HK$104 as we

set a lower target multiple from the previous 18x FY17 PE to

15x FY18 PE to reflect the current steady growth profile. We

derive our TP based on SOTP method: (i) telecom operation at

HK$100 per share based on 15x PE on FY18 earnings

(excluding Towerco earnings), and (ii) Towerco value of HK$4

per share.

China Telecom (CT). We have rev ised up our earnings

estimates for FY18 and19 by 3% and 2% respectively partly

due to higher sub growth assumptions. We expect higher

mobile sub growth of 36m and 18m (vs prev ious 30m and

12m) in FY17 and FY18 respectively . We expect CT to continue

to deliver a stable and consistent performance in the next 2-3

years. Maintain BUY with a higher TP of HK$5.2. We derive our

TP based on SOTP method: (i) telecom operations at HK$4.4

per share based on 15x FY18 PE (excluding Towerco earnings),

and (ii) Towerco value of HK$0.8 per share.

Industry Focus


YOFC. We have rev ised up our FY17-19 earnings forecast by

9%, 17% and 21% respectively as we expect stronger optical

fibre cable demand. We are more selective on equipment

suppliers due to a slight capex reduction and budget shift from

mobile to fixed-line network. We like YOFC the most as it

benefits from the rising demand for optical fibre cables. We

estimate the industry cable demand to grow by 20% in 2018

supported by fixed-line investment from CM, CBN and the

private sector. Maintain BUY with a higher TP of HK$46.5. Our

TP is based on 20x FY18 PE (vs prev ious 15x FY17 PE). The

higher target PE is justified by stronger growth outlook in the

next 2-3 years.

F iberHome. We have rev ised up the earnings estimates for

FY18 and 19 by 20% and 22% respectively due to stronger

demand for fixed-line network equipment. We maintain BUY

on F iberHome with a higher TP of Rmb43.0 as it benefits from

the shift from mobile capex to fixed-line capex. Our TP is

pegged to a higher multiple of 40x FY18 PE (vs prev ious 35x

FY17 PE), which is the higher-end of its historical trading

average. We believe that the stock now has a greater re-rating

potential as it is a key beneficiary of rising fixed-line network

investment, in particular from CBN and the private sector.

Together with its upstream fibre production capability , it now

has higher earnings v isibility .

CCS. We maintain our earnings estimates for the company. We

expect the company to continuously expand to non-operator

customers to support steady growth. A strong net cash

position of Rmb17bn which accounts for c.50% of its market

capitalisation supports a potentially higher div idend payout

ratio. We maintain BUY, with TP unchanged, on CCS for its

steady growth and potential div idend hike. Our TP is pegged to

12x FY18 PE which is higher than its historical average, justified

by improved free cash flow.

ZTE. We maintain our earnings estimates for the company.

ZTE’s share price has risen by 120%+ year-to-date. We think

the current valuation has reflected the potential of 5G capex.

Therefore, we downgrade ZTE-H share from BUY to HOLD and

ZTE-A share from HOLD to FULLY VALUED. We have a higher

TP of HK$28.3 and Rmb29.6 for ZTE-H shares and ZTE-A share

respectively . Our TP for ZTE-H share is based on 20x FY18 PE

(vs prev ious 18x FY17 PE), which is higher than historical

average of c.17x. Our TP for ZTE-A share is based on 24x FY18

PE (vs prev ious 20x FY18 PE), which is higher than historical

average of c.20x. We have a higher target PE multiple to reflect

its potential benefits from 5G capex. The A-H valuation

premium of c.20% is in line with historical patterns.

Industry Focus


Chartbook

Share price performance

Share price performance – telecom operators

Source: Thomson Reuters

Share price performance table – telecom operators

S hare price performance table (%) 1 -mth 3 -mth 6 -mth 1 2 -mth YTD

China Mobile 0.4% -10.3% -8.1% -6.4% -3.6%

China Telecom -2.8% -5.5% -1.3% 1.1% 5.9%

China Unicom 0.9% -1.6% -0.2% 20.2% 25.4%

HSI 3 .0% 3 .9% 1 3 .5% 2 8 .0% 3 2 .6%


60

70

80

90

100

110

120

130

140

150

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

Nov-

17


Rebased 1 Jan 17 = 100

Industry Focus


Valuation – telecom operators

# FY16: FY17; FY17: FY18

Source: Thomson Reuters, *DBS Vickers

Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA F CF Y ield

Currency Price Cap F iscal 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F

Company Name Code Local$ US$m Yr x x % % x x x x % %

China telecom operators

China Mobile* 941 HK HKD 80.05 210,018 Dec 12.3 11.6 7.8 4.0 1.4 1.3 3.3 2.9 9.3 7.3

China Unicom* 762 HK HKD 11.52 35,348 Dec 54.6 34.7 0.6 1.0 1.0 1.0 4.0 3.2 16.2 10.2

China Telecom 'H'* 728 HK HKD 3.78 39,199 Dec 13.0 11.9 3.2 3.5 0.8 0.8 3.6 3.2 0.8 8.6

A v erage 26.6 19.4 3.9 2.8 1.1 1.0 3.6 3.1 8.8 8.7

Hong Kong telecom operators

HKT Trust* 6823 HK HKD 9.89 9,599 Dec 15.8 15.4 6.4 6.6 1.9 1.9 8.7 8.5 12.3 12.5

Hutchison Telecom* 215 HK HKD 2.82 1,742 Dec 20.0 19.7 3.7 3.8 1.2 1.1 7.1 6.8 7.2 8.8

Smartone Telecom* 315 HK HKD 9.29 1,320 Jun 15.0 14.8 6.4 5.0 2.2 2.2 5.1 4.9 13.2 15.8

HKBN* 1310 HK HKD 9.30 1,199 Aug 37.1 19.7 4.7 6.4 7.9 8.2 12.3 9.4 6.0 7.9

A v erage 22.0 17.4 5.3 5.5 3.3 3.4 8.3 7.4 9.7 11.3

Industry Focus


Share price performance – equipment and service providers


Share price performance table - equipment and service providers


Valuation - equipment and service providers

# FY17: FY18; FY18: FY19

Source: Thomson Reuters, *DBS Vickers

60

110

160

210

260

310

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

Nov-

17

CCS ZTE Yangtze Optic Fibre Fiberhome ZTE 'A'

Rebased 1 Jan 17 = 100

Share price performance table (%) 1-mth 3-mth 6-mth 12-mth YTD

Yangtze Optc.Fre.& Cable 36.0% 67.0% 164.3% 147.3% 153.1%

Fiberhome Telecom -4.7% 12.4% 39.6% 13.1% 21.7%

China Comms.Svs.'H' 5.1% 13.0% 11.5% 8.5% 0.4%

ZTE (H) 3.0% 28.4% 72.7% 115.5% 101.4%

ZTE (A) 5.0% 37.7% 70.7% 96.4% 107.4%

Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA ROE ROE

Currency Price Cap F iscal 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F

Company Name Code Local$ US$m Yr x x % % x x x x % %

Yangtze Optc.Fre 'H'* 6869 HK HKD 38.6 3,374 Dec 18.1 16.2 1.4 1.5 4.3 2.9 13.0 10.3 26.2 22.4

Fiberhome Telecom.Techs. 'A'* 600498 CH CNY 30.86 4,887 Dec 38.4 28.7 1.2 1.6 3.6 3.4 20.4 16.6 10.8 12.3

China Comms.Svs.'H'* 552 HK HKD 4.95 4,393 Dec 10.5 9.5 3.4 3.8 1.0 1.0 2.3 1.3 10.1 10.3

ZTE 'H'* 763 HK HKD 28.65 20,562 Dec 21.5 19.7 1.4 1.5 2.5 2.3 10.6 9.7 12.3 12.1

ZTE 'A'* 000063 CH CNY 34.22 20,562 Dec 30.3 27.8 1.0 1.1 3.5 3.2 14.5 13.3 12.3 12.1

Industry Focus


How has mobile market share changed?

Market share – 3G/4G subscriber net-adds (Oct 2017)

Market share – Total mobile subscriber base (Oct 2017)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17

China Mobile China Unicom China Telecom

0%

10%

20%

30%

40%

50%

60%

70%

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17


Market share – 3G/4G subscriber base (Oct 2017)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17


Note: 4G only s tarting from FY16

Source: Companies

Industry Focus


Market share – Total mobile subscriber net-adds (Oct 2017)

Market share – 4G subscriber net-adds (Oct 2017)

China Mobile33%

China Unicom24%

China Telecom

43%

China Mobile40%

China Unicom30%

China Telecom

30%

Market share – Total mobile subscriber base (Oct 2017)

Market share – 4G subscriber base (Oct 2017)

China Mobile60%

China Unicom21%

China Telecom

19%

China Mobile65%

China Unicom17%

China Telecom

18%

Source: Companies

Industry Focus


Aggregated mobile subscriber net-adds in China

Aggregated 3G/4G subscriber net-adds in China (Oct 2017)

-2

0

2

4

6

8

10

12

14

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17

million

0

5

10

15

20

25

30

35

40

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17

million

Aggregated mobile subscriber base in China (Oct 2017)

Aggregated 3G/4G subscriber base in China (Oct 2017)

0

200

400

600

800

1,000

1,200

1,400

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17

million

0

200

400

600

800

1000

1200

Jan-1

2A

pr-

12

Jul-12

Oct

-12

Jan-1

3A

pr-

13

Jul-13

Oct

-13

Jan-1

4A

pr-

14

Jul-14

Oct

-14

Jan-1

5A

pr-

15

Jul-15

Oct

-15

Jan-1

6A

pr-

16

Jul-16

Oct

-16

Jan-1

7A

pr-

17

Jul-17

Oct

-17

million

Note: 4G only s tarting from FY16

Source: Companies

Industry Focus


Monthly subscriber growth of individual operators

Monthly subscriber net-adds – China Mobile (Oct 2017)

Mobile (2G+3G+4G) 4G

2.2

8

2.5

2

2.7

9 3

.46

3.4

8

3.0

8

3.3

5 3.8

7

3.9

8

3.2

3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

17.1

7

6.4

0 9

.47

5.2

6

9.9

0

10.4

2

12.3

2

10.8

5

4.9

4

6.9

0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

Source: Company

Industry Focus


Monthly subscriber net-adds– China Unicom (Oct 2017)


1.2

7

0.5

4

0.6

4

1.0

4

1.0

5

1.0

9

1.2

7

2.3

3

3.8

2

2.3

7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

5.9

8

5.5

8 6.6

1

5.0

3 5.6

2

5.4

3 6.4

2 7.4

9

7.5

6

5.1

0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

Fixed line Broadband

(0.8

0) (0.5

1)

(0.4

1)

(0.4

6)

(0.6

3)

(0.5

6)

(0.3

2)

(0.4

8)

(0.7

3)

(0.4

9)

(1.5)

(1.0)

(0.5)

0.0

0.5

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

0.9

1

0.0

9 0.3

6

0.2

7

0.0

5

0.0

2

0.0

6

0.0

1

0.4

2

0.0

6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

Source: Company

Industry Focus


Monthly subscriber net-adds – China Telecom (Oct 2017)


1.7

7

1.7

5

3.0

1

2.5

2

2.9

7

2.8

3

2.9

8

2.6

6

5.0

7

4.2

2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

4.0

9

4.1

0

5.9

3

4.9

4

4.6

7

4.7

7

5.0

3

4.7

1 5

.76

5.1

5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

Fixed line Broadband

(0.3

0)

(0.6

2)

(0.3

8)

(0.4

8)

(0.4

9)

(0.2

7)

(0.3

5)

(0.3

7)

(0.2

9)

(0.6

5)

(1.0)

(0.9)

(0.8)

(0.7)

(0.6)

(0.5)

(0.4)

(0.3)

(0.2)

(0.1)

0.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

0.9

1

0.8

2

0.9

7

0.7

1

0.7

6

0.8

1

0.8

7

0.8

0

1.5

4

0.8

3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

(million)

Source: Company

Industry Focus


Monthly subscriber growth – China Mobile (Oct 2017)

Million Oct -16 Nov -16 Dec-16 J an-17 F eb-17 Mar-17 A pr-17 May -17 J un-17 J ul-17 A ug-17 Sep-17 Oct -17

Mobile net-adds 2.2 1.4 1.7 2.3 2.5 2.8 3.5 3.5 3.1 3.4 3.9 4.0 3.2

Total mobile sub base 845.8 847.2 848.9 851.2 853.7 856.5 859.9 863.4 866.5 869.9 873.7 877.7 880.9

2G/3G net-adds (10.5) (7.5) (15.1) (14.9) (3.9) (6.7) (1.8) (6.4) (7.3) (9.0) (7.0) (1.0) (3.7)

2G/3G sub base 348.5 337.4 313.9 299.0 295.1 288.4 286.6 280.2 272.9 263.9 256.9 255.9 252.3

4G (TD-LTE) net-adds 16.6 12.5 25.2 17.2 6.4 9.5 5.3 9.9 10.4 12.3 10.9 4.9 6.9

4G (TD-LTE) sub base 497.3 509.8 535.0 552.2 558.6 568.1 573.3 583.2 593.7 606.0 616.8 621.8 628.7

Source: Company

Monthly subscriber growth – China Unicom (Oct 2017)


Mobile sub net-adds 0.5 0.4 0.8 1.3 0.5 0.6 1.0 1.1 1.1 1.3 2.3 3.8 2.4

Total mobile sub base 262.6 263.0 263.8 265.1 265.6 266.3 267.3 268.4 269.4 270.7 273.0 276.9 279.2

4G sub net-adds 5.1 5.0 5.5 6.0 5.6 6.6 5.0 5.6 5.4 6.4 7.5 7.6 5.1

4G sub base 93.995 99.033 104.55 110.5 116.1 122.7 127.8 133.4 138.8 145.2 152.7 160.3 165.4

Broadband sub net-adds 0.4 (0.1) (0.2) 0.9 0.1 0.4 0.3 0.1 0.0 0.1 0.0 0.4 0.1

Broadband sub base 75.5 75.4 75.2 76.1 76.2 76.6 76.9 76.9 76.9 77.0 77.0 77.4 77.5

Fixed line net-adds (0.7) (0.6) (1.1) (0.8) (0.5) (0.4) (0.5) (0.6) (0.6) (0.3) (0.5) (0.7) (0.5)

Fixed line sub base 68.3 67.7 66.6 65.9 65.3 64.9 64.5 63.8 63.3 63.0 62.5 61.8 61.3

Source: Company

Monthly subscriber growth – China Telecom (Oct 2017)


CDMA net-adds (2G and

3G)1.4 0.3 0.8 1.8 1.8 3.0 2.5 3.0 2.8 3.0 2.7 5.1 4.2

CDMA sub base 213.9 214.2 215.0 216.8 218.5 221.5 224.1 227.0 229.9 232.8 235.5 240.6 244.8

4G net-adds 5.48 4.33 4.57 4.9 5.0 5.9 4.9 4.7 4.8 5.0 4.7 5.8 5.2

4G sub base 112.97 117.3 121.87 126.7 131.7 137.6 142.6 147.3 152.0 157.1 161.8 167.5 172.7

Broadband net-adds 0.9 0.7 0.9 0.9 0.8 1.0 0.7 0.8 0.8 0.9 0.8 1.5 0.8

Broadband sub base 121.6 122.2 123.1 124.0 124.9 125.8 126.5 127.3 128.1 129.0 129.8 131.3 132.1

Fixed line net-adds (0.8) (1.0) (0.7) (0.3) (0.6) (0.4) (0.5) (0.5) (0.3) (0.4) (0.4) (0.3) (0.7)

F ixed line sub base 128.5 127.6 126.9 126.6 125.9 125.6 125.1 124.6 124.3 124.0 123.6 123.3 122.7

Source: Company

Industry Focus


Mobile market outlook

Mobile subscriber base in China

Total telecom capex in China

0

50

100

150

200

250

300

350

400

450

500

FY09A

FY10A

FY11A

FY12A

FY13A

FY14A

FY15A

FY16F

FY17F

FY18F

FY19F


RMB bn

Source: Companies, DBS Vickers Source: China Mobile, China Telecom, China Unicom, DBS Vickers

No. of telecom base stations in China

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY09A

FY10A

FY11A

FY12A

FY13A

FY14A

FY15A

FY16A

FY17F

FY18F

FY19F

Source: China Mobile, China Telecom, China Unicom, DBS Vickers

Industry wireless Capex

RMB m F Y10A F Y11A F Y12A F Y13A F Y14A F Y15A F Y16A F Y17F F Y18F F Y19F

Capex 240,837 251,851 281,131 338,351 376,870 437,300 356,300 310,000 295,000 305,000

China Mobile 124,300 128,500 127,400 184,900 215,100 195,600 187,300 176,000 160,000 160,000

China Telecom 43,037 49,551 53,731 79,992 76,889 107,800 97,000 89,000 75,000 75,000

China Unicom 73,500 73,800 100,000 73,459 84,881 133,900 72,000 45,000 60,000 70,000

Source: Companies

726 842 976 1,1

10

1,2

34

1,2

91

1,2

76

1,3

28

1,4

20

1,4

77

1,5

08

0

200

400

600

800

1,000

1,200

1,400

1,600

FY09A

FY10A

FY11A

FY12A

FY13A

FY14A

FY15A

FY16F

FY17F

FY18F

FY19F

Mobile subscriber base (LHS) 4G subscriber base

m

Industry Focus


Base station

F Y10A F Y11A F Y12A F Y13A F Y14A F Y15A F Y16A F Y17F F Y18F F Y19F

Base station (k) 1,392 1,764 2,102 2,675 3,606 4,695 5,826 6,506 7,056 7,606

China Mobile listco (GSM) 545 705 810 881 931 951 951 951 951 951

China Mobile parentco (TD) 135 215 280 446 500 500 500 500 500 500

China Telecom parentco (CDMA/EVDO) 200 230 250 270 290 290 290 290 290 290

China Unicom listco (GSM) 329 375 411 411 420 420 420 420 420 420

China Unicom listco (WCDMA) 183 239 331 407 472 525 525 525 525 525

China Mobile (TD-LTE) 0 0 20 200 720 1,100 1,510 1,770 1,970 2,170

China Unicom (FDD) 0 0 0 0 93 399 740 890 1,040 1,190

China Telecom (FD/TD) 0 0 0 60 180 510 890 1,160 1,360 1,560

Net additions 313 372 338 573 931 1,089 1,131 680 550 550

Source: Companies

Key performance indicators

China Telecom - Revenue breakdown in 1H17

China Unicom - Revenue breakdown in 1H17

Mobile41%

Broadband Access21%

Sales of telecom products

10%

Traditional fixed-line

and others28%

Mobile56%

Broadband Access15%

Sales of telecom products

10%

Traditional fixed-line

and others19%

Source: Companies

Industry Focus


Key performance indicators as of 1H17


Subscriber base (mn)

Mobile 867 230 269

2G/3G 273 78 131

4G 594 152 139

Fixed-line na 124 63

Broadband 93 128 77

A RPU (RMB)

Mobile 61.2 56.8 48.0

4G 71.2 67.2 66.5

Fixed-line na 15.2 15.9

Broadband 34.9 52.0 47.0

Source: Companies

Subscriber number as of Oct 2017

(mn) China Mobile China Telecom China Unicom

Mobile 881 245 279

2G/3G 252 72 114

4G 629 173 165

Fixed-line na 123 61

Broadband 107 132 77

Source: Companies

Industry Focus


PE band chart – Telecom operators

China Mobile (941 HK) China Telecom (728 HK)

China Unicom (762 HK)

Source: Thomson Reuters, DBS Vickers

40

60

80

100

120

140

160

180

Jan-0

9

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Industry Focus


PE chart – Telecom operators




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Industry Focus


PB chart – Telecom operators




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EV/EBITDA band chart – Telecom operators



Source: Thomson Reuters., DBS Vickers

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Industry Focus


PE band chart – Telecom Equipment

China Comservice (552 HK) Fiberhome (600498 CH)

Yangtze Optical Fibre (6869 HK) ZTE (763 HK)

ZTE (000063 CH)


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Industry Focus


PB band chart – Telecom Equipment



ZTE (000063 CH)


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Industry Focus


PE chart – Telecom Equipment



ZTE (000063 CH)


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PB chart – Telecom Equipment



ZTE (000063 CH)


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ed-TH / sa- CS / JY

BUY (Upgrade from HOLD)

Last Traded Price ( 29 Nov 2017):HK$11.52(HSI : 29,624)

Price Target 12-mth:HK$15.60 (35% upside) (Prev: HK$11.30) Analyst Tsz Wang TAM CFA,+852 2971 [email protected] Chris KO CFA,+852 2971 [email protected]

What’s New Earnings recovery through steady revenue

growth and efficiency improvement

Target c.70% earnings CAGR for FY17-20 in mixed-ownership reform (MOR)

Revised down earnings by 13% and 9% for FY17-18 respectively and revised up earnings by 27% for FY19, taking the earnings KPIs into account

Upgrade from HOLD to BUY on clearer earnings outlook

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Turnover 274,197 286,124 303,439 323,290 EBITDA 72,391 87,042 94,643 104,806 Pre-tax Profit 784 5,629 11,308 18,285 Net Profit 625 4,273 8,589 13,892 Net Profit Gth (%) (94.1) 583.7 101.0 61.7 EPS (RMB) 0.03 0.18 0.28 0.45 EPS (HK$) 0.03 0.21 0.33 0.54 EPS Gth (%) (94.1) 583.7 57.3 61.7 Diluted EPS (HK$) 0.03 0.21 0.33 0.54 DPS (HK$) 0.00 0.07 0.12 0.18 BV Per Share (HK$) 11.23 11.44 12.12 12.54 PE (X) 373.6 54.6 34.7 21.5 P/Cash Flow (X) 3.1 2.8 3.3 3.0 P/Free CF (X) nm 6.2 9.8 10.2 EV/EBITDA (X) 5.3 4.0 3.2 2.7 Net Div Yield (%) 0.0 0.6 1.0 1.5 P/Book Value (X) 1.0 1.0 1.0 0.9 Net Debt/Equity (X) 0.7 0.5 0.0 CASH ROAE(%) 0.3 1.9 3.1 4.4 Earnings Rev (%): (13) (9) 27 Consensus EPS (RMB) 0.21 0.41 0.57 Other Broker Recs: B: 21 S: 2 H: 2

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Re-rating on rising earnings visibility Earnings growth backed by mixed-ownership reform. China

Unicom (CU) is undergoing the pilot scheme of mixed ownership

reform (MOR). It has set an earnings CAGR target of c.70% for

the FY17-FY20, which will raise investor confidence with clearer

earnings visibility. We expect re-rating ahead. We have upgraded

our rating on CU from HOLD to BUY with a higher TP of

HK$15.6 from HK$11.3 previously. Where we differ. c.70% earnings CAGR achievable. CU set out a clear set of financial performance indicators in its employees’ share incentive scheme. This implies net profit targets of Rmb4.1bn, Rmb6.7bn, Rmb13.1bn and Rmb19.1bn for FY17/18/19/20 respectively, which translate into c.70% earnings CAGR. Thanks to CU’s strong management execution capability, we believe this is achievable through (1) efficiency improvement, and (2) co-operation with internet companies to expand new revenue streams. Potential catalysts. Towerco IPO. We believe that the market will

focus on the development of Towerco, including its profitability

and valuation. We expect the IPO to take place in 1Q18. CU now

has a 28.1% stake in Towerco. We value Towerco at

c.Rmb270bn, based on 10x FY18 EV/EBITDA and Rmb130bn net

debt. We estimate that Towerco’s value accounts for c.10-20%

of CU’s valuation. The potential IPO will be a share price catalyst.

Valuation: We have a BUY rating on CU. We derive our TP of HK$15.6 based on SOTP method, valuing: (i) telecom operations at HK$13.6 per share based on 20x FY20 PE (excluding Towerco earnings), and (ii) Towerco at HK$2.0 per share.

Key Risks to Our View:

Towerco IPO valuation below expectation. We estimate that

Towerco’s value accounts for c.10-20% of CU’s valuation. A

lower IPO valuation for Towerco will be negative to share price. Policy risks. China's telecom sector has been subjected to various

government intervention and regulatory risks, such as industry

restructuring, management reshuffle as well as tariff cuts, etc.

The business performance could be non-market driven, which

could be unfavourable and give rise to uncertainty.

At A Glance

Issued Capital (m shrs) 23,947

Mkt. Cap (HK$m/US$m) 276,040 / 35,348 Major Shareholders

China United Network Comm. (%) 68.4

Free Float (%) 31.6

3m Avg. Daily Val. (US$m) 62.7 ICB Industry :Telecommunications / Mobile Telecommunications

63

83

103

123

143

163

183

203

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Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

Relative IndexHK$

China Unicom (LHS) Relative HSI (RHS)


1 Dec 2017

China / Hong Kong Company Guide

China Unicom Version 6 |Bloomberg: 762 HK EQUITY| Reuters: 0762.HK


Company Guide

China Unicom

CRITICAL FACTORS TO WATCH

Critical Factors

Mobile subscriber growth. Mobile penetration in China has

become more saturated, and we expect the aggregate sub

base to expand only by a single-digit rate p.a. in the next few

years. Overall mobile sub growth as well as 4G sub growth will

be key growth drivers. We expect mobile sub base to expand

by 14.4m (or 7%) and 9.6m (or 5%) in FY17 and FY18

respectively.

Mobile ARPU (average revenue per user) increase. We believe

that CU’s respective 2G/3G and 4G ARPUs are on a declining

trend due to market competition. However, 2G/3G subs

upgrading to 4G subs will be positive to overall ARPU as 4G

services generate much higher ARPUs than 2G/3G services. We

expect mobile ARPU to increase at low single-digit rates in the

next few years.

Efficiency increase. CU has set out a clear set of financial

performance indicators in its employees’ share incentive

scheme. This implies net profit targets of Rmb6.7bn,

Rmb13.1bn and Rmb19.1bn for FY18/19/20 respectively,

which translate into c.60%+ earnings CAGR. We believe

efficiency improvement will be one of the key drivers to achieve

the target. We forecast its EBIT margin to improve from 1.0%

in FY16 to 7.1% in FY20.

Mobile sub net add (m)

Mobile ARPU (Rmb)

EBITDA margin (%)

Broadband sub net add (m)

Fixed-line sub net add (m)

Source: Company, DBS Vickers

-14.3

11.5

18

14.4

7.2

-15.7

-10.9

-6.0

-1.2

3.7

8.5

13.3

18.2

2015A 2016A 2017F 2018F 2019F

46.3 46.4 47.3 48.3 48.8

0.0

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31.6

29.0 29.5 30.231.4

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4

33

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2015A 2016A 2017F 2018F 2019F

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Company Guide

China Unicom

China Unicom share price vs HSI


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China Unicom share price vs HSI

Increasing mobile penetration

Growth of mobile sub slowed down due to higher base and mobile penetration

Benefit from the increasing penetration of 3G

China Unicom suffered from "VAT reform"and "speed upgrade with lower tariff" policies, which led to earnings uncertainty

Company Guide

China Unicom

Balance Sheet:

Improving balance sheet. CU had net debt of c.Rmb139bn or

60% net gearing ratio as at the end of 1H17. It has budgeted

for capex of c.Rmb45bn for FY17, down from Rmb72bn in

FY16. CU did not pay a dividend in FY16 but we expect it to

resume doing so in FY17. It has raised Rmb75bn by issuing

6.7bn new shares to Unicom (BVI). This will lower its net

gearing ratio in FY18. Given that telecom operations generate

steady cash flows, its overall financial position remains healthy.

Share Price Drivers:

Mobile subscriber growth. CU maintained stable mobile and

4G sub net-adds in FY16. We believe that mobile sub growth

and 4G upgrades will be key earnings drivers.

Mobile ARPU increase. 4G upgrades will be positive to overall

ARPU as 4G services command a much higher ARPU than

2G/3G services. APRU uplift will be positive on overall

profitability together with operating leverage.

Efficiency increase. Efficiency increase will be one of the key

drivers for CU to achieve the financial target in the MOR. We

expect CU’s EBIT margin to improve from 1.0% in FY16 to

7.1% in FY20.

Towerco IPO. We estimate that Towerco’s value accounts for

10-20% of CU’s valuation. Any positive news flow on the

potential IPO will provide upside on CU’s share price. The

expected timing is 1Q18.

Key Risks:

Towerco IPO valuation below expectation. We estimate that

Towerco’s value accounts for c.10-20% of CU’s valuation. A

lower IPO valuation for Towerco may be negative to share

price.

Policy risks. China's telecom sector has been subjected to

various government intervention and regulatory risks, such as

industry restructuring, management reshuffle as well as tariff

cuts, etc. The business performance could be non-market

driven, which could be unfavourable and give rise to

uncertainty.

Company Background

China Unicom (CU) is an integrated telecom operator in

Mainland China. It provides 2G/3G services based on

GSM/WCDMA technologies and 4G services mainly based on

FD-LTE technology, which are widely adopted by other

countries. Its fixed-line business mainly covers the northern

part of China.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


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2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

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Capital Expenditure (-)

RMBm

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2015A 2016A 2017F 2018F 2019F

Avg: 53.3x

+1sd: 99.5x

+2sd: 145.7x

-1sd: 7.1x

-35.2

14.8

64.8

114.8

164.8

214.8

264.8

314.8


(x)

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+2sd: 1.16x

-1sd: 0.81x

-2sd: 0.69x

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Company Guide

China Unicom

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Mobile sub net add (m) (14.3) 11.5 18.0 14.4 7.2 Mobile ARPU (Rmb) 46.3 46.4 47.3 48.3 48.8 EBITDA margin (%) 31.6 29.0 29.5 30.2 31.4 Broadband sub net add (m)

3.5 2.9 2.7 2.2 1.7

Fixed-line sub net add (m) (8.2) (7.2) (7.0) (3.0) (0.5) Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 277,049 274,197 286,124 303,439 323,290

Cost of Goods Sold (266,285) (271,504) (278,164) (291,894) (305,726)

Gross Profit 10,764 2,693 7,960 11,545 17,564

Other Opng (Exp)/Inc 0 0 0 0 0

Operating Profit 10,764 2,693 7,960 11,545 17,564

Other Non Opg (Exp)/Inc 10,568 1,591 1,591 1,591 1,591

Associates & JV Inc (801) 357 931 1,334 1,858

Net Interest (Exp)/Inc (6,496) (3,857) (4,853) (3,162) (2,727)

Dividend Income 0 0 0 0 0

Exceptional Gain/(Loss) 0 0 0 0 0

Pre-tax Profit 14,035 784 5,629 11,308 18,285

Tax (3,473) (154) (1,351) (2,714) (4,388)

Minority Interest 0 (5) (5) (5) (5)

Preference Dividend 0 0 0 0 0

Net Profit 10,562 625 4,273 8,589 13,892

Net Profit before Except. 10,562 625 4,273 8,589 13,892

EBITDA 97,269 72,391 87,042 94,643 104,806

Growth

Revenue Gth (%) (2.7) (1.0) 4.3 6.1 6.5

EBITDA Gth (%) 3.3 (25.6) 20.2 8.7 10.7

Opg Profit Gth (%) (43.1) (75.0) 195.6 45.0 52.1

Net Profit Gth (%) (12.4) (94.1) 583.7 101.0 61.7

Margins & Ratio

Gross Margins (%) 3.9 1.0 2.8 3.8 5.4

Opg Profit Margin (%) 3.9 1.0 2.8 3.8 5.4

Net Profit Margin (%) 3.8 0.2 1.5 2.8 4.3

ROAE (%) 4.6 0.3 1.9 3.1 4.4

ROA (%) 1.8 0.1 0.7 1.3 2.0

ROCE (%) 2.2 0.6 1.5 1.9 2.7

Div Payout Ratio (%) 38.5 0.0 35.0 35.0 33.0

Net Interest Cover (x) 1.7 0.7 1.6 3.7 6.4


Company Guide

China Unicom

Interim Income Statement (RMB m)

FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017

Revenue 144,685 132,364 140,255 133,942 138,160


Gross Profit 11,921 (1,157) 3,369 (676) 4,685

Other Oper. (Exp)/Inc 0 0 0 0 0

Operating Profit 11,921 (1,157) 3,369 (676) 4,685

Other Non Opg (Exp)/Inc 550 10,018 576 1,015 411

Associates & JV Inc (469) (332) (94) 451 748

Net Interest (Exp)/Inc (3,070) (3,426) (2,027) (1,830) (2,427)


Pre-tax Profit 8,932 5,103 1,824 (1,040) 3,417

Tax (1,942) (1,531) (395) 241 (994)

Minority Interest 0 0 0 (5) (8)

Net Profit 6,990 3,572 1,429 (804) 2,415

Net profit bef Except. 6,990 3,572 1,429 (804) 2,415

Growth

Revenue Gth (%) (3.3) (2.0) (3.1) 1.2 (1.5)

Opg Profit Gth (%) 10.3 (114.3) (71.7) (41.6) 39.1

Net Profit Gth (%) 4.5 (33.4) (79.6) N/A 69.0

Margins

Gross Margins (%) 8.2 (0.9) 2.4 (0.5) 3.4

Opg Profit Margins (%) 8.2 (0.9) 2.4 (0.5) 3.4

Net Profit Margins (%) 4.8 2.7 1.0 (0.6) 1.7


Company Guide

China Unicom

Balance Sheet (RMB m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 463,779 460,551 434,235 419,438 411,095

Invts in Associates & JVs 32,975 33,423 34,354 35,688 37,545

Other LT Assets 56,922 37,962 29,265 20,402 11,228

Cash & ST Invts 21,957 25,387 63,148 167,093 193,260

Inventory 3,946 2,431 2,431 2,431 2,431

Debtors 14,957 13,622 13,622 13,622 13,622

Other Current Assets 15,810 40,778 40,778 40,778 40,778

Total Assets 610,346 614,154 617,833 699,452 709,958

ST Debt

106,380 134,089 134,089 134,089 134,089

Creditors 167,396 143,224 143,224 143,224 143,224

Other Current Liab 62,298 65,342 65,342 65,342 65,342

LT Debt 40,676 40,371 40,371 40,371 40,371

Other LT Liabilities 2,380 3,446 2,846 2,367 1,983

Shareholder’s Equity 231,216 227,407 231,680 313,774 324,659

Minority Interests 0 275 280 285 290

Total Cap. &Liab. 610,346 614,154 617,833 699,452 709,958

Non-Cash Wkg. Capital (194,981) (151,735) (151,735) (151,735) (151,735)

Net Cash/(Debt) (125,099) (149,073) (111,312) (7,367) 18,800

Debtors Turn (avg days) 19.5 19.0 17.4 16.4 15.4

Creditors Turn (avg days) 277.1 278.2 259.3 246.9 235.6

Inventory Turn (avg days) 8.0 5.7 4.4 4.2 4.0

Asset Turnover (x) 0.5 0.4 0.5 0.5 0.5

Current Ratio (x) 0.2 0.2 0.4 0.7 0.7

Quick Ratio (x) 0.1 0.1 0.2 0.5 0.6

Net Debt/Equity (X) 0.5 0.7 0.5 0.0 CASH

Net Debt/Equity ex MI (X) 0.5 0.7 0.5 0.0 CASH

Capex to Debt (%) 60.2 56.3 25.8 34.4 40.1

Z-Score (X) 0.5 0.4 0.6 0.7 0.7


Cash Flow Statement (RMB m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 14,035 784 5,629 11,308 18,285

Dep. & Amort. 76,738 76,805 76,560 80,174 83,793

Tax Paid (2,244) (1,972) (154) (1,351) (2,714)

Assoc. & JV Inc/(loss) 801 (357) (931) (1,334) (1,858)

(Pft)/ Loss on disposal of FAs 0 0 0 0 0

Chg in Wkg.Cap. (3,340) (3,898) (600) (480) (384)

Other Operating CF (1,689) 3,231 2,256 2,124 2,050

Net Operating CF 84,301 74,593 82,761 90,441 99,173

Capital Exp.(net) (88,465) (98,293) (45,000) (60,000) (70,000)

Other Invts.(net) (4,542) (4,092) 0 0 0

Invts in Assoc. & JV (8) (48) 0 0 0

Div from Assoc& JV 0 0 0 0 0

Other Investing CF 1,661 6,684 0 0 0

Net Investing CF (91,354) (95,749) (45,000) (60,000) (70,000)

Div Paid (4,643) (4,071) 0 (1,496) (3,006)

Chg in Gross Debt 8,069 25,858 0 0 0

Capital Issues 1 0 0 0 0

Other Financing CF 0 1,090 0 75,000 0

Net Financing CF 3,427 22,877 0 73,504 (3,006)

Currency Adjustments 73 157 0 0 0

Chg in Cash (3,553) 1,878 37,761 103,946 26,167

Opg CFPS (RMB) 3.66 3.28 3.48 2.97 3.25

Free CFPS (RMB) (0.17) (0.99) 1.58 0.99 0.95


Company Guide

China Unicom

Target Price & Ratings History

Source: DBS Vickers

Analyst: Tsz Wang TAM CFA,

1

23

4

5

6

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

Nov-

16

Dec

-16

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

HK$S.No. Date Closing 12-mth Rat ing

Price Target

Price

1: 15-Dec-16 HK$9.52 HK$9.20 Hold

2: 16-Mar-17 HK$9.56 HK$8.80 Hold

3: 22-Mar-17 HK$10.18 HK$8.80 Hold

4: 17-May-17 HK$10.04 HK$8.80 Hold

5: 17-Aug-17 HK$11.94 HK$11.30 Hold

6: 13-Oct-17 HK$11.24 HK$11.30 Hold

ed-TH / sa- DL / CS

BUY

Last Traded Price ( 29 Nov 2017):HK$3.78(HSI : 29,624) Price Target 12-mth:HK$5.20 (38% upside) (Prev HK$5.10) Analyst Tsz Wang TAM CFA,+852 2971 [email protected] Chris KO CFA,+852 2971 [email protected]

What½s New · Expect steady mobile service revenue growth in

2018 mainly driven by mobile sub growth · Expect strong free cash flow growth to support

higher dividend payout after the peak of 4G capex · Revise up earnings estimates for FY18 and FY19 by

3% and 2% respectively partly due to higher sub growth assumptions

· Maintain BUY for steady earnings growth in the next few years, with a higher TP of HK$5.2

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Turnover 352,285 374,021 397,323 413,040 EBITDA 94,917 98,518 105,276 109,936 Pre-tax Profit 24,097 26,393 29,045 31,468 Net Profit 18,004 19,858 21,853 23,677 Net Profit Gth (%) (10.2) 10.3 10.0 8.3 EPS (RMB) 0.22 0.25 0.27 0.29 EPS (HK$) 0.26 0.29 0.32 0.35 EPS Gth (%) (10.2) 10.3 10.0 8.3 Diluted EPS (HK$) 0.26 0.29 0.32 0.35 DPS (HK$) 0.11 0.12 0.13 0.15 BV Per Share (HK$) 4.61 4.79 4.98 5.19 PE (X) 14.4 13.0 11.9 10.9 P/Cash Flow (X) 2.6 2.8 2.7 2.6 P/Free CF (X) 59.4 118.8 11.7 10.0 EV/EBITDA (X) 3.6 3.6 3.2 2.9 Net Div Yield (%) 2.9 3.2 3.5 3.8 P/Book Value (X) 0.8 0.8 0.8 0.7 Net Debt/Equity (X) 0.3 0.3 0.2 0.2 ROAE(%) 5.8 6.2 6.5 6.8 Earnings Rev (%): Nil 3 2 Consensus EPS (RMB) 0.25 0.28 0.30 Other Broker Recs: B: 22 S: 1 H: 3


Steady growth ahead

Stable earnings growth in the next 1-2 years. We rate China Telecom (CT) a BUY with a TP of HK$5.2 mainly on its stable medium-term earnings outlook. CT focuses on the niche customer segment to avoid competing head-to-head with China Mobile (CM). It has been growing mobile subs and 4G subs at a steady rate, which should support steady earnings growth in the next 1-2 years. Where we differ. Rational capex spending on 5G development. The market is concerned that 5G capex would be heavier than 4G capex which could result in a lower return on investment and depletion of its cash position. However, we believe CT’s 5G capex will be rational. Currently, 5G applications such as autonomous driving and augmented reality (AR) are still at an early development stage. We expect the 5G capex spending cycle to be gradual and over a longer time frame than 4G capex spending cycle. Potential catalysts. Towerco IPO. We believe that the market will focus on the development of Towerco, including its profitability and valuation, as well as telecom operators’ cost savings from tower sharing. We expect the IPO to take place in1Q18. CT now has a 27.9% stake in Towerco. We value Towerco at c.Rmb270bn, based on 10x FY18 EV/EBITDA and Rmb130bn net debt. We estimate that Towerco’s value accounts for c.10-20% of CT’s valuation. The potential IPO will be a share price catalyst. Valuation: We have a BUY rating on CT. We derive our TP of HK$5.2 based on SOTP method: (i) telecom operations at HK$4.4 per share based on 15x FY18PE (excluding Towerco earnings), and (ii) Towerco value of HK$0.8 per share. Key Risks to Our View: Towerco IPO valuation below expectation. We estimate that Towerco’s value accounts for c.10-20% of CT’s valuation. A lower IPO valuation for Towerco may be negative to share price Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cuts, etc. The business performance could be non-market driven, which could be unfavourable and uncertain.

At A Glance Issued Capital - H shares (m shs) 13,877 - Non H shares (m

67,055

H shs as a % of Total 17 Total Mkt. Cap (HK$m/US$m) 305,924 / 39,199

Major Shareholders China Tel Corp (%) 70.9 GD Rising Asset Mgt (%) 6.9

Major H Shareholders JPMorgan Chase & Co. (%) 12.1 BlackRock, Inc (%) 7.1 GIC Private Limited (%) 6.0 The Bank of New York Mellon

5.4

Templeton Global Advisors Ltd (%) 5.1 H Shares-Free Float (%) 64.4 3m Avg. Daily Val. (US$m) 27.6 ICB Industry :Telecommunications / Fixed Line Telecommunications

65

85

105

125

145

165

185

205

2.8

3.3

3.8

4.3

4.8

5.3

5.8

6.3


Relative IndexHK$

China Telecom (LHS) Relative HSI (RHS)


1 Dec 2017

China / Hong KongCompany Guide

China Telecom Version7|Bloomberg: 728 HK EQUITY| Reuters: 728.HK Refer to important disclosures at the end of this report

Company Guide

China Telecom


Critical Factors Mobile subscriber growth. Mobile penetration in China has become more saturated, and we only expect aggregate sub base to expand by a single-digit rate per annum in the next few years. CT has been strategically focusing on the niche customer segment to avoid competing head-to-head with CM. Overall mobile sub growth as well as 4G sub growth will be key growth drivers. We expectthe mobile sub base to expand by36m (or 17%) and 18m (or 7%)in FY17 and FY18 respectively. Mobile ARPU (average revenue per user) increase. We believe that CT’s respective 2G/3G and 4G ARPUs are on a declining trend due to market competition. However, 2G/3G subs upgrading to 4G subs will be positive to overall ARPU as 4G services generate much higher ARPUs than 2G/3G services. We expect mobile ARPU to increase at low single-digit rates in the next few years. Capex manageable. We expect the capex in 2017 and 2018 to decline by 11% and 16% respectively as the major investments in 4G network have completed. This will improve the free cash flow of the company. For 5G network investment in 2019 and after, we believe that CT will manage the capex at a prolonged and gradual pace so that the network spending will match the revenue to maintain a reasonable return.


Mobile ARPU (Rmb)

EBITDA margin (%)

Broadband sub net add (m)

Fixed-line sub net add (m)


12.3

17.1

36

18

12

0.0

5.2

10.4

15.6

20.8

26.0

31.2

36.4

2015A 2016A 2017F 2018F 2019F

54.1 55.5 56.1 56.6 57.2

0.0

11.7

23.3

35.0

46.7

58.3

2015A 2016A 2017F 2018F 2019F

28.427.0 26.2 26.2 26.2

0.0

5.8

11.6

17.4

23.2

29.0

2015A 2016A 2017F 2018F 2019F

6

10

9

8 8

0.0

2.0

4.1

6.1

8.1

10.2

2015A 2016A 2017F 2018F 2019F

-11.99

-7.46

-6-5

-3.09

-13

-11

-9

-7

-5

-3

-1

1

2015A 2016A 2017F 2018F 2019F

Company Guide

China Telecom

China Telecom share price vs HSI


0

0.5

1

1.5

2

2.5

Nov

-02

Mar

-03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

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Nov

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Mar

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Mar

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8

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-10

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0

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-11

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-12

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-12

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-15

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Jul-1

6

Nov

-16

Mar

-17

CT benefited from the increasing penetration of 3G mobile sub

CT benefited fromthe increasing penetration of

CT suffered from "VAT reform"and "speed upgrade with lower tariff" policies, which led to earnings uncertainty

Company Guide

China Telecom

Balance Sheet: Healthy financials with 26% net gearing. CT had net debt of c.Rm68bn or c.20% net gearing ratio as at the end of 1H17. CT has budgeted for capex of c.Rmb89bn for FY17 and we expect capex to further decrease in FY18. The company generates steady operating cash flow to support the heavy network investment. Overall financials remain healthy. CT paid out a dividend of HK$0.105 per share in FY16 (representing 42% payout ratio). Share Price Drivers: Mobile subscriber growth. CT maintained stable mobile and 4G sub net-adds in FY16. We believe that mobile sub growth and 4G upgrades will be key earnings drivers. Mobile ARPU increase. 4G upgrades will be positive to overall ARPU as 4G services command a much higher ARPU than 2G/3G services. APRU uplift will be positive on overall profitability together with operating leverage. Towerco IPO. We estimate that Towerco’s value accounts for 10-20% of CT’s valuation. Any update and newsflow on the potential IPO will be positive for CT’s share price. The expected timing is 1Q18. Key Risks: Towerco IPO valuation below expectation. We estimate that Towerco’s value accounts for c.10-20% of CT’s valuation. A lower IPO valuation for Towerco may be negative to share price. Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cuts, etc. The business performance could be non-market driven, which could be unfavourable and uncertain. Company Background China Telecom (CT) is an integrated telecom operator in Mainland China. It provides 2G/3G services based on CDMA technology, and provides 4G services mainly based on FD-LTE technologies. Its fixed-line business mainly covers the southern part of China.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.5

0.5

0.5

0.5

0.5

0.6

0.6

0.6

0.6

0.6

0.6

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2015A 2016A 2017F 2018F 2019F


0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

2015A 2016A 2017F 2018F 2019F


RMBm

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2015A 2016A 2017F 2018F 2019F

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ҌнǎŘΥ мтΦмȄ

πмǎŘΥ мнΦсȄ

πнǎŘΥ ммΦмȄ9.9

11.9

13.9

15.9

17.9

19.9

21.9


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πнǎŘΥ лΦсуȄ0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


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Company Guide

China Telecom

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Mobile sub net add (m) 12.3 17.1 36.0 18.0 12.0 Mobile ARPU (Rmb) 54.1 55.5 56.1 56.6 57.2 EBITDA margin (%) 28.4 27.0 26.2 26.2 26.2 Broadband sub net add (m)

6.1 10.1 9.0 8.0 7.7

Fixed-line sub net add (m) (12.0) (7.5) (6.0) (5.0) (3.1) Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 331,202 352,285 374,021 397,323 413,040 Cost of Goods Sold (305,135) (325,437) (344,455) (365,387) (379,283) Gross Profit 26,067 26,848 29,566 31,936 33,757 Other Opng (Exp)/Inc 0 0 0 0 0 Operating Profit 26,067 26,848 29,566 31,936 33,757 Other Non Opg (Exp)/Inc 5,222 40 40 40 40 Associates & JV Inc (698) 91 924 1,324 1,844 Net Interest (Exp)/Inc (3,898) (2,882) (4,137) (4,256) (4,173) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 26,693 24,097 26,393 29,045 31,468 Tax (6,551) (5,988) (6,334) (6,971) (7,552) Minority Interest (88) (105) (201) (221) (239) Preference Dividend 0 0 0 0 0 Net Profit 20,054 18,004 19,858 21,853 23,677 Net Profit before Except. 20,054 18,004 19,858 21,853 23,677 EBITDA 98,255 94,917 98,518 105,276 109,936 Growth Revenue Gth (%) 2.1 6.4 6.2 6.2 4.0 EBITDA Gth (%) 3.9 (3.4) 3.8 6.9 4.4 Opg Profit Gth (%) (7.6) 3.0 10.1 8.0 5.7 Net Profit Gth (%) 13.4 (10.2) 10.3 10.0 8.3 Margins & Ratio Gross Margins (%) 7.9 7.6 7.9 8.0 8.2 Opg Profit Margin (%) 7.9 7.6 7.9 8.0 8.2 Net Profit Margin (%) 6.1 5.1 5.3 5.5 5.7 ROAE (%) 6.8 5.8 6.2 6.5 6.8 ROA (%) 3.4 2.8 3.0 3.2 3.4 ROCE (%) 4.8 4.7 5.1 5.3 5.5 Div Payout Ratio (%) 32.2 41.9 42.0 42.0 42.0 Net Interest Cover (x) 6.7 9.3 7.1 7.5 8.1 Source: Company, DBS Vickers

Company Guide

China Telecom


FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017 Revenue 164,953 166,249 176,828 175,457 184,118 Cost of Goods Sold (147,963) (157,172) (159,890) (165,547) (166,273) Gross Profit 16,990 9,077 16,938 9,910 17,845 Other Oper. (Exp)/Inc 0 0 0 0 0 Operating Profit 16,990 9,077 16,938 9,910 17,845 Other Non Opg (Exp)/Inc 6 2 9 31 15 Associates & JV Inc (456) (242) 80 11 453 Net Interest (Exp)/Inc (1,996) (1,902) (1,558) (1,324) (1,634) Exceptional Gain/(Loss) 0 5,214 0 0 0 Pre-tax Profit 14,544 12,149 15,469 8,628 16,679 Tax (3,536) (3,015) (3,747) (2,241) (4,084) Minority Interest (28) (60) (49) (56) (58) Net Profit 10,980 9,074 11,673 6,331 12,537 Net profit bef Except. 10,980 3,860 11,673 6,331 12,537 Growth Revenue Gth (%) (0.6) 4.9 7.2 5.5 4.1 Opg Profit Gth (%) (3.6) (14.1) (0.3) 9.2 5.4 Net Profit Gth (%) (4.0) 45.3 6.3 (30.2) 7.4 Margins Gross Margins (%) 10.3 5.5 9.6 5.6 9.7 Opg Profit Margins (%) 10.3 5.5 9.6 5.6 9.7 Net Profit Margins (%) 6.7 5.5 6.6 3.6 6.8 Source: Company, DBS Vickers

Company Guide

China Telecom


FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 466,693 492,984 516,073 521,480 519,915 Invts in Associates & JVs 34,473 34,572 35,496 36,820 38,665 Other LT Assets 50,287 50,840 46,334 41,137 40,596 Cash & ST Invts 34,388 27,948 22,484 36,211 52,735 Inventory 6,281 5,081 5,081 5,081 5,081 Debtors 21,105 21,423 22,494 23,619 24,800 Other Current Assets 16,334 19,520 20,494 21,516 22,589

Total Assets 629,561 652,368 668,455 685,865 704,380 ST Debt

51,758 103,108 103,108 103,108 103,108 Creditors 118,055 122,444 126,117 129,901 133,798 Other Current Liab 86,116 93,446 93,446 93,446 93,446 LT Debt 64,911 9,420 9,420 9,420 9,420 Other LT Liabilities 3,970 7,655 7,655 7,655 7,655 Shareholder’s Equity 303,784 315,324 327,634 341,147 355,645 Minority Interests 967 971 1,074 1,188 1,308 Total Cap. & Liab. 629,561 652,368 668,455 685,865 704,380 Non-Cash Wkg. Capital (160,451) (169,866) (171,495) (173,131) (174,774) Net Cash/(Debt) (82,281) (84,580) (90,044) (76,317) (59,793) Debtors Turn (avg days) 23.5 22.0 21.4 21.2 21.4 Creditors Turn (avg days) 158.7 170.5 164.1 159.2 157.8 Inventory Turn (avg days) 8.1 8.1 6.7 6.3 6.1 Asset Turnover (x) 0.6 0.5 0.6 0.6 0.6 Current Ratio (x) 0.3 0.2 0.2 0.3 0.3 Quick Ratio (x) 0.2 0.2 0.1 0.2 0.2 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 0.2 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.2 0.2 Capex to Debt (%) 87.4 86.0 79.1 66.7 66.7 Z-Score (X) 1.3 1.2 1.2 1.3 1.3 Source: Company, DBS Vickers


FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 26,693 24,097 26,393 29,045 31,468 Dep. & Amort. 67,664 67,938 67,989 71,976 74,295 Tax Paid (4,099) (4,621) (5,988) (6,334) (6,971) Assoc. & JV Inc/(loss) 698 (91) (924) (1,324) (1,844) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 18,940 9,545 1,629 1,637 1,643 Other Operating CF (1,146) 4,262 2,082 2,177 2,230

Net Operating CF 108,750 101,130 91,181 97,176 100,820 Capital Exp.(net) (102,022) (96,772) (89,000) (75,000) (75,000) Other Invts.(net) (1,043) (3,786) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 815 1,520 0 0 0 Net Investing CF (102,250) (99,038) (89,000) (75,000) (75,000) Div Paid (6,160) (6,489) (7,548) (8,340) (9,178) Chg in Gross Debt 10,999 (2,979) 0 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (30) (87) (97) (107) (119) Net Financing CF 4,809 (9,555) (7,645) (8,448) (9,297) Currency Adjustments 124 211 0 0 0 Chg in Cash 11,433 (7,252) (5,464) 13,728 16,523 Opg CFPS (RMB) 1.11 1.13 1.11 1.18 1.23 Free CFPS (RMB) 0.08 0.05 0.03 0.27 0.32 Source: Company, DBS Vickers

Company Guide

China Telecom


Source: DBS Vickers


1 23 4

56

3.03.23.43.63.84.04.24.44.64.85.0

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep-

17

Oct

-17

Nov

-17

HK$ S.No. Date Closing 12-mth Rat ingPrice Target

Price1: 15-Dec-16 HK$3.72 HK$5.10 Buy2: 22-Mar-17 HK$3.78 HK$5.10 Buy3: 11-Apr-17 HK$3.87 HK$5.10 Buy4: 17-May-17 HK$3.78 HK$5.10 Buy5: 24-Aug-17 HK$3.78 HK$5.10 Buy6: 28-Aug-17 HK$3.81 HK$5.10 Buy

ed-TH / sa- DL / CS

BUY Last Traded Price ( 29 Nov 2017):HK$80.05 (HSI : 29,624)

Price Target 12-mth: HK$104 (30% upside) (Prev HK$114) Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New Expect steady mobile service revenue growth in

2018 mainly driven by mobile sub growth Expect strong growth of free cash flow to support

higher dividend payout after the peak of 4G capex Revise up earnings estimates for FY18 and FY19 by

2% and 5% respectively partly due to higher sub

growth assumptions Maintain BUY as CM will remain the winner in the

4G era, despite a lower TP of HK$104

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Turnover 708,421 744,175 780,481 804,390 EBITDA 267,804 276,429 290,433 300,872 Pre-tax Profit 144,462 149,913 159,097 168,849 Net Profit 108,741 112,922 119,839 127,185 Net Profit Gth (%) 16.9 3.8 6.1 6.1 EPS (RMB) 5.31 5.51 5.85 6.21 EPS (HK$) 6.28 6.52 6.92 7.34 EPS Gth (%) 0.2 3.8 6.1 6.1 Diluted EPS (HK$) 6.28 6.52 6.92 7.34 DPS (HK$) 2.83 6.28 3.18 3.38 BV Per Share (HK$) 56.52 56.78 60.77 64.83 PE (X) 12.8 12.3 11.6 10.9 P/Cash Flow (X) 5.5 4.5 5.3 5.1 P/Free CF (X) 22.0 10.8 13.8 12.7 EV/EBITDA (X) 3.5 3.3 2.9 2.5 Net Div Yield (%) 3.5 7.8 4.0 4.2 P/Book Value (X) 1.4 1.4 1.3 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.5 11.5 11.8 11.7 Earnings Rev (%): Nil 2 5 Consensus EPS (RMB) 5.6 5.9 6.2 Other Broker Recs: B: 23 S: 2 H: 2


4G winner Continuous mobile service revenue growth and earnings recovery. We

have a BUY rating on China Mobile (CM) with a TP of HK$104, as we

expect CM to remain the winner in the 4G era, or even 5G era. Its 4G

services have been well received by the market and are gaining

consumer confidence. This will support continuous mobile service

revenue growth and thus earnings recovery. CM has a dividend

payout ratio of 46%, and offers c.3% dividend yield. It has also issued

a special dividend per share of HK$3.2 to celebrate its 20th listing

anniversary, which lifts up its dividend yield to c.8% in FY17. Where we differ. Rational capex spending on 5G development. The

market is concerned that 5G capex would be heavier than 4G capex

which could result in a lower return on investment and depletion of

its cash position. However, we believe CM’s 5G capex will be rational.

Currently, 5G applications such as autonomous driving and

augmented reality (AR) are still at an early development stage. We

expect the 5G capex spending cycle to be gradual and over a longer

time frame than 4G capex spending cycle. Potential catalysts. Increase in dividend payout ratio. CM has a strong

balance sheet with a net cash position of Rmb400bn, which represent

c.25% of its market capitalisation. We believe 5G capex is

manageable supported by its strong operating cash flow of

Rmb200bn+ p.a. The company had increased its dividend payout ratio

to 46% in FY16 from 43% in FY15. A further increase in the dividend

payout ratio will make its dividend growth more attractive and

positive to the share price. Valuation: We rate CM a BUY. We derive our TP of HK$104 based on SOTP method: (i) telecom operations at HK$100 per share based on 15x FY18 earnings (excluding Towerco earnings), and (ii) Towerco value of HK$4 per share. Key Risks to Our View:

Industry restructuring. The regulator may consider another round of

industry restructuring to balance the competition landscape. This

poses a threat to CM’s current pole position. Policy risks. China's telecom sector has been subjected to various

government intervention and regulatory risks, such as industry

restructuring, management reshuffle, as well as tariff cuts, etc. The

business performance could be non-market driven, which could be

unfavourable and uncertain. At A Glance

Issued Capital (m shrs) 20,475

Mkt. Cap (HK$m/US$m) 1,640,071 / 210,018 Major Shareholders

China Mobile (HK) Group (%) 72.7

Free Float (%) 27.3

3m Avg. Daily Val. (US$m) 152.5

ICB Industry : Telecommunications / Mobile Telecommunications

68

88

108

128

148

168

188

208

58.1

68.1

78.1

88.1

98.1

108.1

118.1


Relative IndexHK$

China Mobile (LHS) Relative HSI (RHS)


1 Dec 2017


China Mobile Version 7 | Bloomberg: 941 HK EQUITY | Reuters: 0941.HK


Company Guide

China Mobile


Critical Factors

Mobile subscriber growth. Mobile penetration in China has

become more saturated, and we only expect aggregate sub

base to expand by a single-digit rate per annum in the next few

years. Our channel check suggests that consumers are positive

on CM’s 4G services. CM has also strengthened its network

coverage by aggressively building out 4G base stations. Overall

mobile sub growth as well as 4G sub growth will be key

growth drivers. We expect mobile sub base to expand by 38m

(or 5%) and 24m (or 3%) in FY17 and FY18 respectively.

Mobile ARPU (average revenue per user) increase. We believe

that CM’s respective 2G/3G and 4G ARPUs are on a declining

trend due to market competition. However, 2G/3G subs

upgrading to 4G subs will be positive to overall ARPU as 4G

services generate much higher ARPUs than 2G/3G services. We

expect mobile ARPU to increase at low single-digit rates in the

next few years.

Capex manageable. We expect the capex in 2017 and 2018 to

decline by 6% and 9% respectively as the major investments in

4G network have completed. This will improve the free cash

flow of the company. For 5G network investment in 2019 and

after, we believe that CM will manage the capex at a

prolonged and gradual pace so that the network spending will

match the revenue to maintain a reasonable return.


Mobile ARPU (Rmb)

EBITDA margin (%)


19.6

22.7

38.4

24

12

0.0

5.5

11.1

16.6

22.2

27.7

33.2

38.8

2015A 2016A 2017F 2018F 2019F

56.4 57.5 57.8 58.1 58.4

0.0

11.9

23.8

35.7

47.7

59.6

2015A 2016A 2017F 2018F 2019F

35.9 36.2 35.6 35.6 35.8

0.0

7.4

14.8

22.2

29.6

37.0

2015A 2016A 2017F 2018F 2019F

Company Guide

China Mobile

China Mobile share price vs HSI


0

0.5

1

1.5

2

2.5

3

Jan-0

3

Jun-0

3

No

v-03

Ap

r-04

Sep-0

4

Feb-0

5

Jul-05

Dec-

05

May-

06

Oct

-06

Mar-

07

Au

g-0

7

Jan-0

8

Jun-0

8

No

v-08

Ap

r-09

Sep-0

9

Feb-1

0

Jul-10

Dec-

10

May-

11

Oct

-11

Mar-

12

Au

g-1

2

Jan-1

3

Jun-1

3

No

v-13

Ap

r-14

Sep-1

4

Feb-1

5

Jul-15

Dec-

15

May-

16

Oct

-16

Mar-

17

Au

g-1

7

China Mobile share price vs HSI

The technological disadvantages of TD-LTE (vs. FD-LTE) in terms of network quality and handset choices have narrowed, compared with its 3G technology TD-SCDMA (vs. WCDMA and CDMA). CM has also strengthened its network coverage with 1.8m 4G base stations. The scale is much larger than CU’s and CT’s 4G networks. A better network quality made it a winner in 4G era

Increasing mobile penetration

Mobile subgrowth slowed down due to technology disadvantages of TD-CDMA (3G)

China Mobile suffered from "VAT reform"and "speed upgrade with lower tariff" policies, which led to earnings uncertainty

Company Guide

China Mobile

Balance Sheet:

Strong cash position. Balance sheet is strong with c.Rmb400bn

net cash as at end-1H17. CM generates very strong operating

cash flow to support its capex and remains free cash flow

positive. CM has budgeted for 6% lower capex of c.Rmb176bn

in FY17, and we expect capex to decline further in FY18. The

company adopts a relatively conservative dividend payout ratio

of 46%.


Mobile subscriber growth. CM maintained stable mobile and

4G sub net-adds in FY16. We believe that mobile sub growth

and 4G upgrades will be key earnings drivers.

Mobile ARPU increase. 4G upgrades will be positive to overall

ARPU as 4G services command a much higher ARPU than

2G/3G services. APRU uplift will be positive on overall

profitability together with operating leverage.

Increase in dividend payout ratio. The company had increased

its dividend payout ratio to 46% in FY16 from 43% in FY15. A

further increase in the dividend payout ratio will make its

dividend growth more attractive and positive to the share price.

Key Risks:

Industry restructuring. The regulator may consider another

round of industry restructuring to balance the competition

landscape. This poses a threat to CM’s current leading

position.

Policy risks. China's telecom sector has been subjected to

various government intervention and regulatory risks, such as

industry restructuring, management reshuffle, as well as tariff

cuts. The business performance could be non-market driven,

which could be unfavourable and uncertain.

Company Background

China Mobile (CM) is the largest mobile operator in Mainland

China. It provides 2G services based on GSM technology and

provides 3G/4G services based on Chinese-developed TD-

SCDMA/TD-LTE technologies. It also operates fixed-line

services after acquiring Tietong.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.4

0.4

0.4

0.4

0.4

0.5

0.5

0.5

0.5

0.5

0.5

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2015A 2016A 2017F 2018F 2019F


145,000.0

150,000.0

155,000.0

160,000.0

165,000.0

170,000.0

175,000.0

180,000.0

185,000.0

190,000.0

195,000.0

2015A 2016A 2017F 2018F 2019F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015A 2016A 2017F 2018F 2019F

Avg: 14.1x

+1sd: 16x

+2sd: 18x

-1sd: 12.1x

-2sd: 10.2x

8.9

10.9

12.9

14.9

16.9

18.9

20.9


(x)

Avg: 1.64x

+1sd: 1.79x

+2sd: 1.95x

-1sd: 1.48x

-2sd: 1.33x

1.1

1.3

1.5

1.7

1.9

2.1

2.3


(x)

Company Guide

China Mobile

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Mobile sub net add (m) 19.6 22.7 38.4 24.0 12.0 Mobile ARPU (Rmb) 56.4 57.5 57.8 58.1 58.4 EBITDA margin (%) 35.9 36.2 35.6 35.6 35.8 Source: Company, DBS Vickers


Revenue 668,335 708,421 744,175 780,481 804,390


Gross Profit 102,922 118,088 122,335 129,635 136,186

Other Opng (Exp)/Inc 0 0 0 0 0


Other Non Opg (Exp)/Inc 1,800 1,968 1,968 1,968 1,968

Associates & JV Inc 8,090 8,636 9,859 10,404 11,112

Net Interest (Exp)/Inc 15,397 15,770 15,751 17,091 19,583


Exceptional Gain/(Loss) 15,525 0 0 0 0

Pre-tax Profit 143,734 144,462 149,913 159,097 168,849

Tax (35,079) (35,623) (36,879) (39,138) (41,537)

Minority Interest (116) (98) (113) (120) (127)


Net Profit 108,539 108,741 112,922 119,839 127,185

Net Profit before Except. 93,014 108,741 112,922 119,839 127,185

EBITDA 250,370 267,804 276,429 290,433 300,872

Growth

Revenue Gth (%) 2.6 6.0 5.0 4.9 3.1

EBITDA Gth (%) 0.1 7.0 3.2 5.1 3.6

Opg Profit Gth (%) (12.3) 14.7 3.6 6.0 5.1

Net Profit Gth (%) (0.6) 0.2 3.8 6.1 6.1

Margins & Ratio

Gross Margins (%) 15.4 16.7 16.4 16.6 16.9

Opg Profit Margin (%) 15.4 16.7 16.4 16.6 16.9

Net Profit Margin (%) 16.2 15.3 15.2 15.4 15.8

ROAE (%) 12.0 11.5 11.5 11.8 11.7

ROA (%) 7.8 7.4 7.4 7.6 7.6

ROCE (%) 8.5 9.3 9.3 9.5 9.3

Div Payout Ratio (%) 42.5 45.1 96.4 46.0 46.0

Net Interest Cover (x) NM NM NM NM NM


Company Guide

China Mobile


FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017

Revenue 345,691 322,644 370,351 338,070 388,871


Gross Profit 62,670 40,252 66,131 51,957 67,974

Other Oper. (Exp)/Inc 0 0 0 0 0


Other Non Opg (Exp)/Inc 820 980 550 1,418 450

Associates & JV Inc 3,633 4,457 4,615 4,021 5,407

Net Interest (Exp)/Inc 7,204 8,193 7,508 8,262 7,564


Pre-tax Profit 74,327 53,882 78,804 65,658 81,395

Tax (16,926) (18,153) (18,186) (17,437) (18,668)


Net Profit 57,336 35,678 60,572 48,169 62,675

Net profit bef Except. 57,336 35,678 60,572 48,169 62,675

Growth

Revenue Gth (%) 6.5 (1.3) 7.1 4.8 5.0

Opg Profit Gth (%) 0.5 (26.8) 5.5 29.1 2.8

Net Profit Gth (%) (0.7) (30.7) 5.6 35.0 3.5

Margins

Gross Margins (%) 18.1 12.5 17.9 15.4 17.5

Opg Profit Margins (%) 18.1 12.5 17.9 15.4 17.5

Net Profit Margins (%) 16.6 11.1 16.4 14.2 16.1


Company Guide

China Mobile


FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 700,416 738,929 770,819 780,549 787,100

Invts in Associates & JVs 115,933 124,039 130,919 137,799 144,679

Other LT Assets 122,849 71,381 71,524 70,664 69,664

Cash & ST Invts 422,354 457,804 494,010 561,364 633,953

Inventory 9,994 8,832 9,097 9,370 9,657

Debtors 43,929 44,738 46,080 47,463 48,916


Total Assets 1,427,895 1,520,994 1,541,072 1,626,351 1,713,659

ST Debt

0 4,998 4,998 4,998 4,998

Creditors 244,224 252,044 259,605 267,393 275,585


LT Debt 4,995 0 0 0 0


Shareholder’s Equity 917,336 979,021 983,468 1,052,642 1,123,012

Minority Interests 3,032 3,117 3,230 3,350 3,477

Total Cap. & Liab. 1,427,895 1,520,994 1,541,072 1,626,351 1,713,659

Non-Cash Wkg. Capital (434,695) (402,550) (473,109) (486,919) (501,443)

Net Cash/(Debt) 417,359 452,806 489,012 556,366 628,955




Asset Turnover (x) 0.5 0.5 0.5 0.5 0.5

Current Ratio (x) 1.0 1.1 1.0 1.1 1.2

Quick Ratio (x) 0.9 0.9 1.0 1.1 1.2

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 3,481.6 3,816.8 3,544.6 3,224.4 3,224.4

Z-Score (X) 2.9 2.9 2.8 2.8 2.8



FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 143,734 144,462 149,913 159,097 168,849

Dep. & Amort. 137,532 139,032 142,267 148,426 151,606

Tax Paid (37,794) (39,741) (35,623) (36,879) (39,138)

Assoc. & JV Inc/(loss) (8,090) (8,636) (8,600) (8,600) (8,600)


Chg in Wkg.Cap. 17,751 23,187 70,559 13,810 8,044

Other Operating CF (18,044) (4,603) (12,751) (14,091) (10,103)

Net Operating CF 235,089 253,701 305,766 261,764 270,658

Capital Exp.(net) (173,905) (190,765) (177,157) (161,157) (161,157)

Other Invts.(net) (148) (25,191) 0 0 0

Invts in Assoc. & JV (376) (2,451) 0 0 0

Div from Assoc & JV 2,853 1,944 1,720 1,720 1,720

Other Investing CF 28,833 21,940 14,352 15,692 18,184

Net Investing CF (142,743) (194,523) (161,085) (143,745) (141,253)

Div Paid (47,912) (46,991) (108,475) (50,665) (56,816)

Chg in Gross Debt (8,149) (1,722) 0 0 0

Capital Issues 1,894 0 0 0 0

Other Financing CF (32,343) (245) 0 0 0

Net Financing CF (86,510) (48,958) (108,475) (50,665) (56,816)

Currency Adjustments 194 351 0 0 0

Chg in Cash 6,030 10,571 36,206 67,354 72,590

Opg CFPS (RMB) 10.62 11.26 11.49 12.11 12.83

Free CFPS (RMB) 2.99 3.07 6.28 4.91 5.35


Company Guide

China Mobile


Source: DBS Vickers


1

2

3 45

70.0

75.0

80.0

85.0

90.0

95.0

100.0

Nov-

16

Dec

-16

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17

Nov-

17


Price Target

Price

1: 15-Dec-16 HK$81.95 HK$110 Buy

2: 24-Mar-17 HK$87.25 HK$116.00 Buy

3: 29-Mar-17 HK$86.80 HK$116.00 Buy

4: 17-May-17 HK$84.80 HK$116.00 Buy

5: 10-Aug-17 HK$87.00 HK$114.0 Buy

ed-TH / sa- AH

BUY Last Traded Price ( 29 Nov 2017):HK$38.60 (HSI : 29,624) Price Target 12-mth: HK$46.50 (20% upside) (Prev HK$28.50) Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What½s New · Benefitting from the rising fixed-line capex

supported by investments from China Mobile, China Broadcast Network and private capital

· Expect optical fibre cable industry demand to increase by 20% in 2018

· Raised our FY17-19 earnings by 9%,17% and 21% respectively on higher ASP and margin assumptions

· Maintain BUY for its strong growth profile, with a higher TP of HK$46.5

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Turnover 8,102 10,535 11,383 12,041 EBITDA 1,047 1,699 2,135 2,381 Pre-tax Profit 776 1,389 1,725 1,929 Net Profit 701 1,234 1,532 1,713 Net Profit Gth (Pre-ex) (%) 22.9 75.9 24.2 11.8 EPS (RMB) 1.03 1.81 2.02 2.26 EPS (HK$) 1.22 2.14 2.39 2.67 EPS Gth (%) 15.5 75.9 11.8 11.8 Diluted EPS (HK$) 1.22 2.14 2.39 2.67 DPS (HK$) 0.30 0.53 0.60 0.67 BV Per Share (HK$) 7.24 9.08 13.20 15.27 PE (X) 31.8 18.1 16.2 14.5 P/Cash Flow (X) 17.1 15.8 14.0 12.6 P/Free CF (X) 42.7 31.6 24.3 15.8 EV/EBITDA (X) 21.6 13.0 10.3 8.7 Net Div Yield (%) 0.8 1.4 1.5 1.7 P/Book Value (X) 5.3 4.3 2.9 2.5 Net Debt/Equity (X) 0.0 CASH CASH CASH ROAE (%) 18.1 26.2 22.4 18.8 Earnings Rev (%): 9 17 21 Consensus EPS (RMB) 1.45 1.67 1.86 Other Broker Recs: B: 6 S: 0 H: 1


Leading integrated optical fibre maker

Leading integrated optical fibre maker benefitting from product price increases. Yangtze Optical Fibre and Cable (YOFC) is a leading Chinese optical fibre cable (cable) manufacturer with a global market share of c.10%. It possesses the capability to produce upstream products such as optical fibres (fibre) and optical fibre preforms (preform). Optical fibre cables are widely used in telecom infrastructure. We have a BUY rating on YOFC as it benefits from the anti-dumping ruling by China against imported preform and rising demand for telecom network build-outs. Where we differ. More optimistic on the fixed-line network capex to drive fibre demand. The market is concerned about the decline in optical fibre demand as telecom operators scale down their capex spending after 4G network investment. We expect a shift in operators’ capex budget allocation and expect robust demand for fixed-line investments due to China Mobile (CM)’s investment for broadband network and backhaul for 5G network. Moreover, there is new demand from China Broadcast Network (CBN) and private companies. Potential catalysts. Higher demand and cable price from telecom operators’ tender results. China Telecom (CT) announced that its tender size for cable in 2018 is c.54m fkm (vs 2017 tender’s 35m fkm), which represents a 50%+ growth. We expect CM’s cable demand to be 200m fkm in 2018, which is c50% higher than the tender size in 2017. Higher demand and cable price in the tender results will be positive to YOFC's share price. We have raised our FY17-19 earnings by 9%, 17% and 21% respectively on higher ASP and margin assumptions.

Valuation: Our TP of HK$46.5 is based on 20x FY18 PE (vs previous 15x FY17 PE). The higher target PE is justified by stronger growth outlook in the next 2-3 years. Key Risks to Our View: Capex cut from telecom operators. Decline in fixed-line network capex from telecom operators due to network investment levelling off or from regulatory changes will impact its earnings outlook. Lifting of anti-dumping ruling. The lifting of the anti-dumping ruling against imported preform into China could lead to oversupply and price pressure on fibre products.

At A Glance Issued Capital - H shares (m shs) 352 - Non H shares (m

331

H shs as a % of Total 52 Total Mkt. Cap (HK$m/US$m) 26,330 / 3,374

Major Shareholders China Huaxin Post & Telecom (%) 26.4 Wuhan Yangtze Communications (%) 17.6

Major H Shareholders Draka Comteq B.V. (%) 51.2 Value Partners Group Limited (%) 6.9

H Shares-Free Float (%) 41.9 3m Avg. Daily Val. (US$m) 14.5 ICB Industry : Technology / Technology Hardware & Equipment

74

124

174

224

274

324

374

424

474

5.7

10.7

15.7

20.7

25.7

30.7

35.7

40.7

Dec-14 Dec-15 Dec-16

Relative IndexHK$

Yangtze Optical Fibre and Cable (LHS) Relative HSI (RHS)


1 Dec 2017


Yangtze Optical Fibre and Cable Version 4 | Bloomberg: 6869 HK Equity | Reuters: 6869.HK


Company Guide

Yangtze Optical Fibre and Cable

CRITICAL FACTORS TO WATCH Critical Factors Rising optical fibre demand. The three major Chinese telecom operators account for c.40% of YOFC’s total revenue. Growth will be driven by telecom operators’ capital expenditure on mobile backhaul and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile network build-outs as well as FTTH development. New optical fibre demand is also driven by the increasing investments in fixed-line network by CM, CBN and the private sector. Increasing average selling prices. The supply of preform is tight in China, thanks to the anti-dumping ruling by China against imported preform. Together with strong demand for cable and therefore the upstream fibre and preform, the environment is favourable to preform ASP and margin in the domestic market. This is positive to the company's overall profitability. Capacity expansion. Increase in capacity will translate into increase in revenue under the current supply shortage environment. YOFC will expand its annual production capacity of preform from 57m fkm (or 1,900-metric tonnes) as at the end of 2016 to 97.5m fkm as at the end of 2017. The company also plans to expand its production capacity for fibre from 38m fkm as at the end of 2016 to 57m fkm by the end of 2017.

Sales volume of fibre and preform (m fkm)

Sales volume of cable (m fkm)

Capacity of preform (m fkm)

Gross margin (%)


97 96

111117

125

0

18

36

54

72

90

108

126

2015A 2016A 2017F 2018F 2019F

26.2

38.139.7 39.7 39.7

0.0

8.1

16.2

24.3

32.4

40.5

2015A 2016A 2017F 2018F 2019F

57.0 57.0

82.5 82.5

97.5

0.0

19.9

39.8

59.7

79.6

99.5

2015A 2016A 2017F 2018F 2019F

1921

2628 28

0.0

5.7

11.4

17.2

22.9

28.6

2015A 2016A 2017F 2018F 2019F

Company Guide


YOFC share price vs HSI


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Dec

-14

Jan-

15

Feb-

15M

ar-1

5

Apr

-15

May

-15

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15Ju

l-15

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-15

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ct-1

5

Nov

-15

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16M

ar-1

6

Apr

-16

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17

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17M

ar-1

7

Apr

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-17

Jun-

17Ju

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Aug

-17

YOFC share price vs HSI

Good earnings delivery and anticipation of anti-dumping ruling aginst imported preform

Strong earnings delivery for 1H16 and announcement of China Mobile's optical fibre cable tender results revealed strong demand ahead

Company Guide


Balance Sheet: Healthy balance sheet despite increasing capex. The company’s net gearing was 5% as at the end of 1H17. We expect capital expenditure to be around Rmb700m p.a. in the next few years. This will be supported by its strong operating cash flows and proceeds from A-share listing in 2018. We forecast the company's net gearing to remain healthy at below 10% in the next few years. Share Price Drivers: Increasing optical fibre demand. The three major Chinese telecom operators account for c.40% of YOFC’s total revenue. Higher volume of optical fibre cables in telecom operators’ tender will be positive to the share price. Increase in ASP. YOFC will benefit from price increase of fibre products driven by the stronger demand from CM, CBN and the private sector. Higher ASP in the tender results of optical fibre cables is positive to YOFC’s share price. Key Risks: Capex cut from telecom operators. Decline in fixed-line network capex from telecom operators due to network investment levelling off or from regulatory changes will impact its earnings outlook. Lifting of anti-dumping ruling. The lifting of the anti-dumping ruling against imported preform into China could lead to oversupply and price pressure on fibre products. Company Background YOFC is the largest optical fibre preform, optical fibre and optical cable supplier in China with 34%, 22% and 18% market shares respectively in 2016.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.9

1.0

1.0

1.1

1.1

1.2

1.2

1.3

1.3

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2015A 2016A 2017F 2018F 2019F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

2015A 2016A 2017F 2018F 2019F


RMBm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015A 2016A 2017F 2018F 2019F

Avg: 7.5x

+1sd: 9.4x

+2sd: 11.4x

-1sd: 5.5x

-2sd: 3.6x3.2

5.2

7.2

9.2

11.2

13.2

15.2

17.2

19.2


(x)

Avg: 1.82x

+1sd: 2.46x

+2sd: 3.1x

-1sd: 1.18x

-2sd: 0.54x0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

4.9


(x)

Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Sales volume of fibre and preform (m fkm) 96.5 96.1 110.8 117.2 124.7

Sales volume of cable (m fkm) 26.2 38.1 39.7 39.7 39.7

Capacity of preform (m fkm) 57.0 57.0 82.5 82.5 97.5

Gross margin (%) 19.4 20.7 25.9 27.7 28.3 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 6,731 8,102 10,535 11,383 12,041 Cost of Goods Sold (5,427) (6,427) (7,808) (8,232) (8,632) Gross Profit 1,304 1,675 2,727 3,151 3,408 Other Opng (Exp)/Inc (627) (892) (1,404) (1,497) (1,550) Operating Profit 677 783 1,323 1,654 1,858 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 80 105 140 140 140 Net Interest (Exp)/Inc (125) (112) (74) (69) (69) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 632 776 1,389 1,725 1,929 Tax (74) (97) (174) (216) (241) Minority Interest 12 23 18 23 25 Preference Dividend 0 0 0 0 0 Net Profit 571 701 1,234 1,532 1,713 Net Profit before Except. 571 701 1,234 1,532 1,713 EBITDA 881 1,047 1,699 2,135 2,381 Growth Revenue Gth (%) 18.6 20.4 30.0 8.1 5.8 EBITDA Gth (%) 26.7 18.8 62.2 25.6 11.5 Opg Profit Gth (%) 22.3 15.6 69.0 25.0 12.3 Net Profit Gth (%) 22.4 22.9 75.9 24.2 11.8 Margins & Ratio Gross Margins (%) 19.4 20.7 25.9 27.7 28.3 Opg Profit Margin (%) 10.1 9.7 12.6 14.5 15.4 Net Profit Margin (%) 8.5 8.7 11.7 13.5 14.2 ROAE (%) 17.9 18.1 26.2 22.4 18.8 ROA (%) 8.1 8.9 14.1 14.0 12.9 ROCE (%) 10.2 10.8 16.7 16.0 14.4 Div Payout Ratio (%) 20.8 24.8 25.0 25.0 25.0 Net Interest Cover (x) 5.4 7.0 18.0 24.0 26.9 Source: Company, DBS Vickers

Company Guide



FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017 Revenue 3,050 3,682 3,678 4,425 4,640 Cost of Goods Sold (2,462) (2,965) (2,870) (3,557) (3,405) Gross Profit 588 716 807 868 1,235 Other Oper. (Exp)/Inc (279) (349) (366) (526) (621) Operating Profit 309 368 441 342 615 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 33 47 55 50 71 Net Interest (Exp)/Inc 5 (129) (100) (12) (36) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 347 285 396 380 650 Tax (47) (27) (52) (45) (94) Minority Interest 4 8 11 12 9 Net Profit 305 266 355 347 565 Net profit bef Except. 305 266 355 347 565 Growth Revenue Gth (%) 15.7 21.0 20.6 20.2 26.2 Opg Profit Gth (%) 8.3 37.1 42.6 (7.1) 39.4 Net Profit Gth (%) 44.7 4.0 16.3 30.4 59.4 Margins Gross Margins (%) 19.3 19.5 22.0 19.6 26.6 Opg Profit Margins (%) 10.1 10.0 12.0 7.7 13.2 Net Profit Margins (%) 10.0 7.2 9.6 7.8 12.2 Source: Company, DBS Vickers


FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 1,237 1,787 2,280 2,711 2,759 Invts in Associates & JVs 731 1,053 1,193 1,333 1,473 Other LT Assets 586 703 676 648 621 Cash & ST Invts 2,054 1,676 2,134 4,777 5,888 Inventory 678 644 664 684 704 Debtors 2,119 2,072 2,134 2,199 2,264 Other Current Assets 177 243 243 243 243


1,637 887 887 887 887 Creditors 852 880 907 934 962 Other Current Liab 488 868 945 987 1,013 LT Debt 821 870 870 870 870 Other LT Liabilities 53 237 237 237 237 Shareholder’s Equity 3,575 4,177 5,237 8,461 9,791 Minority Interests 157 259 241 218 193 Total Cap. & Liab. 7,583 8,179 9,324 12,594 13,952 Non-Cash Wkg. Capital 1,634 1,211 1,189 1,204 1,237 Net Cash/(Debt) (403) (80) 377 3,020 4,131 Debtors Turn (avg days) 104.8 94.4 72.9 69.5 67.6 Creditors Turn (avg days) 53.4 50.5 43.1 42.6 41.9 Inventory Turn (avg days) 47.3 38.5 31.5 31.2 30.7 Asset Turnover (x) 0.9 1.0 1.2 1.0 0.9 Current Ratio (x) 1.7 1.8 1.9 2.8 3.2 Quick Ratio (x) 1.4 1.4 1.6 2.5 2.8 Net Debt/Equity (X) 0.1 0.0 CASH CASH CASH Net Debt/Equity ex MI (X) 0.1 0.0 CASH CASH CASH Capex to Debt (%) 13.0 44.5 40.0 42.4 23.0 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers

Company Guide



FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 632 776 1,389 1,725 1,929 Dep. & Amort. 124 160 236 340 383 Tax Paid (54) (103) (97) (174) (216) Assoc. & JV Inc/(loss) (80) (105) (140) (140) (140) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (156) 501 (55) (57) (58) Other Operating CF 84 74 74 69 69

Net Operating CF 551 1,303 1,407 1,764 1,967 Capital Exp.(net) (319) (782) (702) (744) (404) Other Invts.(net) (93) (298) 0 0 0 Invts in Assoc. & JV (12) (244) 0 0 0 Div from Assoc & JV 18 40 0 0 0 Other Investing CF (102) 187 14 19 19 Net Investing CF (508) (1,097) (688) (725) (385) Div Paid (106) (119) (174) (308) (383) Chg in Gross Debt (134) (776) 0 0 0 Capital Issues 305 93 0 2,000 0 Other Financing CF (99) (56) (88) (88) (88) Net Financing CF (33) (858) (262) 1,604 (471) Currency Adjustments 26 32 0 0 0 Chg in Cash 36 (620) 457 2,643 1,111 Opg CFPS (RMB) 1.10 1.18 2.14 2.40 2.67 Free CFPS (RMB) 0.36 0.76 1.03 1.35 2.06 Source: Company, DBS Vickers

Company Guide



Source: DBS Vickers


12 3

45

67

12.0

14.0

16.0

18.0

20.0

22.0

24.0

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep-

17


Price1: 15-Feb-17 HK$17.80 HK$25.00 Buy2: 6-Mar-17 HK$16.70 HK$25.00 Buy3: 27-Mar-17 HK$17.84 HK$23.60 Buy4: 28-Mar-17 HK$16.58 HK$23.60 Buy5: 11-Apr-17 HK$16.40 HK$23.60 Buy6: 18-Aug-17 HK$16.64 HK$24.60 Buy7: 4-Sep-17 HK$23.15 HK$24.60 Buy

ed-TH / sa- PY /CS

BUY

Last Traded Price ( 29 Nov 2017):RMB30.86 (CSI300 Index : 4,054) Price Target 12-mth: RMB43.00 (39% upside) (Prev RMB28.20) Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New · Benefitting from the rising fixed-line capex

supported by investments from China Mobile, China Broadcast Network and private capital

· Expect optical fibre cable industry demand to increase by 20% in 2018

· Revised up earnings estimates for FY18-19 by 20% and 22% respectively due to improving growth outlook

· Maintain BUY with a higher TP of Rmb43.0 as it will benefit from rising fixed-line network investments

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Turnover 17,361 21,322 25,944 29,666 EBITDA 1,249 1,566 1,991 2,198 Pre-tax Profit 869 1,072 1,432 1,568 Net Profit 760 907 1,212 1,326 Net Profit Gth (Pre-ex) (%) 16.0 19.3 33.6 9.4 EPS (RMB) 0.73 0.80 1.07 1.18 EPS Gth (%) 16.4 10.7 33.6 9.4 Diluted EPS (RMB) 0.73 0.80 1.07 1.18 DPS (RMB) 0.34 0.38 0.50 0.55 BV Per Share (RMB) 6.96 8.48 9.05 9.68 PE (X) 42.5 38.4 28.7 26.2 P/Cash Flow (X) 92.8 31.4 74.5 35.3 P/Free CF (X) nm 109.8 nm 312.2 EV/EBITDA (X) 24.8 20.4 16.6 15.4 Net Div Yield (%) 1.1 1.2 1.6 1.8 P/Book Value (X) 4.4 3.6 3.4 3.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 10.8 10.8 12.3 12.6 Earnings Rev (%): 0 20 22 Consensus EPS (RMB) 0.99 1.22 1.57 Other Broker Recs: B: 12 S: 0 H: 3 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Beneficiary of increasing fixed-line network investment Leading fixed-line network equipment provider in China. FiberHome is a leading Chinese telecom network equipment manufacturer after Huawei and ZTE (000063 CH) in China, focusing on fixed-line network products. We have a BUY rating on FiberHome as it is a key beneficiary of rising fixed-line network investments, particularly from China Broadcast Network (CBN) and the private sector. Where we differ. More optimistic on fixed-line network investment. The market is concerned about the capex declines of the three major telecom operators in China. However, we expect fixed-line network investments to increase due to the network build-outs by China Mobile (CM), China Broadcast Network (CBN) and the access network investment from the private sector. Potential catalysts. Higher capex budget to fixed-line network investment by telecom operators. Carriers’ networks account for c.60% of FiberHome’s revenue. FiberHome focuses more on fixed-line network equipment. We expect operators’ capex budget to shift from mobile to fixed-line network to prepare for 5G which will demand more bandwidth for backhaul. This will be positive to FiberHome’s share price. Valuation: We have a BUY rating on FiberHome with a TP of Rmb43.0. Our TP is pegged to 40x FY18 PE (vs previous 35x FY17 PE), higher than its historical average as it is a beneficiary of increasing fixed-line network capex from CM, CBN and the private sector. Key Risks to Our View: Capex cut from telecom operators. Decline in fixed-line network capex from telecom operators due to network investment levelling off or from regulatory changes will impact its earnings outlook.

At A Glance Issued Capital (m shrs) 1,046 Mkt. Cap (RMBm/US$m) 32,288 / 4,887

Major Shareholders Wuhan Fiberhome Tech (%) 46.6

Free Float (%) 53.4 3m Avg. Daily Val. (US$m) 93.6 ICB Industry : Technology / Technology Hardware & Equipment

56

76

96

116

136

156

176

196

216

10.1

15.1

20.1

25.1

30.1

35.1

40.1


Relative IndexRMB

Fiberhome Telecommunication (LHS) Relative CSI300 Index (RHS)


1 Dec 2017


Fiberhome Telecommunication Version 7 | Bloomberg: 600498 CH Equity | Reuters: 600498.SS


Company Guide

Fiberhome Telecommunication


Critical Factors Telecom operators’ fixed-line capex budget. Carriers’ networks account for c.60% of FiberHome’s revenue. FiberHome focuses more on fixed-line network equipment. Growth was mainly driven by telecom operators’ capital expenditure on mobile network’s backhaul and fixed-line network infrastructure. Capex hikes will be positive to product demand. We expect the fixed-line network investment of the three major telecom operators to increase in 2018. We also expect new demand from the fixed-line network investment by China Broadcast Network (CBN), which had obtained its telecom license to become the fourth telecom operator in 2016. Expansion in overseas market driving strong export sales. Export business accounted for 22% of FiberHome’s revenue in FY16, and it registered a CAGR of 47% in FY12-16. FiberHome offers quality products that are comparable to those from international vendors, with more competitive pricing to penetrate into developing countries. It has completed a number of projects in the Philippines, Malaysia, Columbia and Indonesia. Since 2010, the value of communication equipment exported from China has been growing at a double-digit rate. FiberHome is the largest Chinese exporter of optical cables and is benefitting from the fibre network build-outs worldwide. We believe export sales will grow at a CAGR of 27% from FY16-FY18 to account for c.30% of total sales.

Revenue growth rate

Gross margin


25.8

28.7

22.821.7

14.3

0.0

4.1

8.3

12.4

16.6

20.7

24.8

29.0

2015A 2016A 2017F 2018F 2019F

26.524.3 24.0 24.7 24.6

0.0

5.4

10.8

16.2

21.7

27.1

2015A 2016A 2017F 2018F 2019F

Company Guide


Balance Sheet: Strong balance sheet with ample cash. FiberHome’s balance sheet is strong with a net cash position of Rmb1,970m as at end-FY16, accounting for c.25% of its net book value. We forecast the company to maintain a net cash position in the coming years. Share Price Drivers: Telecom operators’ capex budget. Carriers’ networks accounted for c.60% of FiberHome’s revenue. FiberHome focuses more on fixed-line network equipment. We expect operators’ capex budget to shift from mobile to fixed-line network to prepare for 5G which will demand more bandwidth for backhaul. This will be positive to FiberHome. Network investments announced by CBN. CBN has established a company, namely “CBN Broadband” (中国广电宽带运营有限公司), with five other cable TV companies (including Beijing Gehua CATV [600037.CH]) to build a nationwide broadband network. Investments or tenders announced by CBN Broadband will be positive to FiberHome’s share price. Key Risks: Capex cuts from telecom operators. Declines in capex of telecom operators due to network investment levelling off or from regulatory changes, e.g. tower and facility sharing, will impact its earnings outlook. Company Background FiberHome is a leading Chinese telecom network equipment manufacturer in China focusing on optical fibre network products. FiberHome’s parent company is FiberHome Technology Group which was established in 1974 and is directly affiliated to the State-owned Assets Supervision and Administration Commission of the State Council.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.7

0.8

0.8

0.9

0.9

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2015A 2016A 2017F 2018F 2019F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2015A 2016A 2017F 2018F 2019F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015A 2016A 2017F 2018F 2019F

Avg: 30.5x

+1sd: 37.1x

+2sd: 43.8x

-1sd: 23.9x

-2sd: 17.3x15.5

25.5

35.5

45.5

55.5

65.5


(x)

Avg: 3.34x

+1sd: 4.14x

+2sd: 4.93x

-1sd: 2.55x

-2sd: 1.75x1.5

2.5

3.5

4.5

5.5

6.5


(x)

Company Guide


FiberHome share price Vs SHCOMP and Telecom industry capex

Source: Companies, Thomson Reuters, DBS Vickers

2000

2500

3000

3500

4000

4500

5000

0

1

2

3

4

5

6

7

8

9

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

FiberHome share price Vs SHCOMP Telecom industry capex

Benefitedfrom 3G network and fixed-line network build-outs

Market expected 4G network build-out, however, 4G licences to China Telecom and China Unicom were delayed and led to market disappointment

4G network build-outs since China Telecom and China Unicom obtained their 4G licences in Feb 2015

Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Revenue growth rate 25.8 28.7 22.8 21.7 14.3 Gross margin 26.5 24.3 24.0 24.7 24.6 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 13,490 17,361 21,322 25,944 29,666 Cost of Goods Sold (9,909) (13,144) (16,206) (19,541) (22,373) Gross Profit 3,581 4,217 5,116 6,403 7,293 Other Opng (Exp)/Inc (3,031) (3,573) (4,243) (5,163) (5,904) Operating Profit 549 644 873 1,240 1,390 Other Non Opg (Exp)/Inc 227 255 275 275 275 Associates & JV Inc 61 72 83 83 83 Net Interest (Exp)/Inc (74) (101) (158) (165) (179) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (2) 0 0 0 0 Pre-tax Profit 762 869 1,072 1,432 1,568 Tax (58) (75) (97) (129) (141) Minority Interest (50) (34) (69) (92) (101) Preference Dividend 0 0 0 0 0 Net Profit 654 760 907 1,212 1,326 Net Profit before Except. 656 760 907 1,212 1,326 EBITDA 1,051 1,249 1,566 1,991 2,198 Growth Revenue Gth (%) 25.8 28.7 22.8 21.7 14.3 EBITDA Gth (%) 28.2 18.8 25.4 27.1 10.4 Opg Profit Gth (%) 38.1 17.3 35.5 42.0 12.1 Net Profit Gth (%) 20.2 16.3 19.3 33.6 9.4 Margins & Ratio Gross Margins (%) 26.5 24.3 24.0 24.7 24.6 Opg Profit Margin (%) 4.1 3.7 4.1 4.8 4.7 Net Profit Margin (%) 4.8 4.4 4.3 4.7 4.5 ROAE (%) 10.0 10.8 10.8 12.3 12.6 ROA (%) 3.7 3.4 3.3 3.7 3.7

ROCE (%) 5.7 6.2 6.7 7.8 8.3 Div Payout Ratio (%) 54.4 46.8 46.8 46.8 46.8 Net Interest Cover (x) 7.5 6.4 5.5 7.5 7.7 Source: Company, DBS Vickers

Company Guide



FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017 Revenue 6,119 7,370 7,714 9,647 9,721 Cost of Goods Sold (4,573) (5,336) (5,860) (7,284) (7,450) Gross Profit 1,546 2,035 1,854 2,363 2,271 Other Oper. (Exp)/Inc (1,226) (1,805) (1,531) (2,042) (1,841) Operating Profit 320 229 324 321 430 Other Non Opg (Exp)/Inc 63 164 66 189 130 Associates & JV Inc 34 27 32 40 47 Net Interest (Exp)/Inc (24) (49) 1 (102) (85) Exceptional Gain/(Loss) (3) 1 0 0 0 Pre-tax Profit 389 372 423 447 522 Tax (22) (36) (21) (54) (32) Minority Interest (40) (9) (14) (20) (40) Net Profit 327 327 387 373 450 Net profit bef Except. 330 326 387 373 450 Growth Revenue Gth (%) 22.5 28.7 26.1 30.9 26.0 Opg Profit Gth (%) 46.7 27.7 1.2 39.8 32.9 Net Profit Gth (%) 19.4 21.0 18.4 14.2 16.1 Margins Gross Margins (%) 25.3 27.6 24.0 24.5 23.4 Opg Profit Margins (%) 5.2 3.1 4.2 3.3 4.4 Net Profit Margins (%) 5.3 4.4 5.0 3.9 4.6 Source: Company, DBS Vickers

Company Guide



FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 1,915 2,591 2,721 2,816 2,879 Invts in Associates & JVs 49 50 50 50 50 Other LT Assets 821 1,070 1,183 1,271 1,335 Cash & ST Invts 4,183 3,549 7,093 6,028 5,392 Inventory 7,384 9,902 12,077 14,562 16,672 Debtors 3,761 4,915 5,944 7,233 8,271 Other Current Assets 1,852 2,246 2,301 2,394 2,468


1,230 1,229 3,000 3,000 3,000 Creditors 7,067 8,771 11,543 13,793 15,699 Other Current Liab 3,706 5,764 5,764 5,764 5,764 LT Debt 0 350 500 500 500 Other LT Liabilities 209 263 263 263 263 Shareholder’s Equity 6,859 7,280 9,562 10,207 10,913 Minority Interests 894 667 736 828 928 Total Cap. & Liab. 19,964 24,322 31,368 34,354 37,067 Non-Cash Wkg. Capital 2,224 2,529 3,015 4,632 5,948 Net Cash/(Debt) 2,953 1,970 3,593 2,528 1,892 Debtors Turn (avg days) 105.1 91.2 93.0 92.7 95.4 Creditors Turn (avg days) 227.0 224.7 233.6 241.5 245.5 Inventory Turn (avg days) 224.8 245.2 252.7 253.9 260.0 Asset Turnover (x) 0.8 0.8 0.8 0.8 0.8 Current Ratio (x) 1.4 1.3 1.4 1.3 1.3 Quick Ratio (x) 0.7 0.5 0.6 0.6 0.6 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 51.3 54.5 22.6 23.9 25.0 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers


FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 765 869 1,072 1,432 1,568 Dep. & Amort. 228 287 336 394 451 Tax Paid (69) (79) (97) (129) (141) Assoc. & JV Inc/(loss) (61) (72) (83) (83) (83) (Pft)/ Loss on disposal of FAs 4 1 0 0 0 Chg in Wkg.Cap. (384) (1,001) (487) (1,617) (1,316) Other Operating CF 336 342 366 469 507

Net Operating CF 819 348 1,108 467 986 Capital Exp.(net) (631) (861) (791) (837) (875) Other Invts.(net) (170) (67) 0 0 0 Invts in Assoc. & JV (121) 0 0 0 0 Div from Assoc & JV 44 46 0 0 0 Other Investing CF (46) 45 83 83 83 Net Investing CF (924) (837) (709) (755) (792) Div Paid (311) (464) (577) (777) (830) Chg in Gross Debt (50) 349 1,921 0 0 Capital Issues 392 44 1,800 0 0 Other Financing CF 84 (112) 0 0 0 Net Financing CF 115 (183) 3,145 (777) (830) Currency Adjustments 2 28 0 0 0 Chg in Cash 12 (644) 3,544 (1,065) (636) Opg CFPS (RMB) 1.15 1.29 1.41 1.85 2.04 Free CFPS (RMB) 0.18 (0.49) 0.28 (0.33) 0.10 Source: Company, DBS Vickers

Company Guide



Source: DBS Vickers


1 2 3 4

3.0

8.0

13.0

18.0

23.0

28.0

33.0

38.0

43.0

No

v-1

6

Feb

-17

Ap

r-1

7

Jul-

17

Sep

-17

No

v-1

7

RMB S.No. Da te Clos ingPric e

12-mth Ta rge t

Ra ting

Pric e1: 6-Mar-17 RMB25.70 RMB32.00 Buy2: 10-Apr-17 RMB24.93 RMB32.00 Buy3: 9-May-17 RMB22.04 RMB32.00 Buy4: 31-Jul-17 RMB23.81 RMB28.20 Buy

ed-TH / sa- DL / MH

BUY

Last Traded Price ( 29 Nov 2017):HK$4.95 (HSI : 29,624) Price Target 12-mth: HK$5.80 (17% upside) Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New · Expect steady revenue growth to be supported by

the expansion into non-operator business · Expect product distribution business which has

been declining by 20% p.a. in the past two years to stabilise in FY18

· Strong free cash flow and a net cash position of Rmb17bn to support dividend hike

· Maintain BUY for steady earnings growth, with TP unchanged at HK$5.8

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2016A 2017F 2018F 2019F Turnover 88,449 93,976 102,106 111,231 EBITDA 3,769 3,899 4,150 4,436 Pre-tax Profit 3,056 3,309 3,639 3,994 Net Profit 2,536 2,766 3,041 3,337 Net Profit Gth (%) 8.6 9.1 10.0 9.7 EPS (RMB) 0.37 0.40 0.44 0.48 EPS (HK$) 0.43 0.47 0.52 0.57 EPS Gth (%) 8.6 9.1 10.0 9.7 Diluted EPS (HK$) 0.43 0.47 0.52 0.57 DPS (HK$) 0.16 0.17 0.19 0.21 BV Per Share (HK$) 4.54 4.85 5.20 5.58 PE (X) 11.4 10.5 9.5 8.7 P/Cash Flow (X) 5.5 4.9 5.2 4.9 P/Free CF (X) 6.5 5.7 6.2 5.9 EV/EBITDA (X) 3.5 2.3 1.3 0.6 Net Div Yield (%) 3.1 3.4 3.8 4.1 P/Book Value (X) 1.1 1.0 1.0 0.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 9.9 10.1 10.3 10.6 Earnings Rev (%): 0 0 0 Consensus EPS (RMB)

0.399 0.434 0.484

Other Broker Recs: B: 11 S: 0 H: 2


Enriching customer portfolio Leading telecom infrastructure service provider. We rate China Communications Services (CCS) as a BUY on its improving earnings growth and free cash flow outlook. CCS is a leading telecom infrastructure service provider in China. It is also engaged in business process outsourcing (BPO) as well as applications, content and other services (ACO). Business growth is mainly driven by operators’ network build-outs and increasing network maintenance expenditure, as well as expansion into non-operator markets. Where we differ. Expansion into non-operator business to maintain steady growth. CCS provides nationwide telecom infrastructure services, and is continuously expanding its businesses to non-operator customers like government agencies, industrial customers and small- and medium-sized enterprises, with revenue contribution of c.30% in 1H17. We expect the growth from non-operator business to support the company's steady growth. Potential catalyst. Increase in dividend payout ratio. CCS had a strong net cash position of Rmb17bn as at the end of 1H17, accounting for c.50% of its market capitalisation. This is mainly attributable to the improvement in free cash flow through stricter accounts receivable management and stronger focus on earnings quality in the past two years. This supports the company to potentially increase its dividend payout ratio, which should be positive to the share price performance. Valuation: We have a BUY rating on CCS with a target price of HK$5.8, based on 12x FY18 PE which is at the higher end of its historical range. Key Risks to Our View: Capex cuts from telecom operators. Declines in capex of telecom operators due to network investments levelling off or regulatory changes (e.g. tower and facility sharing) will impact its earnings outlook.

At A Glance Issued Capital (m shrs) 6,926 Mkt. Cap (HK$m/US$m) 34,305 / 4,393

Major Shareholders China Telecom Group (%) 51.4 China Mobile (%) 8.8

Free Float (%) 39.8 3m Avg. Daily Val. (US$m) 6.3 ICB Industry : Technology / Technology Hardware & Equipment

54

74

94

114

134

154

174

194

214

2.3

2.8

3.3

3.8

4.3

4.8

5.3

5.8


Relative IndexHK$

China Communications Services (LHS) Relative HSI (RHS)


1 Dec 2017


China Communications Services Version 6 | Bloomberg: 552 HK EQUITY | Reuters: 0552.HK


Company Guide

China Communications Services


Critical Factors

Telecom operators’ capex and opex increase. Telecom infrastructure services (TIS) cover design, construction and project supervision on telecom networks and support systems. The TIS segment accounts for 40-50% of CCS’s revenue. Growth is mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. Capex hikes will generally be positive to demand for network infrastructure services. CCS has been shifting its business from a capex-driven model to an opex-driven one. Revenue derived from network maintenance grew by 14% p.a. in the past two years. We expect the momentum to continue. Proactive expansion into non-operator markets. CCS provides telecom infrastructure services across the nation, and is continuously expanding its businesses to non-operator customers like government agencies, industrial customers and small- and medium-sized enterprises, with revenue contribution of c.30% in 1H17. The technical and service quality requirements are lower as compared to telecom operators which possess expertise in telecom networks. They are also relatively less price-sensitive. CCS enjoys a higher profit margin in the non-operator segment.

Domestic operator rev gth %

Domestic non-operator rev gth %

Gross Margin %


16.3

11.110

7 7

0.0

2.4

4.7

7.1

9.4

11.8

14.1

16.5

2015A 2016A 2017F 2018F 2019F

3.0 3.42.4

12.513.3

0.0

2.7

5.4

8.2

10.9

13.6

2015A 2016A 2017F 2018F 2019F

14.113.2 13.2 13.2 13.2

0.0

2.9

5.7

8.6

11.5

14.3

2015A 2016A 2017F 2018F 2019F

Company Guide


CCS share price vs HIS and capex of three major operators


180

230

280

330

380

430

480

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Dec

-06

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

CCS share price vs HSI Capex of three major operators

Improvement in free cash flow to support increase in div idend payout, triggering re-rating

3G capex up- cycle

Company Guide


Balance Sheet: Healthy cash position to support working capital. CCS’s net cash position was Rmb17bn as at the end of 1H17. This would help CCS service its cash flow requirements due to the long working capital cycle of its operations. The company adopts a dividend policy with a payout ratio of 30%. It has distributed special dividends in the past two years supported by improving free cash flows. Share Price Drivers: Telecom operators’ capex hike. The TIS segment accounts for 40-50% of CCS’s revenue. Growth is mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. New demand is also driven by (i) telecom network construction by CBN, and (ii) increasing investment from the private sector on last mile broadband network. A higher budget on capex by telecom operators will be positive to CCS’s share price. 5G development. The development of 5G will impact the market’s expectation of capex spending by telecom operators. We believe telecom operators will manage the capex so that spending will match the revenue to maintain a reasonable return. Larger scale and faster pace of 5G network deployment will be positive to CCS’s share price. Key Risks: Capex cuts from telecom operators. Declines in capex of telecom operators due to network investments levelling off or regulatory changes (e.g. tower and facility sharing) will impact its earnings outlook. Company Background CCS is a leading telecom infrastructure service provider in China, with services covering design, construction and project supervision on telecom networks and support systems. It is also engaged in business process outsourcing and IT application services. CCS is 51% owned by China Telecom Group.


Capital Expenditure

ROE

Forward PE Band

PB Band


1.4

1.4

1.4

1.5

1.5

1.5

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2015A 2016A 2017F 2018F 2019F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2015A 2016A 2017F 2018F 2019F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2015A 2016A 2017F 2018F 2019F

Avg: 9.1x

+1sd: 10.4x

+2sd: 11.8x

-1sd: 7.7x

-2sd: 6.3x

5.3

6.3

7.3

8.3

9.3

10.3

11.3

12.3

13.3


(x)

Avg: 0.93x

+1sd: 1.07x

+2sd: 1.22x

-1sd: 0.79x

-2sd: 0.64x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


(x)

Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Domestic operator rev gth % 16.3 11.1 10.0 7.0 7.0

Domestic non-operator rev gth % 3.0 3.4 2.4 12.5 13.3

Gross Margin % 14.1 13.2 13.2 13.2 13.2 Key Assumption Name 4 N/A N/A N/A N/A N/A Key Assumption Name 5 N/A N/A N/A N/A N/A Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 80,960 88,449 93,976 102,106 111,231 Cost of Goods Sold (69,572) (76,759) (81,551) (88,591) (96,493) Gross Profit 11,388 11,690 12,425 13,514 14,738 Other Opng (Exp)/Inc (8,705) (8,838) (9,374) (10,197) (11,122) Operating Profit 2,683 2,852 3,051 3,317 3,616 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 50 66 60 60 60 Net Interest (Exp)/Inc 92 137 198 262 317 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2,825 3,056 3,309 3,639 3,994 Tax (487) (503) (529) (582) (639) Minority Interest (3) (17) (14) (15) (17) Preference Dividend 0 0 0 0 (1) Net Profit 2,334 2,536 2,766 3,041 3,337 Net Profit before Except. 2,334 2,536 2,766 3,041 3,337 EBITDA 3,578 3,769 3,899 4,150 4,436 Growth Revenue Gth (%) 10.6 9.3 6.2 8.7 8.9 EBITDA Gth (%) 5.3 5.3 3.4 6.4 6.9 Opg Profit Gth (%) 6.0 6.3 7.0 8.7 9.0 Net Profit Gth (%) 8.6 8.6 9.1 10.0 9.7 Margins & Ratio Gross Margins (%) 14.1 13.2 13.2 13.2 13.2 Opg Profit Margin (%) 3.3 3.2 3.2 3.2 3.3 Net Profit Margin (%) 2.9 2.9 2.9 3.0 3.0 ROAE (%) 9.8 9.9 10.1 10.3 10.6 ROA (%) 4.2 4.2 4.2 4.3 4.4

ROCE (%) 8.7 8.8 8.8 9.0 9.2 Div Payout Ratio (%) 33.0 36.0 36.0 36.0 36.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers

Company Guide



FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017 Revenue 37,563 43,397 42,176 46,274 44,888 Cost of Goods Sold (32,387) (37,185) (36,784) (39,975) (39,179) Gross Profit 5,176 6,212 5,392 6,299 5,709 Other Oper. (Exp)/Inc (3,678) (5,027) (3,830) (5,008) (4,062) Operating Profit 1,497 1,186 1,562 1,290 1,647 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 12 38 35 31 26 Net Interest (Exp)/Inc 43 49 63 74 73 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,552 1,273 1,661 1,395 1,746 Tax (282) (206) (270) (233) (271) Minority Interest 0 (3) (5) (12) (7) Net Profit 1,271 1,063 1,386 1,150 1,469 Net profit bef Except. 1,271 1,063 1,386 1,150 1,469 Growth Revenue Gth (%) 11.3 10.1 12.3 6.6 6.4 Opg Profit Gth (%) 5.0 7.3 4.3 8.8 5.5 Net Profit Gth (%) 2.7 16.5 9.1 8.1 5.9 Margins Gross Margins (%) 13.8 14.3 12.8 13.6 12.7 Opg Profit Margins (%) 4.0 2.7 3.7 2.8 3.7 Net Profit Margins (%) 3.4 2.5 3.3 2.5 3.3 Source: Company, DBS Vickers

Company Guide



FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 5,486 5,430 5,508 5,674 5,937 Invts in Associates & JVs 117 144 204 264 324 Other LT Assets 2,941 2,478 2,401 2,323 3,244 Cash & ST Invts 12,091 16,216 20,444 24,163 27,047 Inventory 2,884 2,221 2,221 2,288 2,357 Debtors 34,394 36,104 36,917 38,429 40,217 Other Current Assets 0 0 0 0 0


177 47 47 47 47 Creditors 28,391 30,130 33,338 36,671 40,339 Other Current Liab 3,221 4,398 4,425 4,477 4,534 LT Debt 34 12 12 12 12 Other LT Liabilities 880 959 959 959 959 Shareholder’s Equity 24,761 26,573 28,427 30,472 32,715 Minority Interests 449 474 488 504 520 Total Cap. & Liab. 57,913 62,594 67,695 73,143 79,126 Non-Cash Wkg. Capital 5,666 3,797 1,376 (432) (2,299) Net Cash/(Debt) 11,880 16,158 20,385 24,105 26,988 Debtors Turn (avg days) 152.5 145.5 141.8 134.7 129.0 Creditors Turn (avg days) 145.1 140.7 143.4 145.5 146.8 Inventory Turn (avg days) 14.1 12.3 10.0 9.4 8.9 Asset Turnover (x) 1.5 1.5 1.4 1.4 1.5 Current Ratio (x) 1.6 1.6 1.6 1.6 1.5 Quick Ratio (x) 1.5 1.5 1.5 1.5 1.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 307.4 1,404.2 1,434.4 1,558.5 1,697.8 Z-Score (X) 2.7 2.7 2.6 2.6 2.6 Source: Company, DBS Vickers


FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 2,825 3,056 3,309 3,639 3,994 Dep. & Amort. 846 850 788 773 760 Tax Paid (576) (535) (503) (529) (582) Assoc. & JV Inc/(loss) (50) (66) (60) (60) (60) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 1,101 1,677 2,394 1,755 1,811 Other Operating CF 542 283 6 6 6

Net Operating CF 4,688 5,265 5,935 5,583 5,928 Capital Exp.(net) (650) (828) (846) (919) (1,001) Other Invts.(net) 1 66 0 0 (1,000) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 64 115 51 51 51 Other Investing CF (1,100) 43 0 0 0 Net Investing CF (1,686) (604) (795) (868) (1,950) Div Paid (716) (821) (913) (996) (1,095) Chg in Gross Debt (77) (148) 0 0 0 Capital Issues 0 20 0 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF (793) (949) (913) (996) (1,095) Currency Adjustments 14 77 0 0 0 Chg in Cash 2,222 3,788 4,227 3,720 2,884 Opg CFPS (RMB) 0.52 0.52 0.51 0.55 0.59 Free CFPS (RMB) 0.58 0.64 0.73 0.67 0.71 Source: Company, DBS Vickers

Company Guide



Source: DBS Vickers


1 2

3

4

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep-

17

Oct

-17

Nov

-17


Price1: 6-Mar-17 HK$5.04 HK$6.80 Buy2: 30-Mar-17 HK$5.22 HK$6.80 Buy3: 11-Apr-17 HK$4.89 HK$6.80 Buy4: 30-Aug-17 HK$4.39 HK$5.80 Buy5: 1-Dec-17 HK$4.95 HK$5.80 Buy

ed-TH / sa- CS / JY

H: HOLD (Downgrade from BUY)

Last Traded Price (H) ( 29 Nov 2017):HK$28.65 (HSI : 29,624) Price Target 12-mth (H): HK$28.30 (-1% downside) (Prev HK$22.40)

A: FULLY VALUED (Downgrade from HOLD)

Last Traded Price (A) ( 29 Nov 2017):RMB34.22 (CSI300 Index : 4,054)

Price Target 12-mth (A): RMB29.60 (-14% downside) (Prev RMB22.60) Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New Expect telecom industry capex to decline by 4% in FY18

as major investments in 4G network have been

completed

Expect 5G capex to be gradual and prolonged

Potential benefits from 5G capex in the price

Downgrade ZTE-H share to HOLD and downgrade ZTE-

A share to FULLY VALUED on valuation grounds

Price Relative

Forecasts and Valuation (H Shares)

FY Dec (RMB m) 2016A 2017F 2018F 2019F

Turnover 101,223 112,475 121,780 131,879

EBITDA 2,072 9,286 10,158 11,187

Pre-tax Profit (1,279) 5,726 6,245 6,896

Net Profit (2,367) 4,697 5,123 5,657

Net Profit Gth (%) N/A N/A 9.1 10.4

EPS (RMB) (0.57) 1.13 1.23 1.36

EPS (HK$) (0.67) 1.33 1.46 1.61

EPS Gth (%) N/A N/A 9.1 10.4

Diluted EPS (HK$) (0.67) 1.33 1.46 1.61

DPS (HK$) 0.00 0.40 0.44 0.48

BV Per Share (HK$) 10.15 11.49 12.54 13.71

PE (X) nm 21.5 19.7 17.8

P/Cash Flow (X) 32.6 15.7 18.1 16.1

P/Free CF (X) 104.9 31.5 43.0 33.3

EV/EBITDA (X) 48.0 10.6 9.7 8.7

Net Div Yield (%) 0.0 1.4 1.5 1.7

P/Book Value (X) 2.8 2.5 2.3 2.1

Net Debt/Equity (X) CASH CASH CASH CASH

ROAE (%) (6.3) 12.3 12.1 12.2

Earnings Rev (%): Nil Nil Nil

Consensus EPS (RMB) 1.11 1.24 1.44

Other Broker Recs: B: 9 S: 6 H: 5


5G capex in the price Leading Chinese telecom equipment manufacturer. ZTE is a leading

Chinese telecom network equipment manufacturer in China. In FY17-

18, its growth will be supported by expansion in overseas market and

government and corporate segment. We have downgraded ZTE-H

share from BUY to HOLD and ZTE-A share from HOLD to FULLY

VALUED as we believe the current valuation has reflected its potential

benefit from the 5G capex which is expect to start in FY19.

Where we differ. Less excited on 5G capex. The market is expecting

higher 5G capex, vs. 4G capex, and is excited about the benefit to

telecom equipment suppliers. However, we believe that telecom

operators will manage the capex at a prolonged and gradual pace so

that the network spending will match the revenue to maintain a

reasonable return.

Potential catalyst. Capex cut from telecom operators. Carriers’ network

accounted for 50-60% of ZTE’s total revenue. Reduction in capex from

telecom operators due to network investment levelling off or network

sharing will impact its earnings outlook. We expect the capex from

telecom operators to decline in 2018 as the major investments of 4G

network have been completed. Reduction in capex budget from

operators will be negative to ZTE's share price. Valuation: Our target prices for ZTE-H share and ZTE-A share are based on 20x and 24x FY18 PE respectively, which are higher than their historical averages of 17x and 20x respectively to reflect the potential benefits from 5G capex. Key Risks to Our View:

Faster expansion into government and enterprise business (upside risk).

Government and corporate customers accounted for c.10% of the total

revenue in FY16. Growth is mainly driven by smart city, information

security and railway projects, etc. Stronger growth from this segment is

positive to ZTE.

Irrational pace of 5G capex spending (upside risk). Aggressive 5G

network construction such as nationwide coverage before the

development of applications will benefit telecom equipment providers

such as ZTE.

At A Glance Issued Capital - H shares (m shs) 756 - Non H shares (m shs)

3,429 H shs as a % of Total 18 Total Mkt. Cap (HK$m/US$m) 160,572 / 20,562

Major Shareholders Zhongxingxin (%) 30.3

Major H Shareholders The Bank of New York Mellon

Corporation (%) 5.8

Massachusetts Financial Services Company (%)

5.3 H Shares-Free Float (%) 100.0

3m Avg. Daily Val. (US$m) 71.5 ICB Industry : Technology / Technology Hardware & Equipment

68

88

108

128

148

168

188

208

8.5

13.5

18.5

23.5

28.5

33.5


Relative IndexHK$

ZTE (LHS) Relative HSI (RHS)

57

77

97

117

137

157

177

197

217

9.1

14.1

19.1

24.1

29.1

34.1

39.1


Relative IndexRMB

ZTE-A (LHS) Relative CSI300 Index (RHS)


1 Dec 2017


ZTE Version 6 | Bloomberg: 763 HK EQUITY | 000063 CH Equity | Reuters: 0763.HK | 000063.SZ


Company Guide

ZTE


Telecom operators’ capex budget. Carriers’ networks

accounted for 50-60% of ZTE’s revenue. Growth was mainly

driven by telecom operators’ capital expenditure on mobile and

fixed-line network infrastructure. We expect the capex of the

three major telecom operators to decrease in 2018. This will be

partly offset by the new demand from network construction by

China Broadcast Network (CBN), which had obtained its

telecom licence to become the fourth telecom operator in

2016. Smartphone shipments. Revenue from sales of smartphones

represented c.70% of revenue from the consumer segment in

FY16. It also contributed c.20-30% to total revenue.

Smartphone shipment volume was c.48m units in FY16. Rising

smartphone shipments will be positive to revenue, margins and

earnings. The company will focus on profitability rather than

only on business growth. Gross margins. The segmental gross margins for carriers’

networks, government and corporate as well as consumer

segments were around 37%, 35% and 14% respectively in

FY16. Group gross margin was 29%. Gross margin expansion

will be positive to overall profitability through operating

leverage. Carriers’ networks segment will command higher

margins along with new technology advancement and new

product launches (e.g. 5G products). On the other hand,

smartphone products in the consumer segment are more or

less commoditised. We expect the company to implement strict

cost control measures to improve the margins of consumer

segment.

Sales growth of carriers' networks (%)

Gross Margin %

Sales growth of consumer products (%)


30.2

2.9

10

7 7

0.0

4.4

8.7

13.1

17.4

21.8

26.2

30.5

2015A 2016A 2017F 2018F 2019F

29.0 29.3 29.2 29.3 29.5

0.0

6.0

12.0

18.1

24.1

30.1

2015A 2016A 2017F 2018F 2019F

13.3

3.0

20.0

10.0 10.0

0.0

4.1

8.2

12.2

16.3

20.4

2015A 2016A 2017F 2018F 2019F

Company Guide

ZTE

ZTE-H share price vs HSI

180

230

280

330

380

430

480

0

0.5

1

1.5

2

2.5

Dec

-06

Mar-

07

Jun-0

7

Sep-0

7

Dec

-07

Mar-

08

Jun-0

8

Sep-0

8

Dec

-08

Mar-

09

Jun-0

9

Sep-0

9

Dec

-09

Mar-

10

Jun-1

0

Sep-1

0

Dec

-10

Mar-

11

Jun-1

1

Sep-1

1

Dec

-11

Mar-

12

Jun-1

2

Sep-1

2

Dec

-12

Mar-

13

Jun-1

3

Sep-1

3

Dec

-13

Mar-

14

Jun-1

4

Sep-1

4

Dec

-14

Mar-

15

Jun-1

5

Sep-1

5

Dec

-15

Mar-

16

Jun-1

6

Sep-1

6

Dec

-16

Mar-

17

Jun-1

7

Sep-1

7

ZTE share price vs HSI Capex of three major operators

4G capex cycle

3G capex up-cycle

Market is excited about the 5G capex


Company Guide

ZTE

Balance Sheet:

Strong balance sheet with c.Rmb4.6bn net cash. ZTE had net

cash of Rmb4.6bn as at the end of 1H17. The company’s

operating cash flow has improved partly due to faster accounts

receivable collection. We expect the company to remain in a

net cash position for the next few years.


Telecom operators’ capex budget. Carriers’ network accounted

for 50-60% of ZTE’s total revenue. Reduction in capex from

telecom operators due to network investment levelling off or

network sharing will impact its earnings outlook. We expect

the capex from telecom operators to decline in 2018 as the

major investments of 4G network have been completed.

Reduction in capex budget from operators will be negative to

ZTE's share price.

5G development. The development of 5G will impact the

market’s expectation of capex spending by telecom operators.

We believe telecom operators will manage the capex so that


return. Smaller scale of 5G network deployment than market

expectations will be negative to ZTE’s share price.

Key Risks:

Faster expansion into government and enterprise business

(upside risk). Government and corporate customers accounted

for c.10% of the total revenue in FY16. Growth is mainly driven

by smart city, information security and railway projects, etc.

Stronger growth from this segment is positive to ZTE.

Irrational pace of 5G capex spending (upside risk). Aggressive

5G network construction such as nationwide coverage before

the development of applications will benefit telecom

equipment providers such as ZTE.

Company Background

ZTE is a leading telecom network equipment manufacturer in

China. It is the second largest Chinese carriers’ network

equipment supplier; and one of the top 10 handset

manufacturers in the world in terms of shipment volume.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.7

0.8

0.8

0.9

0.9

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2015A 2016A 2017F 2018F 2019F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2015A 2016A 2017F 2018F 2019F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2015A 2016A 2017F 2018F 2019F

Avg: 16.8x+1sd: 556x+2sd:

1095.2x-1sd: -522.4x-2sd: -

1061.6x

-6094.8

-1094.8

3905.2

8905.2

13905.2


(x)

Avg: 1.66x

+1sd: 2.07x

+2sd: 2.48x

-1sd: 1.25x

-2sd: 0.84x0.7

1.2

1.7

2.2

2.7

3.2


(x)

Company Guide

ZTE

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Sales growth of carriers' networks (%)

30.2 2.9 10.0 7.0 7.0

Gross Margin % 29.0 29.3 29.2 29.3 29.5 Sales growth of consumer products (%)

13.3 3.0 20.0 10.0 10.0



Revenue 100,186 101,223 112,475 121,780 131,879


Gross Profit 29,093 29,614 32,813 35,731 38,926

Other Opng (Exp)/Inc (24,112) (30,022) (26,082) (28,493) (31,028)

Operating Profit 4,981 (408) 6,731 7,238 7,898

Other Non Opg (Exp)/Inc 0 0 0 0 0

Associates & JV Inc 63 45 45 45 45

Net Interest (Exp)/Inc (1,158) (916) (1,050) (1,038) (1,047)



Pre-tax Profit 3,887 (1,279) 5,726 6,245 6,896

Tax (563) (640) (859) (937) (1,034)



Net Profit 3,208 (2,367) 4,697 5,123 5,657

Net Profit before Except. 3,208 (2,367) 4,697 5,123 5,657

EBITDA 7,056 2,072 9,286 10,158 11,187

Growth

Revenue Gth (%) 23.0 1.0 11.1 8.3 8.3

EBITDA Gth (%) 9.1 (70.6) 348.2 9.4 10.1

Opg Profit Gth (%) 5.6 (108.2) (1,750.7) 7.5 9.1

Net Profit Gth (%) 21.8 N/A N/A 9.1 10.4

Margins & Ratio

Gross Margins (%) 29.0 29.3 29.2 29.3 29.5

Opg Profit Margin (%) 5.0 (0.4) 6.0 5.9 6.0

Net Profit Margin (%) 3.2 (2.3) 4.2 4.2 4.3

ROAE (%) 10.0 (6.3) 12.3 12.1 12.2

ROA (%) 2.7 (1.8) 3.2 3.2 3.3

ROCE (%) 6.5 (0.6) 8.0 8.0 8.3

Div Payout Ratio (%) 32.4 N/A 30.0 30.0 30.0

Net Interest Cover (x) 4.3 (0.4) 6.4 7.0 7.5


Company Guide

ZTE


FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017

Revenue 45,899 54,288 47,757 53,466 54,011


Gross Profit 13,810 15,283 15,127 14,486 16,665

Other Oper. (Exp)/Inc (11,237) (12,875) (12,239) (17,782) (13,338)

Operating Profit 2,574 2,408 2,888 (3,296) 3,328

Other Non Opg (Exp)/Inc 0 0 0 0 0

Associates & JV Inc (38) 101 (20) 65 (4)

Net Interest (Exp)/Inc (574) (584) (411) (506) (287)


Pre-tax Profit 1,962 1,925 2,458 (3,737) 3,037

Tax (310) (253) (519) (121) (744)

Minority Interest (36) (80) (172) (276) 0

Net Profit 1,616 1,592 1,766 (4,134) 2,293

Net profit bef Except. 1,616 1,592 1,766 (4,134) 2,293

Growth

Revenue Gth (%) 21.8 24.0 4.0 (1.5) 13.1

Opg Profit Gth (%) 17.8 (11.3) 12.2 (236.9) 15.2

Net Profit Gth (%) 43.2 5.8 9.3 N/A 29.8

Margins

Gross Margins (%) 30.1 28.2 31.7 27.1 30.9

Opg Profit Margins (%) 5.6 4.4 6.0 (6.2) 6.2

Net Profit Margins (%) 3.5 2.9 3.7 (7.7) 4.2


Company Guide

ZTE


FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 9,583 10,518 12,509 14,310 15,918

Invts in Associates & JVs 561 666 711 756 801

Other LT Assets 15,430 17,577 18,553 19,549 20,581

Cash & ST Invts 28,035 32,405 33,972 34,551 35,678

Inventory 19,732 26,811 29,492 32,441 35,685

Debtors 29,987 30,244 33,268 36,595 40,255


Total Assets 124,588 141,408 154,015 166,267 179,792

ST Debt

17,799 19,327 19,552 19,800 20,074

Creditors 32,818 36,934 40,627 44,690 49,159


LT Debt 7,610 6,410 6,549 6,702 6,871


Shareholder’s Equity 38,981 35,722 40,419 44,133 48,253

Minority Interests 4,367 5,163 5,333 5,519 5,724

Total Cap. & Liab. 124,588 141,408 154,015 166,267 179,792

Non-Cash Wkg. Capital 17,445 8,056 8,708 9,587 10,542

Net Cash/(Debt) 2,627 6,668 7,871 8,049 8,734




Asset Turnover (x) 0.9 0.8 0.8 0.8 0.8

Current Ratio (x) 1.4 1.2 1.2 1.2 1.2

Quick Ratio (x) 0.8 0.7 0.7 0.7 0.7

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 6.9 8.3 12.3 12.1 11.9

Z-Score (X) 2.1 1.7 1.8 1.8 1.8


Company Guide

ZTE


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 4,304 (768) 5,726 6,245 6,896

Dep. & Amort. 2,087 2,434 2,510 2,875 3,244

Tax Paid (824) (714) (640) (859) (937)

Assoc. & JV Inc/(loss) (63) (45) (45) (45) (45)


Chg in Wkg.Cap. (1,063) 2,642 (1,141) (1,255) (1,381)

Other Operating CF 1,200 (457) 7 (1,402) (1,530)

Net Operating CF 5,640 3,093 6,417 5,559 6,247

Capital Exp.(net) (1,765) (2,131) (3,214) (3,214) (3,214)

Other Invts.(net) (1,192) (2,364) (2,025) (2,192) (2,374)

Invts in Assoc. & JV (88) (49) 0 0 0

Div from Assoc & JV 1 14 0 0 0

Other Investing CF 1,176 876 25 25 25

Net Investing CF (1,869) (3,654) (5,213) (5,381) (5,563)

Div Paid 0 0 0 0 0

Chg in Gross Debt 4,816 709 0 0 0

Capital Issues 2,834 2,762 0 0 0

Other Financing CF (2,011) 559 364 402 442

Net Financing CF 5,640 4,029 364 402 442

Currency Adjustments (24) (35) 0 0 0

Chg in Cash 9,387 3,433 1,567 580 1,127

Opg CFPS (RMB) 1.62 0.11 1.82 1.64 1.83

Free CFPS (RMB) 0.94 0.23 0.77 0.56 0.73


H Share - Target Price & Ratings History

Source: DBS Vickers


1

2 34

5

11.0

16.0

21.0

26.0

31.0

Nov-

16

Dec

-16

Jan-1

7

Feb-1

7

Mar-

17

Apr-

17

May-

17

Jun-1

7

Jul-17

Aug-1

7

Sep-1

7

Oct

-17


Price Target

Price

1: 6-Mar-17 HK$12.36 HK$16.00 Buy

2: 8-Mar-17 HK$12.20 HK$16.00 Buy

3: 24-Mar-17 HK$14.84 HK$20.40 Buy

4: 29-Mar-17 HK$14.94 HK$20.40 Buy

5: 25-Aug-17 HK$19.50 HK$22.40 Buy

Company Guide

ZTE

A Share - Target Price & Ratings History

Source: DBS Vickers


12

34

5

3.0

8.0

13.0

18.0

23.0

28.0

33.0

38.0

43.0

No

v-1

6

Feb

-17

Ap

r-1

7

Jul-

17

Sep

-17

No

v-1

7

RMBS.No. Da te Clos ing

Pric e

12-mth

Ta rge t

Ra ting

Pric e

1: 6-Mar-17 RMB15.57 RMB17.40 Buy

2: 8-Mar-17 RMB15.28 RMB17.40 Buy

3: 24-Mar-17 RMB17.40 RMB20.60 Buy

4: 29-Mar-17 RMB17.51 RMB20.60 Buy

5: 25-Aug-17 RMB22.82 RMB22.60 Hold

Industry Focus


DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:

S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

B UY (>15% total return over the next 12 months for small caps, >10% for large caps)

HO LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 1 Dec 2017 14:55:45 (HKT)

Dissemination Date: 1 Dec 2017 17:40:33 (HKT)

Sources for a ll charts and tables are DBS Vickers unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER Th is report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”).This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (S ingapore) Pte Ltd. (“DBSVS”), its respective connected and associated

corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated i n any form or by any means or (ii) redistributed without the prior written consent of DBSV HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affi liates and their respective directors, off icers,

employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research . Accordingly, we

do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contain ed in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is

for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liabil ity whatsoever for any direct, indirect and/or consequential loss

(including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communica tion given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securitie s. The DBS Group, a long

with its affi l iates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document.

The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, esti mates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain a ll material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to

update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in S ingapore, Hong Kong or e lsewhere. There is no planned

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assumptions and are inherently subject to s ignificant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will var y s ignificantly from actual

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(a) such valuations, opinions, estimates, forecasts , ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract re lating to the

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Industry Focus


ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that th e views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) a lso certif ies that no part of his /her

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the is suer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity wh o is responsible for the management of the is suer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or

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procedures in place to e liminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a s eparate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by e ither the research or investment banking function is handled appropriately. There is no direct l i nk of DBS Group's compensation to any specific investment banking function of the

DBS Group.

CO MPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affi liates have proprietary positions in China Unicom (Hong

Kong) Limited (762 HK), China Telecom Corporation Limited (728 HK), China Mobile Limited (941 HK), Zte Corporation (763 HK), Hkt Trust & Hkt Limited (6823 HK), Hutchison Telecommunications Hong Kong Holdings Limited (215 HK), Smartone Te lecommunications Holdings Ltd (315 HK) and Hkbn Limited (1310 HK) recommended in this report as of 29 Nov 2017. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affi liates have a proprietary position in Zte Corpora tion

(000063 CH) recommended in this report as of 31 Oct 2017.

2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affi liates have a net long position exceeding 0.5% of the total is sued share capital in Hkbn Limited (1310 HK) recommended in this report as of 29 Nov 2017.

4. Co mpensation for investment banking services:

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities

as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security

discussed in this document should contact DBSVUSA exclusively.

5. D isclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affi liates of DBSVUSA may have published other investment

recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months . Please contact the primary analyst l isted in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affi liates of DBSVUSA in the preceding 12 months.

1An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which

the analyst, his spouse, minor child (natural or adopted) or minor s tep -child, is a beneficiary or discretionary object; or (i i i ) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a

new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new

lis ting applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new lis ting applicant.

Industry Focus


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Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

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Ki ngdom

This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any

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Du bai

I n ternational Fi nancial

Centre

This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor,

Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for

professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

Industry Focus


United Arab

Em irates

This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined

in the Financial Advisers Act and regulated by the Monetary Authority of S ingapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the

information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on

this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restricti ons on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by

DBSVUSA, which accepts responsibility for its contents . This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may

authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affil iate.

O ther

j urisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,

professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers (Hong Kong) Limited

18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong

Tel: (852) 2820-4888, Fax: (852) 2868-1523

Company Regn. No. 31758

Industry Focus


DBS Regional Research Offices

HO NG KONG

DBS Vickers (Hong Kong) Ltd Co ntact: Carol Wu

18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong

Tel: 852 2820 4888

Fax: 852 2863 1523 e-mail: [email protected]

Participant of the Stock Exchange of Hong Kong Ltd

MALAYSIA

A llianceDBS Research Sdn Bhd Co ntact: Wong Ming Tek (128540 U)

19th Floor, Menara Multi-Purpose, Capita l Square, 8 Ja lan Munshi Abdullah 50100

Kuala Lumpur, Malaysia.

Tel.: 603 2604 3333 Fax: 603 2604 3921

e-mail: [email protected]

S INGAPORE

DBS Bank Ltd Co ntact: Janice Chua

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 S ingapore 018982

Tel: 65 6878 8888

Fax: 65 65353 418 e-mail: [email protected]

Company Regn. No. 196800306E

I NDONESIA PT DBS Vickers Sekuritas (Indonesia) Co ntact: Maynard Priajaya Arif DBS Bank Tower

Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia

Tel: 62 21 3003 4900 Fax: 6221 3003 4943


THAILAND DBS Vickers Securities (Thailand) Co Ltd Co ntact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building,

9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330

Tel. 66 2 857 7831 Fax: 66 2 658 1269


Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

china telecom (762 hk) 3.78 5.20 buy 39,199 china / hong ... china telecom sector 6 page 3 overview...

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