China Results Review 4Q17 results announced on 15 Mar were in line

16 March 2018 Communications | Telecommunications Buy (Maintained) China Unicom Target Price: HKD13.00 Price: HKD9.54 Profitability Ramping Up With Good Capex Discipline Market Cap: USD37,226m Bloomberg Ticker: 762 HK

We expect China Unicom’s recurring earnings to keep rebounding and to Share Data grow another 1.3x in FY18F, mainly driven by continuous healthy revenue Avg Daily Turnover (HKD/USD) 424m/54.2m growth momentum and also good cost controls. The company also guided for a smaller-than-expected increase in capex, while resuming 52-wk Price low/high (HKD) 9.36 - 12.4 dividend payout. Therefore, we maintain BUY but with a slightly lower TP Free Float (%) 20 of HKD13.00 (from HKD13.50, 36% upside) as we factor in lower capex and Shares outstanding (m) 23,947 NP forecasts in FY18-19 of 11-14%, due to impact from cancellation of Estimated Return 36% mobile data roaming charge. Shareholders (%) Good start this year. According to China Unicom, the company’s overall China Unicom (BVI) Limited 53.5 service revenue and reported NP grew by 8.2% and 2.9x YoY in Jan-Feb 2018 China Unicom Group (BVI) Limited 26.4 (vs our full-year forecasts of 4.5% and 1.3x).

Service revenue growing healthily. We expect China Unicom’s mobile arm service revenue to grow by 5.6% in FY18, mainly driven by continuous solid Share Performance (%) data revenue growth, due to higher 4G penetration (to rise to 80% by the end of YTD 1m 3m 6m 12m this year, from 62% last year). China Unicom’s data of usage (DOU) reached Absolute (9.7) (6.5) (10.0) (14.1) (0.2) 2.4GB in FY17, still plenty of room for further increase (neighbouring regions’ Relative (15.1) (7.9) (19.3) (27.5) (32.8) DOU: 3-10GB). Source: Bloomberg While we believe that cancellation of mobile data roaming fee – effective from 1

Jul onwards – would have some impact on China Unicom’s data revenue China Unicom (762 HK) growth momentum, we believe it to be manageable, given that many data plans Price Close Relative to Hang Seng Index (RHS) 13.0 120 already provide data allowance for usage nationwide. In addition, that should 12.0 105 also be partly offset by higher data usage from subscribers. For its fixed arm, 11.0 90 we expect that segment to stay stable, with revenue growing by 2.6% YoY 10.0 75 9.0 60 during the same period. 350 300 Continuous good cost control. We expect market expenses to stay under 250 200 control, via To Internet To Customer (2I2C) initiatives with Internet giants. We 150 also see that handset subsidies should stay on the downtrend, as the purchase 100 50

of handsets continues to shift toward third-party channels. Besides, China Volm

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Unicom also obtained more favourable terms from China Tower, which should -

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Nov Sep May help it better manage its leased lines and other network related costs (includes tower lease fees). During the analyst briefing, management also said it would Source: Bloomberg roll out more cost control measures to help offset the impact from the cancelled mobile data roaming fee. Good capex discipline. Management guided that capex would increase to no more than CNY50bn in FY18F, from CNY42bn in FY17, which is smaller than our and market expectation of c.CNY55bn. Meanwhile, given improving profitability, cash flow and a healthy balance sheet, China Unicom also resumed dividend payout, announcing final DPS of CNY0.052. This implies a dividend payout of 40% on its recurring earnings. Maintain BUY. Our new HKD13.00 TP is based on the same DCF valuation, which implies 3.8x FY18F EV/ EBITDA (0.5SD above its 3-year forward mean). The company is current trading at 2.7x FY18F EV/ EBITDA (1.5SD below its 3- year forward mean), which is attractive, in our view.

Forecasts and Valuations Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Total turnover (CNYm) 274,202 274,829 280,882 287,306 294,401 Reported net profit (CNYm) 630 1,828 9,245 12,360 15,327 Recurring net profit (CNYm) 625 4,001 9,245 12,360 15,327 Recurring net profit growth (%) (85.2) 540.2 131.1 33.7 24.0 Recurring EPS (CNY) 0.03 0.15 0.30 0.40 0.50 DPS (CNY) na 0.05 0.12 0.16 0.20 Recurring P/E (x) 295 52 25 19 15 P/B (x) 0.81 0.78 0.77 0.76 0.74 P/CF (x) 3.54 2.47 3.17 3.04 3.06 Dividend Yield (%) na 0.7 1.6 2.1 2.6 Analyst EV/EBITDA (x) 4.20 2.93 2.70 2.34 2.14 Ken Chui CFA Return on average equity (%) 0.3 0.7 3.0 4.0 4.9 Net debt to equity (%) 65.9 10.8 3.4 net cash net cash +852 2103 9415 Our vs consensus EPS (adjusted) (%) 1.2 (11.0) (21.1) [email protected]

Source: Company data, RHB

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

Financial Exhibits

Financial model updated on : 2018-03-16. Asia Financial summary Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F China Recurring EPS (CNY) 0.03 0.15 0.30 0.40 0.50 Communications EPS (CNY) 0.03 0.07 0.30 0.40 0.50 China Unicom DPS (CNY) 0.00 0.05 0.12 0.16 0.20 Bloomberg 762 HK BVPS (CNY) 9.5 9.9 10.0 10.2 10.4 Buy Weighted avg adjusted shares (m) 23,947 27,273 30,598 30,598 30,598

Valuation basis Valuation metrics Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F DCF valuation (WACC: 9.8%; TG: 1%). Recurring P/E (x) 295 52 25 19 15 P/E (x) 292 115 25 19 15 Key drivers P/B (x) 0.81 0.78 0.77 0.76 0.74 Strong mobile data usage growth due to rising 4G FCF Yield (%) (12.5) 20.3 10.3 8.1 3.5 adoption. Dividend Yield (%) 0.0 0.7 1.6 2.1 2.6

EV/EBITDA (x) 4.20 2.93 2.70 2.34 2.14 Key risks EV/EBIT (x) 124 61 21 15 11 i. Unfavourable changes in regulations/policies; ii. Stiffer-than-expected competition; iii. Faster-than-expected drop in voice and SMS Income statement (CNYm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F due to substitution impact from instant Total turnover 274,202 274,829 280,882 287,306 294,401 messaging apps, like Weixin. Gross profit 173,767 181,062 190,337 198,871 206,762 EBITDA 79,503 81,425 90,780 97,540 104,311 Company Profile Depreciation and amortisation (76,805) (77,492) (79,209) (81,888) (84,771) The second largest mobile/fixed broadband network Operating profit 2,698 3,933 11,571 15,652 19,539 operator in China, with 20%/27% of market share in Net interest (3,857) (4,087) (1,792) (1,833) (1,878) terms of total number of subscribers. Income from associates & JVs 357 1,467 2,265 2,317 2,374 Pre-tax profit 789 2,593 13,415 17,568 21,524 China Unicom’s 3-year forward EV/ EBITDA band Taxation (154) (743) (3,354) (4,392) (5,381) Minority interests (5) (22) (816) (816) (816) Recurring net profit 625 4,001 9,245 12,360 15,327

Cash flow (CNYm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Change in working capital (23,427) 8,138 (11,438) (13,991) (20,130) Cash flow from operations 52,065 84,733 74,196 77,324 76,921 Capex (75,000) (42,130) (50,000) (58,326) (68,599) Cash flow from investing activities (70,375) 32,548 (53,883) (60,048) (69,993) Dividends paid (4,006) 0 (1,591) (3,698) (4,944) Source: RHB Cash flow from financing activities 21,740 (104,306) (1,573) (3,694) (4,944) Cash at beginning of period 21,957 25,387 38,362 57,102 70,685 Net change in cash 3,430 12,975 18,740 13,582 1,984 Ending balance cash 25,387 38,362 57,102 70,685 72,668

Balance sheet (CNYm) Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Total cash and equivalents 25,510 38,522 57,262 70,845 72,828 Tangible fixed assets 451,115 416,596 387,387 363,825 347,652 Intangible assets 2,771 2,771 2,771 2,771 2,771 Total investments 37,749 39,887 39,887 39,887 39,887 Total other assets 40,301 36,007 36,007 36,007 36,007 Total assets 614,154 571,983 562,601 553,791 540,907 Short-term debt 135,230 49,861 47,368 45,000 42,750 Total long-term debt 40,371 21,454 20,381 19,362 18,394 Other liabilities 3,333 3,452 3,452 3,452 3,452 Total liabilities 386,472 269,227 257,417 242,455 221,597 Shareholders' equity 227,682 302,756 305,184 311,337 319,310 Minority interests 0 0 0 0 0 Total equity 227,682 302,756 305,184 311,337 319,310 Net debt 150,091 32,793 10,487 (6,483) (11,685) Total liabilities & equity 614,154 571,983 562,601 553,791 540,907

Key metrics Dec-16 Dec-17 Dec-18F Dec-19F Dec-20F Revenue growth (%) (1.0) 0.2 2.2 2.3 2.5 Recurrent EPS growth (%) (85.2) 462.1 105.9 33.7 24.0 Gross margin (%) 63.4 65.9 67.8 69.2 70.2 Operating EBITDA margin (%) 29.0 29.6 32.3 33.9 35.4 Net profit margin (%) 0.2 0.7 3.3 4.3 5.2 Dividend payout ratio (%) 0.0 87.0 40.0 40.0 40.0 Capex/sales (%) 27.4 15.3 17.8 20.3 23.3 Interest cover (x) 0.54 0.69 2.86 3.79 4.62

Source: Company data, RHB

See important disclosures at the end of this report 2

China Unicom China Results Review

16 March 2018 Communications | Telecommunications

4Q17 Results Review

Figure 1: China Unicom’s 4Q17 results review FYE Dec (CNYm) 4Q16 1Q17 2Q17 3Q17 4Q17 4Q17P Diff (%)

Mobile 35,380 37,197 39,647 40,194 39,403 Fixed 22,751 23,813 22,755 23,050 21,248 Product sales 8,828 7,579 6,475 3,844 7,916 Others 99 416 278 530 484 Total Revenue 67,058 69,005 69,155 67,618 69,051 YoY change 2.9% -1.9% -1.1% 1.1% 3.0% Service Revenue 58,230 61,426 62,680 63,774 61,135 61,120 0.0% YoY change 4.9% 2.4% 3.9% 6.0% 5.0% 5.0%

Network, operation and support expenses 12,541 13,205 13,160 13,511 14,631 Interconnection fees 3,231 3,102 3,229 3,261 3,025 Cost of products sold 9,497 7,900 6,738 4,017 7,988 Personnel expenses 9,082 9,832 10,242 11,389 11,008 Other operating expenses 5,995 5,691 5,406 5,311 6,668 Marketing expenses 9,035 8,300 7,796 8,304 9,690 EBITDA 17,672 20,975 22,625 21,825 16,041 YoY change 33.3% 5.0% 6.1% 6.3% -9.2% EBITDA margin 26.4% 30.4% 32.7% 32.3% 23.2%

Depreciation & Amortization 19,388 19,024 19,850 19,133 19,485 EBIT -1,716 1,951 2,734 2,692 -3,444 YoY change -68.6% 62.6% 25.8% 160.1% 100.7% EBIT margin -2.6% 2.8% 4.0% 4.0% -5.0%

Other Income 813 163 248 139 730 Share of P/L of JV 314 313 435 442 277 Disposal gain 0 0 0 0 0 Interest Income 432 286 417 461 483 Interest Expenses 1,235 1,537 1,593 1,611 993 Profit before Tax -1,392 1,176 2,241 2,123 -2,947

Income tax -356 311 683 476 -727 Minority Interests 5 3 5 8 6 Net Profit -963 862 1,553 1,639 -2,226 -2,224 0.1% YoY change -75.7% 79.6% 63.6% 930.8% 131.2% 130.9% Net margin -1.4% 1.2% 2.2% 2.4% -3.2%

Recurring Net Profit -963 862 1,553 1,639 -53 -54 -2.3% YoY change -75.7% 79.6% 63.6% 930.8% 131.2% -94.4% Recurring Net Margin -1.4% 1.2% 2.2% 2.4% -0.1%

Mobile ARPU 44.2 46.7 49.4 50.0 47.8 Note: 4Q17P refers to China Unicom’s 4Q17 preliminary results, based on its positive profit alert issued on 1 Mar. Source: Company data, RHB

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

China Unicom announced its 4Q17 results after market close on 15 Mar. They were roughly in line with the positive profit alert issued on 1 Mar. i. Recurring NL improved to -CNY53m in 4Q17, from CNY-963m in 4Q16, in line with what the positive profit alert implied (recurring NL of -CNY54m). We would like to highlight that in general, China telcos would launch a lot of promotions in 4Q, leading to lower revenue and higher market expenses QoQ. As China Unicom is just starting to rebound from the trough, only having a thin NPM, it turned to NL in 4Q17 as a result; ii. Total revenue grew by 3% YoY to CNY69.1bn in 4Q17. Service revenue grew by 5% YoY to CNY61.1bn, in line with what the positive profit alert implied (service revenue of CNY61.1bn). Compared to the 6% and 3.9% service revenue growth in 3Q17 and 2Q17, we see this still as a healthy growth momentum. Product sales declined by 10.3% YoY to CNY7.9bn, mainly because the purchase of handsets continued to shift towards third-party channels; Mobile service revenue grew by 11.4% YoY to CNY39.4bn, mainly driven by continuous ramp-up in 4G adoption (up to 62% in December, from 58% in September). Mobile service revenue growth also accelerated from 9.8% and 7.5% in 3Q17 and 2Q17 respectively. Mobile ARPU rose to CNY47.80, from CNY44.20 in 4Q16. This was down from CNY50.00 in 3Q17, mainly because of seasonal factors (more promotions as mentioned above). Data as a percentage of total mobile service revenue increased to 60% in FY17, from 51% in FY16. Fixed service revenue declined by 6.6% YoY to CNY21.2bn, mainly dragged by the fixed line (voice) segment. iii. Excluding a one-off non-cash write-off of assets of CNY2.9bn (due to an optical fibre network upgrade, ie China Unicom completely faded out internet access via telephone lines and broadband access via copper wire last year), EBITDA margin actually expanded by 1ppt YoY to 27.4% in 4Q17. On one hand, that should be due to better operating leverage because of better revenue growth. On the other hand, that should also be due to better cost controls: 1. Handset subsidies -59.1% YoY in FY17; 2. Market expenses -1.6% YoY in FY17. This was mainly the result of synergies from China Unicom’s co-operation with i BAT (Baidu, Alibaba and Tencent) via the 2I2C initiative to promote its 4G services on their platforms. For capex, during the analyst briefing, management guided that it would increase to no more than CNY50bn in FY18F, from CNY42bn in FY17, which is smaller than our and market expectation of c.CNY55bn. Management explained that is because it focuses on certain high data usage regions to upgrade the 4G network and as a result, it could manage to control the increase in capex well. For 5G capex, management reiterated that 5G technology would only mature by the end of 2019, at the earliest. It has already rolled out 5G trials in 12 cities to prepare for this. That said, management also reiterated that at the initial stage of 5G commercial operation, network rollout would only be in some key regions with higher data usage, rather than nationwide. Also, given improving profitability, cash flow and health of its balance sheet, China Unicom also resumed dividend payout and announced a final DPS of CNY0.052 – implying a dividend payout of 40% on its recurring earnings. Regarding the cancellation of mobile data roaming fee, to be effective from 1 Jul onwards, management expects the impact would be larger than the cancellation of domestic roaming fee (mainly on voice). This should also be partly offset by higher data usage from subscribers. However, China Unicom would also roll out more cost control measures to help offset the impact from the cancellation of the mobile data roaming fee. Data contributes a larger portion of mobile service revenue (60% in FY17). When cancellation of domestic roaming fee was rolled out in FY16, mobile voice had only contributed 30% of mobile service revenue (FY15). Besides, China Unicom’s 3G/4G plans already did not include this fee, and as such, we believe that impact from cancellation of mobile data roaming fee would be larger. However, we believe it would be manageable – besides what management mentioned above, many data plans already provide data allowance for usage nationwide, which should also help buffer the impact.

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

FY18 Outlook Revenue +2.2% YoY, with service revenue +4.5% YoY For its mobile arm, we expect its 4G penetration to ramp up further to 80% in FY18F, from 62% in FY17. Mobile data contributed 60% of segmental revenue and should stay as the major growth driver for this segment. China Unicom’s DOU reached 2.4GB in FY17, still plenty of room for further increase (neighbouring regions’ DOU: 3-10GB). The impact from cancellation of mobile data roaming fee should be manageable, in our view. As a result, we expect this segment’s revenue to grow by 5.6% in FY18F. For its fixed arm, we expect that segment to stay stable, with revenue growing by 2.6% during the same period.

Recurring NP +1.3x YoY EBITDA margin to expand 2.7ppts YoY to 32.3%. This would mainly be driven by better operating leverage due to better growth momentum of its service revenue. It should also be driven by continuous good cost control. We see that market expenses should stay under control, via 2I2C initiatives with Internet giants. We also see that handset subsidies should stay on the downtrend, given the purchase of handsets continuing to shift towards third-party channels. Besides, China Unicom also obtained more favourable terms from China Tower, which should help it better manage its leased lines and other network related costs (include tower lease fees). Management also mentioned that it would roll out more cost control measures to help offset the impact from cancellation of mobile data roaming fee.

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

Figure 2: Changes to our earnings forecasts FYE Dec (CNYm) FY18F FY19F New Old Change New Old Change Cellular Voice Cellular SMS 18,906 20,312 -6.9% 16,290 18,178 -10.4% Data 4,358 5,072 -14.1% 4,292 4,971 -13.7% Others 105,673 107,328 -1.5% 114,750 115,555 -0.7% Subtotal 36,244 35,762 1.3% 37,711 37,120 1.6% 165,181 168,475 -2.0% 173,043 175,824 -1.6%

Fixed 11,009 11,858 -7.2% 10,402 11,830 -12.1% Fixed Broadband + Other Internet & Data 61,679 63,985 -3.6% 63,033 66,088 -4.6% ICT 3,651 5,187 -29.6% 3,943 5,810 -32.1% Others 16,916 15,256 10.9% 18,672 16,514 13.1% Subtotal 93,254 96,287 -3.2% 96,050 100,241 -4.2%

Product Sales 20,738 22,773 -8.9% 16,506 19,612 -15.8% Others 1,708 1,323 29.1% 1,708 1,323 29.1% Total revenue 280,882 288,858 -2.8% 287,306 297,000 -3.3%

Network, operation and support expenses 56,155 56,130 0.0% 58,206 58,007 0.3% Interconnection fees 13,389 13,254 1.0% 13,724 13,597 0.9% Cost of products sold 21,000 23,129 -9.2% 16,505 19,615 -15.9% Personnel expenses 43,303 42,845 1.1% 44,448 43,742 1.6% Other operating expenses 22,105 22,872 -3.4% 22,028 23,228 -5.2% Marketing expenses 34,149 35,154 -2.9% 34,855 36,019 -3.2% EBITDA 90,780 95,473 -4.9% 97,540 102,791 -5.1% EBITDA margin 32.3% 33.1% 33.9% 34.6%

Depreciation & Amortization 79,209 80,737 -1.9% 81,888 83,885 -2.4% EBIT 11,571 14,735 -21.5% 15,652 18,906 -17.2% EBIT margin 4.1% 5.1% 5.4% 6.4%

Other Income 1,371 1,473 -6.9% 1,432 1,543 -7.2% Share of P/L of JV 2,265 2,726 -16.9% 2,317 2,803 -17.3% Disposal gain 0 0 0 0 Interest Income 2,247 2,311 -2.8% 2,298 2,376 -3.3% Interest Expenses 4,039 6,882 -41.3% 4,132 7,076 -41.6% Profit Before Tax 13,415 14,363 -6.6% 17,568 18,553 -5.3%

Income tax 3,354 3,591 -6.6% 4,392 4,638 -5.3% Minority Interests 816 32 816 32 Net Profit 9,245 10,740 -13.9% 12,360 13,883 -11.0% Net Margin 3.3% 3.7% 4.3% 4.7%

Recurring Profit 9,245 10,740 -13.9% 12,360 13,883 -11.0% Recurring Net Margin 3.3% 3.9% 4.3% 4.7% Source: RHB

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

Figure 3: Detailed P&L FYE Dec (CNYm) FY16 FY17F FY18F FY19F FY20F Mobile Cellular Voice 35,478 24,183 18,906 16,290 14,300 Cellular SMS 4,804 4,564 4,358 4,292 4,275 Data 73,421 93,283 105,673 114,750 122,560 Others 31,315 34,411 36,244 37,711 39,110 Subtotal 145,018 156,441 165,181 173,043 180,245

Fixed Fixed Voice 13,267 12,045 11,009 10,402 9,683 Fixed Broadband + Other Internet & Data 60,031 60,303 61,679 63,033 64,377 ICT 5,938 3,319 3,651 3,943 4,227 Others 15,423 15,198 16,916 18,672 20,610 Subtotal 94,659 90,865 93,254 96,050 98,896

Product Sales 33,215 25,814 20,738 16,506 13,553 Others 1,305 1,708 1,708 1,708 1,708 Total revenue 274,197 274,828 280,882 287,306 294,401 YoY Change -1.0% 0.2% 2.2% 2.3% 2.5%

Network, operation and support expenses 51,167 54,507 56,155 58,206 60,094 Interconnection fees 12,739 12,617 13,389 13,724 14,121 Cost of products sold 36,529 26,643 21,000 16,505 13,424 Personnel expenses 36,907 42,471 43,303 44,448 45,439 Other operating expenses 22,711 23,076 22,105 22,028 21,736 Marketing expenses 34,646 34,090 34,149 34,855 35,275 EBITDA 79,503 81,425 90,780 97,540 104,311 YoY Change -9.1% 2.4% 11.5% 7.4% 6.9% EBITDA margin 29.0% 29.6% 32.3% 33.9% 35.4%

Depreciation & Amortization 76,805 77,492 79,209 81,888 84,771 EBIT 2,698 3,933 11,571 15,652 19,539 YoY Change -74.9% 45.8% 194.2% 35.3% 24.8% EBIT margin 1.0% 1.4% 4.1% 5.4% 6.6%

Other Income 1,591 1,280 1,371 1,432 1,489 Share of P/L of JV 357 1,467 2,265 2,317 2,374 Disposal gain 0 0 0 0 0 Interest Income 1,160 1,647 2,247 2,298 2,355 Interest Expenses 5,017 5,734 4,039 4,132 4,234 Profit Before Tax 784 2,593 13,415 17,568 21,524

Income tax 154 743 3,354 4,392 5,381 Minority Interests 5 22 816 816 816 Net Profit 625 1,828 9,245 12,360 15,327 YoY Change -94.1% 192.5% 405.8% 33.7% 24.0% Net Margin 0.2% 0.7% 3.3% 4.3% 5.2%

Recurring Profit 625 4,001 9,245 12,360 15,327 YoY Change -85.2% 540.2% 131.1% 33.7% 24.0% Recurring Net Margin 0.2% 1.5% 3.3% 4.3% 5.2% Source: RHB

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

Figure 4: Key assumptions FY16 FY17F FY18F FY19F FY20F YoY (%) Mobile 1.7% 7.9% 5.6% 4.8% 4.2% Cellular Voice -17.5% -31.8% -21.8% -13.8% -12.2% Cellular SMS -14.2% -5.0% -4.5% -1.5% -0.4% Data 17.4% 27.1% 13.3% 8.6% 6.8% Others -0.5% 9.9% 5.3% 4.0% 3.7%

Fixed 3.7% -4.0% 2.6% 3.0% 3.0% Fixed Voice -11.6% -9.2% -8.6% -5.5% -6.9% Fixed Broadband + Other Internet & Data 6.0% 0.5% 2.3% 2.2% 2.1% ICT 71.2% -44.1% 10.0% 8.0% 7.2% Others -4.6% -1.5% 11.3% 10.4% 10.4%

Product Sales -20.5% -22.3% -19.7% -20.4% -17.9% Others -6.8% 30.9% 0.0% 0.0% 0.0% Total revenue -1.0% 0.2% 2.2% 2.3% 2.5%

Revenue contribution (%) Mobile 52.9% 56.9% 58.8% 60.2% 61.2% Cellular Voice 12.9% 8.8% 6.7% 5.7% 4.9% Cellular SMS 1.8% 1.7% 1.6% 1.5% 1.5% Data 26.8% 33.9% 37.6% 39.9% 41.6% Others 11.4% 12.5% 12.9% 13.1% 13.3%

Fixed 34.5% 33.1% 33.2% 33.4% 33.6% Fixed Voice 4.8% 4.4% 3.9% 3.6% 3.3% Fixed Broadband + Other Internet & Data 21.9% 21.9% 22.0% 21.9% 21.9% ICT 2.2% 1.2% 1.3% 1.4% 1.4% Others 5.6% 5.5% 6.0% 6.5% 7.0%

Product Sales 12.1% 9.4% 7.4% 5.7% 4.6% Others 0.5% 0.6% 0.6% 0.6% 0.6% Total revenue 100.0% 100.0% 100.0% 100.0% 100.0%

Mobile Subscribers (m) 4G 104.6 174.9 238.9 272.4 305.8 Total 263.8 284.2 298.6 310.4 321.9

YoY (%) 4G 136.8% 67.3% 36.6% 14.0% 12.3% Total 4.6% 7.7% 5.1% 3.9% 3.7%

% of total (%) 4G 39.6% 61.5% 80.0% 87.8% 95.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%

ARPU (CNY) 46.4 48.0 48.2 48.6 48.8

FBB Subscribers (m) 75.2 76.5 78.9 80.0 80.9

YoY (%) 4.0% 1.7% 3.0% 1.4% 1.2%

ARPU (CNY) 67.8 66.2 66.1 66.2 66.7 Source: RHB

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China Unicom China Results Review

16 March 2018 Communications | Telecommunications

Figure 5: DCF valuation FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F EBIT 11,571 15,652 19,539 22,080 24,508 26,714 28,584 30,013 30,914 31,223 EBIT x (1-tax) 8,678 11,739 14,655 16,560 18,381 20,036 21,438 22,510 23,185 23,417 Depreciation 79,209 81,888 84,771 95,792 106,329 115,898 124,011 130,212 134,118 135,459 Capex -50,000 -58,326 -68,599 -77,517 -86,043 -93,787 -100,352 -105,370 -108,531 -109,616 ∆WC -12,259 -7,159 -9,199 -10,394 -11,538 -12,576 -13,457 -14,129 -14,553 -14,699 FCFF 25,628 28,142 21,629 24,440 27,129 29,570 31,640 33,222 34,219 34,561 Discount factor 0.9104 0.8288 0.7546 0.6870 0.6254 0.5694 0.5184 0.4719 0.4296 0.3912 Discounted FCF 23,332 23,325 16,320 16,790 16,967 16,837 16,401 15,679 14,702 13,519 Total discounted FCF 192,257 WACC 9.8% Terminal growth rate 1% Terminal value 154,435 Enterprise value 346,692 Net cash (10,685) Minority interest - Equity value (CNY) 336,007 Equity value (HKD) 396,488 Outstanding shares 30,598 Equity value/ share (HKD) 13.0 Source: RHB

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Figure 6: Peer comparison 1 Company Ticker Price Mkt cap 3-mth EV/ EV/ EV/ EPS EPS EPS 3-Yr Div yld Div yld P/B P/B (USDm) avg t/o EBITDA EBITDA EBITDA FY1 FY2 FY3 EPS Hist (%) FY1 (%) Hist (x) FY1 (x) (USDm) Hist FY1 FY2 YoY% YoY% YoY% Cagr (%) China Unicom 762 HK 9.54 37,225 58.6 3.3 2.9 2.6 131.1 22.6 23.2 51.7 0.6 1.5 0.8 0.8

HK listed peers China Mobile 941 HK 71.95 187,869 184.2 3.4 3.4 3.1 6.3 15.5 9.1 10.2 3.9 9.9 1.3 1.4 China Telecom-H 728 HK 3.35 34,575 31.7 3.0 2.9 2.8 1.8 11.6 11.2 8.1 3.1 3.6 0.7 0.7 Average 3.2 3.2 2.9 4.1 13.5 10.2 9.2 3.5 6.7 1.0 1.0

Non-HK listed peers Lg Uplus Corp 032640 KS 12,450.00 5,095 21.7 3.3 3.2 3.0 8.8 4.2 11.8 8.2 3.2 3.6 1.0 1.0 Kt Corp 030200 KS 27,750.00 6,792 20.9 2.7 2.7 2.7 47.7 5.2 15.4 21.5 3.6 3.8 0.6 0.6 Sk Telecom 017670 KS 236,500.00 17,900 41.2 5.0 5.0 4.9 (5.8) (3.8) 2.6 (2.4) 4.2 4.3 0.9 0.9 Ntt Docomo Inc 9437 JT 2,757.00 101,349 135.0 7.1 6.8 6.6 11.2 (0.6) 4.3 4.9 3.3 3.6 1.7 1.7 Kddi Corp 9433 JT 2,699.50 65,839 214.9 5.5 5.3 5.1 5.8 6.3 3.7 5.3 3.3 3.4 1.7 1.7 Softbank Group C 9984 JT 8,636.00 89,605 463.3 8.4 8.6 8.4 (24.4) (29.9) 113.0 4.1 0.5 0.5 1.9 1.9 Chunghwa Telecom 2412 TT 109.00 29,016 33.2 10.5 10.3 10.1 0.3 1.5 0.8 0.8 4.5 4.5 2.3 2.3 Taiwan Mobile Co 3045 TT 106.00 12,443 23.7 12.8 12.5 12.4 1.2 3.9 1.3 2.1 5.3 5.3 4.8 5.0 Far Eastone Tele 4904 TT 74.50 8,330 9.1 9.6 9.5 9.5 1.4 2.0 4.8 2.7 5.0 5.1 3.5 3.5 Hkt-Ss 6823 HK 9.84 9,501 11.0 8.6 8.4 8.2 1.1 2.3 3.9 2.4 6.4 6.7 1.9 1.9 Smartone Telecom 315 HK 8.50 1,206 1.3 4.9 4.8 5.0 (9.9) (2.7) (0.4) (4.4) 6.0 5.3 2.0 2.0 Hutchtel Hk 215 HK 2.75 1,690 7.9 3.0 2.9 2.9 (92.0) 0.0 (3.8) (57.5) 3.9 2.1 0.8 0.8 Hkbn Ltd 1310 HK 9.05 1,161 1.3 12.1 10.4 9.1 141.5 29.8 19.4 55.3 5.0 6.0 8.1 9.1 Singapore Teleco ST SP 3.42 42,568 66.8 9.0 12.6 12.4 2.7 (1.2) 8.6 3.3 6.0 5.9 1.9 1.9 M1 Ltd M1 SP 1.78 1,255 1.4 6.8 7.0 7.2 (8.4) (16.0) (4.5) (9.8) 6.2 5.7 3.8 3.7 Starhub Ltd STH SP 2.42 3,190 6.3 8.2 8.6 8.7 (7.0) (6.8) (5.7) (6.5) 7.0 6.5 29.8 18.9 Axiata Group Ber AXIATA MK 5.20 12,024 9.1 7.1 6.7 6.3 65.3 21.0 15.3 32.1 1.5 2.1 2.8 1.9 Maxis Bhd MAXIS MK 5.64 11,257 4.2 11.0 11.3 11.5 (10.8) (0.8) 0.0 (4.0) 3.5 3.5 6.3 6.1 Digi.Com Bhd DIGI MK 4.65 9,239 5.0 13.3 13.3 13.0 0.1 2.1 0.5 0.9 4.0 4.1 69.7 64.6 Telekom Malaysia T MK 5.59 5,368 3.6 7.4 7.1 6.8 (7.7) 6.6 6.2 1.5 3.8 3.8 2.7 2.7 Advanced Info ADVANC TB 207.00 19,738 40.5 10.2 9.4 8.8 6.9 5.2 3.4 5.2 3.8 3.7 12.2 10.4 Total Access Com DTAC TB 46.00 3,493 12.9 4.4 4.6 4.7 (20.3) 277.0 13.7 50.6 0.5 0.6 3.7 3.5 True Corp Pcl TRUE TB 7.15 7,652 32.6 7.8 8.6 8.2 (18.1) 19.3 88.2 22.5 0.4 0.2 1.8 1.4 Jasmine Intl Pcl JAS TB 6.85 1,630 9.0 8.9 9.8 9.7 (20.7) (7.5) 3.2 (8.9) 8.0 12.0 3.4 3.3 Philipp Long Dis TEL PM 1,545.00 6,404 3.4 7.7 6.8 6.5 67.9 2.5 4.0 21.4 4.9 4.3 3.1 2.7 Globe Telecom GLO PM 1,652.00 4,212 1.5 6.2 6.0 5.7 4.3 7.0 2.4 4.5 5.5 5.3 3.4 3.1 Telekomunikasi TLKM IJ 3,930.00 28,802 27.9 6.6 5.9 5.5 13.9 10.3 13.6 12.6 5.0 4.3 4.2 3.7 Xl Axiata Tbk Pt EXCL IJ 2,550.00 1,982 1.3 5.1 4.6 4.2 153.5 63.8 72.7 92.9 N/A 1.5 1.3 1.2 Indosat Tbk Pt ISAT IJ 5,300.00 2,094 0.3 3.6 3.7 3.5 44.4 29.5 25.9 33.0 1.3 2.1 2.1 2.0 Average 7.5 7.5 7.3 12.2 14.8 14.6 10.2 4.1 4.1 6.3 5.6 Note: Data as at 15 Mar 2018 Source: Bloomberg, RHB

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Figure 7: Peer comparison 2 Company Rev Hist Rev FY1 NP Hist NP FY1 Net Net Unlev Gross Net Net ROE Hist ROE FY1 Sh px Sh px (USDm) (USDm) (USDm) (USDm) gearing gearing beta margin margin margin (%) (%) 1-mth % 3-mth % Hist (%) FY1 (%) Hist (%) Hist (%) FY1 (%) China Unicom 43,763 41,005 637 1,350 10.8 3.5 0.8 N/A 1.5 3.3 0.6 3.0 (6.5) (10.0)

HK listed peers China Mobile 112,806 107,842 17,315 16,878 N/A N/A 0.8 N/A 0.2 0.2 11.3 12.2 (3.0) (6.3) China Telecom-H 55,723 58,349 2,848 2,869 26.7 28.6 0.5 N/A 5.1 4.9 6.0 5.6 (3.2) (12.3) Average 26.7 28.6 0.6 N/A 2.6 2.5 8.7 8.9 (3.1) (9.3)

Non-HK listed peers Lg Uplus Corp 11,525 11,639 514 559 54.1 49.2 0.4 76.1 4.5 4.8 10.9 10.9 (5.0) (14.7) Kt Corp 21,950 22,035 447 696 34.0 32.2 0.3 83.5 2.0 3.2 4.1 6.1 0.4 (11.3) Sk Telecom 16,443 16,510 2,440 2,489 25.9 26.2 0.6 89.2 14.8 15.1 15.3 14.9 (3.1) (14.6) Ntt Docomo Inc 43,222 44,777 6,152 6,715 N/A N/A 0.6 53.6 14.2 15.0 12.7 12.6 3.0 2.6 Kddi Corp 44,765 47,030 5,154 5,410 21.4 20.5 0.6 43.8 11.5 11.5 15.7 15.5 3.8 (7.6) Softbank Group C 83,916 86,027 13,447 10,069 267.1 302.2 N.A 38.5 16.0 11.7 38.7 23.5 (1.9) (3.3) Chunghwa Telecom 7,804 7,933 1,333 1,346 N/A N/A 0.4 35.5 17.1 17.0 10.7 10.7 2.3 3.3 Taiwan Mobile Co 4,019 4,148 487 495 77.9 73.4 0.2 30.5 12.1 11.9 23.6 24.1 (1.4) 0.0 Far Eastone Tele 3,158 3,130 372 374 36.5 37.1 0.2 38.8 11.8 12.0 15.4 15.8 1.4 4.9 Hkt-Ss 4,241 4,302 650 661 90.8 88.8 0.1 57.4 15.3 15.4 13.0 13.0 0.6 (0.4) Smartone Telecom 1,111 1,086 86 76 29.6 24.0 0.4 N/A 7.7 7.0 13.2 13.1 (2.1) (8.9) Hutchtel Hk 861 931 608 49 N/A N/A 0.4 57.9 70.6 5.3 34.8 2.5 (17.4) (7.4) Hkbn Ltd 412 472 22 55 309.1 303.4 0.1 78.0 5.3 11.6 13.7 38.1 0.8 (12.6) Singapore Teleco 12,737 13,303 2,937 2,942 37.8 32.2 0.7 72.9 23.1 22.1 20.0 14.4 2.7 (8.1) M1 Ltd 816 800 101 92 94.1 108.5 0.2 56.0 12.4 11.5 31.8 27.4 0.6 (1.1) Starhub Ltd 1,830 1,814 190 175 183.3 274.9 0.2 56.6 10.4 9.6 148.5 103.7 (5.8) (17.1) Axiata Group Ber 6,229 6,410 232 374 40.8 57.6 1.5 N/A 3.7 5.8 3.8 5.8 (7.1) (2.3) Maxis Bhd 2,220 2,188 560 505 100.0 93.9 0.6 77.5 25.2 23.1 37.3 28.2 (6.6) (4.9) Digi.Com Bhd 1,618 1,616 377 378 410.5 371.6 0.2 76.1 23.3 23.4 284.5 269.5 (4.7) (2.5) Telekom Malaysia 3,085 3,197 237 220 78.0 69.8 0.3 N/A 7.7 6.9 12.0 11.0 (7.8) (8.4) Advanced Info 5,058 5,312 965 1,030 196.4 200.4 0.5 41.5 19.1 19.4 64.8 58.6 6.2 11.6 Total Access Com 2,510 2,559 68 53 78.6 143.5 1.3 23.9 2.7 2.1 7.5 5.7 (1.6) 6.4 True Corp Pcl 4,531 4,709 74 15 81.4 70.6 1.1 27.7 1.6 0.3 1.8 6.9 13.5 22.2 Jasmine Intl Pcl 559 607 86 82 42.7 N/A 0.9 36.7 15.5 13.4 22.6 14.8 (2.8) (1.4) Philipp Long Dis 3,079 3,209 257 424 124.8 113.3 0.5 91.5 8.4 13.2 12.5 17.4 2.0 3.0 Globe Telecom 2,605 2,721 290 296 180.8 165.3 0.3 90.4 11.1 10.9 23.0 23.0 (8.2) (6.3) Telekomunikasi 9,329 10,196 1,611 1,876 7.3 N/A 1.0 N/A 17.3 18.4 25.0 24.7 (2.0) (7.1) Xl Axiata Tbk Pt 1,664 1,788 27 64 78.3 55.5 N.A N/A 1.6 3.6 1.8 3.6 (12.4) (15.0) Indosat Tbk Pt 2,123 2,236 80 114 153.9 124.1 0.1 59.2 3.8 5.1 9.9 11.3 (6.2) 7.1 Average 109.0 118.3 0.5 58.0 13.4 11.4 32.0 28.5 (2.0) (3.2) Note: Data as at 15 Mar 2018 Source: Bloomberg, RHB

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SWOT Analysis

 One of two dominant players in the fixed broadband  Policy risk from (FBB) market, commanding 27% share of the market the Chinese in terms of total number of subscribers Government  Substitution impact from instant messaging apps

like Weixin, on voice and SMS divisions  Strong mobile data usage  Intensified growth due to competition in rising 4G the fixed adoption broadband market  Network sharing with China Telecom should help reduce its capex burden going forward. Further cooperation between the two may be  State-owned enterprise (SOE) structure, which possible in the reduces its operational flexibility future

Recommendation Chart

Date Recommendation Target Price Price Price Close 2018-03-16 Buy 13.0 na

16 Recommendations & Target Price 2017-10-30 Buy 13.5 11.2

na

14.0 14.0 11.7 11.7 13.0 13.5 15 12.7 2017-10-20 Buy 13.9 11.2

14 2017-08-23 Buy 13.9 12.0

12.9 12.9 13.9 13.9 13 2017-08-17 Buy 14.0 11.9 12 2017-04-23 Buy 12.9 10.2 11 2017-04-06 Buy 13.0 10.4 2017-03-16 Buy 11.7 10.1 10 2017-01-27 Buy 11.7 9.2 9 2016-12-12 Buy 12.7 9.3 8 Source: RHB, Bloomberg Buy Neutral Sell Trading Buy Take Profit Not Rated 7 Mar-13 Jun-14 Oct-15 Jan-17

Source: RHB, Bloomberg

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RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST Malaysia RHB does not have qualified shareholding (1% or more) in the subject company (ies) covered in this report except for: a) - RHB and/or its subsidiaries are not liquidity providers or market makers for the subject company (ies) covered in this report except for: a) - RHB and/or its subsidiaries have not participated as a syndicate member in share offerings and/or bond issues in securities c overed in this report in the last 12 months except for: a) - RHB has not provided investment banking services to the company/companies covered in this report in the last 12 months except for: a) -

Thailand RHB Securities (Thailand) PCL and/or its directors, officers, associates, connected parties and/or employees, may have, or have had, interests and/or commitments in the securities in subject company(ies) mentioned in this report or any securities related thereto. Further, RHB Securities (Thailand) PCL may have, or have had, business relationships with the subject company(ies) mentioned in this report. As a result, investors should exercise their own judgment carefully before making any investment decisions.

Indonesia PT RHB Sekuritas Indonesia is not affiliated with the subject company(ies) covered in this report both directly or indirectly as per the def initions of affiliation above. Pursuant to the Capital Market Law (Law Number 8 Year 1995) and the supporting regulations thereof, what constitutes as affiliated parties are as follows: 1. Familial relationship due to marriage or blood up to the second degree, both horizontally or vertically; 2. Affiliation between parties to the employees, Directors or Commissioners of the parties concerned; 3. Affiliation between 2 companies whereby one or more member of the Board of Directors or the Commissioners are the same; 4. Affiliation between the Company and the parties, both directly or indirectly, controlling or being controlled by the Company; 5. Affiliation between 2 companies which are controlled, directly or indirectly, by the same party; or

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6. Affiliation between the Company and the main Shareholders. PT RHB Sekuritas Indonesia is not an insider as defined in the Capital Market Law and the information contained in this report is not considered as insider information prohibited by law. Insider means: a. a commissioner, director or employee of an Issuer or Public Company; b. a substantial shareholder of an Issuer or Public Company; c. an individual, who because of his position or profession, or because of a business relationship with an Issuer or Public Company, has access to inside information; and d. an individual who within the last six months was a Person defined in letters a, b or c, above.

Singapore RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or associated companies do not make a market in any secu rities covered in this report, except for: (a) - The staff of RHB Research Institute Singapore Pte Ltd and its subsidiaries and/or its associated companies do not serve on an y board or trustee positions of any issuer whose securities are covered in this report, except for: (a) - RHB Research Institute Singapore Pte Ltd and/or its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate finance advisory relationship with the issuer of the securities covered in this report or any other relationship (including a shareholding of 1% or more in the securities covered in this report) that may create a potential conflict of interest, except for: (a) -

Hong Kong The following disclosures relate to relationships between RHBHK and companies covered by Research Department of RHBSHK and referred to in this research report: RHBSHK hereby certifies that no part of RHBSHK analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. RHBHK had an investment banking services client relationships during the past 12 months with: -. RHBHK has received compensation for investment banking services, during the past 12 months from: -. RHBHK managed/co-managed public offerings, in the past 12 months for: -. On a principal basis. RHBHK has a position of over 1% market capitalization of: -.

Additionally, please note the following: Ownership and material conflicts of interest: RHBSHK policy prohibits its analysts and associates reporting to analysts from owning securities of any company covered by the analyst. Analyst as officer or director: RHBSHK policy prohibits its analysts, and associates reporting to analysts from serving as an officer, director, advisory board member or employee of any company covered by the analyst. RHBHK salespeople, traders, and other non-research professionals may provide oral or written market commentary or trading strategies to RHB clients that reflect opinions that are contrary to the opinions expressed in this research report. This research report is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.

Kuala Lumpur Hong Kong Singapore

RHB Research Institute Sdn Bhd RHB Securities Hong Kong Ltd. RHB Research Institute Singapore Level 3A, Tower One, RHB Centre 12th Floor Pte Ltd. Jalan Tun Razak World-Wide House 10 Collyer Quay Kuala Lumpur 50400 19 Des Voeux Road #09-08 Ocean Financial Centre Malaysia Central, Hong Kong Singapore 049315 Tel : +(60) 3 9280 8888 Tel : +(852) 2525 1118 Tel : +(65) 6533 1818 Fax : +(60) 3 9200 2216 Fax : +(852) 2810 0908 Fax : +(65) 6532 6211 Jakarta Shanghai Bangkok

PT RHB Sekuritas Indonesia RHB (China) Investment Advisory Co. Ltd. RHB Securities (Thailand) PCL Wisma Mulia, 20th Floor Suite 4005, CITIC Square 10th Floor, Sathorn Square Office Tower Jl. Jenderal Gatot Subroto No. 42 1168 Nanjing West Road 98, North Sathorn Road, Silom Jakarta 12710, Indonesia Shanghai 20041 Bangrak, Bangkok 10500 Tel : +(6221) 2783 0888 China Thailand Fax : +(6221) 2783 0777 Tel : +(8621) 6288 9611 Tel: +(66) 2 088 9999 Fax : +(8621) 6288 9633 Fax : +(66) 2 088 9799

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