China / Hong Kong Industry Focus Hong Kong Telecom Sector

Refer to important disclosures at the end of this report

DBS Group Research . Equity 5 June 2018

Ringing a different tone HSI : 30,998

 Expect higher residential broadband ARPU upside as low-ARPU subs contracted during the price war A N ALYST two years ago are due to renew their service Chris KO CFA, +852 2971 1707 [email protected] plans at higher prices in 2018 Tsz Wang TAM CFA, +852 2971 1772  Residential broadband operators are focusing on [email protected] raising revenue per customer by offering more services  Mobile roaming market becoming a new arena Recommendation & valuation for price competition  HKBN is our top pick in the sector as it benefits Company Price T arget Rec Mk t Cap F Y19F the most from a tariff hike in the residential Price Yield broadband market HK$ HK$ US$m % HKBN 11.08 13.90 BUY 1,426 6.7 Renew ing low-ARPU residential broadband subs at higher (1310 HK) HKT Trust prices. We expect the low-ARPU residential broadband subs 9.91 12.80 BUY 9,599 6.7 contracted in 2016 (when there was a price war) to renew (6823 HK) their service plans at a higher price in 2018, supporting an Hutchison Telecom 2.81 3.10 HOLD 1,732 2.0 industry tariff hike. Moreover, the duopoly players HKT (6823 (215 HK) HK, BUY) and HKBN (1310 HK, BUY) are also focusing on Smartone Telecom 8.65 7.80 HOLD 1,245 4.4 increasing their revenue per customer by bundling and selling (315 HK) more value-added services. Source: Thomson Reuters, DBS Vickers, Bloomberg Finance L.P.

Price cuts in mobile roaming market. Competition in the *Closing Price as of 4 June 2018 mobile market remains challenging with the roaming market becoming a new arena. HKBN has launched Global Phone service plan which offers global and local data services at a low price of HK$216 per month. SmarTone (SMT, 315 HK, HOLD) and Hutchison Telecom (HT, 215 HK, HOLD) reacted by offering promotional free data roaming packages on top of the local mobile service plans. Mobile service revenue and margin will face extra pressure as the roaming business commands a higher margin.

HKBN is our top pick. We continue to prefer operators with more fixed-line business exposure, i.e. HKBN and HKT over pure mobile operators, i.e. SMT and HT. We expect upside in the residential broadband market as low-ARPU subs contracted in 2016 will be renewed this year. HKBN will be the biggest beneficiary and is our top pick in the sector. Despite being cautious on mobile ARPU outlook, we upgrade SMT from FULLY VALUED to HOLD as its current price has reflected negative ARPU outlook in the next 1-2 years following a 17% share price decline since our last downgrade.

ed-TH / sa-CS / AH

Industry Focus Hong Kong Telecom Sector

Fixed-line market is 10-30% or HK$20-70 higher than the pricing in 2016. We believe this represents more upside for industry ARPU More ARPU upside as low-ARPU subs contracted during 2016 improvement in 2018 than that in 2017. price war are due for renewal in 2018

Some investors were concerned that HKT was reluctant to raise In 2016, HKBN started a price war in the residential broadband residential broadband tariffs in the past year, thereby hindering market to add 100,000 (or 13%) residential broadband subs. an industry-wide tariff hike. However, HKT’s current pricing is Residential broadband subs contracted at a low ARPU in 2016 still higher than its own pricing in 2016, and also HKBN's, are due for renewal in 2018. Based on our shop visits in the thereby leaving room for price increase. past and present, we estimate that the current monthly pricing

HKT and HKBN's broadband service pricing in public HKT and HKBN's broadband service pricing in public housing estates (May 2018) housing estates (June 2016) HKT - Netvigator HKBN HKT - Netvigator HKBN A v erage 223 216 A v erage 206 168 monthly price* monthly price* (HK$/month) (HK$/month) Service package - HK$168 per month for - HK$198 per month for Service package - 1,000M broadband - 1,000M broadband 2x1,000M broadband 1,000M broadband services services services services - Free myTV SUPER content - Letv content services - Free NOW TV content services - myTV SUPER content services with selected - HK$10 per month for services channels Home telephone services - Home telephone service - HK$38.7 per month for Home telephone services Note - Charging an installation fee - First 10 months services Note - Charging an installation fee - Register before 30 Jun, of HK$480 fee HK$148 of HK$680m HK$148.5 per month - Charging an installation fee - HK$340 coupon of HK$680 - A gift valued at c.HK$500- 600 Contract Period 30 months 24 months Contract Period 24months 24 months HKT and HKBN's broadband service pricing in private HKT and HKBN's broadband service pricing in private housing estates (May 2018) housing estates (June 2016) HKT - Netvigator HKBN HKT - Netvigator HKBN A v erage 248 256 A v erage 246 188 monthly price* monthly price* (HK$/month) (HK$/month) Service package - HK$190 per month for - HK$238 per month for Service package - 1,000M broadband - 100M broadband services 2x1,000M broadband 1,000M broadband services services - Letv content services services - Free myTV SUPER content - myTV SUPER content - Free NOW TV content services services services with selected - HK$10 per month for - Home telephone service channels Home telephone services - HK$38.7 per month for Home telephone services Note - Charging an installation fee - First 10 months services Note - Charging an installation fee - Service not available due HK$680 fee HK$188 of HK$680 to shortage of ports in the - Charging an installation fee - HK$340 coupon building of HK$680 - A gift valued at c.HK$500- 600

Contract Period 36 months 27 months Contract Period 24months 24 months * average monthly tariff including installation fee, refund cash value and months with free services

Source: Companies, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Increasing revenue per customer through cross-selling

The residential broadband market continues to be dominated HKBN mobile bundle plan ARPU by HKT and HKBN with a combined market share of 80%+. HKT and HKBN are focusing on selling more services to FY17 1HFY8/18 Change Mobile ARPU (with HK$268 HK$311 +HK$43 customers to increase the revenue per customer rather than broadband services) solely increasing tariffs. Mobile ARPU (without HK$119 HK$142 +HK$23

broadband services) Implied broadband HK$149 HK$169 +HK$20 Residential broadband market share (Dec 2017) services ARPU Source: Company, DBS VIckers i-Cable HT 6% 7% HKT has lowered residential broadband tariffs to match HKBN’s pricing. It is also focusing on upselling bandwidth and cross- selling more value-added services to enhance its ARPU. For example, it offers 2X1000M residential broadband services and HKT google wifi, etc. It also set up an IoT experience shop to HKBN 54% promote IoT applications and services for additional revenue in 33% the future.

i-Cable’s number of broadband customers continued to decline from 156,000 in 2016 to 149,000 in 2017, though the company had started to upgrade its network to provide high- speed GPON. Going forward, we expect the company to focus more on its media business. Source: Companies, DBS Vickers

HGC had been easier in entering the estates developed by HKBN started raising tariffs for residential broadband services Cheung Kong in the past. Going forward, we expect this at the beginning of FY8/17. The company has managed to competitive advantage to decrease as it is no longer a member maintain a stable residential broadband sub base despite its of Cheung Kong Group. It also changed its Chinese name from tariff increase. It is focusing on bundle plans to increase “和記環球電訊” to “環球全域電訊”. We believe retail customer stickiness and revenue per customer. Its ARPU of consumers may not be familiar with the new brand name, bundle plan with residential broadband and mobile services which would reduce its effectiveness in marketing and sales increased by HK$43 to HK$311 in 1HFY8/18 as compared to activities. FY17. Stripping out mobile service ARPU, the implied residential broadband services ARPU would have also increased by HK$20.

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Industry Focus Hong Kong Telecom Sector

Mobile market

Ov erview Mobile market share (Dec 2017) Mobile sub bases of mobile network operators were stable with a lower churn rate despite intense competition. We noticed that market share is shifting to mobile virtual network operator (MVNOs) from 14% in 2016 to 17% in 2017. MVNO Others / MVNOs mobile subs increased by 30% to 2,635,000 in 2017, partly HKT 17% 28% due to HKBN’s entry into the market. Total mobile sub base grew by only c.8% to 15,724,000 in the same period. We estimate that HKBN added c.200,000 mobile subs in 2017 to CMHK account for c.2-3% of the market share. 20%

After rounds of price cuts in 2H17, we estimate that the total HT SMT 21% mobile service revenues of HKT, SMT and HT had dropped by 14% c.1% in 2017. The decline was mild as less than a quarter (half-year period out of a typical 2-year contract period) of the mobile subs renewed their mobile service plans during the period. Mobile service revenue will continue to be dragged Source: Companies, OFCA, DBS VIckers down in FY18 and FY19 as more existing subs renew at lower prices. Our shop visits revealed that local mobile service pricing was stable in the past few months.

4.5G SIM-only plan for port-in sub - May 2018 4.5G SIM-only plan for port-in sub - Dec 2017

24 month contract (HK$ per month) 24 month contract (HK$ per month)

SMT T hree csl. CMHK CUHK HKBN SMT T hree csl. CMHK CUHK HKBN 1GB 216 na 216 na 59 na 1GB 216 na 216 na 59 na 2.5GB 256 na 256 na na na 2.5GB 256 na 256 na na na 3GB na na na 108* na na 6GB 316 156 316 150 na 156 6GB 316 156 268 138 na 166 8GB na na na 161 na na 8GB na na na 158 na na 10GB na 216 456 na 197 na 12GB na na na 198 na 218 10GB na 216 456 na 177 na 14GB na na na na 257 na 12GB na na na 198 na 236 15GB na 246 na na na na 14GB na na na na 207 na 20GB na na na 222 na na 15GB na 246 na na na na 50GB na na na 312 na na 16GB 444 na na na na na Unlimited* 316 306 316 na na 298 20GB na na na 207 na na 50GB na na na 299 na na Unlimited~ 316 306 316 na na 316 * unlimited data at 128kbps after using up the data volume

~ Subject to Fair Usage Policy after 6GB usage

Source: Companies, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Roaming market a new arena

Overall mobile roaming market showed signs of stabilising in Roaming revenue as % of mobile service revenue 2H17 after years of decline as the growth of mobile data roaming offset the decline in mobile voice roaming. However, Roaming revenue as % of the mobile data roaming market has become a new arena of mobile service revenue price competition as HKBN has partnered with UCloudLink to HKT 13% launch Global Phone service plan which offers global and local Hutchison Telecom 18% data services at a low price of HK$216 per month beginning SmarTone 14% April 2018. SMT and HT reacted by offering promotional free Source: Companies, DBS Vickers data roaming packages on top of the local mobile service plans. Although the roaming revenue accounted for only 13- 18% of the mobile service revenue, it commands a higher margin. Mobile service margin will be pressured if the price cuts in data roaming market persist.

Mobile data roaming package

SmarT one Birdie Mobile T hree csl. HKBN Roaming 6GB 6-Destination data Day Pass pricing at HK$12 HK$216 per month for (1) HK$88 for 6 days roaming HK$216 per month for (1) Pack age share mobile service plan for Macau, Mainland 8GB full speed local mobile data in Mainland China, 3GB (+2GB for port-in at HK$316; destinations China, Singapore, Japan data and (2) 2GB 3- Japan, Korea, Taiwan, customers) 21-Mbps include Hong Kong, and Taiwan destination roaming data; Thailand etc. speed-capped local mobile Mainland China, Macau, destinations include Hong data, (2) 5GB global Taiwan, Japan and Kong, Mainland China and mobile roaming data, (3) a Singapore Macau Global Phone and (4) myTV SUPER apps

Source: Companies, DBS Vickers

Serv ice differentiation through new initiatives redeemed for HKT services and an array of products, services and privileges such as priority booking when buying concert Facing intense competition in the mobile service market, tickets, travel package offers, beverages and electronic mobile operators have launched new initiatives, i.e. online gadgets. platforms and IoT businesses. Though these new initiatives may add new revenue streams and increase customer retention rate (2) NB IoT in the long run, the financial impact is limited in the near term. Mobile operators also started NB IoT business which mainly (1) Online platform and loyalty programme targets corporate customers. Application examples are SIM cards installed in vehicles for performance monitoring, helmets Birdie Mobile. SMT launched an all-digital and self-service of construction workers for safety control, etc. We estimate brand, Birdie, in January 2018. Birdie's first mobile service plan that this accounted for a low single-digit of the total service offers contract-free 5GB mobile data at 21Mbps speed and revenue for mobile operators. priced at HK$90 per month. Birdie targets millennials who embrace the digital lifestyle. Hence, Birdie has no physical shops and all sub acquisitions and customer service are done 5G development in Hong Kong online. Birdie retains customers by offering delayed benefits to We believe the 5G network in Hong Kong could be launched soft-lock its customers. in 2020. The government has started consultations on the 26

GHz spectrum band which is currently vacant. 26 GHz will be CLUB SIM. HKT launched CLUB SIM, which is an online mobile deployed in the hotspot areas. We expect the auction to take service platform, in October 2017. CLUB SIM offers contract- place in 4Q18 or 1Q19. However, 3.5 GHz spectrum band, free local mobile and roaming data services. As at end of FY17, which is now partly occupied by satellite operators, will be CLUB SIM had 196,000 mobile post-paid service customers. more important for building the 5G backbone network. The Earlier, HKT launched The Club which is a loyalty and reward regulator is targeting to launch the auction for 3.5 GHz programme. Eligible spending on HKT services and merchant spectrum band in 2019. partners will earn Clubpoints. The Clubpoints can then be

Page 5

Industry Focus Hong Kong Telecom Sector

currently offers an attractive dividend yield of 6%+ with steady Recommendation and valuation dividend growth in the next few years. Maintain BUY with a higher TP of HK$12.8. Our TP is based on a dividend discount We continue to prefer operators with more fixed-line business model assuming cost of equity of 6.9% and terminal growth exposure, i.e. HKBN and HKT over pure mobile operators, i.e. rate of 1%. SMT and HT. We expect more upside in the residential broadband market as the low-ARPU subs contracted during the HT (HOLD, TP: HK$3.1). We have revised up our earnings price war in 2016 will be renewed in 2018. HKBN will be the estimates by 12% and 22% for FY18 and FY19 respectively as biggest beneficiary and is our top pick in the sector. We are the company provided an accelerated depreciation in FY17, cautious on the mobile ARPU and margin outlook as the which reduces the depreciation expense in the next few years. mobile roaming market has become a new arena for price Also the company paid off HK$3.9bn of debt to reduce its competition. interest expense. These would increase the company's dividend

yield as it pays 75% of its earnings. We are cautious on the HKBN (BUY, TP: HK$13.9). We have largely maintained our outlook of the mobile market due to the overcrowded situation adjusted free cash flow forecast with higher residential and an ongoing price war. However, supported by the net cash broadband ARPU assumption offset by higher investments in proceeds of HK$10bn or c.HK$2.1 per share, we maintain our the mobile business. We forecast its dividends to grow by HOLD rating with TP unchanged on HT. Our TP is based on 23%, 35% and 16% in FY8/18-8/20 respectively. HKBN is our SOTP: (1) HK$1.0 per share for mobile business based on 5x top pick in the sector as we expect the company to achieve its EV/EBITDA, and (2) HK$2.1 net cash per share. target of cumulative dividend per share (dps) at HK$2.1-2.4 for

FY8/18-8/20 set in the Co-Ownership Plan III. This implies an SMT (HOLD, TP: HK$7.8). We have revised down our FY6/18 average of HK$0.7-0.8 dps (or 7-8% dividend yield) p.a. and FY6/19 earnings estimates by 10% and 8% respectively

due to lower mobile ARPU assumptions. We downgraded SMT The company has promoted its Chief Operating Officer, NiQ to FULLY VALUED on 4 August 2017 as we had noticed the Lai, to Chief Executive Officer and the existing Chief Executive outbreak of a price war in the mobile market through our shop Officer, William Yeung, to Executive Vice-chairman. We believe visits. Since then, the share price has dropped by 17% despite this will not change its business strategy in achieving the continuous share buybacks. We believe the share price has dividend target set in Co-Ownership Plan III. Reiterate BUY with reflected the decline in ARPU in the next 1-2 years. As such, we a higher TP of HK$13.9 as we roll over to FY8/19. Our TP is upgrade SMT from FULLY VALUED to HOLD. Our TP of HK$7.8 based on a dividend discount model with 7.9% cost of equity is pegged at 15x FY6/19 PE (vs 12x FY6/18 PE previously), and 1% terminal growth rate. which is in line with its historical average. We have set a higher

target multiple as we expect the earnings to stabilise in FY6/19 HKT (BUY, TP: HK$12.8). We have revised up our FY18 and after four years of decline. FY19 adjusted fund flow estimates by 5% and 4% respectively mainly due to higher opex savings assumptions. The stock

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Industry Focus Hong Kong Telecom Sector

Appendix

Share price performance – Telecom operators

Rebased (1 Jul 17 = 100) 140 130 120 110 100 90 80 70 60

50

1-Jul-17 1-Jul-18

1-Jan-18

1-Jun-18

1-Oct-17

1-Feb-18

1-Sep-17 1-Apr-18

1-Dec-17

1-Nov-17

1-Mar-18

1-Aug-17 1-May-18

SmarTone Hutchison Telecom HKT Trust HKBN

Source: Thomas Reuters

Share price performance table

Share price performance (%) 1-mth 3-mth 6-mth 12-mth YTD SmarTone 1.6 (7.0) (9.1) (21.1) (11.6) Hutchison Telecom (0.4) (18.1) (0.4) 20.2 (10.8) HKT Trust (2.7) 1.0 5.2 (1.6) 1.2 HKBN (3.5) 20.0 15.6 31.8 11.1

Source: Thomas Reuters

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Industry Focus Hong Kong Telecom Sector

Valuation

Mk t PE PE Yield Yield P/Bk P/Bk EV/EBITDA F CF Yield Currency Price Cap F iscal 18F 19F 18F 19F 18F 19F 18F 19F 18F 19F Company Name Code Local$ US$m Yr x x % % x x x x % % Hong Kong telecom operators HKT Trust* 6823 HK HKD 9.91 9,564 Dec 13.7 13.7 6.7 6.7 1.9 1.9 8.3 8.2 13.0 13.1 Hutchison Telecom* 215 HK HKD 2.81 1,720 Dec 35.8 37.9 2.1 2.0 0.9 0.8 2.9 2.8 5.1 4.9 Smartone Telecom* 315 HK HKD 8.65 1,223 Jun 15.8 16.7 4.7 4.4 2.1 2.0 4.7 4.8 16.6 14.3 HKBN* 1310 HK HKD 11.08 1,397 Aug 26.2 19.3 5.0 6.7 10.7 11.5 11.3 9.5 6.5 8.2 A v erage 22.9 21.9 4.6 5.0 3.9 4.1 6.8 6.3 10.3 10.1

China telecom operators China Mobile* 941 HK HKD 71.9 188,339 Dec 10.0 9.5 4.6 4.9 1.1 1.1 2.2 1.9 8.4 9.1 China Unicom* 762 HK HKD 10.84 42,447 Dec 31.3 19.5 1.1 1.7 0.9 0.8 2.9 2.4 11.2 10.8 China Telecom 'H'* 728 HK HKD 3.76 6,667 Dec 11.8 10.7 3.5 3.8 0.6 0.7 2.8 2.5 10.6 12.7 A v erage 17.7 13.2 3.1 3.5 0.9 0.9 2.7 2.3 10.1 10.9 Source: Thomas Reuters, *DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Hong Kong residential broadband market

Hong Kong residential broadband ARPU Hong Kong residential broadband sub base

HK$ per month '000 3,000 10% 300 9% 2,500 8% 250 2,000 7% 6% 1,500 5% 200 4% 1,000 3% 150 500 2% 1% 0 0%

100

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

FY09 FY10 FY12 FY13 FY14 FY16 FY17 FY11 FY15 HKBN HKT HT HKBN HKT i-Cable Growth %

Hong Kong residential broadband market share Hong Kong residential broadband revenue

70% HK$m 60% 9,000 8% 8,000 7% 50% 7,000 6% 6,000 40% 5% 5,000 4% 30% 4,000 3% 20% 3,000 2,000 2% 10% 1,000 1%

0% 0 0%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY09

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 HKBN HKT HT HKBN HKT HT i-Cable i-Cable Growth% Source: Companies, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Hong Kong mobile Market

Hong Kong mobile ARPU Hong Kong mobile subscriber base

HK$ per month '000 300 20,000 8%

250 15,000 6% 4% 200 10,000 2% 150 5,000 0% 100 0 -2%

50

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Dec-11 Dec-12 Dec-13 Dec-15 Dec-16 Dec-17 Dec-14

CSL HKT

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-10

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-16 Dec-17 Dec-15 HT SMT CMHK Others / MVNOs HKT HT SMT Growth%

Hong Kong mobile market share Hong Kong mobile service revenue

35% HK$m 30% 11,000 12% 10% 25% 9,000 8% 7,000 6% 20% 4% 15% 5,000 2% 0% 10% 3,000 -2% 1,000 -4% 5% -6% (1,000) -8%

0%

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-17 Dec-16

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Dec-11 Dec-12 Dec-13 Dec-14 Dec-16 Dec-17 Dec-15 CSL HKT HKT HT SMT CMHK HT SMT Others / MVNOs HoH growth %

Source: Companies, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Revenue breakdown of Hong Kong telecom operators

HKBN’s revenue breakdown (1HFY8/18) HKT’s revenue breakdown (FY17)

Product Other business Local revenue telephony Mobile 1% 5% services handset Sales 10% 7% Local data Residential Mobile and Enterprise Revenue broadband 59% services broadband 28% services Revenue 22% 36%

International Telecommunications services Other TSS 22% services 10%

Hutchison Telecom’s revenue breakdown (FY17) SmarTone’s revenue breakdown (1HFY6/18)

Handset and Hardware accessory Service sales Revenue Mobile revenue 39% 43% telecommunications 61% services 57%

Note: fixed-line business revenue is excluded in Hutchison Telecom’s revenue breakdown

Source: Companies, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

PE & PB band charts

HKBN PE Chart (1310 HK) HKBN PB Chart (1310 HK)

Share Price (HK$) Share Price (HK$) 38 18 54x 17 33 16 15 45x 28 14 13 11.6x 36x 23 12 11 10.1x 18 27x 10 9 8.6x 8 13 18x 7 7.1x 6 8 5 5.6x 4

3 3

Jul-15 Jul-16 Jul-17 Jul-18

Jul-15 Jul-16 Jul-18 Jul-17

Nov-15 Nov-16 Nov-17 Nov-18

Mar-15 Mar-16 Mar-17 Mar-18

Nov-15 Nov-16 Nov-17 Nov-18

Mar-16 Mar-17 Mar-18 Mar-15

HKT Trust PE Chart (6823 HK) HKT Trust PB Chart (6823 HK)

Share Price (HK$) Share Price (HK$) 16 26x 14 2.0x 14 24x 12 1.7x 21x 10 12 1.5x 19x 8 10 1.2x 17x 6 0.9x 8 4

6 2

4 0

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

May-12 May-14 May-16 May-18 May-12 May-13 May-14 May-16 May-17 May-18 May-15 May-17 May-15 May-13 Source: Bloomberg Finance L.P., DBS Vickers

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Industry Focus Hong Kong Telecom Sector

PE & PB band charts

Hutchison Telecom PE Chart (215 HK) Hutchison Telecom PB Chart (215 HK)

Share Price (HK$) Share Price (HK$) 25.0 7.0 2.0x 6.0 20.0 1.7x 5.0 15.0 4.0 1.3x 20x 10.0 16x 3.0 1.0x 11x 2.0 0.7x 5.0 7x 1.0

0.0 3x 0.0

Jan-11 Jan-11

Apr-16 Sep-13 Apr-16 Sep-13

Dec-14 Dec-18 Dec-14 Dec-18

Aug-17 Aug-17 May-12 May-12

Smartone PE Chart (315 HK) Smartone PB Chart (315 HK)

Share Price (HK$) Share Price (HK$) 30 30 6.1x 25 25 5.0x 20 20 4.0x 26x 15 15 21x 2.9x 17x 10 10 13x 1.9x 5 9x 5

0 0

Jan-11

Sep-13 Apr-16

Dec-14 Dec-18

Jan-11

Aug-17

May-12

Sep-13 Apr-16

Dec-14 Dec-18 Aug-17 May-12 Source: Bloomberg Finance L.P., DBS Vickers

Page 13

China / Hong Kong Company Guide HKBN Ltd. Version 11 | Bloomberg: 1310 HK Equity | Reuters: 1310.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 5 Jun 2018

BUY Enjoying clear signals Last Traded Price( 4 Jun 2018):HK$11.08(HSI : 30,998) Price Target 12-mth:HK$13.90 (25% upside) (Prev HK$13.40) Significant upside potential in ARPU under duopoly . We have a BUY

A nalyst rating on HKBN, and a TP of HK$13.90 based on dividend discount Chris KO CFA,+852 2971 1707, [email protected] model (DDM). HKBN offers a dividend yield of 5%+, and we forecast a Tsz Wang TAM CFA,+852 2971 1772, [email protected] dividend CAGR of 20%+ from FY8/18-8/20. The company increased its What’s New market share from c.16% in FY8/08 to c.33% in FY8/17, and is now the second largest residential broadband operator in Hong Kong. We expect  Expect higher ARPU upside as low-ARPU it to enjoy upside to residential broadband ARPU (average revenue per residential broadband subs contracted during the user) and profitability in a duopoly-like market. price war two years ago are due to renew at a

higher price in 2018 Where w e differ: Dividend growth target achievable. The company has  Focusing on increasing revenue per customer by proposed a new Co-Ownership Plan III. It aims to achieve a cumulative bundling more services to customers adjusted free cash flow (AFCF) per share of HK$2.1-2.4 for FY8/18-8/20  The biggest beneficiary of industry-wide tariff which implies an average dividend per share of HK$0.7-0.8 p.a. (or c.7- hike of the residential broadband market 8% dividend yield in FY19 and FY20). We believe this is achievable  Reiterate BUY for its strong dividend growth through the tariff hike in residential broadband market, market share potential, with a higher TP of HK$13.9 as we roll gains in mobile and enterprise broadband markets, as well as over our valuation benchmark to FY8/19 monetisation of myTV SUPER.

Price Relative Potential catalyst: Industry-wide tariff hikes in residential broadband mark et. The residential broadband market is a duopoly dominated by HKT and HKBN with more than 80% combined market share. HKBN has started raising residential broadband tariff in the market as it focuses on revenue market share. We expect HKT to increase its residential broadband tariff to offset the mobile ARPU pressure. An industry -wide tariff hike in the residential broadband market will be positive to HKBN’s share price.

Forecasts and Valuation Valuation: FY Aug (HK$m) 2017A 2018F 2019F 2020F We have a BUY rating on HKBN for its dividend growth potential. Our TP Turnover 3,232 3,916 4,555 5,168 of HK$13.9 is based on DDM, assuming 7.9% cost of equity and 1% EBITDA 1,043 1,282 1,512 1,663 terminal growth rate. Pre-tax Profit 257 546 733 836 Net Profit 171 425 577 660 Net Profit Gth (%) (30.1) 148.2 36.0 14.4 Key Risks to Our View: EPS (HK$) 0.17 0.42 0.57 0.66 Price war. Competitors irrationally undercutting HKBN's prices for a EPS Gth (%) (30.5) 148.2 36.0 14.4 Diluted EPS (HK$) 0.17 0.42 0.57 0.66 prolonged period. AFCF 453 555 747 869 DPS (HK$) 0.45 0.55 0.74 0.86 Interest rate up-cycle. Any increase in interest rates will reduce the AFCF BV Per Share (HK$) 1.12 1.04 0.97 0.82 PE (X) 65.1 26.2 19.3 16.9 and therefore the dividend distribution. CorePE (X) 65.1 26.2 19.3 16.9 P/Cash Flow (X) 12.4 9.9 8.5 7.7 A t A Glance P/Free CF (X) 22.4 15.5 12.2 10.7 Issued Capital (m shrs) 1,006 EV/EBITDA (X) 14.0 11.3 9.5 8.6 Mkt Cap (HK$m/US$m) 10,962 / 1,397 Net Div Yield (%) 4.1 5.0 6.7 7.8 P/Book Value (X) 9.9 10.7 11.5 13.5 Major Shareholders (%) Net Debt/Equity (X) 3.1 3.2 3.3 3.8 CPP Investment Board 18.0 ROAE(%) 13.7 39.1 57.3 73.5 GIC Private Limited 9.0 Earnings Rev (%): 1 1 1 Capital Research Global Investors 7.8 Consensus DPS (HK$) 0.56 0.70 0.81 Matthews International Capital Management, L.L.C. 6.0 Other Broker Recs: B:8 S:0 H:0 Free Float (%) 59.2 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX 3m Avg. Daily Val. (US$m) 1.7 ICB Industry: Technology / Software & Computer Services

ed-TH / sa- CS /AH

Company Guide HKBN Ltd.

CRITICAL FACTORS TO WATCH Residential broadband sub (k)

Critical Factors Mark et share stable. HKBN has gained market share from competitors through its aggressive pricing strategy. It has a track record of managing decent ARPU growth over a longer period despite short-term volatility. Going forward, HKBN has switched its focus from sub to revenue market share and started raising tariffs in January 2017. Therefore, we expect to see low single-digit growth rates with stable market share for sub numbers in the next few years. Residential broadband ARPU (HK$)

A RPU improvement. HKBN has switched its focus from sub to revenue market share and has started to raise tariffs. We estimate that the company can raise the residential broadband service pricing by HK$20-30 per month and the impact will take around three years to be fully reflected in ARPU. We also expect HKBN to continue upselling higher-tier plans' OTT media service and mobile service to its customers.

Expansion into mobile market. HKBN started offering mobile services as a mobile virtual network operator (MVNO) in Mobile sub base (k) September 2016, supported by SMT’s network. As at the end of February 2018, it had acquired 313,000 registered mobile subs. With a variable cost structure, its first sub contract is breaking even, and the renewal contract will be profitable, i.e. worst case is breakeven. We estimate an operating loss of HK$30-60m in FY8/18 due to the upfront customer acquisition costs. We expect the mobile business to be profitable after FY8/19.

Mobile ARPU (HK$)

Source: Company, DBS Vickers

Page 15

Company Guide HKBN Ltd.

Balance Sheet: Strong free cash flow. HKBN generates strong free cash flow Leverage & Asset Turnover (x) with an expected CAGR of c.20%+ p.a. in FY8/18-8/20 The company intends to pay out 90-100% of its adjusted free cash flow (AFCF) as dividends. AFCF is derived from core EBITDA adjusted for capex, net interest, non-recurring items, non-cash items, tax paid and changes in working capital.

Healthy balance sheet. HKBN had total borrowings of HK$3.9bn with a debt-to-EBITDA ratio of 3.6x as at end- FY8/17, which is manageable. We expect the company to maintain its debt level and forecast debt-to-EBITDA to be 3.3x Capital Expenditure in FY8/18.

Share Price Drivers: Industry-wide tariff hikes in residential broadband market. We expect HKT to increase its residential broadband tariff to offset the mobile ARPU pressure. An industry-wide tariff hike in the residential broadband market will be positive to HKBN’s share price.

Key Risks: Price war. Competitors irrationally undercutting HKBN's prices ROE for a prolonged period.

Interest rate up-cycle. Any increase in interest rates will reduce the AFCF and therefore the dividend distribution.

Company Background HKBN is a broadband service provider in Hong Kong. It is the second largest player in the residential segment with a market share of c.33%.

Forward PE Band

PB Band

Source: Company, DBS Vickers

Page 16

Company Guide HKBN Ltd.

Key Assumptions FY Aug 2016A 2017A 2018F 2019F 2020F Residential broadband sub 857.0 871.0 876.0 881.0 886.0 (k) Residential broadband 173.0 168.0 175.0 185.0 195.0 ARPU (HK$) Mobile sub base (k) 0.0 147.0 320.0 500.0 600.0 Mobile ARPU (HK$) 0.0 120.0 140.0 140.0 140.0 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Aug 2016A 2017A 2018F 2019F 2020F Revenue 2,784 3,232 3,916 4,555 5,168 Cost of Goods Sold (451) (710) (1,136) (1,503) (1,860) Gross Profit 2, 333 2, 522 2, 780 3, 052 3, 307 Other Opng (Exp)/Inc (1,857) (2,057) (2,103) (2,184) (2,329) O pe rating Profit 476 465 677 867 978 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 2 (1) (1) (1) Net Interest (Exp)/Inc (141) (210) (130) (133) (141) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 335 257 546 733 836 Tax (90) (86) (122) (156) (176) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Ne t Profit 245 171 425 577 660 Net Profit before Except. 245 171 425 577 660 EBITDA 982 1,043 1,282 1,512 1,663 Growth Revenue Gth (%) 18.9 16.1 21.2 16.3 13.5 EBITDA Gth (%) 6.4 6.2 22.9 18.0 10.0 Opg Profit Gth (%) 6.4 (2.2) 45.6 28.1 12.7 Net Profit Gth (%) 134.7 (30.1) 148.2 36.0 14.4 M a rgins & Ratio Gross Margins (%) 83.8 78.0 71.0 67.0 64.0 Opg Profit Margin (%) 17.1 14.4 17.3 19.0 18.9 Net Profit Margin (%) 8.8 5.3 10.8 12.7 12.8 ROAE (%) 17.0 13.7 39.1 57.3 73.5 ROA (%) 4.0 2.6 6.4 8.6 10.0 ROCE (%) 6.4 5.3 8.9 11.5 13.3 Div Payout Ratio (%) 164.4 264.5 130.6 129.3 131.6 Net Interest Cover (x) 3.4 2.2 5.2 6.5 6.9 Source: Company, DBS Vickers

Page 17

Company Guide HKBN Ltd.

Interim Income Statement (HK$ m) FY Aug 1H2016 2H2016 1H2017 2H2017 1H2018

Revenue 1,226 1,558 1,535 1,698 1,868 Cost of Goods Sold (137) (315) (304) (406) (545) Gross Profit 1, 089 1, 244 1, 231 1, 291 1, 323 Other Oper. (Exp)/Inc (839) (1,018) (1,026) (1,031) (1,008) O pe rating Profit 250 226 205 260 315 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 2 1 0 Net Interest (Exp)/Inc (66) (75) (117) (94) (26) Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 183 151 90 167 288 Tax (48) (42) (44) (42) (47) Minority Interest 0 0 0 0 0 Ne t Profit 135 109 46 125 241 Net profit bef Except. 135 109 46 125 241

Growth Revenue Gth (%) 8.8 28.3 25.2 8.9 21.7 Opg Profit Gth (%) 30.6 (11.7) (17.8) 15.0 53.4 Net Profit Gth (%) N/A (27.5) (66.0) 14.3 423.4

M a rgins Gross Margins (%) 88.9 79.8 80.2 76.1 70.8 Opg Profit Margins (%) 20.4 14.5 13.4 15.3 16.8 Net Profit Margins (%) 11.0 7.0 3.0 7.4 12.9 Source: Company, DBS Vickers

Page 18

Company Guide HKBN Ltd.

Balance Sheet (HK$ m) FY Aug 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 2,420 2,290 2,243 2,156 2,029 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 3,359 3,418 3,260 3,102 2,945 Cash & ST Invts 355 385 736 868 965 Inventory 51 12 12 13 14 Debtors 148 205 215 226 238 Other Current Assets 272 276 289 303 318 T otal Assets 6, 605 6, 585 6, 756 6, 668 6, 508

ST Debt 0 0 0 0 0 Creditors 108 98 103 108 113 Other Current Liab 718 665 676 687 698 LT Debt 3,721 3,831 4,100 4,100 4,100 Other LT Liabilities 694 863 833 802 772 Shareholder’s Equity 1,363 1,129 1,045 972 824 Minority Interests 0 0 0 0 0 T otal Cap. & Liab. 6, 605 6, 585 6, 756 6, 668 6, 508

Non-Cash Wkg. Capital (355) (270) (261) (252) (243) Net Cash/(Debt) (3,366) (3,446) (3,364) (3,232) (3,135) Debtors Turn (avg days) 15.1 19.9 19.6 17.7 16.4 Creditors Turn (avg days) (376.4) 283.2 68.8 44.7 34.3 Inventory Turn (avg days) (214.1) 86.1 8.3 5.4 4.1 Asset Turnover (x) 0.5 0.5 0.6 0.7 0.8 Current Ratio (x) 1.0 1.2 1.6 1.8 1.9 Quick Ratio (x) 0.6 0.8 1.2 1.4 1.5 Net Debt/Equity (X) 2.5 3.1 3.2 3.3 3.8 Net Debt/Equity ex MI (X) 2.5 3.1 3.2 3.3 3.8 Capex to Debt (%) 10.5 10.5 9.8 9.8 9.8 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers

Cash Flow Statement (HK$ m) FY Aug 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 335 257 546 733 836 Dep. & Amort. 506 578 605 645 685 Tax Paid (58) (123) (143) (177) (197) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 0 (53) (8) (9) (10) Other Operating CF 143 242 121 124 132 Ne t Operating CF 926 901 1, 120 1, 316 1, 446 Capital Exp.(net) (393) (404) (400) (400) (400) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (649) 42 1 2 3 Ne t Investing CF ( 1,042) ( 361) ( 399) ( 398) ( 397) Div Paid (402) (422) (509) (651) (808) Chg in Gross Debt 684 21 269 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (137) (109) (131) (135) (144) Ne t Financing CF 144 ( 511) ( 371) ( 786) ( 951) Currency Adjustments (3) 1 0 0 0 Chg in Cash 26 30 351 132 97 Opg CFPS (HK$) 0.93 0.95 1.12 1.32 1.45 Free CFPS (HK$) 0.53 0.49 0.72 0.91 1.04

Source: Company, DBS Vickers

Page 19

Company Guide HKBN Ltd.

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 12.0 5 6 Price T arget 11.5 Price 11.0 1: 3-Nov-17 HK$7.97 HK$12.20 Buy 10.5 3 2: 6-Nov-17 HK$8.92 HK$12.20 Buy 2 4 10.0 3: 8-Dec-17 HK$9.90 HK$13.30 Buy 9.5 4: 5-Jan-18 HK$10.02 HK$13.30 Buy 1 9.0 5: 20-Apr-18 HK$10.04 HK$13.40 Buy 8.5 6: 4-May-18 HK$11.02 HK$13.40 Buy 8.0 7.5

7.0

Jul-17

Jan-18

Jun-17 Jun-17

Oct-17 Feb-18

Sep-17 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17

May-18 May-18

Source: DBSVHK Analyst: Chris KO CFA, Tsz Wang TAM CFA,

Page 20

China / Hong Kong Company Guide HKT Trust Version 7 | Bloomberg: 6823 HK Equity | Reuters: 6823.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 5 Jun 2018

BUY On HKT we Trust Last Traded Price( 4 Jun 2018):HK$9.91(HSI : 30,998) Price Target 12-mth:HK$12.80 (29% upside) (Prev HK$12.60) Incumbent operator with attractive dividend yield. We have a BUY rating on HKT Trust (HKT), with a dividend discount model (DDM)- A nalyst Chris KO CFA,+852 2971 1707, [email protected] based TP of HK$12.8. HKT offers a dividend yield of 6%+ with Tsz Wang TAM CFA,+852 2971 1772, [email protected] potential upside from lower capex and more cost savings arising from the HKT/CSL merger. It is an incumbent player in the fixed-line What’s New segment, and became the largest mobile operator after merging with  Expect massive volume of low-ARPU residential CSL in FY14. HKT intends to pay out 100% of its adjusted fund flow broadband subs contracted during price war to (AFF) which is expected to register steady growth from FY18-20. renew at a higher price in 2018 Where w e differ: Continuous opex and capex savings. The market  Focusing on increasing revenue per customer by believes that cost synergies from CSL integration had already been upselling bandwidth and cross-selling value-added services fully realised in 2016. However, as the network integration has largely been completed, we expect reduction in capex to support dividend  Revised up our FY18 and FY19 adjusted fund flow growth. We also expect further cost savings from optimisation in estimates by 5% and 4% respectively mainly due retail outlets, human resources and system integration, etc. to higher opex saving assumptions  Maintain BUY for its attractive dividend yield and Potential catalysts: Industry -wide tariff hikes in residential broadband steady growth with a higher TP of HK$12.8 mark et. The residential broadband market is a duopoly dominated by HKT and HKBN with more than 80% combined market share. HKBN Price Relative announced that it would focus on revenue market share and raise tariffs for its residential broadband service. We expect HKT to lead the industry-wide tariff hike in the residential broadband market and this will be positive to its share price.

Valuation: We have a BUY rating on HKT for its attractive dividend yield of c.6% with further growth potential. Our TP of HK$12.8 is based on DDM Forecasts and Valuation assuming 6.9% cost of equity and 1% terminal growth rate. FY Dec (HK$m) 2017A 2018F 2019F 2020F Turnover 33,258 33,623 33,916 34,416 EBITDA 12,841 13,478 13,536 13,742 Key Risks to Our View: Pre-tax Profit 6,080 6,552 6,565 6,722 Irrational market competition. Hong Kong’s mobile market is crowded Net Profit 5,097 5,474 5,484 5,616 Net Profit Gth (Pre-ex) (%) 4.3 7.4 0.2 2.4 with four major players and the entry of HKBN as a fifth player EPS (HK$) 0.67 0.72 0.72 0.74 (MVNO), the penetration is more or less saturated. Irrational pricing EPS Gth (%) 4.2 7.4 0.2 2.4 Diluted EPS (HK$) 0.67 0.72 0.72 0.74 may lead to a price war. DPS (HK$) 0.65 0.66 0.67 0.68 BV Per Share (HK$) 5.15 5.18 5.24 5.31 Interest rate up-cycle. Any increase in interest rates will reduce the PE (X) 14.7 13.7 13.7 13.4 CorePE (X) 14.7 13.7 13.7 13.4 AFF and therefore the dividend distribution. P/Cash Flow (X) 6.2 6.1 6.1 6.0 P/Free CF (X) 7.9 7.7 7.6 7.5 A t A Glance EV/EBITDA (X) 8.6 8.3 8.2 8.1 Net Div Yield (%) 6.5 6.7 6.7 6.9 Issued Capital (m shrs) 7,572 P/Book Value (X) 1.9 1.9 1.9 1.9 Mkt Cap (HK$m/US$m) 75,036 / 9,564 Net Debt/Equity (X) 0.9 0.9 0.9 0.9 Major Shareholders (%) ROAE(%) 13.0 14.0 13.9 14.1 PCCW Ltd 63.1 Earnings Rev (%): 14 11 NEW Consensus DPS (HK$) 0.66 0.68 0.70 Free Float (%) 36.9 Other Broker Recs: B:9 S:0 H:1 3m Avg. Daily Val. (US$m) 8.9

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ICB Industry: Telecommunications / Fixed Line Telecommunications

ed-TH / sa- CS /AH Company Guide HKT Trust

CRITICAL FACTORS TO WATCH Fixed-line sub growth (%)

Critical Factors Cost savings from CSL integration and capex reduction. As the network integration with CSL has largely been completed, we expect reduction in capex to support dividend growth. We also expect further cost savings from optimisation in retail outlets, human resources and system integration.

F ixed-line ARPU improvement. We believe that smaller operators HGC and i-Cable have lost their competitiveness and Broadband sub growth (%) therefore pricing power. The residential broadband market is effectively dominated by two players, HKBN and HKT. HKBN has switched its focus from subscribers to revenue market share and will start to raise prices, which is positive to industry ARPU. We expect ARPU and profitability upside for HKT under the duopoly.

Mobile ARPU under pressure. The mobile market is crowded with four major players, namely HKT, Hutchison Telecom (HT), SmarTone (SMT) and China Mobile Hong Kong (CMHK). The competition is further intensified by the entry of HKBN as a Mobile sub growth (%) mobile virtual network operator (MVNO). The mobile industry’s ARPU is under pressure as HKBN and CMHK are offering aggressive price discounts to take market share. However, we expect the negative impact from ARPU pressure to be offset by its opex savings.

Mobile sub growth. Hong Kong's mobile market is more or less matured with low single-digit sub growth in the past two years. HKT, HT, SMT and CMHK commanded market shares of c.28%, c.21%, c.14% and c.20% respectively as at end- Mobile ARPU December 2017. We forecast HKT’s mobile base to decline by a low single-digit rate in the next two years due to a more crowded market.

EBITDA margin (%)

Source: Company, DBS Vickers

Page 22 Company Guide HKT Trust

Balance Sheet: Leverage & Asset Turnover (x) Healthy financials with a debt-to-EBITDA ratio of 3.0x. HKT had bank borrowings of HK$39bn and its debt-to-EBITDA ratio remained healthy at c.3.0x at end-FY17. Average debt maturity is around five years with an effective interest rate of c.3%. The company intends to pay out 100% of its AFF (which is basically free cash flow), and to maintain its debt level.

Share Price Drivers: Industry-wide tariff hikes in residential broadband market. The residential broadband market is a duopoly dominated by HKT and HKBN. HKBN announced that it would focus on revenue Capital Expenditure market share and raise tariffs for residential broadband service. An industry-wide tariff hike in the residential broadband market will be positive to HKT's share price.

Key Risks: Irrational market competition. Hong Kong’s mobile market is crowded with four major players and the entry of HKBN as a MVNO, and the penetration is more or less saturated. Irrational pricing may lead to a price war. ROE Interest rate up-cycle. Any increase in interest rates will reduce the AFF and therefore the dividend distribution.

Company Background HKT is an integrated telecom service provider in Hong Kong, with the largest market share in the fixed-line and mobile market. The company's broadband services are provided via the brand “Netvigator” and its mobile services are provided via the brands “SUN Mobile”, “csl.” and “1O1O”. HKT is 51.97% owned by PCCW. Forward PE Band

PB Band

Source: Company, DBS Vickers

Page 23 Company Guide HKT Trust

Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Fixed -line sub growth (%) (0.2) (0.4) (0.2) (0.2) (0.2) Broadband sub growth (0.3) 1.6 1.2 1.4 1.4 (%) Mobile sub growth (%) (1.0) (2.3) (1.3) (1.3) 0.7 Mobile ARPU 170.0 173.0 182.0 181.0 182.0 EBITDA margin (%) 37.5 39.1 40.1 39.9 39.9 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 33,847 33,258 33,623 33,916 34,416 Cost of Goods Sold (14,445) (14,161) (14,370) (14,573) (14,788) Gross Profit 19, 402 19, 097 19, 253 19, 343 19, 629 Other Opng (Exp)/Inc (12,523) (11,786) (11,602) (11,662) (11,791) O pe rating Profit 6, 879 7, 311 7, 652 7, 680 7, 837 Other Non Opg (Exp)/Inc (51) (145) 0 0 0 Associates & JV Inc (23) (10) (10) (10) (10) Net Interest (Exp)/Inc (1,107) (1,076) (1,089) (1,106) (1,105) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 5, 698 6, 080 6, 552 6, 565 6, 722 Tax (771) (971) (1,048) (1,050) (1,076) Minority Interest (38) (12) (30) (30) (30) Preference Dividend 0 0 0 0 0 Ne t Profit 4, 889 5, 097 5, 474 5, 484 5, 616 Net Profit before Except. 4,889 5,097 5,474 5,484 5,616 EBITDA 12,613 12,841 13,478 13,536 13,742 Growth Revenue Gth (%) (2.5) (1.7) 1.1 0.9 1.5 EBITDA Gth (%) 4.3 1.8 5.0 0.4 1.5 Opg Profit Gth (%) 16.5 6.3 4.7 0.4 2.0 Net Profit Gth (%) 23.8 4.3 7.4 0.2 2.4 M a rgins & Ratio Gross Margins (%) 57.3 57.4 57.3 57.0 57.0 Opg Profit Margin (%) 20.3 22.0 22.8 22.6 22.8 Net Profit Margin (%) 14.4 15.3 16.3 16.2 16.3 ROAE (%) 12.7 13.0 14.0 13.9 14.1 ROA (%) 5.3 5.4 5.7 5.7 5.7 ROCE (%) 7.4 7.4 7.6 7.6 7.7 Div Payout Ratio (%) 95.8 96.4 91.5 92.0 91.7 Net Interest Cover (x) 6.2 6.8 7.0 6.9 7.1 Source: Company, DBS Vickers

Page 24 Company Guide HKT Trust

Interim Income Statement (HK$ m) FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017

Revenue 15,974 18,755 16,388 17,459 15,649 Cost of Goods Sold (6,544) (8,995) (6,973) (7,472) (6,508) Gross Profit 9, 430 9, 760 9, 415 9, 987 9, 141 Other Oper. (Exp)/Inc (6,851) (6,436) (6,375) (6,148) (6,012) O pe rating Profit 2, 579 3, 324 3, 040 3, 839 3, 129 Other Non Opg (Exp)/Inc 33 (15) 9 (60) (2) Associates & JV Inc (15) (10) (8) (15) 7 Net Interest (Exp)/Inc (631) (679) (483) (624) (522) Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 1, 966 2, 620 2, 558 3, 140 2, 612 Tax (171) (429) (231) (540) (213) Minority Interest (17) (20) (10) (28) (10) Ne t Profit 1, 778 2, 171 2, 317 2, 572 2, 389 Net profit bef Except. 1,778 2,171 2,317 2,572 2,389

Growth Revenue Gth (%) 27.6 15.0 2.6 (6.9) (4.5) Opg Profit Gth (%) 24.4 45.7 17.9 15.5 2.9 Net Profit Gth (%) 27.0 36.5 30.3 18.5 3.1

M a rgins Gross Margins (%) 59.0 52.0 57.5 57.2 58.4 Opg Profit Margins (%) 16.1 17.7 18.6 22.0 20.0 Net Profit Margins (%) 11.1 11.6 14.1 14.7 15.3 Source: Company, DBS Vickers

Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 18,272 19,626 20,767 21,846 22,903 Invts in Associates & JVs 855 720 722 724 726 Other LT Assets 61,794 62,187 61,637 61,103 60,598 Cash & ST Invts 2,882 3,217 2,968 3,015 3,095 Inventory 707 749 786 826 867 Debtors 3,035 2,787 2,982 3,191 3,414 Other Current Assets 5,821 6,079 6,356 6,646 6,951 T otal Assets 93, 366 95, 365 96, 218 97, 350 98, 555

ST Debt 0 0 0 0 0 Creditors 2,474 1,874 1,968 2,066 2,169 Other Current Liab 8,828 9,789 9,789 9,789 9,789 LT Debt 38,193 39,146 39,146 39,146 39,146 Other LT Liabilities 4,712 5,497 6,039 6,586 7,139 Shareholder’s Equity 39,096 39,019 39,206 39,663 40,182 Minority Interests 63 40 70 100 130 T otal Cap. & Liab. 93, 366 95, 365 96, 218 97, 350 98, 555

Non-Cash Wkg. Capital (1,739) (2,048) (1,632) (1,192) (726) Net Cash/(Debt) (35,311) (35,929) (36,178) (36,131) (36,051) Debtors Turn (avg days) 34.8 31.9 31.3 33.2 35.0 Creditors Turn (avg days) 98.6 93.6 82.2 84.5 87.1 Inventory Turn (avg days) 27.6 31.3 32.8 33.8 34.8 Asset Turnover (x) 0.4 0.4 0.4 0.4 0.4 Current Ratio (x) 1.1 1.1 1.1 1.2 1.2 Quick Ratio (x) 0.5 0.5 0.5 0.5 0.5 Net Debt/Equity (X) 0.9 0.9 0.9 0.9 0.9 Net Debt/Equity ex MI (X) 0.9 0.9 0.9 0.9 0.9 Capex to Debt (%) 7.4 6.6 6.5 6.4 6.4 Z-Score (X) 1.9 1.9 1.9 1.9 1.9 Source: Company, DBS Vickers

Page 25

Company Guide HKT Trust

Cash Flow Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 5,698 6,080 6,552 6,565 6,722 Dep. & Amort. 5,808 5,685 5,836 5,865 5,915 Tax Paid (551) (711) (786) (788) (807) Assoc. & JV Inc/(loss) 23 10 (2) (2) (2) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (246) (476) (426) (450) (476) Other Operating CF 1,530 1,554 1,121 1,135 1,135 Ne t Operating CF 12, 262 12, 142 12, 296 12, 325 12, 487 Capital Exp.(net) (2,835) (2,602) (2,550) (2,500) (2,500) Other Invts.(net) (4,254) (4,755) (3,867) (3,900) (3,958) Invts in Assoc. & JV (229) 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (616) (100) 0 0 0 Ne t Investing CF ( 7,934) ( 7,457) ( 6,417) ( 6,400) ( 6,458) Div Paid (4,190) (4,759) (5,287) (5,027) (5,098) Chg in Gross Debt (208) 625 0 0 0 Capital Issues (53) 0 0 0 0 Other Financing CF (756) (226) (841) (851) (851) Ne t Financing CF ( 5,207) ( 4,360) ( 6,128) ( 5,878) ( 5,949) Currency Adjustments (7) 10 0 0 0 Chg in Cash (886) 335 (249) 47 80 Opg CFPS (HK$) 1.65 1.67 1.68 1.69 1.71 Free CFPS (HK$) 1.25 1.26 1.29 1.30 1.32 Source: Company, DBS Vickers

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 11.0 1 Price T arget 10.8 Price 10.6 1: 10-Aug-17 HK$10.24 HK$12.80 Buy 10.4 3 2: 8-Dec-17 HK$9.79 HK$12.60 Buy 2 3: 5-Jan-18 HK$9.96 HK$12.60 Buy 10.2 10.0 9.8 9.6 9.4 9.2

9.0

Jul-17

Jan-18

Jun-17 Jun-17

Oct-17 Feb-18

Sep-17 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17

May-18 May-18

Source: DBSVHK Analyst: Chris KO CFA, Tsz Wang TAM CFA,

Page 26

China / Hong Kong Company Guide Hutchison Telecom Version 5 | Bloomberg: 215 HK Equity | Reuters: 0215.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 5 Jun 2018 HOLD Mulling cash options Last Traded Price ( 4 Jun 2018):HK$2.81 (HSI : 30,998) Price Target 12-mth:HK$3.10 (10% upside) Sitting on a huge cash balance sheet. Hutchison Telecom (HT) has now become a pure mobile operator after the sale of its fixed-line assets. We Analyst Chris KO CFA,+852 2971 1707, [email protected] are cautious on the outlook of the local mobile market due to the Tsz Wang TAM CFA,+852 2971 1772, tszwangt [email protected] overcrowded situation and an ongoing price war. However, supported by a net cash position of c.HK$10bn (or c.HK$2.1 per share) from the What’s New sale of its fixed-line assets, we maintain our HOLD rating on HT with a  Mobile roaming market becoming a new arena for TP of HK$3.1. price competition Where w e differ: More negative on the mobile industry’s ARPU. We  Expect the decision to utilise the cash proceeds by expect the price war in the mobile market to continue due to a more next full-year results announcement crowded market. HKBN (1310.HK), as a new entrant to the market, will  Revised up our earnings estimates by 12% and continue to undercut major mobile operators’ pricing to grab market 22% for FY18 and FY19 respectively due to the share. Existing players are also likely to match HKBN’s pricing to defend accelerated depreciation in FY17 and increase in their market shares. We also expect HT’s mobile ARPU to decline by 2% net finance income and 1% in FY18 and FY19 respectively.  Maintain HOLD with TP unchanged at HK$3.1 Potential catalysts: Higher spectrum utilisation fees for the reassignment Price Relative of 900/1800 MHz spectrum band. We expect spectrum reassignment of HK$ Relative Index 900/1800 MHz spectrum band (2G spectrum) to be a negative factor for

4.0 203 mobile operators. Based on the current proposals to determine the new 183 3.5 163 spectrum utilisation fee (SUF) for the 2G spectrum, we estimate that 143 3.0 HT’s SUF will increase by HK$75m p.a. which accounts for c.27% of its 123 103 FY20 earnings. We expect the auction to be made by the end of 2018 2.5 83 and higher SUF will be negative to the share price. 2.0 63 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Hutchison Telecom (LHS) Relative HSI (RHS) Valuation: Our TP is based on SOTP: (1) HK$1.0 per share for mobile business Forecasts and Valuation based on 5x EV/EBITDA, and (2) HK$2.1 net cash per share. FY Dec (HK$m) 2017A 2018F 2019F 2020F Turnover 6,752 6,714 6,662 6,698 EBITDA 7,130 1,277 1,238 1,249 Key Risks to Our View: Pre-tax Profit 4,066 566 535 548 Net Profit 4,766 378 357 366 Irrational market competition (downside risk) . Hong Kong's mobile Net Pft (Pre Ex) (core profit) 4,766 378 357 366 market is crowded with four major players and the entry of HKBN as the Net Profit Gth (Pre-ex) (%) 598.8 (92.1) (5.5) 2.5 fifth player (MVNO), and is more or less saturated. Irrational pricing may EPS (HK$) 0.99 0.08 0.07 0.08 Core EPS (HK$) 0.99 0.08 0.07 0.08 lead to a price war. EPS Gth (%) 598.8 (92.1) (5.5) 2.5 Core EPS Gth (%) 598.8 (92.1) (5.5) 2.5 Priv atisation (upside risk). HT has become a pure mobile operator after Diluted EPS (HK$) 0.99 0.08 0.07 0.08 DPS (HK$) 0.74 0.06 0.06 0.06 the sale of its fixed-line assets. In the absence of any asset injection or BV Per Share (HK$) 3.29 3.30 3.32 3.34 acquisition plans, privatisation is possible. PE (X) 2.8 35.8 37.9 37.0 CorePE (X) 2.8 35.8 37.9 37.0 P/Cash Flow (X) 7.0 11.4 11.7 11.6 A t A Glance P/Free CF (X) 14.6 19.8 20.5 20.2 Issued Capital (m shrs) 4,819 EV/EBITDA (X) 0.5 2.9 2.8 2.5 Net Div Yield (%) 26.4 2.1 2.0 2.0 Mkt Cap (HK$m/US$m) 13,493 / 1,720 P/Book Value (X) 0.9 0.9 0.8 0.8 Major Shareholders (%) Net Debt/Equity (X) CASH CASH CASH CASH CK Hutchison Holdings Ltd. 65.0 ROAE(%) 34.9 2.4 2.2 2.3 Earnings Rev (%): 12 22 New Li (Ka Shing) 8.4 Consensus DPS (HK$) 0.06 0.06 0.06 Free Float (%) 26.6 Other Broker Recs: B:2 S:1 H:4 3m Avg. Daily Val. (US$m) 2.7 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ICB Industry: Telecommunications / Mobile Telecommunications

ed-TH / sa- CS /AH Company Guide Hutchison Telecom

CRITICAL FACTORS TO WATCH Mobile sub number (k) 3328 3313 3313 3332 3,365 3222

Critical Factors 2,885

Mobile sub growth. Hong Kong's mobile market is more or less 2,404 matured with low single-digit sub growth in the past two 1,923 years. HKT, HT, SMT and CMHK commanded market shares of 1,442 c.28%, c.21%, c.14% and c.20% respectively as at end- 962 December 2017. We forecast HT’s mobile base to decline by a 481 low single-digit rate in the next two years due to a more 0 crowded market. 2016A 2017A 2018F 2019F 2020F

Mobile ARPU (HK$) Mobile ARPU under pressure. The mobile market is crowded 107 105.0 with four major players, namely HKT, HT, Smartone (SMT) and 98.0 96.0 95.0 95.0 China Mobile Hong Kong (CMHK). The competition is further 86 intensified by the entry of HKBN as a mobile virtual network 64 operator (MVNO). The mobile industry’s ARPU is under pressure as HKBN and CMHK are offering aggressive price 43 discounts to take market share. We expect HT's mobile ARPU 21 to decline by 2% and 1% in FY18 and FY19 respectively. 0 2016A 2017A 2018F 2019F 2020F A v ailability of “star” handsets. Availability of “star” handsets could result in higher handset sales volumes and margins. Mobile operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans. The benefit from the launch of iPhone X was limited as mobile operators were unable to increase mobile service tariff through iPhone-bundled service plans.

Source: Company, DBS Vickers

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Company Guide Hutchison Telecom

Balance Sheet: Sitting on a huge cash balance sheet. HT has received cash Leverage & Asset Turnover (x) proceeds of HK$14.5bn from the sale of its fixed-line assets. 0.45 0.4 0.40 We estimate that will have a net cash position of c.HK$10bn 0.35 0.4

(or HK$2.1 per share) by the end of FY18. 0.30 0.4 0.25

0.20 Share Price Drivers: 0.3 Industry-wide price cut. The mobile industry’s ARPU is under 0.15 pressure as HKBN and CMHK are offering aggressive price 0.10 0.3 0.05 discounts to take market share. We expect the price war in the 0.00 0.3 mobile market to continue due to a more crowded market. 2016A 2017A 2018F 2019F 2020F News flow on industry-wide price cut will be negative to share Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure prices. HK$m 1,200.0 Higher spectrum utilisation fees for the reassignment of 1,000.0

900/1800 MHz spectrum band. Based on the current proposals 800.0 to determine the new spectrum utilisation fee (SUF) for the 2G 600.0 spectrum, we estimate that HT’s SUF will increase by HK$75m 400.0 p.a. which accounts for c.27% of its FY20 earnings. We expect 200.0 the auction to be made by the end of 2018 and higher SUF will 0.0 be negative to the share price. 2016A 2017A 2018F 2019F 2020F Capital Expenditure (-) Key Risks: ROE 35.0% Irrational market competition (downside risk) . Hong Kong's mobile market is crowded with four major players and the 30.0% entry of HKBN as the fifth player (MVNO), and is more or less 25.0% saturated. Irrational pricing may lead to a price war. 20.0%

15.0% Priv atisation (upside risk). HT has become a pure mobile 10.0% operator after the sale of its fixed-line assets. In the absence 5.0% of any asset injection or acquisition plans, privatisation is 0.0% possible. 2016A 2017A 2018F 2019F 2020F

Forward PE Band Company Background (x) Hutchison Telecom (HT) is an integrated telecom service 44.3 provider in Hong Kong, operating under the brand “3 Hong 34.3 +2sd: 36x Kong”. It has a c.20% mobile sub market share. Its major shareholder is CK Hutchison Holdings Limited. 24.3 +1sd: 25.4x

14.3 Avg: 14.8x

4.3 -1sd: 4.3x

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 -5.7

PB Band (x)

1.8

1.6 +2sd: 1.57x

1.4 +1sd: 1.36x

1.2 Avg: 1.14x

1.0 -1sd: 0.93x 0.8 -2sd: 0.72x 0.6 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Source: Company, DBS Vickers

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Company Guide Hutchison Telecom

Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Mobile sub number (k) 3,222.0 3,328.0 3,313.0 3,313.0 3,332.0 Mobile ARPU (HK$) 105.0 98.0 96.0 95.0 95.0 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 8,332 6,752 6,714 6,662 6,698 Cost of Goods Sold (4,313) (2,841) (2,856) (2,856) (2,856) Gross Profit 4, 019 3, 911 3, 858 3, 807 3, 843 Other Opng (Exp)/Inc (3,487) (5,714) (3,394) (3,384) (3,406) O pe rating Profit 532 ( 1,803) 464 423 436 Other Non Opg (Exp)/Inc 382 5,935 0 0 0 Associates & JV Inc (4) (6) (6) (6) (6) Net Interest (Exp)/Inc (78) (60) 108 118 118 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 832 4, 066 566 535 548 Tax (78) 288 (93) (88) (90) Minority Interest (72) 412 (95) (89) (91) Preference Dividend 0 0 0 0 0 Ne t Profit 682 4, 766 378 357 366 Net Profit before Except. 682 4,766 378 357 366 EBITDA 1,643 7,130 1,277 1,238 1,249 Growth Revenue Gth (%) (62.2) (19.0) (0.6) (0.8) 0.5 EBITDA Gth (%) (40.3) 334.0 (82.1) (3.1) 0.9 Opg Profit Gth (%) (62.8) (438.9) (125.8) (8.9) 3.1 Net Profit Gth (%) (25.5) 598.8 (92.1) (5.5) 2.5 M a rgins & Ratio Gross Margins (%) 48.2 57.9 57.5 57.1 57.4 Opg Profit Margin (%) 6.4 (26.7) 6.9 6.3 6.5 Net Profit Margin (%) 8.2 70.6 5.6 5.4 5.5 ROAE (%) 5.9 34.9 2.4 2.2 2.3 ROA (%) 3.2 21.5 1.8 1.9 1.9 ROCE (%) 2.8 (9.5) 2.1 2.1 2.2 Div Payout Ratio (%) 77.0 75.0 75.0 75.0 75.0 Net Interest Cover (x) 6.8 (30.1) NM NM NM Source: Company, DBS Vickers

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Company Guide Hutchison Telecom

Interim Income Statement (HK$ m) FY Dec 2H2015 1H2016 2H2016 1H2017 2H2017

Revenue 11,022 5,369 6,655 2,902 3,850 Cost of Goods Sold (7,088) (1,478) (2,833) (1,156) (1,685) Gross Profit 3, 934 3, 891 3, 822 1, 746 2, 165 Other Oper. (Exp)/Inc (3,293) (3,356) (3,313) (1,540) (4,174) O pe rating Profit 641 535 509 206 ( 2,009) Other Non Opg (Exp)/Inc 0 0 0 212 5,723 Associates & JV Inc (16) (2) (19) (3) (3) Net Interest (Exp)/Inc (52) (54) (41) (37) (23) Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 573 479 449 378 3, 688 Tax (96) (78) (77) (35) 323 Minority Interest (70) (39) (33) (19) 431 Ne t Profit 407 362 339 324 4, 442 Net profit bef Except. 407 362 339 324 4,442

Growth Revenue Gth (%) 9.5 (51.3) (39.6) (45.9) (42.1) Opg Profit Gth (%) (22.9) (32.2) (20.6) (61.5) (494.7) Net Profit Gth (%) (20.2) (28.7) (16.7) (10.5) 1,210.3

M a rgins Gross Margins (%) 35.7 72.5 57.4 60.2 56.2 Opg Profit Margins (%) 5.8 10.0 7.6 7.1 (52.2) Net Profit Margins (%) 3.7 6.7 5.1 11.2 115.4 Source: Company, DBS Vickers

Page 31

Company Guide Hutchison Telecom

Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 10,930 2,017 2,098 2,182 2,268 Invts in Associates & JVs 460 434 428 422 416 Other LT Assets 8,122 5,249 5,071 4,816 4,563 Cash & ST Invts 357 13,717 10,079 10,427 10,792 Inventory 127 125 125 125 125 Debtors 1,753 950 969 988 1,008 Other Current Assets 0 0 0 0 0 T otal Assets 21, 749 22, 492 18, 770 18, 961 19, 172

ST Debt 0 3,900 0 0 0 Creditors 3,542 2,304 2,327 2,350 2,374 Other Current Liab 592 3 3 3 3 LT Debt 4,467 0 0 0 0 Other LT Liabilities 1,087 330 330 330 330 Shareholder’s Equity 11,478 15,844 15,904 15,983 16,079 Minority Interests 583 111 206 295 386 T otal Cap. & Liab. 21, 749 22, 492 18, 769 18, 961 19, 172

Non-Cash Wkg. Capital (2,254) (1,232) (1,236) (1,240) (1,244) Net Cash/(Debt) (4,110) 9,817 10,079 10,427 10,792 Debtors Turn (avg days) 78.2 73.1 52.2 53.6 54.4 Creditors Turn (avg days) 394.7 (6,545.4) 415.0 419.6 423.4 Inventory Turn (avg days) 36.6 (282.1) 22.4 22.4 22.4 Asset Turnover (x) 0.4 0.3 0.3 0.4 0.4 Current Ratio (x) 0.5 2.4 4.8 4.9 5.0 Quick Ratio (x) 0.5 2.4 4.7 4.9 5.0 Net Debt/Equity (X) 0.3 CASH CASH CASH CASH Net Debt/Equity ex MI (X) 0.4 CASH CASH CASH CASH Capex to Debt (%) 25.2 26.0 N/A N/A N/A Z-Score (X) 1.2 2.8 2.8 4.2 4.2 Source: Company, DBS Vickers

Cash Flow Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 909 4,137 566 535 548 Dep. & Amort. 1,508 3,583 819 821 819 Tax Paid (7) (5) (93) (88) (90) Assoc. & JV Inc/(loss) 4 6 6 6 6 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 9 (115) 4 4 4 Other Operating CF 30 (5,663) (118) (118) (118) Ne t Operating CF 2, 453 1, 943 1, 184 1, 160 1, 169 Capital Exp.(net) (1,127) (1,013) (500) (500) (500) Other Invts.(net) (1,777) 0 (222) (151) (152) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (104) 14,154 118 118 118 Ne t Investing CF ( 3,008) 13, 141 ( 604) ( 533) ( 534) Div Paid (626) (520) (318) (278) (270) Chg in Gross Debt 495 (1,143) (3,900) 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (58) (61) 0 0 0 Ne t Financing CF ( 189) ( 1,724) ( 4,218) ( 278) ( 270) Currency Adjustments 0 0 0 0 0 Chg in Cash (744) 13,360 (3,638) 349 364 Opg CFPS (HK$) 0.51 0.43 0.24 0.24 0.24 Free CFPS (HK$) 0.28 0.19 0.14 0.14 0.14 Source: Company, DBS Vickers

Page 32

Company Guide Hutchison Telecom

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 4.0 Price T arget 1 4 3.8 3 Price 3.6 1: 26-Jul-17 HK$2.98 HK$3.00 Hold 3.4 2 2: 2-Aug-17 HK$3.03 HK$3.30 Hold 5 3.2 3: 27-Oct-17 HK$2.85 HK$3.30 Hold 3.0 4: 8-Dec-17 HK$2.89 HK$3.10 Hold 2.8 5: 5-Jan-18 HK$3.11 HK$3.10 Hold 2.6 2.4 2.2

2.0

Jul-17

Jan-18

Jun-17 Jun-17

Oct-17 Feb-18

Apr-18 Sep-17

Dec-17

Nov-17

Mar-18

Aug-17

May-18 May-18

Source: DBSVHK Analyst: Chris KO CFA, Tsz Wang TAM CFA,

Page 33

China / Hong Kong Company Guide SmarTone Version 8 | Bloomberg: 315 HK EQUITY | Reuters: 315.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 5 Jun 2018

HOLD (Upgrade from FULLY VALUED) Still on a cautious tone Last Traded Price( 4 Jun 2018):HK$8.65(HSI : 30,998) Price Target 12-mth:HK$7.80 (-10% downside) (Prev HK$7.30) Upgrade from FULLY VALUED to HOLD as negative ARPU outlook is A nalyst already in the price. Following weak share price performance since Chris KO CFA,+852 2971 1707, [email protected] 2017, we believe SmarTone (SMT)’s current valuation should have Tsz Wang TAM CFA,+852 2971 1772, [email protected] reflected the decline in ARPU in the next 1-2 years. As such, we upgrade What’s New SMT from FULLY VALUED to HOLD. Note that we downgraded SMT to FULLY VALUED on 4 August 2017 as we had noticed the outbreak of a  Mobile roaming market becoming a new arena for price war in the mobile market through shop visits. Since then, the share price competition price has dropped by 17% despite continuous share buybacks.  Starting new initiatives such as digital mobile platform and NB IoT businesses to add new Where w e differ: More negative on the mobile industry’s ARPU. We revenue streams believe HKBN (1310.HK), as a new entrant, will continue to disrupt the  Revised down our FY6/18 and FY6/19 earnings market and grab market share by “matching the best offer in the estimates by 10% and 8% respectively due to market” with network support from SmarTone, which is perceived to be lower mobile ARPU assumptions of premium quality over other competitors. Existing players are likely to  Upgrade from FULLY VALUED to HOLD as current match HKBN’s pricing to defend market share. We also expect SMT’s price has reflected negative ARPU outlook mobile ARPU to be under pressure in the next two years.

Price Relative Potential catalysts: Higher spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band. We expect spectrum reassignment of 900/1800 MHz spectrum band (2G spectrum) to be a negative factor for mobile operators. Based on the current proposals to determine the new spectrum utilisation fee (SUF) for the 2G spectrum, we estimate that SMT’s SUF will increase by HK$45m p.a. which accounts for c.8% of its FY6/20 earnings. We expect the auction to be made by the end of 2018 and higher SUF will be negative to the share price.

Valuation: Forecasts and Valuation Our TP of HK$7.8 is pegged at 15x FY6/19 PE (vs previous 12x FY6/18 FY Jun (HK$m) 2017A 2018F 2019F 2020F Turnover 8,715 8,122 7,047 7,073 PE), which is in line with its historical average. We have set a higher EBITDA 2,255 2,206 2,057 2,043 target multiple as we expect the earnings to stabilise in FY6/19 after Pre-tax Profit 843 757 714 751 four years of decline. Net Profit 672 597 563 593 Net Pft (Pre Ex) (core profit) 672 597 563 593 Net Profit Gth (Pre-ex) (%) (15.7) (11.1) (5.7) 5.2 Key Risks to Our View: EPS (HK$) 0.62 0.55 0.52 0.54 Irrational market competition (downside risk) . Hong Kong's mobile Core EPS (HK$) 0.62 0.55 0.52 0.54 market is crowded with four major players and the entry of HKBN as EPS Gth (%) (17.5) (11.1) (5.7) 5.2 Core EPS Gth (%) (17.5) (11.1) (5.7) 5.2 the fifth player (MVNO). Irrational pricing may lead to a price war. Diluted EPS (HK$) 0.62 0.55 0.52 0.54 DPS (HK$) 0.60 0.41 0.38 0.40 BV Per Share (HK$) 4.15 4.18 4.30 4.44 Mark et consolidation (upside risk). Market consolidation through M&A PE (X) 14.0 15.8 16.7 15.9 in the mobile market could reduce the competition and will be positive CorePE (X) 14.0 15.8 16.7 15.9 to the industry ARPU. P/Cash Flow (X) 5.4 4.5 5.0 5.0 P/Free CF (X) 8.0 6.0 7.0 7.0 A t A Glance EV/EBITDA (X) 4.8 4.7 4.8 4.6 Issued Capital (m shrs) 1,125 Net Div Yield (%) 6.9 4.7 4.4 4.6 Mkt Cap (HK$m/US$m) 9,598 / 1,223 P/Book Value (X) 2.1 2.1 2.0 1.9 Net Debt/Equity (X) 0.3 0.2 0.1 CASH Major Shareholders (%) ROAE(%) 15.1 13.0 12.0 12.3 Cellular 8 Holdings Ltd. 67.1 Earnings Rev (%): (10) (8) (4) Free Float (%) 32.9 Consensus DPS (HK$) 0.45 0.43 0.44 3m Avg. Daily Val. (US$m) 0.7 Other Broker Recs: B:1 S:1 H:7 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ICB Industry: Telecommunications / Mobile Telecommunications

ed-TH / sa- CS /AH Company Guide SmarTone

CRITICAL FACTORS TO WATCH Mobile Sub number (k) Critical Factors Mobile sub growth. Hong Kong's mobile market is more or less matured with low single-digit sub growth in the past two years. HKT, HT, SMT and CMHK commanded market shares of c.28%, c.21%, c.14% and c.20% respectively as at end- December 2017. We forecast SMT’s mobile sub base to increase by 12% and 9% in FY6/18 and FY6/19 respectively driven by distribution arrangement with HKBN.

Mobile ARPU under pressure. The mobile market is crowded Mobile ARPU (HK$) with four major players, namely HKT, HT, SMT and CMHK. The competition is further intensified by the entry of HKBN as a mobile virtual network operator (MVNO). The mobile industry’s ARPU is under pressure as HKBN and CMHK are offering aggressive price discounts to take market share. We expect SMT's mobile ARPU to decline by 9% and 11% in FY6/18 and FY6/19 respectively.

A v ailability of “star” handsets. Availability of “star” handsets could result in higher handset sales volumes and margins. Mobile operators would also have stronger pricing power to Source: Company, DBS Vickers raise the tariffs for handset-bundled mobile data plans. The benefit from the launch of iPhone X was limited as mobile operators were unable to increase mobile service tariff through iPhone-bundled service plans.

Page 35 Company Guide SmarTone

Balance Sheet: Healthy balance sheet to support steady dividend per share. Leverage & Asset Turnover (x) SMT had a healthy balance sheet with a net gearing of 15% as at the end of FY6/17. The company has ceased to commit paying out an absolute dividend, which may lead to lower dividends going forward. It has a dividend policy with 75% payout ratio.

Share Price Drivers: Industry-wide price cuts. The mobile industry’s ARPU is under pressure as HKBN and CMHK are offering aggressive discounts to take market share. News flow on industry -wide price cuts Capital Expenditure will be negative to share price.

Higher spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band. Based on the current proposals to determine the new spectrum utilisation fee (SUF) for the 2G spectrum, we estimate that SMT’s SUF will increase by HK$45m p.a. which accounts for c.8% of its FY6/18 earnings. We expect the auction to be made by the end of 2018 and higher SUF will be negative to the share price.

Key Risks: ROE Irrational market competition (downside risk) . Hong Kong's mobile market is crowded with four major players and the entry of HKBN as the fifth player (MVNO), and is more or less saturated. Irrational pricing may lead to a price war.

Mark et consolidation (upside risk). Market consolidation through M&A in the mobile market could reduce the competition and will be positive to the industry ARPU.

Company Background Forward PE Band SmarTone (SMT) is a mobile operator in Hong Kong focusing on the high-end customer segment. It has a c.14% mobile sub market share and also provides fixed-line broadband services through a partnership with HKBN. Its major shareholder is Sun Hung Kai Properties.

PB Band

Source: Company, DBS Vickers

Page 36

Company Guide SmarTone

Key Assumptions FY Jun 2016A 2017A 2018F 2019F 2020F Mobile Sub number (k) 1,970.0 2,060.0 2,300.0 2,500.0 2,600.0 Mobile ARPU (HK$) 203.0 195.0 177.0 159.0 151.0 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Jun 2016A 2017A 2018F 2019F 2020F Revenue 18,356 8,715 8,122 7,047 7,073 Cost of Goods Sold (12,795) (3,504) (2,961) (2,073) (2,073) Gross Profit 5, 561 5, 211 5, 161 4, 974 5, 000 Other Opng (Exp)/Inc (4,561) (4,324) (4,359) (4,226) (4,228) O pe rating Profit 1, 000 887 802 748 772 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (37) (44) (44) (34) (21) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 962 843 757 714 751 Tax (175) (177) (167) (157) (165) Minority Interest 10 6 7 7 7 Preference Dividend 0 0 0 0 0 Ne t Profit 797 672 597 563 593 Net Profit before Except. 797 672 597 563 593 EBITDA 2,556 2,255 2,206 2,057 2,043 Growth Revenue Gth (%) (1.6) (52.5) (6.8) (13.2) 0.4 EBITDA Gth (%) (10.5) (11.8) (2.2) (6.7) (0.7) Opg Profit Gth (%) (14.5) (11.2) (9.7) (6.7) 3.2 Net Profit Gth (%) (14.8) (15.7) (11.1) (5.7) 5.2 M a rgins & Ratio Gross Margins (%) 30.3 59.8 63.5 70.6 70.7 Opg Profit Margin (%) 5.4 10.2 9.9 10.6 10.9 Net Profit Margin (%) 4.3 7.7 7.4 8.0 8.4 ROAE (%) 19.5 15.1 13.0 12.0 12.3 ROA (%) 7.5 6.7 6.1 5.7 6.0 ROCE (%) 10.7 9.1 8.1 7.6 7.7 Div Payout Ratio (%) 80.7 98.0 75.0 75.0 75.0 Net Interest Cover (x) 26.7 20.1 18.1 22.0 36.5 Source: Company, DBS Vickers

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Company Guide SmarTone

Interim Income Statement (HK$ m) FY Jun 2H2015 1H2016 2H2016 1H2017 2H2017

Revenue 9,986 10,228 8,127 5,372 3,343 Cost of Goods Sold (7,032) (7,404) (5,391) (2,655) (849) Gross Profit 2, 954 2, 824 2, 736 2, 717 2, 494 Other Oper. (Exp)/Inc (2,333) (2,238) (2,219) (2,190) (2,093) O pe rating Profit 621 587 518 527 401 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (54) (100) (42) (41) (44) Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 567 486 476 486 357 Tax (99) (87) (88) (97) (81) Minority Interest 1 4 6 4 2 Ne t Profit 469 403 394 393 279 Net profit bef Except. 469 403 394 393 279

Growth Revenue Gth (%) 48.7 17.9 (18.6) (47.5) (58.9) Opg Profit Gth (%) 64.9 (5.8) (16.6) (10.1) (22.5) Net Profit Gth (%) 107.7 (13.6) (15.9) (2.3) (29.3)

M a rgins Gross Margins (%) 29.6 27.6 33.7 50.6 74.6 Opg Profit Margins (%) 6.2 5.7 6.4 9.8 12.0 Net Profit Margins (%) 4.7 3.9 4.9 7.3 8.3 Source: Company, DBS Vickers

Balance Sheet (HK$ m) FY Jun 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 3,248 3,083 2,980 2,872 2,763 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 2,629 4,401 4,130 3,777 3,464 Cash & ST Invts 3,375 1,322 1,734 2,248 2,787 Inventory 341 182 182 182 182 Debtors 274 321 328 334 341 Other Current Assets 536 467 467 467 467 T otal Assets 10, 403 9, 776 9, 819 9, 880 10, 004

ST Debt 126 134 134 134 134 Creditors 578 357 365 372 379 Other Current Liab 2,159 1,694 1,761 1,758 1,766 LT Debt 2,724 2,557 2,557 2,557 2,557 Other LT Liabilities 452 399 344 280 235 Shareholder’s Equity 4,317 4,594 4,625 4,751 4,912 Minority Interests 47 41 34 28 21 T otal Cap. & Liab. 10, 403 9, 776 9, 819 9, 880 10, 004

Non-Cash Wkg. Capital (1,586) (1,082) (1,150) (1,147) (1,156) Net Cash/(Debt) 525 (1,369) (957) (443) 96 Debtors Turn (avg days) 6.0 12.5 14.6 17.2 17.4 Creditors Turn (avg days) 21.6 79.9 84.6 176.0 171.0 Inventory Turn (avg days) 6.9 44.6 42.6 86.9 82.7 Asset Turnover (x) 1.7 0.9 0.8 0.7 0.7 Current Ratio (x) 1.6 1.0 1.2 1.4 1.7 Quick Ratio (x) 1.3 0.8 0.9 1.1 1.4 Net Debt/Equity (X) CASH 0.3 0.2 0.1 CASH Net Debt/Equity ex MI (X) CASH 0.3 0.2 0.1 CASH Capex to Debt (%) 21.3 21.4 20.4 20.4 20.4 Z-Score (X) 3.7 2.9 2.9 3.3 2.9 Source: Company, DBS Vickers

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Company Guide SmarTone

Cash Flow Statement (HK$ m) FY Jun 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 962 843 757 714 751 Dep. & Amort. 1,357 1,107 1,118 1,024 986 Tax Paid (180) (313) (167) (157) (165) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (881) (151) 92 20 25 Other Operating CF 255 263 307 300 298 Ne t Operating CF 1, 513 1, 750 2, 108 1, 901 1, 895 Capital Exp.(net) (606) (575) (550) (550) (550) Other Invts.(net) (1,372) (2,783) (580) (400) (374) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 1,558 434 0 0 0 Ne t Investing CF ( 421) ( 2,925) ( 1,130) ( 950) ( 924) Div Paid (464) (306) (566) (437) (432) Chg in Gross Debt (133) (185) 0 0 0 Capital Issues 48 0 0 0 0 Other Financing CF 88 (88) 0 0 0 Ne t Financing CF ( 460) ( 579) ( 566) ( 437) ( 432) Currency Adjustments (37) 3 0 0 0 Chg in Cash 595 (1,752) 412 514 539 Opg CFPS (HK$) 2.25 1.75 1.85 1.73 1.72 Free CFPS (HK$) 0.85 1.08 1.43 1.24 1.24

Source: Company, DBS Vickers

Target Price & Ratings History

HK$ S.No. Date Closing 12-mth Rating 11.0 Price T arget 10.5 1 Price 1: 4-Aug-17 HK$10.22 HK$8.00 Fully Valued 10.0 3 6 2: 30-Aug-17 HK$10.18 HK$7.50 Fully Valued 9.5 2 5 3: 4-Sep-17 HK$9.65 HK$7.50 Fully Valued 9.0 4 4: 13-Nov-17 HK$9.33 HK$7.50 Fully Valued 5: 8-Dec-17 HK$9.26 HK$7.30 Fully Valued 8.5 7 6: 5-Jan-18 HK$9.37 HK$7.30 Fully Valued 8.0 8 7: 14-Feb-18 HK$8.53 HK$7.30 Fully Valued 7.5 8: 5-Mar-18 HK$8.30 HK$7.30 Fully Valued

7.0

Jul-17

Jan-18

Jun-17 Jun-17

Oct-17 Feb-18

Sep-17 Apr-18

Dec-17

Nov-17

Mar-18

Aug-17

May-18 May-18

Source: DBSVHK Analyst: Chris KO CFA, Tsz Wang TAM CFA,

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Industry Focus Hong Kong Telecom Sector

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 U Y (>15% total return over the next 12 months for small caps, >10% for large caps) H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FU LLY 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: 5 Jun 2018 14:42:09 (HKT) Dissemination Date: 5 Jun 2018 17:02:53 (HKT)

Sources for all charts and tables are DBS Vickers unless otherwise specified.

GEN ERAL 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 (Singapore) 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 in 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, affiliates and their respective directors, officers, 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 r ecommendation contained 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 s ubstitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability 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 communication 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 securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mention ed 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, estimates, 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 all material information concerning the company (or companies) referred to in this report and the DBS Group is un der no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant 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 vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or the ir 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 relating to the commodity referred to in this report.

DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not 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 and does not engage in market-making.

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Industry Focus Hong Kong Telecom Sector

A N ALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or i n whole, certifies that he or his associate1 does not serve as an officer of the issuer 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 who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise i n connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment ba nking function of the DBS Group.

C O MPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in China Mobile Limited (941 HK), China Unicom (Hong Kong) Limited (762 HK), China Telecom Corporation Limited (728 HK), Hkt Trust & Hkt Limited (6823 HK), Hutchison Telecommunications Hong Kong Holdings Limited (215 HK), Smartone Telecommunications Holdings Ltd (315 HK) and Hkbn Limited (1310 HK) recommended in this report as of 01 Jun 2018.

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 affiliates have a net long position exceeding 0.5% of the total issued share capital in Hkbn Limited (1310 HK) recommended in this report as of 01 Jun 2018.

4. C o 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 affiliates 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 listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An 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 step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in th e 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 i nvestments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new lis ting applicant.

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Industry Focus Hong Kong Telecom Sector

R ESTRICTIONS ON DISTRIBUTION Ge neral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. A ustralia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

H o ng Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities. I ndonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR S ingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produ ced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Inv estor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Th ailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. U nited This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission Ki ngdom 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 form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. D u bai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3 rd Floor, I n ternational Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Fi nancial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for C entre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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Industry Focus Hong Kong Telecom Sector

U nited Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Em irates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. 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. U nited 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 restrictions 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 shou ld contact DBSVUSA directly and not its affiliate. O ther In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, j urisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. D BS 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

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Industry Focus Hong Kong Telecom Sector

D BS Regional Research Offices

H O NG KONG MA LAYSIA S INGAPORE D BS Vickers (Hong Kong) Ltd A llianceDBS Research Sdn Bhd D BS Bank Ltd C o ntact: Carol Wu C o ntact: Wong Ming Tek (128540 U) C o ntact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2863 1523 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong Ltd e-mail: [email protected] Company Regn. No. 196800306E

I N DONESIA TH AILAND PT DBS Vickers Sekuritas (Indonesia) D BS Vickers Securities (Thailand) Co Ltd C o ntact: Maynard Priajaya Arif C o ntact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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