China / Hong Kong Industry Focus Hong Kong Telecom Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 27 November 2015
Winning through effective pricing HSI : 22,068 strategy ANALYST Mobile operators remain disciplined in mobile data Tsz Wang TAM CFA, +852 2971 1772 [email protected] pricing, positive to ARPU and service revenue Chris KO growth [email protected]
Downside risk from handset sales due to weak iPhone 6S demand in HK, triggering downward earnings revisions Recommendation & valuation Company Price Target Rec Mkt FY15F HKBN gained market share as revealed by its better- than-expected FY8/15 results; expect more Price Cap PE aggressive pricing going forward HK$ HK$ US$m x
Prefer HKBN and SmarTone, who are smaller players Hong Kong Telecom operators and gaining market share with strong capability in HKBN 10.2 11.0 Buy 1,324 98.4 strategy execution (1310 HK) HKT Trust Mobile service revenue growth offset by handset sales 9.72 9.1 Hold 9,496 22.8 (6823 HK) decline. Hong Kong mobile operators remain disciplined in Hutchison Telecom mobile data pricing, which is positive to mobile ARPU and 2.78 2.7 Hold 1,729 14.8 service revenue growth. Operators have recently been (215 HK) focusing more on raising tariffs for lower-tier plans as well Smartone Telecom 11.74 15.0 Buy 1,606 13.2 (315 HK) as launching various top-up plans to monetise more data usage. But we saw limited tariff hike for the higher-tier plans in the past few months. On the other hand, the Source: Thomson Reuters, DBS Vickers demand for iPhone 6S is weaker than iPhone 6 in Hong Kong. This suggests a possible downside risk in handset sales and therefore downward earnings revisions. HKBN successfully gained market share; expect more aggressive pricing to follow. The competition in the residential broadband market started to heat up early this year, and we believe it was initiated by HKBN (1310 HK, BUY). It successfully gained market share with 62k net-adds in FY8/15 with 5% ARPU increase. While we notice that HKT (6823 HK, HOLD) and other smaller players also responded by lowering their prices, HKBN appears to be the winner through tactical pricing strategies. We expect more aggressive pricing from HKBN going forward. We like HKBN and SMT. HKBN and SmarTone (SMT, 315 HK, BUY) are smaller players with strong execution ability in their residential broadband and mobile markets respectively. They have been able to gain market shares. We believe that HKBN is on track to achieve its target of 300k sub net-adds in FY8/15-FY8/19F, which will support 20%+ p.a. dividend growth in the coming few years. Maintain BUY on HKBN with a TP of HK$11.0. SMT, being a smaller player focusing on high-end subs, started to penetrate into specific lower- tier segment a few years back. It has successfully added a new revenue stream. Maintain BUY on SMT with a TP of HK$15.0.
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Industry Focus Hong Kong Telecom Sector
HOLD) raised tariffs of its 4G SIM-only plans by HK$20-30 per Mobile market month to narrow the pricing discounts to its major competitors - HKT and SMT. Expect ARPU improvement through the tariff hike on lower-tier plans and launch of top-up plans Mobile operators also launched various top-up plans to improve mobile ARPU. HT launched a new “Top Up Data Pack” Hong Kong mobile operators remain disciplined in mobile data at an additional HK$40 per month for 1Gb or HK$70 per pricing, recently focusing more on raising the tariffs for lower- month for 2.5Gb. HKT started offering a top-up plan of tier plans to narrow the price gap between lower-tier and high- HK$150 for an additional 10Gb for its 10Gb plan subs. SMT tier plans to minimise the risk of trade downs. Accordingly we also increased the price of its unlimited data top-up plan from did not see much tariff hike for the high-tier plans, during the HK$128 to HK$148, which was launched last year. launch of iPhone 6S. They also launched various top-up plans to monetise more data usage. On the other hand, mobile On a negative note, roaming revenue decline will continue to roaming revenue continues to weigh on service revenue. drag down mobile service revenue. In terms of contribution to mobile service revenue, SMT’s FY6/15 and HT’s FY14 roaming SMT took the lead to further raise the price for the 3G speed- revenues accounted for 15% and 25% of the mobile service capped plan from HK$78 to HK$88 per month in Jun 2015, revenue respectively. We expect roaming contribution to and this was followed by China Mobile Hong Kong (CMHK) continue to decline in the coming years. and HKT. On the other hand, Hutchison Telecom (HT, 215 HK,
Top-up plans of Hong Kong mobile operators
Data plan user (per month) SMT 3 HK CMHK csl. 1010 1Gb User HK$50/Gb HK$38 /200MB HK$30 /0.5Gb HK$28 /200MB HK$28 /200MB **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb
2.5Gb User HK$50/Gb HK$38 /200MB HK$30 /0.5Gb HK$28 /200MB HK$28 /200MB **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb **HK$70 /2.5Gb
6Gb User HK$50/Gb HK$38 /200MB HK$30 /1Gb HK$28 /200MB HK$28 /200MB **HK$148 for unlimited **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb data (subjected to Fair **HK$70 /2.5Gb Usage Policy) **HK$150 /6Gb
10 Gb User HK$50/Gb HK$38 /200MB HK$30 /1Gb HK$28 /200MB HK$28 /200MB **HK$148 for unlimited **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb data (subjected to Fair **HK$70 /2.5Gb **HK$150 /10Gb **HK$150 /10Gb Usage Policy) **HK$200 /10Gb **HK$150 /6Gb
** Required to sign contracts
Source: HKT, HT, SMT, CMHK, DBS Vickers
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Industry Focus Hong Kong Telecom Sector
Downside risk from handset business Hong Kong mobile market share (2014) The demand for iPhone 6S (launched in Sep 2015) in Hong Kong is much lower than that for iPhone 6 (launched in Sep 2014) due to relatively less newly added features and less Others trading demand from China. We expect downside risk for 12% handset sales volume and margins, which should result in HKT downward earnings revisions. 33% CMHK iPhone 6S was launched in Hong Kong and China on 25 Sep 18% 2015. iPhone 6S is less popular than iPhone 6 because it has relatively less newly added features and the pent-up demand for a big screen was largely digested by the previous model. SMT China also launched the product at the same time as Hong 14% Kong and this eliminated the trading demand. We expect both HT 23% the handset sales volume and margins to drop substantially.
We estimate that handset business contributed 29% and 24% Source: HKT, HT, SMT, DBS Vickers to SMT’s 2H6/15 and HT’s 1H15 pre-tax profits respectively. We believe that SMT and HT will face downside risk from handset business. We accordingly revised down our earnings estimates for SMT by 1% in FY6/16F and for HT by 9% in
FY15F.
Mobile sub movement analysis…
SMT has been gaining sub market share in the past few years, thanks to the launch of speed-capped plan which is a product targeting lower-spending customers. The company positioned the products clearly and well; and we do not see much cannibalisation or downgrade in its high-end market positioning. It becomes an additional revenue stream to SMT.
On the other hand, HT decided to give up lower-end subs to focus on mid-high-end customers. It has lost c.574k subs from 3,771k in FY13 to 3,197k in FY14 and further lost c.328k subs in 1H15 to 2,869k.
HKT/CSL started integrating the two mobile networks after the merger in May 2014. While this will bring cost synergy in the long term, it may result in short-term network instability. Re- branding exercise may also lead to some sub churn. We reckon that HKT lost mobile subs from 3,183k in 1H14 to 3,147k in 1H15.
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Industry Focus Hong Kong Telecom Sector
o-y from HK$180m in 1H14 to HK$174m in 1H15 due to Broadband market broadband competition.
HKBN gaining market share amid heating up competition Hong Kong residential broadband market share (1H15) Competition in the Hong Kong residential broadband market started to heat up earlier this year, and we believe it was i-Cable initiated by HKBN. The company gained market share with 62k 7% sub net-adds for FY8/15 (and 32k in 2HFY8/15) with 5% ARPU HT 9% increase in the period. HKT’s sub base remained stable and it managed to increase the broadband revenue by 5% y-o-y in 1H15 through customer upgrades. The residential broadband HKBN HKT revenues of HT and i-Cable, the two smaller players in 29% 55% residential broadband market, fell by 1% and 4% y-o-y respectively in 1H15 due to competition.
The market is concerned about an ongoing price war. HKBN earlier offered PCCW’s home telephone customers a special rate of “existing bill amount + HK$99”, for “VoIP voice service +100Mbps broadband service”. This offer was applicable Source: HKT, HKBN, HT, i-Cable, DBS Vickers exclusively to existing HKT customers who switched over their telephone numbers to HKBN. Meanwhile, HKT is also offering HKBN’s joint promotion with Letv 6-12 months' free mobile broadband data usage to its selected residential broadband customers. HKBN and Letv have a joint promotion to offer bundling package of fibre broadband services and multimedia content Despite the heating-up competition, HKBN gained 62k net- (including English Premier League [EPL]) provided by Letv. Win- adds of residential broadband subs to a total of 754k in FY8/15 win situations can be achieved as HKBN helps distribute Letv with ARPU improving to HK$183 from HK$175. We believe services while Letv (in particular the EPL broadcasting) attracts that HKBN will continue to focus on gaining market share consumers to join HKBN’s broadband service through bundled going forward; and we expect more aggressive pricing package. strategies to come and a relatively stable ARPU in FY8/16. They are offering 12-month content services of Le TV Box 4K HKT’s broadband revenue increased by 5% to c.HK$2,325m for free to new and retention customers of HKBN. They have with a stable sub number in 1H15, despite market’s concerns also offered EPL plan with 100M broadband service plan at an on a potential price war in the residential segment. This is average of HK$272 per month to 5,000 users on a first-come- attributable to continuous customer upgrades to high-speed first-served basis. NOW TV currently offers EPL plan (without fibre service with higher tariff. We expect HKT to continue broadband services) at HK$264 per month to new customers. focusing on profitability rather than market share. NOW TV has lost its exclusive broadcasting rights for EPL in Hong Kong, and we believe that some customers will look for HT’s residential broadband revenue decreased by 1% y-o-y in other options such as Letv. These will encourage those payTV 1H15 and remained a small contributor with only c.3% as well as broadband users to switch to Letv and HKBN. revenue contribution. HT started with the enterprise market in commercial areas, and then extended into the adjacent SMT more proactive on broadband business residential buildings based on commercial network coverage. Therefore, HT is not competing head-to-head with HKBN SMT started offering fixed-line broadband services in 2014 which focuses on densely populated residential areas. with the network and services provided by HKBN. SMT has become more aggressive in the residential broadband market i-Cable (1097 HK, NR) continued to report sub loss. The recently. SMT, to a certain extent, acts as a distributor of number of residential broadband subs fell by 7k to 179k in HKBN’s services. This allows the pure plays HKBN and SMT to 1H15 from 186k in 2H14. We expect the downtrend to have the capability of offering bundling services (mobile with continue. The revenue of internet and multimedia fell by 4% y- broadband services) against integrated operators HKT and HT.
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Industry Focus Hong Kong Telecom Sector
SMT is offering a residential broadband plan with a gimmick post-paid subs in 1H15. We therefore lowered our growth average monthly charge of HK$88.8 for a 100Mbps 30-month forecast for mobile service revenue. Downside risk from contract. But this actually includes a 6-month switch-in period handset sales is limited to the company. We expect the AFF to (the overlapping period of the previous and the new contract). grow by 17% to HK$3,919m in FY15F and 7% to HK$4,210m Excluding the switch-in period, the tariff is HK$111 per month. in FY16F attributable to the consolidation of CSL’s full-year From HKBN’s perspective, the co-operation with SMT helps it results vs 7.5 months’ results in FY14 and cost synergy. to gain market share in some higher-end customers, despite a small cannibalisation to its existing sub base. HT. We have revised down our earnings estimates by 9% for FY15F and 16% for FY16F, mainly due to lower handset sales estimate. We expect the pretax earnings from handset sales, Earnings revisions which accounted for c.23% of the total pretax profit in FY14, SMT. We have revised our earnings estimates down by 1% for to drop by more than 20% in FY15F. We also reckon that the FY6/16F to take into account the weaker handset sales, and negative impact from sub loss and shrinking roaming revenue revised up by 3% for FY6/17F on stronger mobile service will offset the improvement in ARPU and profitability, resulting revenue. We expect the pre-tax profit from handset sales, in a flat mobile service earnings for FY16F. We expect the net which accounted for c.34% of the total pretax profit in FY6/15, profit to grow by 9% to HK$908m in FY15F due to cost to drop by more than 50% in FY6/16F. We expect the drop to savings but decrease by 4% to HK$875m in FY16F due to be partly offset by the 28% pretax profit improvement in weaker handset sales. mobile service segment driven by tariff hike and contribution HKBN. HKBN will focus on gaining market share in the near from top-up plan in FY6/16F. As a result, we expect the term and we expect more tactical pricing strategies to come. earnings for FY6/16F to drop by 6% to Rmb875m due to We expect a relatively stable ARPU in FY8/16. We forecast weaker handset sales. In FY6/17F, we forecast the earnings to HKBN to achieve 10%/15%/20% five-year growth CAGRs for grow by 10% to HK$958m driven by ARPU increase for mobile revenue/EBITDA/AFF supported by 300k sub net-adds with service. operating leverage in FY8/15-FY8/19F. HKT. We have revised down our estimates for adjusted funds flow (AFF) per share stapled unit (SSU) by 4% for FY15F and 4% for FY16F respectively, to take into account slower mobile sub growth forecast, after a net-loss of 31k or 1% drop in
SmarTone and Hutchison Telecom pretax profit breakdowns
HK$m Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 SmarTone Mobile Service pretax profit 368 271 187 312 432 Handset pretax profit 92 41 38 252 135 Hutchison Telecom Mobile Service pretax profit 593 296 414 481 545 Handset pretax profit 146 132 30 243 175
Source: SMT, HT, DBS Vickers
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Industry Focus Hong Kong Telecom Sector
key beneficiary of mobile data tariff hike. Maintain BUY on Valuation and recommendation SMT with TP of HK$15.0, pegged at 18x FY6/16F PE (lowered from previous 20x FY6/16F PE) which is in line with historical We like HKBN and SMT. They are smaller players with strong average. execution ability to drive market share expansion and business growth. Maintain HOLD on HT with TP of HK$2.7, pegged at 15x FY16F PE (lowered from previous 18x FY15F PE), which is in We are confident that HKBN will achieve its target of 300k line with historical average. Maintain HOLD on HKT with a broadband sub net-adds in FY8/15-FY8/19F, which will support DDM-based TP of HK$9.1. We believe that both of the current 20%+ p.a. dividend growth in the coming few years. Maintain share prices reflect their fair valuations. BUY on HKBN with an unchanged TP of HK$11.0 based on dividend discount model (DDM).
We have lowered our multiples for SMT and HT due to weaker earnings growth profile in the near term after taking the downside risk from handset sales into account.
SMT being a smaller player focusing on high-end subs, started to penetrate into specific lower-tier segment a few years back. It has successfully added a new revenue stream. It is also the
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Industry Focus Hong Kong Telecom Sector
Peers valuation
Mkt PE PE Yield Yield P/Bk P/Bk EV/EBITDA FCF Yield Currency Price Cap Fiscal 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F Company NameCodeLocal$US$mYrxx%%xxxx%% Hong Kong telecom operators HKT Trust* 6823 HK HKD 9.72 9,496 Dec 22.8 22.0 5.3 5.7 2.0 2.0 8.9 8.4 11.2 11.9 Hutchison Telecom* 215 HK HKD 2.78 1,729 Dec 14.7 15.3 5.1 4.9 1.2 1.1 6.3 6.7 8.1 8.2 Smartone Telecom* 315 HK HKD 11.74 1,606 Jun 13.2 14.1 5.1 5.3 3.2 3.0 4.0 4.6 17.8 17.6 HKBN* 1310 HK HKD 10.2 1,324 Aug 98.4 29.0 3.8 4.2 6.8 7.0 13.8 11.4 3.4 5.6 Average 37.3 20.1 4.8 5.0 3.3 3.3 8.2 7.8 10.1 10.8
China telecom operators China Mobile* 941 HK HKD 88.8 234,598 Dec 12.1 11.8 3.6 3.6 1.6 1.5 3.9 3.8 2.3 3.2 China Unicom* 762 HK HKD 9.67 29,880 Dec 13.5 14.6 2.5 2.5 0.8 0.8 3.2 3.0 (11.1) 6.4 China Telecom 'H'* 728 HK HKD 3.8 39,681 Dec 12.3 12.1 2.4 2.4 0.8 0.8 3.7 3.8 (3.7) (0.9) Average 12.6 12.9 2.8 2.8 1.1 1.0 3.6 3.5 (4.1) 2.9
Taiwan telecom operators Chunghwa Telecom 2412 TT TWD 99 23,463 Dec 18.8 18.3 5.0 5.2 2.1 2.1 9.0 8.9 4.8 4.8 Taiwan Mobile 3045 TT TWD 100 10,451 Dec 18.0 17.4 5.4 5.5 4.9 4.8 10.6 10.2 6.5 6.8 Far Eastone Telecom. 4904 TT TWD 69 6,869 Dec 19.0 17.8 5.4 5.6 3.1 3.1 9.2 8.7 6.6 7.3 Average 18.6 17.9 5.3 5.4 3.4 3.4 9.6 9.2 6.0 6.3
Singapore telecom operators Starhub* STH SP SGD 3.63 4,418 Dec 16.4 16.9 5.5 5.6 33.7 29.6 9.0 8.9 5.5 5.6 M1 M1 SP SGD 2.88 1,899 Dec 14.8 14.3 6.3 6.4 6.8 6.6 8.8 8.5 7.3 5.6 Average 15.7 15.3 5.5 5.7 14.3 12.8 8.9 8.6 5.6 5.2
Malaysia telecom operators Axiata Group* AXIATA MK MYR 6.14 12,429 Dec 22.3 20.0 3.6 4.3 2.5 2.4 9.2 8.8 0.9 3.6 Digi.Com* DIGI MK MYR 5.12 9,302 Dec 21.5 20.3 4.7 4.9 58.0 58.0 12.9 12.4 4.4 4.7 Maxis* MAXIS MK MYR 6.55 11,295 Dec 24.2 22.6 4.1 4.3 10.4 10.2 13.2 12.8 4.5 4.9 Telekom Malaysia* T MK MYR 6.6 5,695 Dec 27.7 22.8 3.3 4.0 3.2 3.2 7.6 7.1 5.5 3.8 Average 23.9 21.4 3.9 4.3 18.5 18.5 10.7 10.3 3.8 4.2 Source: Thomson Reuters, *DBS Vickers
Page 7
Industry Focus Hong Kong Telecom Sector
PE & PB band charts
HKBN PE chart (1310 HK) HKBN PB chart (1310 HK)
Share Price (HK$) Share Price (HK$) 18 12
16 41x 11 6.3x 14 10 37x 5.9x 12 32x 9 5.5x 27x 5.0x 10 8 4.6x 8 22x 7
6 6 Jul-15 Jul-15 Oct-15 Oct-15 Sep-15 Apr-15 Apr-15 Sep-15 Nov-15 Nov-15 Mar-15 Aug-15 Mar-15 May-15 Aug-15 May-15 HKT Trust PE chart (6823 HK) HKT Trust PB chart (6823 HK)
Share Price (HK$) Share Price (HK$) 12 14
11 26x 12 2.0x 10 24x 1.7x 10 9 21x 1.5x 8 8 19x 1.2x 6 7 17x 0.9x 4 6 5 2 4 0 -12 p Jul-12 Jul-13 Jul-14 Jul-15 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Se Sep-13 Sep-14 Sep-15 Nov-11 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-12 Nov-13 Nov-14 Nov-15 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Aug-12 Aug-13 Aug-14 Aug-15 May-12 May-12 May-13 May-14 May-15 May-13 May-14 May-15
Source: Thomson Reuters, DBS Vickers
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Industry Focus Hong Kong Telecom Sector
PE & PB band charts (contuine)
Hutchison Telecom PE chart (215 HK) Hutchison Telecom PB chart (215 HK)
Share Price (HK$) Share Price (HK$) 7.5 5.5 5.0 2.0x 6.5 4.5 1.7x 5.5 25x 4.0 1.5x 4.5 21x 3.5 3.0 1.2x 3.5 17x 13x 2.5 1.0x 2.5 2.0 9x 1.5 1.5 Jan-11 Jan-11 Jun-13 Jun-13 Oct-11 Feb-15 Oct-11 Feb-15 Apr-14 Apr-14 Nov-15 Nov-15 Aug-12 Aug-12 Smartone Telecom PE chart (315 HK) Smartone Telecom PB chart (315 HK)
Share Price (HK$) Share Price (HK$) 30 30
25 25 6.1x 26x 20 20 5.1x 21x 4.1x 15 17x 15 13x 3.2x 10 10 9x 2.2x 5 5
0 0 Jan-11 Jan-13 Sep-11 Sep-13 Dec-14 Jan-11 Jan-13 Aug-15 May-12 May-14 Sep-11 Sep-13 Dec-14 Aug-15 May-12 May-14 Source: Thomson Reuters, DBS Vickers
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China / Hong Kong Company Guide
HKBN Ltd. Edition 1 Version 1 |Bloomberg: 1310 HK Equity | Reuters: 1310.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 27 November 2015
BUY TACTICAL PRICING STRATEGY TO DRIVE Last Traded Price: HK$10.20 (HSI : 22,068) DIVIDEND GROWTH Price Target: HK$11.00 (8% upside) Buying opportunity emerges due to excessive concerns on price war Market’s excessive concerns on price war in the Hong Kong Potential Catalyst: Market share gain and ARPU increase residential broadband market offer a buying opportunity on HKBN. Where we differ: We focus more on the long-term prospects despite The company has been successful in gaining market share through its short term growth volatility due to tactical pricing strategy aggressive and effective pricing strategy. We estimate that the recent
Analyst price discount for new subscribers would have limited impact on its Tsz Wang TAM CFA, +852 2971 1772 core EBITDA, but could help achieve long-term growth. [email protected] Market share gain through tactical pricing strategy Chris KO HKBN increased its market share from c.16% in FY8/08 to c.29% in [email protected] FY8/15, and is now the second largest residential broadband operator in Hong Kong. It strategically offers deep discounts to lure subs away Price Relative from competitors from time to time. Upon contract renewal, it raises
HK$ Relative Index the tariff back to normal level which is still lower than that of its
10.8 213 major competitor HKT (6823 HK). Churn rate has been maintained at 10.3 193 a low level. The incumbent operator HKT focuses on stable 9.8 173 profitability and cash flow, and therefore has less flexibility to 9.3 153 8.8 undercut HKBN’s pricing. 133 8.3 A growth stock with decent dividend yield 7.8 113 7.3 93 We expect the company to grow its revenue by 10% p.a. from 6.8 73 FY8/16-FY8/19F, driven by market share gain and ARPU improvement. Mar-15 Jun-15 Sep-15 In view of the recent marketing campaign, we estimate that its core HKBN Ltd. (LHS) Relative HSI INDEX (RHS) EBITDA will grow slower at 14% for FY8/16F, but accelerate to 16%
Forecasts and Valuation for FY8/17F upon contract renewal. The company intends to pay out FY Aug (HK$ m) 2014A 2015A 2016F 2017F Turnover 2,132 2,341 2,536 2,797 90-100% adjusted free cash flow (AFCF), which is estimated to grow Core EBITDA 845 978 1,112 1,296 at 20% p.a. from FY8/16-FY8/19F. The stock offers a 4.3% dividend EBITDA 845 923 1,112 1,296 yield for FY8/16F and 5.5% for FY8/17F. Pre-tax Profit 105 190 452 593 Net Profit 54 104 353 471 Valuation: EPS (HK$) 0.05 0.10 0.35 0.47 Decent dividend yield with strong growth opportunity. We derive our EPS Gth (%) N/A 94.7 238.7 33.3 TP of HK$11.0 based on dividend discount model (DDM), with 7.9% Diluted EPS (HK$) 0.05 0.10 0.35 0.47 cost of equity and 1% terminal growth rate. AFCF 311 391 429 547 DPS (HK$) 0.00 0.20 0.43 0.54 BV Per Share (HK$) 1.63 1.51 1.66 1.70 Key Risks to Our View: PE (X) 191.6 98.4 29.0 21.8 A real price war. Competitors irrationally cut prices to be lower than P/Cash Flow (X) 11.7 14.0 10.5 9.0 that offered by HKBN for a prolonged period of time. P/Free CF (X) 19.4 29.0 17.8 14.8 EV/EBITDA (X) 15.2 14.0 11.4 9.7 Increase in finance cost in interest rate up-cycle. Increase in interest Net Div Yield (%) 0.0 2.0 4.2 5.3 rates will decrease the adjusted free cash flow and the dividend yield. P/Book Value (X) 6.2 6.8 6.2 6.0 Net Debt/Equity (X) 1.6 1.8 1.5 1.4 ROAE (%) 3.3 6.6 22.2 27.9 At A Glance Issued Capital (m shrs) 1,006
10,258 / 1,324 Earnings Rev (%): Nil Nil Nil Mkt. Cap (HK$m/US$m)
Consensus EPS (HK$) 0.28 0.40 0.50 Major Shareholders Other Broker Recs: B: 8 S: 0 H: 2 Canada Pension Plan Investment Board (%) 18.0 GIC Private Limited (%) 9.0 Source of all data: Company, DBSV, Thomson Reuters, HKEX The Capital Group Companies, Inc. (%) 6.0 Mondrian Investment Partners Limited (%) 5.6 JP Morgan Asset Management (%) 5.1 Free Float (%) 100.0 3m Avg. Daily Val. (US$m) 3.6 ICB Industry : Telecommunications / Mobile Telecommunications
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
HKBN Ltd.
broadband sub (k)
CRITICAL DATA POINTS TO WATCH 894 900 Earnings Drivers: 834 800 754 Expanding market share through tactical pricing strategy. 692 700 660 HKBN has been gaining market share from its competitors 600 through its aggressive pricing strategy. It strategically offers 500 deep discounts to gain new subscribers, and has been 400 capable of raising back the tariff upon contract renewal. It 300 has a track record of managing ARPU growth over a longer 200 100 period of time despite short-term volatility. We are confident 0 that HKBN can achieve its target of 300k net-adds in five 2013A 2014A 2015A 2016F 2017F ARPU (HK$) years through a similar strategy. 183 183 184 188 175 Rising ARPU. We forecast HKBN’s ARPU to grow by c.4% p.a. 158 through (i) upselling higher-tier plan, and (ii) narrowing the 150
price differences with HKT in selected estates. As a 113 percentage of subscriber number, HKBN’s subscribers for 500Mbps and 1,000Mbps increased from 8% in FY8/12 to 75
16% in FY8/14. We expect HKBN to continue upselling 38 higher-tier plans to its customers. HKT generally charges a 0 c.20% premium over HKBN’s pricing. HKBN may selectively 2013A 2014A 2015A 2016F 2017F narrow the differences in some areas without losing its Core EBITDA (HK$m) customers. 1,400 20%
1,200 Migration to fibre. Consumers are looking for faster 1,000 15% broadband connection due to rising demand for internet 800 10% multimedia content, and therefore continuously migrate to 600 fibre network (FTTx), from other slower technologies such as 400 5% Hybrid Fibre Coaxial (HFC) and Digital Subscriber Line (xDSL) 200 for broadband services. HKBN’s Metro Ethernet network 0 0% FY13 FY14 FY15 FY16F FY17F supports symmetric upstream/downstream transmission speeds from 100Mbps to 1,000Mbps, while HFC and xDSL Core EBITDA Growth %
offer only up to a maximum of 100Mbps downstream speed AFCF (HK$m) with limitations such as lower upstream speeds. We expect HKBN to gain market share from operators providing HFC 600 40% 500 35% and xDSL network services. 30% 400 25% Replication of success in residential market to enterprise 300 20% 200 15% market. HKBN is replicating its success in the residential 10% broadband market to the enterprise market. HKBN focuses 100 5% on the small enterprise segment, of which broadband 0 0% penetration is expected to increase due to the robust FY13 FY14 FY15 FY16F FY17F development of cloud services, enterprise internet AFCF Growth %
applications and e-commerce. We expect the revenue from HKBN's enterprise broadband business to grow at a 11% Source: Company, DBS Vickers CAGR from FY8/16-FY8/17F.
ASIAN INSIGHTS VICKERS SECURITIES
Page 2
Company Guide HKBN Ltd.
Leverage & Asset Turnover (x) Balance Sheet: 0.5 2.00 Strong free cash flow. The company generates strong free cash 0.5 flow with expected growth rate of 20% p.a. The company 0.5 1.50 0.4 intends to pay out 90-100% of the adjusted free cash flow 0.4 0.4 (AFCF) as dividend. AFCF is derived from core EBITDA adjusted 1.00 for capex, net interest, non-recurring items, non-cash items, tax 0.4 0.4 0.50 paid and changes in working capital. 0.3 0.3 0.00 0.3 Healthy balance sheet. HKBN had a total borrowing of HK$3bn 2013A 2014A 2015A 2016F 2017F in FY8/15 and it intends to maintain the current debt level. Debt- Gross Debt to Equity (LHS) Asset Turnover (RHS) to-EBITDA ratio stood at a healthy level of 3.1x in FY8/15. Capital Expenditure (HK$m) HK$ 500.0 450.0 Share Price Drivers: 400.0 Stronger sub growth. Management is targeting 300k net-adds 350.0 (or 60k p.a. on average) in FY8/15-FY8/19F. Faster sub net-adds 300.0 will be positive for share price. 250.0 200.0 150.0 100.0 Increase in ARPU. HKBN has a track record of managing ARPU 50.0 growth over a longer period of time despite aggressive pricing 0.0 2013A 2014A 2015A 2016F 2017F strategy and short term volatility. While market is concerned Capital Expenditure (-) about ARPU pressure due to price discounts, we expect an ROE (%) uptrend in ARPU driven by upselling of bandwidth and the narrowing of the price differences with HKT in selected estates 25.0% in the medium term. 20.0%
Stronger dividend growth. Strong business growth and 15.0% operating leverage could lead to stronger EBITDA growth. 10.0% Reduction in capex as a percentage of revenue will further enhance the AFCF and therefore dividend distribution 5.0% 0.0% 2013A 2014A 2015A 2016F 2017F Forward EV/EBITDA (x) Key Risks: x A real price war 12.5 Competitors irrationally cut prices to be lower than that offered 12.0 +1SD: 11.7x 11.5 by HKBN for a prolonged period of time. 11.0 Avg: 10.7x 10.5 10.0 Increase in interest rates 9.5 -1SD: 9.8x Increase in interest rates will decrease the adjusted free cash 9.0 8.5 flow and the dividend yield. 8.0
Jul-15
Sep-15 Mar-15
May-15 Company Background: PB Band (x) HKBN is a broadband service provider in Hong Kong. It is the (x) 7.5 second largest player in the residential segment with a market 7.0 share of c.29%. +2sd: 6.8x 6.5 +1sd: 6.38x 6.0 Avg: 5.97x
‐1sd: 5.56x 5.5 ‐2sd: 5.14x 5.0
4.5 Mar-15 Jun-15 Sep-15 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 3
Company Guide
HKBN Ltd.
Key Assumptions FY Aug 2013A 2014A 2015A 2016F 2017F broadband sub (k) 660 692 752 812 872 ARPU (HK$) 158 175 186 189 198
Income Statement (HK$ m) FY Aug 2013A 2014A 2015A 2016F 2017F Revenue 1,949 2,132 2,341 2,536 2,797 Cost of Goods Sold (305) (287) (306) (304) (308) Gross Profit 1,644 1,844 2,035 2,232 2,489 Other Opng (Exp)/Inc (1,454) (1,552) (1,588) (1,633) (1,750) Operating Profit 191 293 447 599 739 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (301) (188) (257) (147) (147) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit (110) 105 190 452 593 Tax (29) (51) (86) (99) (122) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit (139) 54 104 353 471 Net Profit before Except. (139) 54 104 353 471 EBITDA 741 845 923 1,112 1,296 Growth Revenue Gth (%) (2.3) 9.3 9.8 8.3 10.3 EBITDA Gth (%) 12.4 14.1 9.2 20.5 16.5 Opg Profit Gth (%) (45.0) 53.6 52.7 33.8 23.5 Net Profit Gth (%) N/A N/A 94.7 238.7 33.3 Margins & Ratio Gross Margins (%) 84.3 86.5 86.9 88.0 89.0 Opg Profit Margin (%) 9.8 13.7 19.1 23.6 26.4 Net Profit Margin (%) (7.1) 2.5 4.5 13.9 16.8 ROAE (%) (6.8) 3.3 6.6 22.2 27.9 ROA (%) (2.4) 0.9 1.9 6.3 8.3 ROCE (%) 3.5 2.8 4.8 9.1 11.3 Div Payout Ratio (%) N/A 0.0 192.9 121.5 116.2 Net Interest Cover (x) 0.6 1.6 1.7 4.1 5.0 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide HKBN Ltd.
Balance Sheet (HK$ m) FY Aug 2013A 2014A 2015A 2016F 2017F
Net Fixed Assets 1,943 1,957 1,970 1,972 1,973 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 3,270 3,044 2,954 2,844 2,734 Cash & ST Invts 355 436 329 557 675 Inventory 14 22 14 15 16 Debtors 75 80 82 86 90 Other Current Assets 199 181 202 212 223 Total Assets 5,855 5,719 5,551 5,686 5,711
ST Debt 0 0 0 0 0 Creditors 14 12 7 7 7 Other Current Liab 443 541 482 489 495 LT Debt 3,231 2,994 3,019 3,019 3,019 Other LT Liabilities 578 530 529 506 482 Shareholder’s Equity 1,590 1,643 1,514 1,666 1,708 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 5,855 5,719 5,551 5,686 5,711
Non-Cash Wkg. Capital (170) (270) (190) (182) (174) Net Cash/(Debt) (2,876) (2,558) (2,690) (2,462) (2,344) Debtors Turn (avg days) 12.9 13.3 12.6 12.1 11.5 Creditors Turn (avg days) (33.1) (18.0) (19.5) (11.7) (10.4) Inventory Turn (avg days) (33.3) (24.3) (38.8) (25.7) (22.7) Asset Turnover (x) 0.3 0.4 0.4 0.5 0.5 Current Ratio (x) 1.4 1.3 1.3 1.8 2.0 Quick Ratio (x) 0.9 0.9 0.8 1.3 1.5 Net Debt/Equity (X) 1.8 1.6 1.8 1.5 1.4 Net Debt/Equity ex MI (X) 1.8 1.6 1.8 1.5 1.4 Capex to Debt (%) 10.0 11.5 12.6 13.4 14.8 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers
Cash Flow Statement (HK$ m) FY Aug 2013A 2014A 2015A 2016F 2017F
Pre-Tax Profit (110) 105 190 452 593 Dep. & Amort. 550 552 476 514 556 Tax Paid (4) (43) (86) (114) (137) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 22 74 (99) (8) (9) Other Operating CF 307 186 252 138 138 Net Operating CF 765 875 733 982 1,141 Capital Exp.(net) (324) (346) (380) (406) (448) 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 (64) 22 8 4 4 Net Investing CF (389) (324) (372) (401) (443) Div Paid (776) 0 (431) (201) (429) Chg in Gross Debt 715 (256) 25 0 0 Capital Issues 0 0 198 0 0 Other Financing CF (147) (169) (260) (151) (151) Net Financing CF (208) (425) (468) (352) (580) Currency Adjustments 2 0 0 0 0 Chg in Cash 171 126 (107) 228 118 Opg CFPS (HK$) 0.74 0.80 0.83 0.98 1.14 Free CFPS (HK$) 0.44 0.53 0.35 0.57 0.69
Source: Company, DBS Vickers
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Company Guide
HKBN Ltd.
Target Price & Ratings History
S.No. Date Closing Target Rating HK$ Price Price 11.0 1: 26-Oct-15 HK$8.98 HK$ 11.00 Buy 10.5 2: 3-Nov-15 HK$9.18 HK$11.00 Buy 1 2 10.0 9.5 9.0 8.5 8.0 7.5 7.0 Jul-15 Jun-15 Oct-15 Sep-15 Apr-15 Nov-15 Mar-15 Aug-15 May-15
Source: DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 6
China / Hong Kong Company Guide
HKT Trust Edition 1 Version 1 |Bloomberg: 6823 HK Equity | Reuters: 6823.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 25 November 2015
HOLD Incumbent operator with stable yield
Last Traded Price: HK$9.72 (HSI : 22,068) Stable dividend yield. We have a HOLD rating on HKT, with a DDM- Price Target: HK$9.10 (-6% downside) (Prev HK$9.50) based TP of HK$9.1. We believe that the current valuation reflects its
fair value. HKT offers a stable dividend yield of c.5.3%. It is an Potential Catalyst: Price hike and market share gain incumbent player in the fixed-line segment with residential market Where we differ: We believe HKT focuses on profitability and stable AFF rather than market share, making it unlikely to cut prices share threatened by HKBN. It became the largest mobile operator after merging with CSL in FY14. HKT intends to pay out 100% of adjusted
Analyst fund flows which is expected to grow at single-digit rate p.a. Tsz Wang TAM CFA, +852 2971 1772 [email protected] Growth driven by CSL consolidation plus cost synergy. HKT benefits Chris KO [email protected] from the disciplined price competition environment in the mobile
market through ARPU increase. We also expect more cost synergies from the merger with CSL to materialise in the future. On the other Price Relative hand, HKT faces aggressive pricing strategy from HKBN in the HK$ Relative Index
11.9 residential broadband market. Despite market’s concern on price war, 10.9 204 broadband network revenue increased by 5% in 1H15, driven by 9.9 184 8.9 customer upgrades. We expect the overall fixed-line business to be 164 7.9 144 stable with a low-single-digit growth. 6.9 124 5.9 4.9 104 Limited upside on share price. We forecast AFF, which is fully 3.9 84 Nov-11 Nov-12 Nov-13 Nov-14 distributed as dividends, to grow at 17% in FY15F and 7.4% FY16F, driven by the consolidation of CSL’s full-year results in FY15 and the HKT Trust (LHS) Relative HSI INDEX (RHS) cost synergy from the merger. We reckon a steady AFF growth at a Forecasts and Valuation single-digit rate after FY16F. With limited growth potential, we believe FY Dec (HK$ m) 2014A 2015F 2016F 2017F Turnover 28,823 32,419 34,028 35,044 its current valuation offers limited upside on share price. EBITDA 10,310 12,052 12,722 13,037 Pre-tax Profit 3,300 3,815 3,940 4,031 Net Profit 2,991 3,225 3,349 3,427 Valuation: Net Pft (Pre Ex) 2,991 3,225 3,349 3,427 We have a HOLD rating on HKT, with a DDM-based TP of HK$9.1 (with EPS (HK$) 0.42 0.43 0.44 0.45 7.6% cost of equity and 1% terminal growth rate). We believe that the AFF 3.354 3.919 4.210 4.308 current share price has largely reflected its fair value. AFF / SSU 0.44 0.52 0.56 0.57 EPS Gth (%) 10.0 0.9 3.8 2.3 Diluted EPS (HK$) 0.42 0.43 0.44 0.45 Key Risks to Our View: DPS (HK$) 0.47 0.52 0.56 0.57 Availability of “star” handsets (upside risk). Mobile operators would BV Per Share (HK$) 5.35 4.94 4.85 4.74 have stronger pricing power to raise the tariffs for handset-bundled PE (X) 23.0 22.8 22.0 21.5 mobile data plans during the launch of “star” handsets. P/Cash Flow (X) 7.2 6.5 6.2 6.0 P/Free CF (X) 9.8 8.9 8.4 8.3 Interest rate up-cycle (downside risk). Increase in interest rates will EV/EBITDA (X) 9.9 8.8 8.4 8.1 reduce the adjusted funds flow and therefore the dividend distribution. Net Div Yield (%) 4.9 5.3 5.7 5.9 P/Book Value (X) 1.8 2.0 2.0 2.1 Net Debt/Equity (X) 0.9 0.9 0.9 0.9 At A Glance 7,572 ROAE (%) 8.7 8.6 9.0 9.4 Issued Capital (m shrs) Mkt. Cap (HK$m/US$m) 73,597 / 9,496 Earnings Rev (%): (6.0) (5.4) New Major Shareholders Consensus EPS (HK$) 0.51 0.56 0.60 PCCW Limited (%) 63.1 Other Broker Recs: B: 9 S: 0 H: 5 The Capital Group Companies, Inc. (%) 6.9 Free Float (%) 36.9 Source of all data: Company, DBSV, Thomson Reuters, HKEX 3m Avg. Daily Val. (US$m) 7.1 ICB Industry : Telecommunications / Fixed Line lii
ASIAN INSIGHTS VICKERS SECURITIES
www.dbsvickers.com ed-TH/ sa- PY
Company Guide
HKT Trust
CRITICAL DATA POINTS TO WATCH Mobile sub growth (%)
181 177 Earnings Drivers: CSL consolidation plus cost savings. HKT has been integrating 145 CSL’s networks as well as optimising the retail channels. We expect cost savings as well as other synergies in operation 108
after the HKT/CSL integration. It targets to close down 380 72 cell sites (or 1/3 of total) in FY15F and we expect more closures in the future. This should have saved network 36 1 1 1 1 maintenance costs, which is positive to earnings and 0 operating cash flow. 2013A 2014A 2015F 2016F 2017F Mobile ARPU (HK$) 222 Mobile tariff hike. The competitive environment in the Hong 225
Kong mobile market has improved since the merger of HKT 196 181 186 168 and CSL. Operators have been able to raise the tariffs for 168 mobile data plans in the past 1-2 years. The market has been 140 133 recently focusing more on raising the tariffs for lower-tier 112 plans and launching various top-up plans to monetise more 84 data usage. HKT has now become the largest mobile operator. 56 It is well positioned to take the lead to raise the tariff when 28 the timing is appropriate. 0 2013A 2014A 2015F 2016F 2017F
EBITDA margin (%) Mobile sub growth. Hong Kong's mobile market is matured 37.3 37.5 37.3 with low-single-digit growth in the past two years. It is 34.6 35.5
dominated by HKT, Hutchison Telecom, SmarTone and China 30.3 Mobile Hong Kong with market shares c.33%, c.20%, c.14% and c.20% respectively in 2014. We expect HKT to continue 22.7
optimising its customer mix to align its new rebranding (csl., 15.1 1O1O and SUN mobile). We believe that HKT will continue to grow its mobile sub base going forward. 7.6
0.0 2013A 2014A 2015F 2016F 2017F Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide HKT Trust
Leverage & Asset Turnover (x) Balance Sheet: 0.4 0.4 Healthy financials with a debt-to-EBITDA ratio of 3.6x. HKT had 1.00 bank borrowings of HK$36bn and the debt to EBITDA ratio 0.4 0.80 0.4 remained healthy at 3.6x in FY14. Average debt maturity is 0.4 around five years with effective interest rate of c.2.9%. The 0.60 0.4 0.3 company intends to pay out 100% adjusted funds flow (which is 0.40 0.3 basically free cash flow), and maintains debt level unchanged. 0.20 0.3 0.3 0.00 0.3 2013A 2014A 2015F 2016F 2017F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) CSL consolidation plus cost savings. HKT has been integrating Capital Expenditure (HK$m) HK$ CSL’s networks as well as optimising the retail channels. We 3,500.0 expect cost savings as well as other synergies in operation after 3,000.0 the HKT/CSL integration. It targets to close down 380 cell sites 2,500.0
(or 1/3 of total) in FY15F and we expect more closures in the 2,000.0 future. 1,500.0
1,000.0 Tariff hike in the mobile market. We believe the price 500.0 competition in the industry is disciplined as mobile operators 0.0 2013A 2014A 2015F 2016F 2017F focus more on profitability rather than market share. We believe Capital Expenditure (-) further tariff hikes will focus on the lower-tier plans to narrow ROE (%) the gap between lower-tier and high-tier plans to prevent trade 9.0% downs. 8.0% 7.0% Mobile sub growth. HKT rebranded SUM Mobile to focus on 6.0% mass market and csl. and 1O1O to focus on mid- to high-end 5.0% postpaid customers. The brands have clear market focuses and 4.0% 3.0% price differentials. We believe this market repositioning may lead 2.0% to some marginal postpaid sub loss in the near term but the 1.0% impact should be limited. Signs of bottoming out are positive to 0.0% 2013A 2014A 2015F 2016F 2017F the share price. Forward PE Band (x) 26.9
24.9 Key Risks: +2sd: 24.1x Market competition. HKT faces severe competition from HKBN in 22.9 +1sd: 22x the residential broadband market. Hong Kong's mobile market is 20.9 Avg: 19.8x crowded with four major players and the penetration is more or 18.9 ‐1sd: 17.6x less saturated. Irrational pricing may lead to a price war. 16.9 ‐2sd: 15.5x 14.9 Interest rate up-cycle. Increase in interest rates will reduce the 12.9 adjusted fund flows and therefore the dividend distribution. Nov-11 Nov-12 Nov-13 Nov-14 PB Band (x) 2.5 2.3 COMPANY BACKGROUND +2sd: 2.22x HKT is an integrated telecom services provider in Hong Kong, 2.1 with the largest market share in the fixed-line and mobile market. 1.9 +1sd: 1.86x 1.7 The broadband services are provided via the brand “Netvigator” 1.5 Avg: 1.51x and the mobile services are provided via the brands “SUN 1.3 Mobile”, “csl.” and “1O1O”. HKT is 63.07% owned by PCCW. 1.1 ‐1sd: 1.15x 0.9 ‐2sd: 0.8x 0.7 0.5 Nov-11 Nov-12 Nov-13 Nov-14 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 3
Company Guide
HKT Trust
Key Assumptions FY Dec 2013A 2014A 2015F 2016F 2017F Fixed-line sub growth 0.2 0.1 0.2 0.2 0.2 (%) Broadband sub growth 0.0 0.0 0.5 0.3 0.2 (%) Mobile sub growth (%) 0.5 177.2 1.5 0.9 1.0 Mobile ARPU 132.7 222.3 168.1 181.1 186.5 EBITDA margin (%) 34.6 35.5 37.3 37.5 37.3
Segmental Breakdown (HK$ m)
FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (HK$ m) TSS 19,251 19,913 20,493 21,046 21,556 Mobile 3,371 8,950 12,088 13,176 13,703 Other businesses 688 564 500 500 500 Elliminations (478) (604) (662) (694) (715) Total 22,832 28,823 32,419 34,028 35,044 Source: Company, DBS Vickers
Income Statement (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 22,832 28,823 32,419 34,028 35,044 Cost of Goods Sold (10,117) (12,053) (13,357) (14,087) (14,578) Gross Profit 12,715 16,770 19,062 19,940 20,466 Other Opng (Exp)/Inc (9,501) (12,416) (13,875) (14,564) (14,999) Operating Profit 3,214 4,354 5,187 5,376 5,467 Other Non Opg (Exp)/Inc 84 99 0 0 0 Associates & JV Inc 50 (29) (29) (29) (29) Net Interest (Exp)/Inc (833) (1,124) (1,343) (1,407) (1,407) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2,515 3,300 3,815 3,940 4,031 Tax (16) (242) (550) (552) (564) Minority Interest (39) (67) (40) (40) (40) Preference Dividend 0 0 0 0 0 Net Profit 2,460 2,991 3,225 3,349 3,427 Net Profit before Except. 2,460 2,991 3,225 3,349 3,427 EBITDA 8,048 10,310 12,052 12,722 13,037 Growth Revenue Gth (%) 8.3 26.2 12.5 5.0 3.0 EBITDA Gth (%) 5.8 28.1 16.9 5.6 2.5 Opg Profit Gth (%) 7.8 35.5 19.1 3.7 1.7 Net Profit Gth (%) 52.8 21.6 7.8 3.8 2.3 Margins & Ratio Gross Margins (%) 55.7 58.2 58.8 58.6 58.4 Opg Profit Margin (%) 14.1 15.1 16.0 15.8 15.6 Net Profit Margin (%) 10.8 10.4 9.9 9.8 9.8 ROAE (%) 8.0 8.7 8.6 9.0 9.4 ROA (%) 3.7 3.8 3.6 3.8 3.9 ROCE (%) 5.4 5.9 5.6 5.9 6.0 Div Payout Ratio (%) 117.9 112.1 121.5 125.7 125.7 Net Interest Cover (x) 3.9 3.9 3.9 3.8 3.9 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 4
Company Guide HKT Trust
Interim Income Statement (HK$ m) FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015
Revenue 11,071 11,761 12,520 16,303 15,974 Cost of Goods Sold (4,901) (5,216) (5,333) (6,720) (6,544) Gross Profit 6,170 6,545 7,187 9,583 9,430 Other Oper. (Exp)/Inc (4,720) (4,781) (5,114) (7,302) (6,851) Operating Profit 1,450 1,764 2,073 2,281 2,579 Other Non Opg (Exp)/Inc 49 35 41 58 33 Associates & JV Inc 6 44 2 (31) (15) Net Interest (Exp)/Inc (458) (375) (452) (672) (631) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,047 1,468 1,664 1,636 1,966 Tax 161 (177) (245) 3 (171) Minority Interest (19) (20) (19) (48) (17) Net Profit 1,189 1,271 1,400 1,591 1,778 Net profit bef Except. 1,189 1,271 1,400 1,591 1,778
Growth Revenue Gth (%) 14.0 3.5 13.1 38.6 27.6 Opg Profit Gth (%) (0.5) 15.7 43.0 29.3 24.4 Net Profit Gth (%) 52.8 52.8 17.7 25.2 27.0
Margins Gross Margins (%) 55.7 55.7 57.4 58.8 59.0 Opg Profit Margins (%) 13.1 15.0 16.6 14.0 16.1 Net Profit Margins (%) 10.7 10.8 11.2 9.8 11.1 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
HKT Trust
Balance Sheet (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F
Net Fixed Assets 14,399 15,767 15,916 16,073 16,235 Invts in Associates & JVs 852 721 692 663 634 Other LT Assets 41,097 61,054 60,008 58,772 57,494 Cash & ST Invts 2,134 3,613 3,809 3,954 4,003 Inventory 1,018 621 652 685 719 Debtors 3,000 3,875 4,069 4,272 4,486 Other Current Assets 3,319 4,149 4,349 4,560 4,780 Total Assets 65,819 89,800 89,495 88,978 88,352
ST Debt 0 3,877 3,877 3,877 3,877 Creditors 1,803 1,979 2,078 2,182 2,291 Other Current Liab 5,354 8,559 8,559 8,559 8,559 LT Debt 24,022 32,549 32,549 32,549 32,549 Other LT Liabilities 3,835 4,797 4,852 4,907 4,964 Shareholder’s Equity 30,623 37,932 37,433 36,717 35,885 Minority Interests 182 107 147 187 227 Total Cap. & Liab. 65,819 89,800 89,495 88,978 88,352
Non-Cash Wkg. Capital 180 (1,893) (1,567) (1,224) (865) Net Cash/(Debt) (21,888) (32,813) (32,617) (32,472) (32,423) Debtors Turn (avg days) 51.4 43.5 44.7 44.7 45.6 Creditors Turn (avg days) 127.0 111.9 114.6 115.8 117.0 Inventory Turn (avg days) 67.0 48.5 36.0 36.3 36.7 Asset Turnover (x) 0.3 0.4 0.4 0.4 0.4 Current Ratio (x) 1.3 0.9 0.9 0.9 0.9 Quick Ratio (x) 0.7 0.5 0.5 0.6 0.6 Net Debt/Equity (X) 0.7 0.9 0.9 0.9 0.9 Net Debt/Equity ex MI (X) 0.7 0.9 0.9 0.9 0.9 Capex to Debt (%) 8.2 6.9 8.5 8.9 9.1 Z-Score (X) 2.2 1.7 1.8 1.9 1.9 Source: Company, DBS Vickers
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Company Guide HKT Trust
Cash Flow Statement (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F
Pre-Tax Profit 2,515 3,300 3,815 3,940 4,031 Dep. & Amort. 4,700 5,886 6,894 7,374 7,599 Tax Paid (331) (395) (495) (496) (508) Assoc. & JV Inc/(loss) (50) 29 29 29 29 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (518) (545) (326) (342) (360) Other Operating CF 827 1,294 1,393 1,457 1,457 Net Operating CF 7,143 9,569 11,310 11,962 12,248 Capital Exp.(net) (1,980) (2,510) (3,080) (3,233) (3,329) Other Invts.(net) (2,091) (3,219) (2,918) (3,062) (3,154) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (152) (18,857) 0 0 0 Net Investing CF (4,223) (24,586) (5,997) (6,295) (6,483) Div Paid (2,731) (3,141) (3,724) (4,064) (4,259) Chg in Gross Debt 298 11,909 0 0 0 Capital Issues 0 7,807 0 0 0 Other Financing CF (751) (34) (1,393) (1,457) (1,457) Net Financing CF (3,184) 16,541 (5,117) (5,521) (5,716) Currency Adjustments (3) (45) 0 0 0 Chg in Cash (267) 1,479 196 145 49 Opg CFPS (HK$) 1.19 1.43 1.54 1.63 1.67 Free CFPS (HK$) 0.80 1.00 1.09 1.15 1.18
Source: Company, DBS Vickers
Target Price & Ratings History
S.No. Date Closing Target Rating HK$ Price Price 11.0 1: 30-Jan-15 HK$9.91 HK$9.20 Hold 1 2 2: 11-Feb-15 HK$10.14 HK$9.70 Hold 10.5 3 4 3: 27-Jul-15 HK$9.52 HK$9.50 Hold 4: 6-Aug-15 HK$9.11 HK$9.50 Hold 10.0
9.5
9.0
8.5
8.0 Jul-15 Jan-15 Jun-15 Oct-15 Feb-15 Sep-15 Apr-15 Dec-14 Nov-14 Nov-15 Mar-15 Aug-15 May-15
Source: DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 7
China / Hong Kong Company Guide
Hutchison Telecom Edition 1 Version 1 | Bloomberg: 215 HK Equity | Reuters: 0215.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 27 November 2015
REPOSITIONING TO MID-HIGH END MARKET HOLD Last Traded Price: HK$2.79 (HSI : 22,489) Current valuation reflects fair value. Price Target: HK$2.70 (-3% downside) (Prev HK$3.70) We have a HOLD rating on Hutchison Telecom (HT) as we believe the current valuation has reflected its fair value. HT has been losing subs Potential Catalyst: Price hike and availability of “star” handsets since the decision to give up the lower-end market in FY14. The Where we differ: Our earnings estimates for FY15-16F are lower than profitability improved due to cost savings. The company benefits from concensus the disciplined price competition environment in the mobile market but also faces the downside risk from handset sales. Analyst Tsz Wang TAM CFA, +852 2971 1772 Mobile ARPU increase offset by mobile sub loss and declining roaming [email protected] revenue. Chris KO HT has taken multiple initiatives to improve the Mobile ARPU. It raised [email protected] tariff of its 4G SIM-only plans by HK$20-30 to narrow the pricing
discounts to its major competitors SmarTone (SMT, 315 HK, BUY) and
Price Relative HKT (6823 HK, HOLD). It also launched “Top Up Data Pack” with HK$ Relative Index 221 additional HK$40 per month for 1Gb or HK$70 per month for 2.5Gb 4.8 201 to enhance ARPU. However, we reckon that the mobile ARPU 4.3 181 improvement will be offset by the mobile sub loss and declining 161 3.8 141 roaming revenue.
3.3 121 101 Expect stable service revenue with declining handset sales profit. 2.8 81 Demand for iPhone 6S in HK is lower than that for iPhone 6. We expect 2.3 61 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 the earnings in FY15F to grow by 9% to HK$908m, due to 17%
Hutchison Telecom (LHS) Relative HSI INDEX (RHS) earnings improvement from service which is partly offset by 20% drop in earnings from handset sales. In FY16F, we expect the handset sales Forecasts and Valuation FY Dec (HK$ m) 2014A 2015F 2016F 2017F profit to drop by a further 20% and the contribution from mobile Turnover 16,296 18,145 16,160 16,519 service to be stable. We forecast the net profit for FY16F to fall by 4% EBITDA 2,644 2,731 2,772 2,891 to HK$875m. Pre-tax Profit 1,168 1,266 1,226 1,265 Net Profit 833 908 875 908 Net Pft (Pre Ex) 833 908 875 908 Valuation: EPS (HK$) 0.17 0.19 0.18 0.19 We have a HOLD rating on HT. Our target price of HK$2.7 is pegged at 15x FY16F PE, which is in line with the historical average. EPS Gth (%) (9.1) 9.1 (3.7) 3.7 Diluted EPS (HK$) 0.17 0.19 0.18 0.19 DPS (HK$) 0.13 0.14 0.14 0.14 Key Risks to Our View: BV Per Share (HK$) 2.34 2.40 2.44 2.49 Availability of “star” handsets (upside risk). Launch of “star” handsets PE (X) 16.1 14.8 15.4 14.8 could result in higher handset sales volume and margins. Mobile P/Cash Flow (X) 5.4 5.4 5.4 5.2 operators would also have stronger pricing power to raise the tariffs for P/Free CF (X) 10.2 12.3 12.3 11.4 EV/EBITDA (X) 6.6 6.3 6.7 6.3 handset-bundled mobile data plans. Net Div Yield (%) 4.6 5.1 4.9 5.1 Irrational market competition (downside risk). Hong Kong's mobile P/Book Value (X) 1.2 1.2 1.1 1.1 market is crowded with four major players and the penetration is more Net Debt/Equity (X) 0.3 0.3 0.4 0.3 or less saturated. Irrational pricing may lead to a price war. ROAE (%) 7.5 8.0 7.5 7.6
At A Glance Earnings Rev (%): (8.6) (15.8) New Issued Capital (m shrs) 4,819 Consensus EPS (HK$) 0.20 0.21 0.21 Mkt. Cap (HK$m/US$m) 13,445 / 1,735 Other Broker Recs: B: 3 S: 0 H: 8 Major Shareholders Source of all data: Company, DBSV, Thomson Reuters, HKEX CK Hutchison Holdings Ltd. (%) 66.1 The Capital Group Companies, Inc. (%) 5.1 0 (%) 0.0 Free Float (%) 28.8 3m Avg. Daily Val. (US$m) 1.1 ICB Industry : Telecommunications / Mobile Telecommunications
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Company Guide
Hutchison Telecom
CRITICAL DATA POINTS TO WATCH Sub number (k)
3,771 Earnings Drivers: 3,500 Tariff hike. The competition environment has improved since 3,197 3,000 2,756 the merger of HKT and CSL. Operators have been able to 2,702 2,729 2,500 raise the tariffs for mobile data plans in the past 1-2 years. 2,000
The market recently focuses more on raising the tariffs for 1,500
lower-tier plans and launching various top-op plans to 1,000
monetise more data usage. HT has also taken multiple 500
initiatives to increase the mobile ARPU. It has raised the tariffs 0 of its 4G SIM-only plans by HK$20-30 to narrow the pricing 2013A 2014A 2015F 2016F 2017F discounts to its major competitors. It also launched “Top Up Mobile ARPU (HK$)
Data Pack” with additional HK$40 per month for 1Gb or 139 133 137 127 HK$70 per month for 2.5Gb to enhance mobile ARPU. 117 111 Mobile ARPU uplift will be a key earnings growth driver. 112
84 Mobile sub growth. Hong Kong mobile market is more or less matured with low-single-digit sub growth in the past two 56
years. There are four major players: HKT, Hutchison Telecom, 28 SmarTone and China Mobile Hong Kong with market shares 0 of c.33%, c.20%, c.14% and c.20% in 2014 respectively. HT 2013A 2014A 2015F 2016F 2017F stopped offering low-tier speed-capped plan in FY14. It has Source: Company, DBS Vickers lost c.900 mobile sub since then (from 3,771k by the end of FY13 to 2,869k by the end of Jun 2015). Mobile post-paid subs decreased by c.390k from 1,933m by end of FY13 to 1,542m by end of Jun 2015. We expect the mobile sub loss to slow down in FY16F.
Availability of “star” handsets. Handset sales depend on the popularity of the new smartphones. Availability of “star” handsets could result in higher handset sales volume and margin. Mobile operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans.
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Company Guide Hutchison Telecom
Leverage & Asset Turnover (x) Balance Sheet: 0.9 Healthy financial position with a net gearing ratio of 38%. The 0.50 0.9 company generates stable operating cash flow. HT has a net 0.40 gearing ratio of 32% and the debt-to-EBITDA ratio of c.1.5x in 0.8 0.30 FY14. We expect HT to pay c.HK$1.8bn for 2.1GHz spectrum 0.8
0.20 utilisation fees in FY16F. Thereafter, we expect a net gearing 0.7 ratio of c.38%, which is healthy. 0.10 0.7
0.00 0.6 Share Price Drivers: 2013A 2014A 2015F 2016F 2017F Tariff hike. Operators have been able to raise mobile tariff in the Gross Debt to Equity (LHS) Asset Turnover (RHS) past 1-2 years. The market has been recently focusing more on Capital Expenditure (HK$m) HK$ raising the tariffs for lower-tier plans and launching various top- 1,450.0 up plans to monetise more data usage. ARPU uplift will be a key 1,400.0 share price catalyst. 1,350.0 1,300.0 Mobile sub growth. Hong Kong mobile market penetration is 1,250.0 1,200.0 more or less matured with low-single-digit sub growth in the 1,150.0 past two years. Further sub growth will be mostly coming from 1,100.0 market share gain. We believe that HT has to first slow down 1,050.0 2013A 2014A 2015F 2016F 2017F any sub loss, and then focus on growing its high-tier sub base. Capital Expenditure (-) ROE (%)
Availability of “star” handsets. Availability of “star” handsets 8.0% could result in higher handset sales volume and margin. Mobile 7.0% operators would also have stronger pricing power to raise the 6.0% tariffs for handset-bundled mobile data plans. 5.0% 4.0% 3.0% Key Risks: 2.0% Irrational market competition. Hong Kong mobile market is 1.0% crowded with four major players and the penetration is more or 0.0% 2013A 2014A 2015F 2016F 2017F less saturated. Irrational pricing may lead to a price war. Forward PE Band (x) Lack of “star” handsets. Handset sales depend on the popularity 26.2 of the new smartphones. Lack of “star” handsets could result in 24.2 lower handset sales volume and margins. And operators would 22.2 +2sd: 22.6x have weaker pricing power to raise tariff for handset-bundled 20.2 +1sd: 20x mobile data plans. 18.2 Avg: 17.4x 16.2
14.2 ‐1sd: 14.8x
12.2 ‐2sd: 12.2x COMPANY BACKGROUND 10.2 Hutchison Telecom is an integrated telecom service provider in Nov-11 Nov-12 Nov-13 Nov-14 Hong Kong, operating under the brand “3 Hong Kong”. It has a PB Band c.23% mobile sub market share. Its major shareholder is CK 2.3 (x) Hutchison Holdings Limited. 2.1
1.9 +2sd: 1.82x 1.7 +1sd: 1.64x 1.5 Avg: 1.45x
1.3 ‐1sd: 1.27x
1.1 ‐2sd: 1.08x
0.9 Nov-11 Nov-12 Nov-13 Nov-14 Source: Company, DBS Vickers
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Company Guide
Hutchison Telecom
Key Assumptions FY Dec 2013A 2014A 2015F 2016F 2017F Sub number (k) 3,771.0 3,197.0 2,702.0 2,729.0 2,756.3 Mobile ARPU (DBSV) 111.1 117.4 126.8 132.7 136.7
Segmental Breakdown (HK$ m)
FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (HK$ m) Moible 5,138 4,646 4,157 4,131 4,368 Fixed-line 3,418 3,664 3,607 3,723 3,846 Hardware sales 4,221 7,986 10,382 8,305 8,305 Total 12,777 16,296 18,145 16,160 16,519 Source: Company, DBS Vickers
Income Statement (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 12,777 16,296 18,145 16,160 16,519 Cost of Goods Sold (3,943) (7,713) (10,164) (8,131) (8,131) Gross Profit 8,834 8,583 7,981 8,029 8,388 Other Opng (Exp)/Inc (7,495) (7,225) (6,587) (6,643) (6,932) Operating Profit 1,339 1,358 1,395 1,386 1,457 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (12) (35) (10) (10) (10) Net Interest (Exp)/Inc (160) (155) (118) (150) (181) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,167 1,168 1,266 1,226 1,265 Tax (77) (205) (228) (221) (228) Minority Interest (174) (130) (130) (130) (130) Preference Dividend 0 0 0 0 0 Net Profit 916 833 908 875 908 Net Profit before Except. 916 833 908 875 908 EBITDA 2,662 2,644 2,731 2,772 2,891 Growth Revenue Gth (%) (17.8) 27.5 11.3 (10.9) 2.2 EBITDA Gth (%) (11.4) (0.7) 3.3 1.5 4.3 Opg Profit Gth (%) (22.4) 1.4 2.7 (0.6) 5.1 Net Profit Gth (%) (24.6) (9.1) 9.1 (3.7) 3.7 Margins & Ratio Gross Margins (%) 69.1 52.7 44.0 49.7 50.8 Opg Profit Margin (%) 10.5 8.3 7.7 8.6 8.8 Net Profit Margin (%) 7.2 5.1 5.0 5.4 5.5 ROAE (%) 8.3 7.5 8.0 7.5 7.6 ROA (%) 4.4 4.0 4.3 3.9 3.8 ROCE (%) 7.6 6.6 6.7 6.1 6.0 Div Payout Ratio (%) 75.0 74.9 75.0 75.0 75.0 Net Interest Cover (x) 8.4 8.8 11.8 9.2 8.0 Source: Company, DBS Vickers
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Company Guide Hutchison Telecom
Interim Income Statement (HK$ m) FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015
Revenue 6,149 6,628 6,227 10,069 11,020 Cost of Goods Sold (1,668) (2,275) (2,060) (5,653) (6,975) Gross Profit 4,481 4,353 4,167 4,416 4,045 Other Oper. (Exp)/Inc (3,661) (3,834) (3,640) (3,585) (3,256) Operating Profit 820 519 527 831 789 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (4) (8) (12) (23) (18) Net Interest (Exp)/Inc (77) (83) (71) (84) (51) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 739 428 444 724 721 Tax (39) (38) (82) (123) (120) Minority Interest (128) (46) (39) (91) (92) Net Profit 572 344 323 510 508 Net profit bef Except. 572 344 323 510 509
Growth Revenue Gth (%) (8.6) (24.7) 1.3 51.9 77.0 Opg Profit Gth (%) 2.4 (43.9) (35.7) 60.1 49.7 Net Profit Gth (%) 0.7 (46.8) (43.5) 48.3 57.3
Margins Gross Margins (%) 72.9 65.7 66.9 43.9 36.7 Opg Profit Margins (%) 13.3 7.8 8.5 8.3 7.2 Net Profit Margins (%) 9.3 5.2 5.2 5.1 4.6 Source: Company, DBS Vickers
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Company Guide
Hutchison Telecom
Balance Sheet (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F
Net Fixed Assets 10,509 10,663 10,985 11,256 11,480 Invts in Associates & JVs 715 515 505 495 485 Other LT Assets 7,520 7,127 6,859 8,391 8,123 Cash & ST Invts 209 359 811 1,251 1,782 Inventory 171 142 149 157 164 Debtors 1,881 1,892 1,987 2,086 2,190 Other Current Assets 0 0 0 0 0 Total Assets 21,005 20,698 21,295 23,636 24,225
ST Debt 0 0 0 0 0 Creditors 3,981 3,956 3,956 3,956 3,956 Other Current Liab 14 18 18 18 18 LT Debt 4,571 3,952 3,952 5,752 5,752 Other LT Liabilities 1,103 1,063 1,279 1,488 1,703 Shareholder’s Equity 11,041 11,293 11,544 11,747 11,989 Minority Interests 295 416 546 676 806 Total Cap. & Liab. 21,005 20,698 21,295 23,636 24,225
Non-Cash Wkg. Capital (1,943) (1,940) (1,838) (1,732) (1,619) Net Cash/(Debt) (4,362) (3,593) (3,141) (4,501) (3,970) Debtors Turn (avg days) 56.0 42.3 39.0 46.0 47.2 Creditors Turn (avg days) 618.7 226.6 163.8 214.4 216.0 Inventory Turn (avg days) 26.0 8.9 6.0 8.3 8.8 Asset Turnover (x) 0.6 0.8 0.9 0.7 0.7 Current Ratio (x) 0.6 0.6 0.7 0.9 1.0 Quick Ratio (x) 0.5 0.6 0.7 0.8 1.0 Net Debt/Equity (X) 0.4 0.3 0.3 0.4 0.3 Net Debt/Equity ex MI (X) 0.4 0.3 0.3 0.4 0.3 Capex to Debt (%) 27.0 29.6 35.4 24.3 24.3 Z-Score (X) 1.5 1.8 1.9 1.7 1.7 Source: Company, DBS Vickers
Cash Flow Statement (HK$ m) FY Dec 2013A 2014A 2015F 2016F 2017F
Pre-Tax Profit 1,167 1,168 1,266 1,226 1,265 Dep. & Amort. 1,335 1,321 1,346 1,396 1,445 Tax Paid (11) (12) (12) (12) (12) Assoc. & JV Inc/(loss) 12 35 10 10 10 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (832) (112) (102) (107) (112) Other Operating CF 64 83 (20) (20) (20) Net Operating CF 1,735 2,483 2,489 2,493 2,576 Capital Exp.(net) (1,234) (1,168) (1,400) (1,400) (1,400) Other Invts.(net) 0 0 0 (1,800) 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (337) 85 20 20 20 Net Investing CF (1,571) (1,083) (1,380) (3,180) (1,380) Div Paid (929) (591) (657) (673) (665) Chg in Gross Debt 800 (650) 0 1,800 0 Capital Issues 0 0 0 0 0 Other Financing CF (8) (9) 0 0 0 Net Financing CF (137) (1,250) (657) 1,127 (665) Currency Adjustments 0 0 0 0 0 Chg in Cash 27 150 452 441 531 Opg CFPS (HK$) 0.53 0.54 0.54 0.54 0.56 Free CFPS (HK$) 0.10 0.27 0.23 0.23 0.24
Source: Company, DBS Vickers
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Company Guide Hutchison Telecom
Target Price & Ratings History
S.No. Date Closing Target Rating HK$ Price Price 4.0 1: 30-Jan-15 HK$3.53 HK$3.20 Hold 2 3.8 1 3 4 5 2: 17-Feb-15 HK$3.46 HK$3.50 Hold 3.6 3: 27-Jul-15 HK$3.43 HK$3.40 Hold 3.4 4: 5-Aug-15 HK$3.35 HK$3.70 Hold 3.2 5: 27-Oct-15 HK$3.04 HK$3.70 Hold 3.0 2.8 2.6 2.4 2.2 2.0 Jul-15 Jan-15 Jun-15 Oct-15 Feb-15 Apr-15 Sep-15 Dec-14 Nov-15 Nov-14 Mar-15 Aug-15 May-15
Source: DBS Vickers
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China / Hong Kong Company Guide
SmarTone Edition 1 Version 1 |Bloomberg: 315 HK EQUITY | Reuters: 315.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 27 November 2015
BUY ROBUST SERVICE REVENUE OUTLOOK Last Traded Price: HK$11.74 (HSI : 22,068) A key beneficiary of tariff hike Price Target: HK$15.00 (28% upside) (Prev HK$17.00) We have a BUY rating on SmarTone (SMT). SMT, being a smaller player, focuses on high-end subs. It is also adding lower-end subs without Potential Catalyst: Price hike, avaliability of “star” handsets jeopardising its market position in the high-end market. As a pure Where we differ: Our earnings estimates for FY6/15-FY6/16F are lower mobile operator, SMT is the key beneficiary from the industry-wide than concensus tariff hike in the mobile market. Despite short-term downside risk from
Analyst handset sales, outlook for core earnings from mobile services remains Tsz Wang TAM CFA, +852 2971 1772 positive. [email protected] Focusing on lower-tier and top-up plans Chris KO [email protected] SMT continues to benefit from the disciplined price competition
environment. It has further raised the price for the 3G speed-capped plan by HK$10 or c.10% in FY15. We believe further tariff hikes will Price Relative focus on the lower-tier plans to narrow the gap between lower-tier and HK$ Relative Index
18.7 high-tier plans to prevent trade downs. SMT also raised the price of the 203 16.7 unlimited data top-up plan from HK$128 to HK$148 in 4Q15. 183 14.7 163 143 Weak handset sales partly offset by growing mobile service 12.7 123 Demand for iPhone 6S is lower than iPhone 6 in HK. We expect pretax 10.7 103 83 earnings from handset sales to drop by more than 50% but it is partly 8.7 63 offset by a c.28% increase in mobile service, resulting in a c.6% drop 6.7 43 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 in the net profit to HK$875m for FY6/16F. We forecast the net profit to SmarTone (LHS) Relative HSI INDEX (RHS) grow by 10% to HK$958m in FY6/17, driven by continuous ARPU Forecasts and Valuation increase. The company has raised its dividend payout ratio to 75% in FY Jun (HK$ m) 2014A 2015A 2016F 2017F 2H6/15 and the stock price currently offers c.5% dividend yield for Turnover 13,244 18,659 13,822 14,008 FY6/16. EBITDA 2,456 2,857 2,878 3,013 Pre-tax Profit 663 1,131 1,058 1,158 Net Profit 537 935 875 958 Valuation: Net Pft (Pre Ex) 537 935 875 958 We have a BUY rating on SMT as it is a beneficiary of mobile data tariff EPS (HK$) 0.52 0.89 0.83 0.91 hike. It currently offers a decent dividend yield of c.5% for FY6/16. Our EPS Gth (%) (36.4) 72.6 (6.4) 9.5 target price of HK$15.0 is pegged at 18x FY8/16F PE, which is in line Diluted EPS (HK$) 0.52 0.89 0.83 0.91 with the historical average. DPS (HK$) 0.31 0.60 0.62 0.68 BV Per Share (HK$) 3.08 3.64 3.86 4.12 Key Risks to Our View: PE (X) 22.7 13.2 14.1 12.9 Irrational market competition. Hong Kong's mobile market is crowded P/Cash Flow (X) 5.7 4.2 4.3 4.3 P/Free CF (X) 9.2 5.6 5.7 5.6 with four major players and the penetration is more or less saturated. EV/EBITDA (X) 4.9 3.9 4.5 4.1 Irrational pricing may lead to a price war. Net Div Yield (%) 2.6 5.1 5.3 5.8 P/Book Value (X) 3.8 3.2 3.0 2.8 Lack of “star” handsets. Handset sales depend on the popularity of the Net Debt/Equity (X) CASH CASH 0.1 CASH new smartphones. Lack of “star” handsets could result in lower ROAE (%) 17.4 26.6 22.1 22.7 handset sales volume and margins. And operators would have weaker
pricing power to raise the tariffs for handset-bundled mobile data plans. Earnings Rev (%): (0.5) 3.2 Consensus EPS (HK$) 0.88 0.91 Other Broker Recs: B: 10 S: 0 H: 3 At A Glance Issued Capital (m shrs) 1,061 Source of all data: Company, DBSV, Thomson Reuters, HKEX Mkt. Cap (HK$m/US$m) 12,460 / 1,608 Major Shareholders Sun Hung Kai Properties Limited (%) 67.0 Free Float (%) 33.0 3m Avg. Daily Val. (US$m) 3.4 ICB Industry : Telecommunications / Mobile Telecommunications
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CRITICAL DATA POINTS TO WATCH Sub base (k)
2,040 1,960 2,010 1,880 Earnings Drivers: 1,820 Tariff hike. The competitive environment has improved since 1,800 the merger of HKT and CSL. Operators have been able to 1,500 raise the tariffs for mobile data plans in the past 1-2 years. 1,200
The market has been recently focusing more on raising the 900
tariffs for lower-tier plans and launching various top-up plans 600
to monetise more data usage. SMT has further increased the 300
price for the 3G speed-capped plan from HK$78 to HK$88 0 per month in FY15. It has also increased the price of its 2013A 2014A 2015A 2016F 2017F unlimited data top-up plan from HK$128 to HK$148. ARPU ARPU (HK$)
uplift will be a key earnings growth driver. 278 273 250 253 244 241 Mobile sub growth. Hong Kong's mobile market is more or 223
less matured with low-single-digit sub growth in the past two 167 years. There are four major players: HKT, Hutchison Telecom, SmarTone and China Mobile Hong Kong with market shares 111
of c.33%, c.20%, c.14% and c.20% in 2014 respectively. 56 SMT has a total sub base of 1,960m in FY6/15 with c.70% post-paid subs and c.30% prepaid subs. Speed-capped plan 0 2013A 2014A 2015A 2016F 2017F subs accounted for 1/3 of post paid sub base, and mid-to- Source: Company, DBS Vickers high end subs accounted for the remaining 2/3. We believe that SMT will continue to grow its mobile sub base, in particular the lower-tier segment where it has less penetration.
Availability of “star” handsets. Handset sales depend on the popularity of the new smartphones. Availability of “star” handsets could result in higher handset sales volume and margins. Mobile operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans.
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Company Guide SmarTone
Leverage & Asset Turnover (x) 1.9 Balance Sheet: 0.90 Strong balance sheet to support mobile spectrum fee. SMT has a 0.80 1.8 strong balance sheet with a net cash position of HK$1.2bn by 0.70 1.7 end of FY6/15. We expect SMT to pay c.HK$2.3bn for the 0.60 1.6 2.1GHz spectrum utilisation fees in FY6/16F. Thereafter, we 0.50 0.40 1.5 expect a net gearing ratio of 16%, which is healthy. 0.30 1.4 0.20 1.3 0.10 0.00 1.2 Share Price Drivers: 2013A 2014A 2015A 2016F 2017F Tariff hike. Operators have been able to raise mobile tariff in the Gross Debt to Equity (LHS) Asset Turnover (RHS) past 1-2 years. The market has been recently focusing more on Capital Expenditure (HK$m) HK$ raising the tariffs for lower-tier plans and launching various top- 1,400.0 up plans to monetise more data usage. ARPU uplift will be a key 1,200.0 share price catalyst. 1,000.0
800.0
Mobile sub growth. Hong Kong mobile market penetration is 600.0 more or less matured with low-single-digit sub growth in the 400.0 past two years. Further sub growth will be mostly coming from 200.0 market share gain. We believe that SMT will continue to grow its 0.0 2013A 2014A 2015A 2016F 2017F mobile sub base, in particular the lower-tier segment where it Capital Expenditure (-) has less penetration. ROE
Availability of “star” handsets. Availability of “star” handsets 25.0% could result in higher handset sales volume and margins. Mobile 20.0% operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans. 15.0% 10.0%
5.0% Key Risks: Irrational market competition. Hong Kong's mobile market is 0.0% 2013A 2014A 2015A 2016F 2017F crowded with four major players and the penetration is more or less saturated. Irrational pricing may lead to a price war. Forward PE Band (x) 27.8 Lack of “star” handsets. Handset sales depend on the popularity +2sd: 25x of the new smartphones. Lack of “star” handsets could result in 22.8 +1sd: 21x lower handset sales volume and margins. And operators would 17.8 have weaker pricing power to raise tariffs for handset-bundled Avg: 16.9x mobile data plans. 12.8 ‐1sd: 12.8x
‐2sd: 8.7x 7.8 COMPANY BACKGROUND Nov-11 Nov-12 Nov-13 Nov-14 Smartone is a mobile operator in Hong Kong focusing on the PB Band high-end customer segment. It has a c.14% mobile sub market (x) share. It also provides fixed-line broadband services through 6.1 +2sd: 5.79x partnership with HKBN. Its major shareholder is Sun Hung Kai 5.6 5.1 Properties. +1sd: 4.95x 4.6 4.1 Avg: 4.1x 3.6
3.1 ‐1sd: 3.25x
2.6 ‐2sd: 2.41x 2.1 Nov-11 Nov-12 Nov-13 Nov-14 Source: Company, DBS Vickers
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Company Guide
SmarTone
Key Assumptions FY Jun 2013A 2014A 2015A 2016F 2017F Sub base (k) 1,820.0 1,880.0 1,960.0 2,010.0 2,040.0 ARPU 272.7 244.3 241.5 250.4 253.1
Segmental Breakdown (HK$ m)
FY Jun 2013A 2014A 2015A 2016F 2017F Revenues (HK$ m) Mobile service 5,657 5,423 5,564 5,965 6,151 Handset and accessory 6,410 7,822 13,095 7,857 7,857 sales Total 12,067 13,244 18,659 13,822 14,008 Source: Company, DBS Vickers
Income Statement (HK$ m) FY Jun 2013A 2014A 2015A 2016F 2017F Revenue 12,067 13,244 18,659 13,822 14,008 Cost of Goods Sold (6,214) (7,743) (12,708) (7,755) (7,755) Gross Profit 5,852 5,502 5,951 6,067 6,253 Other Opng (Exp)/Inc (4,829) (4,801) (4,782) (4,955) (5,023) Operating Profit 1,023 700 1,169 1,112 1,230 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (8) (38) (39) (55) (72) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,015 663 1,131 1,058 1,158 Tax (167) (131) (195) (183) (200) Minority Interest (5) 5 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 843 537 935 875 958 Net Profit before Except. 843 537 935 875 958 EBITDA 2,876 2,456 2,857 2,878 3,013 Growth Revenue Gth (%) 21.2 9.8 40.9 (25.9) 1.3 EBITDA Gth (%) 0.6 (14.6) 16.3 0.7 4.7 Opg Profit Gth (%) (16.8) (31.6) 67.0 (4.8) 10.6 Net Profit Gth (%) (17.6) (36.3) 74.2 (6.4) 9.5 Margins & Ratio Gross Margins (%) 48.5 41.5 31.9 43.9 44.6 Opg Profit Margin (%) 8.5 5.3 6.3 8.0 8.8 Net Profit Margin (%) 7.0 4.1 5.0 6.3 6.8 ROAE (%) 27.7 17.4 26.6 22.1 22.7 ROA (%) 9.9 5.5 9.1 8.0 8.7 ROCE (%) 14.8 8.1 13.3 11.9 12.9 Div Payout Ratio (%) 81.2 60.1 67.8 75.0 75.0 Net Interest Cover (x) 132.8 18.6 30.3 20.4 17.1 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide SmarTone
Interim Income Statement (HK$ m) FY Jun 2H2013 1H2014 2H2014 1H2015 2H2015
Revenue 6,178 6,531 6,713 8,673 9,986 Cost of Goods Sold (3,287) (3,702) (4,041) (5,675) (7,032) Gross Profit 2,891 2,829 2,672 2,997 2,954 Other Oper. (Exp)/Inc (2,386) (2,399) (2,296) (2,375) (2,333) Operating Profit 506 431 377 623 621 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (47) (66) (78) (59) (54) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 459 364 298 564 567 Tax (77) (56) (75) (96) (99) Minority Interest 1 3 2 (1) 1 Net Profit 384 311 226 466 469 Net profit bef Except. 384 311 226 466 469
Growth Revenue Gth (%) 26.3 10.9 8.7 32.8 48.7 Opg Profit Gth (%) (29.9) (30.2) (25.5) 44.5 64.9 Net Profit Gth (%) (29.9) (32.2) (41.2) 49.8 107.7
Margins Gross Margins (%) 46.8 43.3 39.8 34.6 29.6 Opg Profit Margins (%) 8.2 6.6 5.6 7.2 6.2 Net Profit Margins (%) 6.2 4.8 3.4 5.4 4.7 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide
SmarTone
Balance Sheet (HK$ m) FY Jun 2013A 2014A 2015A 2016F 2017F
Net Fixed Assets 3,201 3,411 3,354 3,259 3,116 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 3,077 2,464 2,424 4,510 4,290 Cash & ST Invts 2,514 3,169 4,155 2,423 3,011 Inventory 103 80 82 82 82 Debtors 399 436 332 254 194 Other Current Assets 335 232 466 466 466 Total Assets 9,628 9,792 10,814 10,995 11,159
ST Debt 65 101 124 124 124 Creditors 537 778 755 732 711 Other Current Liab 2,094 2,070 2,413 2,459 2,447 LT Debt 2,530 2,739 2,844 2,844 2,844 Other LT Liabilities 1,354 854 770 696 621 Shareholder’s Equity 2,986 3,193 3,851 4,082 4,355 Minority Interests 62 57 57 57 56 Total Cap. & Liab. 9,628 9,792 10,814 10,995 11,159
Non-Cash Wkg. Capital (1,794) (2,100) (2,287) (2,389) (2,415) Net Cash/(Debt) (81) 329 1,186 (546) 42 Debtors Turn (avg days) 11.2 11.5 7.5 7.7 5.8 Creditors Turn (avg days) 48.2 40.1 25.4 45.3 44.1 Inventory Turn (avg days) 15.0 5.6 2.7 5.0 5.0 Asset Turnover (x) 1.4 1.4 1.8 1.3 1.3 Current Ratio (x) 1.2 1.3 1.5 1.0 1.1 Quick Ratio (x) 1.1 1.2 1.4 0.8 1.0 Net Debt/Equity (X) 0.0 CASH CASH 0.1 CASH Net Debt/Equity ex MI (X) 0.0 CASH CASH 0.1 CASH Capex to Debt (%) 48.4 29.0 25.5 22.9 22.9 Z-Score (X) 3.4 3.4 3.9 3.4 3.5 Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Company Guide SmarTone
Cash Flow Statement (HK$ m) FY Jun 2013A 2014A 2015A 2016F 2017F
Pre-Tax Profit 1,015 663 1,131 1,058 1,158 Dep. & Amort. 1,717 1,627 1,480 1,575 1,593 Tax Paid (9) (181) (258) (183) (200) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (334) (153) 359 142 64 Other Operating CF 252 198 236 257 257 Net Operating CF 2,641 2,154 2,947 2,849 2,872 Capital Exp.(net) (1,255) (824) (757) (680) (680) Other Invts.(net) (1,873) (665) (1,117) (3,255) (918) Invts in Assoc. & JV 78 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (1,744) 629 (444) (1) (1) Net Investing CF (4,795) (860) (2,319) (3,936) (1,599) Div Paid (998) (285) (392) (645) (685) Chg in Gross Debt 2,526 236 116 0 0 Capital Issues (50) 2 110 0 0 Other Financing CF 52 (57) 4 0 0 Net Financing CF 1,531 (104) (163) (645) (685) Currency Adjustments 0 0 1 0 0 Chg in Cash (623) 1,191 467 (1,732) 588 Opg CFPS (HK$) 2.87 2.22 2.47 2.58 2.68 Free CFPS (HK$) 1.34 1.28 2.09 2.07 2.09
Source: Company, DBS Vickers
Target Price & Ratings History
S.No. Date Closing Target Rating HK$ Price Price 17.0 1: 30-Jan-15 HK$13.40 HK$16.00 Buy 16.0 3 2: 18-Feb-15 HK$13.00 HK$16.00 Buy 1 2 4 5 3: 27-Jul-15 HK$15.34 HK$16.00 Buy 15.0 4: 2-Sep-15 HK$14.28 HK$17.00 Buy 5: 19-Oct-15 HK$13.94 HK$17.00 Buy 14.0 13.0 12.0 11.0 10.0 Jul-15 Jan-15 Jun-15 Oct-15 Feb-15 Sep-15 Apr-15 Dec-14 Nov-14 Nov-15 Mar-15 Aug-15 May-15
Source: DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
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Industry Focus Hong Kong Telecom Sector
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (DBSVHK) This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd and DBSVHK, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) 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 DBSVHK.
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 Vickers Group, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation 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 substitution 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 mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, 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 and it may not contain all material information concerning the company (or companies) referred to in this report.
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(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
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DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-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.
ANALYST 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 this report. As of 27 November 2015, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSVHK, their subsidiaries and/or other affiliates have proprietary positions in HKTt Trust & Hkt Limited, Hutchison Telecommunications Hong Kong Holdings Limited, Smartone Telecommunications Holdings Ltd, HKBN Limited recommended in this report as of 25 Nov 2015.
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Industry Focus Hong Kong Telecom Sector
1. Compensation 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.
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Wong Ming Tek, Executive Director, ADBSR
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