China / Hong Kong Industry Focus Hong Kong Telecom Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 Dec 2018
2019 outlook: ARPU recovery HSI: 26,507
• More rational competition after management changes of major listed telecom operators
• Expect further rounds of industry-wide tariff ANALYST Chris KO CFA, +852 3668 4172 [email protected] hikes in the mobile market Tsz-Wang TAM, CFA +852 3668 4195 [email protected] • Increasing spending per sub through upselling and cross-selling in residential broadband market Recommendation & valuation • HKBN (1310 HK, BUY) remains our top pick in the sector due to its attractive dividend yield and Company Price T arget Rec Mk t Cap F Y19F strong growth potential Price Yield HK$ HK$ US$m % More rational competition after various management changes. HKBN 12.18 15.60 BUY 1,566 5.6 In September 2018, HKT (6823 HK, BUY), the largest telecom (1310 HK) operator in Hong Kong, started its tariff hike for mobile service Smartone Telecom 9.74 11.80 BUY 1,395 4.5 plans to end the price war. Going forward, we expect further (315 HK) rounds of industry-wide tariff hikes in the mobile market HKT Trust 11.32 14.90 BUY 10,956 6.4 supported by (1) more rational competition after management (6823 HK) changes in major listed telecom operators, (2) increasing data Hutchison Telecom 2.94 3.30 HOLD 1,811 1.9 usage, and (3) cost pressure from higher spectrum utilisation (215 HK)
fee (SUF) for 900/1800MHz spectrum reassignment. Source: Thomson Reuters, DBS Bank (Hong Kong) Limited (“DBS HK”), Bloomberg Finance L.P. Increasing spending per sub in residential broadband market. In the residential broadband business, dominant operators (HKT and HKBN) are increasing spending per user by upselling bandwidth and cross-selling more services. Smaller operators (HGC and i-Cable [1097 HK, NR]) continue to offer residential broadband services at low prices to gain market share, but the impact has been limited. We anticipate that HKT, the largest residential broadband operator, will raise prices in the residential broadband market after leading the price increase in the mobile market.
Pecking order: HKBN>SMT>HKT>HT. HKBN, with an attractive dividend yield of c.6% and a strong dividend per share CAGR of 20% from FY8/18-FY8/21, remains our top pick in the sector. SmarTone (SMT, 315 HK, BUY) will be the biggest beneficiary from the industry-wide tariff hikes in the mobile market. HKT is an ideal defensive play with an attractive dividend yield, steady growth and decent market capitalisation. For Hutchison Telecom (HT, 215 HK, HOLD), the market now focuses more on how the company utilises its cash proceeds from its asset disposal last year, which account for two-thirds of its market value.
ed-TH / sa-CS / AH
Industry Focus
Hong Kong Telecom Sector
Table of Content
Mobile market outlook 3 Fixed-line market outlook 6 Interest rate hike sensitivity 7 Valuations and recommendations 8 Stock Profile HKBN 12 SmarTone 19 HKT Trust 25 Hutchison Telecom 31
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Industry Focus
Hong Kong Telecom Sector
Mobile market outlook HKT raised mobile service tariff to end the price war HKT adjusted the pricing for its mobile data service plans Overview effective from 21 September 2018. The pricing for 5GB mobile In September 2018, HKT, the largest telecom operator in Hong data service plan with speed capped at 21Mbps increased from Kong, started its tariff hike for mobile service plans to end the HK$96 to HK$116 per month. Unlimited mobile 4G data price war. Going forward, we expect further rounds of service plan increased from HK$316 to HK$366 per month. industry-wide tariff hikes in the mobile market supported by (1) Some mobile service promotion plans at low prices have also more rational competition after recent management changes been discontinued. SMT and HT have followed suit to raise at major listed telecom operators, (2) increasing data usage, their prices. and (3) cost pressure from higher spectrum utilisation fee (SUF) for 900/1800MHz spectrum reassignment.
Mobile postpaid 4.5G SIM-only service plan pricing# for port-in subs
HK$ per month Nov 2018 HK$ per month Sep 2018 (before 21 Sep 2018) SMT T hree csl. CMHK HKBN SMT T hree csl. CMHK HKBN 1GB na na na na na 1GB 216 na 216 na na 2.5GB na na na na na 2.5GB 256 na 256 na na 3GB na na na na na 3GB na na na 108 na 5GB 176 166 176 na na 5GB na na 118 na na 6GB na na na 156 166 6GB 316 156 316 138 166 8GB 246 216 216 na na 8GB na na na 158 na 10GB na na na na na 10GB na 216 456 na na 12GB 316 306 316 138 236 12GB na na na 118 236 15GB na na na na na 15GB na 246 na na na 18GB na na na na na 18GB 256 na na na na 20GB 456 446 456 168 na 20GB na na na 148 na 50GB na na na 238 na 50GB na na na na na Unlimited~ 374 356 366 168 346 Unlimited~ 316 306 316 168 316 Mobile postpaid SIM only speed-capped service plan pricing# for port-in subs HK$ per month Nov 2018 HK$ per month Sep 2018 (before 21 Sep 2018) SUN SUN SMT T hree Mobile CMHK HKBN SMT T hree Mobile CMHK HKBN 384kbps - unlimited 106 na na na na 384kbps - unlimited 96 na na na na 384kbps - 2GB na na 106** na na 384kbps - 2GB na na 106** na na 2Mbps - unlimited 106 na na na na 2Mbps - unlimited 106 na na na na 3.6Mbps - 15GB na na 106* na na 3.6Mbps - 15GB na na na na na 21Mbps - 5GB na 126 116* 88* 86 21Mbps - 5GB 136 96 96* 78* 86 21Mbps - 5GB na na 138 na na 21Mbps - 5GB na na na na na 21Mbps - 10GB na na 158* na na 21Mbps - 10GB na na na na na 21Mbps - Unlimited na na na na na 21Mbps - Unlimited na 136 164* na na 42Mbps - 1GB 166* na na na na 42Mbps - 1GB 166* na na na na 42Mbps - 2GB na na 146 na na 42Mbps - 2GB na na 146 na na 42Mbps - 3GB na na 106** na na 42Mbps - 3GB na na 106** na na 42Mbps - 4GB na na 196 na na 42Mbps - 4GB na na 196 na na 42Mbps - 7GB na na 256 na na 42Mbps - 7GB na na 256 na na Source: Companies, DBS HK Note: #: includes some mobile service promotion plans * thereafter unlimited data at 128kbps ** thereafter unlimited data at 384kbps ~Subject to fair usage policy
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Industry Focus
Hong Kong Telecom Sector
More rational competition after management change Increasing data usage The competition in the mobile market has become more In Hong Kong, thanks to the proliferation of multi-media rational after management changes at HKT, HT and HKBN. content and mobile applications, data usage per capita has Both the new CEOs of HKT and HKBN have financial increased by 73% from 3,171Mbytes in 2016 to 5,474Mbytes background, hence will likely be more sensitive to the in April 2018. We believe this will support data usage upgrade profitability and financial performance of the companies, in our for the industry and ARPU improvement in the next few years. view. We believe the price war in the mobile market was triggered by the entry of HKBN in 2H16. We estimate that the Data usage per capita in Hong Kong mobile service pricing has decreased by c.10-30% while the market share gained by HKBN was only 3%. HKT, HT and SMT MBytes also only gained 1-3% market share. Going forward, we 6,000 expect telecom operators to maximise revenue and profitability 5,000 rather than sub market share. This will be favourable to industry pricing. 4,000 3,000 Management changes of Hong Kong telecom operators 2,000 Prev ious Background of Effectiv e 1,000 Company New CEO CEO new CEO date HKBN NiQ Lai William COO and previously 1-Sep-18 0
Yeung CFO of the
2008 2009 2010 2011 2013 2014 2015 2016 2017
company 2012 Apr-18 HKT Susanna Hui Alexander CFO of the 31-Aug-18 Mobile data usage per capita Arena company Huctchison Sing Fai Koo Cliff Woo Chief Commercial 1-Aug-18 Telecom Officer of the Source: OFCA, DBS HK company SmarTone Anna Yip Douglas Li Head of HK/Macau 16-Jun-16 Stable market share MasterCard Going forward, we expect the mobile market share to remain Asia/Pacific relatively stable amid industry-wide tariff hikes. Though CMHK and HKBN have not followed suit on the tariff hike, the Source: Companies, DBS HK potential market share shift should be slow as CMHK mainly focuses on the lower-end market where the pricing differences Mobile postpaid sub market share (Jun 2016-Jun 2018) of mobile service plans are small. HKBN offers discounts mainly through bundling plans. 45% 40% Mobile market share in Hong Kong (Jun 2018) 35% 30% 25% 20% 15% CMHK and HKT 10% other 27% 5% MVNOs
0% 35%
Jun-17 Jun-18 Jun-16
Oct-16 Feb-17 Oct-17 Feb-18
Apr-17 Apr-18
Dec-16 Dec-17
Aug-16 Aug-17
HKT HT SMT (include HKBN) CMHK and Others HT SMT 22% 16% Source: OFCA, Companies, DBS HK
Source: OFCA, Companies, DBS HK
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Industry Focus
Hong Kong Telecom Sector
Higher costs for 900/1800MHz spectrum Expect 5G capex to be prolonged and gradual We expect the reassignment of the spectrum in 900MHz and 5G Spectrum bands to be assigned by the regulators will be 1800MHz bands (2G spectrum) to take place by the end of 3.5Ghz, 4.9GHz, 26/28GHz and 3.3GHz. 3.5GHz should be 2018. 60% of the 2G spectrum will be re-assigned by auction used as the backbone network while 26/28 GHz will be used in and the remaining 40% can be retained by existing mobile hot spot areas. As 5G commercial applications have yet to be operators through the offer of right of first refusal. developed, we believe mobile operators will spend the 5G capex in a gradual and prolonged way. We currently expect We expect the related spectrum utilisation fee to increase from stable capex (excluding spectrum utilisation fees) for mobile an average of HK$1.45m to HK$2.96m per MHz p.a., operators in the next few years. representing a c.100% increase. We expect the increase in SUF to represent 20% and 6% of HT’s FY19 and SMT’s FY6/19 earnings respectively. HKT will be least impacted as the Assignment of 5G spectrum increase in SUF will only represent 2% of its FY19 adjusted fund flows. The financial impact will materialise in 2020. More total Proposed Date of detailed analysis on the spectrum re-assignment can be found Spectrum resources method of auction/ band av ailable assignment A ssignment in our previous report dated 5 January 2018. 3.3 GHz 100MHz Auction Mid of 2019 3.5 GHz 200MHz Auction End of 2019 4.9 GHz 100MHz Auction Mid of 2019 26/28 GHz 4,100MHz Administrative End of 2018 assignment Source: OFCA, DBS HK
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Industry Focus
Hong Kong Telecom Sector
Fixed-line market outlook i-Cable’s residential broadband sub base stabilised at 150,000 in 1H18. We believe its cable network is not competitive Expect HKT to lead tariff hikes in residential broadband market against optical fibre network in Hong Kong. Though the In the residential broadband business, dominant operators HKT company has started to build FTTH network coverage, we and HKBN are increasing spending per user by upselling believe it will focus more resources on the media business. bandwidth and cross-selling more services. Smaller operators
HGC and i-Cable, continue to offer residential broadband In the medium-to-long term, we reckon that smaller residential services at low price to gain market share, but the impact has broadband operators will be further marginalised by bundling been limited. We reckon that largest residential broadband plans offered by larger broadband operators. operator, HKT, will raise prices in the residential broadband market after leading the price increase in the mobile market. Residential broadband market share (Jun 2018)
HKT’s residential broadband sub base increased by 1% (or 16,000) to 1,439,000 in 1H18 from 1,423,000 in 2H17. The i-Cable company is focusing on upselling bandwidth e.g. 2G HT 6% broadband at HK$168 per month. It is also cross-selling value- 9% added services such as Google Wifi and Gamer Pack, etc. HKT HKT 53% has increased its prices in the mobile service market. We reckon that they will increase their prices in the residential broadband market.
HKBN’s residential broadband sub base decreased by 11,000 to HKBN 860,000 in 2HFY8/18 from 871,000 in 1HFY8/18. The 32% company has increased the pricing for renewing customers. It is also focusing on increasing the total spending per household through bundling residential broadband, mobile, home telephone and OTT content services. We estimated that its Source: Companies, DBS HK implied broadband services' ARPU has increased by HK$25 (or 17%) in FY8/18. Consolidation in fixed-line enterprise market HKBN mobile service bundle plan ARPU HKBN has announced its acquisition of WTT, a fixed-line operator focusing on the enterprise market, for HK$10.5bn at F Y8/17 F Y8/18 Change a valuation of c.13x EV/EBITDA. The number of major players Mobile ARPU HK$119 HK$147 +HK$28 (with broadband services) left in the fixed-line enterprise market will be reduced from Mobile ARPU HK$268 HK$321 +HK$53 four to three after the acquisition. We believe this is positive to (without broadband services) the industry in the long run. HK$149 HK$174 +HK$25 Implied broadband services ARPU Source: HKBN, DBS HK M&As in Hong Kong telecom sector
Transaction Transaction HGC continues to offer low prices for its residential broadband valutaion consideration A sset EV/EBITDA (HK$m) Seller Buy er T ime business to take market share. It is also trying to upsell HGC 11x 14,497 Hutchison I-square Oct-17 bandwidth to 2.2G fibre broadband services to increase the Telecom spending per sub. WTT 12x 9,500 Wharf MBK Oct-16 Group and TPG i-Cable na Issuing 3,353m Wharf Forever Sep-17 new shares (or Group Top 62.5% of (Asia) enlarged share Limited capital) @HK$0.21 per share WTT 13x 10,489 MBK and HKBN Expect to TPG complete in 1Q19 Source: HKBN, DBS HK
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Industry Focus
Hong Kong Telecom Sector
Interest rate hike sensitivity floating-rate borrowings of 50%. We estimate that for any 1- ppt interest rate increase, HKT’s dividend will decrease by Hong Kong telecom operators are generally highly leveraged. 3.8% in FY19. HKBN and SMT have a higher proportion of This may be a concern for some investors as the coming fixed-rate borrowings of 71% and 79% respectively. The interest rate upcycle will negatively impact earnings or impact from a 1-ppt interest rate increase is limited. In the dividends. We accordingly performed a sensitivity analysis on longer term, HKBN and HKT will be the most severely impacted their dividends towards interest rate changes. Hutchison due to their higher gearing. Telecom has no borrowing now, and so will be free from interest rate hike risk. HKT has a relatively higher portion of
Interest rate sensitivity analysis
% of Total 1% int. rate impact 1% int. rate impact borrowings (floating only) (assume all floating) Net debt to EBITDA Total borrowings % decrease Dollar % decrease of as at the end of Jun (HK$m) as at end of F ixed- F loating- Dollar amount of dividend amount dividend in 2018* 1HF Y18* rate rate (HK$m) in F Y19** (HK$m) F Y19 HKBN 4.3x 9,159 71% 29% 26 3.1% 92 10.8% HKT 3.2x 39,585 50% 50% 198 3.8% 396 7.7% HT net cash - 0% 100% - 0.0% - 0.0% SMT 0.01x 2,430 79% 21% 5 0.7% 24 3.2% *FY8/19 for HKBN, FY6/18 for SMT
**FY8/19 for HKBN, FY6/19 for SMT
Source: Companies, DBS HK
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Industry Focus
Hong Kong Telecom Sector
Valuations and recommendations dividend yield of c.6% with steady dividend growth. We forecast the dividend to grow by 5%/6%/4% in FY18-20 HKBN. We believe the company remains on track to achieve its respectively. Maintain BUY with a higher TP of HK$14.9. Our cumulative DPS target set in COP III. The acquisition of WTT TP is based on dividend discount model assuming cost of should further boost DPS growth in the medium term. The equity of 6.9% and terminal growth rate of 1%. stock currently offers an attractive yield of c.6% for FY8/19 with a DPS CAGR of c.20% from FY8/19-8/21. Reiterate BUY HT. We have revised up our earnings forecast by 1%/2%/2% with TP of HK$15.6. Our TP is based on the dividend discount for FY18-20 respectively mainly due to higher mobile ARPU model, assuming 7.9% cost of equity and 1% terminal growth assumptions. The market is now focusing on how the company rate. will utilises the HK$10bn (or HK$2.1 per share) of cash
proceeds from the fixed-line asset disposal. We maintain our SMT. We upgraded SMT from HOLD to BUY on 20 September HOLD rating due to the uncertainty from the utilisation of cash 2018 as HKT led the tariff hike in the mobile market. We proceeds but with a higher TP of HK$3.3. Our TP is based on expect SMT, as a pure mobile operator, to benefit the most SOTP: (1) HK$1.2 per share for mobile business based on 6x from the industry-wide tariff hikes. Our TP is pegged to 20x FY19 EV/EBITDA (vs 5x FY18 EV/EBITDA), and (2) HK$2.1 net FY6/19 PE, which is 1SD above its historical average. Our cash per share. Our higher target multiple for mobile business higher target multiple is justified by the company's improving is justified by the company’s improving growth outlook. growth outlook.
HKT. We have revised up our AFF forecast by 1%/6%/8% for
FY18-20 respectively mainly due to higher mobile ARPU and lower cost assumptions. The stock currently offers an attractive
Performance chart
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SmarTone Hutchison Telecom HKT Trust HKBN
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Industry Focus
Hong Kong Telecom Sector
Valuation
Mk t PE PE Yield Yield P/Bk P/Bk EV/EBITDA F CF Yield Currency Price Cap F iscal 18F 19F 18F 19F 18F 19F 18F 19F 18F 19F Company Name Code Local$ US$m Yr x x % % x x x x % % Hong Kong telecom operators HKT Trust* 6823 HK HKD 11.18 10,817 Dec 16.7 15.9 6.2 6.5 2.2 2.2 9.2 8.7 10.8 11.1
Hutchison Telecom* 215 HK HKD 2.91 1,792 Dec 37.1 39.3 2.0 1.9 0.9 0.9 3.2 3.1 4.9 4.7
Smartone Telecom* 315 HK HKD 9.44 1,352 Jun 17.0 16.0 4.3 4.6 2.2 2.1 5.2 4.8 15.3 14.2 HKBN* 1310 HK HKD 11.66 1,498 Aug 29.5 24.1 4.8 5.8 11.3 2.3 12.6 12.2 5.5 5.9 A v erage 25.1 23.8 4.3 4.7 4.1 1.9 7.6 7.2 9.1 9.0
China telecom operators China Mobile* 941 HK HKD 75.9 198,585 Dec 12.0 11.8 4.0 4.1 1.3 1.2 3.0 2.7 6.9 7.0 China Unicom* 762 HK HKD 8.68 33,952 Dec 26.6 16.5 1.3 2.0 0.8 0.7 2.5 1.8 20.9 19.2 China Telecom 'H'* 728 HK HKD 4.07 7,209 Dec 14.5 13.6 2.9 3.0 0.8 0.8 3.3 3.0 10.6 11.6 A v erage 17.7 14.0 2.7 3.0 0.9 0.9 2.9 2.5 12.8 12.6
Taiwan telecom operators
Chunghwa Telecom 2412 TT TWD 108 27,080 Dec 22.9 22.9 4.3 4.3 2.3 2.3 10.5 10.4 n.a. n.a. Taiwan Mobile 3045 TT TWD 110 12,163 Dec 22.5 21.4 5.0 5.0 5.3 5.4 12.1 11.8 n.a. n.a. Far Eastone Telecom. 4904 TT TWD 74.5 7,847 Dec 23.8 23.5 5.0 5.1 3.6 3.7 9.8 9.6 n.a. n.a. A v erage 23.1 22.6 4.8 4.8 3.7 3.8 10.8 10.6 n.a. n.a.
Singapore telecom operators Singapore Telecom*# ST SP SGD 3.12 37,055 Mar 16.9 16.1 5.6 5.6 1.7 1.7 9.0 8.7 4.5 3.0 Starhub* STH SP SGD 1.87 2,355 Dec 14.6 15.0 8.6 5.7 38.0 27.5 7.1 7.5 6.3 1.6 A v erage 15.1 16.4 6.8 5.1 21.2 15.9 7.5 7.9 6.6 1.6
Malaysia telecom operators
Axiata Group* AXIATA MK MYR 3.41 7,379 Dec 28.2 19.6 3.0 4.3 1.2 1.2 5.7 5.3 0.6 7.5
Digi.Com* DIGI MK MYR 4.21 7,808 Dec 21.8 21.7 4.6 4.6 63.1 63.1 11.9 11.7 5.1 4.6
Maxis* MAXIS MK MYR 5.31 9,901 Dec 20.8 20.2 3.8 4.1 5.6 5.4 11.7 11.4 6.4 6.2 Telekom Malaysia* T MK MYR 2.33 2,089 Dec 15.6 15.8 8.0 8.0 1.1 1.2 4.3 4.3 9.4 6.1 A v erage 21.6 19.3 4.8 5.3 17.8 17.7 8.4 8.2 5.4 6.1
Indonesia telecom operators Telekomunikasi Indo* TLKM IJ IDR 3990 27,209 Dec 19.6 18.1 3.8 4.1 4.4 4.4 7.0 6.6 4.8 6.0 Xl Axiata* EXCL IJ IDR 2220 1,633 Dec 38.2 25.8 1.6 2.3 1.1 1.0 4.9 4.2 (3.9) 8.3 A v erage 28.9 22.0 1.8 2.2 2.2 2.2 5.6 5.2 (3.3) 3.8
Thailand telecom operators Advanced Info Ser.* ADVANC TB THB 177.5 15,953 Dec 17.7 16.1 3.9 4.3 8.9 7.5 8.4 7.6 6.1 8.4
True Corporation TRUE TB THB 5.8 5,851 Dec 28.7 84.1 0.2 0.3 1.3 1.3 6.9 7.2 n.a. (1.5)
A v erage 23.2 50.1 2.1 2.3 5.1 4.4 7.7 7.4 6.1 3.5 Source: Thomson Reuters, *DBS HK
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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$) 30 55x 50 45 8.8x 25 46x 40 35 20 37x 7.2x 30 15 25 5.5x 28x 20 3.9x 10 15 19x 2.3x 5 10 5 0 0 Jul-15 Jul-16 Jul-17 Jul-18 Jul-15 Jul-16 Jul-17 Jul-18 Nov-15 Nov-16 Nov-17 Nov-18 Nov-15 Nov-16 Nov-17 Nov-18 Mar-15 Mar-16 Mar-17 Mar-18 Mar-15 Mar-16 Mar-17 Mar-18
HKT Trust PE Chart (6823 HK) HKT Trust PB Chart (6823 HK)
Share Price (HK$) Share Price (HK$) 16 26x 14 2.0x 14 24x 12 1.7x 21x 10 12 1.5x 19x 8 10 1.2x 17x 6 8 0.9x 4
6 2
4 0 Nov-11 Nov-11 Nov-12 Nov-12 Nov-13 Nov-13 Nov-14 Nov-14 Nov-15 Nov-15 Nov-16 Nov-16 Nov-17 Nov-17 Nov-18 Nov-18 May-12 May-12 May-13 May-13 May-14 May-14 May-15 May-15 May-16 May-16 May-17 May-17 May-18 May-18
Source: Bloomberg Finance L.P., DBS HK
Page 10 Industry Focus
Hong Kong Telecom Sector
PE & PB band charts
Hutchison Telecom PE Chart (215 HK) Hutchison Telecom PB Chart (215 HK)
Share Price (HK$) Share Price (HK$) 25.0 7.0 2.0x 6.0 20.0 1.7x 5.0 15.0 4.0 1.3x 20x 10.0 16x 3.0 1.0x 11x 2.0 0.7x 5.0 7x 1.0 0.0 3x 0.0 Jan-11 Jan-11 Sep-13 Sep-13 Apr-16 Apr-16 Dec-14 Dec-14 Dec-18 Dec-18 Aug-17 Aug-17 May-12 May-12
Smartone PE Chart (315 HK) Smartone PB Chart (315 HK)
Share Price (HK$) Share Price (HK$) 30 30 6.1x 25 25 5.0x 20 20 26x 3.9x 15 21x 15 17x 2.8x 10 10 13x 1.7x 5 9x 5
0 0 Jul-14 Jul-14 Jan-11 Jan-18 Jan-11 Jan-18 Jun-17 Jun-17 Oct-12 Feb-15 Oct-12 Feb-15 Sep-15 Apr-16 Sep-15 Apr-16 Dec-13 Dec-13 Nov-16 Nov-16 Mar-12 Mar-12 Aug-11 Aug-18 Aug-11 Aug-18 May-13 May-13
Source: Bloomberg Finance L.P., DBS HK
Page 11 China / Hong Kong Company Guide HKBN Ltd. Version 12 | Bloomberg: 1310 HK Equity | Reuters: 1310.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 Dec 2018
BUY Dialling into harvest period Last Traded Price ( 30 Nov 2018):HK$12.18(HSI : 26,507) Significant upside potential in ARPU under duopoly. We have a BUY Price Target 12-mth:HK$15.60 (28.1% upside) rating on HKBN for its attractive dividend yield of 6% and strong Analyst growth potential with a dividend CAGR of 20%+ from FY8/18-8/21. Chris KO CFA,+852 36684172, [email protected] The company is now the second largest residential broadband Tsz-Wang TAM, CFA+852 36684195, [email protected] operator in Hong Kong. It will also be the second largest fixed-line What’s New operator in the enterprise market after the acquisition of WTT. We • More rational competition after management expect HKBN to enjoy ARPU (average revenue per user) and changes of major listed telecom operators profitability upside for its residential broadband business. • Focusing on cross-selling through bundling plans Where we differ: WTT acquisition accretive. HKBN has announced its to increase spending per household acquisition of WTT, a fixed-line operator focusing on the enterprise market, for HK$10.5bn at a valuation of c.13x EV/EBITDA. We believe • Expect industry-wide tariff hikes in the residential the acquisition will be dividend accretive, thanks to cost and revenue broadband market synergies. The company targets to save 7-10% of the combined cash • Reiterate BUY for its attractive yield and strong operating expenses and HK$60m capex per year. It will incentivise growth potential with TP unchanged at HK$15.6 WTT’s staff by extending its co-ownership plan to the employees and changing the pay structure to be more commission-focused. Price Relative Potential catalyst: Industry-wide residential broadband tariff hikes. HK$ Relative Index
14.7 The residential broadband market is a duopoly dominated by HKT 203 13.7 and HKBN with more than 80% combined market share. HKBN has 12.7 183 11.7 163 started raising its residential broadband tariff in the market as it 10.7 143 focuses on revenue market share. We anticipate that HKT will also 9.7 123 8.7 103 increase its residential broadband tariff after it has increased prices in 7.7 83 6.7 63 the mobile service market. Mar-15 Mar-16 Mar-17 Mar-18 Valuation: HKBN Ltd. (LHS) Relative HSI (RHS) Our TP of HK$15.6 is based on DDM, assuming 7.9% cost of equity Forecasts and Valuation FY Aug (HK$m) 2018A 2019F 2020F 2021F and 1% terminal growth rate. Turnover 3,949 5,492 7,222 7,589 EBITDA 1,210 1,913 2,689 2,918 Key Risks to Our View: Pre-tax Profit 489 773 1,123 1,272 Price war. Competitors irrationally undercutting HKBN's prices for a Net Profit 397 601 868 990 prolonged period. Net Profit Gth (Pre-ex) (%) 132.0 51.4 44.4 14.1 EPS (HK$) 0.39 0.48 0.59 0.67 Interest rate upcycle. Any increase in interest rates will reduce the EPS Gth (%) 132.0 22.6 21.3 14.1 Diluted EPS (HK$) 0.39 0.48 0.59 0.67 adjusted free cash flow (AFCF) and therefore the dividend DPS (HK$) 0.56 0.68 0.85 0.99 distribution. BV Per Share (HK$) 1.03 5.02 4.03 3.77 PE (X) 30.9 25.2 20.8 18.2 At A Glance P/Cash Flow (X) 11.7 8.9 7.5 6.9 Issued Capital (m shrs) 1,006 P/Free CF (X) 19.0 17.7 10.5 9.3 Mkt Cap (HK$m/US$m) 12,249 / 1,566 EV/EBITDA (X) 13.0 12.5 9.9 9.1 Major Shareholders (%) Net Div Yield (%) 4.6 5.6 7.0 8.2 P/Book Value (X) 11.8 2.4 3.0 3.2 CPP Investment Board 18.0 Net Debt/Equity (X) 3.4 1.4 1.5 1.5 Capital World Investors 9.2 ROAE(%) 36.7 16.5 14.2 17.2 GIC Private Limited 9.0 Earnings Rev (%): Nil Nil Nil Matthews International Capital Management, L.L.C. 7.1 Consensus EPS (HK$) 0.44 0.59 0.69 Free Float (%) 56.7 Other Broker Recs: B:7 S:0 H:0 3m Avg. Daily Val. (US$m) 2.6 Source of all data on this page: Company, DBS Bank (Hong Kong) ICB Industry: Technology / Software & Computer Services Limited (“DBS HK”), Thomson Reuters
ed-TH / sa- CS /AH Company Guide
HKBN Ltd.
CRITICAL FACTORS TO WATCH Residential broadband sub (k) 875 880 889 871 860 870
Critical Factors 762 Market share stable. HKBN has gained market share from 635 competitors through its aggressive pricing strategy. It has a 508 track record of managing decent ARPU growth over a longer 381 period despite short-term volatility. Going forward, HKBN has 254 switched its focus from sub to revenue market share and 127 started raising tariffs in January 2017. Therefore, we expect to 0 see low single-digit growth rates with stable market share for 2017A 2018A 2019F 2020F 2021F sub numbers in the next few years. Residential broadband ARPU (HK$)
195.0 195.0 199 185.0 ARPU improvement. HKBN has switched its focus from sub to 176.0 168.0 revenue market share and has started to raise tariffs. We 159 estimate that the company can raise the residential broadband 119 service pricing by HK$20-30 per month and the impact will take around three years to be fully reflected in ARPU. We also 80 expect HKBN to continue upselling higher-tier plans' OTT 40 media service and mobile service to its customers. 0 2017A 2018A 2019F 2020F 2021F Expansion into mobile market. HKBN started offering mobile services as a mobile virtual network operator (MVNO) in Mobile sub base (k) September 2016, supported by SMT’s network. As at the end 525 515.0 465.0 of August 2018, it had acquired 265,000 mobile subs. With a 420 variable cost structure, its first sub contract is breaking even, 365.0 315 and the renewal contract will be profitable, i.e. the worst case 265.0 is breakeven. We expect the mobile business to be profitable 210 after FY8/19. 147.0 105
0 2017A 2018A 2019F 2020F 2021F Mobile ARPU (HK$)
147 148 140 140 140
120 119
89
59
30
0 2017A 2018A 2019F 2020F 2021F Source: Company, DBS HK
Page 13 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%+ from FY8/18-8/21. The 0.6 3.50 0.6 company intends to pay out 90-100% of its adjusted free cash 3.00 0.6 flow (AFCF) as dividends. AFCF is derived from core EBITDA 0.5 2.50 adjusted for capex, net interest, non-recurring items, non-cash 0.5 2.00 0.5 items, tax paid and changes in working capital. 1.50 0.5 0.5 1.00 Healthy balance sheet. HKBN had total borrowings of 0.4 0.50 HK$3.9bn with a net debt-to-EBITDA ratio of 3.0x as at end- 0.4 0.00 0.4 FY8/18, which is manageable. 2017A 2018A 2019F 2020F 2021F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure Share Price Drivers: HK$ m Industry-wide tariff hikes in residential broadband market. We 900.0 expect HKT to also increase its residential broadband tariff after 800.0 700.0 it has increased prices in the mobile service market. An 600.0 industry-wide tariff hike in the residential broadband market 500.0 will be positive to HKBN’s share price. 400.0 300.0 200.0 Key Risks: 100.0 0.0 Price war. Competitors irrationally undercutting HKBN's prices 2017A 2018A 2019F 2020F 2021F for a prolonged period. Capital Expenditure (-) ROE Interest rate up-cycle. Any increase in interest rates will reduce 35.0% the AFCF and therefore the dividend distribution. 30.0%
25.0%
Company Background 20.0% HKBN is a broadband service provider in Hong Kong. It is the 15.0% second largest player in the residential segment with a market 10.0% share of c.32%. 5.0%
0.0% 2017A 2018A 2019F 2020F 2021F Forward PE Band (x) 60.6 +2sd: 56.7x
50.6 +1sd: 45.4x 40.6
Avg: 34.2x 30.6
-1sd: 23x 20.6
10.6 -2sd: 11.8x Mar-15 Mar-16 Mar-17 Mar-18 PB Band (x)
12.8 11.8
10.8 +2sd: 10.57x 9.8 8.8 +1sd: 8.99x 7.8 Avg: 7.42x 6.8 5.8 -1sd: 5.85x 4.8 -2sd: 4.28x 3.8 Mar-15 Mar-16 Mar-17 Mar-18 Source: Company, DBS HK
Page 14 Company Guide
HKBN Ltd.
Key Assumptions FY Aug 2017A 2018A 2019F 2020F 2021F Residential broadband sub 871.0 860.0 870.0 875.0 880.0 (k) Residential broadband 168.0 176.0 185.0 195.0 195.0 ARPU (HK$) Mobile sub base (k) 147.0 265.0 365.0 465.0 515.0 Mobile ARPU (HK$) 120.0 147.0 140.0 140.0 140.0 Source: Company, DBS HK Income Statement (HK$ m) FY Aug 2017A 2018A 2019F 2020F 2021F Revenue 3,232 3,949 5,492 7,222 7,589 Cost of Goods Sold (710) (1,247) (1,483) (1,842) (1,935) Gross Profit 2,522 2,702 4,009 5,381 5,654 Other Opng (Exp)/Inc (2,057) (2,096) (2,963) (3,835) (3,946) Operating Profit 465 606 1,046 1,545 1,708 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 2 (1) (1) (1) (1) Net Interest (Exp)/Inc (210) (116) (271) (422) (435) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 257 489 773 1,123 1,272 Tax (86) (92) (172) (255) (282) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 171 397 601 868 990 Net Profit before Except. 171 397 601 868 990 EBITDA 1,043 1,210 1,913 2,689 2,918 Growth Revenue Gth (%) 16.1 22.2 39.1 31.5 5.1 EBITDA Gth (%) 6.2 16.0 58.0 40.6 8.5 Opg Profit Gth (%) (2.2) 30.2 72.7 47.8 10.5 Net Profit Gth (%) (30.1) 132.0 51.4 44.4 14.1 Margins & Ratio Gross Margins (%) 78.0 68.4 73.0 74.5 74.5 Opg Profit Margin (%) 14.4 15.3 19.0 21.4 22.5 Net Profit Margin (%) 5.3 10.1 10.9 12.0 13.1 ROAE (%) 13.7 36.7 16.5 14.2 17.2 ROA (%) 2.6 6.0 5.0 5.0 5.8 ROCE (%) 5.3 8.6 7.3 7.2 8.2 Div Payout Ratio (%) 264.5 141.9 140.7 145.2 148.5 Net Interest Cover (x) 2.2 5.2 3.9 3.7 3.9 Source: Company, DBS HK
Page 15 Company Guide
HKBN Ltd.
Interim Income Statement (HK$ m) FY Aug 2H2016 1H2017 2H2017 1H2018 2H2018
Revenue 1,558 1,535 1,698 1,868 2,081 Cost of Goods Sold (315) (304) (406) (545) (702) Gross Profit 1,244 1,231 1,291 1,323 1,379 Other Oper. (Exp)/Inc (1,018) (1,026) (1,031) (1,008) (1,088) Operating Profit 226 205 260 315 291 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 2 1 0 0 Net Interest (Exp)/Inc (75) (117) (94) (26) (89) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 151 90 167 288 201 Tax (42) (44) (42) (47) (45) Minority Interest 0 0 0 0 0 Net Profit 109 46 125 241 156 Net profit bef Except. 109 46 125 241 156
Growth Revenue Gth (%) 28.3 25.2 8.9 21.7 22.6 Opg Profit Gth (%) (11.7) (17.8) 15.0 53.4 11.9 Net Profit Gth (%) (27.5) (66.0) 14.3 423.4 24.7
Margins Gross Margins (%) 79.8 80.2 76.1 70.8 66.3 Opg Profit Margins (%) 14.5 13.4 15.3 16.8 14.0 Net Profit Margins (%) 7.0 3.0 7.4 12.9 7.5 Source: Company, DBS HK
Balance Sheet (HK$ m) FY Aug 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 2,290 2,294 4,483 4,173 3,777 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 3,418 3,333 11,614 11,456 11,298 Cash & ST Invts 385 373 936 1,080 1,221 Inventory 12 33 34 36 38 Debtors 205 247 260 273 286 Other Current Assets 276 301 316 331 347 Total Assets 6,585 6,581 17,642 17,349 16,968
ST Debt 0 0 0 0 0 Creditors 98 139 146 153 161 Other Current Liab 665 776 790 804 819 LT Debt 3,831 3,874 9,739 9,739 9,739 Other LT Liabilities 863 755 725 695 666 Shareholder’s Equity 1,129 1,037 6,242 5,958 5,583 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 6,585 6,581 17,642 17,349 16,968
Non-Cash Wkg. Capital (270) (334) (326) (318) (309) Net Cash/(Debt) (3,446) (3,500) (8,803) (8,659) (8,518) Debtors Turn (avg days) 19.9 20.9 16.8 13.4 13.4 Creditors Turn (avg days) 283.2 67.2 84.4 78.1 79.0 Inventory Turn (avg days) 86.1 12.7 19.9 18.4 18.6 Asset Turnover (x) 0.5 0.6 0.5 0.4 0.4 Current Ratio (x) 1.2 1.0 1.7 1.8 1.9 Quick Ratio (x) 0.8 0.7 1.3 1.4 1.5 Net Debt/Equity (X) 3.1 3.4 1.4 1.5 1.5 Net Debt/Equity ex MI (X) 3.1 3.4 1.4 1.5 1.5 Capex to Debt (%) 10.5 10.3 8.7 6.9 6.7 Z-Score (X) NA NA NA NA NA Source: Company, DBS HK
Page 16 Company Guide
HKBN Ltd.
Cash Flow Statement (HK$ m) FY Aug 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 257 489 773 1,123 1,272 Dep. & Amort. 578 605 867 1,143 1,210 Tax Paid (123) (116) (194) (276) (303) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (53) 26 (8) (9) (9) Other Operating CF 242 42 262 413 428 Net Operating CF 901 1,046 1,701 2,394 2,598 Capital Exp.(net) (404) (400) (848) (676) (656) 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 42 (90) 1 3 3 Net Investing CF (361) (490) (847) (673) (653) Div Paid (422) (493) (625) (1,152) (1,366) Chg in Gross Debt 21 42 606 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (109) (117) (272) (425) (438) Net Financing CF (511) (568) (292) (1,577) (1,804) Currency Adjustments 1 0 0 0 0 Chg in Cash 30 (12) 563 144 141 Opg CFPS (HK$) 0.95 1.01 1.38 1.62 1.76 Free CFPS (HK$) 0.49 0.64 0.69 1.16 1.31
Source: Company, DBS HK
Page 17 Company Guide
HKBN Ltd.
Target Price & Ratings History
HK$ S.No. Date Closing 12-mth Rating 14.0 Price T arget Price 13.0 6 1: 8-Dec-17 HK$9.90 HK$13.30 Buy 7 2: 5-Jan-18 HK$10.02 HK$13.30 Buy 12.0 4 5 3: 20-Apr-18 HK$10.04 HK$13.40 Buy 4: 4-May-18 HK$11.02 HK$13.40 Buy 11.0 1 3 8 5: 5-Jun-18 HK$11.08 HK$13.90 Buy 2 6: 9-Aug-18 HK$12.16 HK$14.80 Buy 10.0 7: 2-Nov-18 HK$12.04 HK$15.60 Buy 9.0 8: 9-Nov-18 HK$11.44 HK$15.60 Buy
8.0 Jul-18 Jan-18 Jun-18 Oct-18 Feb-18 Apr-18 Sep-18 Dec-17 Nov-17 Nov-18 Nov-18 Mar-18 Aug-18 May-18
Source: DBS HK Analyst: Chris KO CFA, Tsz-Wang TAM, CFA
Page 18 China / Hong Kong Company Guide SmarTone Version 10 | Bloomberg: 315 HK EQUITY | Reuters: 315.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 Dec 2018
BUY Biggest beneficiary of tariff hikes Last Traded Price ( 30 Nov 2018):HK$9.74(HSI : 26,507) Price Target 12-mth:HK$11.80 (21.1% upside) Pure mobile operator with improving pricing outlook. We Analyst expect SmarTone’s (SMT) mobile pricing outlook to improve as Chris KO CFA,+852 36684172, [email protected] HKT (6823 HK), which is the largest mobile operator, has Tsz-Wang TAM, CFA+852 36684195, [email protected] started to raise tariffs. We believe this will lead to an industry- What’s New wide tariff hike. SMT, as a pure mobile operator, will benefit the most. As such, we have a BUY rating on SMT with a TP of • More rational competition after management HK$11.8. changes of major listed telecom operators
• Expect further rounds of industry-wide tariff hikes Where we differ: Expect further rounds of industry-wide tariff in the mobile market hikes. We expect further rounds of industry-wide tariff hikes in the mobile market supported by (1) more rational competition • Expect 5G capex to be gradual and prolonged after recent management changes at major listed telecom • Maintain BUY with TP unchanged for its operators, (2) increasing data usage, and (3) cost pressure from improving mobile pricing outlook higher spectrum utilisation fee (SUF) for the upcoming 900/1800MHz spectrum reassignment. Price Relative HK$ Relative Index Potential catalysts: Tariff hikes by smaller mobile operators. 17.0 16.0 209 Tariff hikes by smaller mobile operators will further ease the 15.0 189 14.0 169 competition after HKT’s increase in mobile pricing. This will 13.0 149 12.0 129 improve the mobile pricing outlook as subsequent rounds of 11.0 109 10.0 industry-wide tariff hikes will be possible. 9.0 89 8.0 69 7.0 49 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Valuation:
SmarTone (LHS) Relative HSI (RHS) Our TP of HK$11.8 is pegged at 20x FY6/19 PE, which is 1SD Forecasts and Valuation higher than its historical average. Our higher target multiple is FY Jun (HK$m) 2018A 2019F 2020F 2021F justified by the company's improving mobile pricing and Turnover 9,988 10,147 10,291 10,569 earnings growth outlook. EBITDA 2,104 2,193 2,263 2,353 Pre-tax Profit 787 839 963 1,018 Net Profit 615 654 750 792 Key Risks to Our View: Net Profit Gth (Pre-ex) (%) (8.5) 6.3 14.6 5.7 EPS (HK$) 0.55 0.59 0.68 0.71 Irrational market competition. Hong Kong's mobile market is EPS Gth (%) (10.2) 6.3 14.6 5.7 crowded with four major players and the entry of HKBN as the Diluted EPS (HK$) 0.55 0.59 0.68 0.71 fifth player (MVNO). Irrational pricing may lead to a price war. DPS (HK$) 0.41 0.44 0.50 0.53 BV Per Share (HK$) 4.27 4.42 4.63 4.82 PE (X) 17.6 16.5 14.4 13.6 New entrant to the market. A new entrant into the mobile P/Cash Flow (X) 4.8 5.3 5.2 5.0 market will intensify the competition and lead to sub losses P/Free CF (X) 6.7 7.3 7.1 6.7 EV/EBITDA (X) 5.4 4.9 4.5 4.7 and pricing pressure for existing players. Net Div Yield (%) 4.2 4.5 5.1 5.4 P/Book Value (X) 2.3 2.2 2.1 2.0 At A Glance Net Debt/Equity (X) 0.1 CASH CASH 0.0 ROAE(%) 13.1 13.4 14.7 14.9 Issued Capital (m shrs) 1,120 Mkt Cap (HK$m/US$m) 10,914 / 1,395 Earnings Rev (%): 0 0 0 Major Shareholders (%) Consensus EPS (HK$) 0.58 0.61 0.63 Other Broker Recs: B:5 S:0 H:4 Cellular 8 Holdings Ltd. 67.4 Free Float (%) 32.6 Source of all data on this page: Company, DBS Bank (Hong Kong) 3m Avg. Daily Val. (US$m) 3.1 Limited (“DBS HK”), Thomson Reuters ICB Industry: Telecommunications / Mobile Telecommunications
ed-TH / sa- CS /AH Company Guide
SmarTone
CRITICAL FACTORS TO WATCH Mobile Sub number (k)
2690 2740 2,767 2590 2390 Critical Factors 2,372 Mobile sub growth. Hong Kong's mobile market is more or less 2060 1,977 matured with low single-digit sub growth in the past two 1,581 years. (1) HKT, (2) Hutchison Telecom (HT, 215 HK), (3) SMT 1,186 and (4) China Mobile Hong Kong (CMHK) and others 791 commanded market shares of c.27%, c.22%, c.16% and 395 c.35% respectively as at end-June 2018. We forecast SMT’s 0 mobile sub base to increase by 8% and 4% in FY6/19 and 2017A 2018A 2019F 2020F 2021F FY6/20 respectively, driven by distribution arrangement with Mobile ARPU (HK$) HKBN and the launch of new digital brand, Birdie. 199 195.0 177.0 162.0 158.0 163.0 Improving mobile pricing outlook. HKT, the largest mobile 159 operator, has raised the mobile tariffs for its speed-capped plan 119 and unlimited data plan. This ends the price war in the mobile market which began in 2H16. We believe this will lead to an 80 industry-wide tariff hike. SMT, as a pure mobile operator, will 40 benefit the most and improve its mobile pricing outlook. As its sub net-adds will be mainly lower-end subs over the next few 0 2017A 2018A 2019F 2020F 2021F years, its overall mobile ARPU will be diluted. Source: Company, DBS HK Availability of “star” handsets. Availability of “star” handsets could result in higher handset sales volumes and margins. Mobile operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans. We believe the benefits from the launch of new iPhone models XS, XS Max and XR will be limited as there are no major new features.
Page 20 Company Guide
SmarTone
Balance Sheet: Healthy balance sheet to support steady dividend per share. Leverage & Asset Turnover (x) 1.1 SMT had a healthy balance sheet with a net gearing of 1% as 0.60 at the end of FY6/18. We believe 5G capex will be gradual and 1.1 0.50 prolonged, which will result in relatively stable capex in the 1.0 next few years. It has a dividend policy with 75% payout ratio. 0.40 1.0 0.30
Share Price Drivers: 0.20 0.9
Tariff hikes by smaller mobile operators. Tariff hikes by smaller 0.10 0.9 mobile operators will further ease the competition after HKT’s 0.00 0.8 increase in mobile pricing. This will improve the mobile pricing 2017A 2018A 2019F 2020F 2021F outlook as subsequent rounds of industry-wide tariff hikes will Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure be possible. HK$ m 640.0 Key Risks: 620.0 Irrational market competition. Hong Kong's mobile market is 600.0 crowded with four major players and the entry of HKBN as the 580.0 fifth player (MVNO). Irrational pricing may lead to a price war. 560.0 540.0 New entrant to the market. A new entrant into the mobile 520.0 500.0 market will intensify the competition and lead to sub losses 2017A 2018A 2019F 2020F 2021F and pricing pressure for existing players. Capital Expenditure (-) ROE
Company Background 14.0%
SmarTone (SMT) is a mobile operator in Hong Kong focusing 12.0% on the high-end customer segment. It has a c.16% mobile 10.0% sub market share and also provides fixed-line broadband 8.0% services through a partnership with HKBN. Its major 6.0% shareholder is Sun Hung Kai Properties. 4.0%
2.0%
0.0% 2017A 2018A 2019F 2020F 2021F Forward PE Band (x) 25.5
23.5 +2sd: 22.3x 21.5
19.5 +1sd: 20x
17.5 Avg: 17.7x
15.5 -1sd: 15.4x
13.5 -2sd: 13.1x
11.5 Dec-14 Dec-15 Dec-16 Dec-17 PB Band (x) 4.8
4.3 +2sd: 4.31x
3.8 +1sd: 3.6x 3.3
2.8 Avg: 2.89x
2.3 -1sd: 2.17x 1.8 -2sd: 1.46x 1.3 Dec-14 Dec-15 Dec-16 Dec-17 Source: Company, DBS HK
Page 21 Company Guide
SmarTone
Key Assumptions FY Jun 2017A 2018A 2019F 2020F 2021F Mobile Sub number (k) 2,060.0 2,390.0 2,590.0 2,690.0 2,740.0 Mobile ARPU (HK$) 195.0 177.0 162.0 158.0 163.0 Source: Company, DBS HK
Income Statement (HK$ m) FY Jun 2017A 2018A 2019F 2020F 2021F Revenue 8,715 9,988 10,147 10,291 10,569 Cost of Goods Sold (3,504) (4,867) (4,865) (4,865) (4,865) Gross Profit 5,211 5,121 5,282 5,426 5,704 Other Opng (Exp)/Inc (4,324) (4,307) (4,413) (4,447) (4,685) Operating Profit 887 814 869 979 1,020 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (44) (27) (30) (16) (1) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 843 787 839 963 1,018 Tax (177) (180) (193) (222) (234) Minority Interest 6 8 8 8 8 Preference Dividend 0 0 0 0 0 Net Profit 672 615 654 750 792 Net Profit before Except. 672 615 654 750 792 EBITDA 2,255 2,104 2,193 2,263 2,353 Growth Revenue Gth (%) (52.5) 14.6 1.6 1.4 2.7 EBITDA Gth (%) (11.8) (6.7) 4.2 3.2 4.0 Opg Profit Gth (%) (11.2) (8.2) 6.7 12.7 4.2 Net Profit Gth (%) (15.7) (8.5) 6.3 14.6 5.7 Margins & Ratio Gross Margins (%) 59.8 51.3 52.1 52.7 54.0 Opg Profit Margin (%) 10.2 8.2 8.6 9.5 9.6 Net Profit Margin (%) 7.7 6.2 6.4 7.3 7.5 ROAE (%) 15.1 13.1 13.4 14.7 14.9 ROA (%) 6.7 6.2 6.5 7.3 7.6 ROCE (%) 9.1 8.2 8.7 9.6 9.8 Div Payout Ratio (%) 98.0 74.5 75.0 75.0 75.0 Net Interest Cover (x) 20.1 29.8 29.4 62.5 876.8 Source: Company, DBS HK
Page 22 Company Guide
SmarTone
Interim Income Statement (HK$ m) FY Jun 2H2016 1H2017 2H2017 1H2018 2H2018
Revenue 8,127 5,372 3,343 4,108 5,881 Cost of Goods Sold (5,391) (2,655) (849) (1,547) (3,320) Gross Profit 2,736 2,717 2,494 2,560 2,561 Other Oper. (Exp)/Inc (2,219) (2,190) (2,093) (2,107) (2,168) Operating Profit 518 527 401 453 394 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (42) (41) (44) (35) (24) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 476 486 357 418 369 Tax (88) (97) (81) (93) (86) Minority Interest 6 4 2 4 4 Net Profit 394 393 279 328 287 Net profit bef Except. 394 393 279 328 287
Growth Revenue Gth (%) (18.6) (47.5) (58.9) (23.5) 75.9 Opg Profit Gth (%) (16.6) (10.1) (22.5) (14.1) (1.9) Net Profit Gth (%) (15.9) (2.3) (29.3) (16.6) 3.0
Margins Gross Margins (%) 33.7 50.6 74.6 62.3 43.6 Opg Profit Margins (%) 6.4 9.8 12.0 11.0 6.7 Net Profit Margins (%) 4.9 7.3 8.3 8.0 4.9 Source: Company, DBS HK
Balance Sheet (HK$ m) FY Jun 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 3,083 2,982 2,929 2,875 2,823 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 4,401 4,126 3,757 3,430 4,584 Cash & ST Invts 1,322 1,915 2,472 3,052 2,184 Inventory 182 161 161 161 161 Debtors 321 365 372 379 387 Other Current Assets 467 469 469 469 469 Total Assets 9,776 10,018 10,161 10,366 10,609
ST Debt 134 136 136 136 136 Creditors 357 522 532 543 554 Other Current Liab 1,694 1,840 1,863 1,878 1,901 LT Debt 2,557 2,295 2,295 2,295 2,295 Other LT Liabilities 399 395 336 297 299 Shareholder’s Equity 4,594 4,799 4,974 5,201 5,417 Minority Interests 41 33 25 17 9 Total Cap. & Liab. 9,776 10,018 10,161 10,366 10,609
Non-Cash Wkg. Capital (1,082) (1,366) (1,393) (1,411) (1,437) Net Cash/(Debt) (1,369) (516) 41 621 (246) Debtors Turn (avg days) 12.5 12.5 13.3 13.3 13.2 Creditors Turn (avg days) 79.9 44.8 54.3 54.8 56.6 Inventory Turn (avg days) 44.6 17.5 16.6 16.5 16.7 Asset Turnover (x) 0.9 1.0 1.0 1.0 1.0 Current Ratio (x) 1.0 1.2 1.4 1.6 1.2 Quick Ratio (x) 0.8 0.9 1.1 1.3 1.0 Net Debt/Equity (X) 0.3 0.1 CASH CASH 0.0 Net Debt/Equity ex MI (X) 0.3 0.1 CASH CASH 0.0 Capex to Debt (%) 21.4 25.6 22.6 22.6 22.6 Z-Score (X) 3.3 3.4 3.3 3.3 NA Source: Company, DBS HK
Page 23 Company Guide
SmarTone
Cash Flow Statement (HK$ m) FY Jun 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 843 787 839 963 1,018 Dep. & Amort. 1,107 989 1,039 999 975 Tax Paid (313) (132) (193) (222) (234) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (151) 313 52 42 27 Other Operating CF 263 273 301 297 369 Net Operating CF 1,750 2,231 2,039 2,079 2,156 Capital Exp.(net) (575) (623) (550) (550) (550) Other Invts.(net) (2,783) (577) (400) (374) (310) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 434 239 (53) (53) (1,587) Net Investing CF (2,925) (961) (1,003) (977) (2,447) Div Paid (306) (147) (479) (523) (577) Chg in Gross Debt (185) (281) 0 0 0 Capital Issues (266) 0 0 0 0 Other Financing CF 178 (263) 0 0 0 Net Financing CF (579) (691) (479) (523) (577) Currency Adjustments 3 7 0 0 0 Chg in Cash (1,752) 585 557 580 (868) Opg CFPS (HK$) 1.75 1.73 1.79 1.84 1.92 Free CFPS (HK$) 1.08 1.45 1.34 1.38 1.45
Source: Company, DBS HK
Target Price & Ratings History
HK$ S.No. Date Closing 12-mth Rating 12.0 Price T arget 11.5 Price 11.0 1: 8-Dec-17 HK$9.26 HK$7.30 Fully Valued 2: 5-Jan-18 HK$9.37 HK$7.30 Fully Valued 10.5 7 3: 14-Feb-18 HK$8.53 HK$7.30 Fully Valued 10.0 1 4: 5-Mar-18 HK$8.30 HK$7.30 Fully Valued 9.5 5 5: 5-Jun-18 HK$8.65 HK$7.80 Hold 9.0 2 6: 6-Sep-18 HK$7.88 HK$8.10 Hold 8.5 7: 20-Sep-18 HK$9.54 HK$11.80 Buy 3 8.0 4 6 7.5 7.0 Jul-18 Jan-18 Jun-18 Oct-18 Feb-18 Apr-18 Sep-18 Dec-17 Nov-17 Nov-18 Nov-18 Mar-18 Aug-18 May-18
Source: DBS HK Analyst: Chris KO CFA, Tsz-Wang TAM, CFA
Page 24 China / Hong Kong Company Guide HKT Trust Version 8 | Bloomberg: 6823 HK Equity | Reuters: 6823.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 Dec 2018
BUY The tariff hike leader Last Traded Price ( 30 Nov 2018):HK$11.32(HSI : 26,507) Incumbent operator with attractive dividend yield. We have a Price Target 12-mth:HK$14.90 (31.6% upside) (Prev HK$13.10) BUY rating on HKT Trust (HKT), with a TP of HK$14.9. HKT Analyst offers a dividend yield of c.6% with potential upside from tariff Chris KO CFA,+852 36684172, [email protected] hikes in the mobile and residential broadband markets. It is an Tsz-Wang TAM, CFA+852 36684195, [email protected] incumbent player in the fixed-line segment and became the What’s New largest mobile operator after merging with CSL in FY14. HKT • More rational competition after management intends to pay out 100% of its adjusted fund flow (AFF) which changes of major listed telecom operators is expected to register steady growth from FY18-20. • Expect further rounds of industry-wide tariff hikes Where we differ: Expecting further rounds of industry-wide in the mobile market tariff hikes. HKT has raised its tariffs for mobile service plans to • Revised our adjusted fund flow forecast by end the price war which began in 2H16. We expect further 1%/6%/8% for FY18-20 respectively mainly due to rounds of industry-wide tariff hikes in the mobile market higher mobile ARPU and lower cost assumptions supported by (1) more rational competition after recent management changes at major listed telecom operators, (2) • Maintain BUY with a higher TP of HK$14.9 for its increasing data usage, and (3) cost pressure from higher attractive yield and steady growth spectrum utilisation fee (SUF) for the upcoming 900/1800MHz spectrum reassignment. Price Relative Potential catalysts: Tariff hikes by smaller mobile operators. Tariff hikes by smaller mobile operators will further ease the competition after HKT’s increase in mobile pricing. This will improve the mobile ARPU outlook as subsequent rounds of industry-wide tariff hikes will be possible.
Valuation: Our TP of HK$14.9 is based on DDM assuming 6.9% cost of equity and 1% terminal growth rate. Forecasts and Valuation FY Dec (HK$m) 2017A 2018F 2019F 2020F Turnover 33,258 38,190 38,524 39,183 Key Risks to Our View: EBITDA 12,841 12,888 13,335 13,696 Irrational market competition. Hong Kong’s mobile market is Pre-tax Profit 6,080 6,103 6,527 6,857 crowded with four major players and the entry of HKBN as a Net Profit 5,097 4,974 5,322 5,592 Net Profit Gth (Pre-ex) (%) 4.3 (2.4) 7.0 5.1 fifth player (MVNO), the penetration is more or less saturated. EPS (HK$) 0.67 0.66 0.70 0.74 Irrational pricing may lead to a price war. EPS Gth (%) 4.2 (2.4) 7.0 5.1 Diluted EPS (HK$) 0.67 0.66 0.70 0.74 Interest rate upcycle. Any increase in interest rates will reduce DPS (HK$) 0.65 0.68 0.72 0.76 BV Per Share (HK$) 5.15 5.10 5.10 5.10 the AFF and therefore the dividend distribution. PE (X) 16.8 17.2 16.1 15.3 P/Cash Flow (X) 7.1 7.3 7.1 6.9 At A Glance P/Free CF (X) 9.0 9.4 9.1 8.8 Issued Capital (m shrs) 7,572 EV/EBITDA (X) 9.5 9.3 8.8 8.4 Mkt Cap (HK$m/US$m) 85,712 / 10,956 Net Div Yield (%) 5.7 6.0 6.4 6.7 Major Shareholders (%) P/Book Value (X) 2.2 2.2 2.2 2.2 Net Debt/Equity (X) 0.9 0.9 0.8 0.8 PCCW Ltd 52.0 ROAE(%) 13.0 12.8 13.8 14.5 Free Float (%) 48.0 DPS Rev (%): 1 6 8 3m Avg. Daily Val. (US$m) 13.9 Consensus EPS (HK$) 0.67 0.69 0.71 ICB Industry: Telecommunications / Fixed Line Telecommunications Other Broker Recs: B:9 S:0 H:2 Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters
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 been largely 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.
Fixed-line ARPU improvement. We believe that smaller operators HGC and i-Cable (1097 HK)) have lost their Broadband sub growth (%) competitiveness and therefore pricing power. The residential broadband market is effectively dominated by two players, HKBN (1310 HK) 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.
Improving mobile ARPU outlook. HKT, the largest mobile operator, has raised the mobile tariffs for its speed-capped plan and unlimited data plan. We expect more rounds of industry- wide tariff hike in the mobile market supported by (1) more Mobile sub growth (%) rational competition after recent management changes at major listed telecom operators, (2) increasing data usage, and (3) cost pressure from higher spectrum utilisation fee (SUF) for 900/1800MHz spectrum reassignment.
Mobile sub growth. Hong Kong's mobile market is more or less matured with low single-digit sub growth in the past two years. (1) HKT, (2) Hutchison Telecom (HT, 215 HK), (3) SmarTone (SMT, 315 HK) and (4) China Mobile Hong Kong (CMHK) and others commanded market shares of c.27%, Mobile ARPU c.22%, c.16% and c.35% respectively as at end-June 2018. We forecast HKT’s mobile base to decline by a low single-digit rate in the next two years as it leads industry-wide tariff hikes.
EBITDA margin (%)
Source: Company, DBS HK
Page 26 Company Guide
HKT Trust
Balance Sheet: Healthy financials with a debt-to-EBITDA ratio of 3.0x. HKT had Leverage & Asset Turnover (x) 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: Tariff hikes by smaller mobile operators. Tariff hikes by smaller mobile operators will further ease the competition after HKT’s increase in mobile pricing. This will improve the mobile ARPU Capital Expenditure outlook as subsequent rounds of industry-wide tariff hike will be possible.
Industry-wide tariff hikes in the residential broadband market. The residential broadband market is a duopoly dominated by HKT and HKBN. HKBN announced that it would focus on revenue market share and raise tariffs for residential broadband services. An industry-wide tariff hike in the residential broadband market will be positive to HKT’s share price.
Key Risks: ROE 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.
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, Forward PE Band 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.
PB Band
Source: Company, DBS HK
Page 27 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 170.0 173.0 183.0 183.0 188.0 EBITDA margin (%) 37.5 39.1 33.7 34.6 35.0 Source: Company, DBS HK
Income Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 33,847 33,258 38,190 38,524 39,183 Cost of Goods Sold (14,445) (14,161) (19,487) (19,381) (19,601) Gross Profit 19,402 19,097 18,703 19,144 19,582 Other Opng (Exp)/Inc (12,523) (11,786) (11,462) (11,484) (11,614) Operating Profit 6,879 7,311 7,241 7,660 7,967 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) (1,128) (1,123) (1,100) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 5,698 6,080 6,103 6,527 6,857 Tax (771) (971) (1,099) (1,175) (1,234) Minority Interest (38) (12) (30) (30) (30) Preference Dividend 0 0 0 0 0 Net Profit 4,889 5,097 4,974 5,322 5,592 Net Profit before Except. 4,889 5,097 4,974 5,322 5,592 EBITDA 12,613 12,841 12,888 13,335 13,696 Growth Revenue Gth (%) (2.5) (1.7) 14.8 0.9 1.7 EBITDA Gth (%) 4.3 1.8 0.4 3.5 2.7 Opg Profit Gth (%) 16.5 6.3 (1.0) 5.8 4.0 Net Profit Gth (%) 23.8 4.3 (2.4) 7.0 5.1 Margins & Ratio Gross Margins (%) 57.3 57.4 49.0 49.7 50.0 Opg Profit Margin (%) 20.3 22.0 19.0 19.9 20.3 Net Profit Margin (%) 14.4 15.3 13.0 13.8 14.3 ROAE (%) 12.7 13.0 12.8 13.8 14.5 ROA (%) 5.3 5.4 5.2 5.5 5.8 ROCE (%) 7.4 7.4 7.1 7.5 7.7 Div Payout Ratio (%) 95.8 96.4 103.6 103.0 102.3 Net Interest Cover (x) 6.2 6.8 6.4 6.8 7.2 Source: Company, DBS HK
Page 28 Company Guide
HKT Trust
Interim Income Statement (HK$ m) FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 16,388 17,459 15,211 18,047 17,022 Cost of Goods Sold (6,973) (7,472) (7,124) (7,037) (8,858) Gross Profit 9,415 9,987 8,087 11,010 8,164 Other Oper. (Exp)/Inc (6,375) (6,148) (5,222) (6,564) (5,224) Operating Profit 3,040 3,839 2,865 4,446 2,940 Other Non Opg (Exp)/Inc 9 (60) (2) (143) (2) Associates & JV Inc (8) (15) 7 (17) (6) Net Interest (Exp)/Inc (483) (624) (560) (516) (626) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2,558 3,140 2,310 3,770 2,306 Tax (231) (540) (161) (810) (423) Minority Interest (10) (28) (10) (2) (15) Net Profit 2,317 2,572 2,139 2,958 1,868 Net profit bef Except. 2,317 2,572 2,139 2,958 1,868
Growth Revenue Gth (%) 2.6 (6.9) (7.2) 3.4 11.9 Opg Profit Gth (%) 17.9 15.5 (5.8) 15.8 2.6 Net Profit Gth (%) 30.3 18.5 (7.7) 15.0 (12.7)
Margins Gross Margins (%) 57.5 57.2 53.2 61.0 48.0 Opg Profit Margins (%) 18.6 22.0 18.8 24.6 17.3 Net Profit Margins (%) 14.1 14.7 14.1 16.4 11.0 Source: Company, DBS HK
Balance Sheet (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 18,272 19,626 19,540 19,430 19,274 Invts in Associates & JVs 855 720 722 724 726 Other LT Assets 61,794 62,187 60,181 58,179 56,185 Cash & ST Invts 2,882 3,217 5,101 7,392 9,697 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 Total Assets 93,366 95,365 95,668 96,387 97,114
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 6,062 6,649 7,251 Shareholder’s Equity 39,096 39,019 38,633 38,637 38,629 Minority Interests 63 40 70 100 130 Total Cap. & Liab. 93,366 95,365 95,668 96,387 97,114
Non-Cash Wkg. Capital (1,739) (2,048) (1,632) (1,192) (726) Net Cash/(Debt) (35,311) (35,929) (34,045) (31,754) (29,449) Debtors Turn (avg days) 34.8 31.9 27.6 29.2 30.8 Creditors Turn (avg days) 98.6 93.6 50.7 53.8 55.8 Inventory Turn (avg days) 27.6 31.3 20.3 21.5 22.3 Asset Turnover (x) 0.4 0.4 0.4 0.4 0.4 Current Ratio (x) 1.1 1.1 1.3 1.5 1.8 Quick Ratio (x) 0.5 0.5 0.7 0.9 1.1 Net Debt/Equity (X) 0.9 0.9 0.9 0.8 0.8 Net Debt/Equity ex MI (X) 0.9 0.9 0.9 0.8 0.8 Capex to Debt (%) 7.4 6.6 6.6 6.6 6.6 Z-Score (X) 2.0 2.0 2.1 2.0 2.0 Source: Company, DBS HK
Page 29 Company Guide
HKT Trust
Cash Flow Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 5,698 6,080 6,103 6,527 6,857 Dep. & Amort. 5,808 5,685 5,657 5,685 5,739 Tax Paid (551) (711) (824) (881) (926) 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 1,160 1,174 1,174 Net Operating CF 12,262 12,142 11,669 12,053 12,366 Capital Exp.(net) (2,835) (2,602) (2,600) (2,600) (2,600) Other Invts.(net) (4,254) (4,755) (955) (963) (980) 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 Net Investing CF (7,934) (7,457) (3,555) (3,563) (3,580) Div Paid (4,190) (4,759) (5,360) (5,318) (5,601) Chg in Gross Debt (208) 625 0 0 0 Capital Issues (53) 0 0 0 0 Other Financing CF (756) (226) (870) (881) (881) Net Financing CF (5,207) (4,360) (6,230) (6,199) (6,482) Currency Adjustments (7) 10 0 0 0 Chg in Cash (886) 335 1,884 2,291 2,305 Opg CFPS (HK$) 1.65 1.67 1.60 1.65 1.70 Free CFPS (HK$) 1.25 1.26 1.20 1.25 1.29
Source: Company, DBS HK
Target Price & Ratings History
S.No. Date Closing 12-mth Rating HK$ 12.0 Price T arget Price 11.5 1: 8-Dec-17 HK$9.79 HK$12.60 Buy 4 2: 5-Jan-18 HK$9.96 HK$12.60 Buy 11.0 3 3: 5-Jun-18 HK$9.91 HK$12.80 Buy 1 4: 7-Aug-18 HK$10.42 HK$13.10 Buy 10.5 2
10.0
9.5
9.0 Jul-18 Jan-18 Jun-18 Oct-18 Feb-18 Apr-18 Sep-18 Dec-17 Nov-17 Nov-18 Nov-18 Mar-18 Aug-18 May-18
Source: DBS HK Analyst: Chris KO CFA, Tsz-Wang TAM, CFA
Page 30 China / Hong Kong Company Guide Hutchison Telecom Version 13 | Bloomberg: 215 HK Equity | Reuters: 0215.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 Dec 2018 HOLD All eyes on cash utilisation Last Traded Price ( 30 Nov 2018):HK$2.94(HSI : 26,507) Price Target 12-mth:HK$3.30 (12.2% upside) (Prev HK$3.10) Sitting on huge cash. Hutchison Telecom (HT) has now become a pure mobile operator after the sale of its fixed-line assets. Analyst Despite an improving outlook for mobile ARPU, we have a Chris KO CFA,+852 36684172, [email protected] Tsz-Wang TAM, CFA+852 36684195, [email protected] HOLD rating on the company, due to the uncertainty on the What’s New utilisation of cash proceeds from the fixed-line asset disposal. The cash proceed accounts for c.70% of the company’s market • More rational competition after management capitalisation. changes of major listed telecom operators
• Expect further rounds of industry-wide tariff hikes Where we differ: Expect further rounds of industry-wide tariff in the mobile market hikes. We expect further rounds of industry-wide tariff hikes in the mobile market supported by (1) more rational competition • Revised up our earnings forecast by 1%/2%/2% after recent management changes at major listed telecom for FY18-20 respectively mainly due to higher operators, (2) increasing data usage, and (3) cost pressure from mobile ARPU assumptions higher spectrum utilisation fee (SUF) for the upcoming • Maintain HOLD despite a higher TP of HK$3.30, 900/1800MHz spectrum reassignment. due to uncertainty on the utilisation of the cash proceeds from fixed-line asset disposal Potential catalysts: Distributing the cash proceeds. The market is now focusing on how the company will utilise the HK$10bn, or Price Relative HK$2.1 per share, cash proceeds from the fixed-line asset disposal. Distributing the cash proceeds to shareholders will be positive to share price.
Valuation: Our TP is based on SOTP: (1) HK$1.0 per share for mobile business based on 6x EV/EBITDA, and (2) HK$2.1 net cash per share.
Forecasts and Valuation Key Risks to Our View: FY Dec (HK$m) 2017A 2018F 2019F 2020F Irrational market competition (downside risk). Hong Kong's Turnover 6,752 6,731 6,697 6,733 mobile market is crowded with four major players and the EBITDA 7,130 1,283 1,249 1,260 Pre-tax Profit 4,066 571 544 557 entry of HKBN as the fifth player (MVNO), and is more or less Net Profit 4,766 382 364 372 saturated. Irrational pricing may lead to a price war. Net Profit Gth (Pre-ex) (%) 598.8 (92.0) (4.7) 2.4 EPS (HK$) 0.99 0.08 0.08 0.08 EPS Gth (%) 598.8 (92.0) (4.7) 2.4 Privatisation potential (upside risk). A privatisation is possible Diluted EPS (HK$) 0.99 0.08 0.08 0.08 with the large cash proceeds from the sale of fixed-line asset. DPS (HK$) 0.74 0.06 0.06 0.06 BV Per Share (HK$) 3.29 3.30 3.32 3.34 PE (X) 3.0 37.1 39.0 38.0 At A Glance P/Cash Flow (X) 7.3 11.9 12.1 12.0 Issued Capital (m shrs) 4,819 P/Free CF (X) 15.2 20.6 21.2 20.9 Mkt Cap (HK$m/US$m) 14,168 / 1,811 EV/EBITDA (X) 0.6 3.3 3.2 3.0 Net Div Yield (%) 25.2 2.0 1.9 2.0 Major Shareholders (%) P/Book Value (X) 0.9 0.9 0.9 0.9 Li (Ka Shing) 8.4 Net Debt/Equity (X) CASH CASH CASH CASH Free Float (%) 91.6 ROAE(%) 34.9 2.4 2.3 2.3 3m Avg. Daily Val. (US$m) 1.7 Earnings Rev (%): 1 2 2 ICB Industry: Telecommunications / Mobile Telecommunications Consensus EPS (HK$) 0.08 0.08 0.09 Other Broker Recs: B:3 S:1 H:3 Source of all data on this page: Company, DBS Bank (Hong Kong) Limited (“DBS HK”), Thomson Reuters
ed-TH/ sa- CS /AH Company Guide
Hutchison Telecom
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. (1) HKT (6823 HK), (2) HT, (3) SmarTone (SMT, 315 HK) and (4) China Mobile Hong Kong (CMHK) and others commanded market shares of c.27%, c.21%, c.16% and 35% respectively as at end-June 2018. We forecast HT’s mobile base to decline by a low single-digit rate in the next two years due to a more crowded market. Mobile ARPU (HK$)
Improving mobile ARPU outlook. HKT, the largest mobile operator, has raised the mobile tariffs for its speed-capped plan and unlimited data plan. This ends the price war in the mobile market since 2H16. We believe this will also lead to an industry-wide tariff hike. We expect HT's mobile ARPU to stabilise in the next few years from previous declining trend.
Availability 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 HK raise the tariffs for handset-bundled mobile data plans. We believe the benefits from the launch of new iPhone models XS, XS Max and XR will be limited as there are no major new features.
Page 32 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. We estimate that the company will have a net cash position of c.HK$10bn (or HK$2.1 per share) by the end of FY18.
Share Price Drivers: Distributing the cash proceeds. The market is now focusing on how the company will utilise the HK$10bn (or HK$2.1 per share) of cash proceeds from the fixed-line asset disposal. Distributing the cash proceeds to shareholders will be positive to its share price. Capital Expenditure Tariff hikes by smaller mobile operators. Tariff hikes by smaller mobile operators will further ease the competition after HKT’s increase in mobile pricing. This will improve the mobile ARPU outlook as subsequent rounds of industry-wide tariff hikes will be possible.
Key Risks: Irrational market competition (downside risk). Hong Kong's mobile market is crowded with four major players and the entry of HKBN as the fifth player (MVNO), and is more or less ROE saturated. Irrational pricing may lead to a price war.
Privatisation (upside risk). HT has become a pure mobile operator after the sale of its fixed-line assets. In the absence of any asset injection or acquisition plans, privatisation is possible.
Company Background Hutchison Telecom (HT) is an integrated telecom service provider in Hong Kong, operating under the brand “3 Hong Forward PE Band Kong”. It has a c.20% mobile sub market share. Its major shareholder is CK Hutchison Holdings Limited.
PB Band
Source: Company, DBS HK
Page 33 Company Guide
Hutchison Telecom
Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Mobile sub number (k) 3,222.0 3,328.0 3,313.0 3,313.0 3,332.0 Mobile ARPU (HK$) 105.0 98.0 96.0 96.0 96.0 Source: Company, DBS HK
Income Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 8,332 6,752 6,731 6,697 6,733 Cost of Goods Sold (4,313) (2,841) (2,856) (2,856) (2,856) Gross Profit 4,019 3,911 3,875 3,841 3,877 Other Opng (Exp)/Inc (3,487) (5,714) (3,406) (3,408) (3,431) Operating Profit 532 (1,803) 470 433 446 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 4,066 571 544 557 Tax (78) 288 (94) (90) (92) Minority Interest (72) 412 (95) (91) (93) Preference Dividend 0 0 0 0 0 Net Profit 682 4,766 382 364 372 Net Profit before Except. 682 4,766 382 364 372 EBITDA 1,643 7,130 1,283 1,249 1,260 Growth Revenue Gth (%) (62.2) (19.0) (0.3) (0.5) 0.5 EBITDA Gth (%) (40.3) 334.0 (82.0) (2.6) 0.9 Opg Profit Gth (%) (62.8) (438.9) (126.0) (7.8) 3.0 Net Profit Gth (%) (25.5) 598.8 (92.0) (4.7) 2.4 Margins & Ratio Gross Margins (%) 48.2 57.9 57.6 57.4 57.6 Opg Profit Margin (%) 6.4 (26.7) 7.0 6.5 6.6 Net Profit Margin (%) 8.2 70.6 5.7 5.4 5.5 ROAE (%) 5.9 34.9 2.4 2.3 2.3 ROA (%) 3.2 21.5 1.8 1.9 2.0 ROCE (%) 2.8 (9.5) 2.1 2.2 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 HK
Page 34 Company Guide
Hutchison Telecom
Interim Income Statement (HK$ m) FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 5,369 6,655 3,117 3,635 4,021 Cost of Goods Sold (1,478) (2,833) (1,156) (1,685) (2,156) Gross Profit 3,891 3,822 1,961 1,950 1,865 Other Oper. (Exp)/Inc (3,356) (3,313) (1,755) (3,959) (1,681) Operating Profit 535 509 206 (2,009) 184 Other Non Opg (Exp)/Inc 0 0 212 5,723 0 Associates & JV Inc (2) (19) (3) (3) (2) Net Interest (Exp)/Inc (54) (41) (37) (23) 79 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 479 449 378 3,688 261 Tax (78) (77) (35) 323 (42) Minority Interest (39) (33) (19) 431 (21) Net Profit 362 339 324 4,442 198 Net profit bef Except. 362 339 324 4,442 198
Growth Revenue Gth (%) (51.3) (39.6) (41.9) (45.4) 29.0 Opg Profit Gth (%) (32.2) (20.6) (61.5) (494.7) (10.7) Net Profit Gth (%) (28.7) (16.7) (10.5) 1,210.3 (38.9)
Margins Gross Margins (%) 72.5 57.4 62.9 53.6 46.4 Opg Profit Margins (%) 10.0 7.6 6.6 (55.3) 4.6 Net Profit Margins (%) 6.7 5.1 10.4 122.2 4.9 Source: Company, DBS HK
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 5,072 4,817 4,564 Cash & ST Invts 357 13,717 10,082 10,435 10,802 Inventory 127 125 125 125 125 Debtors 1,753 950 969 988 1,008 Other Current Assets 0 0 0 0 0 Total Assets 21,749 22,492 18,773 18,969 19,183
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 15,906 15,989 16,086 Minority Interests 583 111 206 297 390 Total Cap. & Liab. 21,749 22,492 18,773 18,969 19,183
Non-Cash Wkg. Capital (2,254) (1,232) (1,236) (1,240) (1,244) Net Cash/(Debt) (4,110) 9,817 10,082 10,435 10,802 Debtors Turn (avg days) 78.2 73.1 52.0 53.3 54.1 Creditors Turn (avg days) 394.7 (6,545.4) 415.1 419.8 423.7 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) 4.1 4.4 4.4 4.4 4.4 Source: Company, DBS HK
Page 35 Company Guide
Hutchison Telecom
Cash Flow Statement (HK$ m) FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 909 4,137 571 544 557 Dep. & Amort. 1,508 3,583 819 822 821 Tax Paid (7) (5) (94) (90) (92) 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) Net Operating CF 2,453 1,943 1,189 1,169 1,178 Capital Exp.(net) (1,127) (1,013) (500) (500) (500) Other Invts.(net) (1,777) 0 (222) (152) (153) 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 Net Investing CF (3,008) 13,141 (605) (534) (536) Div Paid (626) (520) (319) (281) (275) 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 Net Financing CF (189) (1,724) (4,219) (281) (275) Currency Adjustments 0 0 0 0 0 Chg in Cash (744) 13,360 (3,635) 353 367 Opg CFPS (HK$) 0.51 0.43 0.25 0.24 0.24 Free CFPS (HK$) 0.28 0.19 0.14 0.14 0.14
Source: Company, DBS HK
Target Price & Ratings History
S.No. Date Closing 12-mth Rating HK$ 4.0 Price T arget 3.8 Price 3.6 1: 8-Dec-17 HK$2.89 HK$3.10 Hold 2: 5-Jan-18 HK$3.11 HK$3.10 Hold 3.4 3: 5-Jun-18 HK$2.81 HK$3.10 Hold 3.2 3 1 4 4: 26-Jul-18 HK$2.91 HK$3.10 Hold 3.0 2 2.8 2.6 2.4 2.2 2.0 Jul-18 Jan-18 Jun-18 Oct-18 Feb-18 Apr-18 Sep-18 Dec-17 Nov-17 Nov-18 Nov-18 Mar-18 Aug-18 May-18
Source: DBS HK Analyst: Chris KO CFA, Tsz-Wang TAM, CFA
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DBS HK 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
Completed Date: 3 Dec 2018 11:29:38 (HKT) Dissemination Date: 3 Dec 2018 16:02:36 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“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 DBS 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 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, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in 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 their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc (“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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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 the report. The research analyst (s) primarily responsible for the content of this research report, in part or in 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 in 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 banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Hkt Trust & Hkt Limited (6823 HK), Hutchison Telecommunications Hong Kong Holdings Limited (215 HK), Hkbn Limited (1310 HK), China Mobile Limited (941 HK), China Unicom (Hong Kong) Limited (762 HK) and China Telecom Corporation Limited (728 HK) recommended in this report as of 29 Nov 2018.
DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Singapore Telecommunications Limited (ST SP) and Starhub Limited (STH SP) recommended in this report as of 31 Oct 2018.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from The Wharf Holdings Limited (4 HK), Singapore Telecommunications Limited (ST SP) and Xl Axiata Terbuka (EXCL IJ) as of 31 Oct 2018.
DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from The Wharf Holdings Limited (4 HK) and Xl Axiata Terbuka (EXCL IJ) as of 31 Oct 2018.
4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for The Wharf Holdings Limited (4 HK), Singapore Telecommunications Limited (ST SP) and Xl Axiata Terbuka (EXCL IJ) in the past 12 months, as of 31 Oct 2018.
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. Nihal Vijaya Devadas Kaviratne CBE, Director of DBS Group Holdings, is a Director of Starhub Limited as of 30 Sep 2018.
6. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, 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, DBS HK, DBSVS, 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 the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Wong Ming Tek, Executive Director, ADBSR Singapore 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 produced 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 Investor, 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. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. United This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority Kingdom 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. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608-610, 6th Floor, Gate International Precinct Building 5, PO Box 506538, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates 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. United States This report was prepared by DBS HK. 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 should contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Bank (Hong Kong) Limited 11th Floor The Centre, 99 Queen’s Road Central, Central, Hong Kong Tel: (852) 3668-4181, Fax: (852) 2521-1812
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