China / Hong Kong Industry Focus Hong Kong Telecom Sector

Refer to important disclosures at the end of this report DBS Group Research . Equity 25 Apr 2017

Spectrum re-assignment putting mobile operation at risk HSI: 24,139

• Re-assigning 60% of 900 MHz and 1800 MHz

spectrum through auction ANALYST • Expect the related spectrum utilisation fee to Tsz Wang TAM CFA, +852 2971 1772 [email protected] increase by more than 100%, impacting mobile Chris KO CFA, +852 2971 1707 operators’ earnings by 3-14% [email protected] • Potential new entrants such as China Unicom will

intensify market competition

• Maintain cautious view on HK mobile market Expect new entrants into a crowded mobile market. Between November 2020 and September 2021, mobile operators’ 15- Recommendation & valuation year licences for 49.8 MHz of spectrum in the 900 MHz band and 148.8 MHz of spectrum in the 1800 MHz band Company Price T arget Rec Mkt FY18F (collectively 2G spectrum) will expire. 40% of the expiring Price Cap Yield HK$ HK$ US$m % spectrum will be kept by the incumbent operators while 60% of the spectrum will be re-assigned through auction. The Hong Kong Telecom operators auction may introduce new entrants from China such as China HKBN 8.15 12.2 Buy 1,054 7.3 Unicom Hong Kong which has indicated its interest to (1310 HK) participate in the auction. HKT Trust 9.94 13.5 Buy 9,675 6.9 (6823 HK) Higher spectrum utilisation fee puts earnings at risk. Based on Hutchison Telecom 2.29 2.4 Hold 1,419 5.4 the current proposals to determine the new spectrum (215 HK) utilisation fee (SUF) for the 2G spectrum, we expect the SUF to Smartone Telecom 10.2 10.4 Hold 1,454 5.1 increase from an average of HK$1.45m to HK$3.95m per MHz (315 HK) per year, representing an 100%+ increase. As a percentage of earnings, we expect Hutchison Telecom (HT, 215.HK, HOLD) to Source: Thomson Reuters, DBS Vickers be impacted the most by higher SUF followed by SmarTone (SMT, 315.HK, HOLD). We expect the increase in SUF to represent 14% and 9% of HT’s FY17F and SMT’s FY6/17F earnings respectively. HKT (6823.HK, BUY) will be least impacted as the increase in SUF will only represent 3% of its FY17F earnings.

Maintain cautious view on HK mobile market. We do not favour telecom operators with large exposure to mobile operation such as SMT and HT in the sector as the 2G spectrum re-assignment may introduce new Chinese entrants into the mobile market and incur higher SUF in the medium- term. The market has yet to price in the potential earnings risk, in our view. Moreover, industry wide mobile tariff hike is challenging in the near-term as competition remains intense. Maintain HOLD on SMT and HT. We prefer HKT and HKBN (1310.HK, BUY) as they have less exposure to mobile business in terms of percentage of earnings. We also expect them to enjoy ARPU and profitability upside in the duopoly-like residential broadband market in the medium term. Maintain BUY on HKT and HKBN.

ASIAN INSIGHTS VICKERS SECURITIES

ed-TH/ sa- DL

Industry Focus Hong Kong Telecom Sector

Background of 900 MHz and 1800 MHz spectrum re- the 1800 MHz band which are currently vacant, a total of 200 assignment MHz of spectrum will be re-assigned. The re-assignment is a major reshuffle of spectrum resources as 2G spectrum, Mobile operators’ 15-year licences for 49.8 MHz of spectrum in totalling 198.6 MHz of spectrum, accounts for 36% of a total the 900 MHz band and 148.8 MHz of spectrum in the 1800 of 552 MHz of spectrum in Hong Kong and 45% of spectrum MHz band (collectively 2G spectrum) will expire between deployed for 4G network service. November 2020 and September 2021. Together with 0.2 MHz of spectrum in the 900 MHz band and 1.2 MHz of spectrum in

Mobile spectrum allocation

2500/ Frequency band 850/900 MHz 900 MHz 1800 MHz 2100 MHz 2300 MHz 2600 MHz Total Unit: MHz CM HK - - 26.4 19.6 30.0 40.0 116.0 HKT 15.0 16.6 72.8 29.6 - 60.0 194.0 HT 10.0 16.6 23.2 29.6 30.0 20.0 129.4 SMT 10.0 16.6 26.4 39.6 - 20.0 112.6 Total 35.0 49.8 148.8 118.4 60.0 140.0 552.0

Source: Office of the Communications Authority, DBS Vickers

2G spectrum was firstly assigned in the 1990s for the provision to provide 3G services. We expect the demand for the of 2G services and was re-assigned in the period of 2005/2006. spectrum to be high as 4G services will be the major mobile Now, 145.6 MHz of the 2G spectrum has been refarmed to services in the next few years before the 5G era. provide 4G services and 9 MHz of spectrum has been refarmed

Application of radio spectrum in the provision of public mobile telecommunications services

Frequency band 2G 3G 4G CDMA 2000 Total unit: MHz 850/900 MHZ 20.0 15.0 35.0 900 MHz 15.2 9.0 25.6 49.8 1800 MHz 28.8 120.0 148.8 2100 MHz 98.6 19.8 118.4 2300 MHz 60.0 60.0 2500/ 2600 MHz 140.0 140.0 Total 44.0 127.6 365.4 15.0 552.0 Source: Office of the Communications Authority

The first consultation on the re-assignment has finished on 18 May 2016 and the second consultation has begun and will finish by the end of 24 Apr 2017. Final decision on the arrangement of spectrum re-assignment and the related SUF will be made by the end of 2017.

Based on our analysis on the current spectrum re-assignment proposal, we expect mobile operators to suffer from higher spectrum utilisation fee (SUF), more competition from new entrants, and loss of spectrum resources.

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Industry Focus Hong Kong Telecom Sector

Approach to re-assign 2G spectrum 1. 2 x 10 [=20] MHz of spectrum in the 1800 MHz band will be re-assigned to each of the four incumbent spectrum After the first consultation, the regulator has proposed that assignees with the right of first refusal (RFR spectrum). 40% of the expiring spectrum will be kept by the incumbent 2. The remaining 70 MHz of spectrum in the 1800 MHz operators and 60% of the spectrum will be re-assigned band and all the 50 MHz of spectrum in the 900 MHz through auction (also refer to the graph below). Under the band, totalling 120 MHz, will be assigned by through proposed re-assignment: auction (auction spectrum).

Proposed band plan for the 1800 MHz frequency band

Auction HKT Auction SMT CMHK HT Auction Auction Lower band 1710 MHz 10 10 10 10 10 10 10 5 1785 MHz

Auction HKT Auction SMT CMHK HT Auction Auction Upper band 1,805 MHz 10 10 10 10 10 10 10 5 1,880 MHz

HKT RFR Spectrum to be offered to HKT SMT RFR Spectrum to be offered to SMT Auction Frequency slots to be re-assigned by way of auction CMHK RFR Spectrum to be offered to CMHK

HT RFR Spectrum to be offered to HT Source: Office of the Communications Authority

Proposed band plan for the 900 MHz frequency band

Lower band 890 MHz 55555915 MHz

Upper band 935 MHz 55555960 MHz

Frequency slots to be assigned by way of auction Source: Office of the Communications Authority

Risks: introduction of new entrants and loss of spectrum mobile network to maintain the same network quality with less The proportion of auction spectrum for 2G spectrums is spectrum resources. proposed to increase to 60%, compared with 2100MHz spectrum re-assignment’s 33% back in 2016. It was the regulator’s intention to encourage more competition through the auction to bring in new players. Chinese mobile operators in Hong Kong such as China Unicom Hong Kong (CUHK), China Telecom Hong Kong (CTHK) as well as HKBN (1310.HK, BUY) are the potential bidders. CUHK has indicated its interest to participate in the auction. We reckon that CUHK and CTHK could form a JV to bid and share the spectrum to increase the economies of scale. Existing mobile operators may lose some of their spectrum. They may need to spend more capex on the

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Industry Focus Hong Kong Telecom Sector

Approach to set spectrum utilisation fees and SCED’s present inclination is that the final value would be closer to the higher end. In 2005/2006’s re-assignment, the SUF of 2G spectrum was set at HK$145k per MHz per annum in the first 5 years. And from 2. The SUF of the RFR Spectrum should be set at the average the sixth licence year onwards to the expiry (2010/2011- SUF of the auction spectrum in the same frequency band, 2020/2021), SUF was set at 5% royalty over the annual subject to a minimum price and a cap, both to be set by network turnover of the licensee, subject to a minimum fee of the SCED. HK$1.45m per MHz per year.

3. For RFR minimum price, SCED proposed that it may be set In the second consultation paper relating to the SUF, the between HK$38m per MHz (or HK$2.53m per MHz per authority, Secretary for Commerce and Economic Development annum) and HK$67m per MHz (or HK$4.47m per MHz (SCED) proposed: per annum) for 15 years, and SCED’s inclination is that the

final value would be closer to the higher end. 1. The auction reserve price for both 900 MHz spectrum and 1800 MHz spectrum will be set between HK$19m per MHz (or HK$1.27m per MHz per annum) and HK$54m 4. The SCED proposes that the cap should be set at around per MHz (or HK$3.6m per MHz per annum) for 15 years 30% to 40% higher than the minimum price for the RFR spectrum.

Proposed spectrum utilisation fee pricing

900 MHz band 1800 MHz band 50MHz 70MHz 80MHz

Re-assigned through Auction Re-assigned to Incumbents with the RFR (Auction spectrum) (RF R spectrum)

Reserve price for auction RFR minimum price

proposed range: HK$19m-HK$54m per proposed range: HK$38m-HK$67m per MHz for 15 years MHz for 15 years

SUF Pricing Auction price Max [Auction price, RFR minimum price ]

Max [Reserve price, Auction price] Subject to cap: RFR minimum price x [1 + 40%]

Source: Office of the Communications Authority, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Risks: higher SUF and higher tax expense We have set out some general assumptions in our scenario Based on our analysis of the current re-assignment proposal in analysis: the second consultation paper, we have set out base, bear and bull case scenarios for 2G SUF of the mobile operators. In our 1. There will be a new entrant taking 10 MHz of 900 MHz base case scenario, we expect the annual SUF for 2G spectrum bands and 20 MHz of 1800 MHz. to increase from an average of HK$1.45m to HK$3.95m, representing a more than 100% increase. We also expect the 2. For 900 MHz band, we have also assumed, each mobile new SUF to be non-tax deductible and lead to higher tax operator and the new entrant to receive 10MHz. expense as current SUF for 2G spectrum is tax deductible. 3. The allocation of 1800 MHz is approximately in We expect HKT (6823.HK, BUY) to be impacted the most in accordance to their respective market shares. absolute dollar terms with a higher spectrum payment and tax expense of HK$140m and HK$21m per year respectively. Our base-case scenario is based on SCED’s proposal and However, this only accounts for 3% of its FY17F earnings. We inclination. We assume the reserve price to be HK$54m per expect Hutchison Telecom (HT, 215.HK, HOLD) to be impacted MHz or HK$3.6m per MHz per annum which is at the higher the most in terms of the percentage of earnings. In our base- end of the proposed price range. We also expect the auction case scenario, the incremental SUF and tax expense represent price to stay at reserve price. For the RFR price, we expect it to 14% of HT’s FY17F earnings. We also estimate that the be HK$67m or HK$4.47m per MHz per annum which is the incremental SUF and tax expense to represent 9% of higher end of the range for minimum price [More to see SmarTone’s (SMT, 315.HK, HOLD) FY6/17F earnings. Appendix – scenario analysis].

Summary of scenario analysis Hong Kong Inland Revenue Department (IRD) has advised that SUF will be regarded as capital expenditure and therefore not Change of % of FY17F earnings tax deductible. This will increase the effective tax rate as the spectrum Bear Base Bull spectrum utilisation fee of current 2G spectrum is tax resources case case case deductible. HKT -19.4 6% 3% 0%

HT 0.2 25% 14% 2% The SCED proposed that the spectrum assignees will be given a SMT* -13.0 17% 9% 0% choice to pay the SUF either by: * FY6/17F Source: DBS Vickers 1. lump sum payment upfront, which is the lump sum amount obtained in auction and/or via right of first refusal

2. annual instalments, with the first instalment equivalent to the lump sum amount obtained in (a) above divided by 15 (i.e. the number of years of assignment), and subsequent instalments increased every year by a pre-set fixed percentage which aims to reflect the time value of money to the government

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Industry Focus Hong Kong Telecom Sector

Estimation of current spectrum utilisation fee

900 MHz 1800 MHz Total Current SUF Calculat ion A B C D [=A+B] [=CxHK$1.45m] Unit MHz MHz HK$m p.a. HK$m p.a. CM HK 0.0 26.4 26.4 38.3 HKT 16.6 72.8 89.4 129.6 HT 16.6 23.2 39.8 57.7 SMT 16.6 26.4 43.0 62.4 New Entrant 0.0 0.0 0.0 0.0 Total 49.8 148.8 198.6 288.0 Source: Office of the Communications Authority, DBS Vickers

Scenario analysis – base case

Assumptions: 15 y ears per y ear Reserve price (HK$m per MHz) 54.0 3.6 RFR minimum price (HK$m per MHz) 67.0 4.5 RFR cap (HK$m per MHz) 93.8 6.3

Auction spectrum price (HK$m per MHz) 54.0 3.6 RFR spectrum price (HK$m per MHz) 67.0 4.5

900 MHz 1800 MHz Total Current Renewal SUF Renewal SUF Total SUF Annual Increase in Total SUF through RFR through change of tax financial auction SUF expense impact

Calculation A B C DE F G H I J [=A+B] [=20xHK$4.5m]* [=(C-20) [=E+F] [=G-D] [=Dx16.5 [=H+I] xHK$3.6m]* # %] Unit MHz MHz MHz HK$m HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. CMHK 10.0 20.0 30.0 38.3 89.3 36.0 125.3 87.1 6.3 93.4 HKT 10.0 60.0 70.0 129.6 89.3 180.0 269.3 139.7 21.4 161.1 HT 10.0 30.0 40.0 57.7 89.3 72.0 161.3 103.6 9.5 113.1 SMT 10.0 20.0 30.0 62.4 89.3 36.0 125.3 63.0 10.3 73.3 New Entrant 10.0 20.0 30.0 0.0 0.0 108.0 108.0 108.0 0.0 108.0 Total 50.0 150.0 200.0 288.0 357.3 432.0 789.3 501.4 47.5 548.9

Av erage SUF HK$m per MHz p.a. 1.45 3.95

*2x10 (=20) MHz of spectrum is subject to RFR spectrum price and rest (c-20) is subject to auction spectrum price. #Calculation of renewal SUF through auction for New Entrant is CxHK$3.6m. Source: Office of the Communications Authority, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Does increase in administration fee help? Conclusion HKT has claimed that it would have to increase the We do not favour telecom operators with large exposure to administration fee by HK$12 from the current HK$18 to mobile operation such as SMT and HT in the sector as the 2G HK$30 to offset the impact from increasing network cost. The spectrum re-assignment may introduce new Chinese entrants administration fee should be only applicable to the post-paid into the mobile market and incur higher SUF in the medium- subs. HKT should benefit the most as it has the largest term. The market is yet to price in the potential earnings risk, in customer base. We estimate the additional revenue for HKT to our view. Moreover, industry wide mobile tariff hike is be HK$451m while that for SMT and HT to be HK$214m and challenging in the near-term as competition remains intense. HK$202m respectively. The additional revenue through the Maintain HOLD on SMT and HT. HK$12 increase in administration is higher than the incremental SUF and tax expense due to the 2G spectrum re- For the Hong Kong telecom sector, we prefer HKT and HKBN assignment in our base case scenario analysis. as they have less exposure to mobile business in terms of percentage of earnings. We also expect them to enjoy ARPU Additional revenue through HK$12 increase in and profitability upside in the duopoly-like residential administration fee broadband market in the medium term. Maintain BUY on HKT Number of Additional and HKBN. post paid subs revenue (k) (HK$m) HKT 3,130.0 450.7 HT 1,486.0 214.0 SMT 1,400.0 201.6 Source: Companies, DBS Vickers

However, the ability to pass the increased network cost to consumer by increasing the administration fee (or mobile service plan tariff hike) will depend on the intensity of market competition. If there are new Chinese mobile operators entering the mobile market through the auction of spectrum, we reckon that competition will be more intense as the new entrants will focus on market share first. This will prevent the full transfer of increased spectrum costs to consumers.

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Industry Focus Hong Kong Telecom Sector

Peers valuation

Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA F CF Yield Currency Price Cap Fiscal 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F Company Name Code Local$ US$m Y r x x % % x x x x % % China telecom operators China Mobile* 941 HK HKD 82.8 217,933 Dec 13.1 12.5 3.5 3.7 1.4 1.3 3.5 3.2 8.5 6.0 China Unicom* 762 HK HKD 10.26 31,597 Dec 36.5 22.2 1.0 1.6 0.9 0.9 3.7 3.3 18.1 12.1 China Telecom 'H'* 728 HK HKD 3.82 39,734 Dec 13.6 13.0 2.8 2.8 0.7 0.8 3.6 3.3 4.7 9.1 Average 21.1 15.9 2.4 2.7 1.0 1.0 3.6 3.3 10.4 9.1

Hong Kong telecom operators HKT Trust* 6823 HK HKD 9.94 9,675 Dec 14.4 13.8 6.6 6.9 1.9 1.9 8.5 8.2 12.4 12.9 Hutchison Telecom* 215 HK HKD 2.29 1,419 Dec 14.6 13.8 5.1 5.4 0.9 0.9 5.9 5.5 11.1 11.6 Smartone Telecom* 315 HK HKD 10.2 1,454 Jun 14.7 14.2 5.8 5.1 2.5 2.4 4.9 4.7 14.7 14.9 HKBN* 1310 HK HKD 8.15 1,054 Aug 32.5 17.3 5.4 7.3 6.9 7.2 11.1 8.5 6.8 9.0 Average 19.1 14.8 5.7 6.2 3.1 3.1 7.6 6.7 11.2 12.1

Taiwan telecom operators Chunghwa Telecom 2412 TT TWD 103 26,458 Dec 20.0 19.3 4.9 5.1 2.2 2.2 9.4 9.2 n.a. n.a. Taiwan Mobile 3045 TT TWD 110.5 12,517 Dec 20.1 18.9 5.1 5.2 5.2 5.3 11.1 10.7 n.a. n.a. Far Eastone Telecom. 4904 TT TWD 74.4 8,028 Dec 21.2 20.1 5.1 5.2 3.5 3.5 9.5 9.1 n.a. n.a. Average 20.4 19.4 5.0 5.2 3.6 3.7 10.0 9.7 n.a. n.a.

Singapore telecom operators Starhub* STH SP SGD 2.8 3,481 Dec 17.5 17.5 5.7 5.7 27.3 27.4 9.2 9.4 2.5 (0.3) M1* M1 SP SGD 2.11 1,420 Dec 13.6 15.1 5.9 5.3 4.6 4.4 7.3 7.9 7.0 (1.7) Average 15.5 16.3 5.8 5.5 16.0 15.9 8.2 8.7 4.7 (1.0)

Malay sia telecom operators Axiata Group* AXIATA MK MYR 5.06 10,322 Dec 28.7 25.8 1.7 3.3 1.9 1.8 8.0 7.7 (0.1) 4.0 Digi.Com* DIGI MK MYR 5.17 9,138 Dec 25.8 25.4 3.9 3.9 77.4 77.4 14.4 14.2 3.8 3.6 Maxis* MAXIS MK MYR 6.44 10,995 Dec 24.7 24.1 3.4 3.7 9.6 9.2 13.0 13.0 5.1 5.6 Telekom Malaysia* T MK MYR 6.48 5,536 Dec 28.3 24.3 3.2 3.7 3.1 3.1 7.6 7.1 0.0 4.0 Average 26.8 24.9 3.1 3.7 23.0 22.9 10.8 10.5 2.2 4.3

Indonesia telecom operators Telekomunikasi Indo* TLKM IJ IDR 4420 33,537 Dec 19.6 16.6 4.1 4.8 5.0 4.8 7.4 6.8 5.3 7.0 Indosat* ISAT IJ IDR 7300 2,986 Dec 22.5 17.0 0.0 0.0 2.6 2.3 4.0 3.5 16.7 11.1 Xl Axiata* EXCL IJ IDR 3000 2,414 Dec 31.5 20.7 1.9 2.9 1.5 1.4 5.6 5.2 (5.8) 5.0 Average 24.5 18.1 2.0 2.6 3.0 2.8 5.7 5.2 5.4 7.7

Thailand telecom operators Advanced Info Ser.* ADV ANC TB THB 174.5 15,102 Dec 18.5 16.1 3.8 4.3 10.8 8.8 9.4 8.6 0.6 1.1 Total Access Comms.* DTAC TB THB 42.25 2,912 Dec 61.0 24.7 0.8 2.0 3.7 3.4 4.6 4.4 5.1 2.7 True Corporation TRUE TB THB 6.4 6,216 Dec n.a. 457.1 0.0 0.0 1.7 1.6 9.0 7.5 (7.8) (8.6) Average 39.7 166.0 1.5 2.1 5.4 4.6 7.7 6.8 (0.7) (1.6)

# FY17: FY18; FY18: FY19 Source: Thomson Reuters, *DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Appendix – scenario analysis Base case Based on the second consultation paper, we have set out bear base and bull case scenarios for 2G SUF of the mobile Our base-case scenario is based on SCED’s proposal and operators. We have set out some general assumptions in all inclination. We expect the reserve price to be HK$54m per three cases: MHz or HK$3.6m per MHz per annum which is the higher end

of proposed price range. We also expect the auction price to 1. There will be a new entrant taking 10 MHz of 900 MHz stay at reserve price. For the RFR price, we expect it to be bands and 20 MHz of 1800 MHz HK$67m which is the higher end of the range for minimum

price. 2. For 900 MHz band, we have also assumed, each mobile

operator and the new entrant to receive 10MHz

3. The distribution of 1800 MHz is approximately in

accordance to their respective market shares.

Estimation of current spectrum utilisation fee

900 MHz 1800 MHz Total Current SUF Calculat ion A B C D [=A+B] [=CxHK$1.45m] Unit MHz MHz HK$m p.a. HK$m p.a. CM HK 0.0 26.4 26.4 38.3 HKT 16.6 72.8 89.4 129.6 HT 16.6 23.2 39.8 57.7 SMT 16.6 26.4 43.0 62.4 New Entrant 0.0 0.0 0.0 0.0 Total 49.8 148.8 198.6 288.0 Source: Office of the Communications Authority, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Scenario analysis – base case

Assumptions: 15 years per year Reserve price (HK$m per MHz) 54.0 3.6 RFR minimum price (HK$m per MHz) 67.0 4.5 RFR cap (HK$m per MHz) 93.8 6.3

Auction spectrum price (HK$m per MHz) 54.0 3.6 RFR spectrum price (HK$m per MHz) 67.0 4.5

900 MHz 1800 MHz Total Current Renewal SUF Renewal SUF Total SUF Annual Increase in Total SUF through RFR through change of tax financial auction SUF expense impact

Calc ulat ion A B C DE F G H I J [=A+B] [=20xHK$4.5m]* [=(C-20) [=E+F] [=G-D] [=Dx16.5 [=H+I] xHK$3.6m]* # %] Unit MHz MHz MHz HK$m HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. CMHK 10.0 20.0 30.0 38.3 89.3 36.0 125.3 87.1 6.3 93.4 HKT 10.0 60.0 70.0 129.6 89.3 180.0 269.3 139.7 21.4 161.1 HT 10.0 30.0 40.0 57.7 89.3 72.0 161.3 103.6 9.5 113.1 SMT 10.0 20.0 30.0 62.4 89.3 36.0 125.3 63.0 10.3 73.3 New Entrant 10.0 20.0 30.0 0.0 0.0 108.0 108.0 108.0 0.0 108.0 Total 50.0 150.0 200.0 288.0 357.3 432.0 789.3 501.4 47.5 548.9

Average SUF HK$m per MHz p.a. 1.45 3.95

*2x10 (=20) MHz of spectrum is subject to RFR spectrum price and rest (c-20) is subject to auction spectrum price. #Calculation of renewal SUF through auction for New Entrant is CxHK$3.6m. Source: Office of the Communications Authority, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Bear case the final auction price may be bid higher. We assume it is bid to 40% higher than the reserve price. For the RFR price, we In our bear case scenario, we have assumed the reserve price assumed it to be HK$93.8m which is 40% higher than the to be HK$54m per MHz or HK$3.6m per MHz per annum higher end of the range for minimum price. which is the higher end of suggested price range. However,

Scenario analysis – bear case

Assumptions: 15 years per year Reserve price (HK$m per MHz) 54.0 3.6 RFR minimum price (HK$m per MHz) 67.0 4.5 RFR cap (HK$m per MHz) 93.8 6.3

Auction spectrum price (HK$m per MHz) 93.8 6.3 RFR spectrum price (HK$m per MHz) 93.8 6.3

900 MHz 1800 MHz Total Current Renewal SUF Renewal SUF Total SUF Annual Increase in Total SUF through RFR through change of tax financial auction SUF expense impact

Calculation A B C DE F G H I J [=A+B] [=20xHK$6.3m]* [=(C-20) [=E+F] [=G-D] [=Dx16.5 [=H+I] xHK$6.3m]*# %]

Unit MHz MHz MHz HK$m HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. p.a. CMHK 10.0 20.0 30.0 38.3 125.1 62.5 187.6 149.3 6.3 155.6 HKT 10.0 60.0 70.0 129.6 125.1 312.7 437.7 308.1 21.4 329.5 HT 10.0 30.0 40.0 57.7 125.1 125.1 250.1 192.4 9.5 201.9 SMT 10.0 20.0 30.0 62.4 125.1 62.5 187.6 125.3 10.3 135.5 New Entrant 10.0 20.0 30.0 0.0 0.0 187.6 187.6 187.6 0.0 187.6 Total 50.0 150.0 200.0 288.0 500.3 750.4 1250.7 962.7 47.5 1010.2 Average SUF HK$m per MHz p.a. 1.45 6.25

*2x10 (=20) MHz of spectrum is subject to RFR spectrum price and rest (c-20) is subject to auction spectrum price. #Calculation of renewal SUF through auction for New Entrant is CxHK$6.3m Source: Office of the Communications Authority, DBS Vickers

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Industry Focus Hong Kong Telecom Sector

Bull case auction price to stay at reserve price. For the RFR price, we expect it to be HK$38m which is the lower end of the In our bull-case scenario, we have assumed the reserve price to suggested range for minimum price. be HK$19m per MHz or HK$1.26m per MHz per annum which is the lower end of suggested price range. We also expect the

Scenario analysis – bull case

Assumptions: 15 y ears per y ear Reserve price (HK$m per MHz) 19.0 1.3 RFR minimum price (HK$m per MHz) 38.0 2.5 RFR cap (HK$m per MHz) 53.2 3.5

Auction spectrum price (HK$m per MHz) 19.0 1.3 RFR spectrum price (HK$m per MHz) 38.0 2.5

900 MHz 1800 MHz Total Current Renewal SUF Renewal SUF Total SUF Annual Increase in Total SUF through RFR through change of tax financial auction SUF expense impact

Calculat ion A B C DE F G H I J [=A+B] [=20xHK$2.5m]* [=(C-20) [=E+F] [=G-D] [=Dx16.5 [=H+I] xHK$1.3m]*# %]

Unit MHz MHz MHz HK$m HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. HK$m p.a. p.a. CMHK 10.0 20.0 30.0 38.3 50.7 12.7 63.3 25.1 6.3 31.4 HKT 10.0 60.0 70.0 129.6 50.7 63.3 114.0 -15.6 21.4 5.8 HT 10.0 30.0 40.0 57.7 50.7 25.3 76.0 18.3 9.5 27.8 SMT 10.0 20.0 30.0 62.4 50.7 12.7 63.3 1.0 10.3 11.3 New Entrant 10.0 20.0 30.0 0.0 0.0 38.0 38.0 38.0 0.0 38.0 Total 50.0 150.0 200.0 288.0 202.7 152.0 354.7 66.7 47.5 114.2 Av erage SUF HK$m per MHz p.a. 1.45 1.77

*2x10 (=20) MHz of spectrum is subject to RFR spectrum price and rest (c-20) is subject to auction spectrum price. #Calculation of renewal SUF through auction for New Entrant is CxHK$1.3m Source: Office of the Communications Authority, DBS Vickers

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China / Hong Kong Company Guide

HKBN Ltd. Version 9 | Bloomberg: 1310 HK Equity | Reuters: 1310.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 25 Apr 2017

BUY Looking up to a clearer sky Last Traded Price ( 24 Apr 2017):HK$8.15 (HSI : 24,139) Significant upside potential in ARPU under duopoly Price Target 12-mth: HK$12.20 (50% upside) We have a BUY rating on HKBN, and TP of HK$12.20 based on Potential Catalyst: ARPU increase and market share gain dividend discount model (DDM). HKBN offers a dividend yield of 5%+, Where we differ: We focus more on the long-term prospects despite the and we forecast dividend CAGR of 20%+ from FY8/17-FY8/19F. The volatility in short-term free cash flow due to higher customer acquisition cost for sub net-adds company increased its market share from c.16% in FY8/08 to c.33% in FY8/16, and is now the second largest residential broadband operator Analyst Tsz Wang TAM CFA, +852 2971 1772 in Hong Kong. We expect it to enjoy upside to residential broadband [email protected] ARPU (average revenue per user) and profitability in a duopoly-like market. Chris KO CFA, +852 2971 1707 [email protected] Switching focus from sub to revenue market share

HKBN achieved its 100k sub net-add target in FY8/16, and now has a

Price Relative total sub base of 857k. In 2015, it initiated a price war in the residential HK$ Relative Index broadband market and gained 100k sub net-adds in FY8/16, and 11.8 213 targets to add another 100k in FY8/17F. It is now shifting its focus from 193 10.8 173 sub to revenue market share and has started raising tariffs in Jan 2017. 9.8 153 This will result in lower customer acquisition cost and higher ARPU, 8.8 133 113 which is positive to free cash flow. HKBN’s residential broadband ARPU 7.8 93 is c.40% below HKT's (6823.HK), offering significant upside potential 6.8 73 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 for ARPU and profitability improvement.

HKBN Ltd. (LHS) Relative HSI (RHS) A growth stock with decent dividend yield

Forecasts and Valuation We expect the company to grow its revenue by c.14% p.a. from FY Aug (HK$ m) 2015A 2016A 2017F 2018F Turnover 2,341 2,784 3,169 3,615 FY8/17-FY8/19F, driven by residential market share gain and expansion Core EBITDA 979 1,009 1,044 1,353 in the enterprise segment. We estimate that its core EBITDA will grow Pre-tax Profit 190 335 342 617 Net Profit 104 245 252 475 at a CAGR of c.15%+ from FY8/17-FY8/19F. The company intends to Net Pft (Pre Ex) (core profit) 104 245 252 475 pay out 90-100% of its adjusted free cash flow (AFCF), which is Net Profit Gth (Pre-ex) (%) 94.7 134.7 3.1 88.3 estimated to grow at a CAGR of 20%+ from FY8/17-FY8/19F. The EPS (HK$) 0.10 0.24 0.25 0.47 stock offers 5.1% dividend yield for FY8/17F and 7.0% for FY8/18F. EPS Gth (%) 94.7 134.6 2.5 88.3 Diluted EPS (HK$) 0.10 0.24 0.25 0.47 Valuation: AFCF 392 409 440 600 We have a BUY rating on HKBN for its dividend growth potential. Our DPS (HK$) 0.20 0.41 0.44 0.60 TP of HK$12.2 is based on DDM, assuming 7.9% cost of equity and BV Per Share (HK$) 1.51 1.36 1.18 1.14 1% terminal growth rate. PE (X) 78.2 33.3 32.5 17.3 P/Cash Flow (X) 12.4 8.8 8.4 6.9 Key Risks to Our View: P/Free CF (X) 24.5 15.3 14.7 11.1 Price war. Competitors irrationally cutting prices to be lower than that EV/EBITDA (X) 11.7 11.7 11.1 8.5 offered by HKBN for a prolonged period. Net Div Yield (%) 2.5 5.0 5.4 7.3 P/Book Value (X) 5.4 6.0 6.9 7.2 Net Debt/Equity (X) 1.8 2.5 2.8 2.9 Increase in finance cost due to interest rate up-cycle. Increase in ROAE (%) 6.6 17.0 19.7 40.7 interest rates will decrease AFCF and dividend yield.

Earnings Rev (%): 0 0 Consensus EPS (HK$) 0.44 0.53 At A Glance Other Broker Recs: B: 7 S: 0 H: 0 Issued Capital (m shrs) 1,006 Source of all data on this page: Company, DBSV, Thomson Reuters, Mkt. Cap (HK$m/US$m) 8,196 / 1,054 Major Shareholders HKEX Canada Pension Plan Investment Board (%) 18.0 GIC Private Limited (%) 9.1 The Capital Group Companies, Inc. (%) 8.0 Matthews International Capital Management, LLC (%) 6.0 Mondrian Investment Partners Limited (%) 5.6 Free Float (%) 100.0 3m Avg. Daily Val. (US$m) 2.1 ICB Industry : Telecommunications / Fixed Line Telecommunications

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Company Guide

HKBN Ltd.

CRITICAL DATA POINTS TO WATCH Residential broadband sub (k)

900 910 Earnings Drivers: 857 Expanding market share through tactical pricing strategy. 788 754 692 HKBN has been gaining market share from competitors 657 through aggressive pricing strategy. It strategically offers deep 525

discounts to gain new subscribers, and has been capable of 394

raising back tariffs upon contract renewal. It has a track 263

record of managing decent ARPU growth over a longer 131

period of time despite short-term volatility. Going forward, 0 HKBN has switched its focus from sub to revenue market 2014A 2015A 2016A 2017F 2018F

share and started raising tariffs in Jan 2017. Therefore, we expect to see low single-digit growth rates for sub numbers in Residential broadband ARPU (HK$) 190.0 the next few years. 183.0 176.0 176.0 175.0

155 ARPU improvement. HKBN has switched its focus from sub to revenue market share and started to raise tariffs. HKBN’s 116 residential broadband ARPU is around HK$170 which is 40% 78 below HKT’s c.HK$300, offering significant upside potential for ARPU and profitability improvement. HKBN may selectively 39 narrow the differences in some areas without losing its 0 customers. We also expect HKBN to continue upselling 2014A 2015A 2016A 2017F 2018F higher-tier plans to its customers. Source: Company, DBS Vickers

Migration to fibre. Consumers are looking for faster broadband connection due to rising demand for internet multimedia content, and therefore are migrating to fibre network (FTTx), from other slower technologies such as Hybrid Fibre Coaxial (HFC) and Digital Subscriber Line (xDSL) for broadband services. HKBN’s Metro Ethernet network supports symmetric upstream/downstream transmission speeds from 100-1,000Mbps, while HFC and xDSL offer only up to a maximum of 100Mbps downstream speed with limitations such as lower upstream speeds. We expect HKBN to gain market share from operators providing HFC and xDSL network services.

Replication of success in residential market to enterprise market. HKBN is replicating its success in the residential broadband market to the enterprise market. HKBN focuses on the small enterprise segment, of which broadband penetration is expected to increase due to the robust development of cloud services, enterprise internet applications and e-commerce.

Expansion of enterprise broadband business through acquisition. HKBN acquired an enterprise broadband business (New World Telecom) on 18 February 2016. This will double the scale of HKBN’s enterprise broadband business. The acquisition will enable HKBN to penetrate into a higher-tiered enterprise customer group. New revenue opportunities from extended coverage and new services such as data centres will also help business growth.

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Company Guide HKBN Ltd.

Leverage & Asset Turnover (x) Balance Sheet: 0.6 Strong free cash flow. The company generates strong free cash 3.00 0.6 flow with an expected CAGR of 20%+ p.a. The company 2.50 0.5 intends to pay out 90-100% of its adjusted free cash flow (AFCF) 2.00 as dividends. AFCF is derived from core EBITDA adjusted for 0.5 1.50 capex, net interest, non-recurring items, non-cash items, tax paid 0.4 1.00 and changes in working capital. 0.4 0.50 0.00 0.3 Healthy balance sheet. HKBN had total borrowings of HK$3.7bn 2014A 2015A 2016A 2017F 2018F with a debt-to-EBITDA ratio of 3.6x at end-FY8/16, which is Gross Debt to Equity (LHS) Asset Turnover (RHS) manageable. We expect the company to maintain the debt level Capital Expenditure and forecast debt-to-EBITDA to be 3.3x in FY8/17F. HK$m 500.0 450.0 400.0 350.0 300.0 Share Price Drivers: 250.0 Stronger sub growth. Going forward, HKBN has switched its 200.0 focus from sub to revenue market share and has started to raise 150.0 100.0 tariffs. Therefore, we expect to see low single-digit growth rates 50.0 for sub numbers in the next few years. Faster sub net-adds will 0.0 2014A 2015A 2016A 2017F 2018F be positive for the company's share price. Capital Expenditure (-) ROE ARPU improvement. HKBN has switched its focus from sub to 40.0% revenue market share and started raising tariff in Jan 2017. 35.0%

HKBN’s residential broadband ARPU is around HK$170, which is 30.0%

40% below HKT’s c.HK$300, offering significant upside 25.0% potential for ARPU and profitability improvement. HKBN may 20.0% selectively narrow the differences in some areas without losing 15.0% its customers. We also expect HKBN to continue upselling 10.0% higher-tier plans to its customers. 5.0%

0.0% 2014A 2015A 2016A 2017F 2018F Stronger dividend growth. Strong business growth and operating leverage could lead to stronger EBITDA growth. Forward PE Band (x) Reduction in capex as a percentage of revenue will further 58.6 enhance AFCF and therefore dividend distribution. 53.6 +2sd: 50.9x 48.6

43.6 +1sd: 43.5x

38.6 Key Risks: Avg: 36.1x A real price war 33.6 Competitors irrationally cut prices to be lower than that offered 28.6 ‐1sd: 28.7x 23.6 by HKBN for a prolonged period. ‐2sd: 21.4x 18.6 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Increase in interest rates PB Band Increase in interest rates will decrease the AFCF and the dividend (x) yield. 8.0 7.5 +2sd: 7.47x 7.0 +1sd: 6.98x Company Background: 6.5 Avg: 6.49x HKBN is a broadband service provider in Hong Kong. It is the 6.0 ‐1sd: 5.99x second largest player in the residential segment with a market 5.5 ‐2sd: 5.5x share of c.30%. 5.0

4.5 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Source: Company, DBS Vickers

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Company Guide

HKBN Ltd.

Key Assumptions FY Aug 2014A 2015A 2016A 2017F 2018F Residential broadband 692.0 754.0 857.0 900.0 910.0 sub (k) Residential broadband 176.0 183.0 176.0 175.0 190.0 ARPU (HK$) Source: Company, DBS Vickers

Income Statement (HK$ m) FY Aug 2014A 2015A 2016A 2017F 2018F Revenue 2,132 2,341 2,784 3,169 3,615 Cost of Goods Sold (287) (306) (451) (618) (651) Gross Profit 1,844 2,035 2,333 2,551 2,964 Other Opng (Exp)/Inc (1,552) (1,588) (1,857) (2,081) (2,218) Operating Profit 293 447 476 471 745 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 4 4 Net Interest (Exp)/Inc (188) (257) (141) (132) (132) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 105 190 335 342 617 Tax (51) (86) (90) (90) (142) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 54 104 245 252 475 Net Profit before Except. 54 104 245 252 475 EBITDA 845 923 982 1,044 1,353 Growth Revenue Gth (%) 9.3 9.8 18.9 13.8 14.1 EBITDA Gth (%) 14.1 9.2 6.4 6.3 29.5 Opg Profit Gth (%) 53.6 52.7 6.4 (1.1) 58.4 Net Profit Gth (%) N/A 94.7 134.7 3.1 88.3 Margins & Ratio Gross Margins (%) 86.5 86.9 83.8 80.5 82.0 Opg Profit Margin (%) 13.7 19.1 17.1 14.8 20.6 Net Profit Margin (%) 2.5 4.5 8.8 8.0 13.1 ROAE (%) 3.3 6.6 17.0 19.7 40.7 ROA (%) 0.9 1.9 4.0 3.9 7.4 ROCE (%) 2.8 4.8 6.4 6.1 10.3 Div Payout Ratio (%) 0.0 192.9 167.3 174.6 126.3 Net Interest Cover (x) 1.6 1.7 3.4 3.6 5.6 Source: Company, DBS Vickers

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Company Guide HKBN Ltd.

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

Revenue 1,126 1,215 1,226 1,558 1,535 Cost of Goods Sold (129) (177) (137) (315) (304) Gross Profit 997 1,038 1,089 1,244 1,231 Other Oper. (Exp)/Inc (806) (782) (839) (1,018) (1,026) Operating Profit 191 256 250 226 205 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 2 Net Interest (Exp)/Inc (197) (61) (66) (75) (117) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit (6) 196 183 151 90 Tax (41) (44) (48) (42) (44) Minority Interest 0 0 0 0 0 Net Profit (47) 151 135 109 46 Net profit bef Except. (47) 151 135 109 46

Growth Revenue Gth (%) 10.3 9.4 8.8 28.3 25.2 Opg Profit Gth (%) 49.1 55.4 30.6 (11.7) (17.8) Net Profit Gth (%) N/A 253.8 N/A (27.5) (66.0)

Margins Gross Margins (%) 88.6 85.4 88.9 79.8 80.2 Opg Profit Margins (%) 17.0 21.1 20.4 14.5 13.4 Net Profit Margins (%) (4.1) 12.4 11.0 7.0 3.0 Source: Company, DBS Vickers

Balance Sheet (HK$ m) FY Aug 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 1,957 1,970 2,420 2,389 2,354 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 3,044 2,954 3,359 3,236 3,114 Cash & ST Invts 436 329 355 354 438 Inventory 22 14 51 53 56 Debtors 80 82 148 155 163 Other Current Assets 181 202 272 286 300 Total Assets 5,719 5,551 6,605 6,474 6,425

ST Debt 0 0 0 0 0 Creditors 12 7 108 161 169 Other Current Liab 541 482 718 732 746 LT Debt 2,994 3,019 3,721 3,721 3,721 Other LT Liabilities 530 529 694 669 643 Shareholder’s Equity 1,643 1,514 1,363 1,191 1,145 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 5,719 5,551 6,605 6,474 6,425

Non-Cash Wkg. Capital (270) (190) (355) (399) (396) Net Cash/(Debt) (2,558) (2,690) (3,366) (3,367) (3,283) Debtors Turn (avg days) 13.3 12.6 15.1 17.5 16.1 Creditors Turn (avg days) (18.0) (19.5) (376.4) 1,114.1 1,397.4 Inventory Turn (avg days) (24.3) (38.8) (214.1) 429.3 459.7 Asset Turnover (x) 0.4 0.4 0.5 0.5 0.6 Current Ratio (x) 1.3 1.3 1.0 1.0 1.0 Quick Ratio (x) 0.9 0.8 0.6 0.6 0.7 Net Debt/Equity (X) 1.6 1.8 2.5 2.8 2.9 Net Debt/Equity ex MI (X) 1.6 1.8 2.5 2.8 2.9 Capex to Debt (%) 11.5 10.7 10.5 11.3 12.1 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers

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Company Guide

HKBN Ltd.

Cash Flow Statement (HK$ m) FY Aug 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 105 190 335 342 617 Dep. & Amort. 552 476 506 574 607 Tax Paid (43) (86) (58) (107) (159) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 74 (115) 0 44 (3) Other Operating CF 186 193 143 123 123 Net Operating CF 875 657 926 976 1,186 Capital Exp.(net) (346) (324) (393) (420) (450) 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 22 0 (649) 2 2 Net Investing CF (324) (324) (1,042) (418) (448) Div Paid 0 (230) (402) (425) (520) Chg in Gross Debt (256) (105) 684 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (169) (108) (137) (134) (134) Net Financing CF (425) (443) 144 (559) (654) Currency Adjustments 0 2 (3) 0 0 Chg in Cash 126 (107) 26 (1) 84 Opg CFPS (HK$) 0.80 0.77 0.93 0.93 1.18 Free CFPS (HK$) 0.53 0.33 0.53 0.55 0.73

Source: Company, DBS Vickers

Target Price & Ratings History

S.No. Date Closing 12-mth Rating HK$ 3 4 Price Target 10.0 5 7 1 Price 1: 27-Apr-16 HK$9.42 HK$12.50 Buy 9.5 6 2: 13-May-16 HK$9.00 HK$11.80 Buy 9.0 2 3: 14-Sep-16 HK$9.32 HK$11.80 Buy 4: 27-Oct-16 HK$9.05 HK$12.60 Buy 8.5 5: 10-Nov-16 HK$9.05 HK$12.20 Buy 6: 15-Nov-16 HK$8.77 HK$12.20 Buy 8.0 7: 14-Dec-16 HK$8.59 HK$12.20 Buy 7.5

7.0 Jul-16 Jan-17 Jun-16 Oct-16 Feb-17 Sep-16 Apr-16 Apr-17 Dec-16 Nov-16 Mar-17 Aug-16 May-16

Source: DBS Vickers Analyst: Tsz Wang TAM CFA,

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China / Hong Kong Company Guide

HKT Trust Version 5 | Bloomberg: 6823 HK Equity | Reuters: 6823.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 25 Apr 2017

BUY Cost savings to drive higher dividends Last Traded Price ( 24 Apr 2017):HK$9.94 (HSI : 24,139) Price Target 12-mth: HK$13.50 (36% upside) Incumbent operator with attractive dividend yield Potential Catalyst: Availability of popular handsets, price hikes and more We have a BUY rating on HKT Trust (HKT), with a dividend discount cost savings from HKT/CSL merger model (DDM)-based TP of HK$13.5. HKT offers a dividend yield of Where we differ: HKT has low incentive to lead mobile tariff hikes as c.7% with potential upside from lower capex and more cost savings steady AFF growth can be driven by cost savings from HK/CSL merger arising from the HKT/CSL merger. It is an incumbent player in the fixed-

Analyst line segment, and became the largest mobile operator after merging Tsz Wang TAM CFA, +852 2971 1772 with CSL in FY14. HKT intends to pay out 100% of its adjusted fund [email protected] flows (AFF) which is expected to grow by c.5% p.a. from FY17-18F.

Chris KO CFA, +852 2971 1707 [email protected] Continuous cost savings from lower capex ahead and CSL integration

We expect mobile ARPU (average revenue per user) and subscriber base Price Relative to record flat to low single digit growth amid intense competition. We HK$ Relative Index expect HKT to reap further cost savings from (1) exiting 52 low usage

13.4 206 mobile value-added services, (2) reduction in spectrum expenses by 12.4 186 11.4 retaining only half of the 2.1GHz spectrum, and (3) lower capex due to 166 10.4 146 9.4 network integration. We also forecast mid to low-single digit growth 126 8.4 for the fixed-line business driven by (1) less competition in the 7.4 106 6.4 86 residential broadband market, and (2) increasing bandwidth demand 5.4 66 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 for corporates and international carriers.

HKT Trust (LHS) Relative HSI (RHS) Stable growth with upside potential from the next iPhone Forecasts and Valuation FY Dec (HK$ m) 2015A 2016A 2017F 2018F We forecast AFF, which is fully distributed as dividends, to grow by Turnover 34,729 33,847 35,840 36,447 c.5% p.a. in FY17-18F, driven by cost savings from reduction in capex EBITDA 12,098 12,613 12,963 13,317 Pre-tax Profit 4,586 5,698 6,099 6,369 and the continuous cost synergies from HKT/CSL merger. The stock Net Profit 3,949 4,889 5,208 5,440 currently offers an attractive dividend yield of c.7% which should be Net Pft (Pre Ex) (core 3,949 4,889 5,208 5,440 sustainable in the medium term. The launch of next iPhone at its 10th profit) Net Profit Gth (Pre-ex) anniversary in 2H17 could potentially offer the next window of mobile 32.0 23.8 6.5 4.5 (%) tariff hikes and drive stronger handset sales. EPS (HK$) 0.52 0.65 0.69 0.72 Core EPS (HK$) 0.52 0.65 0.69 0.72 EPS Gth (%) 23.7 23.8 6.5 4.5 Valuation: We have a BUY rating on HKT for its attractive dividend yield with Core EPS Gth (%) 23.7 23.8 6.5 4.5 Diluted EPS (HK$) 0.52 0.65 0.69 0.72 further growth potential. Our TP of HK$13.5 is based on DDM DPS (HK$) 0.54 0.62 0.65 0.68 assuming 6.9% cost of equity and 1% terminal growth rate. BV Per Share (HK$) 4.97 5.17 5.22 5.27 PE (X) 19.0 15.4 14.4 13.8 Key Risks to Our View: Core PE (X) 19.0 15.4 14.4 13.8 Irrational market competition. Hong Kong’s mobile market is crowded P/Cash Flow (X) 6.6 6.4 6.2 6.1 P/Free CF (X) 9.0 8.4 8.1 7.8 with four major players and the penetration is more or less saturated. EV/EBITDA (X) 8.9 8.7 8.5 8.2 Irrational pricing may lead to a price war. Net Div Yield (%) 5.4 6.2 6.6 6.9 P/Book Value (X) 2.0 1.9 1.9 1.9 Interest rate up-cycle. Any increase in interest rates will reduce the AFF Net Debt/Equity (X) 0.9 0.9 0.9 0.9 ROAE (%) 10.5 12.7 13.3 13.7 and therefore the dividend distribution.

Earnings Rev (%): Nil Nil Consensus EPS (HK$) 0.63 0.65 At A Glance Other Broker Recs: B: 10 S: 0 H: 1 Issued Capital (m shrs) 7,572 Mkt. Cap (HK$m/US$m) 75,263 / 9,675 Source of all data on this page: Company, DBSV, Thomson Reuters, Major Shareholders HKEX PCCW Limited (%) 52.0 Free Float (%) 48.0 3m Avg. Daily Val. (US$m) 48.2 ICB Industry : Telecommunications / Fixed Line lii ASIAN INSIGHTS VICKERS SECURITIES

ed- JS / sa- DL

Company Guide

HKT Trust

Fixed-line sub growth (%) CRITICAL DATA POINTS TO WATCH 0.11 0.11 Earnings Drivers: 0.06 Cost savings from CSL integration and capex reduction. HKT 0.01 0 00

has been integrating CSL’s networks as well as optimising the -0.04

retail channels. As the network integration has largely been -0.09

completed, we expect reduction in capex to support dividend -0.14

growth. We also expect further cost savings from (1) exiting -0.20 52 low usage mobile value-added services, and (2) lower -0.25 -0.23 spectrum expense by retaining only half of the 2.1GHz 2014A 2015A 2016A 2017F 2018F spectrum. Further optimisation in retail outlets, human resources, and network backhaul will bring in more cost Broadband sub growth (%)

synergies in the next few years. 1.45 1.4

1.09 Fixed-line ARPU improvement. We believe that smaller

operators HT and i-Cable have lost their competitiveness and 0.74 0.6 therefore pricing power. The residential broadband market is 0.39 effectively dominated by two players, HKBN and HKT. HKBN 0.1 has switched its focus from subscribers to revenue market 0.04 share and will start to raise prices, which is positive to -0.31 -0.3 -0.3 industry ARPU. We expect ARPU and profitability upside 2014A 2015A 2016A 2017F 2018F

under the duopoly. Mobile sub growth (%)

Mobile tariff hikes. The mobile market is crowded with four -0.31 major players, namely HKT, Hutchison Telecom (HT), SmarTone (SMT) and China Mobile Hong Kong (CMHK). -0.47

Despite increasing data usage partly due to over-the-top (OTT) -0.63 -0.6 content data consumption, the market lacks a price leader to take the initiative to raise the tariff for higher-end mobile -0.79

data packages. HKT has the largest market share of mobile -0.95 subscriber base and stands to benefit the most from a tariff -1.0 hike. However, it has been focusing on network and brand -1.11 2015A 2016A 2017F 2018F integration as well as cost savings after the acquisition of CSL in May 2014. We reckon that the cost synergies should be Mobile ARPU

able to support its free cash flow or dividend growth target in 177 177 179 168 the coming few years. Therefore, HKT lacks incentive to 146 improve dividend growth by raising mobile tariff and we 145

expect it to be a price follower in the near term. It has the 108 market power to take the lead to raise the tariff when the timing is appropriate. 72

36 Mobile sub growth. Hong Kong's mobile market is more or 0 less matured with low single-digit sub growth in the past two 2014A 2015A 2016A 2017F 2018F years. HKT, HT, SMT and CMHK commanded market shares of c.31%, c.22%, c.14% and c.20% respectively in June EBITDA margin (%) 2016. We expect HKT to continue optimising its customer mix 40 37.5 36.2 36.5 to align its new rebranding (csl., 1O1O and SUN mobile). 35.5 34.8 35 30

25

20

15

10

5

0 2014A 2015A 2016A 2017F 2018F

Source: Company, DBS Vickers ASIAN INSIGHTS VICKERS SECURITIES

Page 20

Company Guide HKT Trust

Leverage & Asset Turnover (x) 0.4 Balance Sheet: 1.00 Healthy financials with a debt-to-EBITDA ratio of 3.0x. HKT had 0.4 0.4 bank borrowings of HK$38bn and its debt-to-EBITDA ratio 0.80 0.4 remained healthy at c.3.0x at end-FY16. Average debt maturity 0.4 0.60 is around five years with an effective interest rate of c.2.5%. The 0.4 company intends to pay out 100% of its AFF (which is basically 0.40 0.3 0.3 free cash flow), and to maintain its debt level. 0.20 0.3 0.3 0.00 0.3 2014A 2015A 2016A 2017F 2018F Share Price Drivers: Gross Debt to Equity (LHS) Asset Turnover (RHS) Cost savings from CSL integration and capex reduction. HKT has Capital Expenditure been integrating CSL’s networks as well as optimising the retail HK$m 3,500.0 channels. As the network integration has largely been completed, 3,000.0 we expect reduction in capex to support dividend growth. We 2,500.0 expect further cost savings from (1) exiting 52 low usage mobile 2,000.0 value-added services and (2) reduction in spectrum expense by 1,500.0 retaining only half of the 2.1GHz spectrum. Further optimisation 1,000.0 in retail outlets, human resources, and network backhaul will 500.0 bring in more cost synergies in the next few years. 0.0 2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-) Tariff hike in the mobile market. Industry-wide tariffs for mobile ROE operators are competitive and requires one major player to take the lead. HKT has the largest market share of mobile subscriber 12.0% base and stands to benefit the most from a tariff hike. It has the 10.0% market power to take the lead to raise the tariff when the timing 8.0% is appropriate. 6.0%

Mobile sub growth. HKT has rebranded SUN Mobile to focus on 4.0% the mass market, and csl. and 1O1O to focus on mid- to high- 2.0% end postpaid customers. The brands have clear target markets 0.0% 2014A 2015A 2016A 2017F 2018F and price differentials. We believe this market repositioning may lead to some marginal postpaid subscriber loss in the near term Forward PE Band (x) but the impact should be limited. Signs of this bottoming out will be positive to the share price. 22.1 20.1 +2sd: 20.1x +1sd: 18.5x 18.1 Key Risks: Avg: 16.9x Irrational market competition. Hong Kong’s mobile market is 16.1 ‐1sd: 15.4x crowded with four major players and the penetration is more or 14.1 ‐2sd: 13.8x less saturated. Irrational pricing may lead to a price war. 12.1 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Interest rate up-cycle. Any increase in interest rates will reduce PB Band (x) the AFF and therefore the dividend distribution. 2.7 2.5 2.3 +2sd: 2.33x Company Background: 2.1 +1sd: 2.08x HKT is an integrated telecom service provider in Hong Kong, 1.9 Avg: 1.84x with the largest market share in the fixed-line and mobile market. 1.7 ‐1sd: 1.59x The broadband services are provided via the brand “Netvigator” 1.5 and the mobile services are provided via the brands “SUN 1.3 ‐2sd: 1.35x

Mobile”, “csl.” and “1O1O”. HKT is 63.07% owned by PCCW. 1.1 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Company, DBS Vickers

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Company Guide

HKT Trust

Key Assumptions FY Dec 2014A 2015A 2016A 2017F 2018F Fixed-line sub growth 0.1 0.0 (0.2) 0.0 0.0 (%) Broadband sub growth (0.3) 0.1 (0.3) 0.6 1.4 (%) Mobile sub growth (%) N/A (0.6) (1.0) (0.3) (0.3) Mobile ARPU 146.0 168.0 177.0 177.0 179.0 EBITDA margin (%) 35.5 34.8 37.5 36.2 36.5 Source: Company, DBS Vickers

Segmental Breakdown (HK$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (HK$ m) TSS 19,913 20,877 21,414 21,820 22,355 Mobile 8,950 14,317 13,063 14,552 14,636 Other businesses 564 207 237 200 200 Elliminations (604) (672) (867) (731) (744) Total 28,823 34,729 33,847 35,840 36,447 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 28,823 34,729 33,847 35,840 36,447 Cost of Goods Sold (12,053) (15,539) (14,445) (16,210) (16,336) Gross Profit 16,770 19,190 19,402 19,630 20,112 Other Opng (Exp)/Inc (12,416) (13,287) (12,523) (12,400) (12,583) Operating Profit 4,354 5,903 6,879 7,229 7,529 Other Non Opg (Exp)/Inc 99 18 (51) 0 0 Associates & JV Inc (29) (25) (23) (23) (23) Net Interest (Exp)/Inc (1,124) (1,310) (1,107) (1,107) (1,136) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 3,300 4,586 5,698 6,099 6,369 Tax (242) (600) (771) (854) (892) Minority Interest (67) (37) (38) (38) (38) Preference Dividend 0 0 0 0 0 Net Profit 2,991 3,949 4,889 5,208 5,440 Net Profit before Except. 2,991 3,949 4,889 5,208 5,440 EBITDA 10,310 12,098 12,613 12,963 13,317 Growth Revenue Gth (%) 26.2 20.5 (2.5) 5.9 1.7 EBITDA Gth (%) 28.1 17.3 4.3 2.8 2.7 Opg Profit Gth (%) 35.5 35.6 16.5 5.1 4.1 Net Profit Gth (%) 21.6 32.0 23.8 6.5 4.5 Margins & Ratio Gross Margins (%) 58.2 55.3 57.3 54.8 55.2 Opg Profit Margin (%) 15.1 17.0 20.3 20.2 20.7 Net Profit Margin (%) 10.4 11.4 14.4 14.5 14.9 ROAE (%) 8.7 10.5 12.7 13.3 13.7 ROA (%) 3.8 4.4 5.3 5.5 5.7 ROCE (%) 5.9 6.5 7.4 7.5 7.8 Div Payout Ratio (%) 112.1 103.7 95.8 94.6 95.2 Net Interest Cover (x) 3.9 4.5 6.2 6.5 6.6 Source: Company, DBS Vickers

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Company Guide HKT Trust

Interim Income Statement (HK$ m) FY Dec 2H2014 1H2015 2H2015 1H2016 2H2016

Revenue 16,303 15,974 18,755 16,388 17,459 Cost of Goods Sold (6,720) (6,544) (8,995) (6,973) (7,472) Gross Profit 9,583 9,430 9,760 9,415 9,987 Other Oper. (Exp)/Inc (7,302) (6,851) (6,436) (6,375) (6,148) Operating Profit 2,281 2,579 3,324 3,040 3,839 Other Non Opg (Exp)/Inc 58 33 (15) 9 (60) Associates & JV Inc (31) (15) (10) (8) (15) Net Interest (Exp)/Inc (672) (631) (679) (483) (624) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,636 1,966 2,620 2,558 3,140 Tax 3 (171) (429) (231) (540) Minority Interest (48) (17) (20) (10) (28) Net Profit 1,591 1,778 2,171 2,317 2,572 Net profit bef Except. 1,591 1,778 2,171 2,317 2,572

Growth Revenue Gth (%) 38.6 27.6 15.0 2.6 (6.9) Opg Profit Gth (%) 29.3 24.4 45.7 17.9 15.5 Net Profit Gth (%) 25.2 27.0 36.5 30.3 18.5

Margins Gross Margins (%) 58.8 59.0 52.0 57.5 57.2 Opg Profit Margins (%) 14.0 16.1 17.7 18.6 22.0 Net Profit Margins (%) 9.8 11.1 11.6 14.1 14.7 Source: Company, DBS Vickers

Balance Sheet (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 15,767 16,939 18,272 19,494 20,640 Invts in Associates & JVs 721 621 855 832 809 Other LT Assets 61,054 60,010 61,794 60,836 59,908 Cash & ST Invts 3,613 3,768 3,368 3,576 3,788 Inventory 621 598 707 778 855 Debtors 3,875 3,422 3,035 3,187 3,346 Other Current Assets 4,149 4,559 5,335 5,858 6,432 Total Assets 89,800 89,917 93,366 94,560 95,779

ST Debt 3,877 3,879 0 0 0 Creditors 1,979 2,194 2,474 2,721 2,994 Other Current Liab 8,559 8,705 8,828 8,828 8,828 LT Debt 32,549 32,436 38,193 38,193 38,193 Other LT Liabilities 4,797 4,968 4,712 5,218 5,741 Shareholder’s Equity 37,932 37,616 39,096 39,499 39,885 Minority Interests 107 119 63 101 139 Total Cap. & Liab. 89,800 89,917 93,366 94,560 95,779

Non-Cash Wkg. Capital (1,893) (2,320) (2,225) (1,727) (1,188) Net Cash/(Debt) (32,813) (32,547) (34,825) (34,617) (34,405) Debtors Turn (avg days) 43.5 38.3 34.8 31.7 32.7 Creditors Turn (avg days) 111.9 81.6 98.6 90.7 99.1 Inventory Turn (avg days) 48.5 23.8 27.6 25.9 28.3 Asset Turnover (x) 0.4 0.4 0.4 0.4 0.4 Current Ratio (x) 0.9 0.8 1.1 1.2 1.2 Quick Ratio (x) 0.5 0.5 0.6 0.6 0.6 Net Debt/Equity (X) 0.9 0.9 0.9 0.9 0.9 Net Debt/Equity ex MI (X) 0.9 0.9 0.9 0.9 0.9 Capex to Debt (%) 6.9 8.4 7.4 7.2 7.1 Z-Score (X) 1.8 2.0 2.0 2.0 2.0 Source: Company, DBS Vickers

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Company Guide

HKT Trust

Cash Flow Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 3,300 4,586 5,698 6,099 6,369 Dep. & Amort. 5,886 6,202 5,808 5,757 5,811 Tax Paid (395) (365) (551) (640) (669) Assoc. & JV Inc/(loss) 29 25 23 23 23 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (545) (624) (322) (328) (370) Other Operating CF 1,294 1,545 1,170 1,170 1,199 Net Operating CF 9,569 11,369 11,826 12,081 12,364 Capital Exp.(net) (2,510) (3,037) (2,835) (2,750) (2,700) Other Invts.(net) (3,219) (3,760) (5,229) (3,441) (3,499) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (18,857) (418) 0 0 0 Net Investing CF (24,586) (7,215) (8,064) (6,191) (6,199) Div Paid (3,141) (3,713) (4,483) (4,805) (5,053) Chg in Gross Debt 11,909 (128) 1,105 0 0 Capital Issues 7,807 6 0 0 0 Other Financing CF (34) (168) (784) (878) (900) Net Financing CF 16,541 (4,003) (4,162) (5,682) (5,953) Currency Adjustments (45) 4 0 0 0 Chg in Cash 1,479 155 (400) 208 212 Opg CFPS (HK$) 1.43 1.59 1.61 1.64 1.68 Free CFPS (HK$) 1.00 1.10 1.19 1.23 1.28

Source: Company, DBS Vickers

Target Price & Ratings History

S.No. Date Closing 12-mth Rating HK$ Price Target 13.0 2 Price 12.5 1: 13-May-16 HK$11.36 HK$12.90 Buy 12.0 2: 11-Aug-16 HK$11.96 HK$12.90 Buy 1 3: 27-Oct-16 HK$10.92 HK$12.30 Buy 11.5 4: 16-Jan-17 HK$9.50 HK$13.50 Buy 3 4&5 11.0 5: 16-Jan-17 HK$9.50 HK$13.50 Buy 10.5 10.0 9.5 9.0 Jul-16 Jan-17 Jun-16 Oct-16 Feb-17 Sep-16 Apr-17 Apr-16 Dec-16 Nov-16 Mar-17 Aug-16 May-16

Source: DBS Vickers Analyst: Tsz Wang TAM CFA,

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Page 24

China / Hong Kong Company Guide

Hutchison Telecom Version 7 | Bloomberg: 215 HK Equity | Reuters: 0215.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 25 Apr 2017

HOLD Moderate recovery in the price Last Traded Price ( 24 Apr 2017):HK$2.29 (HSI : 24,139) Current valuation reflects fair value Price Target 12-mth: HK$2.40 (5% upside) We have a HOLD rating on Hutchison Telecom (HT) as we believe the Potential Catalyst: Price hike and availability of “star” handsets current valuation reflects its fair value. HT is an integrated telecom Where we differ: We expect earnings recovery in the next few years but operator in Hong Kong with mobile service declining and fixed-line already in the price revenue being stable in the past few years. HT has lost c.550k mobile

Analyst subs to 3,222k as at end-FY16 since its decision to give up the lower- Tsz Wang TAM CFA, +852 2971 1772 end of the market in FY14. Since the re-launch of speed-capped plan, [email protected] mobile sub base has stabilized in 2016. Mobile tariff hike is a major Chris KO CFA, +852 2971 1707 growth driver but this will depend on the availability of “star” handsets [email protected] and a price leader to take the lead.

Price Relative The price leader lacks incentive to raise mobile tariffs.

HK$ Relative Index The mobile market remains competitive and raising tariffs will be more

5.0 208 challenging. Mobile operators were unable to raise tariffs through the 4.5 188 launch of iPhone 7, which was in line with our expectation. HKT 168 4.0 148 (6823.HK) has the largest market share of mobile subs and stands to 3.5 128

3.0 108 benefit the most from a tariff hike. However, it lacks incentive to raise 88 2.5 mobile tariffs as it focuses on cost savings from the CSL integration in 68 2.0 48 the near term. Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Hutchison Telecom (LHS) Relative HSI (RHS) Fixed-line business to drive a moderate recovery Forecasts and Valuation We forecast the service revenue to increase by c.4% to HK$7,956m in FY Dec (HK$ m) 2015A 2016A 2017F 2018F FY17, supported by fixed-line business which is driven by increasing Turnover 22,042 12,024 12,342 12,558 EBITDA 2,754 2,444 2,590 2,659 bandwidth demand by corporate and carrier segments. Prior to any Pre-tax Profit 1,293 928 992 1,043 meaningful price hikes, we expect the growth of mobile ARPU and Net Profit 915 701 756 799 service revenue to be limited. We expect the company's earnings to Net Pft (Pre Ex) (core 915 701 756 799 profit) increase by 8% in FY17F and 6% in FY18F mainly due to the growth of Net Profit Gth (Pre-ex) fixed-line business. However, we believe the current share price has 9.8 (23.4) 7.9 5.6 (%) already reflected the moderate earnings recovery from 2016. EPS (HK$) 0.19 0.15 0.16 0.17 Core EPS (HK$) 0.19 0.15 0.16 0.17 Valuation: EPS Gth (%) 9.8 (23.4) 7.9 5.6 We have a HOLD rating on HT. Our target price of HK$2.4 is pegged at Core EPS Gth (%) 9.8 (23.4) 7.9 5.6 15x FY17F PE, which is in line with its historical average. Our TP also Diluted EPS (HK$) 0.19 0.15 0.16 0.17 implies a dividend yield of c.5% in FY17F, which is in line with peers’ DPS (HK$) 0.14 0.11 0.12 0.12 average. BV Per Share (HK$) 2.39 2.40 2.45 2.49 PE (X) 12.1 15.7 14.6 13.8 Key Risks to Our View: Core PE (X) 12.1 15.7 14.6 13.8 Availability of “star” handsets (upside risk). The launch of “star” P/Cash Flow (X) 4.5 5.0 4.8 4.7 P/Free CF (X) 7.7 10.1 9.0 8.6 handsets could result in higher handset sales volumes and margins. EV/EBITDA (X) 5.3 6.5 5.9 5.5 Mobile operators would also have stronger pricing power to raise the Net Div Yield (%) 6.2 4.8 5.1 5.4 tariffs for handset-bundled mobile data plans. P/Book Value (X) 1.0 1.0 0.9 0.9 Net Debt/Equity (X) 0.2 0.3 0.3 0.2 Irrational market competition (downside risk). Hong Kong's mobile ROAE (%) 8.0 6.1 6.5 6.7 market is crowded with four major players and is more or less saturated. Earnings Rev (%): Nil Nil Irrational pricing may lead to a price war. Consensus EPS (HK$) 0.16 0.17 Other Broker Recs: B: 0 S: 0 H: 8 At A Glance Issued Capital (m shrs) 4,819 Source of all data on this page: Company, DBSV, Thomson Reuters, Mkt. Cap (HK$m/US$m) 11,035 / 1,419 HKEX Major Shareholders CK Hutchison Holdings Ltd. (%) 66.1 Li Ka-Shing (%) 8.4 Free Float (%) 25.5 3m Avg. Daily Val. (US$m) 1.1 ICB Industry : Telecommunications / Mobile Telecommunications ASIAN INSIGHTS VICKERS SECURITIES

ed- JS / sa- DL

Company Guide

Hutchison Telecom

Mobile sub number (k)

CRITICAL DATA POINTS TO WATCH 3287 3,320 3197 3222 3254 3031 Earnings Drivers: 2,846 Mobile tariff hike. The mobile market is crowded with four 2,371

major players, namely HKT, HT, SmarTone (SMT) and China 1,897

Mobile Hong Kong (CMHK). Despite increasing data usage 1,423

partly due to OTT content data consumption, the market 949

lacks a price leader to take the initiative to raise the tariff for 474 higher-end mobile data packages. HKT has the largest market 0 share of mobile sub base and stands to benefit the most from 2014A 2015A 2016A 2017F 2018F a tariff hike. However, it has been focusing on network and brand integration as well as cost savings after the acquisition Mobile ARPU (HK$)

of CSL in May 2014. We reckon that the cost synergies 113 111.0 110.0 105.0 104.0 105.0 should be able to support its free cash flow or dividend 91 growth target in the coming few years. Therefore, HKT lacks incentive to improve its dividend growth by raising mobile 68 tariff and industry wide tariff hike is challenging for mobile 45 operators including HT. 23 Mobile sub growth. Hong Kong's mobile market is more or 0 less matured with low single-digit sub growth in the past two 2014A 2015A 2016A 2017F 2018F

years. HKT, HT, SMT and CMHK commanded market shares of c.31%, c.22%, c.14% and c.20% respectively in June Fixed-line business growth (%) 5.7 2016. HT stopped offering low-tier speed-capped plans in 5.84 FY14. It has lost c.550k mobile subs since then (from 3,771k 4.9 3.9 3.98 as at end-FY13 to 3,222k as at end-FY16). Mobile postpaid 3.2

subs decreased by c.450k from 1,933m as at end-FY13 to 2.12 1,486m as at end-FY16. HT launched its mobile speed- capped plan in 2016 to target the mass market, and stabilise 0.26

the post-paid mobile sub base. We expect the number of -1.60 mobile subs to be stable going forward. -3.46 -3.1 2014A 2015A 2016A 2017F 2018F Availability of “star” handsets. Availability of “star” handsets could result in higher handset sales volumes and margins. Source: Company, DBS Vickers Mobile operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans. However, mobile operators were unable to raise the tariff through the launch of iPhone 7, which was in line with our expectation.

Stable fixed-line business growth. We are optimistic on the growth of fixed-line business supported by the corporate and carrier segments. We expect a mid-single digit growth from international and local carrier business which is driven by increasing data traffic and higher demand for bandwidth.

Through providing one-stop ICT solutions which offers more business opportunities, HT’s corporate business has successfully penetrated into difference industries such as banks, insurers and retailers. The bandwidth demand from corporate has also been increasing.

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Page 26

Company Guide Hutchison Telecom

Leverage & Asset Turnover (x) Balance Sheet: 0.45 1.1 Healthy financial position with a net gearing ratio of 30% in 0.40 1.0 FY17F. The company generates stable operating cash flows to 0.35 support 75% dividend payout ratio and HK$1.1bn capex per 0.30 0.9 0.25 annum. HT had a net gearing ratio of 37% and debt-to-EBITDA 0.8 0.20 ratio of c.1.8x in FY16, which is manageable. We expect the net 0.15 0.7 gearing to decrease to c.20-30% in FY17-18F. 0.10 0.6 0.05 0.00 0.5 Share Price Drivers: 2014A 2015A 2016A 2017F 2018F Tariff hike. Tariff hike looks unlikely in the near term as Gross Debt to Equity (LHS) Asset Turnover (RHS) competition remains intense. Industry-wdie tariff hike requires Capital Expenditure the largest player HKT to take the lead. However, it lacks the HK$m 1,180.0 incentive to raise tariff as it focuses on cost synergies from CSL 1,160.0 1,140.0 integration. The market has recently been focusing launching 1,120.0 various top-up plans to monetise more data usage. ARPU uplift 1,100.0 1,080.0 will be a key share price catalyst. 1,060.0 1,040.0 1,020.0 Mobile sub growth. Hong Kong's mobile market penetration is 1,000.0 more or less matured with low single-digit sub growth in the 980.0 2014A 2015A 2016A 2017F 2018F past two years. Further sub growth will come mostly from Capital Expenditure (-) market share gains. HT stopped offering low-tier speed-capped ROE plans in FY14. It has lost c.550k mobile subs since then (from 8.0% 3,771k as at end-FY13 to 3,222k as at end-FY16). Mobile 7.0% postpaid subs decreased by c.450k from 1,933m as at end-FY13 6.0% to 1,486m as at end-FY16. HT launched mobile speed-capped 5.0% plan in 2016 to target the mass market and stabilise the post- 4.0% paid mobile sub base. We expect the number of mobile subs to 3.0% be stable going forward. 2.0%

1.0%

Availability of “star” handsets. Availability of “star” handsets 0.0% 2014A 2015A 2016A 2017F 2018F could result in higher handset sales volumes and margins. Mobile operators would also have stronger pricing power to Forward PE Band (x) raise the tariffs for handset-bundled mobile data plans. However, 26.1 mobile operators were unable to raise the tariff through the 24.1 launch of iPhone 7, which was in line with our expectation. 22.1 +2sd: 22.5x

20.1 +1sd: 20.3x

Key Risks: 18.1 Irrational market competition. Hong Kong's mobile market is Avg: 18x 16.1 crowded with four major players and is more or less saturated. ‐1sd: 15.8x 14.1 Irrational pricing may lead to a price war. ‐2sd: 13.5x 12.1 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Lack of “star” handsets. Handset sales depend on the popularity PB Band (x) of the new smartphones. The lack of “star” handsets could 2.3 result in lower handset sales volumes and margins. And 2.1 operators would have weaker pricing power to raise the tariff for 1.9 handset-bundled mobile data plans. 1.7 +2sd: 1.76x 1.5 +1sd: 1.53x Company Background: 1.3 Avg: 1.29x Hutchison Telecom (HT) is an integrated telecom service provider 1.1 ‐1sd: 1.06x in Hong Kong, operating under the brand “3 Hong Kong”. It 0.9 ‐2sd: 0.83x has a c.20% mobile sub market share. Its major shareholder is 0.7 CK Hutchison Holdings Limited. Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Company, DBS Vickers

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Company Guide

Hutchison Telecom

Key Assumptions FY Dec 2014A 2015A 2016A 2017F 2018F Mobile sub number (k) 3,197.0 3,031.0 3,222.0 3,254.0 3,287.0 Mobile ARPU (HK$) 111.0 110.0 105.0 104.0 105.0 Fixed-line business 5.7 (3.1) 3.9 4.9 3.2 growth (%) Source: Company, DBS Vickers

Segmental Breakdown (HK$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (HK$ m) Moible 4,646 4,106 3,915 4,025 4,101 Fixed-line 3,664 3,565 3,725 3,931 4,071 Hardware sales 7,986 14,371 4,384 4,386 4,386 Total 16,296 22,042 12,024 12,342 12,558 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 16,296 22,042 12,024 12,342 12,558 Cost of Goods Sold (7,713) (14,063) (4,311) (4,313) (4,313) Gross Profit 8,583 7,979 7,713 8,029 8,245 Other Opng (Exp)/Inc (7,225) (6,549) (6,669) (6,877) (7,043) Operating Profit 1,358 1,430 1,044 1,152 1,202 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (35) (34) (21) (21) (21) Net Interest (Exp)/Inc (155) (103) (95) (138) (138) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,168 1,293 928 992 1,043 Tax (205) (216) (155) (166) (174) Minority Interest (130) (162) (72) (70) (70) Preference Dividend 0 0 0 0 0 Net Profit 833 915 701 756 799 Net Profit before Except. 833 915 701 756 799 EBITDA 2,644 2,754 2,444 2,590 2,659 Growth Revenue Gth (%) 27.5 35.3 (45.4) 2.6 1.8 EBITDA Gth (%) (0.7) 4.2 (11.3) 6.0 2.7 Opg Profit Gth (%) 1.4 5.3 (27.0) 10.3 4.4 Net Profit Gth (%) (9.1) 9.8 (23.4) 7.9 5.6 Margins & Ratio Gross Margins (%) 52.7 36.2 64.1 65.1 65.7 Opg Profit Margin (%) 8.3 6.5 8.7 9.3 9.6 Net Profit Margin (%) 5.1 4.2 5.8 6.1 6.4 ROAE (%) 7.5 8.0 6.1 6.5 6.7 ROA (%) 4.0 4.4 3.3 3.5 3.7 ROCE (%) 6.6 7.1 5.0 5.4 5.5 Div Payout Ratio (%) 74.9 74.8 74.9 74.9 74.9 Net Interest Cover (x) 8.8 13.9 11.0 8.3 8.7 Source: Company, DBS Vickers

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Company Guide Hutchison Telecom

Interim Income Statement (HK$ m) FY Dec 2H2014 1H2015 2H2015 1H2016 2H2016

Revenue 10,069 11,020 11,022 5,324 6,700 Cost of Goods Sold (5,653) (6,975) (7,088) (1,478) (2,833) Gross Profit 4,416 4,045 3,934 3,846 3,867 Other Oper. (Exp)/Inc (3,585) (3,256) (3,293) (3,290) (3,379) Operating Profit 831 789 641 556 488 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (23) (18) (16) (14) (7) Net Interest (Exp)/Inc (84) (51) (52) (49) (46) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 724 720 573 493 435 Tax (123) (120) (96) (78) (77) Minority Interest (91) (92) (70) (39) (33) Net Profit 510 508 407 376 325 Net profit bef Except. 510 508 407 376 325

Growth Revenue Gth (%) 51.9 77.0 9.5 (51.7) (39.2) Opg Profit Gth (%) 60.1 49.7 (22.9) (29.5) (23.9) Net Profit Gth (%) 48.3 57.3 (20.2) (26.0) (20.1)

Margins Gross Margins (%) 43.9 36.7 35.7 72.2 57.7 Opg Profit Margins (%) 8.3 7.2 5.8 10.4 7.3 Net Profit Margins (%) 5.1 4.6 3.7 7.1 4.9 Source: Company, DBS Vickers

Balance Sheet (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 10,663 10,656 10,631 10,587 10,524 Invts in Associates & JVs 515 493 460 439 418 Other LT Assets 7,127 6,696 8,120 7,795 7,470 Cash & ST Invts 359 1,021 237 945 1,662 Inventory 142 591 127 127 127 Debtors 1,892 1,817 1,719 1,626 1,539 Other Current Assets 0 0 0 0 0 Total Assets 20,698 21,274 21,294 21,519 21,739

ST Debt 0 0 0 0 0 Creditors 3,956 4,200 3,581 3,509 3,439 Other Current Liab 18 11 8 8 8 LT Debt 3,952 3,962 4,467 4,467 4,467 Other LT Liabilities 1,063 1,010 1,082 1,082 1,082 Shareholder’s Equity 11,293 11,522 11,573 11,799 12,020 Minority Interests 416 569 583 653 723 Total Cap. & Liab. 20,698 21,274 21,294 21,519 21,739

Non-Cash Wkg. Capital (1,940) (1,803) (1,743) (1,764) (1,782) Net Cash/(Debt) (3,593) (2,941) (4,230) (3,522) (2,805) Debtors Turn (avg days) 42.3 30.7 53.7 49.5 46.0 Creditors Turn (avg days) 226.6 117.2 491.4 453.5 447.3 Inventory Turn (avg days) 8.9 10.5 45.3 16.2 16.3 Asset Turnover (x) 0.8 1.1 0.6 0.6 0.6 Current Ratio (x) 0.6 0.8 0.6 0.8 1.0 Quick Ratio (x) 0.6 0.7 0.5 0.7 0.9 Net Debt/Equity (X) 0.3 0.2 0.3 0.3 0.2 Net Debt/Equity ex MI (X) 0.3 0.3 0.4 0.3 0.2 Capex to Debt (%) 29.6 26.4 24.6 24.4 24.4 Z-Score (X) 1.6 1.9 1.4 1.5 1.6 Source: Company, DBS Vickers

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Company Guide

Hutchison Telecom

Cash Flow Statement (HK$ m) FY Dec 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 1,168 1,293 928 992 1,043 Dep. & Amort. 1,321 1,358 1,421 1,459 1,478 Tax Paid (12) (16) (155) (166) (174) Assoc. & JV Inc/(loss) 35 34 21 21 21 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (112) (223) (57) 21 18 Other Operating CF 83 32 38 (18) (18) Net Operating CF 2,483 2,478 2,196 2,310 2,367 Capital Exp.(net) (1,168) (1,045) (1,098) (1,090) (1,090) Other Invts.(net) 0 0 (1,779) 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 85 (92) 18 18 18 Net Investing CF (1,083) (1,137) (2,859) (1,072) (1,072) Div Paid (591) (670) (626) (530) (578) Chg in Gross Debt (650) (9) 505 0 0 Capital Issues 0 0 0 0 0 Other Financing CF (9) 0 0 0 0 Net Financing CF (1,250) (679) (121) (530) (578) Currency Adjustments 0 0 0 0 0 Chg in Cash 150 662 (784) 708 717 Opg CFPS (HK$) 0.54 0.56 0.47 0.47 0.49 Free CFPS (HK$) 0.27 0.30 0.23 0.25 0.26

Source: Company, DBS Vickers

Target Price & Ratings History

S.No. Date Closing 12-mth Rating HK$ Price Target 4.0 Price 3.8 1: 13-May-16 HK$2.80 HK$2.70 Hold 3.6 2: 6-Jul-16 HK$2.59 HK$2.50 Hold 3.4 3: 3-Aug-16 HK$2.85 HK$2.50 Hold 3.2 3 4: 27-Oct-16 HK$2.58 HK$2.50 Hold 3.0 1 5: 17-Nov-16 HK$2.57 HK$2.50 Hold 2 2.8 4 5 6: 1-Mar-17 HK$2.43 HK$2.40 Hold 6 2.6 7&8 7: 3-Mar-17 HK$2.40 HK$2.40 Hold 2.4 8: 3-Mar-17 HK$2.40 HK$2.40 Hold 2.2 2.0 Jul-16 Jan-17 Jun-16 Oct-16 Feb-17 Apr-16 Sep-16 Apr-17 Dec-16 Nov-16 Mar-17 Aug-16 May-16

Source: DBS Vickers Analyst: Tsz Wang TAM CFA,

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Page 30

China / Hong Kong Company Guide

SmarTone Version 6 | Bloomberg: 315 HK EQUITY | Reuters: 315.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 25 Apr 2017

HOLD Getting harder to raise tariffs Last Traded Price ( 24 Apr 2017):HK$10.20 (HSI : 24,139) Challenging outlook compensated by an attractive yield Price Target 12-mth: HK$10.40 (2% upside) We have a HOLD rating on SmarTone (SMT) due to a more challenging Potential Catalyst: Price hike, availability of “star” handsets outlook for a tariff hike, compensated by an attractive yield of 5%+. Where we differ: Our earnings estimates for FY6/17F are lower than SMT, being a smaller mobile operator, focuses on high-end subscribers consensus (subs). The mobile market is saturated and we do not expect any

Analyst market share re-shuffle. Tariff hike is a major growth driver but the Tsz Wang TAM CFA, +852 2971 1772 opportunity for tariff hikes on high-tier plans to take place will depend [email protected] on the availability of “star” handsets.

Chris KO CFA, +852 2971 1707 The price leader lacks incentive to raise mobile tariffs. [email protected] The mobile market remains competitive and raising tariffs will be more Price Relative challenging. Mobile operators were unable to raise tariffs through the

HK$ Relative Index launch of iPhone 7, which was in line with our expectation. HKT

16.7 210 (6823.HK) has the largest market share of mobile subs and stands to 190 14.7 benefit the most from a tariff hike. However, it lacks incentive to raise 170 12.7 150 mobile tariffs as it focuses on cost savings from the CSL integration in 130 10.7 110 the near term. 90 8.7 70 Expect earnings pressure in FY6/17 6.7 50 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 We forecast the company's earnings to decline by 9% in FY6/17F due

SmarTone (LHS) Relative HSI (RHS) to (1) increasing spectrum licence fee, (2) shrinking handset sales Forecasts and Valuation business, and (3) decline in roaming revenue. In addition, we also FY Jun (HK$ m) 2015A 2016A 2017F 2018F expect a decline in interest income due to the spectrum licence fee of Turnover 18,659 18,356 9,770 9,822 EBITDA 2,857 2,556 2,316 2,310 HK$2.3bn paid upfront. We expect earnings to resume a low single- Pre-tax Profit 1,131 962 877 905 digit growth in FY6/18F driven by improvement in service revenue. The Net Profit 935 797 729 753 management intends to maintain its dividend per share of HK$0.6 for Net Pft (Pre Ex) (core 935 797 729 753 profit) FY6/17F, in absolute terms, or 75% of the earnings in FY6/17F, Net Profit Gth (Pre-ex) whichever higher. 74.2 (14.8) (8.5) 3.2 (%) EPS (HK$) 0.89 0.76 0.70 0.72 Valuation: Core EPS (HK$) 0.89 0.76 0.70 0.72 We have a HOLD rating on SMT due to a more challenging outlook for EPS Gth (%) 72.6 (14.8) (8.5) 3.2 a tariff hike, compensated by an attractive yield of 5%+. Our target Core EPS Gth (%) 72.6 (14.8) (8.5) 3.2 price of HK$10.4 is pegged at 15x FY6/17F PE, which is in line with its Diluted EPS (HK$) 0.89 0.76 0.69 0.72 historical average. DPS (HK$) 0.60 0.60 0.60 0.52 BV Per Share (HK$) 3.64 3.99 4.07 4.20 Key Risks to Our View: PE (X) 11.4 13.4 14.7 14.2 Availability of “star” handsets (upside risk). Launch of “star” handsets Core PE (X) 11.4 13.4 14.7 14.2 could result in higher handset sales volumes and margins. Mobile P/Cash Flow (X) 3.6 7.1 5.0 5.0 P/Free CF (X) 4.9 11.8 6.8 6.7 operators would also have stronger pricing power to raise the tariffs for EV/EBITDA (X) 3.4 4.0 4.9 4.7 handset-bundled mobile data plans. Net Div Yield (%) 5.9 5.8 5.8 5.1 P/Book Value (X) 2.8 2.6 2.5 2.4 Irrational market competition (downside risk). Hong Kong's mobile Net Debt/Equity (X) CASH CASH 0.1 0.0 market is crowded with four major players and it is more or less ROAE (%) 26.6 19.5 16.7 16.8 saturated. Irrational pricing may lead to a price war. Earnings Rev (%): Nil Nil Consensus EPS (HK$) 0.72 0.72 At A Glance Other Broker Recs: B: 4 S: 0 H: 6 Issued Capital (m shrs) 1,109 Source of all data on this page: Company, DBSV, Thomson Reuters, Mkt. Cap (HK$m/US$m) 11,310 / 1,454

HKEX Major Shareholders Sun Hung Kai Properties Limited (%) 68.1 Free Float (%) 32.0 3m Avg. Daily Val. (US$m) 2.0 ICB Industry : Telecommunications / Mobile Telecommunications

ASIAN INSIGHTS VICKERS SECURITIES

ed-TH / sa- AH

Company Guide

SmarTone

Mobile Sub number (k) CRITICAL DATA POINTS TO WATCH 2110 2,131 1960 1970 2010 1880 Earnings Drivers: 1,827 Mobile tariff hikes. The mobile market is crowded with four 1,522

major players, namely HKT, Hutchison Telecom (HT), SMT and 1,218

China Mobile Hong Kong (CMHK). Despite increasing data 913 usage partly due to over-the-top (OTT) content data 609 consumption, the market lacks a price leader to take the 304 initiative to raise the tariff for higher-end mobile data 0 packages. HKT has the largest market share of mobile sub 2014A 2015A 2016A 2017F 2018F

base and stands to benefit the most from a tariff hike. However, it has been focusing on network and brand Mobile ARPU (HK$)

208.0 integration as well as cost savings after the acquisition of CSL 202.0 203.0 201.0 200.0 in May 2014. We reckon that the cost synergies should be able to support its free cash flow or dividend growth target in 170

the coming few years. Therefore, HKT lacks incentive to 127 improve its dividend growth by raising mobile tariff and industry wide tariff hike is challenging for mobile operators 85

including SMT. 42

0 Mobile sub growth. Hong Kong's mobile market is more or 2014A 2015A 2016A 2017F 2018F less matured with low single-digit sub growth in the past two years. HKT, HT, SMT and CMHK commanded market shares Source: Company, DBS Vickers of c.31%, c.22%, c.14% and c.20% respectively in June 2016. SMT had a total sub base of 1,970m in FY6/16 with c.70% postpaid subs and c.30% prepaid subs. Speed-capped plan subs accounted for one-third of its postpaid sub base, and mid- to high-end subs accounted for the balance.

Availability of “star” handsets. 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.

However, mobile operators were unable to raise the tariff through the launch of iPhone 7, which was in line with our expectation.

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Page 32

Company Guide SmarTone

Leverage & Asset Turnover (x) 1.9 Balance Sheet: 0.90 Healthy balance sheet to support steady dividend per share. SMT 1.8 0.80 1.7 had a healthy balance sheet with a net gearing of 25% as at the 0.70 1.6 0.60 end of 1HFY6/17. It expects capex to drop from HK$600m in 1.5 FY6/16 to HK$550m in FY6/17F. Supported by strong operating 0.50 1.4 0.40 cash flow, the company intended to maintain its dividend per 1.3 0.30 1.2 share of HK$0.6 for FY6/17F, in absolute terms, or 75% of the 0.20 1.1 earnings in FY6/17F, whichever higher. 0.10 1.0 0.00 0.9 2014A 2015A 2016A 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure Share Price Drivers: Tariff hike. Tariff hike looks unlikely in the near term as HK$m 900.0 competition remains intense. Industry-wdie tariff hike requires 800.0 the largest player HKT to take the lead. However, it lacks the 700.0 600.0 incentive to raise tariff as it focuses on cost synergies from CSL 500.0 integration. The market has recently been focusing launching 400.0 various top-up plans to monetise more data usage. ARPU uplift 300.0 200.0 will be a key share price catalyst. 100.0 0.0 2014A 2015A 2016A 2017F 2018F Mobile sub growth. Hong Kong's mobile market penetration is Capital Expenditure (-) more or less matured with low single-digit sub growth in the ROE past two years. Further sub growth will come mostly from 25.0% market share gains. We believe that SMT will continue to grow its mobile sub base, in particular the lower-tier segment where it 20.0% has less penetration. 15.0%

Availability of “star” handsets. Availability of “star” handsets 10.0% should lead to higher handset sales volumes and margins. 5.0% Mobile operators would also have stronger pricing power to raise the tariffs for handset-bundled mobile data plans. However, 0.0% 2014A 2015A 2016A 2017F 2018F mobile operators were unable to raise the tariff through the launch of iPhone 7, which was in line with our expectation. Forward PE Band (x) 28.1

23.1 +2sd: 23.6x Key Risks: Irrational market competition. Hong Kong's mobile market is +1sd: 19.9x crowded with four major players and is more or less saturated. 18.1 Avg: 16.3x Irrational pricing may lead to a price war. 13.1 ‐1sd: 12.7x

Lack of “star” handsets. Handset sales depend on the popularity ‐2sd: 9.1x 8.1 of new smartphones. Lack of “star” handsets could result in Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 lower handset sales volumes and margins. And operators would PB Band (x) have weaker pricing power to raise tariffs for handset-bundled 5.5 mobile data plans. 5.0

4.5 +2sd: 4.52x

4.0 +1sd: 3.96x Company Background: 3.5 SmarTone (SMT) is a mobile operator in Hong Kong focusing on Avg: 3.39x 3.0 the high-end customer segment. It has a c.14% mobile sub ‐1sd: 2.82x market share and also provides fixed-line broadband services 2.5 ‐2sd: 2.26x through a partnership with HKBN. Its major shareholder is Sun 2.0 Hung Kai Properties. Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Company, DBS Vickers

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Page 33

Company Guide

SmarTone

Key Assumptions FY Jun 2014A 2015A 2016A 2017F 2018F Mobile Sub number (k) 1,880.0 1,960.0 1,970.0 2,010.0 2,110.0 Mobile ARPU (HK$) 202.0 208.0 203.0 201.0 200.0 Source: Company, DBS Vickers

Segmental Breakdown (HK$ m)

FY Jun 2014A 2015A 2016A 2017F 2018F Revenues (HK$ m) Mobile service 5,423 5,564 5,471 5,260 5,312 Handset and accessory 7,822 13,095 12,885 4,510 4,510 sales Total 13,244 18,659 18,356 9,770 9,822 Source: Company, DBS Vickers

Income Statement (HK$ m) FY Jun 2014A 2015A 2016A 2017F 2018F Revenue 13,244 18,659 18,356 9,770 9,822 Cost of Goods Sold (7,743) (12,708) (12,795) (4,442) (4,442) Gross Profit 5,502 5,951 5,561 5,328 5,380 Other Opng (Exp)/Inc (4,801) (4,782) (4,561) (4,384) (4,411) Operating Profit 700 1,169 1,000 944 969 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (38) (39) (37) (67) (64) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 663 1,131 962 877 905 Tax (131) (195) (175) (158) (163) Minority Interest 5 0 10 10 11 Preference Dividend 0 0 0 0 0 Net Profit 537 935 797 729 753 Net Profit before Except. 537 935 797 729 753 EBITDA 2,456 2,857 2,556 2,316 2,310 Growth Revenue Gth (%) 9.8 40.9 (1.6) (46.8) 0.5 EBITDA Gth (%) (14.6) 16.3 (10.5) (9.4) (0.3) Opg Profit Gth (%) (31.6) 67.0 (14.5) (5.6) 2.6 Net Profit Gth (%) (36.3) 74.2 (14.8) (8.5) 3.2 Margins & Ratio Gross Margins (%) 41.5 31.9 30.3 54.5 54.8 Opg Profit Margin (%) 5.3 6.3 5.4 9.7 9.9 Net Profit Margin (%) 4.1 5.0 4.3 7.5 7.7 ROAE (%) 17.4 26.6 19.5 16.7 16.8 ROA (%) 5.5 9.1 7.5 7.0 7.3 ROCE (%) 8.1 13.3 10.7 10.1 10.3 Div Payout Ratio (%) 60.1 67.6 80.7 88.2 75.0 Net Interest Cover (x) 18.6 30.3 26.7 14.2 15.2 Source: Company, DBS Vickers

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Page 34

Company Guide SmarTone

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

Revenue 8,673 9,986 10,228 8,127 5,372 Cost of Goods Sold (5,675) (7,032) (7,404) (5,391) (2,655) Gross Profit 2,997 2,954 2,824 2,736 2,717 Other Oper. (Exp)/Inc (2,375) (2,333) (2,238) (2,219) (2,190) Operating Profit 623 621 587 518 527 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (59) (54) (100) (42) (41) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 564 567 486 476 486 Tax (96) (99) (87) (88) (97) Minority Interest (1) 1 4 6 4 Net Profit 466 469 403 394 393 Net profit bef Except. 466 469 403 394 393

Growth Revenue Gth (%) 32.8 48.7 17.9 (18.6) (47.5) Opg Profit Gth (%) 44.5 64.9 (5.8) (16.6) (10.1) Net Profit Gth (%) 49.8 107.7 (13.6) (15.9) (2.3)

Margins Gross Margins (%) 34.6 29.6 27.6 33.7 50.6 Opg Profit Margins (%) 7.2 6.2 5.7 6.4 9.8 Net Profit Margins (%) 5.4 4.7 3.9 4.9 7.3 Source: Company, DBS Vickers

Balance Sheet (HK$ m) FY Jun 2014A 2015A 2016A 2017F 2018F

Net Fixed Assets 3,411 3,354 3,248 3,125 2,967 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 2,464 2,424 2,629 3,792 3,467 Cash & ST Invts 3,169 4,155 3,375 2,264 2,760 Inventory 80 82 341 341 341 Debtors 436 332 274 280 286 Other Current Assets 232 466 536 536 536 Total Assets 9,792 10,814 10,403 10,337 10,357

ST Debt 101 124 126 126 126 Creditors 778 755 578 589 601 Other Current Liab 2,070 2,413 2,159 2,076 2,024 LT Debt 2,739 2,844 2,724 2,724 2,724 Other LT Liabilities 854 770 452 385 311 Shareholder’s Equity 3,193 3,851 4,317 4,400 4,544 Minority Interests 57 57 47 37 26 Total Cap. & Liab. 9,792 10,814 10,403 10,337 10,357

Non-Cash Wkg. Capital (2,100) (2,287) (1,586) (1,509) (1,463) Net Cash/(Debt) 329 1,186 525 (586) (90) Debtors Turn (avg days) 11.5 7.5 6.0 10.4 10.5 Creditors Turn (avg days) 40.1 25.4 21.6 69.4 70.1 Inventory Turn (avg days) 5.6 2.7 6.9 40.5 40.1 Asset Turnover (x) 1.4 1.8 1.7 0.9 0.9 Current Ratio (x) 1.3 1.5 1.6 1.2 1.4 Quick Ratio (x) 1.2 1.4 1.3 0.9 1.1 Net Debt/Equity (X) CASH CASH CASH 0.1 0.0 Net Debt/Equity ex MI (X) CASH CASH CASH 0.1 0.0 Capex to Debt (%) 29.0 25.5 21.3 19.3 19.3 Z-Score (X) 3.2 3.7 3.9 3.8 3.9 Source: Company, DBS Vickers

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Page 35

Company Guide

SmarTone

Cash Flow Statement (HK$ m) FY Jun 2014A 2015A 2016A 2017F 2018F

Pre-Tax Profit 663 1,131 962 877 905 Dep. & Amort. 1,627 1,480 1,357 1,131 1,076 Tax Paid (181) (258) (180) (158) (163) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (153) 359 (881) (3) 31 Other Operating CF 198 236 255 280 295 Net Operating CF 2,154 2,947 1,513 2,128 2,144 Capital Exp.(net) (824) (757) (606) (550) (550) Other Invts.(net) (665) (1,117) (1,372) (2,042) (490) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 629 (444) 1,558 0 0 Net Investing CF (860) (2,319) (421) (2,592) (1,040) Div Paid (285) (392) (464) (646) (608) Chg in Gross Debt 236 116 (133) 0 0 Capital Issues 2 110 136 0 0 Other Financing CF (57) 4 0 0 0 Net Financing CF (104) (163) (460) (646) (608) Currency Adjustments 0 1 (37) 0 0 Chg in Cash 1,191 467 595 (1,111) 496 Opg CFPS (HK$) 2.22 2.47 2.28 2.03 2.01 Free CFPS (HK$) 1.28 2.09 0.86 1.50 1.52

Source: Company, DBS Vickers

Target Price & Ratings History

S.No. Date Closing 12-mth Rating HK$ Price Target 15.0 2 3 Price 1: 13-May-16 HK$12.60 HK$12.10 Hold 14.0 4&5 1 2: 29-Aug-16 HK$13.06 HK$12.00 Hold 13.0 6 3: 10-Nov-16 HK$11.14 HK$12.00 Hold 4: 17-Feb-17 HK$10.88 HK$10.40 Hold 12.0 5: 17-Feb-17 HK$10.88 HK$10.40 Hold 6: 21-Feb-17 HK$10.56 HK$10.40 Hold 11.0

10.0

9.0 Jul-16 Jan-17 Jun-16 Oct-16 Feb-17 Sep-16 Apr-17 Apr-16 Dec-16 Nov-16 Mar-17 Aug-16 May-16

Source: DBS Vickers Analyst: Tsz Wang TAM CFA,

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Page 36

Industry Focus Hong Kong Telecom Sector

PE & PB band charts

HKBN PE chart (1310 HK) HKBN PB chart (1310 HK)

Share Price (HK$) Share Price (HK$) 33 13 55x 28 12 46x 11 23 8.2x 38x 10 18 7.6x 29x 9 13 6.9x 8 21x 6.3x 8 7 5.6x 3 6 Jul-15 Jul-16 Jul-17 Jul-15 Jul-16 Jul-17 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 HKT Trust PE chart (6823 HK) HKT Trust PB chart (6823 HK)

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

6 2

4 0 Jul-17 Jul-17 Jul-16 Jul-16 Jul-15 Jul-15 Jul-14 Jul-14 Jul-13 Jul-13 Jul-12 Jul-12 Nov-16 Nov-16 Nov-15 Nov-15 Nov-14 Nov-14 Nov-13 Nov-13 Nov-12 Nov-12 Nov-11 Nov-11 Mar-17 Mar-17 Mar-16 Mar-16 Mar-15 Mar-15 Mar-14 Mar-14 Mar-13 Mar-13 Mar-12 Mar-12 Source: Thomson Reuters, DBS Vickers

Page 37

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 4.0 1.4x 4.5 25x 3.5 21x 3.0 1.2x 3.5 17x 2.5 0.9x 2.5 13x 2.0 1.5 9x 1.5 -11 -12 -13 -14 -15 -16 -17 -12 -13 -14 -16 -17 -11 -12 -13 -14 -15 -17 -11 -12 -13 -14 -15 -16 -17 y y y y y y y y y y y y y p p p p p p p p p p p p Jan-11 Jan-12 Jan-16 Jan-13 Jan-14 Jan-15 Jan-17 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-11 Sep-11 Se Se Se Sep-15 Se Se Se Se Se Se Se Se Se Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma May-16 Ma Ma Smartone Telecom PE chart (315 HK) Smartone Telecom PB chart (315 HK)

Share Price (HK$) Share Price (HK$) 30 30

25 25 6.1x

20 26x 20 5.1x 21x 4.1x 15 15 17x 3.2x 10 13x 10 2.2x 9x 5 5

0 0 -11 -12 -13 -14 -15 -16 -17 -11 -12 -13 -14 -16 -11 -12 -13 -14 -15 -16 -17 -11 -12 -14 -16 y y y y y y y p p p p p y y y y y y y p p p p Jan-12 Jan-13 Jan-14 Jan-15 Jan-17 Jan-16 Jan-11 Se Se Se Se Sep-15 Se Sep-17 Jan-12 Jan-13 Jan-15 Jan-17 Jan-11 Jan-14 Jan-16 Ma Ma Ma Ma Ma Ma Ma Se Se Sep-13 Se Sep-15 Se Sep-17 Ma Ma Ma Ma Ma Ma Ma Source: Thomson Reuters, DBS Vickers

Page 38

Industry Focus Hong Kong Telecom Sector

DBSVHK 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: 25 Apr 2017 14:46:49 (HKT) Dissemination Date: 25 Apr 2017 15:08:20 (HKT)

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

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. (“DBSVS”) and DBSVHK, 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 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 Bank Ltd., DBSVS and DBSVHK, 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.

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.

Page 39

Industry Focus Hong Kong Telecom Sector

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 DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 24 Apr 1. 2017.

2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd., DBSVS, DBSVHK, DBSVUSA, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in HKBN Limited (1310 HK) recommended in this report as of 21 Apr 2017.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in the Starhub Limited (STH SP) and M1 Limited/Singapore (M1 SP) recommended in this report as of 31 Mar 2017.

4. DBS Bank Ltd., DBSVS, DBSVHK, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of HKBN Limited (1310 HK) as of 21 Apr 2017.

5. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Starhub Limited (STH SP) and Indosat Terbuka (ISAT IJ) as of 31 Mar 2017.

DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Starhub Limited (STH SP) and Indosat Terbuka (ISAT IJ) in the past 12 months, as of 31 Mar 2017.

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.

6. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in 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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Industry Focus Hong Kong Telecom Sector

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be

contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or DBS Vickers (Hong Kong) Limited (“DBSVHK”), which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA. Hong Kong This report is being distributed in Hong Kong by DBSVHK which is licensed and regulated by the Hong Kong Securities and

Futures Commission.

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

Wong Ming Tek, Executive Director, ADBSR 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. Research reports distributed are only

intended for institutional clients only and no other person may act upon it. United This report is produced by DBSVHK which is regulated by the Securities and Futures Commission of Hong Kong. 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 in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act

upon it. United States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 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 Vickers (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758

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