Investment Thesis: Catching up in network coverage and quality

Key arguments

  • Co-building and co-sharing a 5G network with China Telecom (CT, 728HK) to narrow competitive disadvantage against China Mobile (CM, 941 HK) in terms of network quality and coverage. This will enable CU to gain market share.
  • Expect mobile ARPU to improve by 8% in FY21, supported by higher 5G penetration, from 23% in FY20 to 46% in FY21.
  • Expect efficiency gains through mixed-ownership reform (MOR). CU implemented MOR in 2017 with management restructuring and share incentive scheme to improve operating efficiency. We expect its operating margin to improve from 1.4% in FY17 to 4.2% in FY21 (vs peers’ 8%+).

Valuation

CU is trading at c.8x FY21 PE supported by a c.15% earnings CAGR over FY21-23. Our TP of HK$7.8 is pegged to 12x FY22 PE, in line with peers’ target multiple.

Where we differ

Expect to gain market share. Market expects CM to maintain its dominant market share of c.60% in 5G era. However, implementation of mobile number portability will reduce customer stickiness. CU is co-building and co-sharing a 5G network with CT, which will improve its network quality to gain market share.

Key risk to our view

Policy risks. China’s telecom sector is exposed to policy risks, such as management reshuffle and tariff cuts. This could be unfavourable for its business performance.
Irrational competition in the mobile market. Irrational competition for mobile sub market share could lead to higher ARPU pressure.