Company Update: Bargain sale

  • Potential dividend hike not priced in; expect gradual increase in dividend payout ratio to 70% by FY23 
  • Expect 5G penetration rate to reach 41% and 61% respectively in FY21 and FY22 for China Mobile
  • New business is a key growth driver for services revenue
  • Maintain BUY with a higher TP of HK$68.6, potential dividend hike is a near-term catalyst

Investment Thesis

Attractive valuation at c.7x FY22 PE, 1.5SD below historical average. Potential risks from co-building and co-sharing a network by China Telecom and China Unicom should be priced in at current valuation.

Expect profitability of 5G business to improve in FY22 on higher penetration. We expect 5G sub penetration to increase from 41% in FY21 to 61% in FY22, which should improve mobile ARPU and profitability.

Dividend hike a positive catalyst. Following CT’s dividend hike, we expect CM to raise its payout ratio gradually to 70% by FY23, given CM’s stable capex outlook for FY22-23. This would be a positive catalyst to trigger share price re-rating.

Valuation:

The stock is trading at a c.7x FY22 PE, 1.5SD below its historical average, with an attractive dividend yield of c.9%. Our TP of HK$68.60 is based on 10x FY22 PE, in line with its historical average.

Where we differ:

The market is concerned about the profitability of the 5G business due to higher operating costs. We believe profitability will improve as 5G penetration increases and local governments offer subsidies for rent and electricity tariffs, etc. to encourage 5G investments.

Key Risks to Our View:

Lower-than-expected 5G penetration ramp-up. Lower-than-expected 5G penetration will generate lower returns on 5G network investments.

Policy risk. China’s telecom sector is subject to policy risks such as management reshuffle and tariff cuts. This may not bode well for its business performance.