Company Update: Set to gain market share in 5G era

  • Expect 5G penetration rate to reach 50% and 72% in FY21 and FY22 for China Telecom
  • Expect broadband revenue to increase 6% and 8% in FY21 and FY22
  • Industry digitalisation business to be a key growth driver with 20% and 15% growth for FY21 and FY22
  • Maintain BUY with TP unchanged at HK$4.2 for its attractive valuation of 8x FY22 PE and leading position in new business

Investment Thesis

Co-building and co-sharing one 5G network with China Unicom (CU, 762 HK) to narrow competitive disadvantage against China Mobile (CM, 941 HK) on network quality and coverage.

Expect 5G penetration to increase from 50% in FY21 to 72% in FY22 for China Telecom, supported by more choices of 5G handset models and proliferation of mobile multimedia content. We expect mobile ARPU to improve by 2% in FY22.

Accelerated earnings growth to support valuation re-rating. Adjusted net profit growth to accelerate from 2% in FY20 to 17%, 11%, and 8% for FY21, FY22 and FY23 respectively. This should support a valuation re-rating.

Valuation:

The stock is trading at a c.8x FY22F PE, 2SD below its historical average, with a decent yield of c.8%. Our TP of HK$4.20 is based on a 12x FY22F PE, in line with its historical average.

Where we differ:

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

Key Risks to Our View:

Policy risks. China’s telecom sector is exposed to policy risks, management reshuffle, and tariff cuts. This could be unfavourable to business performance.

Irrational competition in the mobile market. Irrational competition for mobile subscriber market share could lead to higher ARPU pressure.