• Potential dividend hike not yet priced in for China Unicom (CU, 762 HK) and China Mobile (CM, 941 HK)
  • Solid earnings growth for telecom operators driven by strong new business performance
  • Expect stable capex for operators; selective on telecom equipment and service providers
  • Top pick China Unicom (762.HK) among operators and ZTE (763.HK) for equipment and service providers

Potential dividend hike has not been priced in for CU and CM. We expect CU to raise its distribution payout ratio to 60% for FY22, after China Telecom’s  (CT, 728 HK) earlier hike, which implies 10% yield. We also expect CM to increase its distribution ratio after A-share listing. Our DPS forecasts for CU and CM are 20% and 10% higher than consensus respectively. 

Solid earnings growth driven by new business, such as IDC, Cloud, ICT services and IoT. We expect revenue from new businesses to grow 20% in FY22, higher than the traditional telecom business. This would lead to solid telecom operators’ earnings growth of c.7% for FY22.

Expect capex to remain stable for operators in FY22-23, due to 5G base station construction of 600k per annum. Given the stable capex outlook, companies able to gain market share such as ZTE, or diversify their revenue base like CCS are likely to outperform peers.

Top picks – CU for operators and ZTE for equipment and service providers. For operators, our pecking order is CU>CT>CM. We prefer CU for its attractive valuation of 6x FY22F PE and 10% yield from potential dividend hike. Among equipment and service providers, we favour ZTE for its potential to gain market share and margin improvement in carriers’ network business.