Company Update: Catching up in network coverage and quality

  • Expect 5G penetration rate to reach 49% and 73% in FY21 and FY22 for China Unicom
  • Expect broadband revenue to increase 5% and 9% in FY21 and FY22
  • Industry internet to be a key growth driver with 25% and 20% growth in FY21 and FY22 
  • Maintain BUY with a higher TP of HK$7.9, with dividend hike as a near-term catalyst

Investment Thesis

Co-building and co-sharing a 5G network with China Telecom (CT, 728 HK) 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 5G penetration to increase from 49% in FY21 to 73% in FY22, supported by more choices of 5G handset models and proliferation of mobile multimedia content. We expect mobile ARPU to improve by 2% in FY22.

Dividend hike a positive catalyst. Following CT’s dividend hike, we expect CU to raise its payout ratio to a similar level as CT. This would be a positive catalyst to trigger share price rerating.

Valuation:

CU is trading at c.6x FY21 PE supported by 14% earnings CAGR in FY20-23. Our TP of HK$7.90 is pegged to 12x FY22F PE, in line with peers’ target multiple.

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 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 and enable it to gain market share.

Key Risks 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 subscriber market share could lead to higher ARPU pressure.