• Continued restructuring of telco businesses
• Expecting continued improvement in underlying earnings for most divisions
• Looking out for UK CMA’s decision on tower sales by mid March
Busy on the M&A front – The start of this year saw the completion of the merger of the telecommunications businesses of Ooredoo Group and CK Hutchison in Indonesia, creating the country’s second largest mobile telecoms company. Indosat Ooredoo Hutchison will be jointly controlled by Ooredoo Group and CK Hutchison with a 65.6% shareholding, with the Government of Indonesia retaining a 9.6% stake. Meantime, according to sources cited by Bloomberg (14 Jan 2022 report), CK Hutchison’s Italian wireless unit (Italy’s number 3 mobile carrier) is weighing a spinoff of its remaining network infrastructure. There is talk that Wind Tre SpA is considering separating the infrastructure assets and selling a minority stake in the portfolio to a financial investor. Recall that Wind Tre was formed from the 2016 merger of the Italian operations of CK Hutchison and Vimpelcom Ltd in a transaction valued at EUR7.9b.
Fundamental improvement intact, but also sensitive to FX movements and style investing – We see continued improvement in the group’s underlying businesses and a stronger balance sheets with recent divestments. However, the stock is also sensitive to currency movements such as the EUR and GBP, due to the group’s overseas businesses operations. As the EUR and GBP started to depreciate against the HKD since Sep last year, the stock corrected about 15% from Sep to Dec, but recently rebounded about 12% with the strengthening of the GBP and the rotation to value from growth names.
Developments to look out for – Looking ahead, the group is expected to report its FY21 results in mid March and we expect an improvement in underlying earnings for most divisions. In our previous report, we mentioned that the market is likely to monitor the pace of potential share buybacks or other forms of capital returns. In 2021, CK Hutch spent HKD1.24b on share buybacks, representing ~0.56% of shares. We would also look out for the UK CMA decision on tower sales by mid March 2022. We maintain our fair value estimate of HKD70 for CKH.
ESG updates
CK Hutchison’s ESG rating was downgraded at Dec 2020; inclusion of the Corporate Behavior theme in the company’s governance assessment, and concerns over its board structure have led to the downgrade. With no independent majority on the board, and 10 of 17 directors tenured for over 20 years, board entrenchment risks persist. On the other hand, the group contributes to clean technology markets through its investments in its infrastructure segment; the company holds direct interests in CKI-led waste-to-energy, hydrogen-powered rail system, and water treatment projects. Such segments may benefit from increased investor interest in the UN’s Sustainable Development Goals and a low-carbon economy. BUY. (Research Team)
Global Technology – Navigating through the storm
Having been a beneficiary of historically low interest rates and a subdued growth environment for some time now, stocks within the technology complex now face considerable near-term headwinds. Over the past 5 years, periods of rising US 10Y bond yields have typically seen the Nasdaq Composite struggle to outperform the broader market (S&P 500 index); this is intuitively reasonable, given the longer-duration nature of a number of growth/tech names. This observation is particularly pertinent against the current backdrop of rising inflation and potentially tighter monetary policy. This setup, in our view, was a major reason for us to maintain our Market Weight view on the Information Technology and Communication
Services sectors as we headed into the new year. In this note, we dive deeper into the ramifications
and outlook for both the software and semis subsectors arising from such a backdrop, as investors review their positions in this space.
On software, there appears to be a trend towards accelerating spending intentions on the back of strong secular drivers. While encouraging, we also highlight further key considerations when identifying opportunities. First, while M&A driven growth typically involves investors ascribing valuation discounts to the acquirer, we believe software companies have increasingly become more capable of maintaining innovation across its acquired targets while extracting synergies across its existing portfolio at the same time. Second, we also believe that large enterprises are looking to ramp up on the build of modern cloud-based apps, and hyperscalers are likely to be well-positioned in that regard. All considered, while there are reasons to remain constructive on growth prospects ahead, we think it is important to remain selective on companies given the headwinds as described above, and ideally focus on larger-cap names with more mature cashflows/earnings and reasonable valuation levels. Our picks in this space are Salesforce.com, Microsoft and SAP SE.
For semis, 2021 was another strong year for the SOX index – for the first time, the SOX index outperformed the S&P 500 index for the 3rd consecutive year. The macro and supply chain challenges arising from Covid-19 have continued to linger, but higher levels of semiconductor consumption were observed as the digital transformation that had already been in motion across the various verticals continued. At a high level, we observe that despite concerns around rising rates, semis tend to outperform the overall market in a rising rate environment. However, we should not be too quick to draw conclusions as this is set against our other observation that semis do historically underperform during inflationary periods. Again, a selective stock-picking approach would probably be prudent here.
Looking ahead, we believe that the opportunities within Data Center remain healthy, as we expect a sustained recovery in enterprise as well as an acceleration in spending associated with long-term secular trends, which should help to ease certain WFH-related capacity expansion. As for PCs, strong demand in 2021 could normalize this year, as Covid-19 related demand eventually subsides. In smartphones, while we remain somewhat cautious on the growth outlook for smartphone units, we still expect higher semiconductor content across a broad range of device types due to increased 5G penetration. All considered, our picks in this space are Skyworks and TSMC. (Research Team)
