Earnings Alert: 1H22 results beat; expect strong growth momentum for industry internet business
- 1H22 earnings grew by 19.5% y-o-y, above market expectations
- Solid growth in mobile service and broadband businesses of 3.4% and 4.3% y-o-y, respectively
- Industryinternet business rapidly expanded 31.8% y-o-y in 1H22, accounting for 22.9% of service revenue
- Maintain BUY due to strong earnings growth; cut TP to HK$6.8 for lack of commitment to raising payout ratio
1H22 results highlights
Revenue increased by 7.4% y-o-y to Rmb176bn in 1H22. Service revenue grew by 8.3% y-o-y to Rmb161bn, mainly driven by a 31.8% growth in the industry internet business. Industry internet revenue accounted for 22.9% of service revenue and 72.4% of incremental service revenue in 1H22.
Mobile service revenue increased by 3.4% y-o-y to Rmb85bn while mobile ARPU remained stable at Rmb44.4. The 5G penetration rate expanded 21ppts y-o-y to 58%. Broadband access revenue increased by 4.3% y-o-y to Rmb23bn. Broadband access ARPU declined by 6% y-o-y to Rmb39.3.
EBITDA increased by 3.9% y-o-y to Rmb51bn, with service EBITDA margin contracting 1.4ppts to 31.9%. Net profit increased by 19.5% y-o-y to Rmb11bn, thanks to the strong growth momentum of the industry internet business. The company proposed an interim dividend of Rmb0.165 per share, representing a 37.5% y-o-y increase.
Outlook
Management did not reiterate the 5G net adds target of 75m for FY22. We lowered our forecast from 75m to 60m and expect 5G penetration to increase from 49% in FY21 to 67% in FY22. We estimate mobile ARPU and mobile service revenue to improve by 1% and 3.6% in FY22, respectively.
We expect the strong growth momentum of the industry internet business to sustain, riding on the industry digitalisation trend. However, the increasing contribution from industry internet revenue might put pressure on the service EBITDA in the short term. In the long term, the industry internet business will drive up the EBITDA margin.
Capex was Rmb28.4bn in 1H22, up by 98.5% y-o-y. Management expected a higher capex in FY22 compared to FY21. Specifically for the industry internet business, management expected to double investment in the cloud and IDC businesses in FY22, with 35k net adds of IDC cabinets.
In terms of the dividend policy, management still has not made a commitment to raise dividend payout ratio increase, while China Mobile targets 70% payout ratio by FY24 and China Telecom targets 70% by FY23.
We have raised our earnings forecast by 0.7% and 1.4% for FY22 and FY23, respectively. We forecast net profit to grow by 13%, 11%, and 8% in FY22, FY23, and FY24, respectively. We maintain BUY on CU due to its strong earnings growth, with a TP of HK$6.8. Our TP is pegged to 10x FY23 PE (12x FY22 PE previously), lower than its peers’ target multiple, due to its lack of commitment to a dividend payout ratio increase.
