Earning Alert: 1H22 results beat; digital transformation revenue registered rapid growth
- 1H22 adjusted earnings grew by 7.3% y-o-y, above market expectations
- Mobile service and broadband revenue increased by 2.7% and 14.8% y-o-y, respectively
- Digital transformation revenue expanded by 39.2% y-o-y, accounting for 26.0% of service revenue
- Maintain BUY on attractive dividend yield of 9%, with TP raised to HK$74
1H22 results highlights
Operating revenue increased by 12% y-o-y to Rmb497bn. Service revenue grew by 8.4% y-o-y to Rmb426bn. Mobile and broadband service revenue increased by 2.7% and 14.8% y-o-y to Rmb300bn and Rmb54bn, respectively. Digital transformation revenue rapidly expanded by 39.2% y-o-y to Rmb111bn, accounting for 26% of service revenue. Specifically, mobile cloud revenue grew by 103.6% y-o-y to Rmb23.4bn.
Mobile ARPU increased by 0.2% y-o-y to Rmb52.3 and 5G ARPU slightly dropped by 4.4% y-o-y to Rmb85. Household broadband ARPU increased by 0.6% to Rmb36.3.
EBITDA increased by 7.4% y-o-y to Rmb174bn, with service EBITDA margin contracting by 0.4ppt to 40.8%.
Net profit increased by 18.9% y-o-y to Rmb70bn, above market expectations, thanks to strong service revenue growth and service EBITDA margin improvement in 2Q22. Net profit excluding the impact of the adjustment to the residual value rate for certain wireless and transmission assets grew by 7.3% y-o-y.
An interim dividend of HK$2.20 per share was declared, an increase of 34.9% y-o-y. The dividend payout increase is in line with management’s target of raising the payout ratio to 70% by FY23.
Outlook
Management reiterates the 5G network subscribers net-adds target of 130m in FY22. We expect 5G package subscribers to increase by 220m and 5G penetration to increase from 40% in FY21 to 62% in FY22, which will support mobile ARPU and mobile service revenue to improve by 1% and 3% in FY22, respectively. The 8%+ ARPU uplift for 5G upgrade is partly offset by the 5G ARPU decrease.
The digital transformation business has become the key growth driver, contributing 90%+ of incremental service revenue in 1H22. We expect the strong growth momentum to sustain in the next few years.
Capex was Rmb92bn in 1H22, up by 7% y-o-y. Management maintained a full-year capex guidance of Rmb185.2bn, representing a 0.9% y-o-y increase, including Rmb110bn in 5G-related capex and Rmb48bn for computing force. Management expects to deploy at least a cumulative 660k cloud servers and 450k IDC cabinets for external use.
We have raised our earnings estimates by 2.5% and 2.2% for FY22 and FY23, respectively for the strong growth momentum of digital transformation business. We forecast earnings to grow by 10.3%, 6.0%, and 5.0% in FY22, FY23, and FY24, respectively. We maintain BUY on CM for its attractive yield of c.9%, with a higher TP of HK$74. We rolled the valuation forward to FY23. Our TP is pegged to a 10x FY23 PE (previously 10x FY22 PE), in line with its historical average.
