China / Hong Kong Industry Focus China Telecom Sector Industry Focus China Telecom Sector Page 3 Estimated earnings impact from mobile data carried forward policy CM CT CU Estimated

ed- JS / sa- DL

Negative accounting impact from data carried forward policy in FY15; expect profitability to improve in FY16

• Accounting policy to carry forward unused mobile data will defer revenue recognition by 1 month; one-off negative impact on 4Q15 earnings

• Expect profitability improvement in 3Q15 to be sustained into FY16

• China Mobile remains the winner in the 4G era; smaller operators are hoping for the next industry restructuring

• Stock preference in this order: China Mobile > China Unicom > China Telecom

Mobile data carried forward policy to defer revenue. From 1 Oct 2015, China telecom operators are allowing mobile users who subscribe for monthly data packages to carry forward any unused data traffic to the end of the following month. Assuming that half of the mobile data in Oct 2015 was carried forward, operators would recognise one month less mobile data revenue in 4Q15 (or FY15) while operating cost remains unchanged. This policy would drag down FY15 earnings for CM, CT and CU by 10%, 14% and 22% respectively.

Stable 2016 outlook with improvement in profitability. We expect the industry to register 3-4% revenue growth in FY16, driven by mobile sub growth and continuous ARPU uplift from 3G/4G upgrades. Overall sector profitability actually started recovering in 3Q15 after the negative impact from VAT reform, and we expect further enhancement in FY16. Operators have shifted away from the subsidy-driven strategy. Therefore we expect a relatively slower revenue growth but improvement in margins.

Ranking our stock preference: CM > CU > CT. CM should remain the winner in the 4G era, before any restructuring takes place. We expect CM to outperform CU and CT in terms of sub growth and profitability in the medium term. The share prices of CT and CU would benefit from any potential merger. Between these two, we prefer CU as it will receive short term benefit from finance cost savings after the sale of its tower assets. We also expect improvement in operating efficiency, strategy execution capability and corporate visibility as a strong Chairman comes onboard.

HSI: 19,183

ANALYST Tsz Wang TAM CFA +852 2971 1772 [email protected]

Recommendation & valuation

Upside/ F Y 16F(dow nside) PE

HK $ HK $ % x US$bn

T elec om operat o rsChina Mobile(941 HK)

85.65 133.0 55 Buy 11.7 225.3

China Telecom(728 HK)

3.68 4.7 28 Buy 12.0 38.3

China Unicom(762 HK)

8.56 11.8 38 Buy 13.2 26.3

T elec om equ ipment s and in f rast ruc t u re serv ic e p rov idersZTE 'H'(763 HK)

13.3 24.0 80 Buy 11.8 8.8

ZTE 'A'~(000063 CH)

14.61 24.0 64 Buy 15.4 8.8

Comba*(2342 HK)

1.15 1.4 22 Hold 6.5 0.3

CCS(552 HK)

2.96 4.5 52 Buy 6.9 2.6

Trigiant(1300 HK)

1.33 2.3 73 Buy 4.7 0.3

YangtzeOptic F ibre(6869 HK)^

7.55 n.a. n.a. NR 6.1 0.6

M k tCapCompany Pric e

T argetPric e Recom

^ Consensus

* Rating & Target price under review

~ Denominated in RMB

Source: Thomson Reuters, DBS Vickers

DBS Group Research . Equity 5 February 2016

China / Hong Kong Industry Focus

China Telecom Sector Refer to important disclosures at the end of this report

Industry Focus

China Telecom Sector

Page 2

Stable 2016 outlook with profitability improvement

The China Telecom industry reported 0.8% revenue growth in 2015, according to the Ministry of Industry and Information Technology. The Value Added Tax (“VAT”) pilot scheme that started in Jun 2014 had adversely affected revenue growth and profitability in 2H14 and 1H15. Note that both 3Q14 and 3Q15 are under the new VAT regime. Telecom operators’ service revenue resumed positive y-o-y growth in 3Q15. We saw 2%, 6% and 0.6% service revenue growth for China Mobile (CM, 941 HK), China Telecom (CT, 728 HK) and China Unicom (CU, 762 HK) respectively in 3Q15. We expect the industry to register 3-4% revenue growth in FY16, driven by mobile sub growth and continuous ARPU improvements from 3G/4G upgrades.

Operators have shifted away from the subsidy-driven strategy (i.e. higher subsidies and therefore higher nominal pricing) after the regulator’s recommendation of lowering marketing cost by c.20% p.a. from 2H14. As a result, we expect relatively slower revenue growth but improvement in margins and profitability. CM and CT registered EBITDA growth of 13% and 6% in 3Q15 respectively, while CU reported a 2% decline. Overall sector profitability points to a recovery and we expect further enhancement in FY16. That said, we expect smaller operators, in particular China Unicom, will be more aggressive in gaining market share. We are unlikely to see 20% decline in distribution cost in FY16.

3Q15 performance

2%

13% 13%6% 6%

14%

0.6%

-2%

-69%-80%-70%-60%-50%-40%-30%-20%-10%

0%10%20%

Service revenue growth

EBITDA growth Earnings growth

CM CT CU

Source: Companies

Earnings risk for FY15 from data carried forward policy

CM, CT and CU will announce their FY15 results in late March. There is potential downside risk partly due to the impact from the implementation of unused handset data carried forward policy.

From 1 Oct 2015, telecom operators are allowing mobile users who subscribe for monthly data packages to carry forward any remaining unused data traffic to the end of the following month. The policy follows the government’s initiative of network speed upgrades and tariff reduction. We believe that operators will strive to up-sell data usage to offset the decline in tariffs, in order to maintain overall ARPU.

From an accounting perspective, operators will recognise mobile data revenue when the mobile data is consumed (or no longer valid). If we were to assume 50% mobile data utilisation rate, half of the mobile data quota in Oct 2015 would be carried forward to Nov, and all the mobile data quota in Nov would be carried forward to Dec. Operators would record one month less mobile data revenue in 4Q15 (or FY15) while operating cost would remain unchanged. This should result in a negative impact on earnings, but no impact on cash flow.

Based on 1H15 results, wireless data accounted for c.33%, 15% and 21% of CM’s, CT’s and CU’s respective total service revenue. The policy would result in deferring one month of data revenue, and this would drag down full year earnings by 10%, 14% and 22% for CM, CT and CU respectively. We maintain our FY15 earnings estimates for the time being, as we do not have sufficient information for the actual mobile data utilisation rate, and this is more an accounting treatment. But investors should expect a one-off negative earnings impact due to the abovementioned unused data rollover policy, which would partially offset gains from tower sales.

Industry Focus


Page 3

Estimated earnings impact from mobile data carried forward policy

CM CT CU

Estimated data rev enue (Rmb m)* 198,566 44,922 49,856

One month data rev enue (Rmb m) 16,547 3,744 4,155

Our FY15 pre-tax earningsestimates (Rmb m)

162,091 27,500 18,637

% of our F Y15 pre-tax earningsestimates

10% 14% 22%

Before tax gain recognised uponcompletion due to tower assetsales (Rmb m)

11,780 3,605 7,190

* (i) CM: Revenue from mobile data traffic

(ii) CT: Handset internet access revenue

(iii) CU: Data revenue by mobile broadband handset users

Source: Companies

CM maintaining strong 3G/4G sub growth momentum

CM maintained strong 3G/4G sub growth momentum in FY15. CM registered 3G/4G sub net-adds at a monthly run rate of 12m in FY15. The momentum is accelerating m-o-m with 15m net-adds in Dec 2015. Mobile sub net-adds monthly run rate was around 1.6m.

CU’s performance was weak. 3G/4G net-adds monthly run rate was below 1m in Jan-May, but picked up to 3-5m per month starting from Jun. However, CU lost 12m mobile subs in FY15 (or 1m per month on average). Sub loss has been slowing down in recent months and we expect it to resume growth in FY16.

CT’s mobile sub and 3G/4G sub growth have been stable with monthly run rates of 1m and 2m, respectively, in FY15. We expect similar momentum in FY16.

In terms of 3G/4G sub net-adds in Dec 2015, CM, CT and CU had market shares of 73%,10% and 17% respectively. In terms of 3G/4G sub base, CM, CT and CU’s shares were 60%, 18%, 23% respectively (vs. 56%, 20% and 25% respectively in Dec 2014). CM gained 3G/4G sub market share from the two smaller players.

We reckon that operators are focusing more on 3G/4G sub growth (instead of total mobile sub growth). CM continues to dominate the 3G/4G net-adds market share. CU performed badly with mobile sub loss in FY15. We believe that CU will spend more on marketing to upgrade its 4G network to acquire more 3G/4G subs and stabilise its mobile sub base.

Market share – 3G/4G subscriber net-adds

0%10%20%30%40%50%60%70%80%90%

100%

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

China Mobile China Unicom

China Telecom

Source: Companies

Market share – 3G/4G subscriber base

0%

10%

20%

30%

40%

50%

60%

70%

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15


China Telecom

Source: Companies

Industry Focus


Page 4

Valuation and recommendation

CM has gained back its sub growth momentum after the launch of TD-LTE (4G) services, and is a threat to the two smaller players. Ignoring the possibility of any restructuring taking place, CM should remain as the winner in the 4G era. Maintain BUY on CM with TP of HK$133.0, pegged to 18x FY16F PE. The target multiple represents an upcycle PE and is around 2SD above its historical average.

We believe that the regulator is considering a merger of CT and CU (refer to our note “Beneficiaries in the potential

restructuring” dated 21 September 2015). CT and CU are potential beneficiaries as far as share price is concerned. The potential merger is anticipated to result in a stronger smaller player with higher operating efficiency and profitability. We rate CU as a BUY with TP of HK$11.8, pegged to 18x FY16F PE. The target valuation is justified as it reflects the benefits of a potential merger and earnings turnaround as a strong Chairman (Wang Xiaochu) comes onboard. CT is our least preferred operator now due to its technology disadvantage and the departure of Chairman Wang. We also rate CT as a BUY with TP of HK$4.7, pegged to a slightly lower 15x FY16F PE on its stable growth outlook.

Share price performance – Telecom operators

60708090

100110120130140150160

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

China Mobile China Telecom China Unicom

Rebased 1 Jan 15 = 100

Source: Thomson Reuters

Share price performance table Share price performance (%) 1-mth 3-mth 6-mth 12-mth YT DChina Mobile 0.6 (9.8) (13.9) (18.9) (2.1)

China Telecom 4.8 (11.3) (14.2) (22.9) 1.1

China Unicom (7.3) (10.4) (19.5) (31.3) (9.4)

Source: Thomson Reuters

Industry Focus


Page 5

Valuation

T arget M k t PE PE Y ield Y ield P/Bk P/Bk EV /EB IT DA ROE ROE

Price Price Recom Cap F iscal 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F

Company Name Code HK $ HK $ US$bn Y r x x % % x x x x % %

T elecom operat ors

China Mobile 941 HK 85.65 133.00 Buy 225.3 Dec 11.7 11.3 3.7 3.8 1.5 1.4 3.6 3.4 13.1 12.6

China Telecom 'H' 728 HK 3.68 4.70 Buy 38.3 Dec 12.0 10.7 2.4 2.4 0.8 0.7 3.7 3.6 6.7 7.1

China Unicom 762 HK 8.56 11.80 Buy 26.3 Dec 13.2 11.8 2.8 2.8 0.7 0.7 2.8 2.6 5.4 5.9

T elecom equ ipment and inf rast ruc t ure serv ice prov iders

ZTE 'H' 763 HK 13.3 24.00 Buy 8.8 Dec 11.8 10.9 2.1 2.3 1.5 1.4 7.5 7.1 13.4 13.1ZTE 'A'@ 000063 CH 14.61 24.00 Buy 8.8 Dec 15.4 14.3 1.6 1.8 2.0 1.8 9.1 8.6 13.4 13.1

Comba Telecom 2342 HK 1.15 1.40 Hold 0.3 Dec 6.5 5.7 3.8 4.3 0.6 0.5 3.7 3.4 9.0 9.6

China Comserv ice 'H' 552 HK 2.96 4.50 Buy 2.6 Dec 6.9 6.5 4.3 4.6 0.7 0.6 2.7 2.7 9.8 9.7Trigiant 1300 HK 1.33 2.30 Buy 0.3 Dec 4.7 4.3 10.4 10.4 0.6 0.6 4.0 3.7 14.1 14.4Yangtze Optic F ibre* 6869 HK 7.55 n.a. NR 0.6 Dec 6.1 5.2 3.8 4.4 1.6 1.3 n.a. n.a. 26.5 29.4

@ RMB for price & target price

* Consensus


ASIAN INSIGHTS VICKERS SECURITIES

ed-TH/ sa- DL

BUY

Last Traded Price: HK$85.65 (HSI : 19,183) Price Target: HK$133 (55% upside) Potential Catalyst: Strong 4G sub growth and ARPU uplift Where we differ: We are bullish on CM’s continuous market share gain and profitability improvement in the medium term Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 641,448 674,749 704,077 711,995 EBITDA 243,442 262,799 270,806 281,815 Pre-tax Profit 142,592 162,091 165,278 171,792 Net Profit 109,279 123,876 126,311 131,290 Net Pft (Pre Ex) 109,279 112,096 126,311 131,290 Net Profit Gth (Pre-ex) (%) (10.2) 2.6 12.7 3.9

EPS (RMB) 5.38 6.06 6.18 6.42 EPS (HK$) 6.39 7.19 7.33 7.62 EPS Gth (%) (11.1) 12.6 2.0 3.9 Diluted EPS (HK$) 6.35 7.18 7.32 7.61 DPS (HK$) 2.74 3.09 3.15 3.28 BV Per Share (HK$) 49.71 54.05 58.26 62.66 PE (X) 13.4 11.9 11.7 11.3 P/Cash Flow (X) 7.0 6.3 6.2 5.9 P/Free CF (X) 37.4 43.0 31.1 25.4 EV/EBITDA (X) 4.3 3.8 3.6 3.4 Net Div Yield (%) 3.2 3.6 3.7 3.8 P/Book Value (X) 1.7 1.6 1.5 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.3 13.9 13.1 12.6 Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) 5.65 5.90 6.31

Other Broker Recs: B: 20 S: 2 H: 5

Source of all data: Company, DBSV, Thomson Reuters, HKEX

Winner in the 4G playing field Continuous market share and earnings recovery. We rate BUY on China Mobile (CM) with TP of HK$133.0, as we expect CM to remain the winner in the 4G era, before any industry restructuring takes place. CM’s 4G service has been well received by the market and is gaining consumer confidence. This will support continuous market share gain and therefore earnings recovery. CM has a dividend payout ratio of 43%, and the stock now offers 3%+ dividend yield. 3Q15 earnings momentum picking up. CM reported 13% y-o-y growth in both EBITDA and earnings in 3Q15. Excluding the one-off gain from tower sale and depreciation cut, we expect earnings to increase by 5%, 10% and 4%, and EBITDA to increase by 8%, 7% and 4% for FY15-17F respectively. CM has been adding 12m 3G/4G subs per month on average during 9M15. Winning back consumer confidence after launch of 4G service. Our channel check suggests that consumers are liking CM’s 4G service. The technological disadvantage of TD-LTE (vs. FD-LTE) in terms of network quality and handset choice is narrowed down, compared with its 3G technology TD-SCDMA (vs. WCDMA and CDMA). CM has also strengthened its network coverage by building 480k 4G base stations in FY15 (220k in 1H15) to a total of 1.2m by the end of FY15. The scale is much larger than CU’s and CT’s 3G/4G networks. Valuation: We believe that CM will remain the winner in the 4G era. We rate CM a BUY with TP of HK$133.0, pegged to 18x FY16F PE. The target multiple represents an up-cycle PE and is around 2SD above its historical average. Key Risks to Our View: Industry restructuring. The regulator may consider next round of industry restructuring to balance the competition landscape. This represents a threat to CM’s current leading position. Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cut, etc. The business performance could be non-market driven, which could be unfavourable and uncertain.

At A Glance Issued Capital (m shrs) 20,475 Mkt. Cap (HK$m/US$m) 1,755,508 / 225,371

Major Shareholders China Mobile (HK) Group (%) 73.0

Free Float (%) 27.0 3m Avg. Daily Val. (US$m) 166.1 ICB Industry : Telecommunications / Mobile Telecommunications

71

91

111

131

151

171

191

211

58.1

68.1

78.1

88.1

98.1

108.1

118.1

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

Relative IndexHK$

China Mobile (LHS) Relative HSI INDEX (RHS)


China / Hong Kong Company Guide

China Mobile Version 2 | Bloomberg: 941 HK EQUITY | Reuters: 0941.HK

Refer to important disclosures at the end of this report


Page 7

Company Guide

China Mobile

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Mobile subscriber growth. Mobile penetration in China has become more saturated, and we only expect aggregated sub base to expand by a single-digit rate p.a. in the next few years. Our channel check suggests that consumers are liking CM’s 4G service. The technological disadvantage of TD-LTE (vs. FD-LTE) in terms of network quality and handset choice has been narrowed down, compared with its 3G technology TD-SCDMA. CM has also strengthened its network coverage by aggressively building out 4G base stations. The company has been maintaining a sub market share of 63%. We expect mobile sub base to expand by 18m in FY16. ARPU increase. CM used to be a dominant player in the 2G market. However its 3G service was not well received due to inferior network quality and lack of handset choices; but CM has gained back traction in the 4G era. We believe that respective 2G and 3G/4G ARPUs are on a declining trend due to market competition. However, 3G/4G upgrade will be positive to overall ARPU as 3G/4G service generates a much higher ARPU than 2G service. Revenue growth will be driven by 3G/4G sub upgrade and improvement in customer mix. CM will focus much on service and network quality to maintain 3G/4G sub growth and to encourage more data consumption to drive higher ARPU. We expect ARPU to increase by 2-3% in FY16. Marketing expense cut. The regulator set a target for telecom operator to cut down selling and marketing expenses by 20% per year in the coming few years. The initiative encourages competition on service quality, but not purely on pricing or handset subsidies. This is positive to the industry’s long-term development. Telecom operators have scaled down handset subsidies, resulting in overall profitability improvement.

Mobile sub net add (m)

Mobile ARPU (Rmb)

EBITDA margin (%)

Source: Company, DBS Vickers

56.9

39.4

21.718

12

0.0

7.2

14.4

21.6

28.7

35.9

43.1

50.3

57.5

2013A 2014A 2015F 2016F 2017F

66.661.6 60.6 62.1 61.8

0.0

13.6

27.2

40.8

54.4

2013A 2014A 2015F 2016F 2017F

38.236.7 37.6 37.2 38.3

0.0

7.8

15.6

23.4

31.3

39.1

2013A 2014A 2015F 2016F 2017F


Page 8

Company Guide

China Mobile

Balance Sheet: Strong cash position. CM generates very strong operating cash flow. While it stepped up its capex in recent years to expand the 4G network infrastructure, it remains free cash positive. CM budgeted c.Rmb200bn capex for FY15, and we expect it to peak off in FY16. Overall balance sheet is strong with Rmb400bn+ net cash. The company adopts a relative conservative dividend payout ratio of 43%. Share Price Drivers: Mobile subscriber growth. CM maintained positive mobile sub growth in FY15. We believe that CM will focus on 3G/4G sub growth, and will continue to improve customer mix with more high-ARPU subs. ARPU increase. 3G/4G upgrade will be positive to overall ARPU as 3G/4G service commands a much higher ARPU than 2G service. APRU uplift will be positive on overall profitability together with operating leverage. Key Risks: Industry restructuring. The regulator may consider next round of industry restructuring to balance the competition landscape. This poses a threat to CM’s current leading position. Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle, as well as tariff cut. The business performance could be non-market driven, which could be unfavourable and uncertain. Company Background: China Mobile (CM) is the largest mobile operator in Mainland China. It provides 2G services based on GSM technology and provides 3G/4G services based on Chinese developed TD-SCDMA/TD-LTE technologies. It also operates fixed-line services after acquiring Tietong.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


0.4

0.5

0.5

0.6

0.6

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013A 2014A 2015F 2016F 2017F

Avg: 12.1x

+1sd: 13.5x

+2sd: 14.9x

‐1sd: 10.7x

‐2sd: 9.4x

8.4

9.4

10.4

11.4

12.4

13.4

14.4

15.4

16.4

17.4

Feb-12 Feb-13 Feb-14 Feb-15

(x)

Avg: 1.79x

+1sd: 1.98x

+2sd: 2.17x

‐1sd: 1.6x

‐2sd: 1.41x

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5


(x)

0.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure ( - )

RMB M


Page 9

Company Guide

China Mobile

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Mobile sub net add (m) 56.9 39.4 21.7 18.0 12.0 Mobile ARPU (Rmb) 66.6 61.6 60.6 62.1 61.8 EBITDA margin (%) 38.2 36.7 37.6 37.2 38.3

Segmental Breakdown (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Voice services 355,686 308,959 262,615 241,606 229,526 Data services 206,886 253,088 312,134 362,472 382,469 Others 28,239 19,770 20,000 20,000 20,000 Sales of products 39,366 59,631 80,000 80,000 80,000 Total 630,177 641,448 674,749 704,077 711,995 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 630,177 641,448 674,749 704,077 711,995 Cost of Goods Sold (494,528) (524,114) (549,172) (565,688) (567,577) Gross Profit 135,649 117,334 125,578 138,389 144,418Other Opng (Exp)/Inc 0 0 0 0 0 Operating Profit 135,649 117,334 125,578 138,389 144,418Other Non Opg (Exp)/Inc 910 1,089 1,089 1,089 1,089 Associates & JV Inc 7,062 8,248 8,000 8,000 8,000 Net Interest (Exp)/Inc 14,958 15,921 15,644 17,800 18,285 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 11,780 0 0 Pre-tax Profit 158,579 142,592 162,091 165,278 171,792Tax (36,776) (33,187) (38,091) (38,840) (40,371) Minority Interest (111) (126) (124) (126) (131) Preference Dividend 0 0 0 0 0 Net Profit 121,692 109,279 123,876 126,311 131,290Net Profit before Except. 121,692 109,279 112,096 126,311 131,290 EBITDA 248,820 243,442 262,799 270,806 281,815 Growth Revenue Gth (%) 8.3 1.8 5.2 4.3 1.1 EBITDA Gth (%) (4.4) (2.2) 8.0 3.0 4.1 Opg Profit Gth (%) (11.2) (13.5) 7.0 10.2 4.4 Net Profit Gth (%) (5.9) (10.2) 13.4 2.0 3.9 Margins & Ratio Gross Margins (%) 21.5 18.3 18.6 19.7 20.3 Opg Profit Margin (%) 21.5 18.3 18.6 19.7 20.3 Net Profit Margin (%) 19.3 17.0 18.4 17.9 18.4 ROAE (%) 16.1 13.3 13.9 13.1 12.6 ROA (%) 11.0 8.9 9.2 8.8 8.6 ROCE (%) 13.4 10.8 10.6 10.8 10.4 Div Payout Ratio (%) 43.3 43.2 43.0 43.0 43.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers


Page 10

Company Guide

China Mobile

Interim Income Statement (RMB m)

FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 303,104 327,073 324,681 316,767 340,727 Cost of Goods Sold (231,680) (262,848) (262,327) (261,787) (278,225) Gross Profit 71,424 64,225 62,354 54,980 62,502 Other Oper. (Exp)/Inc 0 0 0 0 0 Operating Profit 71,424 64,225 62,354 54,980 62,502 Other Non Opg (Exp)/Inc 387 523 332 757 837

Associates & JV Inc 3,308 3,754 3,966 4,282 3,633

Net Interest (Exp)/Inc 7,157 7,801 7,756 8,165 7,282 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 82,276 76,303 74,408 68,184 74,254 Tax (19,095) (17,681) (16,619) (16,568) (16,924) Minority Interest (53) (58) (47) (79) (65) Net Profit 63,128 58,564 57,742 51,537 57,265 Net profit bef Except. 63,128 58,564 57,742 51,537 57,265 Growth Revenue Gth (%) 10.4 6.4 7.1 (3.2) 4.9 Opg Profit Gth (%) (2.6) (19.1) (12.7) (14.4) 0.2 Net Profit Gth (%) 1.5 (12.7) (8.5) (12.0) (0.8) Margins Gross Margins (%) 23.6 19.6 19.2 17.4 18.3 Opg Profit Margins (%) 23.6 19.6 19.2 17.4 18.3 Net Profit Margins (%) 20.8 17.9 17.8 16.3 16.8 Source: Company, DBS Vickers

Balance Sheet (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 583,962 682,991 656,089 721,291 781,513 Invts in Associates & JVs 53,940 70,444 127,844 134,244 140,644 Other LT Assets 62,301 65,431 60,527 59,778 58,247 Cash & ST Invts 419,908 421,557 489,249 502,363 524,966 Inventory 9,152 9,130 9,404 9,686 9,977 Debtors 25,556 30,738 31,660 32,610 33,588 Other Current Assets 12,573 16,158 16,618 17,092 17,581

Total Assets 1,167,392 1,296,449 1,391,391 1,477,063 1,566,516 ST Debt

68 68 68 68 68 Creditors 174,517 224,177 230,902 237,829 244,964 Other Current Liab 196,328 207,631 213,551 219,649 225,930 LT Debt 4,989 4,992 4,992 4,992 4,992 Other LT Liabilities 766 938 8,158 8,158 8,158 Shareholder’s Equity 788,773 856,576 931,528 1,004,050 1,079,955 Minority Interests 1,951 2,067 2,191 2,317 2,449 Total Cap. & Liab. 1,167,392 1,296,449 1,391,391 1,477,063 1,566,516 Non-Cash Wkg. Capital (323,564) (375,782) (386,771) (398,090) (409,748) Net Cash/(Debt) 414,851 416,497 484,189 497,303 519,906 Debtors Turn (avg days) 13.3 16.0 16.9 16.7 17.0 Creditors Turn (avg days) 140.4 178.6 197.3 193.4 200.6 Inventory Turn (avg days) 7.7 8.2 8.0 7.9 8.2 Asset Turnover (x) 0.6 0.5 0.5 0.5 0.5 Current Ratio (x) 1.3 1.1 1.2 1.2 1.2 Quick Ratio (x) 1.2 1.0 1.2 1.2 1.2 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 2,769.3 3,395.4 3,967.0 3,775.3 3,775.3 Z-Score (X) 3.9 3.4 3.4 3.4 3.3 Source: Company, DBS Vickers


Page 11

Company Guide

China Mobile

Cash Flow Statement (RMB m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 158,579 142,592 162,091 165,278 171,792 Dep. & Amort. 105,162 116,737 128,132 123,328 128,307 Tax Paid (43,222) (39,040) (33,187) (38,091) (38,840) Assoc. & JV Inc/(loss) (7,062) (8,248) (8,000) (8,000) (8,000) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 19,204 5,347 10,989 11,319 11,658 Other Operating CF (7,676) (6,366) (24,924) (15,300) (15,785)

Net Operating CF 224,985 211,022 235,101 238,534 249,133 Capital Exp.(net) (140,041) (171,806) (200,730) (191,030) (191,030) Other Invts.(net) (355) (23) 0 0 0 Invts in Assoc. & JV 6 0 0 0 0 Div from Assoc & JV 2,096 2,476 1,600 1,600 1,600 Other Investing CF (33,181) 23,134 80,847 18,003 18,488 Net Investing CF (171,475) (146,219) (118,283) (171,427) (170,942) Div Paid (55,491) (50,924) (48,923) (53,790) (55,384) Chg in Gross Debt (23,633) 0 0 0 0 Capital Issues 43 8,215 0 0 0 Other Financing CF (350) (235) (202) (202) (202) Net Financing CF (79,431) (42,944) (49,126) (53,993) (55,587) Currency Adjustments (54) (46) 0 0 0 Chg in Cash (25,975) 21,813 67,692 13,114 22,604 Opg CFPS (RMB) 10.24 10.14 10.97 11.12 11.62 Free CFPS (RMB) 4.23 1.93 1.68 2.32 2.84 Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers

1 2 3 45

71.0

81.0

91.0

101.0

111.0

121.0

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

HK$S.No. Da te Clos ing Ta rge t Ra ting

Pric e Pric e1: 9-Feb-15 HK$105.90 HK$110.00 Buy2: 19-Mar-15 HK$100.10 HK$120.00 Buy3: 10-Aug-15 HK$100.90 HK$129.00 Buy4: 20-Aug-15 HK$98.15 HK$129.00 Buy5: 10-Nov-15 HK$91.20 HK$133.00 Buy


ed-TH/ sa- DL

BUY

Last Traded Price: HK$3.68 (HSI : 19,183) Price Target: HK$4.70 (28% upside) Potential Catalyst: Strong mobile sub growth and industry restructuring Where we differ: We expect a high likelihood of merging smaller operators Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 324,394 325,133 332,594 342,023 EBITDA 94,893 95,836 97,038 100,013 Pre-tax Profit 23,202 27,500 27,837 31,101 Net Profit 17,625 20,691 20,945 23,400 Net Pft (Pre Ex) 17,625 17,086 20,945 23,400 Net Profit Gth (Pre-ex) (%) 0.4 (3.1) 22.6 11.7

EPS (RMB) 0.22 0.26 0.26 0.29 EPS (HK$) 0.26 0.30 0.31 0.34 EPS Gth (%) 0.4 17.4 1.2 11.7 Diluted EPS (HK$) 0.26 0.30 0.31 0.34 DPS (HK$) 0.09 0.09 0.09 0.09 BV Per Share (HK$) 4.24 4.45 4.67 4.92 PE (X) 14.3 12.1 12.0 10.7 P/Cash Flow (X) 2.6 2.5 2.6 2.5 P/Free CF (X) 15.8 nm nm 23.9 EV/EBITDA (X) 3.6 3.7 3.7 3.6 Net Div Yield (%) 2.4 2.4 2.4 2.4 P/Book Value (X) 0.9 0.8 0.8 0.7 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 ROAE (%) 6.2 7.0 6.7 7.1 Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) 0.24 0.25 0.28 Other Broker Recs: B: 14 S: 2 H: 10


Expect stable outlook; potential merger a new stock catalyst Stable medium-term outlook. We rate China Telecom (CT) a BUY with TP of HK$4.7 mainly on its stable medium-term outlook. CT focuses on niche customer segment to avoid competing head to head with China Mobile (CM). It has been growing its mobile sub and 3G/4G subs at a stable rate, which should support steady earnings growth in the next 1-2 years. A potential merger with China Unicom (CU) will be an event-driven catalyst.

3Q15 results were encouraging. CT showed a decent profitability recovery by reporting a 6% y-o-y EBITDA growth in 3Q15. Excluding the one-off gain from tower sale and depreciation cut, we expect earnings to grow by 2%, 16% and 12% and EBITDA to increase by 2%, 3% and 3% for FY15-17F respectively. We expect overall performance to remain stable in the medium term.

A new hope for next round of restructuring. We believe that an industry restructuring, or in particular, a merger between the two smaller operators is needed, which is favourable to CT. Competitor CM's technological disadvantage in TD-LTE (vs. FD-LTE) in terms of network quality and handset choice has been narrowed down, compared with its 3G technology TD-SCDMA. CT has been facing more challenges to grow its sub base. Smaller mobile operators suffer from suboptimal operating scale in terms of sub base, base stations and financial resources, compared with CM. Valuation: We rate CT a BUY with TP of HK$4.7, pegged to 15x FY16 PE on its stable growth outlook. The multiple is in-line with other regional telecom operators. Potential merger is a new stock catalyst. Key Risks to Our View: Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cut, etc. The business performance could be non-market driven, which could be unfavourable and uncertain. Earnings downside. CT suffers from suboptimal operating scale in terms of sub base, base stations and financial resources, in the long term. Sub market share loss and ARPU pressure could lead to earnings decline.

At A Glance Issued Capital - H shares (m shs) 13,877 - Non H shrs (m shs) 67,055 H shs as a % of Total 17 Total Mkt. Cap (HK$m/US$m) 297,831 / 38,274 Major Shareholders

China Tel Corp (%) 70.9 GD Rising Asset Mgt (%) 6.9

Major H Shareholders (%) JPMorgan Chase & Co. (%) 11.0 BlackRock, Inc (%) 8.2 UBS Group AG (%) 6.3 The Bank of New York Mellon Corporation (%) 6.0 Templeton Investment Counsel, LLC (%) 5.0

H Shares-Free Float (%) 63.5 3m Avg. Daily Val. (US$m) 25.7 ICB Industry : Telecommunications / Fixed Line Telecommunications

60

80

100

120

140

160

180

200

220

2.8

3.3

3.8

4.3

4.8

5.3

5.8

6.3


Relative IndexHK$

China Telecom (LHS) Relative HSI INDEX (RHS)



China Telecom Version 2| Bloomberg: 728 HK EQUITY | Reuters: 728.HK

Refer to important disclosures at the end of this report


Page 13

Company Guide

China Telecom

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Mobile subscriber growth. Mobile penetration in China has become more saturated, and we only expect aggregated sub base to expand by a single-digit rate p.a. in the next few years. CT has been strategically focusing on niche customer segment to avoid competing head to head with CM. It expanded its mobile sub base during the 3G era. It currently has 18% 3G/4G sub market share. But CM has gained back consumer confidence after the launch of 4G service. CT’s sub growth has become much more challenging. CT has been maintaining stable mobile and 3G/4G sub net-adds. Overall mobile sub growth as well as 3G/4G sub growth will be the key growth driver. We expect mobile sub base to expand by 7m for FY16. ARPU increase. We believe that 2G and 3G/4G ARPUs are on a declining trend due to market competition. However, 3G/4G upgrade will be positive to overall ARPU as 3G/4G service generates a much higher ARPU than 2G service. Revenue growth will be driven by 3G/4G sub upgrade and improvement in customer mix. Therefore, CT will focus much on service and network quality to maintain its 3G/4G sub growth and to encourage more data consumption to drive higher ARPU. Marketing expense cut. The regulator set a target for telecom operator to cut down selling and marketing expenses by 20% per year in the coming few years. The initiative encourages competition on service quality, but not purely on pricing or handset subsidies. This is positive to the industry’s long-term development. Telecom operators have scaled down handset subsidies, resulting in overall profitability improvement.


Mobile ARPU (Rmb)

EBITDA margin (%)

Broadband sub net add (m)

Fixed-line sub net add (m)


25

0

11.7

7.26

0.0

3.2

6.3

9.5

12.6

15.8

18.9

22.1

25.2

2013A 2014A 2015F 2016F 2017F

54.8 54 53.1 52.9 53.6

0.0

11.2

22.3

33.5

44.7

55.9

2013A 2014A 2015F 2016F 2017F

30 29.2 29.8 29.2 29.2

0.0

6.1

12.2

18.4

24.5

30.6

2013A 2014A 2015F 2016F 2017F

10

6.96.4

5.95.4

0.0

1.3

2.5

3.8

5.0

6.3

7.6

8.8

10.1

2013A 2014A 2015F 2016F 2017F

-7

-9

-8

-4

-10.442013A 2014A 2015F 2016F 2017F


Page 14

Company Guide

China Telecom

Balance Sheet: Healthy financial with 29% net gearing. CT had net debt of c.Rmb85bn or 29% net gearing ratio as at end of FY14. CT budgeted c.Rmb108bn capex for FY15 and we expect it to peak off in FY16. The company generates steady operating cash flow to support the heavy network investment. Overall financials remain healthy. CT paid out a fixed dividend of HK$0.95 per share in FY14 (representing 34% of earnings). Share Price Drivers: Mobile subscriber growth. CT has been maintaining stable mobile and 3G/4G sub net-adds in FY15. We believe that continuous mobile sub growth and 3G/4G upgrade will be the key earnings drivers. ARPU increase. 3G/4G upgrade will be positive to overall ARPU as 3G/4G service command a much higher ARPU than 2G service. CT has to focus more on 3G/4G upgrade as well as encourage more mobile data consumption to raise overall spending. APRU uplift will be positive on overall profitability together with operating leverage. Industry restructuring. Smaller operators suffer from suboptimal operating scale in terms of sub base, base stations and financial resources, compared with CM. The market has started speculating on the next round of restructuring, in particular a merger between CU and CT. We believe that the likelihood of a merger is high. Any update and market news will be positive to the share price. Key Risks: Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cut, etc. The business performance could be non-market driven, which could be unfavourable and uncertain. Earnings downside. CT suffers from suboptimal operating scale in terms of sub base, base stations and financial resources in the longer term. Potential sub market share loss and ARPU pressure due to competition from CM could lead to earnings decline. Company Background: China Telecom (CT) is an integrated telecom operator in Mainland China. It provides 2G/3G services based on CDMA technology, and provides 4G services based TD-LTE and FD-LTE technologies. Its fixed-line business mainly covers the southern part of China.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.5

0.5

0.5

0.6

0.6

0.6

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2013A 2014A 2015F 2016F 2017F


0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

RM

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013A 2014A 2015F 2016F 2017F

Avg: 15.4x

+1sd: 17.6x

+2sd: 19.8x

‐1sd: 13.3x

‐2sd: 11.1x

9.6

11.6

13.6

15.6

17.6

19.6

21.6


(x)

Avg: 0.97x

+1sd: 1.09x

+2sd: 1.21x

‐1sd: 0.86x

‐2sd: 0.74x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


(x)


Page 15

Company Guide

China Telecom

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Mobile sub net add (m) 25.0 0.0 11.7 7.2 6.0 Mobile ARPU (Rmb) 54.8 54.0 53.1 52.9 53.6 EBITDA margin (%) 30.0 29.2 29.8 29.2 29.2 Broadband sub net add (m)

10.0 6.9 6.4 5.9 5.4


(7.2) (9.5) (7.9) (3.5) (1.5)


FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Mobile 113,751 120,256 121,950 127,604 133,519 Internet 71,432 74,622 75,069 76,827 79,685 Traditional voice 38,633 33,587 29,894 27,554 26,779 Other fixed-line 55,035 58,902 62,265 64,534 65,964 Handset sales 42,733 37,015 35,956 36,075 36,075 Total 321,584 324,382 325,133 332,594 342,023 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 321,584 324,394 325,133 332,594 342,023 Cost of Goods Sold (294,116) (295,886) (295,973) (300,202) (306,234) Gross Profit 27,468 28,508 29,161 32,392 35,789Other Opng (Exp)/Inc 0 0 0 0 0 Operating Profit 27,468 28,508 29,161 32,392 35,789Other Non Opg (Exp)/Inc 670 6 6 6 6 Associates & JV Inc 103 34 (900) 0 0 Net Interest (Exp)/Inc (5,150) (5,346) (4,372) (4,561) (4,693) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 3,605 0 0 Pre-tax Profit 23,091 23,202 27,500 27,837 31,101Tax (5,422) (5,498) (6,600) (6,681) (7,464) Minority Interest (121) (79) (209) (212) (236) Preference Dividend 0 0 0 0 0 Net Profit 17,548 17,625 20,691 20,945 23,400 Net Profit before Except. 17,548 17,625 17,086 20,945 23,400 EBITDA 97,324 94,893 95,836 97,038 100,013 Growth Revenue Gth (%) 13.6 0.9 0.2 2.3 2.8 EBITDA Gth (%) 37.0 (2.5) 1.0 1.3 3.1 Opg Profit Gth (%) 29.5 3.8 2.3 11.1 10.5 Net Profit Gth (%) 17.4 0.4 17.4 1.2 11.7 Margins & Ratio Gross Margins (%) 8.5 8.8 9.0 9.7 10.5 Opg Profit Margin (%) 8.5 8.8 9.0 9.7 10.5 Net Profit Margin (%) 5.5 5.4 6.4 6.3 6.8 ROAE (%) 6.5 6.2 7.0 6.7 7.1 ROA (%) 3.2 3.2 3.6 3.5 3.7 ROCE (%) 5.5 5.5 5.4 5.7 6.1 Div Payout Ratio (%) 34.8 34.5 29.4 29.1 26.0 Net Interest Cover (x) 5.3 5.3 6.7 7.1 7.6 Source: Company, DBS Vickers


Page 16

Company Guide

China Telecom


FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 157,559 164,025 165,973 158,421 160,180 Cost of Goods Sold (142,122) (151,994) (148,211) (147,675) (148,174) Gross Profit 15,437 12,031 17,762 10,746 12,007 Other Oper. (Exp)/Inc 0 0 0 0 0 Operating Profit 15,437 12,031 17,762 10,746 12,007 Other Non Opg (Exp)/Inc 673 (3) 2 4 0

Associates & JV Inc 27 76 7 27 (444)

Net Interest (Exp)/Inc (2,642) (2,508) (2,729) (2,617) (2,174) Exceptional Gain/(Loss) 0 0 0 0 3,605 Pre-tax Profit 13,495 9,596 15,042 8,160 12,994 Tax (3,225) (2,197) (3,561) (1,937) (3,039) Minority Interest (68) (53) (38) (41) (181) Net Profit 10,202 7,346 11,443 6,182 9,774 Net profit bef Except. 10,202 7,346 11,443 6,182 6,169 Growth Revenue Gth (%) 14.2 13.0 5.3 (3.4) (3.5) Opg Profit Gth (%) 24.0 37.4 15.1 (10.7) (32.4) Net Profit Gth (%) 16.0 19.3 12.2 (15.8) (14.6) Margins Gross Margins (%) 9.8 7.3 10.7 6.8 7.5 Opg Profit Margins (%) 9.8 7.3 10.7 6.8 7.5 Net Profit Margins (%) 6.5 4.5 6.9 3.9 6.1 Source: Company, DBS Vickers


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 443,505 450,467 461,221 495,964 520,988 Invts in Associates & JVs 1,106 4,106 3,206 3,206 3,206 Other LT Assets 45,845 47,158 76,562 72,987 68,710 Cash & ST Invts 18,357 21,815 12,922 4,107 8,252 Inventory 6,523 4,225 4,225 4,225 4,225 Debtors 20,022 21,562 22,640 23,772 24,961 Other Current Assets 7,881 11,941 12,470 13,026 13,609

Total Assets 543,239 561,274 593,246 617,286 643,950 ST Debt

47,760 44,058 44,058 44,058 44,058 Creditors 81,132 88,458 91,112 93,845 96,660 Other Current Liab 71,206 73,809 80,380 86,951 93,522 LT Debt 62,617 62,918 69,918 69,918 69,918 Other LT Liabilities 1,860 1,923 3,318 3,318 3,318 Shareholder’s Equity 277,741 289,183 303,789 318,649 335,964 Minority Interests 923 925 671 547 510 Total Cap. & Liab. 543,239 561,274 593,246 617,286 643,950 Non-Cash Wkg. Capital (117,912) (124,539) (132,157) (139,773) (147,388) Net Cash/(Debt) (92,020) (85,161) (101,054) (109,869) (105,724) Debtors Turn (avg days) 22.0 23.4 24.8 25.5 26.0 Creditors Turn (avg days) 121.7 134.8 143.5 143.3 143.7 Inventory Turn (avg days) 10.1 8.5 6.8 6.5 6.4 Asset Turnover (x) 0.6 0.6 0.6 0.5 0.5 Current Ratio (x) 0.3 0.3 0.2 0.2 0.2 Quick Ratio (x) 0.2 0.2 0.2 0.1 0.1 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.3 0.3 0.3 0.3 0.3 Capex to Debt (%) 64.4 75.2 94.8 87.7 79.0 Z-Score (X) 1.5 1.5 1.4 1.4 1.4 Source: Company, DBS Vickers


Page 17

Company Guide

China Telecom


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 23,088 23,257 27,500 27,837 31,101 Dep. & Amort. 69,083 66,345 67,569 64,640 64,219 Tax Paid (4,539) (6,407) (5,498) (6,600) (6,681) Assoc. & JV Inc/(loss) (103) (34) 900 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 450 8,796 7,618 7,617 7,614 Other Operating CF 372 4,448 565 4,112 4,251

Net Operating CF 88,351 96,405 98,654 97,606 100,504 Capital Exp.(net) (71,032) (80,457) (108,000) (100,000) (90,000) Other Invts.(net) (14,269) (2,990) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (22,647) 1,739 0 0 0 Net Investing CF (107,948) (81,708) (108,000) (100,000) (90,000) Div Paid (5,433) (6,198) (6,085) (6,085) (6,085) Chg in Gross Debt 10,928 (3,798) 7,000 0 0 Capital Issues 0 0 0 0 0 Other Financing CF 142 (331) (463) (336) (274) Net Financing CF 5,637 (10,327) 453 (6,421) (6,359) Currency Adjustments (69) (4) 0 0 0 Chg in Cash (14,029) 4,366 (8,893) (8,815) 4,146 Opg CFPS (RMB) 1.09 1.08 1.12 1.11 1.15 Free CFPS (RMB) 0.21 0.20 (0.12) (0.03) 0.13 Source: Company, DBS Vickers


Source: DBS Vickers

1 23 4 5 6

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16


Pric e Pric e1: 9-Feb-15 HK$4.77 HK$5.70 Buy2: 18-Mar-15 HK$4.84 HK$5.60 Buy3: 13-Jul-15 HK$4.37 HK$5.60 Buy4: 10-Aug-15 HK$4.27 HK$5.00 Buy5: 19-Aug-15 HK$4.20 HK$5.00 Buy6: 10-Nov-15 HK$4.08 HK$4.70 Buy


ed-TH/ sa- DL

BUY

Last Traded Price: HK$8.56 (HSI : 19,183) Price Target: HK$11.80 (38% upside) Potential Catalyst: Strong mobile sub growth and industry restructuring Where we differ: We expect a turnaround after management change; and a high likelihood of merging smaller operators Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Price Relative

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 284,681 278,267 286,134 294,845 EBITDA 94,133 96,221 99,205 102,796 Pre-tax Profit 15,931 18,637 17,194 19,351 Net Profit 12,055 14,164 13,068 14,707 Net Pft (Pre Ex) 12,055 6,974 13,068 14,707 Net Profit Gth (Pre-ex) (%) 15.8 (42.1) 87.4 12.5

EPS (RMB) 0.51 0.59 0.55 0.61 EPS (HK$) 0.60 0.70 0.65 0.73 EPS Gth (%) 14.9 17.0 (7.7) 12.5 Diluted EPS (HK$) 0.58 0.70 0.65 0.73 DPS (HK$) 0.24 0.24 0.24 0.24 BV Per Share (HK$) 11.27 11.73 12.14 12.63 PE (X) 14.3 12.2 13.2 11.8 P/Cash Flow (X) 2.0 1.9 1.9 1.8 P/Free CF (X) 9.3 nm 14.3 10.7 EV/EBITDA (X) 3.0 3.0 2.8 2.6 Net Div Yield (%) 2.8 2.8 2.8 2.8 P/Book Value (X) 0.8 0.7 0.7 0.7 Net Debt/Equity (X) 0.5 0.5 0.4 0.4 ROAE (%) 5.4 6.1 5.4 5.9 Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) 0.48 0.49 0.58 Other Broker Recs: B: 21 S: 1 H: 7


Re-rating supported by potential merger Potential merger is a key catalyst. We have a BUY rating on China Unicom (CU) with TP of HK$11.8 with the potential merger with China Telecom (CT) being an event-driven catalyst for the stock. Meanwhile, CU’s financial performance will be supported by finance cost savings after its tower asset sale. In addition, we also expect improvement in operating efficiency, strategy execution capability and corporate visibility now that a Chairman withi an outstanding track record has come on board.

Expect earnings recovery in FY16. 3Q15 results were disappointing with 2% y-o-y EBITDA decline, which is mainly attributable to the mobile sub loss since the beginning of the year, sluggish 3G/4G growth in 1H15, as well as ARPU pressure. Having said that, the 3G/4G net adds recovery in 3Q should help earnings recover in FY16. Excluding the one-off gain from tower sale and depreciation cut, we expect EBITDA to increase by 3%, 7% and 3% for FY15-FY17 respectively; but we expect earnings to decrease by 28% in FY15 and grow by 50% and 13% for FY16 and FY17 respectively.

A new hope for next round of restructuring. We believe that an industry restructuring, or in particular, a merger between the two smaller operators is needed, which is favourable to CU. CU’s leading position in 3G/4G segment has been threatened by CM’s 4G service, and CU has been losing mobile sub since the beginning of 2015. The technological advantage of FD-LTE (vs. TD-LTE) in terms of network quality and handset choice has narrowed down, compared with its 3G technology WCDMA (vs. CM’s TD-SCDMA). CU suffers from suboptimal operating scale in terms of sub base, base stations and financial resources, compared with China Mobile (CM).

Valuation: We have a BUY rating on CU with a TP of HK$11.8, based on 18x FY16F PE. The multiple is in-line with other regional telecom operators. A potential merger with CT will be an event-driven catalyst for the stock.

Key Risks to Our View: Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cut, etc. The business performance could be non-market driven, which could be unfavourable and uncertain.

Earnings downside. CU suffers from suboptimal operating scale in terms of sub base, base stations and financial resources, in the long term. Sub market share loss and ARPU pressure could lead to earnings decline.

At A Glance Issued Capital (m shrs) 23,947 Mkt. Cap (HK$m/US$m) 205,195 / 26,343

Major Shareholders China United Network Comm. (%) 75.9 Telefonica S.A. (%) 5.0

Free Float (%) 19.0 3m Avg. Daily Val. (US$m) 44.4 ICB Industry : Telecommunications / Mobile Telecommunications

54

74

94

114

134

154

174

194

214

7.2

8.2

9.2

10.2

11.2

12.2

13.2

14.2

15.2

16.2


Relative IndexHK$

China Unicom (LHS) Relative HSI INDEX (RHS)



China Unicom Version 2| Bloomberg: 762 HK EQUITY | Reuters: 0762.HK Refer to important disclosures at the end of this report


Page 19

Company Guide

China Unicom

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Mobile subscriber growth. Mobile penetration in China has become more saturated, and we only expect aggregated sub base to expand by a single-digit rate p.a. in the next few years. CU’s leading position in 3G/4G segment has been threatened by CM’s 4G service, and CU has been losing mobile subs since the beginning of 2015. The technology advantage of FD-LTE (vs. TD-LTE) in terms of network quality and handset choice has been narrowed down, compared with its 3G technology WCDMA (vs. CM’s TD-SCDMA). CU’s 3G/4G market share has dropped from FY14’s 25% to currently around 23%. Overall mobile sub growth as well as 3G/4G sub growth will be the key growth drivers. We expect mobile sub base to expand by 6m in FY16. ARPU increase. CU used to be the most preferred 3G operator in China during the 3G era. However, CM gained back traction after the launch of its 4G service. We believe that 2G and 3G/4G ARPUs are on a declining trend due to market competition. However, 3G/4G upgrade will be positive to overall ARPU as 3G/4G service generates a much higher ARPU than 2G service. Revenue growth will be driven by 3G/4G sub upgrade and improvement in customer mix. Therefore, CU will focus much on service and network quality to maintain its 3G/4G sub growth and to encourage more data consumption to drive higher ARPU. We expect ARPU to increase by 3% in FY16. Marketing expense cut. The regulator has set a target for telecom operators to cut down selling and marketing expenses by 20% per year in the coming few years. The initiative encourages competition on service quality, but not purely on pricing or handset subsidies. This is positive to the industry’s long-term development. Telecom operators have scaled down handset subsidies, resulting in overall profitability improvement.


Mobile ARPU (Rmb)

EBITDA margin (%)

Broadband sub net add (m)



41.5

18.1

-13

6 6

-14.3

-9.1

-3.8

1.4

6.6

11.9

17.1

22.4

27.6

32.9

38.1

2013A 2014A 2015F 2016F 2017F

48.244.1 42.5 43.9 44.8

0.0

9.8

19.7

29.5

39.3

49.2

2013A 2014A 2015F 2016F 2017F

28.5

32.634.5 34.1 34.4

0.0

7.0

14.1

21.1

28.1

35.2

2013A 2014A 2015F 2016F 2017F

6.11

4.14

2.942.64 2.44

0.00

0.77

1.54

2.31

3.08

3.86

4.63

5.40

6.17

2013A 2014A 2015F 2016F 2017F

-4

-6

-7-7.74

2013A 2014A 2015F 2016F 2017F


Page 20

Company Guide

China Unicom

Balance Sheet: Net gearing ratio of 49%. CU had net debt of c.Rmb110bn or 49% net gearing ratio as at end of FY14. The company has spent most of its operating cash flow to invest heavily on its 3G/4G mobile networks after the previous round of industry restructuring in 2008. It budgeted c.Rmb110bn capex for FY15 and we expect it to peak off in FY16. Given that telecom operations generate steady cash flows, its overall financial position remains healthy. CU paid out a fixed dividend of Rmb0.2 per share in FY14 (representing 40% of earnings). Share Price Drivers: Mobile subscriber growth. CU registered weak mobile sub growth in FY15, and experienced sub loss in some months. We believe that CU has to maintain overall mobile sub growth as well as continuous 3G/4G sub upgrade. ARPU increase. 3G/4G upgrade will be positive to overall ARPU as 3G/4G service command a much higher ARPU than 2G service. CU has to focus more on 3G/4G upgrade as well as encouraging more mobile data consumption to raise overall spending. APRU uplift will be positive on overall profitability together with operating leverage. Industry restructuring. Smaller operators suffer from suboptimal operating scale in terms of sub base, base stations and financial resources, compared with CM. The market has started speculating on the next round of restructuring, in particular a merger between CU and CT. We believe the likelihood of a merger is high. Any update and market news will be positive to the share price. Key Risks: Policy risks. China's telecom sector has been subjected to various government intervention and regulatory risks, such as industry restructuring, management reshuffle as well as tariff cut, etc. The business performance could be non-market driven, which could be unfavourable and uncertain. Earnings downside. CU suffers from suboptimal operating scale in terms of sub base, base stations and financial resources in the long term. Potential sub market share loss and ARPU pressure due to competition from CM could lead to earnings decline. Company Background: China Unicom (CU) is an integrated telecom operator in Mainland China. It provides 2G/3G services based on GSM/WCDMA technologies and 4G services mainly based on FD-LTE technology which are widely adopted by other countries around the world. Its fixed-line business mainly covers the northern part of China.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.5

0.5

0.5

0.6

0.6

0.6

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2013A 2014A 2015F 2016F 2017F

Avg: 22.9x

+1sd: 28.5x

+2sd: 34x

‐1sd: 17.4x

‐2sd: 11.9x10.7

15.7

20.7

25.7

30.7

35.7

40.7


(x)

Avg: 1.01x

+1sd: 1.14x

+2sd: 1.28x

‐1sd: 0.88x

‐2sd: 0.74x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


(x)

0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure ( - )

RMB M


Page 21

Company Guide

China Unicom

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Mobile sub net add (m) 41.5 18.1 (13.0) 6.0 6.0 Mobile ARPU (Rmb) 48.2 44.1 42.5 43.9 44.8 EBITDA margin (%) 28.5 32.6 34.5 34.1 34.4 Broadband sub net add (m) 6.1 4.1 2.9 2.6 2.4

Fixed-line sub net add (m) (4.3) (5.6) (7.0) (0.5) (0.5)


FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Fixed-line 86,566 88,481 88,984 90,188 91,564 Mobile 151,133 155,095 149,241 152,072 158,543 Terminal sales 56,393 39,803 39,142 42,974 43,838 Others 946 1,302 900 900 900 Total 295,038 284,681 278,267 286,134 294,845 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 295,038 284,681 278,267 286,134 294,845 Cost of Goods Sold (279,271) (265,778) (260,373) (264,540) (271,142) Gross Profit 15,767 18,903 17,894 21,594 23,703Other Opng (Exp)/Inc 0 0 0 0 0 Operating Profit 15,767 18,903 17,894 21,594 23,703Other Non Opg (Exp)/Inc 887 1,362 1,500 1,500 1,500 Associates & JV Inc 0 0 (1,200) 0 0 Net Interest (Exp)/Inc (2,940) (4,334) (6,746) (5,900) (5,852) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 7,190 0 0 Pre-tax Profit 13,714 15,931 18,637 17,194 19,351Tax (3,306) (3,876) (4,473) (4,127) (4,644) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 10,408 12,055 14,164 13,068 14,707Net Profit before Except. 10,408 12,055 6,974 13,068 14,707 EBITDA 84,850 94,133 96,221 99,205 102,796 Growth Revenue Gth (%) 18.5 (3.5) (2.3) 2.8 3.0 EBITDA Gth (%) 14.7 10.9 2.2 3.1 3.6 Opg Profit Gth (%) 35.9 19.9 (5.3) 20.7 9.8 Net Profit Gth (%) 46.7 15.8 17.5 (7.7) 12.5 Margins & Ratio Gross Margins (%) 5.3 6.6 6.4 7.5 8.0 Opg Profit Margin (%) 5.3 6.6 6.4 7.5 8.0 Net Profit Margin (%) 3.5 4.2 5.1 4.6 5.0 ROAE (%) 4.9 5.4 6.1 5.4 5.9 ROA (%) 2.0 2.2 2.5 2.3 2.6 ROCE (%) 3.3 3.9 3.6 4.4 4.8 Div Payout Ratio (%) 36.6 39.7 33.8 36.7 32.6 Net Interest Cover (x) 5.4 4.4 2.7 3.7 4.1 Source: Company, DBS Vickers


Page 22

Company Guide

China Unicom


FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 144,307 150,731 149,569 135,112 144,685 Cost of Goods Sold (136,036) (143,235) (138,762) (127,016) (132,764) Gross Profit 8,271 7,496 10,807 8,096 11,921 Other Oper. (Exp)/Inc 0 0 0 0 0 Operating Profit 8,271 7,496 10,807 8,096 11,921 Other Non Opg (Exp)/Inc 215 672 604 758 541

Associates & JV Inc 0 0 0 0 0

Net Interest (Exp)/Inc (1,394) (1,546) (2,574) (1,760) (3,070) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 7,092 6,622 8,837 7,094 9,392 Tax (1,775) (1,531) (2,148) (1,728) (1,942) Minority Interest 0 0 0 0 0 Net Profit 5,317 5,091 6,689 5,366 7,450 Net profit bef Except. 5,317 5,091 6,689 5,366 7,450 Growth Revenue Gth (%) 18.6 18.5 3.6 (10.4) (3.3) Opg Profit Gth (%) 41.0 30.7 30.7 8.0 10.3 Net Profit Gth (%) 55.0 38.9 25.8 5.4 11.4 Margins Gross Margins (%) 5.7 5.0 7.2 6.0 8.2 Opg Profit Margins (%) 5.7 5.0 7.2 6.0 8.2 Net Profit Margins (%) 3.7 3.4 4.5 4.0 5.1 Source: Company, DBS Vickers


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 439,663 447,532 427,313 432,112 435,404 Invts in Associates & JVs 0 3,037 41,037 41,037 41,037 Other LT Assets 37,298 37,929 34,332 31,678 28,161 Cash & ST Invts 21,560 25,364 32,473 14,815 26,259 Inventory 5,536 4,378 4,378 4,378 4,378 Debtors 14,842 14,671 14,671 14,671 14,671 Other Current Assets 10,272 12,161 12,161 12,161 12,161

Total Assets 529,171 545,072 566,365 550,852 562,071 ST Debt

129,470 112,694 112,694 87,694 87,694 Creditors 102,212 120,371 120,371 120,371 120,371 Other Current Liab 63,557 58,855 60,262 61,711 63,203 LT Debt 13,483 23,880 31,880 31,880 31,880 Other LT Liabilities 1,550 1,731 4,242 4,002 3,810 Shareholder’s Equity 218,899 227,541 236,916 245,195 255,112 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 529,171 545,072 566,365 550,852 562,071 Non-Cash Wkg. Capital (135,119) (148,016) (149,423) (150,872) (152,364) Net Cash/(Debt) (121,393) (111,210) (112,101) (104,759) (93,315) Debtors Turn (avg days) 17.7 18.9 19.2 18.7 18.2 Creditors Turn (avg days) 182.2 211.7 240.9 233.2 227.0 Inventory Turn (avg days) 9.8 9.4 8.8 8.5 8.3 Asset Turnover (x) 0.6 0.5 0.5 0.5 0.5 Current Ratio (x) 0.2 0.2 0.2 0.2 0.2 Quick Ratio (x) 0.1 0.1 0.2 0.1 0.2 Net Debt/Equity (X) 0.6 0.5 0.5 0.4 0.4 Net Debt/Equity ex MI (X) 0.6 0.5 0.5 0.4 0.4 Capex to Debt (%) 50.9 51.0 76.1 66.9 66.9 Z-Score (X) 0.6 0.6 0.6 0.7 0.8 Source: Company, DBS Vickers


Page 23

Company Guide

China Unicom


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 13,714 15,931 18,637 17,194 19,351 Dep. & Amort. 68,196 73,868 78,027 76,111 77,593 Tax Paid (3,219) (4,620) (3,876) (4,473) (4,127) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (2,263) (1,329) 1,107 1,209 1,301 Other Operating CF 2,054 4,244 (4,998) 2,091 2,115

Net Operating CF 78,482 88,094 88,898 92,132 96,233 Capital Exp.(net) (72,758) (69,586) (110,000) (80,000) (80,000) Other Invts.(net) (6,050) (3,807) 0 0 0 Invts in Assoc. & JV 0 (3,075) 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 1,698 1,149 25,000 0 0 Net Investing CF (77,110) (75,319) (85,000) (80,000) (80,000) Div Paid (2,686) (3,677) (4,789) (4,789) (4,789) Chg in Gross Debt 2,166 (6,640) 8,000 (25,000) 0 Capital Issues 1,102 871 0 0 0 Other Financing CF 1,344 473 0 0 0 Net Financing CF 1,926 (8,973) 3,211 (29,789) (4,789) Currency Adjustments 0 0 0 0 0 Chg in Cash 3,298 3,802 7,109 (17,658) 11,444 Opg CFPS (RMB) 3.41 3.75 3.67 3.80 3.96 Free CFPS (RMB) 0.24 0.78 (0.88) 0.51 0.68 Source: Company, DBS Vickers


Source: DBS Vickers

1

2

3

45

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16


Pric e Pric e1: 9-Feb-15 HK$12.78 HK$11.80 Hold2: 4-Mar-15 HK$12.38 HK$11.20 Hold3: 10-Aug-15 HK$10.68 HK$10.60 Hold4: 24-Aug-15 HK$10.82 HK$12.60 Buy5: 10-Nov-15 HK$9.91 HK$11.80 Buy

Industry Focus


Page 24

Appendix

Market share – 3G/4G subscriber net-adds Market share – Total mobile subscriber base

0%10%20%30%40%50%60%70%80%90%

100%

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15


China Telecom

0%

10%

20%

30%

40%

50%

60%

70%

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15


China Telecom Market share – 3G/4G subscriber base Market share – 3G/4G subscriber net-adds (Dec 15)

0%

10%

20%

30%

40%

50%

60%

70%

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15


China Telecom

China Mobile73%China

Unicom17%

China Telecom

10%

Market share – Total mobile subscriber base (Dec 15) Market share – 3G/4G subscriber base (Dec 15)

China Mobile63%

China Unicom22%

China Telecom

15%China Mobile59%

China Unicom23%

China Telecom

18%

Source: Companies

Industry Focus


Page 25

Aggregated mobile subscriber net-adds in China

Aggregated 3G/4G subscriber net-adds in China

-2

0

2

4

6

8

10

12

14

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

million

0

5

10

15

20

25

30

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

million

Aggregated mobile subscriber base in China

Aggregated 3G/4G subscriber base in China

0

200

400

600

800

1,000

1,200

1,400

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

million

0

100

200

300

400

500

600

700

800

900

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

million

3G/4G sub base as % of total mobile sub base

0%

10%

20%

30%

40%

50%

60%

70%

80%

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

Total China MobileChina Unicom China Telecom

Source: Companies

Industry Focus


Page 26

Monthly subscriber net-adds – China Mobile

Mobile (2G+3G+4G) 3G+4G

4.66

3.

75

5.47

3.

53

2.68

3.32

2.

96

2.46

3.09

2.

32

2.41

2.

78

1.92

2.

23

4.60

0.

58

0.37

0.

86 1.58

1.

37

2.76

1.

07

1.21

1.

05

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

Ma y

-14

Jun-

14Ju

l-14

Au g

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

a y-1

5Ju

n-15

Jul-1

5A

u g-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

14.2

4 10

.88

11.0

3 9.

01

7.62

8.

06

8.88

10

.44 13

.63

11.9

3 16.0

8 22

.40

12.0

0 17

.72

12.3

0 4.

56

10.6

2 11

.46 14

.23

13.1

9 11

.00

11.4

8 11

.85 15

.44

0.0

5.0

10.0

15.0

20.0

25.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

Ma y

-14

Jun-

14Ju

l-14

Au g

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

a y-1

5Ju

n-15

Jul-1

5A

u g-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

Source: Company

Industry Focus


Page 27

Monthly subscriber net-adds – China Telecom


(0.8

0)0.

22

(1.8

0) (1.0

3)(0

.95)

(0.9

8) (0.2

0)0.

52 1.01

1.

26

1.31

1.

48

1.05

0.

90

1.25

0.

95

0.91

0.

76

0.82

0.

90

1.18

1.

20

1.03

1.

33

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

0.

03

0.80

0.

20 0.

83

0.98

1.

29

1.45

1.

80

2.02

2.

10

2.02

2.

00

2.12

1.

80 2.

30

2.32

2.

01

1.82

1.

90

1.81

2.

10

2.30

1.

92

2.10

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Au g

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

Fixed line Broadband

(0.8

8)(1

.03)

(1.0

6)(1

.16)

(1.0

7)(1

.38)

(0.9

8)(1

.06) (0.8

7)(0

.77)

(1.0

2)(0

.96)

(0.8

1) (0.5

3)(0

.81)

(0.8

5) (0.6

2)(0

.59)

(0.8

7)(0

.85)

(0.7

4)(0

.92)

(0.9

6) (0.6

9)

(2.0)(1.8)(1.6)(1.4)(1.2)(1.0)(0.8)(0.6)(0.4)(0.2)0.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

0.75

0.

72

0.76

0.

65

0.60

0.

55

0.53

0.

49

0.56

0.

46

0.42

0.

36

0.41

0.

43

0.51

0.

48

0.40

0.

38

0.50

0.

45

0.58

0.

70

0.61

0.

66

0.00.20.40.60.81.01.21.41.61.82.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Au g

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

Source: Company

Industry Focus


Page 28

Monthly subscriber net-adds – China Unicom


3.12

1.

57

4.02

0.

90

2.70

1.

71

0.89

0.

64

0.54

0.

68

0.55

0.

80

0.08

(2

.82) (1

.61)

(2.5

3)(1

.91) (1

.00)

(0.8

9)(0

.56)

(0.2

9)(0

.31)

(0.3

5)(0

.26)

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

3.

872.

543.

292.

113.

353.

052.

511.

261.

131.

151.

091.

150.

880.

56 0.81

0.69

0.73

5.00

5.07

4.80

4.81

4.02

3.75

3.61

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Au g

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

Fixed line Broadband

0.38

0.

10

(0.3

3)(0

.47)

(0.4

7)(0

.78)

(0.6

3)(0

.83)

(0.7

4)(0

.59)

(0.5

4)(0

.69) (0.5

2)(0

.65)

(0.5

8)(0

.71)

(0.7

4) (0.4

3)(0

.70)

(0.2

8)(0

.93)

(0.8

2)(0

.74)

(1.1

1)

(1.5)

(1.0)

(0.5)

0.0

0.5

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

0.66

0.

42 0.

71

0.36

0.

26

0.36

0.

38

0.29

0.

39

0.26

0.

03

0.02

0.32

0.

12 0.

38

0.35

0.

36

0.28

0.

47

0.48

0.

16 0.

42

0.16

0.

06

0.00.20.40.60.81.01.21.41.61.82.0

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Au g

-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5A

pr-1

5M

ay-1

5Ju

n-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

(million)

Source: Company

Industry Focus


Page 29

Monthly subscriber growth – China Mobile M illion Dec - 14 J an - 15 F eb - 15 M ar- 15 A pr- 15 M ay - 15 J un - 15 J u l- 15 A ug - 15 Sep - 15 O c t - 15 Nov - 15 Dec - 15Mobile net-adds 2.8 1.9 2.2 4.6 0.6 0.4 0.9 1.6 1.4 2.8 1.1 1.2 1.1Mobile sub base 806.6 808.6 810.8 815.4 816.0 816.3 817.2 818.8 820.1 822.9 824.0 825.2 826.2

2G net-adds (19.6) (10.1) (15.5) (7.7) (4.0) (10.2) (10.6) (12.7) (11.8) (8.2) (10.4) (10.6) (14.4)2G sub base 470.8 460.7 445.2 437.5 433.6 423.3 412.7 400.1 388.2 380.0 369.6 359.0 344.6

3G net-adds 3.6 (4.7) 1.1 (7.4) (5.5) (6.6) (7.9) (4.9) (7.3) (7.4) (8.2) (8.2) (9.5)3G sub base 245.8 241.0 242.2 234.8 229.2 222.7 214.8 209.9 202.6 195.3 187.1 178.9 169.4

4G net-adds 18.8 16.7 16.6 19.7 10.1 17.2 19.3 19.2 20.5 18.4 19.7 20.0 25.04G sub base 90.1 106.8 123.4 143.1 153.1 170.3 189.7 208.8 229.3 247.6 267.3 287.3 312.3

Source: Company

Monthly subscriber growth – China Unicom M illion Dec - 14 J an - 15 F eb - 15 M ar- 15 A pr- 15 M ay - 15 J un - 15 J u l- 15 A ug- 15 Sep - 15 O c t - 15 Nov - 15 Dec - 15Mobile net-adds 0.8 0.1 (2.8) (1.6) (2.5) (1.9) (1.0) (0.9) (0.6) (0.3) (0.3) (0.3) (0.3)

Mobile sub base 299.1 299.2 296.4 294.8 292.2 290.3 289.3 288.4 287.9 287.6 287.3 286.9 286.7

3G/4G net-adds 1.2 0.9 0.6 0.8 0.7 0.7 5.0 5.1 4.8 4.8 4.0 3.8 3.6

3G/4G sub base 149.1 150.0 150.6 151.4 152.1 152.8 157.8 162.9 167.7 172.5 176.5 180.2 183.9


Broadband net-adds 0.0 0.3 0.1 0.4 0.3 0.4 0.3 0.5 0.5 0.2 0.4 0.2 0.1Broadband sub base 68.8 69.1 69.2 69.6 69.9 70.3 70.6 71.1 71.5 71.7 72.1 72.3 72.3

F ixed line net-adds (0.7) (0.5) (0.7) (0.6) (0.7) (0.7) (0.4) (0.7) (0.3) (0.9) (0.8) (0.7) (1.1)F ixed line sub base 82.1 81.5 80.9 80.3 79.6 78.9 78.4 77.7 77.4 76.5 75.7 75.0 73.9

Source: Company

Monthly subscriber growth – China Telecom M illion Dec - 14 J an - 15 F eb - 15 M ar- 15 A pr- 15 M ay - 15 J un - 15 J u l- 15 A ug - 15 Sep - 15 O c t - 15 Nov - 15 Dec - 15Mobile net-adds 1.5 1.1 0.9 1.3 1.0 0.9 0.8 0.8 0.9 1.2 1.2 1.0 1.3Mobile sub base 185.6 186.7 187.6 188.8 189.8 190.7 191.4 192.3 193.2 194.3 195.5 196.6 197.9

3G/4G net-adds 2.0 2.1 1.8 2.3 2.3 2.0 1.8 1.9 1.8 2.1 2.3 1.9 2.13G/4G sub base 118.6 120.8 122.6 124.9 127.2 129.2 131.0 132.9 134.7 136.8 139.1 141.0 143.1


Broadband net-adds 0.4 0.4 0.4 0.5 0.5 0.4 0.4 0.5 0.5 0.6 0.7 0.6 0.7Broadband sub base 107.0 107.4 107.8 108.3 108.8 109.2 109.6 110.1 110.5 111.1 111.8 112.4 113.1

F ixed line net-adds (1.0) (0.8) (0.5) (0.8) (0.9) (0.6) (0.6) (0.9) (0.9) (0.7) (0.9) (1.0) (0.7)F ixed line sub base 143.6 142.8 142.2 141.4 140.6 139.9 139.4 138.5 137.6 136.9 136.0 135.0 134.3

Source: Company

Industry Focus


Page 30

China Telecom - Revenue breakdown in 1H15

China Unicom - Revenue breakdown in 1H15

Mobile28%

Internet23%

Sales of telecom products

10%

Traditional fixed-line

and others39%

Mobile51%

Internet19%

Sales of telecom products

15%

Traditional fixed-line

and others15%

Source: Companies

Key performance indicators as of Jun 2015

China M obile China T elecom China UnicomSubsc riber base ( '000)

Mobile 790,614 191,440 289,307

2G 538,153 60,440 131,5193G/4G 252,461 131,000 126,788

4G 13,943 29,000 31,000

F ixed-line na 139,350 78,427

Broadband na 109,560 70,590

A RPU (RM B)Mobile 64 55 42

2G na 31 25

3G/4G na 67 58F ixed-line na 18 n.a.

Broadband na 58 n.a. Source: Companies

Subscriber number as of Dec 2015 ( '000) China M obile China T elecom China Unicom

Mobile 826,241 197,900 286,657

2G 344,583 54,770 102,807

3G/4G 481,658 143,130 183,850

F ixed-line na 134,320 73,858

Broadband na 113,060 72,330

*

* Include 312,282k 4G subscribers

Source: Companies

Industry Focus


Page 31

PE & PB charts

PE band chart – Telecom operators

China Mobile (941 HK) China Telecom (728 HK)

405060708090

100110120130140

Jan

-09

Jul-

09

Feb

-10

Au

g-1

0

Mar

-11

Sep

-11

Ap

r-1

2

Oct

-12

May

-13

No

v-1

3

Jun

-14

Dec

-14

Jul-

15

Feb

-16

Share Price (HK$)

16x

14x

12x

10x

9x

0

1

2

3

4

5

6

7

8

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

Share Price (HK$)

23x

20x

17x

14x

11x

China Unicom (762 HK)

0

5

10

15

20

25

30

35

40

45

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

Share Price (HK$)

60x

48x

36x

24x

12x


Industry Focus


Page 32

PB band chart – Telecom operators


0

20

40

60

80

100

120

140

160

180

Jan

-09

Jul-

09

Feb

-10

Au

g-1

0

Mar

-11

Sep

-11

Ap

r-1

2

Oct

-12

May

-13

No

v-1

3

Jun

-14

Dec

-14

Jul-

15

Feb

-16

Share Price (HK$)

2.9x

2.5x

2.1x

1.7x

1.3x

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

Share Price (HK$)

1.3x

1.2x

1.0x

0.9x

0.7x


02468

101214161820

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

Share Price (HK$)

1.5x

1.3x

1.1x

0.9x

0.7x


Industry Focus


Page 33

EV/EBITDA band chart – Telecom operators


40

50

60

70

80

90

100

110

120

130

Jan

/09

Jul/0

9

Feb

/10

Au

g/1

0

Mar

/11

Sep

/11

Ap

r/1

2

Oct

/12

May

/13

No

v/1

3

Jun

/14

Dec

/14

Jul/1

5

Feb

/16

Share Price (HK$)

2.8x

3.5x

4.2x

5.0x

5.7x

0

1

2

3

4

5

6

7

8

Jan

/09

Jul/0

9

Feb

/10

Au

g/1

0

Mar

/11

Sep

/11

Ap

r/1

2

Oct

/12

May

/13

No

v/1

3

Jun

/14

Dec

/14

Jul/1

5

Feb

/16

Share Price (HK$)

3.2x

3.8x

4.4x

5.0x

5.7x


0

5

10

15

20

25

30

Jan

/09

Jul/0

9

Feb

/10

Au

g/1

0

Mar

/11

Sep

/11

Ap

r/1

2

Oct

/12

May

/13

No

v/1

3

Jun

/14

Dec

/14

Jul/1

5

Feb

/16

Share Price (HK$)

2.7x

3.6x

4.5x

5.5x

6.4x

Source: Thomson Reuters., DBS Vickers

Industry Focus


Page 34

PE chart – Telecom operators


8

9

10

11

12

13

14

15

16

17

Jan

-09

Jul-

09

Feb

-10

Au

g-1

0

Mar

-11

Sep

-11

Ap

r-1

2

Oct

-12

May

-13

No

v-1

3

Jun

-14

Dec

-14

Jul-

15

Feb

-16

x

+1SD: 12.8x

Avg: 11.3x

-1SD: 9.9x

579

1113151719212325

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

x

Avg: 15.9x

+1SD: 18.3x

-1SD: 13.6x


0

10

20

30

40

50

60

70

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

x

Avg: 30.1x

+1SD: 44.4x

-1SD: 15.9x


Industry Focus


Page 35

PB chart – Telecom operators


1.01.21.41.61.82.02.22.42.62.83.0

Jan

-09

Jul-

09

Feb

-10

Au

g-1

0

Mar

-11

Sep

-11

Ap

r-1

2

Oct

-12

May

-13

No

v-1

3

Jun

-14

Dec

-14

Jul-

15

Feb

-16

x

+1SD: 2.1x

Avg: 1.8x

-1SD: 1.6x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

x

Avg: 1x

+1SD: 1.1x

-1SD: 0.9x


0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan

-09

Jun

-10

No

v-1

1

Ap

r-1

3

Sep

-14

Feb

-16

x

Avg: 1x

+1SD: 1.2x

-1SD: 0.8x


Industry Focus


Page 36

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”) This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 February 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 02 Feb 2016.

2. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Industry Focus


Page 37

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Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers (Hong Kong) Limited

18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong

Tel: (852) 2820-4888, Fax: (852) 2868-1523

Documents

China / Hong Kong Industry Focus China Telecom Sector Industry Focus China Telecom Sector Page 3 Estimated earnings impact from mobile data carried forward policy CM CT CU Estimated