CSCI-Telecommunications-China Comservice (552 HK)：More than just a value play - 20180328

More than just a value play

• China Comservice (CCS) continued to maintain stable revenue and profit growth in FY17, regardless of domestic telcos reducing capex for the third consecutive year.
• On the back of stable profit growth and 40% increase in free cash flow, CCS announced a special dividend, making a total final DPS of HKD0.141.
• We slightly trimmed our FY19E revenue and net profit estimates by 0.5% and 2.4%, respectively, and lowered our DCF-based price target to HKD5.80 (from HKD6.00), implying 27.5% potential upside. Maintain Buy.

Stable revenue and profit growth, regardless of telcos’ declining Capex. CCS continued to maintain stable revenue and profit growth in FY17, in spite of domestic telcos reducing Capex for the third consecutive year. The 6.9% YoY revenue growth was primarily driven by domestic non-operators (+12.4% YoY) and market share gains with China Mobile and China Unicom (+15.9% YoY in total revenue). In the non-operator market, revenue growth mainly came from TIS (+30.3% YoY) and ACO (+22.5% YoY). Excluding product distribution (lower gross margin), revenue rose 12.4% YoY. Revenue from overseas market dropped 26.3% YoY, which helped improve cash flow and allowed management to be more focused on the more profitable domestic market, in our view.

On track transformation toward an ICT industry expert. With a decade-long operating history, CCS has amassed abundant industry expertise and delivery capacity in the communications industry. Built on that core capability, CCS has increasingly transformed itself into an ICT service provider that caters well for the increasingly sophisticated demand from the government and large enterprises. Looking ahead, while CCS is well poised to enjoy another round of 5G spending (likely starting from 2019 the earliest), its transformation towards ICT service secures its long-term growth.

Good value, with stable long-term growth. We have slightly nudged up our FY18E revenue/net profit estimates by 1.1%/0.4%, but trimmed our FY19E revenue/net profit forecasts by 0.5%/2.4%, respectively, as we expect the telcos to further reduce capex in 2019 ahead of 3G investment (in 2020 in our estimates). We have also lowered our DCF-based price target to HKD5.80 (from HKD6.00). Trading at FY18E 8.7x PER, 0.8x PBR and 4.0% yield, CCS’ current valuation looks appealing, in view of its sustainable long-term growth and strong cash flow securing stable-to-rising dividend payout. Maintain Buy.