CSCI-Telecommunications-China Comservice (552 HK)：Ample room for re-rating - 20180830

Ample room for re-rating

• Bucking the industry trend of declining telcos’ capex, China Comservice (“CCS”) again delivered a solid set of results for 1H18, posting revenue and earnings growth of 13.2% and 8.6% YoY respectively.
• Although the telcos haven’t substantially raised capex on 5G, CCS will be an early beneficiary of the 5G investment cycle, in our view.
• We nudged up our FY18E/19E revenue and earnings estimates by 3.7%/6.1% and 0.5%/1.7% and raised our DCF-based price target to HKD6.60. Maintain Buy.

A solid set of 1H18 results, bucking the industry trend. CCS reported a solid set of 1H18 headlines, with revenue and net profit rising 13.2% and 8.6% YoY respectively , in spite of the telcos’ continuously declining capex (-8.5% YoY in 1H18). The solid revenue growth was primarily driven by TIS (+17.7% YoY) and ACO (+18.2%). Meanwhile, CCS’ gross margin slid to 12.2% in 1H18 from 12.7% in 1H17 due to continued cost pressure despite its efforts to contain growth of its low-margin distribution business. Nonetheless, the strong results, which include continued positive free cash flow, bode well for a full-year dividend payout given its solid financial position.

An early beneficiary of 5G investment cycle. Having started outdoor trials of 5G in 1H18, China telcos have made their 5G roadmap: pre-commercial trial in 2019 and commercial rollout in 2020. Given higher spectrum frequency (hence smaller base station coverage area) and the prolonged period of 3G/4G/5G co-existence, the telcos would have a longer 5G investment cycle, in our view. Prior to large-scale commercial deployment, telcos usually need to conduct design and planning work in advance, which would benefit CCS given its industry-leading expertise and experience during 2G/3G/4G rollout.

CCS has more sophisticated service offerings than the TowerCo. CCS provides a wide scope of telecoms infrastructure services and solutions, which are more sophisticated than that of the TowerCo, in our view. CCS’ services entail deep understanding of the telecoms networking while the TowerCo will (initially at least) be more focused on towers operation.

TowerCo listing provides CCS ample room for valuation catch-up. We nudged up our FY18E/19E revenue and earnings by 3.7%/6.1% and 0.5%/1.7% and raised our DCF-based price target to HKD6.60 for end-2019 (from HKD5.80 for end-2018). Trading at FY19E 10.7x PER, 4.5x EV/EBITDA, 1.1x PBR and 3.3% yield, CCS’ current valuation still represents a deep discount to the TowerCo, leaving ample room for further re-rating, in our view.