CSCI-Telecommunications-China Comservice (552 HK)：Don’t miss this 5G play - 20171124

Don’t miss this 5G play

• While the market is in early exercise looking for beneficiaries of 5G, China Comservice (CCS)’s positioning as one of the most authentic 5G beneficiary is yet to be recognised, in our view.
• Our channel checks suggest a rebound in China telcos’ spending in transmission network and FTTx, which would benefit CCS.
• We nudged up our FY17/18/19E revenue and earnings estimates by 0.3%/0.5%/0.6% and 1.6%/4.1%/4.1% and raised our DCF-based price target to HKD6.0 (from HKD5.8). Maintain Buy.

An early beneficiary of 5G. In our view, 5G won’t be making any meaningful revenue contribution to telecoms equipment vendors in the near-term. Telcos had indicated a timeline for 5G rollout, which would see pre-commercial trials in 2019.Meanwhile, we expect CCS to be an early beneficiary of 5G, given that the telcos usually start field trials and network planning in advance.

Telcos in rush to upgrade transmission and FTTx network ahead of 5G. Our channel checks suggest a rebound in spending on fibre network upgrades by telcos in China, which will likely be primarily driven by 1) telcos’ advance bandwidth upgrade of their transmission network ahead of 5G, and 2) accelerating household upgrade to FTTH. In addition, telcos in the developed markets like Japan’s NTT have started to deploy 400Gbps transmission network, which could be followed by Chinese telcos over the next 2-3 years.

Rising contribution from TowerCo. As the TowerCo, which has become CCS’s third-largest customer in terms of revenue contribution (over 5%) in 1H17, is planning a listing (likely in 2018), there would be a strong pickup in TowerCo’s capex that would be a major revenue driver for CCS. In addition, management saw continuously strong demand in other non-telecom markets including security surveillance, transportation and power grid.

A bargain with solid growth. We nudged up our FY17/18/19E revenue and earnings estimates by 0.3%/0.5%/0.6% and 1.6%/4.1%/4.1% and raised our DCF-based price target to HKD6.0 (from HKD5.8). CCS trades at FY18E 10.3x PER, 1.0x PBR and 3.4% yield, which is least reflective of its long-term growth prospects as a key 5G play with good earnings visibility and strong cash flow securing good dividend payouts.