CSCI-Telecommunications-China Unicom (762 HK)：Earnings turnaround on track-20180816

Earnings turnaround on track

• China Unicom (“CU”) reported a solid set of 1H18 headlines, with healthy growth in 4G, industrial internet and ICT, suggesting that its mixed-ownership reform is paying off.
• As of Jun-2018, CU’s net gearing had dropped to a trivial 2.9%, which together with strong earnings recovery would make CU a stronger play in the 5G era, in our view.
• We trimmed our FY18E/19E service revenue estimates by 0.9%/1.9% and FY18E/19E earnings forecasts by 7.9%/12.1% respectively and lowered our DCF-based price target to HKD12.80. Maintain Buy.

A solid set of 1H18 results. CU reported a solid set of 1H18 results (+8.3% YoY in service revenue, +4.9% YoY in EBITDA and +121.6% YoY in net profit). CU’s industry leading service revenue growth was mainly driven by steady growth in mobile services (+9.7% YoY) and surge in revenue from industrial internet (+39.3% YoY) and ICT (+67.9% YoY), in a sign that the company’s mixed-ownership reform appears to have bear fruit. Despite lower ARPU, CU’s 4G subs monetisation potential is higher than its domestic rivals, given its higher DOU of 7.6GB versus 3.1GB for China Mobile. In addition, the share of CU’s non-voice service revenue exceeded 82% in 1H17, making it increasingly a data play.

Saving the bullets for 5G. Although CU has substantially reduced its capex since 2016, it does not appear to have resulted in a significant compromise on network coverage, which suggests that it can deploy the extra capital in 5G projects in future, in our view. With net gearing slipping to a trvial 2.9% as of Jun-2018, CU appears to be strongly positioned (capital and earnings wise) to potentially become a stronger play in the 5G era.

Deepening mixed-ownership reform. Capitalising on the privileges from the mixed-ownership reform, CU made substantial progress in its newly established ‘Five New’ strategy, featuring new DNA, new governance, new operation, new Energy and new ecology, that started to deliver as evident from the 39.3% YoY surge in industrial internet revenue. 

Still compelling turnaround story. Factoring in the potential impact of the cancellation of domestic data roaming fees, we trimmed our FY18E/19E service revenue estimates by 0.9%/1.9% and earnings forecasts by 7.9%/12.1% respectively and lowered our DCF-based price target to HKD12.80 (from HKD15.0). Trading at FY19E 2.7x EV/EBITDA and 0.75x PBR, CU’s current valuation looks compelling, in our view.