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CSCI-Telecommunications-China Telecom (728 HK)：Network coverage remains an edge - 20180828

Network coverage remains an edge

• China Telecom (“CT”)’s legacy network coverage, carrying network in particular, remains an edge in securing quality service and high customer satisfaction.
• CT has a prudent strategy in 5G, featuring precision investment, divergent target applications and 4G & 5G co-existence that would avoid high earnings volatility seen during the 3G and 4G rollouts.
• We trimmed our FY18E/19E service revenue and earnings estimates by 1.1%/0.4% and 3.4%/3.0% respectively and lowered our DCF-based price target to HKD4.5. Maintain Buy.

Legacy network coverage remains an edge. With the longest operating history, CT maintains an edge over its peers in network coverage, the carrying network in particular, which also puts the company in an advantageous position in mobile network coverage, in our view. As of Jun-2018, CT boasts 1.2bn mobile base stations with a 36% network capacity utilisation, giving it the leeway to drive data traffic through more competitive pricing strategy. In carrying network, CT’s FTTH home pass reached 96% in cities and towns along with an entrenched industry-leading position in IP metropolitan and backbone network (with bandwidth of 500Tbps and 170Tbps, respectively), which gives it a strong edge in serving corporate clients (IDC, cloud and big data etc.), in our view.

Prudent 5G strategy. Although won’t be laggard in 5G deployment compared with its domestic peers, it has a more prudent strategy in 5G, in our view. Management expects 4G and 5G will co-exist for an extended period, whilst the company continue its efforts to proactively foster 5G applications (e.g. VR, IOT, auto and industrial internet etc.). The company intends to deploy a return-oriented precision investment in 5G, avoid high earnings volatility as seen during the 3G and 4G rollouts. With a solid track record of stable earnings growth with high visibility, we believe CT will continue to post sustainable earnings growth during the 5G investment cycle.  

A safe play ahead of 5G investment cycle. Factoring in the impacts of the cancellation of domestic data roaming fees, we have trimmed our FY18E/19E services revenue and earnings estimates by 1.1%/0.4% and FY18E/19E earnings forecasts by 3.4%/3.0% respectively and lowered our DCF-based price target to HKD4.5 for end-2019 (from HKD4.6 for end-2018). Trading at 12.3x FY19E PER, 2.5x EV/EBITDA, 0.75x FYXXE PBR and 3.2% dividend yield, CT’s current valuation provides a good entry opportunity. Maintain Buy.