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CSCI-Telecommunications-China Unicom (762 HK)：A new chapter unravelling - 20180316

A new chapter unravelling

• China Unicom (CU) reported a set of solid headline figures, which together with a strategic overhaul in its operational structure and deepening collaboration with the OTTs, bodes well for a new chapter in its earnings recovery. 
• CU resumed dividend payments, though trivial but guided a lower-than-expected capex (
• We nudged up our FY18/19E service revenue and earnings estimates by 0.8%/3.1% and 0.5%/8.6%, and raised our DCF-based price target to HKD15.0 (from HKD13.2), implying 57.2% potential upside.

A solid set of FY17 results. CU reported a strong set of top-line figures, with a 4.6% YoY growth in service revenue primarily driven by mobile service (+9.7% YoY) and industrial internet services (+17.4% YoY, consisting of IDC, IT services, IOT, Cloud and Big Data). With non-voice contributing 78.5% of service revenue (up from 73.8% in FY16), CU has increasingly become a data play. On the back of its strategic reshuffle in its operational structure and deepening collaboration with OTTs, CU aims to maintain strong mobile business growth and significantly grow its industrial internet business (from 6.1% in FY17 to 15% in three years), which would likely make it a pioneer in the transformation towards a de-telecom play providing data, application services and solutions for individuals, households, the government and enterprises, in our view.

Strengthening fundamental metrics. Management’s optimistic view on CU’s growth outlook appears to have strong fundamental supports. As of end-2017, CU’s net gearing had dropped to 12.7% (from 66.3% as of end-2016). Free cash flow swung to a hefty RMB42.9bn, which encouraged the company to resume dividend payments. In spite of the government order for the telcos to scrap domestic data roaming fee, management remains confidence to achieve the strong growth as promised in its mixed-ownership reform filing.

To be a 5G early mover. Management expects 5G ecosystem to be mature by end-2019 the earliest, and pledged to be the early mover in 5G deployment. In addition, CU will shut down its 2G network in three years.

Imminent re-rating likely ahead. On the back of its strong 4G subs growth and management’s upbeat outlook on the industrial internet business, we nudged up our FY18/19E service revenue and earnings estimates by 0.8%/3.1%, and 0.5%/8.6%, respectively, and raised our DCF-based price target to HKD15.0 (from HKD13.2) on a more positive long-term growth outlook. CU trades at FY18E 2.7x EV/EBITDA and 0.79x PBR, both multiples looking appealing in view of its bright growth outlook (FY18E 24.7x PER, but it’s in a high growth stage). Maintain Buy.