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CSCI-Telecommunications-China Mobile (941 HK)：Increasing a cash cow, regardless of 5G - 20180809

Increasing a cash cow, regardless of 5G

• China Mobile (“CM”)’s 1H18 headlines came in slightly behind our expectation amid rising competition and cancellation of domestic data roaming fees, whilst it is likely to see a tougher 2H18 ahead.
• Steady growth in dividend playout ratio and stable earnings make CM increasingly a cash cow, regardless of upcoming 5G investments.
• We trimmed our FY18/19E service revenue and net profit estimates by 1.4%/0.5% and 4.4%/2.1% respectively and lowered our DCF-based price target to HKD86.0. Maintain Buy.

Rising operation burden in 2H18. CM reported a lacklustre set of 1H18 results, on continuous voice substitution of OTT Apps (-28.6% YoY drop in voice revenue) and intensifying competition. On an apple-for-apple basis, service revenue rose 5.5% YoY, on strong wireline broadband revenue (+26.1% YoY) and robust emerging business (+17.8% YoY).However, CM is likely to see a tough 2H18 on rising competition and cancellation of domestic data roaming fees. In addition, CM has stepped up network modernisation (2G spectrum re-farm and 5G trials), adding to operating burden. On the competition front, CM faces rising competition from smaller peers and slowing 4G subs growth given a high 4G subs penetration (74.7% as of Jun-2018).

Increasingly a cash cow, regardless of 5G investment. While CM will face rising headwinds in revenue and earnings growth on intensifying competition and upcoming 5G investments, the company’s strong cash position and stable cash flow make it increasingly a cash cow, in our view. In 5G investments, we believe CM can avoid a sharp increase in total capex, given the room to reduce its 4G capex by 2020. Having been granted with a FDD-LTE license, CM has stepped up efforts in 2G spectrum re-farm for 4G (it built 100k new FDD-LTE base stations on 900MHz in 1H18).

Valuation close to historical trough. Incorporating impacts of the cancellation of domestic data roaming fees (starting from 1July 2018), we trimmed our FY18/19E service revenue and net profit estimates by 1.4/0.5% and 4.4%/2.1% respectively, and lowered our DCF-based price target to HKD86.0 (from HKD95.0). Trading at FY18E 10.4x PER, 3.1x EV/EBITDA and 4.5% yield, CM’s current valuation is close to its historical trough. Maintain Buy.