China Telecom (728 HK) is one of Maybank-KE HK/China Internet & Telcos team’s top picks. Our house is positive on China Telcos sector because we are moving on from the operationally challenged 2015 and the market now has a more clear view of 2016 even if margins and earnings growth are still a year away.
In 2015, China Telecom was the only operator to post revenue and earnings growth. However, operating profit came in below expectations due to weaker revenues from tariff cut and data roll over as well as higher network operations cost that weighed on margins. For this reason, we had maintained a cautious view throughout last year but we are more constructive now as we believe the sector’s risk reward is much more attractive with low expectations.
The Company guides for 11% lower capex and 13-15m net subscriber adds for 2016. Capex could fall even lower if network sharing with China Unicom (762 HK) could be implemented successfully. On the other hand, we estimate a 30bps decline in EBITDA margin due to the tower lease back.
We maintain BUY on China Telecom with unchanged price target of HKD4.76, based on the DCF methodology using a WACC of 8.5% and 1% terminal growth rate.