汇丰银行-中国-电信通讯行业-中国电信业：网络共享——这次可能会有所不同-2019.8.16-21页.pdf

Disclosures&Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix,and with the Disclaimer,which forms part of it.Issuer of report:The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at:https:/ THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE PRC)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)4G network sharing between Unicom and Telecom didnt amount to much 5G might be different Higher capital intensity of 5G means sharing makes more sense expect policy support for two strong 5G networks Downgrade China Tower from Buy to Hold on lower tenancy ratio estimates;remain Buy China Mobile/Unicom/Telecom 5G network sharing the logic of a Unicom/Telecom merger without the complexity.China Unicoms network sharing plan(see our 15 August report 5G co-build,co-share strategy offers promise)could enable two high-quality 5G networks in China.It would accelerate 5G speed of deployment and potentially improve quality both important to policy makers.And it would maintain price competition,with the sharing entities offering completely separate prices and services.This time looks different downgrade China Tower to Hold from Buy.Unicom attempted to share 4G rollout costs with Telecom,but with little tangible impact.With 5G the potential investment is larger,and the benefits would be less skewed to Unicom.There is less potential for active sharing with China Mobile,but a near-term roaming agreement is possible,as is more active sharing later on.We adjust our tenancy ratio forecast to reflect our view that some form of sharing is likely we now model a medium-term tenancy ratio of 1.55x(our prior estimate of 1.72x becomes our bull case),and downgrade to Hold.Minor changes to China telco estimates lower 5G capex risk and improving earnings momentum.Lower China Tower estimates and valuation results in slight declines in our China telco estimates and target prices.Our bull case analysis implies substantial valuation upside in the scenario of full network sharing between Unicom and Telecom.This is an additional positive after better dividend support from China Mobile last week.We look to China Telecom results on 22 August for additional colour,as well as further telco announcements on network sharing agreements.This report replaces that of the same title and date to correct the tenancy ratio figures on the front page for our base and bull case.16 August 2019 Neale Anderson*Head of Telecoms Research,Asia Pacific The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6716 *Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations China telcos Equities Telecommunications China China telcos-key data Ticker Company Old TP New TP%change Old Rating Rating CP Upside/Mcap ADT EV/EBITDA PE Div Yield HKD HKD HKD Downside USDm USDm 2019e 2019e 2019e 0941.HK Mobile 81.00 79.00-2.5%Buy Buy 66.10 19.5%172,487 138 2.3 11.4 4.6%0762.HK Unicom 11.20 10.90-2.7%Buy Buy 7.82 39.4%30,495 25 2.0 21.1 1.9%0728.HK Telecom 5.00 4.80-4.0%Buy Buy 3.60 33.3%37,132 19 2.4 12.8 3.2%0788.HK Tower 2.36 1.97-16.5%Buy Hold 1.84 7.1%41,274 128 9.1 58.0 0.9 Source:Company data,HSBC estimates.Prices as of close on 15 Aug 2019 Network sharing this time might be different Equities Telecommunications 16 August 2019 2 China Tower:scenario analysis We outline our scenario analysis for China Tower below:Tenancy ratio we cut our estimates.The change we make to our estimates is to reduce them for telecom tower tenancy ratio.We now expect some form of sharing,which means a lower volume of equipment being sited on China Towers locations compared to our prior forecasts.Base case.In our base case we assume 1.55x in the medium-term,compared to the 1.5x reported at 1H results.We believe it is possible that the tenancy ratio goes higher than this in the near term,as telcos deploy 5G kit and keep 3G and 4G equipment.Long term however,we expect 5G sharing and decommissioning of legacy equipment to result in a lower tenancy ratio.Bull case.Our prior medium-term estimate of 1.72x becomes our new bull case estimate.Bear case.This assumes the tenancy ratio falls to 1.3x.The tenancy ratio was 1.28x at end-2015 when China Tower was established.5G sharing makes sense The increased capital intensity of deploying 5G at higher frequencies and the uncertain business model means sharing makes sense Near-term beneficiaries are Unicom and Telecom,because of their adjacent spectrum holdings but Mobile can benefit medium-term Downgrade China Tower to Hold;remain Buy on China Mobile,China Telecom and China Unicom China Tower scenario analysis _ Base _ _ Bull _ _ Bear _ China Tower 2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022 Capex,RMBm 28,374 47,768 44,343 38,431 28,374 41,577 38,485 33,133 28,374 57,265 54,011 47,723 Revenue YoY growth 6.5%7.0%7.9%7.5%6.5%6.3%6.3%6.5%6.5%8.1%10.2%9.3%Net Profit YoY growth 88.7%46.3%11.4%23.7%88.7%42.0%15.4%26.5%88.7%53.0%6.2%19.1%Leveraged FCF(RMBm)15,097(1,756)5,124 14,420 15,097 4,220 9,947 18,017 15,097(10,922)(2,926)7,870 SoTP DCF target price,HKD 1.97 2.03 1.79 Source:HSBC estimates 3 Equities Telecommunications 16 August 2019 China telcos scenario analysis Our China telco forecasts are substantially unchanged.We lower our target prices and net income forecasts slightly,reflecting our more cautious view of China Tower.Otherwise we make no changes to estimates:China Mobile.China Mobiles commentary at results was positive(see our 9 August report Upgrade to Buy:change dividend,5G reassurance).It has less near-term potential to share with peers due to different spectrum.We suspect also that China Mobile has the least need to share rollout,given its strong balance sheet.However,when 5G is deployed in spectrum that it has in common with Unicom and Telecom(such as 900MHz and 2.1GHz),sharing becomes more feasible.China Unicom.Having failed to secure a meaningful sharing deal with 4G,Unicom looks to be better positioned with 5G.In our bull case we halve the number of 5G base stations deployed by Unicom relative to our base case.In practice this is likely to be partly offset by higher spending on other areas,such as fixed line.China Telecom.We will watch China Telecoms tone at half-year results on 22nd August with interest.It was less interested with 4G in sharing,but may be keener to share with 5G.China telcos-scenario analysis _ Base _ _ Bull _ _ Bear _ China Mobile 2019e 2020e 2021e 2022e 2019e 2020e 2021e 2022e 2019e 2020e 2021e 2022e Capex,RMBm 166,000 197,805 202,715 207,223 166,000 180,555 188,915 194,803 166,000 232,305 230,315 232,063 Revenue YoY growth 3.5%3.3%3.9%3.2%3.5%3.3%3.9%3.2%3.5%3.3%3.9%3.2%Net Profit YoY growth -9.5%8.0%-0.5%2.6%-9.5%8.5%1.8%4.3%-9.5%6.9%-5.2%-1.2%Leveraged FCF(RMBm)70,206 43,804 48,473 50,866 70,206 60,864 61,219 61,538 70,206 9,691 22,971 29,504 SoTP DCF target price,HKD 79.00 81.00 76.00 China Unicom 2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022 Capex,RMBm 58,000 76,321 74,367 65,917 58,000 57,346 57,117 53,497 58,000 102,196 95,067 84,547 Revenue YoY growth -1.2%4.8%2.2%1.6%-1.2%4.8%2.2%1.6%-1.2%4.8%2.2%1.6%Net Profit YoY growth -0.4%36.6%-4.0%-1.5%-0.4%45.3%9.9%12.6%-0.4%25.0%-26.0%-30.1%Leveraged FCF(RMBm)35,325 20,201 21,065 28,177 35,325 38,884 37,352 38,883 35,325(5,278)1,676 11,735 SoTP DCF target price,HKD 10.90 12.20 9.10 China Telecom 2019 2020 2021 2022 2019 2020 2021 2022 2019 2020 2021 2022 Capex,RMBm 78,000 92,297 92,981 83,298 78,000 66,422 68,831 64,668 78,000 118,172 113,681 101,928 Revenue YoY growth 1.6%2.7%1.0%0.6%1.6%2.7%1.0%0.6%1.6%2.7%1.0%0.6%Net Profit YoY growth -3.7%7.0%4.8%-2.4%-3.7%12.0%14.9%8.1%-3.7%2.4%-9.0%-17.2%Leveraged FCF(RMBm)28,055 12,968 12,402 22,393 28,055 38,508 35,429 39,002 28,055(12,593)(7,004)5,959 SoTP DCF target price,HKD 4.80 5.60 4.00 Source:HSBC estimates Equities Telecommunications 16 August 2019 4 5G base station estimate-scenario analysis _ Base _ _ Bull _ _Bear _ 2019e 2020e 2021e 2022e 2019e 2020e 2021e 2022e 2019e 2020e 2021e 2022e Mobile 65 515 1,065 1,665 65 415 865 1,365 65 715 1,465 2,265 Unicom 41 261 511 711 41 151 276 376 41 411 811 1,161 Telecom 41 341 691 991 41 191 366 516 41 491 991 1,441 Total 147 1,117 2,267 3,367 147 757 1,507 2,257 147 1,617 3,267 4,867 Source:HSBC estimates Our 5G base station forecast is outlined in the table above.Our base case capex estimate is outlined in the chart below.5G capex higher for longer.In our base case we assume that capital intensity remains high for a number of years,rather than surging in one or two years.This is backed up by China Mobile comments at its 1H19 briefing,to the effect that capex will not be substantially increased as a result of 5G.4G capex spike had reasons.China Mobile wanted to accelerate 4G network rollout as its TD-SCDMA 3G technology was not supported by global handset vendors,such as Apple.We also note that capex was higher in prior periods as telcos were constructing their own towers,compared to the current model of leasing sites from China Tower.Total capex-2010-2025e,RMBm -50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,0002010201120122013201420152016201720182019202020212022202320242025CMCUCT Source:Company data,HSBC estimates 5 Equities Telecommunications 16 August 2019 China Tower(788 HK,HKD1.84,downgrade to Hold,TP HKD1.97 from HKD2.36)We value China Tower using DCF methodology in which we apply a cost of equity of 8%(based on a risk-free rate of 3.0%,beta of 1 and equity risk premium of 5.0%),cost of debt of 5.5%and debt to capital ratio of 48%.This results in a WACC of 6.1%.We apply a terminal growth rate of 1%.Our DCF valuation returns a target price of HKD1.97,down 16.5%from HKD2.36,implying 7.1%upside from the close price on 15 August 2019.We apply a Hold rating rather than Buy as we are worried about the impact of 5G network sharing on the companys growth.We assume a lower tenancy ratio and lower revenue per site as a result of network sharing among the telcos.Downside risks to our view include:Risk from a possible full merger of China Unicom and China Telecom:The potential full merger of China Unicom and China Telecom could create a better capitalised competitor.Slower-than-expected 5G rollout in China:From 2020 and onwards,5G rollout will be a major growth driver for China Tower as reflected in the accelerating growth in the number of tower site net additions.Slower-than-expected 5G network rollout would lead to lower-than-expected revenue growth from the tower leasing business.Lower-than-expected lease rentals at the time of lease renewal:If renewals are done at lower-than-expected lease rentals,there is risk to our revenue and margin estimates.For China Tower,if the renewal rental rate per tenant is 1%lower than our estimate,our DCF-based fair value would be negatively impacted by 1.3%.New business rollout being slower than expected:New businesses include Trans Sector Site Application and Information(TSSAI)which has potential new business in data collection,corporate and government private communication,video surveillance and the IoT.Unfavourable 5G infrastructure leasing terms:Customers may sign new leasing contracts with China Tower coming into 5G deployment that are different from existing contracts and potentially with worse economics.Unexpected changes in regulations that materially affect China Towers competitive environment:Any unexpected changes to regulations and the competitive landscape could significantly change China Towers operational and competition environment.Valuation,rating,risks Cut tenancy ratio forecast at China Tower downgrade to Hold from Buy,and cut DCF-based TP by 16.5%This drives small reductions in net profit and target price in our China telco models Buy rating on China Mobile,Unicom and Telecom confirmation of network sharing a potential catalyst Equities Telecommunications 16 August 2019 6 Upside risks to our view include Less network sharing than expected.As with 4G,plans to share networks may not work out.Faster-than-expected growth in new business areas.Faster-than-expected increase in dividend to offset earnings pressure.Better-than-expected 5G leasing terms.Changes to our estimates are outlined below:China Tower:HSBCe vs consensus,prior estimates RMBm 2018a 2019e 2020e 2021e 18-21e CAGR Consensus Revenues 71,819 78,276 85,662 94,600 9.6%chg YoY 4.6%9.0%9.4%10.4%Operating Expense(30,046)(30,614)(33,069)(35,800)6.0%chg YoY 6.1%1.9%8.0%126.5%EBITDA 41,773 47,662 52,593 58,800 12.1%chg YoY 3.5%14.1%10.3%11.8%margin 58.2%60.9%61.4%62.2%Operating Profit 9,081 12,096 15,750 19,378 28.7%chg YoY 17.7%33.2%30.2%23.0%margin 12.6%15.5%18.4%20.5%Net Income 2,650 5,574 8,662 12,283 66.7%chg YoY 36.4%110.3%55.4%108.1%EPS,RMB 0.02 0.03 0.05 0.07 58.5%HSBC Revenues 71,819 76,481 81,827 88,268 7.1%chg YoY 4.6%6.5%7.0%7.9%Operating Expense(30,046)(32,296)(34,353)(37,117)7.3%chg YoY 6.1%7.5%6.4%8.0%EBITDA 41,773 44,185 47,474 51,151 7.0%chg YoY 3.5%5.8%7.4%7.7%margin 58.2%57.8%58.0%57.9%Operating Profit 9,081 10,746 13,532 14,644 17.3%chg YoY 17.7%18.3%25.9%8.2%margin 12.6%14.1%16.5%16.6%Net Income 2,650 5,001 7,318 8,154 45.4%chg YoY 36.4%88.7%46.3%11.4%EPS 0.02 0.03 0.04 0.05 37.4%HSBC vs.Consensus Sales -2.3%-4.5%-6.7%EBITDA -7.3%-9.7%-13.0%OP -11.2%-14.1%-24.4%Net Income -10.3%-15.5%-33.6%EPS -8.3%-16.8%-34.7%HSBC Aug 2019 estimates Sales 77,806 85,388 94,023 EBITDA 44,954 50,012 55,550 OP 11,514 16,071 19,883 Net Income 5,587 9,274 12,379 EPS 0.03 0.05 0.07 HSBC vs.previous Sales -1.7%-4.2%-6.1%EBITDA -1.7%-5.1%-7.9%OP -6.7%-15.8%-26.3%Net Income -10.5%-21.1%-34.1%EPS -10.5%-21.1%-34.1%Source:Company data,HSBCe,Bloomberg 7 Equities Telecommunications 16 August 2019 Changes to our telco forecasts We make minor changes to our telco estimates,driven by changes in our associate income from China Tower.China telcos:estimates vs prior forecasts _ HSBCe vs prior estimates _ 2019e 2020e 2021e China Mobile Sales 0.0%0.0%0.0%EBITDA 0.0%0.0%0.0%OP 0.0%0.0%0.0%Net Income-0.1%-0.4%-0.8%EPS-0.1%-0.4%-0.8%China Unicom Sales 0.0%0.0%0.0%EBITDA 0.0%0.0%0.0%OP 0.0%0.0%0.0%Net Income-0.9%-2.2%-4.8%EPS-0.9%-2.2%-4.8%China Telecom Sales 0.0%0.0%0.0%EBITDA 0.0%0.0%0.0%OP 0.0%0.0%0.0%Net Income-0.5%-1.5%-3.2%EPS-0.5%-1.5%-3.2%Source:Company data,HSBCe China Mobile(941 HK,HKD66.10,Buy,TP HKD79 from HKD81)We use a sum-of-the-parts valuation approach to better capture the value of China Mobiles core telecom business in China as well as its investment stakes in different entities.For the core telecom assets,we use a DCF valuation for which our assumptions remain unchanged:A risk free rate of 3.0%,beta of 1 and equity risk premium of 5.0%,which results in a cost of equity assumption of 8%.A cost of debt of 19%and debt to capital ratio of 0%.A terminal growth rate of 1.0%.This leads to a blended WACC of 8.0%,which results in fair value of HKD47.3 per share.