20170829-汇丰银行-数码通电讯-00315.HK-Hold Stable underlying trends in a tough market.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:/ MiFID II ResearchIs your access agreed?CONTACT us today SmarTone headline financials were hit by a decline in handset sales in 2H FY17,but underlying trends were better Cut near-term forecasts to reflect shift in handset business model,offset by lower medium-term cost outlook Hold:cut TP to HKD10.4(HKD10.6);change in competitive dynamics and spectrum outlook are potential catalysts Net profit declined 16%YoY,but underlying trends are better than headline numbers suggest.SmarTone EBIT and net income both fell 16%in the FYE June 2017,with an increase in spectrum amortization,lower voice roaming and lower handset profit the main reasons.However,underlying performance was better than the headline 6%fall in service revenue,and 13%decline in EBITDA.Adjusting for the impacts of handset subsidy amortization at the revenue line,local mobile postpaid service revenue grew 2%YoY,and the EBITDA decline is reduced to 5%.SmarTone is aiming to mitigate revenue pressure with new initiatives.Even if the next iPhone expected in September is very popular,changed handset distribution dynamics in Hong Kong mean that the benefits to SmarTone will likely be lower than in previous years.Recognizing this,it is working to offset the impact via a number of initiatives,including enhanced IoT(Internet of Things)rollout,loyalty programs,and cost-saving programs in customer care.However,we still expect the core business to remain soft,with voice roaming expected to decline further,and competition remaining high in both the post-paid and pre-paid segments.Cut revenue and EBITDA forecasts,reflecting weaker than expected handset sales.2H handset sales were weaker than both we and the consensus expected.However,we assume the next iPhone will be more popular than its predecessors,and estimate that equipment revenue should grow by 25%in FY June 2018 to HKD4.4bn(compared to HKD13bn booked in FY June 2016).Service revenue decline should moderate to 3%in the current financial year,from 6%in FY June 2017.We lower our EBITDA forecast for 7%this year and 5%next year on continued pressure from roaming and lower handset profit than previously forecast.However,this is offset in our DCF by lower medium-term staff costs,with SmarTone maintaining good cost control in the second half(up just 1%YoY).Change in spectrum and competition outlook are potential catalysts.SmarTone remains a well-managed business in a very tough operating environment.A more flexible approach from the regulator on 3.5GHz spectrum and a reduction in competitive intensity in the mobile market are the main potential catalysts in our view.We forecast a dividend decline of 6%in FY June 2018,a payout ratio of c80%.29 August 2017 MAINTAIN HOLD TARGET PRICE(HKD)PREVIOUS TARGET(HKD)10.40 10.60 SHARE PRICE(HKD)UPSIDE/DOWNSIDE 10.12+2.8%(as of 28 Aug 2017)MARKET DATA Market cap(HKDm)11,191 Free float 72%Market cap(USDm)1,430 BBG 315 HK 3m ADTV(USDm)1 RIC 0315.HK FINANCIALS AND RATIOS(HKD)Year to 06/2017a 06/2018e 06/2019e 06/2020e HSBC EPS 0.62 0.70 0.65 0.59 HSBC EPS(prev)0.71 0.69 0.70 0.65 Change(%)-12.7 1.4-7.1-9.2 Consensus EPS 0.71 0.70 0.71-PE(x)16.4 14.4 15.5 17.3 Dividend yield(%)5.9 5.6 4.8 4.3 EV/EBITDA(x)5.2 5.2 5.1 6.1 ROE(%)15.2 16.4 14.7 12.7 52-WEEK PRICE(HKD)Source:Thomson Reuters IBES,HSBC estimates Neale Anderson*Head of Asia Telecoms Research The Hongkong and Shanghai Banking Corporation Limited .hk+852 2996 6716 Saileela Ravuri*Associate Bangalore *Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations SmarTone(315 HK)EQUITIES WIRELESS TELECOMS Hong Kong 9.5011.7514.0008/1602/1708/17Target price:10.40High:13.02 Low:9.93 Current:10.12Hold:Stable underlying trends in a tough market EQUITIES WIRELESS TELECOMS 29 August 2017 2 Financial statements Year to 06/2017a 06/2018e 06/2019e 06/2020e Profit&loss summary(HKDm)Revenue 8,715 9,461 9,386 9,294 EBITDA 2,296 2,238 2,217 2,190 Depreciation&amortisation-1,368-1,230-1,282-1,356 Operating profit/EBIT 929 1,008 935 833 Net interest-85-47-55-49 PBT 843 960 879 785 HSBC PBT 848 960 879 785 Taxation-177-193-171-148 Net profit 672 767 709 637 HSBC net profit 676 767 709 637 Cash flow summary(HKDm)Cash flow from operations 2,059 2,002 1,979 1,985 Capex-2,788-555-596-3,207 Cash flow from investment-3,058-959-1,048-3,696 Dividends-639-653-614-532 Change in net debt 1,808-390-318 2,242 FCF equity-727 1,431 1,406-1,199 Balance sheet summary(HKDm)Intangible fixed assets 3,631 3,450 3,241 5,566 Tangible fixed assets 3,083 2,993 2,968 2,982 Current assets 2,291 4,132 4,120 4,106 Cash&others 1,272 3,000 3,000 3,000 Total assets 9,776 11,344 11,098 13,424 Operating liabilities 2,052 2,129 2,024 1,948 Gross debt 2,691 4,029 3,711 5,952 Net debt 1,419 1,029 711 2,952 Shareholders funds 4,594 4,747 4,924 5,083 Invested capital 5,683 5,446 5,305 7,706 Ratio,growth and per share analysis Year to 06/2017a 06/2018e 06/2019e 06/2020e Y-o-y%change Revenue-52.5 8.6-0.8-1.0 EBITDA-13.7-2.5-0.9-1.2 Operating profit-15.9 8.5-7.2-10.8 PBT-12.4 13.9-8.4-10.8 HSBC EPS-17.5 14.1-7.6-10.1 Ratios(%)Revenue/IC(x)1.9 1.7 1.7 1.4 ROIC 27.8 22.9 23.9 19.7 ROE 15.2 16.4 14.7 12.7 ROA 7.7 7.8 7.1 5.9 EBITDA margin 26.3 23.7 23.6 23.6 Operating profit margin 10.7 10.6 10.0 9.0 EBITDA/net interest(x)26.9 47.5 40.1 44.8 Net debt/equity 30.6 21.5 14.3 57.6 Net debt/EBITDA(x)0.6 0.5 0.3 1.3 CF from operations/net debt 145.1 194.6 278.5 67.2 Per share data(HKD)EPS Rep(diluted)0.62 0.70 0.65 0.59 HSBC EPS(diluted)0.62 0.70 0.65 0.59 DPS 0.60 0.56 0.49 0.44 Book value 4.22 4.36 4.52 4.67 Valuation data Year to 06/2017a 06/2018e 06/2019e 06/2020e EV/sales 1.4 1.2 1.2 1.4 EV/EBITDA 5.2 5.2 5.1 6.1 EV/IC 2.1 2.1 2.1 1.7 PE*16.4 14.4 15.5 17.3 PB 2.4 2.3 2.2 2.2 FCF yield(%)-6.9 13.5 13.3-11.4 Dividend yield(%)5.9 5.6 4.8 4.3*Based on HSBC EPS(diluted)Issuer information Share price(HKD)10.12 Free float 72%Target price(HKD)10.40 Sector Wireless Telecoms Reuters(Equity)0315.HK Country Hong Kong Bloomberg(Equity)315 HK Analyst Neale Anderson Market cap(USDm)1,430 Contact+852 2996 6716 ESG metrics*Environmental Indicators Governance Indicators GHG Intensity(kg/USD)N/A No.of board members 14 Energy Intensity(kWh/USD)N/A Average board experience(years)11 CO2 reduction policy NA Female board members(%)14 Social Indicators Board members Independence(%)36 Employee costs as%of sales 4%Employee turnover(%)N/A Diversity policy N/A Source:Company data,HSBC *ESG Metrics correspond to 2015 Price relative Source:HSBC Note:Priced at close of 28 Aug 2017 7.509.5011.5013.5015.5017.507.509.5011.5013.5015.5017.50201520162017SmarToneRel to HANG SENG INDEXFinancials&valuation:SmarTone Hold 3 EQUITIES WIRELESS TELECOMS 29 August 2017 Valuation and risks We use a DCF valuation methodology,in common with other telco stocks under our coverage.Given that a key focus of SmarTones investor base is the dividend,we believe its ability to generate cash sustainably is a key driver of value.We apply a cost of equity of 7.5%in line with our equity strategy teams latest update,a cost of debt of 4.9%given falling interest rates and terminal growth rate of 1%.This results in a WACC of 6.1%(all inputs are unchanged).This results in a new target price of HKD10.40,from HKD10.60 previously.The decrease in our forecasts is offset in our DCF by the effective cost control by SmarTone.With 2.8%upside to the closing price on 28 August,2017 we maintain our Hold rating.Downside risks to our view are:Higher than expected competition in the wireless market.Competition eased following the acquisition of CSL.However,should this increase possibly as a result of increased activity by China Mobile(0941.HK,HKD87.95,Hold)as well as the launch of MVNO by HKBN SmarTones marketing costs are likely to increase,while the benefits of migration to higher-value tariff plans would diminish.Lower-than-expected device sales.If device sales are lower than we forecast,SmarTone would lose its current 2%gross profit from these sales(c3%for popular models,such as the iPhone 7).Surge in traffic volumes resulting in higher capex.Higher competition may result in more flat-rate data offers in the market.In turn,this could drive higher volumes of traffic,resulting in pressure on SmarTone,which lacks both its own backhaul and Wi-Fi offload capability.Increase in churn rate.If SmarTone cannot renew its enterprise and residential customers at current low levels of churn,then its subscriber acquisition costs would increase and revenue would be affected.Upside risks are the opposite of those above.Valuation and risks Much greater decline in handset revenues in the second half than expected,but underlying impact is less than headline figures suggest Trim forecasts to reflect weaker handset sales than previously forecast,offset by lower medium-term costs than prior forecast Hold:trim DCF-derived target price by 2%4 EQUITIES WIRELESS TELECOMS 29 August 2017 SmarTone P&L,FCF and Key operating Drivers HKD m 1H16a 2H16a 1H17-a 2H17-a FY15a FY16a FY17a FY18e FY19e FY20e CAGR 15a-17a CAGR 18e-20e P&L Revenues 10,228 8,127 5,372 3,343 18,659 18,356 8,715 9,461 9,386 9,294-31.7%-0.9%chg 17.9%-18.6%-47.5%-58.9%40.9%-1.6%-52.5%8.6%-0.8%-1.0%EBITDA 1,377 1,283 1,249 1,048 2,932 2,661 2,296 2,238 2,217 2,190-11.5%-1.1%chg-6.2%-12.3%-9.4%-18.3%14.4%-9.3%-13.7%-2.5%-0.9%-1.2%margin 13.5%15.8%23.2%31.3%15.7%14.5%26.3%23.7%23.6%23.6%Net Income 403 394 393 279 935 797 672 767 709 637-15.2%-8.9%chg-13.6%-15.9%-2.3%-29.3%74.2%-14.8%-15.7%14.1%-7.6%-10.1%margin 3.9%4.9%7.3%8.3%5.0%4.3%7.7%8.1%7.6%6.9%Free Cash Flow(FCF),HKDm EBITDA 1,377 1,283 1,249 1,048 2,932 2,661 2,296 2,238 2,217 2,190-11.5%-1.1%Less cash outflows in respect of:Capital Expenditures (169)(425)(160)(354)(680)(594)(514)(555)(596)(625)%chg YoY-53.0%32.7%-5.5%-16.7%-27.3%-12.6%-13.5%8.0%7.4%4.9%of sales 1.7%5.2%3.0%10.6%3.6%3.2%5.9%5.9%6.4%6.7%FCF before adjustments 1,208 858 1,089 694 2,252 2,067 1,782 1,683 1,621 1,564-11.0%-3.6%chg YoY 5.7%-29.0%26.8%-36.3%38.3%-8.2%-13.8%-5.6%-3.7%-3.5%Adjustments Tax payment (99)(87)(88)(97)(258)(180)(175)(177)(193)(171)Net Finance costs (100)(42)(41)(44)(85)(86)(85)(47)(55)(49)Changes in working capital Non-recurring items Adjusted FCF(HKDm)1,009 730 959 553 1,909 1,800 1,522 1,458 1,372 1,345-10.7%-4.0%chg YoY 1.6%-27.6%31.4%-42.3%39.8%-5.7%-15.5%-4.2%-5.9%-2.0%Dividend per share,HKD 0.27 0.33 0.27 0.33 0.60 0.60 0.60 0.56 0.49 0.44%payout ratio 71%89%74%129%67%80%97%80%75%75%Key Operating Drivers Total Accounts,000s 1,970 1,970 2,000 2,060 1,960 1,970 2,060 2,070 2,070 2,070 2.5%0.0%Net Additions,000s 10-30 10 80 10 40 10-%Service EBITDA margin 47.9%46.0%45.1%41.8%45.7%47.0%43.5%43.4%43.3%43.3%Wireless ARPU,HKD 236 228 224 204 241 232 213 202 201 199-6.0%-0.9%chg YoY-1.3%-5.0%-4.7%-10.4%-1.1%-3.9%-8.0%-5.1%-0.8%-1.0%Revenue Service 2,778 2,693 2,674 2,487 5,564 5,471 5,160 5,017 4,987 4,938-3.7%-0.8%Equipment 7,451 5,434 2,699 856 13,095 12,885 3,555 4,444 4,399 4,355-47.9%-1.0%contribution Wireless Service 27.2%33.1%49.8%74.4%29.8%29.8%59.2%53.0%53.1%53.1%Equipment 72.8%66.9%50.2%25.6%70.2%70.2%40.8%47.0%46.9%46.9%Source:Company data,HSBC estimates 5 EQUITIES WIRELESS TELECOMS 29 August 2017 Changes to forecasts SmarTone:HSBC vs Consensus HKDm Jun-16a Jun-17a Jun-18e Jun-19e 16-19e CAGR Consensus Revenues 18,356 11,987 13,574 13,443 -9.9%y-o-y-1.6%-34.7%13.2%-1.0%Operating Expense (15,695)(9,568)(11,199)(11,099)-10.9%y-o-y-0.2%-39.0%17.0%-0.9%EBITDA 2,661 2,419 2,375 2,344 -4.1%y-o-y-9.3%-9.1%-1.8%-1.3%margin 14.5%20.2%17.5%17.4%Operating Profit 1,104 1,019 1,025 1,044 -1.9%y-o-y-11.2%-7.7%0.6%1.9%margin 6.0%8.5%7.6%7.8%Net Income 797 753 763 781-0.7%y-o-y-14.8%-5.6%1.4%2.2%EPS 0.75 0.71 0.72 0.73 -0.8%HSBC Revenues 18,356 8,715 9,461 9,386-20.0%y-o-y-1.6%-52.5%8.6%-0.8%Operating Expense (15,695)(6,419)(7,223)(7,169)%y-o-y-0.2%-59.1%12.5%-0.7%EBITDA 2,661 2,296 2,238 2,217-5.9%y-o-y-9.3%-13.7%-2.5%-0.9%margin 14.5%26.3%23.7%23.6%Operating Profit 1,104 929 1,008 935-5.4%y-o-y-11.2%-15.9%8.5%-7.2%margin 6.0%10.7%10.6%10.0%Net Income 797 672 767 709-3.8%y-o-y-14.8%-15.7%14.1%-7.6%EPS 0.75 0.62 0.70 0.65 -4.6%HSBC vs.Consensus Sales -27.3%-30.3%-30.2%EBITDA -5.1%-5.8%-5.4%OP -8.9%-1.7%-10.5%Net Income -10.7%0.5%-9.2%EPS -12.5%-1.4%-10.8%HSBC Mar 2017 estimates Sales 18,356 12,335 10,416 9,459 EBITDA 2,661 2,463 2,417 2,340 OP 1,104 1,059 1,011 1,007 Net Income 797 771 746 754 EPS 0.75 0.71 0.69 0.70 HSBC vs.previous Sales -29.3%-9.2%-0.8%EBITDA -6.8%-7.4%-5.2%OP -12.3%-0.4%-7.2%Net Income -12.9%2.9%-6.0%EPS -13.5%2.1%-6.7%Source:Company data,Bloomberg,HSBC estimates EQUITIES WIRELESS TELECOMS 29 August 2017 6 Disclosure appendix Analyst Certification The following analyst(s),economist(s),or strategist(s)who is(are)primarily responsible for this report,including any analyst(s)whose name(s)appear(s)as author of an individual section or sections of the report and any analyst(s)named as the covering analyst(s)of a subsidiary company in a sum-of-the-parts valuation certifies(y)that the opinion(s)on the subject security(ies)or issuer(s),any views or forecasts expressed in the section(s)of which such individual(s)is(are)named as author(s),and any other views or forecasts expressed herein,including any views expressed on the back page of the research report,accurately reflect their personal view(s)and that no part of their compensation was,is or will be directly or indirectly related to the specific recommendation(s)or views contained in this research report:Neale Anderson Important disclosures Equities:Stock ratings and basis for financial analysis HSBC believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors existing holdings,risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions.Ratings should not be used or relied on in isolation as investment advice.Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report.Further,investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts views and the basis for the rating.From 23rd March 2015 HSBC has assigned ratings on the following basis:The target price is based on the analysts assessment of the stocks actual current value,although we expect it to take six to 12 months for the market price to reflect this.When the target price is more than 20%above the current share