CHINATELCOSOUTLOOK：THEPOLITICALANGLE1212

1、buy buy hold th buy buy deutsche bank markets research asia china telecommunications industry china telcos 2013 outlook date 12 december 2012 industry update alan hellawell iii the political angle a question of political priorities. buy cu and ct. as we peer into 2013, we believe the single greatest

2、 driving force to the business performance, and thus share prices, of chinas three operators will be telecoms policy. we expect the miit and relevant govt organs single highest priority will be to continue restructuring. lower down the hierarchy would be elements such as promoting td technologies. w

3、e thus expect cu and ct to out-perform in 2013. research analyst (+852) 2203 6240 top picks china telecom (0728.hk),hkd4.28 china unicom (0762.hk),hkd12.38 companies featured china mobile (0941.hk),hkd89.10 recent beijing, shanghai trips suggest continued commitment to restructuring in our first maj

4、or set of visits through the telecoms eco-system since the 18 party congress, it became quite clear to us that the single greatest determinant in predicting the fate of each of chinas three telecoms operators, namely p/e (x) ev/ebitda (x) price/book (x) 2011a 2012e 2013e 9.8 11.7 11.4 4.7 5.1 4.6 1.

5、9 2.0 1.8 regulatory policy, is like to remain oriented first-and-foremost toward further restructuring. china telecom (0728.hk),hkd4.28 2011a 2012e 2013e cm, chinas leading operator, left to execute a challenging plan while we continue to identify china mobiles leadership in areas such as brand equ

6、ity and operational excellence, we see these elements continuing to erode p/e (x) ev/ebitda (x) price/book (x) 19.3 4.5 1.2 19.1 3.9 1.1 15.6 3.3 1.0 into 2013 as the operator bridles under a deteriorating 2g service, lack of a viable 3g alternative, and a 4g program with unsure commercial benefit c

7、hina unicom (0762.hk),hkd12.38 2011a 2012e 2013e through 2015. conversely, china unicom offers in our mind at least 2-3 years of 3g/3.5g dominance, hindered only by the basic operational deficiencies which have plagued it for years. china telecom delivers unrivaled transparency p/e (x) ev/ebitda (x)

8、 price/book (x) 69.7 6.0 1.6 36.3 4.5 1.1 22.8 3.8 1.1 in a most opaque market, albeit with more modest evidence of the benefits of restructuring in its growth trajectory. applying dcf in valuing chinas three operators our standard valuation methodology for the chinese telcos is dcf given the relati

9、vely high predictability of cash flows. we use deutsche banks internal risk-free (2.9%) and equity risk premium (5.7%) rates for china and a company- specific beta and cost of debt ratios. terminal growth rate is set at 0% for the three telcos as we believe the companies will cease to deliver meanin

10、gful growth in the out years. risks involve changes in government policy (from 4g licensing to mobile number portability), competition (a sharp rise in competition would drive down industry profitability), more/less generous dividend policy, higher/lower capex, etc. _ deutsche bank ag/hong kong deut

11、sche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their invest

12、ment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012. 12 december 2012 telecommunications china telcos 2013 outlook subtle policy changes but big company / stock implications regulatory hierarchy of priorities drives much of our house-view very simply

13、put, we view regulatory policy as the single greatest determinant to the business and share price performance of chinas three telco operators. questions ranging from the reversal of china mobiles fate as a forced donor of subscriber, revenue and profit market share to the allocation and timing of 4g

14、 licenses, all relate to how the miit prioritizes its policies. having recently returned from beijing, we remain convinced that the miits greatest priority is to continue to drive a re-balancing in chinas still very unbalanced telecoms industry. on more than a couple of occasions during our recent f

15、our-day trip through beijing and shanghai, references were made to a government mobile subscriber market share target of 50% for china mobile. the operator today still stakes a claim to more than 64% of chinas mobile subscriber base, and we do not see that sinking toward 50% for five or six years on

16、 our modeling. politics figuring in prominently to regulatory assumptions related to the regulatory discussion, one of the more interesting and yet overlooked aspects of chinas telecom industry is the political dimension. this is somewhat surprising given their relative size, the governments majorit

17、y ownership across all three telcos, the already established precedent of political intervention, the “national champion” status of the companies and the importance of the regulatory framework in determining future profitability. so one of the key issues for investors is whether china mobile is faci

18、ng a period of waning political influence despite its sheer size. after all, it is possible that if political sentiment is starting to move against china mobile, then the future regulatory environment may become less conducive - as experienced in other markets, telcos defined as dominant can face fa

19、r more difficult regulatory environments when regulators decide that the promotion of competition is more important than the preservation of a politically-connected incumbent. there is, we believe, select evidence of china mobiles declining political influence. for example, we believe the companys s

20、enior executives were absent from the 18th national party congress in contrast to china telecom and china unicom. in fact, wang xiaochu, china telecoms chairman, recently became a candidate member of the central committee, while china unicoms chairman, chang xiaobing, also attended the 18th npc. bot

21、h unicom and telecom detailed their 4g (lte) progress during the congress. in addition, china mobiles political positioning is not necessarily helped by the retirement of wu bangguo who was seen as a supporter of xi guohua, china mobiles chairman. admittedly, mr xis previous experience as vice-minis

22、ter of miit clearly suggests a range of contacts with that ministry but we view the retirement of wu bangguo as potentially key to the strength of china mobiles relationships at the highest echelons of government. furthermore, china mobiles management has, we believe, been distracted by the ongoing

23、substantial audit (involving hundreds of auditors) which only finished several weeks ago. this audit has been reviewing multiple businesses and activities following allegations of bribery against senior executives, the resignation of lu xiangdong (a vice page 2deutsche bank ag/hong kong 12 december

24、2012 telecommunications china telcos 2013 outlook president) and previous comments by wang janzhous (the previous chairman) that senior executives had violated the law and regulations. this has also led to changes in internal process and management which may have disrupted the day-to-day functioning

25、 of the company. we expect further announcements relating to the internal audit, including associated actions, to be released over the near-term. as a result of china mobiles weaker political position, we believe investors should significantly reduce any expectations they may have with respect to an

26、 improved dividend payout or special dividend. even if the senior management team was supportive of such a move, we simply do not believe that the government would approve an improved payout to foreign shareholders and in the current environment, we do not believe mobiles senior management has the p

27、olitical clout to drive through any such decision. in fact, it is possible that any previous effort to improve the dividend payout was viewed negatively by government agencies and as such, was counter-productive. furthermore, the build out of the td-scdma network at the parentco level, which had the

28、 effect of “protecting” foreign investors from the lower returns of this investment, may also have been viewed negatively by government agencies and ministries (e.g. sasac). so our expectations of an improved dividend payout or an accelerated shareholder return through special dividends or capital r

29、eturns are rapidly dissipating another reason to underpin our relatively cautious view on the company. the obvious question, therefore, is what will mobile do with its rapidly accumulating cash position. in our view, it is highly likely that the company will revisit international expansion plans but

30、 instead of trying to buy an entire telco they will look to buy minority stakes. in part, this increased international expansion interest reflects the status of mobile as a chinese national champion there are few chinese companies which clearly have the potential to expand internationally in size. a

31、s such, we would not be surprised if mobile was under increasing pressure to expand internationally. but while any such international m b) raises the risk of new international m and c) commits mobile to td-lte all these factors underpin our cautious view on mobile into 2013 especially as we expect t

32、hese dynamics to become more apparent through next year. unicom facing favorable policy environment, but ongoing lack of clarity and transparency persists the above discussion clearly reinforces mobile as our least preferred chinese telco as we head into 2013. in terms of what we like, we recently m

33、et with china unicom. key highlights of the meeting included: managements current focus going into 2013 is still on achieving top-line growth (a continuation of the key 2012 objective). however, management does expect to try and focus more on margin trends versus revenue growth than in 2012 and will

34、 also try to “smooth out” quarter-on-quarter profit changes in contrast to previous years in terms of the newly introduced 3g data plans (launched on 18 october), the company provided only very preliminary feedback but suggested that the initial response had not been particularly strong. these new p

35、lans are focused on 2g subs that may have a 3g phone and are priced at rmb10/month (100mb/mo), rmb20 (300mb) and rmb30 (500mb). theoretically, this may be incremental to 2g arpus but the risk is that such subscribers give up more expensive gprs plans to take the higher-end 3g data plans 3g arpu was

36、down significantly in the 3q12 given new campus promotions but since many of the new 3g plans were converting 3g users, the net impact on blended arpus should be supportive in terms of costs, network maintenance costs should continue to decline as a percentage of revenues. however, inter-connection

37、and sales and marketing (excluding subsidies) may see less downward leverage.encouragingly, 3g marketing expenses relative to 3g service revenue are falling (excluding subsidies, the ratio was 21.1% for 9m12), but the level is still higher than the 2g ratio and the overall ratio (excl subsidies, thi

38、s was 16.2% for the first three quarters) in terms of 2013 ebitda / npat expectations, the company expects subsidies to sales to fall while 2012 ebitda margin will likely be flat yoy. total ebitda thus should rise in 2013 (db is forecasting a 14% yoy growth in 2013e ebitda). management also suggeste

39、d that the current consensus expectations for 2013e profit were too high at approx rmb11bn (for reference, dbs 2013e npat forecast is rmb9.5bn) regarding capex, unicom only spent rmb55 in first three quarters versus dbes rmb100bn forecast. as such, we expect a significant 4q pick-up in capex spend e

40、specially as urban coverage is very expensive and as such, their rmb100bn capex guidance for 2012e remains unchanged page 4deutsche bank ag/hong kong - - - - - - - - 12 december 2012 telecommunications china telcos 2013 outlook 2013 operating metrics another year, another opportunity for cu to lever

41、age favorable factors we present below the 2013 operating metrics of the three chinese telcos versus consensus. as the table amply indicates, we envision china unicom delivering the greatest growth of the three operators from both a top and bottom-line perspective, the latter largely due to an (admi

42、ttedly long-delayed) operational leverage occurring as its 3g network enjoys greater utilization. figure 1: 2013 operating metrics of the three chinese telcos versus consensus china mobile china unicom china telecom china mobilechina unicomchina telecomconcensusconcensusconsensus operating revenue59

43、2,281282,053306,449595,960287,703310,646 yoy change operating expenses yoy change 6.9% 335,644 9.3% 12.7% 193,614 10.5% 9.9% 210,151 1.8% operating profit yoy change operating margin 256,636 3.8% 43.3% same as ebitda same as ebitda same as ebitda 96,298 33.1% 31.4% 97,947 31.5% adjusted ebitda yoy c

44、hange adjusted ebitda margin 259,751 3.9% 43.9% 88,439 17.8% 31.4% 105,978 8.8% 34.6% 258,700 43.4% 85,870 29.8% ebit yoy change ebit margin 154,661 1.1% 26.1% 18,102 41.2% 6.4% 27,693 31.6% 9.0% 18,326 6.4% 30,464 9.8% profit attributable to equity shareholders126,28110,40317,882126,88011,24819,395

45、 yoy change2.5%59.5%22.6% net profit margin eps -basic 21.3% 6.29 3.7% 0.44 5.8% 0.22 21.3% 6.27 3.9% 0.48 6.2% 0.25 dividend payout ratio43.0%22.6%31.2% source: deutsche bank, bloomberg finance lp we present below a table showing the 2013 capex and handset subsidies for each of the three chinese te

46、lcos. for china mobile, we expect handset subsidies to account for about 5.1% of operating revenues versus 4.7% in 2012. we regard a deepening in subsidies as the main, if not only, catalyst for china mobile to drive 3g net adds growth in 2012. we also noted that many of the top selling smartphones

47、on the cm website including lenovo s899t (rmb1,150), huawei t8620 (rmb608), etc. are all below rmb1,000. each of these smartphone packages offers a certain amount of free voice to users when they register as 3g users. for cu, we expect handsets subsidies (rmb10.9b) to account for about 11.7% of 3g m

48、obile service revenue in 2013 vs. 10.4% in 2012, driven partly from the sale of the iphone 5. ct offers the lone opportunity for a relative decline in subsidy intensity (as a percentage of revenues); 2013 handset subsidies (rmb27.2b) will account for about 24.5% of mobile service revenue compared to

49、 26.5% in 2012. it is in the area of capex in which we expect china unicom to evidence the greatest improvement in relative positioning across the three telcos. again, in belated fashion, we expect cu to ease off from its capex peak of 2012, as the recent period of urban network optimization and sub

50、urban/rural expansion retreats to the rear-view mirror. deutsche bank ag/hong kongpage 5 12 december 2012 telecommunications china telcos 2013 outlook figure 2: capex and handset subsidies of the three telcos capex (rmbm) 201120122013 china mobile china telecom china unicom 128,500 49,551 76,659 131

51、,900 54,000 100,000 130,000 74,000 75,000 capex yoy growth china mobile china telecom china unicom 3.4% 15.1% 9.2% 2.6% 9.0% 30.4% -1.4% 37.0% -25.0% handset subsidy (rmbm) china mobile china telecom china unicom 17,200 15,641 5,790 26,000 23,833 6,343 30,000 27,222 10,857 handset subsidy yoy growth

52、 china mobile china telecom china unicom 13.2% 29.1% 82.6% 51.2% 52.4% 9.6% 15.4% 14.2% 71.2% source: deutsche bank, company data we present below a table showing our arpu and net add assumptions. we expect mobile blended arpu for ct to remain relatively stable in 2013, where cm will continue to see

53、 a slight decline in mobile arpu on lower tariffs, continued flight of high-end users, and growing presence of low-end arpu subs in incremental growth. we expect cu arpu to increase to rmb50.7 in 2013 due to the addition of more high end users. figure 3: 2013 apru and net adds assumption mobile net

54、adds (m) 20122013 source: deutsche bank, company data page 6 china mobile china telecom china unicom 3g net adds (m) china mobile china telecom china unicom 3g penetration china mobile china telecom china unicom mobile arpu china mobile china telecom china unicom bb arpu china telecom china unicom m

55、obile mou china mobile china telecom 68 34 39 33 31 36 11.7% 41.9% 31.9% 67.6 52.2 48.5 67.8 54.7 520 313 60 34 38 40 33 38 16.0% 51.6% 41.2% 66 52.2 50.7 63.6 53.2 518 293 deutsche bank ag/hong kong 12 december 2012 telecommunications china telcos 2013 outlook the big picture view expecting another

56、 mediocre year of performance for china telcos in 2013 we plot below a p/e chart below across all the asia telcos. china mobile (11.3x) is trading at a 2013 p/e slightly below the sector weighted average (13.1x), while china unicom (24.5x) and china telecom (15.7x) are both trading above the sector

57、average. china unicom has the highest 2013 p/e multiple across the asia telcos, however it has a relatively lower 2012 peg ratio (1.2x) due to its strong eps growth (2011-2013 eps cagr 31.2%). figure 4: 2013 p/e (x) (db eps) across the asia telcos 30.0 25.0 24.5 22.6 21.9 21.4 22.9 20.0 15.014.4 11.

58、3 15.7 11.2 16.5 14.4 17.6 12.1 17.4 19.7 16.4 11.7 14.0 14.5 15.1 12.9 19.0 17.1 17.1 18.0 15.6 14.0 10.0 9.8 7.5 9.5 8.3 7.8 7.9 7.1 5.0 0.0 p/e (x) (db eps)sector weighted average (13.1x) source: deutsche bank, bloomberg finance lp, dec 7, 2012 chinas telecoms sector year-to-date has performed no

59、ticeably below the average across major sectors. the china telecom sector registered a 8.5% ytd performance in 2012 compared to the average msci china index of 15.8%. the chinese telcos moreover were trading at a slightly higher p/e (12.5x) relative to the china index (10.6x). as we move in to 2013,

60、 relatively anemic earnings growth for the overall telcos sector (with dominant china mobile delivering sub-3% eps improvement) renders the sector relatively unexciting in our view, with china unicom presenting the only persuasive earnings improvement, albeit at high pe levels. deutsche bank ag/hong