Industry Chinese Telecoms

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1 Deutsche Bank Markets Research Asia China Industry Date 29 November 217 Forecast Change Some risks emerging but we remain constructive Sector risk manageable... CU our top pick on stronger momentum The Chinese telcos have delivered solid top-line growth this year (6%) but have been casualties of risk-on trade. While competitive intensity increased following the launch of CT s RMB99/mth unlimited data plans in September, we do not believe the sector will engage in cut throat competition at this stage, in view of its orderly behavior to date. M&A risk also recently came to the fore, with CT looking to acquire a near bankrupt Oi, although if this goes through, it would most likely occur at the parent level. While we still like CM, whose next likely major catalyst is in 1H18, we change our top pick to CU, where revenue momentum is improving and cost control is better than at peers. Sector remains in good condition The sector remains in good condition with revenue growth accelerating to 7% in 3Q and free cash flow set to improve in the next few years from capex reductions. While cost management at CM and CT has been less than desirable this year, maintenance cost growth should ease as soon as the network roll-out slows. On pricing and competition: we are encouraged by the top-line growth spurred by unlimited data plans that have been introduced so far but remain watchful for possible deterioration in pricing levels from here. CU now our top pick on cost control and better-than-expected top-line growth CU is now our top pick for its better-than-expected revenue momentum, with 3Q revenue growth rising to 6% YoY from 2% in 1Q and 4% in 2Q. Cost management has also been strong. EBITDA margin has improved 6bps YTD and we see prospects for further margin improvement as CU consolidates more of its various business divisions. With better growth prospects and a focus on cost control, which could see capex to sales ratio in line with regional peers over the next 3 years, we see significant re-rating potential as CU trades at 3.9x FY17E EV/EBITDA vs a regional average of 6.5x. We still like CM but major catalyst likely to occur only in 1H18 CM is a close second in our pecking order for its cheap valuation, market leading position, prospects for future dividend increases and strong earnings power. It should also benefit from risk-off trade, given valuation support and a vast cash holding (HKD24/share). That said, the next re-rating catalyst could be some time away, most likely in 1H18, when we expect CM to announce a special dividend on receiving cash from the towerco. Some concerns for CT but valuation remains supportive We have more concern for CT post the 3Q results including: 1) weaker cost control with EBITDA growth of 3.7% YTD vs peers avg of 5.7%, 2) risks from a stronger CU, particularly in the enterprise segment, and 3) the Oi deal though it is more likely to occur at a parent level. While we have made reductions to our earnings forecasts to reflect the above, CT s valuation remains supportive with the stock trading 1 standard deviation below its long run average EV/EBITDA. Valuation and risks We base our sector valuation generally on a DCF approach, which we apply due to the relatively predictable cash flow profiles of Chinese telcos. We use a 7.5% WACC for China Telecom and China Mobile, and an 8.4% WACC for China Unicom. We use -.5% perpetual growth rates to reflect population growth. Upside risk: cost cuts. Downside risk: lower ARPU from competition. James Wang Research Analyst (+852 ) james-z.wang@db.com Peter Milliken, CFA Research Analyst (+852 ) peter.milliken@db.com Key Changes Company Target Price Rating 728.HK 5.4 to 4.55(HKD) HK Source: Deutsche Bank Top picks 14.8 to 15.5(HKD) China Unicom (762.HK),HKD11.6 China Mobile (941.HK),HKD8.35 Source: Deutsche Bank Companies Featured Deutsche Bank AG/Hong Kong Distributed on: 29/11/217 12:57:45 GMT Deutsche 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 investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 83/4/217. bed7b6cf11c - Buy Buy China Telecom Corp (728.HK),HKD3.79 Buy 216A 217E 218E P/E (x) EV/EBITDA (x) Price/book (x) China Unicom (762.HK),HKD11.6 Buy 216A 217E 218E P/E (x) EV/EBITDA (x) Price/book (x) China Mobile (941.HK),HKD8.35 Buy 216A 217E 218E P/E (x) EV/EBITDA (x) Price/book (x) Source: Deutsche Bank

2 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug November 217 Some sector concerns Overall sector revenue growth accelerated from 6% in 1H17 to 7% in 3Q17 with net adds increasing and ARPU holding up. We highlight below some recent developments, which give us some concern, but overall we are constructive on the Chinese telecom sector: CT is gaining high-value subscribers via its aggressive RMB99/mth plan with unlimited local provincial data, which it launched at around September. Hence, a risk of further price reductions has risen, although we do not think competition will get out of hand at this stage, since the operators have been rational in the past. As it stands, if all the operators roll out RMB1/mth unlimited plans, which is around 1.7 times blended ARPU, the experience of regional peers suggests that no ARPU decline will result for the Chinese operators. Figure 1: CM losing share in overall net adds 1% 8% 6% 4% 2% % 7% 35% 19% 2% 23% 16% 1% 1% 9% 13% 2% 25% 24% 11% 11% 14% 14% 16% 17% 26% 3% 24% 35% 5% 52% 39% 43% 43% 38% 35% 12% 25% 33% 36% 68% 58% 53%53% 5% 52% 53% 45%46%46% 43% 46% 44%44%44% 39% 31%33% 45%3%25% Feb/16 Apr/16 Jun/16 Aug/16 Oct/16 Dec/16 Feb/17 51% 34% 4% 4% 39% Apr/17 Jun/17 3% Aug/17 39% 43% Total net adds (m) Oct/ Figure 2: CT aggressive with its unlimited plan push "Unlimited" data plans Data allowance 15GB 15GB 4GB Geographic limit National Within province National Price Video cards Data allowance One of iqiyi, Youku, Migu, 3GB Unlimited Youku with 1GB data and 1min Unlimited Tencent apps Price , Net adds market share shown, 4G net adds market share shown Figure 3: Historical revenue growth has been consistent Figure 4: Taiwan experience (Chunghwa Telecom) 14% 12% 1% 8% NT$ Apr 15: NT$988 plan launched, 1.7x ARPU Aug 16: NT$699 plan launched, 1.2x ARPU 6% VAT changes 59 4% 2% 58 % -2% FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 1H17 CHT, Sector service revenue growth rate shown The MIIT has been telling operators to allow existing customers to switch to the large data plans previously sold via the internet channel. The internet channel data plans are typically priced at ~RMB2/mth but are designed to be used with a second SIM rather than the main Page 2 Deutsche Bank AG/Hong Kong

3 29 November 217 SIM (e.g. most do not include a call allowance). Furthermore, their introduction has benefited industry revenue growth so far in adding to the number of subscribers, so the operators may change their pricing structures in response if this does result in significant cannibalization of the existing business. Hence, we treat this as a risk for the sector at this stage. Concerns about national service coming to the fore, with CT looking at a deal to acquire near bankrupt Brazilian operator Oi, and CM and CT potentially setting up base in the Philippines. While these regions would not be a strategic fit for the Chinese operators, we believe the risk of the operators making sizeable acquisitions at the listed-entity level is low. If an operator acquires these assets at the parent level, we may actually see more cash being distributed by its listed entities. Figure 5: Oi has run up significant losses in last 4 years Figure 6: Oi debt metrics RMBbn FY11 FY12 FY13 FY14 FY15-14 FY16 9M RMBbn FY16 FY17E FY18E FY19E x Oi Net profit (RMBm) Net debt Net debt to EBITDA (RHS) Source: Deutsche Bank estimates, Company Data, Bloomberg Finance LP Earnings growth below revenue growth (particularly for CT in 3Q), despite a period of strong revenue growth. We continue to expect the sector to show better cost management over the next months as their network roll-out slows. Figure 7: Sector EBITDA growth lagging revenue growth Figure 8: Need better margin management than peers 8% 6% 4% 7.1% 7.% 4.1% 5.5% 3.7% 5.9% x FY16 EBIT margin 2% 1.5x 5 % Service revenue EBITDA Korea China Thailand India NZ Indonesia Singapore Taiwan Phillippines HK Malaysia Australia, Growth in the first 9 months Some may point to the recent rally of equipment names (e.g. ZTE) as suggesting government-mandated high 5G capex spending in China. While this is a risk for Chinese telcos, we believe there are a number Deutsche Bank AG/Hong Kong Page 3

4 29 November 217 of moderating factors, including a longer investment horizon for 5G vs 4G, the limited international use case and the need to improve SOE returns. Our total capex forecasts for the Chinese operators are shown below, with the details in the back section of this report. Figure 9: Recent rally of telco equipment names suggests high 5G capex spending 4 HKD/share Jun/217 Dec/216 Jun/216 Dec/215 Jun/215 Dec/214 Figure 1: However, we believe telcos will tread the middle path when it comes to capex spending RMBm 3G 4G G 224E 223E 222E 221E 22E 219E 218E 217E Yangtze Optic ZTE Mobile Fixed broadband and transmission Others, Growth in the first 9 months Source: Deutsche Bank estimates, Company Data, Bloomberg Finance LP data used That said, the telcos are still trading at very cheap valuation multiples, with CM and CT below their LR averages and CU below regional peers. Figure 11: 12mth fwd EV/EBITDA vs LR average Figure 12: CU to potentially re-rate to regional peers 6 15 x SK Telecom KT Corp LG Uplus CM Indosat CT CU PLDT, Inc. KDDI Corp TLS Globe Telecom M1 Telkom CITIC Telecom Spark NZ Singapore Telecom HK Telecom Trust Bharti Airtel Limited Starhub SoftBank TPG AIS Vocus Far EasTone Telecom Taiwan Mobile DiGi Maxis Current LR avg 5 year avg FY17 EV/EBITDA Regional average, Bloomberg Finance LP Source: Company Data, Bloomberg Finance LP Earnings and valuation changes: we have made the following changes to our earnings forecasts and valuations. Figure 13: Earnings and valuation changes NPAT change FY17F % -2% -1% FY18F % -3% -4% FY19F % -5% 7% Target price changes Change % -15% 5% TP implied FY17 PE (x) nm Page 4 Deutsche Bank AG/Hong Kong

5 29 November 217 Upside to share price 41% 2% 35% Source: Deutsche Bank estimates, Company Data We have reduced our earnings forecasts for CT to reflect weaker cost control exhibited to date. We have increased the long-term revenue growth rate for CU to reflect the better-than-expected revenue momentum and an expected improvement in its enterprise offerings via deep strategic partnerships with the internet giants. We have left CM s earnings unchanged but will continue to assess the impact of the aforementioned concerns. Deutsche Bank AG/Hong Kong Page 5

6 29 November 217 CU is now our top pick We are moving CU to become our top pick on the following basis: Revenue growth momentum picking up: CU s improvement in revenue growth was faster than we expected with 3Q revenue growth picking up to 6% YoY and mobile net adds also seeing a lift. Figure 14: Revenue growth momentum picking up 8% 6% 4% Figure 15: CU mobile net adds showing improvement 5% 4% 3% 2% 2% % 1% % Oct/17 Sep/17 Aug/17 Jul/17 Jun/17 May/17 Apr/17 Mar/17 Feb/17 Jan/17 Dec/16 Nov/16 Oct/16 Sep/16 Aug/16 Jul/16 Jun/16 May/16 Apr/16 Mar/16 Feb/16 FY16 1Q17 2Q17 3Q17 Overall net adds 4G, CU s share of net adds shown Lower impact from pricing competition: Should the sector start to reduce prices in unlimited data plans, it should have less impact on CU, given its ARPU is already RMB8-1/mth below peers. In fact, we saw CU s mobile ARPU improve 5% in 3Q17 while the other two had flat to declining ARPU; Figure 16: CU has the lowest ARPU vs peers Figure 17: CU showing better mobile ARPU trends RMB % 4% 2% % 3.3% 1.6%.8%.9%.2% 5.1% 4.3% 2-2% -4% -.8% -2.% FY16 ARPU 1Q17 2Q17 3Q17, ARPU growth YoY shown Cost control to continue from interest alignment: We expect CU s margin to expand in the coming years with better cost control and more sales from the online channel, which requires little sales and marketing expenses. Page 6 Deutsche Bank AG/Hong Kong

7 29 November 217 Figure 18: Good control in maintenance and selling costs so far 15% 1% 1% 1% 7% 5% 5% 3% % -5% -6% -1% Figure 19: This should continue to lead to better margin going forward 6% 3.% 5% 29.5% 4% 29.% 3% 28.5% 2% 28.% 1% 27.5% % 27.% FY16 FY17F FY18F FY19F SG&A cost growth Maintenance cost growth Net profit margin (LHS) EBITDA margin (RHS) Source: Deutsche Bank estimates, Company Data More immune to national service duty: With the change in board composition and the change in incentive structure, we expect CU to focus only on network investments that have the greatest return potential. We see greater risk for CM and CT having to perform national service in the form of higher capex investments in low return areas (e.g. rural and Tier 3/4 cities); Sufficient valuation support: We conducted a detailed analysis of China Unicom s sustainable capex in the note, Testing the BUY thesis, which gives us confidence in the sustainability of RMB6bn p.a. capex spending by CU. While CU s PE valuation multiple remains high, it is burdened by higher historical capex spending. We believe the EV/EBITDA multiple is a better metric for CU s valuation and we expect its gap with regional peers to close as CU demonstrates capex discipline and growth potential over time. Figure 2: Expect CU s capex discipline to improve vs the past Figure 21: To lead to a re-rating towards regional peers 1 x FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F Capex D&A CU Historical average Asia emerging country average Source: Deutsche Bank estimates, Company Data Deutsche Bank AG/Hong Kong Page 7

8 29 November 217 Figure 22: CU historical capex intensity vs peers Figure 23: Capex intensity going forward 4% 3% Average capex to sales ratio (217-19) 35% 25% 3% 2% 25% 15% 2% 1% 15% 5% 1% % 5% % Reliance DiGi Maxis Idea DTAC Vimpelcom Megafon Telkomsel MTS Rostelcom AIS Indosat CT True CM Bharti CU Reliance DiGi Maxis Megafon Vimpelcom MTS Idea Rostelcom China Mobile China Unicom Bharti Telkomsel Indosat China Telecom AIS PLDT Globe True DTAC (last 5 years Source: Bloomberg Finance LP, Company Data Page 8 Deutsche Bank AG/Hong Kong

9 29 November 217 CM needs a cooler market We continue to like CM for its valuation appeal, strong cash flow generation, commanding market position, prospects for future dividend increases and earnings power, which we mentioned at length in previous reports. It is also quite resilient to price competition in mobile, despite its larger mobile business, given its higher profit margin. Figure 24: FY17E PE vs incumbent peers Figure 25: Continue to expect dividend increases 35 1% % 6% 4.% 4.% 1 5 4% 2% 4.2% 4.7% 5.1% SK Tel CM TLS NTT DoCoMo PLDT HKT Singtel Spark AIS Telkom Chunghwa Maxis Bharti % FY17F FY18F FY19F Base dividend Special dividend Source: Bloomberg Finance LP Source: Deutsche Bank estimates, Company Data, Dividend yield shown above Figure 26: Higher margin means stronger cash flow generation and a more resilient business model 45% 4% 35% 3% 25% 2% 15% 1% 5% % EBITDA margin Capex to sales FY16 Figure 27: CM s bundled ARPU actually below peers Mobile Fixed broadband, Sales based on service revenue, FY16 numbers shown That said, while we have correctly predicted some catalyst events, such as: 1) the special dividend at the 1H17 results, and 2) solid 3Q results, which saw CM deliver 7% net profit growth, its share price has not reacted to the same extent as we had expected. It does seem that a change in overall market sentiment is required for investors to start re-rating the name and with our next major catalyst (i.e. another potential HKD3.2/share special dividend at the 1H18 results, which is 9 months away), we are removing CM as our top pick but retain its Buy rating. Deutsche Bank AG/Hong Kong Page 9

10 29 November 217 Concerns rising for CT We reduced our earnings forecasts for CT on one or more of the following concerns: Disappointing cost outcome, with 3Q net profit flat on revenue growth of 7%. CT has not shown sufficient cost control and operating leverage so far to convince us that it can deliver a significantly better net profit growth outcome than China Mobile in the long run. As a result, we are reducing our NPAT growth forecasts from 9% p.a. to 7% p.a. over the next 3 years; Figure 28: Less cost discipline than we had expected Figure 29: Leading to a reduced NPAT outlook 8% 6% 4% 7.5% 4.2% 6.2% 3.2% 7.2% 3.7% 1% 8% 6% 4% 9.5% 7.3% 8.% 9.4% 7.% 7.% 2% 2% % 1Q17 2Q17 3Q17 % FY17F FY18F FY19F Previous forecast Current forecast Service revenue growth EBITDA growth Source: Deutsche Bank estimates Risks posed by a stronger CU: CU s cooperation with Tencent and AliCloud strengthens its enterprise offering and some data center businesses may switch to CU. CT is most exposed to this risk, given its overweight position in IDCs and enterprise services; More exposure to mobile competition given its higher ARPU and lower profit margin; Figure 3: CT more exposed to competition in enterprise and IDC 2% 15% 1% 5% % IDC & ICT business as % of service revenue Figure 31: Lower profit margin and higher mobile ARPU mean that CT is more exposed to pricing competition % Impact on net profit -1% -2% -3% -4% -3% -5% -7% -11% -1% -13% -16% -17% -21% -2% -27% -32% Change in mobile ARPU (RMB/mth) CM CT Source: Deutsche Bank estimates, Company Data Page 1 Deutsche Bank AG/Hong Kong

11 29 November 217 Alliance with CU weakening: We think the alliance between CT and CU is weakening, as evidenced by their reduced cooperation in network construction (CT focused on 8MHz refarm) and more competitive intensity in the mobile business. Meanwhile, CU s focus is increasingly moving towards cooperation with strategic partners rather than CT. We expect lower windfall gains for CT from cooperation with CU in the future. Acquisition risk: Reuters reported on 22 September that CT is mulling over acquiring Oi, a telecom operator that filed for bankruptcy protection in 216. We do not like this deal due to Oi s heavy debt burden; however, if CT goes ahead with it, we think the acquisition is likely to occur at the parent level and should have limited impact on the listed entity. That said, valuation remains cheap vs regional peers and its long-run average. Figure 32: PE valuation still cheap vs regional peers Figure 33: EV/EBITDA valuation vs LR average 35 3 x 8 x Bharti Airtel Limited DiGi Maxis Far EasTone Telecom Chunghwa Telecom Taiwan Mobile Indosat Telkom AIS Spark NZ Globe Telecom SoftBank Singapore Telecom Starhub HK Telecom Trust TPG Vocus PLDT, Inc. NTT Docomo KDDI Corp CT TLS NTT M1 KT Corp LG Uplus CITIC Telecom SK Telecom CT Historical average +1 st dev -1 st dev Source: Company Data, Bloomberg Finance LP Current average, Bloomberg Finance LP As noted above, while we have some additional concerns for CT, some of these are already factored in, so with valuation remaining supportive, we retain our Buy rating. Deutsche Bank AG/Hong Kong Page 11

12 29 November 217 China 5G capex forecasts We earlier discussed our 5G capex forecasts in the ZTE initiation note published on 9 Nov and now reproduce our key messages in this section. Global telcos generally cautious about 5G spending In the 5G era, the investing intentions of telcos globally are generally subdued as telco profitability and growth stall, and with limited evidence of 4G monetization. Figure 34: Telco profitability has declined Figure 35: Weak European telco mobile revenue growth 5% 4% 3% 2% 1% % APAC Ex Jpn Telco EBITDA margin Source: Deutsche Bank estimates, Company Data Hence, it is understandable to hear such comments by telco operators on 5G investments (paraphrased below): China Mobile chairman: We will not blindly invest in 5G without viable business applications and there are no such viable applications under 5G at the moment; China Unicom chairman: 5G will co-exist with 4G for a long time and it is different when migrating from 2G to 4G than from 4G to 5G. 5G remains just a story at the moment; MTS (Russia) chief marketing officer: There is no business case behind it and it is not in our business plan for 217 or 218; Deutsche Telecom chief technology officer: 4G will evolve further and it is not going to be a big bang with 5G. Greater industry collaboration is needed to reduce the cost of rolling out a 5G radio network and some established vendors may not survive the transition from 4G to 5G; DoCoMo management: We would like to see capex decline up until FY19 and then be flat from FY2 onwards. Korean telcos: The annual capex burden won t be too different vs. 4G. Page 12 Deutsche Bank AG/Hong Kong

13 29 November 217 More political support for 5G in China The Chinese government has long wanted to make the country a global IT and networking powerhouse, and reiterated this message at the recent 19th National Congress. The government also appears keen to lead 5G development, based on the recent approval of 5G spectrum in the 3.5GHz and 5.GHz bands. Hence, political support for 5G development is solid in China. That said, we see some moderating factors, including: The need to improve SOE returns: the government wants to improve SOEs returns and reduce unwanted supply, and the reform actions at China Unicom suggest a desire to improve telco sector returns; Telecom infrastructure has caught up: Chinese telcos already invested significantly in the past and the state of Chinese telecom infrastructure has caught up with (and even exceeded) many of its international peers; China already has a strong say in international standards, with Time Division (TD) now a globally-recognized standard under 4G and likely to be a core component of 5G standards; Unbalanced competitive strength in the telecom sector, with China Mobile still making the lion s share of industry profits. A drive to spend significantly on the network would invariably tip the competitive balance against smaller players, given their lower margins and weaker financial strength. Figure 36: Chinese telco capex vs. international peers Figure 37: China 4G and fiber penetration vs. peers 35% 1% 3% 25% 8% 2% 6% 15% 1% 4% 5% 2% % % China Korea Japan US China North Asia Western America Pacific Europe Fiber as % of total broadband subs 4G as % of total mobile subs, Avg capex to sales ratio FY12-FY16, Ericsson, OECD We believe the government will likely factor in the needs of all stakeholders in its considerations, and given limited global support for 5G, we would expect Chinese telcos to be somewhat cautious in their capex spending. Deutsche Bank AG/Hong Kong Page 13

14 29 November 217 5G capex forecasts The table below shows our forecast of total 5G capex in China. We expect total 5G capex to be about double that of 4G to reflect the higher frequency, offset by improving technology (e.g. higher propagation) and declining equipment pricing over time. Figure 38: Total 5G capex estimate By 224 By 23 Number of 4G base stations equivalent Coverage 85-95% 95%-1% Multiple to get to 5G equivalent 2x 3x Number of 5G base stations (m) Cost per base station (RMB') Total 5G wireless capex (RMBbn) 798 1,5 Total wireless capex under 4G for similar coverage (RMBbn) G vs. 4G total wireless capex 1.8x 2.x We forecast total 5G wireless capex spending of RMB1.5trn with initial spending of RMB.8trn, spread over the first five years, on the following basis: Cost per 5G base station added of RMB115k, broadly based on historical average spending per 4G base station added and CU s own estimate of RMB1k to RMB13k per 4G base station. We assume a total of 7m 5G base stations being deployed over five years based on 3.5m 4G base stations as at 1H17 (where the major operators already have 85-95% 4G network coverage), multiplied by two to account for the lower penetration of high-frequency 5G spectrum, partially offset by its larger bandwidth. We assume the number of base stations required will double from 7m in 224 to 15m in 23 to handle rising data usage, partially offset by a decline in ASP with improvement in technology. Figure 39: Cost per base station added Figure 4: DB 5G capex vs. CAICT forecasts 2 RMB' Adopted 22E 221E 222E 223E 224E CAICT 5G capex forecast DB forecast wireless capex spend Mobile capex including backhaul spend Source: Deutsche Bank, CAICT, Company Data Our 5G capex forecasts are lower than CAICT s (a think-tank for the MIIT) forecasts in their 5G White Paper (published in June 217 and shown above), Page 14 Deutsche Bank AG/Hong Kong

15 29 November 217 particularly after 222. We do not think CAICT s capex forecasts are reasonable (particularly those beyond 222), given limited number of use cases for 5G. Applying such a hefty capex burden implies that Chinese telcos would hardly generate any free cash flow in FY22-24, 2-3 years after the 5G launch, when the telcos would have already tested the waters in terms of user demand for the services. Figure 41: Telcos unlikely to spend capex without having the revenue to show for it after 2-3 years FY2F FY21F FY22F FY23F FY24F Total capex implied by CAICT paper Telco EBITDA less tax Figure 42: CAICT expects a strong contribution from 5G for telecom operators 2, RMBbn 1,5 6 1, E 229E 228E 227E 226E 225E 224E 223E 222E 221E 22E Value add revenue Data usage revenue contribution to telco operators Source: CAICT, Deutsche Bank Source: CAICT, Deutsche Bank Implied Chinese telcos overall capex forecasts The following chart summarizes our telco capex forecasts. Backhaul capacity upgrades are assumed to occur at a constant pace and we assume a 5% p.a. increase in spending each year. We forecast 22 and 221 as the peak years in terms of total 5G spending, averaging RMB2bn p.a., which is in line with the peak wireless capex in 215. While our total capex spending is less than the 215 peak, this accounts for the following two factors: 1) RMB28bn of the wireless capex is spent on 2G/3G by CU, and 2) the operators no longer need to spend on fiber for the last-mile fixed broadband access in 22. Deutsche Bank AG/Hong Kong Page 15

16 29 November 217 Figure 43: Total capex spending 5 RMBm 3G 4G 5G E 223E 222E 221E 22E 219E 218E 217E Mobile Fixed broadband and transmission Others Source: Deutsche Bank estimates, Company Data Capex spending by telco is shown below. Figure 44: CM Figure 45: CT Figure 46: CU 25 RMBbn 12 RMBbn 15 RMBbn E 223E 222E 221E 22E 219E 218E 217E E 223E 222E 221E 22E 219E 218E 217E E 223E 222E 221E 22E 219E 218E 217E Mobile Fixed broadband and transmission Others Mobile Fixed broadband and transmission Others Mobile Fixed broadband and transmission Others Source: Deutsche Bank estimates Source: Deutsche Bank estimates Source: Deutsche Bank estimates Page 16 Deutsche Bank AG/Hong Kong

17 29 November 217 Earnings changes We have made the following changes to our earnings forecasts: CT: We reduced our earnings growth forecasts for CT to reflect the weaker-than-expected cost control in the first 9 months; CU: We increased our long-term growth rate assumptions for CU to reflect the stronger-than-expected revenue growth momentum in 3Q17. In the near term, we increase salary cost growth to reflect a desire by the company to align employee pay with industry peers; CM: no earnings changes. Figure 47: Net profit changes FY17F % -2% -1% FY18F % -3% -4% FY19F % -5% 7% Source: Deutsche Bank estimates, Company Data Our key forecasts are shown below. We expect better revenue and earnings growth trends for CU from: 1) faster improvement in mobile ARPU as it starts to align itself with peers, 2) better cost control and capex discipline leading to margin expansion, 3) contributions from strategic partnerships. Figure 48: Revenue growth forecasts by segment FY17F FY18F FY19F Mobile CM 4.7% 4.% 3.5% CT 12.6% 11.8% 6.7% CU 7.9% 1.4% 8.% Fixed broadband CM 47.6% 31.% 17.8% CT 2.5% 1.1% 1.6% CU -3.6% -3.7% -.8% Others (IDC, ICT etc) CM 4.% 35.% 25.% CT 2.2% 1.6% 1.% CU 2.5% 6.8% 9.9% Source: Deutsche Bank estimates Figure 49: Service revenue growth FY17F FY18F FY19F FY2F CM 6.9% 6.3% 4.5% 3.3% CT 6.9% 6.3% 3.9% 3.6% CU 4.7% 7.3% 7.1% 6.7% Sector 6.4% 6.5% 4.9% 4.1% Source: Deutsche Bank estimates, Company Data Deutsche Bank AG/Hong Kong Page 17

18 29 November 217 Figure 5: EBITDA growth FY17F FY18F FY19F FY2F CM 6.2% 6.8% 4.6% 2.9% CT 4.% 4.8% 4.2% 3.4% CU 6.4% 6.% 8.% 7.6% Sector 5.8% 6.2% 5.2% 3.9% Source: Deutsche Bank estimates, Company Data Figure 51: NPAT growth FY17F FY18F FY19F FY2F CM 5.4% 5.6% 4.7%.6% CT 7.3% 7.% 7.% 2.5% CU 584.2% 112.1% 58.8% 32.7% Sector 8.5% 9.1% 8.2% 3.7% Source: Deutsche Bank estimates, Company Data Page 18 Deutsche Bank AG/Hong Kong

19 29 November 217 3Q17 results summary CM had the strongest momentum in 3Q Figure 52: 3Q17 results review CT CU CM Sector Service revenue growth 7.2% 6.% 7.4% 7.1% EBITDA growth 3.7% 6.6% 7.% 6.2% Net profit growth.1% nm 7.% 1.2% Operating stats Mobile subs growth 13.2% 5.7% 4.% 5.8% Mobile ARPU growth -2.% 5.1%.2% 1.1% Broadband subs growth 8.8% 3.1% 39.3% 15.6% Source: Deutsche Bank, Company data Solid revenue growth for the sector: with sector top line up 7.1% YoY, an improvement from 6.2% in 1H17, driven by ARPU improvement and strong subs growth in both mobile and broadband; CM had the strongest revenue and NPAT growth in 3Q, driven by strong growth in fixed broadband and better cost control; CU momentum picking up with revenue growth only 1% below peers and EBITDA growth aided by tight cost control in maintenance and sales and marketing, offset by higher payments to frontline staff. Figure 53: Industry net profit Figure 54: Net profit margin 5 RMBbn Pre-VAT Post VAT change 25% 4 2% 3 15% 2 1% 1 5% -1 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 % 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Sector, Rolling 12mth net profit margin Deutsche Bank AG/Hong Kong Page 19

20 29 November 217 Mobile Mobile subscriber growth continues: subscriber growth has returned, post the real-name clean-up and has now accelerated to 6%. While some of these may be a second SIM, China s mobile penetration is still below its international peers, so we believe it can maintain this growth rate in the medium term. CT had the strongest subs growth: benefiting from the proliferation of six-mode handsets and unlimited data plans. CM and CT s 4G penetration is now ~7% and their 4G net adds are expected to slow materially in the coming quarters. Figure 55: Mobile subs growth momentum is strongest for CT Figure 56: 4G penetration 15% 1% 5% % 8% 7% 6% 5% 4% 3% 51% 44% 28% 57% 51% 34% 63% 57% 4% 66% 62% 46% 71% 69% 7% 66% 58% 52% -5% 2% 1% -1% 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 % 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17, YoY growth shown Figure 57: Mobile quarterly net adds 35 m Q16 3Q16 2Q16 1Q16 4Q15 3Q15 2Q15 1Q15 4Q Q17 2Q17 1Q17 Figure 58: Mobile subs market share 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 22% 23% 23% 23% 23% 23% 23% 23% 22% 22% 2% 2% 2% 2% 2% 2% 2% 2% 15% 15% 15% 15% 14% 14% 14% 15% 15% 15% 16% 16% 16% 16% 16% 16% 17% 17% 63% 62% 62% 62% 62% 63% 62% 63% 63% 63% 65% 64% 64% 64% 64% 64% 63% 63% 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Page 2 Deutsche Bank AG/Hong Kong

21 29 November 217 Figure 59: Mobile ARPU trends Figure 6: Mobile service revenue growth % 12% 1% 8% 6% 4% 2% 6% 5% 4% 12% 12% 8% 1% 5% 1 % 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17-2% -1% 1H16 1H17 3Q17, Rolling 12 mth ARPU, FY16 ARPU is on a different basis to FY15 for CU Fixed line CT doing slightly better than CU in fixed broadband: CT s subs grew 9% YoY, while CU seems to be feeling the competitive heat from CM, with subs growth sliding below 5% YoY. CT doing better in wireline voice subs growth: CT s wireline subs declined 4.6% in 3Q YoY, an improvement from prior quarters and better than the 1.5% decline at CU. CM continues to gain market share in broadband and now has around a 33% share of the subscriber market. Figure 61: Broadband subs growth Figure 62: Wireline voice subs growth 5% 4% 41% 41% 41% 39% % -2% 3% -4% 2% 1% 15% 15% 16% 16% 9% 8% 9% 9% 4% 4% 4% 3% -6% -8% -1% % 4Q16 1Q17 2Q17 3Q17 CT CU CM Sector -12% 4Q14 1Q15 2Q15 3Q15 CT 4Q15 1Q16 2Q16 3Q16 4Q16 CU 1Q17 2Q17 3Q17 Deutsche Bank AG/Hong Kong Page 21

22 29 November 217 Figure 63: Fixed broadband subscriber market share Figure 64: Wireline voice subs market share 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 23% 24% 26% 27% 28% 3% 31% 33% 3% 29% 29% 28% 27% 27% 26% 25% 47% 46% 46% 45% 45% 44% 43% 42% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 4Q15 3Q15 2Q15 1Q15 4Q14 3Q14 2Q14 1Q14 3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 4Q15 CT CU CM CT CU Operating expenses and EBITDA Divergent EBITDA margin trends by operator, with CM and CU broadly flat, while CT had a decline. Overall industry margin was flat YoY. Figure 65: Operating expenses growth Figure 66: Network cost as % of revenue 16% 35% 14% 12% 1% 8% 3% 25% 2% 6% 4% 2% % 15% 1% 5% -2% % 3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 4Q15 3Q15 2Q15 1Q15 4Q14 3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 CT CU Page 22 Deutsche Bank AG/Hong Kong

23 29 November 217 Figure 67: Industry EBITDA trends Figure 68: EBITDA growth by company RMBbn 5% 4% 3% 2% 1% % -1% -2% -3% -4% 3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 4Q15 3Q15 2Q15 3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 4Q15 3Q15 2Q15 1Q15 4Q14 3Q14 2Q14 1Q14 4Q13 3Q13 2Q13 Figure 69: Telecom industry EBITDA margin 45% 4% 35% 3% 25% 2% 15% 1% 5% % 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Figure 7: EBITDA margin by operator 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17, Rolling 12mth EBITDA margin shown, 12mth EBITDA margin shown Deutsche Bank AG/Hong Kong Page 23

24 29 November 217 Valuations and risks China Mobile We derive our target price using a DCF valuation, with allowance for valuation contributions from the towerco and other associates. Our DCF-based valuation uses a 7.5% WACC (risk-free rate of 3.%, risk premium of 5.%, beta of.9) and % perpetual growth rate. We assign a % terminal growth rate to the company to reflect longer-term market share losses. We apply a 4% discount to CM s cash holdings to reflect the low rate at which cash is returned to shareholders. We have applied a 3% holdco discount to the towerco stake and valuations of other associates to reflect the uncertainty in respect of the valuation and typical holding company discounts. Figure 71: Detailed valuation of CM HKDm FY17E EBITDA Valuation Implied EV/EBITDA EV using DCF valuation 311,826 1,838, towerco stake at 3% discount 72,31 Associates and others at 3% discount 6,565 Net cash at 4% discount 333,238 Equity NPV 2,293,246 NPV per share / Price target (HKD) 112 Source: Deutsche Bank estimates, Company Data Downside risks include: Asymmetric regulation, Intense competition in the mobile business, particularly as early 4G adopters start to roll off contracts, and Higher-than-expected capex, particularly in future years. China Telecom We derive our target price using a DCF valuation with an allowance for valuation contribution from the towerco. We derive our DCF valuation using a 7.5% WACC (risk-free rate of 3.%, risk premium of 5.%, beta of.9) and a.5% perpetual growth rate to reflect market share gains. We apply a 3% holdco discount to the towerco stake to reflect the uncertainty in respect of the valuation. Page 24 Deutsche Bank AG/Hong Kong

25 29 November 217 Figure 72: Detailed valuation of CT HKDm FY17E EBITDA Valuation Implied EV/EBITDA EV using DCF valuation 122, , towerco stake at 3% discount 53,275 Others -1,148 Net debt -1,617 Equity NPV 369,488 NPV per share / Price target (HKD) 4.55 Source: Deutsche Bank estimates, Company Data Downside risks include: A significant pick-up in fixed broadband competition, CT s most profitable business, Higher-than-expected spending on subsidies, marketing and network as it looks to gain market share, A slowdown in net adds as other competitors start to gain share, and Higher-than-expected capital expenditure. China Unicom We derive our target price using a DCF valuation with an allowance for valuation contribution from the towerco. We value China Unicom based on a DCF model assuming 8.4% WACC (risk-free rate of 3%, risk premium of 5.5%, beta of 1.1x) and a.5% perpetual growth rate to reflect market share gains. The WACC is higher for CU to reflect the more volatile nature of its business given thin profit margins and slower roll-out of its 4G network. We apply a 3% holdco discount to the towerco stake to reflect the uncertainty in respect of the valuation. Figure 73: Detailed valuation of CU HKDm FY17E EBITDA Valuation EV/EBITDA EV using DCF 99, , towerco stake at 3% discount 53,275 Net debt -65,886 Equity NPV 475,834 NPV per share / Price target (HKD) 15.5 Source: Deutsche Bank estimates, Company Data Key downside risks include: Worse-than-expected mobile net adds, Slower-than-expected ARPU improvement we assume that CU s ARPU recovers towards peer levels in the long run, Mixed ownership impact being less favorable than expected, and Slower-than-expected growth in the enterprise business segment. Deutsche Bank AG/Hong Kong Page 25

26 29 November 217 Model updated:28 November 217 Running the numbers Asia China China Unicom Reuters: 762.HK Buy Bloomberg: 762 HK Price (28 Nov 17) HKD 11.6 Target Price HKD Week range HKD Market Cap (m) HKDm 355,44 Company Profile USDm 45,554 China Unicom operates GSM and CDMA networks in 3 provinces, municipalities and autonomous regions in China, and also provides nationwide international and domestic long distance calls, data and Internet services, and other related telecommunication value-added businesses. The Company through its subsidiaries also operates telecommunications businesses in Hong Kong and USA as well as 3G mobile services in Macau. Price Performance Nov 15Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17 Margin Trends China Unicom HANG SENG INDEX (Rebased) E 18E 19E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 18E 19E Sales growth (LHS) ROE (RHS) E 18E 19E Fiscal year end 31-Dec E 218E 219E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 23,852 23,947 23,947 27,294 3,641 3,641 Average market cap (CNYm) 217, ,57 182,238 3,755 3,755 3,755 Enterprise value (CNYm) 328, , ,34 318, , ,899 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) 8.9 nm nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 284, ,49 274, ,42 35,84 326,91 Gross profit 284, ,49 274, ,42 35,84 326,91 EBITDA 92,771 87,52 79,498 84,586 89,621 96,752 Depreciation 73,868 76,738 76,85 76,96 78,587 8,57 Amortisation EBIT 18,93 1,764 2,693 7,68 11,34 16,695 Net interest income(expense) -4,334-6,496-3,857-4,845-2,488-1,797 Associates/affiliates Exceptionals/extraordinaries 9, Other pre-tax income/(expense) 1, ,948 2,645 3,91 3,796 Profit before tax 15,931 14, ,66 11,999 19,55 Income tax expense 3,876 3, ,379 2,923 4,641 Minorities Other post-tax income/(expense) Net profit 12,55 1, ,277 9,71 14,48 DB adjustments (including dilution) DB Net profit 12,55 1, ,277 9,71 14,48 Cash Flow (CNYm) Cash flow from operations 88,94 84,31 74,593 85,665 1,2 11,348 Net Capex -68,789-86,129-91,91-45, -65, -65, Free cash flow 19,35-1,828-17,38 4,665 35,2 36,348 Equity raised/(bought back) Dividends paid -3,677-4,643-4,71-1,627-3,449 Net inc/(dec) in borrowings -6,6 8,286 26,264 18, Other investing/financing cash flows -6,691-5,369-3,7 Net cash flow 3,82-3,553 1,878 58,665 33,393 32,899 Change in working capital -1,31-2,213-4,264 4,477 12,357 6,877 Balance Sheet (CNYm) Cash and other liquid assets 25,38 21,755 23,633 82, , ,591 Tangible fixed assets 438, , , , ,31 47,889 Goodwill/intangible assets 2,771 2,771 2,771 2,771 2,771 2,771 Associates/investments 8,995 38,29 39,53 39,251 39,176 39,88 Other assets 69,677 93,16 97,132 81,83 85,556 9,27 Total assets 545,72 61, ,154 63,225 66, ,547 Interest bearing debt 136, ,56 174,46 99,46 99,46 99,46 Other liabilities 18, ,74 212,12 223, ,88 263,45 Total liabilities 317, ,13 386, , , ,91 Shareholders' equity 227, , ,47 36, ,43 325,362 Minorities Total shareholders' equity 227, , ,682 37, , ,637 Net debt 111, ,31 15,827 17,161-16,232-49,131 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) James Wang james-z.wang@db.com Page 26 Deutsche Bank AG/Hong Kong

27 29 November 217 Model updated:28 November 217 Running the numbers Asia China China Mobile Reuters: 941.HK Buy Bloomberg: 941 HK Price (28 Nov 17) HKD 8.35 Target Price HKD Week range HKD Market Cap (m) HKDm 1,642,228 Company Profile USDm 21,472 China Mobile Limited provides a full range of mobile telecommunications services in all 31 provinces, autonomous regions and directly-administered municipalities in Mainland China as well as in Hong Kong via its wholly-owned China Mobile Peoples Telephone Co Ltd. Price Performance Nov 15Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17 Margin Trends China Mobile HANG SENG INDEX (Rebased) E 18E 19E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 18E 19E Sales growth (LHS) ROE (RHS) E 18E 19E Fiscal year end 31-Dec E 218E 219E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 2,13 2,438 2,475 2,475 2,475 2,475 Average market cap (CNYm) 1,321,195 1,632,78 1,549,374 1,389,567 1,392,86 1,392,86 Enterprise value (CNYm) 99,392 1,236,933 1,131, , , ,667 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 641, ,335 78, ,24 85,81 841,397 Gross profit 641, ,335 78, ,24 85,81 841,397 EBITDA 233,665 24,28 256, , ,186 34,695 Depreciation 116, , ,9 148, ,84 166,437 Amortisation EBIT 117,334 12, ,88 123,446 13, ,758 Net interest income(expense) 15,921 15,397 15,77 16,68 17,129 16,8 Associates/affiliates 8,248 23,615 8,636 1,132 1,612 11,434 Exceptionals/extraordinaries Other pre-tax income/(expense) 1,89 1,8 1,968 2,14 2,237 2,337 Profit before tax 142, , , ,29 16, ,33 Income tax expense 33,187 35,79 35,623 37,616 39,724 41,578 Minorities Other post-tax income/(expense) Net profit 19,279 18,539 18, ,571 12, ,638 DB adjustments (including dilution) DB Net profit 19,279 18,539 18, ,571 12, ,638 Cash Flow (CNYm) Cash flow from operations 211,22 235,89 253,71 264,23 277, ,919 Net Capex -17, , ,44-176, -152, ,865 Free cash flow 4,224 62,641 64,657 88,23 124,43 124,54 Equity raised/(bought back) 8,215 1,24 Dividends paid -5,934-47,933-47,4-113,7-119,783-69,651 Net inc/(dec) in borrowings -8,149-1,722 71,4 Other investing/financing cash flows 24,38-1,553-5,36 6,529 6,57 5,419 Net cash flow 21,813 6,3 1,571 52,585 11,19 59,821 Change in working capital 5,347 17,751 23,187 26,861 23,67 18,465 Balance Sheet (CNYm) Cash and other liquid assets 418,862 43, ,71 478, , ,36 Tangible fixed assets 658, , ,29 734, ,54 71,623 Goodwill/intangible assets 36,66 36,111 37,51 37,51 37,51 37,51 Associates/investments 7, , ,74 134, , ,218 Other assets 112, , ,95 235,16 247, ,551 Total assets 1,296,449 1,427,895 1,52,994 1,618,968 1,641,662 1,71,748 Interest bearing debt 4,992 4,995 4,998 23,444 23,444 23,444 Other liabilities 432,814 52, , ,641 66,31 632,626 Total liabilities 437,86 57, , ,85 629, ,7 Shareholders' equity 856, , ,21 1,2,662 1,8,857 1,51,235 Minorities 2,67 3,32 3,117 3,221 3,33 3,444 Total shareholders' equity 858,643 92, ,138 1,23,883 1,12,187 1,54,679 Net debt -413,87-398,177-42, , ,42-525,863 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) nm nm nm nm nm nm Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) James Wang james-z.wang@db.com Deutsche Bank AG/Hong Kong Page 27

28 29 November 217 Model updated:28 November 217 Running the numbers Asia China China Telecom Corp Reuters: 728.HK Buy Bloomberg: 728 HK Price (28 Nov 17) HKD 3.79 Target Price HKD Week range HKD Market Cap (m) HKDm 36,732 Company Profile USDm 39,312 China Telecom Corporation Limited, through its subsidiaries, provides wireline telephone, data, and Internet, as well as leased line services in China. Price Performance Nov 15Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17 Margin Trends China Telecom Corp HANG SENG INDEX (Rebased) E 18E 19E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 18E 19E Sales growth (LHS) ROE (RHS) E 18E 19E Fiscal year end 31-Dec E 218E 219E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 8,932 8,932 8,932 8,932 8,932 8,932 Average market cap (CNYm) 264, , ,24 259, , ,541 Enterprise value (CNYm) 351, , , , , ,853 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 324, ,22 352, , ,112 49,357 Gross profit 324, ,22 352, , ,112 49,357 EBITDA 94,853 94,16 95,139 98,943 13,688 18,6 Depreciation 66,345 67,664 67,938 7,93 73,875 77,14 Amortisation EBIT 28,58 26,442 27,21 28,85 29,813 3,992 Net interest income(expense) -5,291-4,273-3,235-3,837-3,875-3,744 Associates/affiliates ,679 2,283 Exceptionals/extraordinaries 5,214 Other pre-tax income/(expense) Profit before tax 23,257 26,693 24,97 25,853 27,657 29,571 Income tax expense 5,498 6,551 5,988 6,412 6,859 7,334 Minorities Other post-tax income/(expense) Net profit 17,68 2,54 18,4 19,322 2,678 22,117 DB adjustments (including dilution) DB Net profit 17,68 2,54 18,4 19,322 2,678 22,117 Cash Flow (CNYm) Cash flow from operations 96,45 18,75 11,13 11,68 14,241 13,568 Net Capex -79,442-11,85-95,13-89, -75, -75, Free cash flow 16,963 7,665 6,27 12,68 29,241 28,568 Equity raised/(bought back) Dividends paid -6,198-6,461-6,489-7,548-7,533-7,876 Net inc/(dec) in borrowings -3,798 1,999-2,979 1,227 Other investing/financing cash flows -2,61-1,71-3,972-2, Net cash flow 4,366 11,132-7,413 3,654 21,468 2,63 Change in working capital -8,796-18,94-9,545-12,334-11,246-6,6 Balance Sheet (CNYm) Cash and other liquid assets 2,436 31,869 24,617 24,16 44,79 65,23 Tangible fixed assets 426,57 443,84 47,29 496,168 51,68 52,338 Goodwill/intangible assets 38,91 4,659 41,167 41,167 41,167 41,167 Associates/investments 6,457 38,616 39,438 39,438 39,438 39,438 Other assets 69,423 75,333 77,117 81,423 84,664 86,752 Total assets 561, , , , , ,898 Interest bearing debt 16, , ,18 115, ,3 118,184 Other liabilities 164,19 27, , , , ,21 Total liabilities 271, ,81 336,73 354, , ,386 Shareholders' equity 289,183 33, , ,997 34,41 354,181 Minorities ,91 1,211 1,331 Total shareholders' equity 29,18 34, , ,88 341, ,512 Net debt 86,54 85,255 88,491 91,781 72,51 52,981 Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) James Wang james-z.wang@db.com Page 28 Deutsche Bank AG/Hong Kong