Hong Kong Telecom Sector

Transcription

1 China / Hong Kong Industry Focus Hong Kong Telecom Sector Refer to important disclosures at the end of this report DBS Group Research. Equity 2018 outlook: Two to thrive but not five Expect HKBN to continue disrupting the mobile market as the fifth player, and price war to continue in 2018 Decision on spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band will be a downside risk for mobile operators Expect tariff upside in the two-player residential broadband market as we believe HKT needs a fixed-line tariff hike to offset the mobile ARPU pressure HKBN is our top pick in the sector on aggressive dividend target Mobile segment is struggling in a price war. In 2018, we expect the price war in the mobile market to continue in a crowded five-player market. HKBN (1310.HK), as a new entrant, will continue to disrupt the market and grab market share by matching the best offer in the market with network support from SmarTone, which is perceived to be of premium quality over other competitors. Existing players are likely to match HKBN s pricing to defend market share. Moreover, we also expect higher spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band, which will be a negative factor in the near term. Expect tariff hike in the residential broadband market. The residential broadband market is effectively a two-player market. Of the fringe players, HGC experienced leveraged buyouts by private equity funds in Going forward, we reckon that HGC will focus more on international carrier business while i-cable will focus more on media business after the change of owners. Since shifting the focus from sub to revenue market share, HKBN has raised residential broadband tariff and increased its exit ARPU to HK$194 (vs FY8/17 s ARPU of HK$168) in the market. We believe HKT needs stronger fixed-line segment performance to offset the mobile ARPU pressure. This is favourable for an industry-wide tariff hike for the broadband market. 8 Dec 2017 HSI: 28,303 ANALYST Chris KO CFA, chriskof@dbs.com Tsz Wang TAM CFA, tszwangtam@dbs.com Recommendation & valuation Price HK$ T arget Price HK $ Source: Thomson Reuters, DBS Vickers, Bloomberg Finance L.P. Mk t Cap US$m Company Rec HKBN (1310.HK) BUY 1,275 HKT (6823.HK) BUY 9,495 Hutchison Telecom (215.HK) HOLD 1,784 SmarTone (315.HK) FV 1,312 HKBN is our top pick in the sector. We continue to prefer fixed-line plays to pure mobile plays. Maintain BUY calls on HKT and HKBN for positive dividend growth outlook. HKBN is our top pick in the sector as we expect it to achieve its target of a cumulative dividend per share (dps) of HK$ for FY8/18-FY8/20 set in the Co-Ownership Plan III. This implies an average of HK$ dps (or 7-8% dividend yield) per annum. Maintain HOLD on Hutchison Telecom (HT, 215.HK) despite the company's negative mobile business outlook as it has HK$14.5bn (or HK$3.2 per share) cash on hand after the sale of its fixed-line assets. Maintain FULLY VALUED on SmarTone (SMT, 315.HK) due to negative mobile ARPU and poor dividend growth outlook. ed-th/ sa- CS, DL

2 Industry Focus Hong Kong Telecom Sector Table of Contents Mobile market outlook 3 Fixed-line market outlook 5 Valuations and recommendations 7 Appendix 8 Stock Profile 15 HKBN 15 HKT Trust 23 Hutchison Telecom 30 SmarTone 37 Page 2

3 Industry Focus Hong Kong Telecom Sector Mobile market outlook Overview In 2018, we expect the price war in the mobile market to continue in a crowded five-player market. HKBN (1310.HK), as a new entrant, will continue to disrupt the market and grab market share by matching the best offer in the market with network support from SmarTone, which is perceived to be of premium quality over other competitors. Existing players are likely to match HKBN s pricing to defend their market shares. Moreover, we also expect higher spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band, which will be a negative factor in the near term. Mobile market price war to continue There was an outbreak of price war in the high-tier mobile service space in July HKBN launched mobile service plans by matching the best offer in the market with network support from SmarTone, which is perceived to be of premium quality over other competitors. As a result, HKBN successfully took market share from others. This triggered price cuts in the market. We estimate that the prices for some high-tier mobile service plans have decreased by 30-50%. For example, SMT s and csl. s (under HKT) 6GB mobile data service plans are priced at HK$316 per month while competitors are pricing theirs at 50% of that. In 2018, we believe that mobile pricing will remain under pressure as other mobile operators are hoping to defend their respective market shares. Mobile postpaid 4.5G SIM-only service plan pricing for port-in subs 24 month contract (HK$ per mont h) SMT T hree csl. CMHK CUHK HKBN SMT T hree csl. CMHK CUHK HKBN 0.5GB na na na na na na na 156 na na na na 1GB 216 na 216 na 59 na na 2.5GB 256 na 256 na na na na 206 na 3GB na na na na na na na na na 216 na 216 6GB na GB na na na 161 na na na na na na na na 10GB na na 197 na na na 12GB na na na 198 na 218 na na na na na na 14GB na na na na 257 na na na na na na na 15GB na 246 na na na na na na na na na na 20GB na na na 222 na na na na na na na na 50GB na na na 312 na na na na na na na na Unlimited* na na na 464 na na 464 *Subject to Fair Usage Policy after 6GB usage Source: Companies, DBS Vickers 4Q17 4Q16 Page 3

4 Industry Focus Hong Kong Telecom Sector Slight mobile market share shifting to HKBN Hong Kong's mobile market is matured with 200%+ penetration rate. We forecast the total mobile sub base to register a low single-digit growth in We expect the HKBN/SMT camp to take away market share from HKT, HT and CMHK. We also forecast HKBN to gain c.200,000 mobile subs (or 2% of postpaid mobile market share) in Hong Kong mobile market share (1H17) Others / MVNOs 14% HKT 29% 900/1800 MHz spectrum reassignment will be a risk We expect spectrum reassignment to be a negative factor for mobile operators in the near term. Mobile operators 15-year licences for 49.8 MHz of spectrum in the 900 MHz band and MHz of spectrum in the 1800 MHz band (collectively 2G spectrum) will expire between November 2020 and September Together with 0.2 MHz of spectrum in the 900 MHz band and 1.2 MHz of spectrum in the 1800 MHz band which are currently vacant, a total of 200 MHz of spectrum will be reassigned. The re-assignment is a major reshuffle of spectrum resources as 2G spectrum, totalling MHz of spectrum, accounts for 36% of the total 552 MHz of spectrum in Hong Kong and 45% of spectrum deployed for 4G network service. CMHK 20% SMT 14% HT 23% Based on the current proposals, we expect the spectrum utilisation fee (SUF) to increase from an average of HK$1.45m to HK$3.95m per MHz per year, representing a 100%+ increase. We expect HT to be impacted the most by higher SUF, followed by SMT. We also expect the increase in SUF to represent c.30% and c.10% of HT s FY18 and SMT s FY6/18 earnings respectively. HKT (6823.HK, BUY) will be least impacted as the increase in SUF will only represent 3% of its FY18 earnings. We expect the decision to be made around 1Q18 and will be negative to share prices. Source: Companies, DBS Vickers Limited benefits from iphone X The reception for iphone 8 was unsatisfactory as customers were awaiting the launch of iphone X. On the other hand, the launch of iphone X was well received. However, the supply allocation to Hong Kong mobile operators was insufficient after providing for handset-bundled mobile service plan offerings. We reckon that the allocations to China and Apple s own distribution channels are higher (compared with the launch of previous versions of iphones), leaving less trading opportunities for mobile operators. Page 4

5 Industry Focus Hong Kong Telecom Sector Fixed-line market outlook Hong Kong's residential broadband market is effectively down to a two-player market. Of the fringe players HGC experienced leveraged buyouts by private equity funds in Going forward, we reckon that HGC will focus more on international carrier business while i-cable will focus more on media business after the change of owners. Cash flow and profitability have become a priority due to higher leverage. HKBN has started raising residential broadband tariff in the market. We expect HKT to follow suit, as we believe it needs stronger fixed-line segment performance to offset the mobile ARPU pressure. This is favourable for a medium-term industrywide tariff hike. Expect industry-wide tariff hike We expect a tariff hike in the residential broadband market in the medium term as: (i) Market share is now at an equilibrium. While HKBN shifted its strategy from sub market share to profitability in FY16, HKT attempted to undercut HKBN s standalone residential broadband pricing in the public housing estates. HKBN defended its market share by bundling its services with OTT content, home telephone and mobile services, and offering them at lower prices. We believe the room for HKT to further gain market share from HKBN is limited as HKBN now only has 90,000 subs with standalone residential broadband service in the public housing estates. Further price cuts are unlikely to be a long-term strategy. (ii) HKT needs a tariff hike to support its dividend growth. HKT s mobile tariff is unlikely to increase under a five-player market. We believe the company needs to have a stronger fixed-line segment performance to compensate for the pressure in mobile segment, in order to maintain its dividend growth target to shareholders. (iii) Now all players are focusing on near-term cash flows and profitability. Wharf T&T and HGC were sold to private equity funds TPG and MBK, and I-square respectively. These two companies are now highly geared. Therefore, stable cash flows are at a higher priority to service their debts. Moreover, the new shareholders will focus more on earnings and cash flows in both short term and long term, in our view. Hong Kong residential broadband market share (1H17) HKBN 33% HT 7% i-cable 6% Source: Companies, DBS Vickers M&As in Hong Kong telecom sector Tra nsa c tion va lua tion (EV/EBITDA) HKT 54% Tra nsa c tion c onside ra tion (HK$m) Se lle r Buye r Asse t HGC 11x 14,497 Hutchison Telecom I-square WTT 12x 9,500 Wharf Group MBK and TPG NWT 10x 647 New World Group HKBN i-cable na Issuing 3,353m new shares (or 62.5% of enlarged share HK$0.21 per share Source: Companies, DBS Vickers Wharf Group Forever Top (Asia) Limited Debt to EBITDA ratio of Hong Kong fixed-line players Est. gross de bt to Fixe d-line ma rke t pla ye r EBITDA (FY17) HKT 3.0x HKBN 3.6x HGC 3.9x WTT 5.6x i-cable na Source: Companies, DBS Vickers Page 5

6 Industry Focus Hong Kong Telecom Sector Interest rate hike sensitivity Hong Kong telecom operators are generally highly leveraged. This may be a concern for some investors as the coming interest rate up-cycle will negatively impact earnings or dividends. We accordingly performed a sensitivity analysis on their dividends towards interest rate changes. HKT and HT have a relatively higher portion of floating-rate borrowings of 50% and 100% respectively. We estimate that for any 1ppt interest rate increase, HKT s and HT s dividend will decrease by 4% and 14.5% respectively in FY18. SMT and HKBN have a higher proportion of fixed-rate borrowings of 81% and 68% respectively. The impact from 1ppt interest rate increase is limited. In the longer term, HKBN and HKT will be the most severely impacted due to their higher gearing. Interest rate sensitivity analysis T otal borrowings (HK$m) % of T otal borrow ings 1% int. rate impact (floating only ) 1% int. rate impact (assume all floating) Net gearing as at the end of J un 2017* F Y17* F ixedrate F loatingrate Dollar amount (HK$m) % decrease of div idend in F Y18** Dollar amount (HK$m) % decrease of div idend in F Y17F HKBN 305% 3,831 68% 32% % % HKT 88% 38,698 50% 50% % % HT net cash 4,900 0% 100% % % SMT 3% 2,690 81% 19% 5 0.8% % *FY8/17 for HKBN, FY6/17 for SMT **FY8/18 for HKBN, FY6/18 for SMT Source: Companies, DBS Vickers Page 6

7 Industry Focus Hong Kong Telecom Sector Valuations and recommendations HKBN (BUY, TP: HK$13.3). We have revised down our FY8/18 adjusted free cash flow by 10% for FY8/18 as we expect the company to increase its investments to spur growth in FY8/19 FY8/20. We forecast its dividends to grow by 20%, 37% and 19% in FY8/18 FY8/20 respectively. HKBN is our top pick in the sector as we expect it to achieve its target of a cumulative dividend per share (dps) of HK$ for FY8/18-FY8/20 set in the co-ownership plan III. This implies an average of HK$ dps (or 7-8% dividend yield) per annum. Reiterate BUY with a higher TP of HK$13.3 as we roll over to FY8/18. Our TP is based on a dividend discount model with 7.9% cost of equity and 1% terminal growth rate. HKT (BUY, TP: HK$12.6). We have revised down our FY17-19 earnings estimates by 1%, 1% and 3% respectively due to lower mobile ARPU assumptions. The stock currently offers an attractive dividend yield of 6%+ with steady dividend growth in the next two years. Maintain BUY with a lower TP of HK$12.6. Our TP is based on a dividend discount model assuming cost of equity of 6.9% and terminal growth rate of 1%. HT (HOLD, TP: HK$3.1). We have revised down our FY17-19 earnings estimates by 19%, 51% and 59% respectively after incorporating (1) the sale of fixed-line assets which accounted for c.50% of HT s earnings and (2) lower mobile ARPU assumptions. The company has now become a pure mobile operator after the sale of its fixed-line assets. We are bearish on the outlook of the local mobile market due to the overcrowded market and an ongoing price war. However, supported by the cash proceeds of HK$14.5bn or c.hk$3.2 per share from the sale of its fixed-line asset, we maintain our HOLD rating on Hutchison Telecom with a lower TP of HK$3.1. Our TP is based on SOTP: (1) HK$0.9 per share for mobile business based on 5x EV/EBITDA, and (2) HK$2.2 net cash per share. SMT (FULLY VALUED, TP: HK$7.3). We have revised down our FY6/18-FY6/19 earnings estimates by 3% and 4% respectively due to lower mobile ARPU assumptions. SMT suffers from a competitive market environment. The company has ceased to commit paying out an absolute dividend, which may lead to lower dividends going forward. Expect de-rating of the stock ahead on negative mobile ARPU and poor dividend growth outlook. Maintain our FULLY VALUED rating on SMT, with a lower TP of HK$7.3. Our TP is pegged at 12x FY6/18 PE, which is below its historical average to reflect negative core earnings growth outlook. Page 7

8 Industry Focus Hong Kong Telecom Sector Appendix Share price performance Share price performance Telecom operators Rebased 11 Dec 15 = Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 HKT TRUST & HKT HKBN SMARTONE TELECOM.HDG. Source: Thomson Reuters Share price performance table Share price performance table (%) 1- mth 3- mth 6- mth 12- mth YT D HKBN 0.3% 32.9% 18.1% 13.7% 16.3% HKT 2.6% 0.4% -4.8% -1.8% 2.9% Hutchison Telecom 0.7% -1.0% 17.0% 11.2% 15.6% SmarTone -1.1% -2.1% -12.0% -11.1% -11.1% Source: Thomson Reuters Page 8

9 Industry Focus Hong Kong Telecom Sector Valuation Mk t PE PE Yield Yield P/Bk P/Bk EV /EBIT DA F CF Yield Currency Price Cap F iscal 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F Company Name Code Local$ US$m Yr x x % % x x x x % % Hong Kong telecom operators HKT Trust* 6823 HK HKD ,502 Dec Hutchison Telecom* 215 HK HKD ,785 Dec Smartone Telecom* 315 HK HKD ,316 Jun HKBN* 1310 HK HKD ,276 Aug A v erage China telecom operators China Mobile* 941 HK HKD ,041 Dec China Unicom* 762 HK HKD ,920 Dec China Telecom 'H'* 728 HK HKD ,791 Dec A v erage # FY16: FY17; FY17: FY18 Source: Thomson Reuters, *DBS Vickers Page 9

10 Industry Focus Hong Kong Telecom Sector Hong Kong residential broadband market Hong Kong residential broadband ARPU Hong Kong residential broadband sub base FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 3,000 2,500 2,000 1,500 1, FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% HKBN HKT HKBN HKT HT i-cable Growth % Hong Kong residential broadband market share Hong Kong residential broadband revenue 70% 60% 50% 40% 30% 20% 10% 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 HKBN HKT HT i-cable HK$m 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 HKBN HKT HT i-cable Growth% FY16 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Companies, DBS Vickers Page 10

11 Industry Focus Hong Kong Telecom Sector Hong Kong mobile market Hong Kong mobile ARPU Hong Kong mobile subscriber base HK$m Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 HKT HT SMT 20,000 15,000 10,000 5,000 0 Jun-11 Dec-11 Jun-12 Dec-12 CSL HT CMHK Growth% Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 HKT SMT Others / MVNOs 5% 4% 3% 2% 1% 0% -1% -2% Hong Kong mobile market share Hong Kong mobile service revenue 35% 30% 25% 20% 15% 10% 5% 0% Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 HKT SMT Others / MVNOs Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 HT CMHK Dec-16 Jun-17 HK$m 11,000 9,000 7,000 5,000 3,000 1,000 (1,000) Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 CSL HT HoH growth % HKT SMT 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Source: Companies, DBS Vickers Page 11

12 Industry Focus Hong Kong Telecom Sector Revenue breakdown of Hong Kong telecom operators HKBN s revenue breakdown (FY8/17) Product revenue 2% HKT s revenue breakdown (1H17) Other business 1% Mobile handset Sales 6% Local telephony services 10% Enterprise broadband Revenue 37% Residential broadband Revenue 61% Mobile services 29% Local data and broadband services 22% Other TSS services 10% International Telecommunications services 22% Hutchison Telecom s revenue breakdown (1H17) SmarTone s revenue breakdown (FY6/17) Hardware Revenue 38% Mobile telecommunications services 62% Handset and accessory sales 41% Service revenue 59% Note: fixed-line business revenue is excluded in Hutchison Telecom s revenue breakdown Source: Companies, DBS VIckers Page 12

13 Industry Focus Hong Kong Telecom Sector PE & PB band Charts HKBN PE Chart (1310 HK ) HKBN PB Chart (1310 HK ) Share Price (HK$) 33 Share Price (HK$) x Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 45x 35x 25x 16x Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov x 8.0x 7.2x 6.4x 5.6x HKT Trust PE chart (6823 HK) HKT Trust PB Chart (6823 HK) Share Price (HK$) x 24x 21x 19x 17x Share Price (HK$) x 1.7x 1.5x 1.2x 0.9x Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 0 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Source: Bloomberg Finance L.P., DBS Vickers Page 13

14 Industry Focus Hong Kong Telecom Sector PE & PB band Charts (con t) Hutchison Telecom PE Chart (215 HK ) Hutchison Telecom PB Chart (215 HK ) Share Price (HK$) Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 25x 21x 17x 13x x 1.5 Share Price (HK$) 5.5 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep x 1.7x 1.4x 1.2x 0.9x Smartone Telecom PE chart (315 HK) Smartone Telecom PB Chart (315 HK) Share Price (HK$) 30 Share Price (HK$) x x 21x 17x 13x 9x x 4.1x 3.1x 2.2x 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Source: Bloomberg Finance L.P., DBS Vickers Page 14

15 China / Hong Kong Company Guide HKBN Ltd. Version 10 Bloomberg: 1310 HK Equity Reuters: 1310.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 8 Dec 2017 BUY Last Traded Price ( 7 Dec 2017):HK$9.90 (HSI : 28,303) Price Target 12-mth: HK$13.30 (34% upside) (Prev HK$12.20) Analyst Chris KO CFA, chriskof@dbs.com Tsz Wang TAM CFA, tszwangtam@dbs.com What s New Expect tariff upside in the residential broadband market as HKT may raise its broadband tariff to offset the mobile ARPU pressure Achievable dividend target set in Co-Ownership Plan III, translating into an average dividend yield of 7-8% in FY8/18-FY8/20 Revised down FY8/18 adjusted free cash flow estimates by 10% due to higher investments to spur growth in FY8/19-8/20 Reiterate BUY for its clearer dividend growth outlook with a higher TP of HK$13.3 as we roll the valuation forward Price Relative Forecasts and Valuation FY Aug (HK$ m) 2016A 2017A 2018F 2019F Turnover 2,784 3,232 3,802 4,445 EBITDA 982 1,043 1,237 1,476 Pre-tax Profit Net Profit Net Profit Gth (%) (30.1) EPS (HK$) EPS Gth (%) (30.5) Diluted EPS (HK$) AFCF DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (22) New Consensus EPS (HK$) Other Broker Recs: B: 9 S: 0 H: 1 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX Looking up to a clearer sky Significant upside potential in ARPU under duopoly We have a BUY rating on HKBN, and a TP of HK$13.30 based on dividend discount model (DDM). HKBN offers a dividend yield of 5%+, and we forecast a dividend CAGR of 20%+ from FY8/18-FY8/20. The company increased its market share from c.16% in FY8/08 to c.33% in FY8/17, and is now the second largest residential broadband operator in Hong Kong. We expect it to enjoy upside to residential broadband ARPU (average revenue per user) and profitability in a duopoly-like market. Where we differ: Dividend growth target achievable. The company has proposed a new Co-Ownership Plan III (subject to shareholders approval). It aims to achieve a cumulative adjusted free cash flow (AFCF) per share of HK$ for FY8/18-FY8/20 which implies an average of dividend per share of HK$ p.a. (or c.7-8% dividend yield). We believe this is achievable through the tariff hike in residential broadband market, market share gains in mobile and enterprise broadband markets, as well as monetisation of mytv SUPER. Potential catalyst: Industry-wide tariff hikes in residential broadband market. The residential broadband market is a duopoly dominated by HKT and HKBN with more than 80% combined market share. HKBN has started raising residential broadband tariff in the market as it focuses on revenue market share. We expect HKT to increase its residential broadband tariff to offset the mobile APRU pressure. An industry-wide tariff hike in the residential broadband market will be positive to HKBN s share price. Valuation: We have a BUY rating on HKBN for its dividend growth potential. Our TP of HK$13.3 is based on DDM, assuming 7.9% cost of equity and 1% terminal growth rate. Key Risks to Our View: Price war. Competitors irrationally undercutting HKBN's prices for a prolonged period. Interest rate up-cycle. Any increase in interest rates will reduce the AFCF and therefore the dividend distribution. At A Glance Issued Capital (m shrs) 1,006 Mkt. Cap (HK$m/US$m) 9,956 / 1,275 Major Shareholders Canada Pension Plan Investment Board (%) 18.0 GIC Private Limited (%) 9.1 The Capital Group Companies, Inc. (%) 8.0 Matthews International Capital 6.0 Management, LLC (%) Mondrian Investment Partners Limited (%) 5.6 Free Float (%) m Avg. Daily Val. (US$m) 1.7 ICB Industry : Telecommunications / Fixed Line Tl i i ed-th / sa- CS, DL

16 HKBN Ltd. CRITICAL FACTORS TO WATCH Critical Factors Market share stable. HKBN has gained market share from competitors through its aggressive pricing strategy. It has a track record of managing decent ARPU growth over a longer period of time despite short-term volatility. Going forward, HKBN has switched its focus from sub to revenue market share and started raising tariffs in January Therefore, we expect to see low single-digit growth rates with stable market share for sub numbers in the next few years. Residential broadband sub (k) Residential broadband ARPU (HK$) ARPU improvement. HKBN has switched its focus from sub to revenue market share and started to raise tariffs. HKBN s residential broadband ARPU is around HK$170 which is 40% below HKT s c.hk$300, offering significant upside potential for ARPU and profitability improvement. HKBN may selectively narrow the differences in some areas without losing its customers. We also expect HKBN to continue upselling highertier plans OTT media service and mobile service to its customers. Expansion into mobile market. HKBN started offering mobile services as a mobile virtual network operator (MVNO) in Sep 2016, supported by SMT s network. As at the end of Oct 2017, it has acquired 250k registered mobile subs. With a variable cost structure, its first sub contract is breakeven, and the renewal contract will be profitable, i.e. worst case is breakeven. We estimate operating losses of 30m-60m in FY8/17-FY8/18 due to the upfront customer acquisition costs. We expect the mobile business to be profitable after FY8/19. Mobile sub base (k) Mobile ARPU (HK$) Page 16

17 HKBN Ltd. HKBN's share price vs HSI and residential broadband ARPU Initiated a price war in the residential broadband market and acquired 100,000 sub net-add /12/2015 5/12/2015 7/12/2015 9/12/ /12/2015 1/12/2016 3/12/2016 5/12/2016 7/12/2016 9/12/ /12/2016 1/12/2017 3/12/2017 5/12/2017 7/12/2017 9/12/ /12/2017 HKBN share price vs HSI Residential Broadband ARPU Page 17

18 HKBN Ltd. Balance Sheet: Strong free cash flow. The company generates strong free cash flow with an expected CAGR of c.20%+ p.a. in FY8/18-FY8/20 The company intends to pay out % of its adjusted free cash flow (AFCF) as dividends. AFCF is derived from core EBITDA adjusted for capex, net interest, non-recurring items, non-cash items, tax paid and changes in working capital. Healthy balance sheet. HKBN had total borrowings of HK$3.9bn with a debt-to-ebitda ratio of 3.6x at end-fy8/17, which is manageable. We expect the company to maintain its debt level and forecast debt-to-ebitda to be 3.3x in FY8/18. Share Price Drivers: ARPU improvement. HKBN has switched its focus from sub to revenue market share and started raising tariff in January HKBN s residential broadband ARPU is around HK$170, which is 40% below HKT s c.hk$300, offering significant upside potential for ARPU and profitability improvement. HKBN may selectively narrow the differences in some areas without losing its customers. We also expect HKBN to continue upselling higher-tier plans to its customers. Stronger dividend growth. Strong business growth and operating leverage could lead to stronger EBITDA growth. Reduction in capex as a percentage of revenue will further enhance AFCF and therefore dividend distribution. Leverage & Asset Turnover (x) Capital Expenditure ROE Key Risks: A real price war Competitors irrationally undercutting HKBN's prices for a prolonged period. Increase in interest rates An increase in interest rates will decrease the company's AFCF and dividend yield. Forward PE Band Company Background HKBN is a broadband service provider in Hong Kong. It is the second largest player in the residential segment with a market share of c.33%. PB Band Page 18

19 HKBN Ltd. Key Assumptions FY Aug 2015A 2016A 2017A 2018F 2019F Residential broadband sub (k) Residential broadband ARPU (HK$) Income Statement (HK$ m) FY Aug 2015A 2016A 2017A 2018F 2019F Revenue 2,341 2,784 3,232 3,802 4,445 Cost of Goods Sold (306) (451) (710) (837) (978) Gross Profit 2,035 2,333 2,522 2,966 3,467 Other Opng (Exp)/Inc (1,588) (1,857) (2,057) (2,343) (2,646) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (257) (141) (210) (137) (137) Dividend Income Exceptional Gain/(Loss) Pre-tax Profit Tax (86) (90) (86) (119) (157) Minority Interest Preference Dividend Net Profit Net Profit before Except EBITDA ,043 1,237 1,476 Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) (2.2) Net Profit Gth (%) (30.1) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Page 19

20 HKBN Ltd. Interim Income Statement (HK$ m) FY Aug 2H2015 1H2016 2H2016 1H2017 2H2017 Revenue 1,215 1,226 1,558 1,535 1,698 Cost of Goods Sold (177) (137) (315) (304) (406) Gross Profit 1,038 1,089 1,244 1,231 1,291 Other Oper. (Exp)/Inc (782) (839) (1,018) (1,026) (1,031) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (61) (66) (75) (117) (94) Exceptional Gain/(Loss) Pre-tax Profit Tax (44) (48) (42) (44) (42) Minority Interest Net Profit Net profit bef Except Growth Revenue Gth (%) Opg Profit Gth (%) (11.7) (17.8) 15.0 Net Profit Gth (%) N/A (27.5) (66.0) 14.3 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Page 20

21 HKBN Ltd. Balance Sheet (HK$ m) FY Aug 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 1,970 2,420 2,290 2,233 2,136 Invts in Associates & JVs Other LT Assets 2,954 3,359 3,418 3,260 3,102 Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 5,551 6,605 6,585 6,439 6,314 ST Debt Creditors Other Current Liab LT Debt 3,019 3,721 3,831 3,831 3,831 Other LT Liabilities Shareholder s Equity 1,514 1,363 1, Minority Interests Total Cap. & Liab. 5,551 6,605 6,585 6,439 6,314 Non-Cash Wkg. Capital (190) (355) (270) (261) (252) Net Cash/(Debt) (2,690) (3,366) (3,446) (3,402) (3,298) Debtors Turn (avg days) Creditors Turn (avg days) (19.5) (376.4) Inventory Turn (avg days) (38.8) (214.1) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) NA NA NA NA NA Cash Flow Statement (HK$ m) FY Aug 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit Dep. & Amort Tax Paid (86) (58) (123) (140) (178) Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. (115) 0 (53) (8) (9) Other Operating CF Net Operating CF ,083 1,284 Capital Exp.(net) (324) (393) (404) (400) (400) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 0 (649) Net Investing CF (324) (1,042) (361) (399) (399) Div Paid (230) (402) (422) (503) (643) Chg in Gross Debt (105) Capital Issues Other Financing CF (108) (137) (109) (138) (138) Net Financing CF (443) 144 (511) (640) (781) Currency Adjustments 2 (3) Chg in Cash (107) Opg CFPS (HK$) Free CFPS (HK$) Page 21

22 HKBN Ltd. Target Price & Ratings History HK$ 4 5 S.No. Date of Report Closing Price 12-mth Target Price Rating 1: 21 Apr BUY 2: 14 J ul BUY 3: 21 J ul BUY 4: 03 Nov BUY 5: 06 Nov BUY Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 No te : Share price and Target price are adjusted for corporate actions. Source: DBSVHK Analyst: Chris KO CFA, Tsz Wang TAM CFA, Page 22

23 China / Hong Kong Company Guide HKT Trust Version 6 Bloomberg: 6823 HK Equity Reuters: 6823.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 8 Dec 2017 BUY Last Traded Price ( 7 Dec 2017):HK$9.79 (HSI : 28,303) Price Target 12-mth: HK$12.60 (29% upside) (Prev HK$12.80) Analyst Chris KO CFA, chriskof@dbs.com Tsz Wang TAM CFA, tszwangtam@dbs.com What s New Upside potential from the residential broadband industry-wide tariff hike Mobile ARPU pressure from price war partly offset by the continuous savings from mobile capex and higher residential broadband ARPU Revised down our AFF estimates by 1%,1% and 3% for FY17-19 due to lower mobile ARPU assumptions Maintain BUY despite a lower TP of HK$12.6, for its attractive dividend yield of 6%+ Price Relative HK$ Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 HKT Trust (LHS) Relative HSI (RHS) Relative Index Forecasts and Valuation FY Dec (HK$ m) 2016A 2017F 2018F 2019F Turnover 33,847 33,574 33,704 33,941 EBITDA 12,613 12,574 12,708 12,878 Pre-tax Profit 5,698 5,540 5,638 5,786 Net Profit 4,889 4,726 4,811 4,938 Net Pft (Pre Ex) (core profit) 4,889 4,726 4,811 4,938 Net Profit Gth (Pre-ex) (%) 23.8 (3.3) EPS (HK$) EPS Gth (%) 23.8 (3.4) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (1) (1) (3) Consensus EPS (HK$) Other Broker Recs: B: 10 S: 0 H: 1 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX On HKT we trust Incumbent operator with attractive dividend yield We have a BUY rating on HKT Trust (HKT), with a dividend discount model (DDM)-based TP of HK$12.6. HKT offers a dividend yield of c.6% with potential upside from lower capex and more cost savings arising from the HKT/CSL merger. It is an incumbent player in the fixed-line segment, and became the largest mobile operator after merging with CSL in FY14. HKT intends to pay out 100% of its adjusted fund flow (AFF) which is expected to register steady growth from FY Where we differ: Continuous cost savings from lower capex ahead and CSL integration. The market believes that cost synergies from CSL integration had been fully realised in However, we expect HKT to reap further cost savings from (1) lower mobile capex due to the completion of network integration, and (2) reduction in spectrum expenses by retaining only half of the 2.1GHz spectrum. We also reckon that there is room for retail shop consolidation in the medium term. Potential catalysts: Industry-wide tariff hikes in residential broadband market. The residential broadband market is a duopoly dominated by HKT and HKBN with more than 80% combined market share. HKBN announced that it would focus on revenue market share and raise tariffs for its residential broadband service. We expect HKT to lead the industry-wide tariff hike in the residential broadband market and this will be positive to its share price. Valuation: We have a BUY rating on HKT for its attractive dividend yield of c.6% with further growth potential. Our TP of HK$12.6 is based on DDM assuming 6.9% cost of equity and 1% terminal growth rate. Key Risks to Our View: Irrational market competition. Hong Kong s mobile market is crowded with four major players and the entry of HKBN as a fifth player (MVNO), the penetration is more or less saturated. Irrational pricing may lead to a price war. Interest rate up-cycle. Any increase in interest rates will reduce the AFF and therefore the dividend distribution. At A Glance Issued Capital (m shrs) 7,572 Mkt. Cap (HK$m/US$m) 74,127 / 9,495 Major Shareholders PCCW Limited (%) 52.0 Free Float (%) m Avg. Daily Val. (US$m) 13.8 ICB Industry : Telecommunications / Fixed Line l i i ed-th / sa- CS, DL

24 HKT Trust CRITICAL FACTORS TO WATCH Critical Factors Cost savings from CSL integration and capex reduction. HKT has been integrating CSL s networks as well as optimising its retail channels. As the network integration has largely been completed, we expect reduction in capex to support dividend growth. We also expect further cost savings from lower spectrum expense by retaining only half of the 2.1 GHz spectrum. Further optimisation in retail outlets, human resources, and network backhaul will bring in more cost synergies in the next few years. Fixed-line ARPU improvement. We believe that smaller operators HGC and i-cable have lost their competitiveness and therefore pricing power. The residential broadband market is effectively dominated by two players, HKBN and HKT. HKBN has switched its focus from subscribers to revenue market share and will start to raise prices, which is positive to industry ARPU. We expect ARPU and profitability upside for HKT under the duopoly. Mobile ARPU under pressure. The mobile market is crowded with four major players, namely HKT, Hutchison Telecom (HT), SmarTone (SMT) and China Mobile Hong Kong (CMHK). The competition is further intensified by the entry of HKBN as a mobile virtual network operator (MVNO). The mobile industry s ARPU is under pressure as HKBN and CMHK are offering aggressive price discounts to take market share. We expect HKT s mobile ARPU to decline by a low single-digit rate in FY However, we expect the negative impact from ARPU pressure to be offset by its cost savings from CSL and capex reduction. Mobile sub growth. Hong Kong's mobile market is more or less matured with low single-digit sub growth in the past two years. HKT, HT, SMT and CMHK commanded market shares of c.29%, c.23%, c.14% and c.20% respectively as at end-1h17. We forecast HKT s mobile base to decline by a low single-digit rate in the next two years due to a more crowded market Fixed-line sub growth (%) A 2016A 2017F 2018F 2019F Broadband sub growth (%) A A 2017F 2018F 2019F Mobile sub growth (%) A 2016A 2017F 2018F 2019F Mobile ARPU A 2016A 2017F 2018F 2019F EBITDA margin (%) A 2016A 2017F 2018F 2019F Page 24

25 HKT Trust HKT s share price vs HSI and Postpaid mobile ARPU x Higher penetration of 3G service plans which commended higher ARPUs Industry-wide tariff hike took place due to the launch of iphone 6 and HKT/CSL merger HK$ Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Competition intensifies due to the entry of HKBN as a MVNO, which led to drop in mobile industry's ARPU Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul HKT share price vs HSI (LHS) HKT mobile postpaid ARPU (RHS) Page 25

26 HKT Trust Balance Sheet: Healthy financials with a debt-to-ebitda ratio of 3.0x. HKT had bank borrowings of HK$38bn and its debt-to-ebitda ratio remained healthy at c.3.0x at end-1h17. Average debt maturity is around five years with an effective interest rate of c.2.6%. The company intends to pay out 100% of its AFF (which is basically free cash flow), and to maintain its debt level Leverage & Asset Turnover (x) Share Price Drivers: Cost savings from CSL integration and capex reduction. HKT has been integrating CSL s networks as well as optimising its retail channels. As the network integration has largely been completed, we expect reduction in capex to support dividend growth. We also expect reduction in spectrum expense by retaining only half of the 2.1GHz spectrum. Further optimisation in retail outlets, human resources, and network backhaul will bring in more cost synergies in the next few years. Industry-wide tariff hikes in residential broadband market. The residential broadband market is a duopoly dominated by HKT and HKBN. HKBN announced that it would focus on revenue market share and raise tariffs for residential broadband service. An industry-wide tariff hike in the residential broadband market will be positive to HKT's share price A 2016A 2017F 2018F 2019F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure HK$m 3, , , , , , A 2016A 2017F 2018F 2019F Capital Expenditure (-) 12.0% ROE % Key Risks: Irrational market competition. Hong Kong s mobile market is crowded with four major players and the entry of HKBN as a MVNO, and the penetration is more or less saturated. Irrational pricing may lead to a price war. Interest rate up-cycle. Any increase in interest rates will reduce the AFF and therefore the dividend distribution. Company Background HKT is an integrated telecom service provider in Hong Kong, with the largest market share in the fixed-line and mobile market. The company's broadband services are provided via the brand Netvigator and its mobile services are provided via the brands SUN Mobile, csl. and 1O1O. HKT is 51.97% owned by PCCW. 8.0% 6.0% 4.0% 2.0% 0.0% 2015A 2016A 2017F 2018F 2019F Forward PE Band (x) sd: 19.8x sd: 18.4x Avg: 17x sd: 15.6x sd: 14.2x Dec-13 Dec-14 Dec-15 Dec PB Band (x) sd: 2.29x +1sd: 2.1x Avg: 1.91x -1sd: 1.71x -2sd: 1.52x 1.2 Dec-13 Dec-14 Dec-15 Dec-16 Page 26

27 HKT Trust Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Fixed-line sub growth (%) 0.0 (0.2) (0.2) (0.2) (0.2) Broadband sub growth (%) 0.1 (0.3) Mobile sub growth (%) (0.6) (1.0) (6.1) (1.3) (1.3) Mobile ARPU EBITDA margin (%) Income Statement (HK$ m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 34,729 33,847 33,574 33,704 33,941 Cost of Goods Sold (15,539) (14,445) (14,467) (14,492) (14,597) Gross Profit 19,190 19,402 19,107 19,212 19,344 Other Opng (Exp)/Inc (13,287) (12,523) (12,455) (12,439) (12,424) Operating Profit 5,903 6,879 6,652 6,773 6,920 Other Non Opg (Exp)/Inc 18 (51) Associates & JV Inc (25) (23) (23) (23) (23) Net Interest (Exp)/Inc (1,310) (1,107) (1,089) (1,112) (1,111) Dividend Income Exceptional Gain/(Loss) Pre-tax Profit 4,586 5,698 5,540 5,638 5,786 Tax (600) (771) (776) (789) (810) Minority Interest (37) (38) (38) (38) (38) Preference Dividend Net Profit 3,949 4,889 4,726 4,811 4,938 Net Profit before Except. 3,949 4,889 4,726 4,811 4,938 EBITDA 12,098 12,613 12,574 12,708 12,878 Growth Revenue Gth (%) 20.5 (2.5) (0.8) EBITDA Gth (%) (0.3) Opg Profit Gth (%) (3.3) Net Profit Gth (%) (3.3) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Page 27

28 HKT Trust Interim Income Statement (HK$ m) FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017 Revenue 15,974 18,755 16,388 17,459 15,649 Cost of Goods Sold (6,544) (8,995) (6,973) (7,472) (6,508) Gross Profit 9,430 9,760 9,415 9,987 9,141 Other Oper. (Exp)/Inc (6,851) (6,436) (6,375) (6,148) (6,012) Operating Profit 2,579 3,324 3,040 3,839 3,129 Other Non Opg (Exp)/Inc 33 (15) 9 (60) (2) Associates & JV Inc (15) (10) (8) (15) 7 Net Interest (Exp)/Inc (631) (679) (483) (624) (522) Exceptional Gain/(Loss) Pre-tax Profit 1,966 2,620 2,558 3,140 2,612 Tax (171) (429) (231) (540) (213) Minority Interest (17) (20) (10) (28) (10) Net Profit 1,778 2,171 2,317 2,572 2,389 Net profit bef Except. 1,778 2,171 2,317 2,572 2,389 Growth Revenue Gth (%) (6.9) (4.5) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (HK$ m) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 16,939 18,272 19,249 20,171 21,031 Invts in Associates & JVs Other LT Assets 60,010 61,794 60,727 59,666 58,618 Cash & ST Invts 3,768 2,882 3,422 3,527 3,651 Inventory Debtors 3,422 3,035 3,187 3,346 3,513 Other Current Assets 4,559 5,821 5,897 6,476 7,113 Total Assets 89,917 93,366 94,091 94,850 95,653 ST Debt 3, Creditors 2,194 2,474 2,721 2,994 3,293 Other Current Liab 8,705 8,828 8,828 8,828 8,828 LT Debt 32,436 38,193 38,193 38,193 38,193 Other LT Liabilities 4,968 4,712 5,147 5,591 6,039 Shareholder s Equity 37,616 39,096 39,101 39,106 39,123 Minority Interests Total Cap. & Liab. 89,917 93,366 94,091 94,850 95,653 Non-Cash Wkg. Capital (2,320) (1,739) (1,688) (1,144) (554) Net Cash/(Debt) (32,547) (35,311) (34,771) (34,666) (34,542) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Page 28

29 HKT Trust Cash Flow Statement (HK$ m) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 4,586 5,698 5,540 5,638 5,786 Dep. & Amort. 6,202 5,808 5,945 5,958 5,981 Tax Paid (365) (551) (620) (631) (648) Assoc. & JV Inc/(loss) (Pft)/ Loss on disposal of FAs Chg in Wkg.Cap. (624) (246) (331) (374) (420) Other Operating CF 1,545 1,530 1,118 1,146 1,146 Net Operating CF 11,369 12,262 11,674 11,760 11,868 Capital Exp.(net) (3,037) (2,835) (2,500) (2,450) (2,400) Other Invts.(net) (3,760) (4,254) (3,525) (3,539) (3,564) Invts in Assoc. & JV 0 (229) Div from Assoc & JV Other Investing CF (418) (616) Net Investing CF (7,215) (7,934) (5,575) (5,989) (5,964) Div Paid (3,713) (4,190) (4,721) (4,807) (4,921) Chg in Gross Debt (128) (208) Capital Issues 6 (53) Other Financing CF (168) (756) (838) (859) (859) Net Financing CF (4,003) (5,207) (5,559) (5,666) (5,780) Currency Adjustments 4 (7) Chg in Cash 155 (886) Opg CFPS (HK$) Free CFPS (HK$) Target Price & Ratings History HK$ & S.No. Date Closing 12-mth Rating Price Target Price 1: 11-Aug-16 HK$11.96 HK$12.90 Buy 2: 27-Oct-16 HK$10.92 HK$12.30 Buy 3: 16-Jan-17 HK$9.50 HK$13.50 Buy 4: 16-Jan-17 HK$9.50 HK$13.50 Buy 5: 25-Apr-17 HK$9.94 HK$13.50 Buy 6: 17-May-17 HK$9.90 HK$13.50 Buy 7: 10-Aug-17 HK$10.24 HK$12.80 Buy Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Source: DBS Vickers Analyst: Chris KO CFA, Page 29

30 China / Hong Kong Company Guide Hutchison Telecom Version 10 Bloomberg: 215 HK Equity Reuters: 0215.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 8 Dec 2017 HOLD Last Traded Price ( 7 Dec 2017):HK$2.89 (HSI : 28,303) Price Target 12-mth: HK$3.10 (7% upside) (Prev HK$3.30) Analyst Chris KO CFA, chriskof@dbs.com Tsz Wang TAM CFA, tszwangtam@dbs.com What s New Becoming a pure mobile operator after divesting its fixed-line assets, bearish outlook due to pricing pressure Decision on spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band will be a risk Revised down FY17-19 earnings estimates by 19%, 51% and 59% respectively after incorporating the sale of its fixed-line assets and lower mobile ARPU assumptions Maintain HOLD with a lower TP of HK$3.1 Price Relative HK$ Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Hutchison Telecom (LHS) Relative HSI (RHS) Relative Index Forecasts and Valuation FY Dec (HK$ m) 2016A 2017F 2018F 2019F Turnover 12,024 7,352 9,012 7,891 EBITDA 2,444 1,525 1,183 1,135 Pre-tax Profit 928 6, Net Profit 701 6, Net Pft (Pre Ex) (core Net Profit Gth (Pre-ex) (23.4) (21.6) (38.4) (13.3) EPS (HK$) Core EPS (HK$) EPS Gth (%) (23.4) (94.9) (13.3) Core EPS Gth (%) (23.4) (21.6) (38.4) (13.3) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) Core PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) 0.3 CASH CASH CASH ROAE (%) Earnings Rev (%): 884 (51) (59) Consensus EPS (HK$) Other Broker Recs: B: 4 S: 0 H: 4 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX At a crossroads with cash Sitting on a huge cash balance sheet. Hutchison Telecom (HT) has now become a pure mobile operator after the sale of its fixed-line assets. We are bearish on the outlook of the local mobile market due to the overcrowded market and an ongoing price war. However, supported by the cash proceeds of HK$14.5bn (or c.hk$3.2 per share) from the sale of its fixedline assets and a net cash position of c.hk$2.2 per share, we maintain our HOLD rating on Hutchison Telecom with a lower TP of HK$3.1. Where we differ: More negative on the mobile industry s ARPU. We expect the price war in the mobile market to continue due to a more crowded market. HKBN (1310.HK), as a new entrant to the market, will continue to undercut major mobile operators pricing to grab market share. Existing players are also likely to match HKBN s pricing to defend their market shares. We also expect HT s mobile ARPU to decline by 6% and 3% in FY17 and FY18 respectively. Potential catalysts: Higher spectrum utilisation fees for the reassignment of 900/1800 MHz spectrum band. We expect spectrum reassignment of 900/1800 MHz spectrum band (2G spectrum) to be a negative factor for mobile operators in the near term. Based on the current proposals to determine the new spectrum utilisation fee (SUF) for the 2G spectrum, we estimate that HT s SUF will increase by HK$113m p.a. which accounts for c.30% of its FY18 earnings. We expect the decision to be made around 1Q18 and will be negative to the share price. Valuation: Our TP of HK$3.1 is based on SOTP: (1) HK$0.9 per share for mobile business based on 5x EV/EBITDA, and (2) HK$2.2 net cash per share. Key Risks to Our View: Irrational market competition (downside risk). Hong Kong's mobile market is crowded with four major players and the entry of HKBN as the fifth player (MVNO), and is more or less saturated. Irrational pricing may lead to a price war. Privatisation (upside risk). HT has become a pure mobile operator after the sale of its fixed-line assets. In the absence of any asset injection or acquisition plans, privatisation is possible. At A Glance Issued Capital (m shrs) 4,819 Mkt. Cap (HK$m/US$m) 13,927 / 1,784 Major Shareholders CK Hutchison Holdings Ltd. (%) 66.1 Li Ka-Shing (%) 8.4 Free Float (%) m Avg. Daily Val. (US$m) 2.4 ICB Industry : Telecommunications / Mobile Telecommunications ed-th / sa- CS, DL