CSL acquisition FCF accretive: Prefer HKT among HK telcos

Transcription

1 CSL acquisition FCF accretive: Prefer HKT among HK telcos Equity Research HKT s pending acquisition of CSL signals industry consolidation The HK mobile industry stands to benefit from HKT s proposed US$2.4bn acquisition of CSL in the longer term, in our view, as it would reduce competitive intensity in Asia s highest penetrated mobile market. The deal is pending regulatory approval after receiving PCCW and HKT shareholders approval (99.98%) at the EGM on Feb 28. The acquisition could also potentially remove the overhang of the upcoming spectrum reauction, which we would see as an industry-wide positive. HKT management estimates 10%-15% opex synergy on the combined mobile business after full integration, or US$596mn-934mn in savings by our estimate, which we believe is achievable for an in-market consolidation. This amount of savings would lower CSL s implied EV/AFF to 18.2x-21.0x from 24.8x for 2015E (vs. 17.8x for HKT on the announcement date). HKT remains our preferred HK telco; raising TP to HK$8.90 HKT is our preferred HK telco on its pricing power in FTTH and fixed-line telephony. In 4Q13, HKT raised its fixed line telephony monthly rate by 64% to HK$180 for private residential units (c.46% of HK) when contracts are renewed. We estimate HKT has a 70% share in the 1.1mn private residential segment; assuming 5% churn, this implies additional revenue of HK$109mn/286mn in 2014E/15E as 24-month contracts roll over. Coupled with stable 2H13 revenue on higher broadband prices and lower CAC, we raise our 2014/15 AFF estimates by 8%/9%. Lastly, we roll forward our DCF and raise our 12-month target price by 27% to HK$8.90 (including HK$0.90 per share of synergy benefits). Our PCCW SOTP-based target price rises 13% to HK$3.60. Stay Neutral on both. Cut SmarTone and HTHK estimates; rolling forward valuations SmarTone: We cut FY14E-16E EPS by 30%-38% on continued service revenue decline and higher opex on expanded network capacity. We roll our DCF valuation forward and our 12-month target price declines 9% to HK$10.0. Maintain Neutral. HTHK: We cut 2014E/15E EPS by 37%/38% as we factor in worse-than-expected revenue pressure and higher taxes starting 2014 and introduce 2016E EPS of HK$0.17. We roll our DCF forward and our revised 12-month target price drops 10% to HK$2.60. Maintain Neutral. HONG KONG TELECOM VALUATION COMPS 12-Mo. Market Up/Down Total Name Ticker Rating Tgt Px Price Side Return PCCW 0008.HK Neutral % 2% HKT Trust 6823.HK Neutral % 14% HTHK 0215.HK Neutral % 4% SmarTone 0315.HK Neutral % 12% P/E EV/EBITDA Div Yld Name 2014E 2015E 2014E 2015E 2014E 2015E PCCW 13.0x 11.5x 5.6x 5.2x 6.0% 6.8% HKT Trust 22.7x 16.5x 8.9x 8.5x 5.9% 6.0% HTHK 15.6x 15.6x 6.4x 6.3x 4.8% 4.8% SmarTone 15.8x 16.3x 4.5x 4.5x 3.8% 3.7% ROE ROIC CROCI Name 2014E 2015E 2014E 2015E 2014E 2015E PCCW 22.1% 23.4% 18.1% 19.9% 9.7% 9.8% HKT Trust 7.7% 10.7% 39.3% 35.2% 7.4% 7.5% HTHK 7.2% 7.1% 14.6% 13.2% 7.7% 7.2% SmarTone 19.6% 17.7% 68.8% 73.6% 13.2% 11.7% Prices in HK$, as of market close of March 7, Source: Bloomberg, Goldman Sachs Global Investment Research. KEY RISKS HKT: Upside: Higher-than-expected fiber and mobile growth; Downside: Merger doesn't receive regulatory approval, regulatory pressure on fixed-line, higher-thanexpected fixed-line disconnection, high interest rate environment. PCCW: Upside: Stronger-than-expected IT solutions and pay TV business; Downside: reinvestment risk. SmarTone: Upside: Continued market share gain; Downside: Further roaming revenue decline, greater-than-expected handset subsidies. HTHK: Upside: stronger-than-expected growth in the enterprise and carrier segment; Downside: price competition in mobiles as the industry slows. Piyush Mubayi Goldman Sachs does and seeks to do business with piyush.mubayi@gs.com Goldman Sachs (Asia) L.L.C. Tina Hou tina.hou@gs.com Goldman Sachs (Asia) L.L.C. companies covered in its research reports. As a result, 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research

2 HKT s pending acquisition of CSL signals potential industry consolidation and improved market dynamics Regulatory approval last remaining obstacle for merger On Dec 20, 2013, HKT announced that it had entered an agreement with CSLNW (Telstra owns 76.4%, New World 23.6%) to acquire the entire share capital of CSLNW for US$2.425bn (HK$18.87bn). At its EGM on Feb 28, 2014, HKT received shareholders approval (99.98%) for the proposed acquisition. Completion of the acquisition remains conditional upon the approval of OFCA, Hong Kong s telecommunications regulator. The sale agreement includes a non-competition clause that requires both Telstra and New World not to engage in any direct or indirect mobile wireless core operations (including WiFi) in Hong Kong for three years from the date of the deal completion. The acquisition will be initially funded by a US$2.5bn 18-month bridge loan from Standard Chartered Bank at an interest rate comparable to HKT s current bank loan facilities, or just below 3%. Management indicated that it intends to refinance the bridge loan quickly after deal close with a combination of debt and equity. 24.8x EV/AFF for CSL drops to 18.2x-21.0x on synergy gains Management targets to reduce the operating expenses of the combined mobile businesses by 10% to 15% after full integration of the business. Synergies should come from: a) Removal of overlapping base stations. b) Replacement of backhaul transmission network lease with HKT s own infrastructure. c) Network and spectrum sharing should generate economies of scale and lower both capex and maintenance spending. d) Retail/distribution channel optimization as the rental leases expire in up to 2-3 years and related cost savings from the streamlining process. PCCW/HKT has 48 retail outlets throughout Hong Kong. Adding the 32 One2free stores and nine 1O1O stores, the combined HKT/CSL entity will have a reach of 89 stores. In comparison, HTHK has 60, CMHK 45 and SmarTone 32. e) Improved bargaining power in equipment/content procurement and administrative cost savings. Other gains could potentially accrue on the revenue side from: a) CSL s bundling of its services with those of the fixed-line carrier, a proven strategy to lower churn in other markets. b) We believe the benefits of CSL s superior brand position and a robust network more than offset the risks from bill shock. Lastly, and rather unusually, since CSL used to be a part of HKT a decade ago, we believe the risks around execution are meaningfully lower than would be otherwise. Goldman Sachs Global Investment Research 2

3 Exhibit 1: HKT/CSL combined entity would have 89 stores Hong Kong telcos retail outlets Hong Kong Kowloon New Territories Total PCCW/HKT One2free O1O HKT+CSL HTHK CMHK SmarTone Source: Company data. The deal translates to 9.2x CSL s FY13 (June year-end) EBITDA. The multiple would drop to 5.7x if we were to use HKT s handset amortization policy. In contrast, the multiple being paid for Hong Kong wireless companies (i.e. SmarTone the only publicly listed pure wireless operator in HK) is 3.6x 2014E EV/EBITDA while the Asia Pacific telecom average multiple is 6.8x. A comparison with the five M&A transactions in Hong Kong since 2000 shows that the 9.2x EV/EBITDA multiple is below the 11.6x historical average. Recent acquisitions in the EU and the US imply a lower average multiple of 6.8x. As a result of the range in multiples, we estimate AFF based multiples are a better way to look at the transaction. Based on CSL s FY13 (June YE) normalized adjusted funds flow (AFF) of HK$760mn, the proposed acquisition implies an EV/AFF of 24.8x compared to HKT s 2013 EV/AFF of 17.8x (Dec 24, 2013). Further, including synergy benefits, multiples would improve to 18.2x-21.0x from 24.8x. We believe this should be factored into valuations in cases where in-market consolidation also involves the incumbent fixed-line telco. Factoring in synergy gains from this merger would lower the EBITDA multiple for CSL from 9.2x to 8.1x-8.6x, or from 9.2x to 5.7x on HKT s handset accounting. Goldman Sachs Global Investment Research 3

4 Exhibit 2: Historical transactions in Hong Kong and recent transactions globally 9.2x implied EV/EBITDA is lower than historical average of 11.6x in Hong Kong, but higher than recent global average of 6.8x Hong Kong Transactions EV/EBITDA Announcement Date Target Target Country Acquirer (Last FY) Mar 2006 New World PCS Hong Kong Telstra Corporation 7.3x Oct 2005 China Resources Peoples Hong Kong China Mobile Hong Kong Company Telephone Company 6.4x Jun 2005 Sunday Communications Hong Kong PCCW 19.0x Jun 2002 CSL (40%) Hong Kong Telstra Corporation 6.7x Feb 2001 CSL (60%) Hong Kong Telstra Corporation 18.5x Average 11.6x Other Recent Transactions EV/EBITDA Announcement Date Target Target Country Acquirer (Last FY) Asia Jan 2013 Companhia de Macau CITIC Telecom International Holdings 8.5x Telecomunicações de Macau Europe Jul 2013 E-Plus Gruppe Germany Telefónica Deutschland Holding 6.3x Jun 2013 Telefónica Ireland Ireland Hutchison 3G Ireland 6.0x Feb 2012 Orange Austria Telecommunication Austria Hutchison 3G Austria 6.9x Dec 2011 Orange Communications Switzerland Matterhorn Mobile Holdings 6.5x US Jul 2013 Leap Wireless International US AT&T 6.7x Jan 2013 Allied Wireless US AT&T 8.0x Communications Corporation Oct 2012 MetroPCS Communications US T-Mobile USA 5.5x Average 6.8x Source: Company data. CSL s capex should level off post 4G investment CSL remains one of the few telcos in the world that has successfully positioned two brands across one network. It has outperformed the Hong Kong mobile industry over the past 30 months in terms of both mobile service revenue and EBITDA growth. We attribute CSL s success to its revitalized branding and positioning aided by its first-mover advantage, as it launched LTE services in Nov Its high-end 1010 brand and mass market one2free brand have captured different segments of the Hong Kong population. CSL has spent a cumulative HK$3.88bn on capital expenditure over the past five years (compared to SmarTone s HK$3.75bn). We estimate capex should level off from the 2012 peak of HK$930mn as we believe the company s 4G investment cycle is largely behind us. CSL s network is supported by the most spectrum holdings across multiple spectrum bands. Goldman Sachs Global Investment Research 4

5 Exhibit 3: Mobile service revenue yoy growth CSL has outperformed the HK wireless industry over the past 30 months not only in revenue growth Exhibit 4: HK wireless EBITDA yoy growth but also in EBITDA growth Mobile service revenue yoy growth Reported EBITDA yoy growth 60% HKT HTHK CSL SmarTone CSL vs. Industry 100.0% HKT HTHK CSL SmarTone CSL vs. Industry 40% 80.0% 20% 60.0% 0% 20% 40% 60% 40.0% 20.0% 0.0% 20.0% 40.0% 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 Source: Company data, Goldman Sachs Global Investment Research. Source: Company data. Exhibit 5: Mobile subscriber net adds ( 000) CSL has been the beneficiary of MNP Exhibit 6: Current spectrum allocation (MHz) CSL holds the most spectrum among HK wireless carriers Mobile subscriber net adds ('000) (50) HKT HTHK CSL SmarTone /2.6GHz 2.3GHz 1.9/2.1GHz 1800MHz 850/900MHz Source: Company data. Source: OFCA. Implication of acquisition on HKT s balance sheet Net debt/ebitda to 3.6x from 2.8x We expect consolidated net debt/ebitda for the enlarged entity to rise to 3.6x from HKT s current ratio of 2.8x as of Dec 2013, assuming HKT raises US$2.5bn debt to finance the deal and acquires CSL. Thereafter, leverage should gradually decline to 3.1x in 2015E as synergy gains filter through and combined EBITDA rises at a CAGR of 7% over E while the debt level remains stable. Debt profile On Dec 23, 2013, S&P placed HKT s BBB long-term corporate credit rating on negative credit watch following the announcement of the CSL acquisition. S&P aims to resolve the credit watch in 1Q14 by either affirming the rating or lowering the rating by no more than one notch, which would not alter interest costs meaningfully, in our view. We expect the credit rating agencies to focus on the cash flow outlook, refinancing risk were there to be a credit issue in the market in the next 18 months, and HKT s ability to cut operating costs Goldman Sachs Global Investment Research 5

6 and capex by: a) HKT providing CSL backhaul; b) cutting staff where there is an overlap; c) bundling products to lower churn; d) negotiating better with vendors; e) lowering capex; and f) potentially lower regulatory payments. It should also help that the new company would be larger/more dominant in mobiles in particular. Exhibit 7: We estimate implied net debt/ebitda for the enlarged entity will decline from 3.6x in 2013 to 3.1x in 2015E Selected consolidated financial metrics EBITDA (HK$ mn) (Dec YE) Jun E 2015E 2015E HKT 7,772 7,901 8,347 8,715 CSL (Telstra) 2,057 2,186 CSL (HKT) 3,290 3,530 3,962 4,297 HKT+CSL (Telstra) 9,829 10,087 HKT+CSL (HKT) 11,062 11,431 12,309 13,012 13,012 13,012 13,012 HKT+CSL (HKT, w/ 10% mob. synerg 11,062 11,431 12,309 13,525 13,525 13,525 13,525 HKT+CSL (HKT, w/ 20% mob.) 11,062 11,431 12,309 13,872 13,872 13,872 13,872 HKT+CSL (HKT, w/ 30% mob.) 11,062 11,431 12,309 14,302 14,302 14,302 14,302 Net debt/(cash) (HK$ mn) Jun E 2015E 2015E HKT 21,923 21,888 21,392 21,056 21,056 21,056 21,056 Acquisition 18,867 18,867 18,867 18,867 18,867 18,867 18,867 CSL (paid out Telstra) (1,296) (1,150) (941) (910) Equity raised 3,900 5,850 7,800 Current Market Cap 52,932 52,932 52,932 52,932 52,932 52,932 52,932 % dilution 7% 11% 15% HKT+CSL 40,790 40,755 40,259 39,923 36,023 34,073 32,123 AFF Jun E 2015E 2015E HKT 2,726 2,901 3,114 3,174 3,174 3,174 3,174 CSL (HKT) HKT+CSL (HKT) 3,486 3,716 4,029 4,167 4,167 4,167 4,167 Net debt/ebitda Jun E 2015E 2015E HKT 2.8x 2.8x 2.6x 2.4x CSL (Telstra) -0.6x -0.5x CSL (HKT) -0.4x -0.3x -0.2x -0.2x HKT+CSL (Telstra) 4.1x 4.0x HKT+CSL (HKT) 3.7x 3.6x 3.3x 3.1x 2.8x 2.6x 2.5x HKT+CSL (HKT, w/ 10% mob. synergy) 3.0x 2.7x 2.5x 2.4x HKT+CSL (HKT, w/ 20% mob.) 2.9x 2.6x 2.5x 2.3x HKT+CSL (HKT, w/ 30% mob.) 2.8x 2.5x 2.4x 2.2x EV/EBITDA Jun E 2015E HKT 9.4x 9.3x 8.8x 8.4x CSL (Telstra accounting) 9.2x CSL (HKT accounting) 5.7x HKT+CSL (HKT) 8.3x 8.1x 7.5x 7.1x HKT+CSL (HKT, w/ 10% mob. synergy) 6.8x HKT+CSL (HKT, w/ 20% mob.) 6.6x HKT+CSL (HKT, w/ 30% mob.) 6.4x EV/AFF Jun E 2015E HKT 26.9x 25.2x 23.5x 23.1x CSL 24.8x 23.1x 20.6x 19.0x HKT+CSL 26.4x 24.8x 22.8x 22.1x Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 6

7 Exhibit 8: HKT s debt profile in HK$ millions, Y/E DEC E 2015E Short-term loans (HKD) 31 8, Interest rate (%) 4.7% 3.9% 3.9% 3.9% 3.9% US$500 mn guaranteed notes, due , Interest rate (%) - 6.0% 6.0% 6.0% 6.0% Interest expense Long term debt US$500 mn guaranteed notes, due ,867 3,861 3,861 3,861 - Interest rate (%) % 5.25% 5.25% 5.25% 5.25% 5.25% Interest expense US$500 mn guaranteed notes, due ,979 4,016 4,016 4,016 4,016 Interest rate (%) % 4.3% 4.3% 4.3% 4.3% 4.3% Interest expense year HK$23.8 bn revolving & term facilities 11,743 7,767 12,679 12,679 21,027 Interest rate (%) - HIBOR bps 2.2% 2.2% 3.2% 4.1% 4.8% Interest expense US$500 mn guaranteed notes, due 2023 (on Mar 8, 2013) 3,466 3,466 3,466 Interest rate (%) % 3.75% 3.75% 3.75% Interest expense Total long-term bank loans US$500 guaranteed notes, due , US$500 mn guaranteed notes, due ,867 3,861 3,861 3,861 - US$500 mn guaranteed notes, due ,979 4,016 4,016 4,016 4, year HK$23.8 bn revolving & term facilities 11,743 7,767 12,679 12,679 21,027 US$500 mn guaranteed notes, due 2023 (on Mar 8, 2013) - - 3,466 3,466 3,466 Total LT bank loans 23,470 15,644 24,022 24,022 28,509 Weighted interest rate 3.6% 3.6% 3.8% 4.3% 4.6% Weighted interest expense ,023 1,211 TOTAL DEBT 23,501 24,106 24,022 24,022 28,509 Interest rate 5.4% 3.7% 3.8% 4.3% 4.6% Gross interest expense (incl int. capitalised) 1, ,023 1,211 Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 7

8 Exhibit 9: HKT P&L drivers Fixed broadband and mobile are the key drivers in HK$ mn E 2015E 2016E 1H12 2H12 1H13 2H13 1. Local telephony Lines in service (000s) 2,646 2,651 2,655 2,658 2,661 2,641 2,646 2,651 2,651 ARPU (HK$) Revenue 3,401 3,434 3,488 3,652 3,814 1,680 1,721 1,680 1,754 yoy 0% 1% 2% 5% 4% 2% -1% 0% 2% 2. Data revenue FTTH subs (000s) Broadband subs (000s) 1,567 1,567 1,569 1,572 1,574 1,540 1,567 1,567 1,567 Broadband ARPU (HK$) Revenue, data 6,055 6,460 6,729 6,959 7,150 2,875 3,180 3,140 3,320 yoy 7% 7% 4% 3% 3% 8% 5% 9% 4% 3. International revenue 5,247 6,711 7,248 7,712 8,107 2,188 3,059 3,222 3,489 yoy 25% 28% 8% 6% 5% 0% 52% 47% 14% 4. Other revenue 3,663 3,370 3,176 3,015 2,893 1,682 1,981 1,588 1,782 yoy -9% -8% -6% -5% -4% -4% -12% -6% -10% 5. Mobile revenue Subs (000s) 1,645 1,654 1,661 1,667 1,672 1,605 1,645 1,652 1,654 ARPU (HK$) yoy 19% 3% 3% 2% 2% 16% 19% 17% -4% Revenue 2,466 2,647 2,734 2,805 2,864 1,133 1,333 1,360 1,287 yoy 25% 7% 3% 3% 2% 23% 27% 20% -3% TOTAL REVENUE 21,081 22,832 23,557 24,297 24,952 9,715 11,366 11,071 11,761 yoy 6% 8% 3% 3% 3% 2% 10% 14% 3% EBITDA TSS 7,126 7,264 7,702 8,064 8,394 3,467 3,659 3,522 3,742 Mobile Total, net of other 7,669 7,901 8,347 8,715 9,049 3,736 3,933 3,839 4,062 EBITDA margin TSS 38.8% 36.4% 37.3% 37.8% 38.2% 41.2% 36.8% 36.6% 36.2% Mobile 29.8% 32.1% 32.0% 32.0% 32.0% 30.2% 29.6% 32.4% 31.9% Total 36.4% 34.6% 35.4% 35.9% 36.3% 38.5% 34.6% 34.7% 34.5% NET PROFIT 1,610 2,460 2,328 3,209 3, ,189 1,271 Net finance cost (805) (833) (911) (1,090) (871) (355) (373) (239) (450) change 699 (28) (78) (179) (18) 134 (211) CAC (amortized) (1,524) (1,408) (1,309) (1,257) (1,207) (571) (953) (651) (757) EBITDA less CAC Fixed 6,476 6,628 7,080 7,440 7,770 3,223 3,253 3,203 3,425 Mobile (70% CAC) (331) (135) (42) (58) (273) (15) (120) EBITDA less CAC 6,145 6,493 7,038 7,458 7,842 3,165 2,980 3,188 3,305 EBITDA Margin, CAC Adj 29.1% 28.4% 29.9% 30.7% 31.4% 32.6% 26.2% 28.8% 28.1% Capex + License fee (2,101) (2,175) (2,268) (2,309) (2,341) (1,017) (1,084) (1,049) (1,126) % sales 10.0% 9.5% 9.6% 9.5% 9.4% 10.5% 9.5% 9.5% 9.6% Working cap (441) (397) (355) (348) (350) (340) (101) (309) (88) % sales 2.1% 1.7% 1.5% 1.4% 1.4% 3.5% 0.9% 2.8% 0.7% Acquisition (211) (211) - - Adjusted funds flow 2,672 2,901 3,114 3,174 3,658 1,430 1,242 1,484 1,417 change (188) 242 (67) Source: Company data, Goldman Sachs Global Investment Research. Implications of spectrum re-auction: positive for FCF, dividend With its Share Purchase Agreement, conditional upon the successful completion of the CSL acquisition, HKT also proposed: (1) It would not seek to renew 2x15MHz of 3G spectrum when the HKT and CSL licenses expire in 2015, i.e. voluntarily return an additional 2x5MHz of 3G spectrum apart from the 2x10MHz OFCA is proposing to take back and put into re-auction in 2H14; and (2) It would not participate in the 3G spectrum re-auction. We believe this could remove an overhang for the Hong Kong telcos as the market has been expecting hefty auction payments in light of the recent 4G spectrum license payments Goldman Sachs Global Investment Research 8

9 in the region. Price/MHz was as high as US$55mn in Korea when KT paid this sum for 15MHz in the 1800MHz spectrum band in Auctions in Taiwan that ended in Oct 2013 saw Chunghwa paying US$29mn/MHz for 30MHz in the 1800MHz band. In comparison, OFCA s bidding price guidance range of HK$66-86mn per MHz, or US$ mn is below the US$12mn regional average and significantly lower than the high end. Exhibit 10: Recent 4G spectrum license auctions in the region OFCA s bidding price guidance range of HK$66-86mn per MHz, or US$ mn is below the US$12mn regional average and significantly lower than the high end Auction Spectrum Price Price Price/MHz Price/MHz/Pop/Yr Time Frequency Expire Result (lc mn) (US$ mn) (US$ mn) (US$) Taiwan MHz (700MHz) 2030 APT: 20MHz 6, FET: 20MHz 6, Foxconn: 20MHz 6, TWM: 30MHz 10, MHz (900MHz) 2030 Taiwan Star: 20MHz 3, CHT: 20MHz 3, Foxconn: 20MHz 2, MHz (1800MHz) 2030 TWM: 30MHz 18, CHT: 20MHz 10, FET: 20MHz 12, FET: 20MHz 11, CHT: 30MHz 25, Korea MHz (800MHz) 2021 KT: 10MHz 261, MHz (1800MHz) 2021 SKT: 20MHz 995, MHz (2100MHz) 2021 LGU+: 20MHz 445, MHz (1800MHz) 2021 SKT: 35MHz 1,050, KT: 15MHz 900, MHz (2600MHz) 2021 LGU+: 40MHz 479, Hong Kong MHz (2.5/2.6GHz) 2028 SmarTone: 20MHz CSL: 10MHz CMHK: 10MHz Genius (HTHK+HKT) : 10MHz MHz (2.3GHz) ViaNet: 30MHz CMHK: 30MHz HTHK: 30MHz Singapore MHz (1800MHz) 2030 M1: 40MHz SingTel: 60MHz StarHub: 50MHz MHz (2.5GHz) 2030 M1: 40MHz SingTel: 40MHz StarHub: 40MHz Average Source: NCC, KCC, OFCA, IDA, Bloomberg. In addition, with possibly five bidders reduced to three and the extra 2x5MHz spectrum to be given back by HKT/CSL, we expect the final bidding prices to be within the regulator s guidance. This is a positive for the telcos FCF and dividend payment, in our view. Goldman Sachs Global Investment Research 9

10 Exhibit 11: OFCA s hybrid approach to re-assignment of the spectrum in GHz band HKT/CSL proposes to return an additional 2x5MHz of spectrum to OFCA conditional on the deal HKT CSL SmarTone Hutchison 14.8 MHz 14.8 MHz 14.8 MHz 14.8 MHz S1 S2 S3 S4 S5 S6 S7 S8 S9 S10 S11 S12 Slots to be offered to existing 3G operators under the right of first refusal Slots would be made available for re-auction Slots voluntarily returned by HKT if merged with CSL. Source: OFCA, Company data. HKT/CSL implications for industry: positive for data monetization HKT s pending acquisition of CSL represents the latest step in the long-drawn industry consolidation in HK. With five major mobile service providers namely HTHK, HKT, SmarTone, CSL, and CMHK vying for 7.2 million subscribers, Hong Kong s mobile market is one of the most fragmented and competitive in the region, based on HHI (Herfindahl Hirschman Index) score for both 2013 mobile service revenue and mobile subscriber numbers. Sustained high-level competitive intensity threatens the ability of the industry to push through tiered plans, in our view. Exhibit 12: HK scores among the lowest in DM Asia HHI score based on mobile service revenue (2013) Exhibit 13: HK scores among the lowest in DM Asia HHI score based on mobile subscriber (2013) 6,000 5,000 4,000 3,000 2,000 1,000 0 HHI score based on mobile service revenue (2013) 6,000 5,000 4,000 3,000 2,000 1,000 0 HHI score based on mobile subscriber (2013) Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 10

11 Exhibit 14: Hong Kong ranks the highest Mobile penetration (2013) across Asia Exhibit 15: Growth started to decelerate in 1H12 Hong Kong mobile service revenue and yoy growth 200% 160% Mobile penetration (2013) 20% 15% Mobile service revenue yoy growth HK$ mn yoy % 12,000 10, % 10% 8,000 80% 5% 6,000 40% 0% 4,000 0% 5% 2,000 10% Source: Company data, Bloomberg, Goldman Sachs Global Investment Research. Source: Company data. If the acquisition is approved by the regulator, the number of competitors will drop from five to four, which would lead to an improvement in the HHI score for mobile subscribers from 1,946 to 2,638. Even ahead of the final regulator approval, we have already started to see telcos competing more rationally with the introduction of tiered data pricing in 2H13. This could lead to reaccelerated mobile data revenue growth on better data traffic monetization, and potentially higher margin in line with the positive trends we have observed in both Korea and Singapore in 2013, where tiered pricing was introduced in 3Q11 and 3Q12, respectively. In Korea, SKT s blended mobile ARPU growth improved to 3% in 2Q13 from -5% in 3Q11. In Singapore, M1 s mobile data ARPU growth accelerated to 28% in 4Q13 from 15% in 3Q12. Telcos are also reporting higher average smartphone monthly data usage of up to 2.5GB, and more subscribers exceeding their data limit and paying for extra usage. Exhibit 16: M1 s data ARPU growth accelerated to 28% in 4Q13 from 15% in 3Q12 M1 data ARPU yoy% Exhibit 17: SKT s blended ARPU improved from -5% in 3Q11 to 3% in 2Q13 SKT blended ARPU yoy % Source: Company data. Source: Company data Goldman Sachs Global Investment Research 11

12 HKT remains our preferred telco in Hong Kong: raising 12-month TP to HK$8.90 on fixed-line pricing power After four effective price hikes in its fixed broadband offering since 2012, HKT s residential fixed broadband revenue grew 9% yoy on 7% higher ARPU in 2013, and management expects ARPU increases to continue over the next two years as subscribers recontract or until HKT's broadband rates are on par with other international markets. In 4Q13, HKT implemented a HK$70/month hike to HK$180/month for deluxe/high-end private residential units, a significant 64% increase in its fixed-line telephony monthly charge for private residential units when contracts are renewed. Mass market pricing remains unchanged at HK$110. We estimate HKT has a 70% market share in the 1.1 mn private residential segment in HK. Factoring in a 5% disconnection rate on the price hike, we estimate HKT s revenue could rise by HK$109mn/286mn in 2014E/15E, as 24-month contracts roll over. As of 1H13, HKT had about 7% mobile revenue market share, the second smallest after China Mobile Hong Kong among the five major operators. After the acquisition of CSL, the combined market share would rise to about 29%, bringing it almost on par with SmarTone (33%) and HTHK (32%). We estimate 10%-15% opex synergy from the acquisition and the deal to be AFF accretive, translating to US$596mn-934mn synergy gains. We are not consolidating the financials of HKT and CSL until the merger receives regulatory approval. Off a low base, HKT has been able to grow its mobile ARPU for the past two years, with only CSL surpassing that pace of growth in 2H13. HKT s ARPU has exceeded HTHK and has caught up to CSL, reinforcing our confidence in continued growth and outperformance. The mobile segment also turned profitable in 2013 as customer acquisition cost (CAC) declined to 5.8% of revenue in 2013 from 7% in 2012 on lower handset subsidy. Exhibit 18: Blended mobile ARPU (HK$) Exhibit 19: Blended mobile ARPU yoy % 350 Blended Mobile ARPU HKT HTHK CSL SmarTone 30% Blended Mobile ARPU yoy % HKT H3 CSL SmarTone % % 0% 10% 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H % 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 30% Source: Company data. Source: Company data. Scenario analysis We present our target price progression and theoretical value for HKT s shares post the CSL acquisition. Our theoretical values are based on the assumption that after the deal closes, the company conducts a US$750mn rights issue at a 10% discount to current market price. Goldman Sachs Global Investment Research 12

13 Exhibit 20: The deal could potentially deliver US$596mn-934mn synergy gains 12-month target price and theoretical value progression Previous DCF Fixed-line CSL Equity Post Target Price Roll Over Price Hike Acquisition Raised Synergy Enterprise value 66,194 68,870 72,078 91,578 91,578 98,864 Net debt 21,225 20,750 20,750 40,250 34,400 34,400 Equity value 44,969 48,120 51,328 51,328 57,178 64,463 Equity raised discount to spot price 10% # of new shares # of shares 6,416 6,416 6,416 6,416 7,204 7,204 Theoretical value (HK$) vs. previous TP 7.1% 14.3% 0.0% -0.8% 11.3% EV change (HK$ mn) 2,676 3,208 19,500-7,285 EV change (US$ mn) , Priced as of market close on March 7, Figures in HK$ mn, unless otherwise stated (theoretical value/tp is per share). Source: Goldman Sachs Global Investment Research. Based on our sensitivity analysis of synergy gains, rights issue pricing discount, and amount of equity raised, the theoretical value could range between HK$7.94 and HK$9.45. Exhibit 21: Theoretical value range of HK$7.94-HK$9.45 Sensitivity analysis to synergy gains Sensitivity to synergy gains Enterprise value 98,864 98,864 98,864 98,864 Net debt 34,400 34,400 34,400 34,400 Equity value 57,178 57,178 57,178 57,178 Synergy gain (US$ mn) ,401 Synergy gain (HK$ mn) 0 3,643 7,285 10,928 EV + synergy gain 57,178 60,821 64,463 68,106 # of shares 7,204 7,204 7,204 7,204 Theoretical value Figures in HK$ mn, unless otherwise stated (theoretical value is per share). Source: Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 13

14 Exhibit 22: Theoretical value range of HK$8.89-HK$9.05 Sensitivity analysis to discount to current share price Sensitivity to discount to current share price Enterprise value 98,864 98,864 98,864 98,864 Net debt 34,400 34,400 34,400 34,400 Equity value 64,463 64,463 64,463 64,463 Spot price Discount to current share price 0% 5% 10% 15% Issue price # of shares 7,125 7,162 7,204 7,250 Theoretical value Priced as of market close on March 7, Figures in HK$ mn, unless otherwise stated (theoretical value is per share). Source: Goldman Sachs Global Investment Research. Exhibit 23: Theoretical value range of HK$8.89-HK$9.07 Sensitivity analysis to equity raised Sensitivity to equity raised Enterprise value 98,864 98,864 98,864 98,864 Net debt 38,300 36,350 34,400 32,450 Equity value 60,563 62,513 64,463 66,413 Equity raised (US$ mn) ,000 Equity raised (HK$ mn) 1,950 3,900 5,850 7,800 # of shares 6,679 6,941 7,204 7,467 Theoretical value Figures in HK$ mn, unless otherwise stated (theoretical value is per share). Source: Goldman Sachs Global Investment Research. Valuation HKT: We raise our 2014E/15E AFF estimates by 8%/9% to factor in the fixed-line price hike and lower CAC, roll forward DCF by one year and raise our 12-month target price to HK$8.90 (including HK$0.90 per share of synergy benefits) from HK$7.00. Our rating remains Neutral. Key risks: Upside: Higher-than-expected fiber and mobile growth; Downside: Merger doesn't receive regulatory approval, regulatory pressure on fixed-line, higher-than-expected fixed-line disconnection, high interest rate environment. PCCW: After incorporating our new HKT assumptions, EPS estimates change by -4%/+4% in 2014E/15E and PCCW s 12-month SOTP-based target price rises by 13% to HK$3.60, with an unchanged 45% holding company discount. We stay Neutral. Key risks: Upside: Stronger-than-expected IT solutions and pay TV business; Downside: reinvestment risk. Goldman Sachs Global Investment Research 14

15 Exhibit 24: PCCW SOTP valuation (HK$ mn, except per share figures) Owned Holdco EBITDA Value PCCW (%) discount (x) (HK$m) to PCCW HK$/sh HKT 63.0% 57,102 35, Rights issue (3,686) PCCW Group, ex HKT, ex PCPD IT 8.0 5,412 5, Media 8.0 4,472 4, Other/cash 2, PCCW group (ex HKT, ex PCPD) 12, PCPD 74.5% 2,405 1, NAV 46, Less discount to NAV 45% (21,123) (2.91) NAV, less holdco 25, Source: Bloomberg, Company data, Goldman Sachs Global Investment Research. HK wireless growth rates slowing Both SmarTone and HTHK reported 2H13 earnings that were weaker than we estimated due to three factors: 1) Subs are switching from subsidized handset plans to SIM-only plans. Due to the absence of killer handsets in a market with high smartphone penetration, business models that center on the sale of star handsets are under duress. 2) High margin roaming revenue remains under pressure. In SmarTone s case, we estimate roaming revenue declined 19% yoy as it dropped from 18% of service revenue in 2H12 to 15% in 2H13. 3) Margins under pressure due to higher depreciation for 4G network. EBIT margin on service revenue for SmarTone dropped 600bps yoy and 320bps hoh to 15.5% in 2H13. SmarTone: Cutting target price by 9% to HK$10.0 Valuation: We cut FY14E-16E EPS estimates by 30%-38% on continued service revenue decline and higher opex and depreciation as a result of expanded network capacity and traffic. We roll forward our DCF valuation by one year and our 12-month target price declines to HK$10.0 from HK$11.0. Maintain Neutral. Key risks: Upside: Continued market share gain; Downside: Further roaming revenue decline, greater-than-expected handset subsidies. HTHK: Target lowered by 10% to HK$2.60 We cut our 2014E/15E EPS by 37%/38% as we factor in worse-than-expected revenue pressure and mobile tax payment starting We introduce 2016E EPS of HK$0.17. We roll forward DCF by one year and our 12-month DCF-based target price declines by 10% to HK$2.60. Maintain Neutral. Key risks: Upside stronger-than-expected growth in the enterprise and carrier segment; Downside price competition in mobiles as the industry slows. Goldman Sachs Global Investment Research 15

16 Exhibit 25: HKT/CSL pro-forma income statement (HK$ millions) Income statement E 2015E 2016E Service revenue 24,325 26,799 28,270 29,566 30,651 yoy % 10.2% 5.5% 4.6% 3.7% Handset sales 3,870 4,295 4,561 4,789 4,978 yoy % 11.0% 6.2% 5.0% 3.9% Total sales/revenues 28,195 31,095 32,831 34,356 35,629 yoy % 10.3% 5.6% 4.6% 3.7% COGS (11,036) (12,376) (12,637) (13,163) (13,569) Total COGS (11,036) (12,376) (12,637) (13,163) (13,569) Gross profit 17,160 18,719 20,193 21,192 22,060 yoy % 9.1% 7.9% 4.9% 4.1% Gross Margin 60.9% 60.2% 61.5% 61.7% 61.9% SG&A (6,561) (7,288) (7,884) (7,667) (7,964) Total operating expense (6,561) (7,288) (7,884) (7,667) (7,964) EBITDA 10,599 11,431 12,309 13,525 14,096 yoy % 7.8% 7.7% 9.9% 4.2% Depreciation (2,720) (2,628) (2,693) (2,763) (2,821) Amortization (3,689) (4,308) (4,478) (3,731) (3,799) EBIT (operating profit) 4,191 4,495 5,139 7,030 7,476 yoy % 7.3% 14.3% 36.8% 6.3% Interest income Interest expense (949) (983) (1,057) (1,230) (1,084) Net interest income/expense (916) (941) (1,020) (1,200) (981) Profit/loss on disposal of assets (pre-tax) Share of results in jointly controlled entities (79) Other non-operating income/expense Non-operating income/(loss) (977) (794) (1,020) (1,200) (981) Pre-tax profit 3,215 3,701 4,119 5,831 6,495 yoy % 15.1% 11.3% 41.5% 11.4% Income taxes (647) (219) (687) (886) (1,000) Minority interest (61) (56) (56) (71) (81) Net income to shareholders 2,507 3,426 3,376 4,873 5,414 yoy % 36.7% (1.5%) 44.3% 11.1% Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 16

17 Exhibit 26: HKT/CSL pro-forma balance sheet (HK$ millions) Balance sheet E 2015E 2016E Cash and equivalents 3,837 3,284 2,687 7,480 2,890 Net receivables 3,804 3,455 3,865 4,256 4,640 Inventory/stocks 1,062 1,095 1,105 1,112 1,118 Other current assets 3,749 4,423 4,423 4,423 4,423 Current assets 12,451 12,258 12,080 17,271 13,071 Gross PP&E/Fixed assets 47,599 50,655 53,747 56,860 59,942 Less accumulated depreciation (30,656) (33,446) (36,110) (38,830) (41,593) Net PP&E/Fixed assets 16,943 17,209 17,638 18,029 18,349 Gross intangibles 52,829 53,780 53,664 54,371 55,057 Accumulated amortization (7,202) (9,503) (12,554) (15,736) (19,015) Net intangibles 45,628 44,277 41,109 38,634 36,042 Total investments 1,163 2,371 4,258 6,298 9,958 Other long-term assets Total assets 76,832 76,798 75,768 80,916 78,104 Accounts payable 2,779 2,762 2,880 2,971 3,042 Short-term debt and current portion of long-term debt 8, Other current liabilities 7,740 7,639 7,771 7,905 8,024 Current liabilities 18,981 10,401 10,650 10,875 11,066 Long-term debt 15,644 24,022 23,139 27,626 23,610 Deferred Tax Liabilities 1,831 1,811 1,888 1,995 2,118 Other long-term liabilities/creditors 2,972 3,190 3,190 3,190 3,190 Total long-term liabilities 20,447 29,023 28,217 32,811 28,918 Total liabilities 39,428 39,424 38,867 43,686 39,984 Common stock (includes par value, capital surplus, and treasury) 31,196 35,818 35,818 35,818 35,818 Retained earnings 6,005 1, ,065 1,875 Total common equity 37,201 37,154 36,626 36,883 37,693 Minority interest (balance sheet) Total shareholders funds/equity 37,405 37,374 36,901 37,230 38,120 Total liabilities and equity 76,832 76,798 75,768 80,916 78,104 Source: Company data, Goldman Sachs Global Investment Research. Exhibit 27: HKT/CSL pro-forma cash flow (HK$ millions) Cash flow statement E 2015E 2016E Pre Tax Income (ex Minority, preferred shares) 3,154 3,645 4,064 5,759 6,414 Income pre-preferred share dividends 3,154 3,645 4,064 5,759 6,414 Minority interest add-back Depreciation and amortization add-back 6,408 6,936 7,170 6,495 6,620 Customer Acquisition Costs - Cash Spent (1,490) (1,408) (1,309) (1,257) (1,207) Net income from associates and jointly controlled entities 79 (50) Cash Taxes Paid (203) (331) (390) (538) (621) (Increase)/decrease in working capital (237) (298) (303) (307) (318) Other operating cash flow items 2, ,188 1,364 1,203 Cash flow from operations 10,101 8,795 10,142 10,720 11,315 Capital expenditure (2,643) (2,956) (3,077) (3,103) (3,089) Investments (1,790) (1,999) (1,887) (2,039) (3,661) Other investment cash flow items (2,276) (43) (44) (52) (51) Cash flow from investing (6,709) (4,997) (5,008) (5,195) (6,801) Dividends paid (common and preferred) (1,901) (3,476) (3,905) (4,103) (4,118) Share repurchase/issue (change In common stock) (39) Increase/(decrease) in short-term debt 3,617 (8,462) Increase/(decrease) in long-term debt (3,992) 8,378 (883) 4,487 (4,016) Change in minority interest (41) Other financing cash flow items (714) (983) (1,057) (1,230) (1,084) Cash flow from financing (3,070) (4,429) (5,731) (732) (9,104) Total cash flow 322 (632) (597) 4,793 (4,589) Source: Company data, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 17

18 HKT Trust: Summary financials Profit model (HK$ mn) 12/13 12/14E 12/15E 12/16E Balance sheet (HK$ mn) 12/13 12/14E 12/15E 12/16E Total revenue 22, , , ,952.4 Cash & equivalents 2, , , ,801.1 Cost of goods sold (10,117.0) (10,102.6) (10,413.7) (10,650.8) Accounts receivable 3, , , ,052.4 SG&A (4,814.0) (5,107.4) (5,168.0) (5,252.7) Inventory 1, , , ,018.0 R&D Other current assets 3, , , ,319.0 Other operating profit/(expense) Total current assets 9, , , ,190.5 EBITDA 7, , , ,048.9 Net PP&E 14, , , ,629.4 Depreciation & amortization (4,700.0) (4,604.9) (3,721.2) (3,666.8) Net intangibles 39, , , ,966.3 EBIT 3, , , ,382.1 Total investments 1, , , ,957.0 Interest income Other long-term assets Interest expense (869.0) (942.7) (1,116.1) (970.0) Total assets 65, , , ,299.2 Income/(loss) from uncons. subs Others Accounts payable 1, , , ,803.0 Pretax profits 2, , , ,510.6 Short-term debt Income tax (16.0) (467.2) (644.2) (744.3) Other current liabilities 5, , , ,738.6 Minorities (39.0) (36.9) (50.9) (58.8) Total current liabilities 7, , , ,541.6 Long-term debt 24, , , ,610.0 Net income pre-preferred dividends 2, , , ,707.6 Other long-term liabilities 3, , , ,141.7 Preferred dividends Total long-term liabilities 27, , , ,751.7 Net income (pre-exceptionals) 2, , , ,707.6 Total liabilities 35, , , ,293.3 Post-tax exceptionals Net income 2, , , ,707.6 Preferred shares Total common equity 30, , , ,677.4 EPS (basic, pre-except) (HK$) Minority interest EPS (basic, post-except) (HK$) EPS (diluted, post-except) (HK$) Total liabilities & equity 65, , , ,299.2 DPS (HK$) Dividend payout ratio (%) BVPS (HK$) Free cash flow yield (%) Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth 52.8 (5.4) ROACE (%) EPS growth 52.8 (5.4) Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) Interest cover - EBIT (X) Cash flow statement (HK$ mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 2, , , ,707.6 D&A add-back 4, , , ,666.8 P/E (analyst) (X) Minorities interests add-back P/B (X) Net (inc)/dec working capital (382.1) (354.8) (347.7) (349.9) EV/EBITDA (X) Other operating cash flow (1,457.0) (158.0) EV/GCI (X) Cash flow from operations 5, , , ,088.2 Dividend yield (%) Capital expenditures (1,980.0) (2,073.0) (2,113.8) (2,145.9) Acquisitions Divestitures Others (42.6) (44.3) (52.4) (1,551.1) Cash flow from investments (2,022.6) (2,117.3) (2,166.3) (3,697.0) Dividends paid (common & pref) (2,731.0) (2,901.0) (3,114.3) (3,174.4) Inc/(dec) in debt (84.0) (883.0) 4,487.0 (4,016.0) Common stock issuance (repurchase) Other financing cash flows (789.3) (942.7) (1,116.1) (970.0) Cash flow from financing (3,604.3) (4,726.7) (8,160.4) Total cash flow (267.0) (387.5) 4,823.7 (4,769.2) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 18

19 PCCW Limited: Summary financials Profit model (HK$ mn) 12/13 12/14E 12/15E 12/16E Balance sheet (HK$ mn) 12/13 12/14E 12/15E 12/16E Total revenue 27, , , ,248.9 Cash & equivalents 5, , , ,294.4 Cost of goods sold (13,111.0) (13,764.9) (14,402.9) (14,998.1) Accounts receivable 3, , , ,988.3 SG&A (2,735.0) (2,686.0) (2,788.9) (2,593.3) Inventory 1, , , ,365.9 R&D Other current assets 7, , , ,370.0 Other operating profit/(expense) (3,438.0) (3,376.4) (3,505.7) (3,259.8) Total current assets 17, , , ,018.5 EBITDA 8, , , ,397.6 Net PP&E 24, , , ,683.3 Depreciation & amortization (4,571.0) (4,244.5) (4,100.4) (4,259.8) Net intangibles 7, , , ,758.0 EBIT 3, , , ,137.9 Total investments 1, , , ,244.0 Interest income Other long-term assets 3, , , ,446.0 Interest expense (1,111.0) (1,138.1) (1,021.8) (945.3) Total assets 53, , , ,149.8 Income/(loss) from uncons. subs Others Accounts payable 2, , , ,412.8 Pretax profits 3, , , ,244.6 Short-term debt Income tax (210.0) (588.4) (705.8) (865.4) Other current liabilities 8, , , ,901.7 Minorities (1,170.0) (880.8) (1,206.9) (1,391.4) Total current liabilities 10, , , ,315.5 Long-term debt 29, , , ,694.0 Net income pre-preferred dividends 1, , , ,987.8 Other long-term liabilities 5, , , ,572.0 Preferred dividends Total long-term liabilities 34, , , ,266.0 Net income (pre-exceptionals) 1, , , ,987.8 Total liabilities 45, , , ,581.5 Post-tax exceptionals Net income 1, , , ,987.8 Preferred shares Total common equity 9, , , ,428.1 EPS (basic, pre-except) (HK$) Minority interest (554.0) (268.2) ,140.2 EPS (basic, post-except) (HK$) EPS (diluted, post-except) (HK$) Total liabilities & equity 53, , , ,149.8 DPS (HK$) Dividend payout ratio (%) BVPS (HK$) Free cash flow yield (%) Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) Interest cover - EBIT (X) Cash flow statement (HK$ mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 1, , , ,987.8 D&A add-back 4, , , ,259.8 P/E (analyst) (X) Minorities interests add-back 1, , ,391.4 P/B (X) Net (inc)/dec working capital (126.0) (121.7) (111.7) EV/EBITDA (X) Other operating cash flow 1, , ,220.0 EV/GCI (X) Cash flow from operations 9, , , ,747.3 Dividend yield (%) Capital expenditures (2,607.0) (2,708.9) (2,824.6) (2,928.7) Acquisitions (977.5) (958.7) (939.0) (915.6) Divestitures Others (36.6) (31.7) (36.9) (33.8) Cash flow from investments (3,621.1) (3,699.3) (3,800.5) (3,878.1) Dividends paid (common & pref) (1,445.0) (1,518.7) (1,697.4) (1,992.5) Inc/(dec) in debt 2,609.0 (1,532.0) (3,848.0) 0.0 Common stock issuance (repurchase) Other financing cash flows (1,706.0) (1,733.1) (1,616.8) (1,540.3) Cash flow from financing (542.0) (4,783.8) (7,162.2) (3,532.8) Total cash flow 5,460.9 (460.0) (2,090.9) 2,336.3 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 19

20 Hutchison Telecommunications Hong Kong Holdings: Summary fin Profit model (HK$ mn) 12/13 12/14E 12/15E 12/16E Balance sheet (HK$ mn) 12/13 12/14E 12/15E 12/16E Total revenue 12, , , ,978.2 Cash & equivalents , Cost of goods sold (3,943.0) (3,943.0) (3,943.0) (3,943.0) Accounts receivable 1, , , ,910.6 SG&A (783.0) (815.5) (845.0) (868.9) Inventory R&D Other current assets Other operating profit/(expense) (5,377.0) (5,358.4) (5,403.9) (5,470.7) Total current assets 2, , , ,159.7 EBITDA 2, , , ,695.7 Net PP&E 10, , , ,187.7 Depreciation & amortization (1,335.0) (1,361.2) (1,383.6) (1,406.3) Net intangibles 6, , , ,153.0 EBIT 1, , , ,289.3 Total investments ,215.0 Interest income Other long-term assets 1, , , ,479.0 Interest expense (181.0) (199.0) (199.0) (199.0) Total assets 21, , , ,194.4 Income/(loss) from uncons. subs Others (12.0) Accounts payable 3, , , ,051.8 Pretax profits 1, , , ,216.2 Short-term debt Income tax (77.0) (132.4) (172.1) (200.7) Other current liabilities Minorities (174.0) (164.5) (171.1) (181.3) Total current liabilities 3, , , ,065.8 Long-term debt 4, , , ,571.0 Net income pre-preferred dividends Other long-term liabilities 1, , , ,103.0 Preferred dividends Total long-term liabilities 5, , , ,674.0 Net income (pre-exceptionals) Total liabilities 9, , , ,739.8 Post-tax exceptionals Net income Preferred shares Total common equity 11, , , ,642.7 EPS (basic, pre-except) (HK$) Minority interest EPS (basic, post-except) (HK$) EPS (diluted, post-except) (HK$) Total liabilities & equity 21, , , ,194.4 DPS (HK$) Dividend payout ratio (%) BVPS (HK$) Free cash flow yield (%) Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth (17.8) (0.2) CROCI (%) EBITDA growth (11.1) (1.3) ROE (%) EBIT growth (22.4) (4.6) (0.4) 1.2 ROA (%) Net income growth (24.6) (12.0) (0.2) 3.7 ROACE (%) EPS growth (24.6) (12.0) (0.2) 3.7 Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) Interest cover - EBIT (X) Cash flow statement (HK$ mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends D&A add-back 1, , , ,406.3 P/E (analyst) (X) Minorities interests add-back P/B (X) Net (inc)/dec working capital (691.0) EV/EBITDA (X) Other operating cash flow EV/GCI (X) Cash flow from operations 1, , , ,436.8 Dividend yield (%) Capital expenditures (1,234.0) (1,289.5) (1,312.8) (1,339.5) Acquisitions (343.0) Divestitures Others (1,500.0) Cash flow from investments (1,571.0) (1,289.5) (1,312.8) (2,839.5) Dividends paid (common & pref) (929.0) (627.3) (603.9) (611.9) Inc/(dec) in debt Common stock issuance (repurchase) Other financing cash flows (8.0) Cash flow from financing (137.0) (627.3) (603.9) (611.9) Total cash flow (1,014.7) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research 20