Oct stats - bigger pie for all

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1 Deutsche Bank Markets Research Asia Hong Kong Industry Chinese teleco sector Date 20 Noveber 2017 Industry Update Oct stats - bigger pie for all CT the strongest gainer in Oct, likely aided by the prootion of large data plans The igration towards large data packs has been beneficial to the telcos so far with obile net adds rising and industry revenue growth picking up to ~7% in 3Q17. The trend continued in October with the three operators adding 9.8 new obile subscribers vs. a onthly average of 7.5 in FY17 YTD. CT saw the strongest gains in October (and in Septeber) with 4.2 net adds which is likely the result of its prootion of the unliited local data plans which typically sell for RMB100/th. Risk that CM ay retaliate, though there are soe offsets CM has been losing arket share in the obile segent this year, as it has not aggressively followed the push towards unliited data plans. While we think CM could tolerate soe arket share loss to CU, should CT also continue to gain share at the current rate, there is a risk of CM retaliating. At this stage, we see soe offsets to the above risk including: 1) CM is still growing in obile (4% YoY run-rate) and growing above the arket overall, 2) CM appears to want to protect the value of its existing custoer base, and 3) it ay still be holding on to its core high-value custoers as the other two operators are ainly targeting second sis. No let-up in fixed broadband copetition There still does not see to be any lessening in broadband copetition with CM adding another 3.6 subscribers in October (vs. onthly average of 2.9 YTD), while CU s subscriber base was broadly flat onth-on-onth. CT is holding its ground in fixed broadband with 0.8 net adds. Figure 1: Overall arket growth boosted by large data plans May-16 Jun-16 Jul-16 Aug-16 Oct-16 Net adds picked up post video data si launch Nov-16 Dec-16 Jan-17 Feb-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Oct-17 Figure 2: CT aggressively pushing unliited data plans Jaes Wang Research Analyst (+852 ) jaes-z.wang@db.co Peter Milliken, CFA Research Analyst (+852 ) peter.illiken@db.co Top picks China Teleco Corp (0728.HK),HKD3.85 China Unico (0762.HK),HKD11.66 China Mobile (0941.HK),HKD78.15 Source: Deutsche Bank Copanies Featured China Teleco Corp (0728.HK),HKD A 2017E 2018E P/E (x) EV/EBITDA (x) Price/book (x) China Unico (0762.HK),HKD A 2017E 2018E P/E (x) EV/EBITDA (x) Price/book (x) China Mobile (0941.HK),HKD A 2017E 2018E P/E (x) EV/EBITDA (x) Price/book (x) Source: Deutsche Bank China Mobile China Teleco China Unico Valuation and risks We base our sector valuation on a DCF approach, which we apply due to the relatively predictable cash flow profiles of Chinese telcos. We use a 7.5% WACC for China teleco and China Mobile and an 8.4% WACC for China Unico. We use 0-0.5% perpetual growth rates to reflect anticipated arket share gains. Upside risk: cost cuts. Downside risk: lower ARPU due to copetition. Please see page 4 for ore details on valuation and risks. Deutsche Bank AG/Hong Kong Distributed on: 20/11/ :06:27 GMT Deutsche Bank does and seeks to do business with copanies covered in its research reports. Thus, investors should be aware that the fir ay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in aking their investent decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/ bed7b6cf11c

2 20 Noveber 2017 Key charts Figure 3: Mobile net adds Figure 4: 4G net adds Oct Feb-17 Jan-17 Dec-16 Nov May-17 Apr Aug-17 Jul-17 Jun Oct Dec/ Jan/ Feb/ Mar/ Apr/ Aug/17 Jul/17 Jun/17 May/ Oct/17 Sep/17 China Mobile China Teleco China Unico CM CT CU Source: Deutsche Bank, MIIT Figure 5: 4G penetration by telcos Figure 6: China Mobile obile net adds 80% 70% 60% 50% 40% 30% 20% 10% 0% Aug/16 Sep/16 Sep/17 Aug/17 Jul/17 Jun/17 May/17 Apr/17 Mar/17 Feb/17 Jan/17 Dec/16 Nov/16 Oct/16 CM CU CT Oct/ , 3th oving average shown Figure 7: China Teleco obile net adds Figure 8: China Unico obile net adds , 3th oving average shown, 3th oving average shown Page 2 Deutsche Bank AG/Hong Kong

3 20 Noveber 2017 Figure 9: CT onthly fixed line voice net adds Fixed line net adds (3 vg avg) 0% -1% -2% -3% -4% -5% -6% -7% -8% -9% Fixed voice LIS growth (YoY, RHS) Figure 10: CU onthly fixed line voice net adds Fixed voice net adds 3M MA (LHS) YoY growth (RHS) 0% -2% -4% -6% -8% -10% -12% Figure 11: China Unico onthly fixed line bb net adds Broadband net adds (3th oving avg) Broadband sub growth (YoY, RHS) 8% 7% 6% 5% 4% 3% 2% 1% 0% Figure 12: China Teleco onthly fixed line bb net adds Broadband net adds (3th oving avg, LHS) Growth (YoY, RHS) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Figure 13: Mobile subscriber arket share Figure 14: Fixed line broadband subs arket share 80% 70% 60% 50% 40% 30% 20% 10% 0% Jun/09 Jun/10 Jun/11 Jun/12 Jun/13 Jun/14 Jun/15 Jun/16 Jun/17 China Mobile China Unico China Teleco China Mobile 35% China Unico 25% China Teleco 40% Deutsche Bank AG/Hong Kong Page 3

4 20 Noveber 2017 Valuation and risks China Teleco We derive our target price based on a DCF analysis using a 7.5% WACC (using an 8.0% cost of equity for the copany with a beta of 0.9) and a 1% perpetual growth rate to reflect arket share gains. We assign a 0.5% terinal growth rate to CT and CU as we expect a long-ter arket share loss fro CM to the two saller players CT and CU, which are cooperating to increase 4G network coverage and iprove cost efficiencies. Our cost of debt assuption and target debt/equity ratio are 4.3% and 10/90, respectively. Downside risks include: higher spending on subsidies and arketing, ore intense price copetition, deteriorating ARPU, higher capital expenditures than expected, slower obile net adds and negative policy easures. An additional copany-specific risk relates to a significant pick-up in fixed broadband copetition. China Unico We value China Unico based on a DCF odel, assuing an 8.4% WACC (a risk-free rate of 3%, risk preiu of 5.5% and beta of 1.1x) and a 0.5% perpetual growth rate to reflect arket share gains. Key downside risks include: worse-than-expected obile net adds or ARPU recovery, and negative regulatory policies. Additionally, downside risks relate to ixed ownership being less favorable than expected. China Mobile We derive our DCF-based target price using a 7.5% WACC (a risk-free rate of 3.0%, risk preiu of 5.0% and beta of 0.9) and a 0% perpetual growth rate. We assign a 0% terinal growth rate to the copany to reflect longer-ter arket share losses. We also apply a 40% discount to its cash to reflect a cobination of potential long-ter earnings pain fro a new entrant, and the fir's reluctance to invest or return that cash. Downside risks include: ore intensive price copetition, deteriorating ARPU and declining argins, higher spending on subsidies and sales and arketing, negative policies and regulatory easures, as well as asyetric regulation. Page 4 Deutsche Bank AG/Hong Kong

5 20 Noveber 2017 Appendix 1 Iportant Disclosures *Other inforation available upon request Disclosure checklist Copany Ticker Recent price* Disclosure China Teleco Corp 0728.HK 3.85 (HKD) 17 Nov China Unico 0762.HK (HKD) 17 Nov China Mobile 0941.HK (HKD) 17 Nov 17 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced fro local exchanges via Reuters, Blooberg and other vendors. Other inforation is sourced fro Deutsche Bank, subject copanies, and other sources. For disclosures pertaining to recoendations or estiates ade on securities other than the priary subject of this research, please see the ost recently published copany report or visit our global disclosure look-up page on our website at Aside fro within this report, iportant conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this inforation before investing. Iportant Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Iportant Disclosures Required by US Regulators and the Explanatory Notes. 13. As of the end of the preceding week, Deutsche Bank and/or its affiliate(s) owns one percent or ore of a class of coon equity securities of this copany. For disclosures pertaining to recoendations or estiates ade on securities other than the priary subject of this research, please see the ost recently published copany report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any copensation for providing a specific recoendation or view in this report. Jaes Wang Deutsche Bank AG/Hong Kong Page 5

6 Security Price Security Price 20 Noveber 2017 Historical recoendations and target price: China Teleco Corp (0728.HK) (as of 11/17/2017) Previous Recoendations Strong Market Perfor Underperfor Not Rated Suspended Rating Current Recoendations Hold Sell Not Rated Suspended Rating Nov 15 Feb 16 May 16 Aug 16 Nov 16 Date Feb 17 May 17 Aug 17 *New Recoendation Structure as of Septeber 9,2002 **Analyst is no longer at Deutsche Bank 1. 21/03/2017:, Target Price Change HKD5.20 Peter Milliken 3. 14/09/2017:, Target Price Change HKD5.40 Jaes-z Wang 2. 23/08/2017:, Target Price Change HKD5.30 Jaes-z Wang Historical recoendations and target price: China Unico (0762.HK) (as of 11/17/2017) Previous Recoendations Strong Market Perfor Underperfor Not Rated Suspended Rating 8.00 Current Recoendations Hold Sell Not Rated Suspended Rating Nov 15 Feb 16 May 16 Aug 16 Nov 16 Date Feb 17 May 17 Aug 17 *New Recoendation Structure as of Septeber 9,2002 **Analyst is no longer at Deutsche Bank 1. 29/03/2016: Upgrade to, Target Price Change HKD11.75 Peter Milliken 6. 09/04/2017:, Target Price Change HKD13.00 Jaes-z Wang 2. 18/04/2016:, Target Price Change HKD11.00 Peter Milliken 7. 23/04/2017:, Target Price Change HKD12.80 Jaes-z Wang 3. 24/10/2016: Downgrade to Hold, Target Price Change HKD10.50 Peter Milliken 8. 16/08/2017:, Target Price Change HKD13.50 Jaes-z Wang 4. 26/01/2017: Hold, Target Price Change HKD10.00 Peter Milliken 9. 14/09/2017:, Target Price Change HKD14.80 Jaes-z Wang 5. 15/03/2017: Upgrade to, Target Price Change HKD12.00 Peter Milliken Page 6 Deutsche Bank AG/Hong Kong

7 Security Price 20 Noveber 2017 Historical recoendations and target price: China Mobile (0941.HK) (as of 11/17/2017) Previous Recoendations Strong Market Perfor Underperfor Not Rated Suspended Rating Nov 15 Feb 16 May 16 Aug 16 Nov 16 Date Feb 17 May 17 Aug 17 Current Recoendations Hold Sell Not Rated Suspended Rating *New Recoendation Structure as of Septeber 9,2002 **Analyst is no longer at Deutsche Bank 1. 18/01/2016: Upgrade to, HKD Peter Milliken 5. 13/11/2016: Upgrade to, Target Price Change HKD Peter Milliken 2. 17/03/2016:, Target Price Change HKD Peter Milliken 6. 10/08/2017:, Target Price Change HKD Jaes-z Wang 3. 07/06/2016: Downgrade to Hold, Target Price Change HKD Peter Milliken 4. 20/10/2016: Hold, Target Price Change HKD Peter Milliken 7. 14/09/2017:, Target Price Change HKD Jaes-z Wang Equity rating key : Based on a current 12- onth view of total share-holder return (TSR = percentage change in share price fro current price to projected target price plus pro-jected dividend yield ), we recoend that investors buy the stock. Sell: Based on a current 12-onth view of total shareholder return, we recoend that investors sell the stock Hold: We take a neutral view on the stock 12-onths out and, based on this tie horizon, do not recoend either a or Sell. Newly issued research recoendations and target prices supersede previously published research. Equity rating dispersion and banking relationships % 33 % 17 % 11 % 17 % 11 % Hold Sell Copanies Covered Cos. w/ Banking Relationship Asia-Pacific Universe Deutsche Bank AG/Hong Kong Page 7

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