20131108-巴黎银行证券-Dip_before_growth_returns_20页_844kb

HUTCHISON TELECOM HK: Summary

Core Content

Hutchison Telecom HK is a major integrated telecommunications operator in Hong Kong, part of the Hutchison Whampoa Limited group. The company is currently facing a dip before growth returns due to a declining mobile business and a trough in net profit in 2H13E. However, its fixed-line business is showing healthy growth, driven by the International and Carrier segments, as well as corporate clients. The mobile business is under pressure, with a declining ARPU and a shrinking postpaid subscriber base, which is increasingly dominated by low-value prepaid users.

Main Points

• Fixed-line business growth:

  • Fixed-line accounts for about 30% of revenue and has shown double-digit growth.
  • It contributes significantly to EBITDA and profitability, with a higher margin than mobile services.
  • The International and Carrier business, along with corporate clients, are key drivers of growth.

• Mobile business decline:

  • Mobile revenue makes up about 70% of total revenue.
  • Mobile service revenue has been declining since 2H12, with the ARPU dropping significantly.
  • Hardware sales have also slowed, contributing to margin pressure.
  • The mobile business is becoming less profitable due to low-value subscribers and declining data consumption.

• Impact of mobile tariff increase:

  • The recent mobile tariff increase is expected to generate incremental revenue of HKD14m in 2H13, HKD234m in 2014, and HKD453m in 2015.
  • This is anticipated to support net profit growth of 2% in FY14 and 17% in FY15.
  • However, the net profit is expected to trough by 23% y-y in 2H13, which is 20% below the Bloomberg consensus.

• Regulatory risk:

  • The upcoming 3G spectrum re-assignment decision is a key regulatory risk.
  • If it leads to an auction with new entrants, it may increase competition and amortisation costs, negatively impacting EPS estimates.
  • This uncertainty is a reason for the HOLD rating and the recommendation to wait for a better entry point.

• Investment Thesis:

  • The company is at an inflection point with the potential for recovery after the 2H13 earnings trough.
  • Roaming revenue is playing a critical role in supporting mobile margins, as it has a higher margin than local services.
  • The revenue mix shift away from hardware sales is also helping to improve margins.

Key Information

• Target Price: HKD3.40

• Current Share Price: HKD3.40

• EPS 2013: 0.22 (down 11.9% y-y)

• EPS 2014: 0.23 (up 1.8% y-y)

• EPS 2015: 0.27 (up 16.8% y-y)

• Recurring P/E: 15.2 (2013E), 14.9 (2014E), 12.7 (2015E)

• Dividend Yield: 6.2% (2013E), 6.3% (2014E), 7.3% (2015E)

• EV/EBITDA: 6.8 (2013E), 6.1 (2014E), 5.5 (2015E)

• Net Debt/Equity: 22.9% (2013E), 17.7% (2014E), 15.3% (2015E)

• ROE: 9.4% (2013E), 8.9% (2014E), 9.9% (2015E)

• Market Share: 26% in mobile services (as of 1H13).

• Mobile ARPU: 114 (2013E), expected to continue declining.

• Mobile Subscriber Base: 3,893 (2013E), with a declining postpaid base and an increasing share of prepaid users.

• 3G Spectrum Re-Assignment: A major regulatory risk, potentially leading to intensified competition and amortisation costs.

• Catalysts:

  • Conclusion of 3G spectrum re-assignment
  • 2H13 interim results
  • Gradual effects of mobile tariff increases

• Risks:

  • Downside: Unfavourable 3G spectrum decision, disappointing 2H13 results.
  • Upside: Better-than-expected impact of tariff increases, removal of regulatory overhang.

Key Assumptions

• Mobile ARPU and Subscriber Growth:
  • Mobile ARPU is expected to decline at high-single digits.
  • Mobile subscriber base is expected to grow slowly, with a focus on low-value users.
• Migration Rate:
  • Theoretical migration rate is 4.2% per month, but actual rate could vary.
• Incremental Revenue from Tariff Increase:
  • Estimated at HKD3.1m/month in 2013, increasing to HKD14m in 2H13, HKD234m in 2014, and HKD453m in 2015.

Conclusion

Hutchison Telecom HK is navigating a period of transition from a declining mobile business to a more stable fixed-line growth. While the tariff increase is expected to provide a recovery boost, the short-term earnings trough and regulatory uncertainty make the stock a HOLD at this time. Investors are advised to wait for a better entry point after the earnings trough. The roaming revenue and revenue mix shift are key factors supporting the company's margin stability.