Picking winners in a revamped sector

Deutsche Bank Markets Research Industry Chinese Telecoms Date 29 March 2016 Asia Hong Kong Telecommunications F.I.T.T. for investors Picking winners in a revamped sector CU's operational turnaround encouraging, but CM and CT entrenched We conducted three studies to determine sector direction, and found: 1) Unicom's network is surprisingly competitive, 2) Consumers are willing to switch networks, with CM's large pool of users not appearing particularly loyal, and 3) CU appears to be following a proven strategy for telco turnarounds. We believe that Unicom is improving and lift it to BUY. We forecast sector net profit CAGR of 8% in 2015-'18, led by data monetization as less regulatory intervention combines with better networks. VAT clawback will also help, We expect growth should attract investor attention, as unlike most regional telcos, China's big three trade below 10-year average multiples. Peter Milliken, CFA Research Analyst (+852 ) 2203 6190 peter.milliken@db.com James Wang Research Analyst (+852 ) 2203 6145 james-z.wang@db.com Alan Hellawell Research Analyst (+852 ) 2203 6240 alan.hellawell@db.com ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Deutsche Bank Markets Research Asia Hong Kong Telecommunications Industry Chinese Telecoms Date 29 March 2016 FITT Research Picking winners in a revamped sector CU's operational turnaround encouraging, but CM and CT entrenched ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Peter Milliken, CFA Research Analyst (+852 ) 2203 6190 peter.milliken@db.com James Wang Research Analyst (+852 ) 2203 6145 james-z.wang@db.com Alan Hellawell Research Analyst (+852 ) 2203 6240 alan.hellawell@db.com Key Changes Company Target Price Rating 0762.HK 11.00 to 11.75(HKD) Hold to Buy Source: Deutsche Bank Top picks China Telecom Corp (0728.HK),HKD3.94 Buy China Mobile (0941.HK),HKD83.30 Buy Source: Deutsche Bank Companies Featured China Telecom Corp (0728.HK),HKD3.94 Buy 2015A 2016E 2017E P/E (x) 14.8 14.0 12.2 EV/EBITDA (x) 4.1 3.3 3.6 Price/book (x) 0.8 0.7 0.9 China Unicom (0762.HK),HKD10.00 Buy 2015A 2016E 2017E P/E (x) 21.0 24.5 17.7 EV/EBITDA (x) 4.0 3.5 3.0 Price/book (x) 0.8 0.9 0.8 China Mobile (0941.HK),HKD83.30 Buy 2015A 2016E 2017E P/E (x) 15.1 12.1 11.3 EV/EBITDA (x) 5.2 3.6 3.0 Price/book (x) 1.6 1.3 1.2 Source: Deutsche Bank We conducted three studies to determine sector direction, and found: 1) Unicom's network is surprisingly competitive, 2) Consumers are willing to switch networks, with CM's large pool of users not appearing particularly loyal, and 3) CU appears to be following a proven strategy for telco turnarounds. We believe that Unicom is improving and lift it to BUY. We forecast sector net profit CAGR of 8% in 2015-'18, led by data monetization as less regulatory intervention combines with better networks. VAT clawback will also help, We expect growth should attract investor attention, as unlike most regional telcos, China's big three trade below 10-year average multiples. What have we done? – On the ground studies and deep dives Following 4G licensing delays for CT and CU, the two operators are now ramping up, and aiming to narrow the network gap with CM. They are helped in this build-out, by the TowerCo, and by the cooperation agreement the two have signed. Management change at CU is also widely seen as significant. To understand the likely impact of these changes, we obtained data from OpenSignal, conducted our own network tests, commissioned a 500 participant consumer survey, and examined overseas experience on stemming share loss. We have also updated our China Tower forecasts, given the greater clarity on the business. We conclude that: 1) Network quality, does seem to be converging in the cities,