Too cheap to ignore – now the sector top pick

Deutsche Bank Markets Research Rating Buy Asia China Telecommunications Wireless Company China Mobile Date 17 July 2017 Company Update Too cheap to ignore – now the sector top pick Reuters Bloomberg Exchange Ticker 0941.HK 941 HK HSI 0941 ADR Ticker ISIN CHL US16941M1099 Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales (CNYm) 668,335.0 708,421.0 756,718.3 800,084.2 839,532.8 EBITDA (CNYm) 240,028.0 256,677.0 276,379.1 293,672.4 309,240.2 Reported NPAT (CNYm) 108,539.0 108,741.0 114,961.5 122,130.7 129,910.9 DB EPS FD(CNY) 5.30 5.31 5.61 5.96 6.34 PER (x) 15.1 14.2 12.7 12.0 11.3 EV/EBITDA (x) 5.2 4.4 3.4 2.9 2.5 DPS (net) (CNY) 2.26 2.39 2.75 3.10 3.49 Yield (net) (%) 2.8 3.2 3.9 4.3 4.9 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Low expectations providing rerating opportunities ________________________________________________________________________________________________________________ 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) 083/04/2017. Price at 14 Jul 2017 (HKD) 82.25 Price target - 12mth (HKD) 110.00 52-week range (HKD) 99.00 - 80.30 HANG SENG INDEX 26,389 James Wang Research Analyst (+852 ) 2203 6145 james-z.wang@db.com Peter Milliken, CFA Research Analyst (+852 ) 2203 6190 peter.milliken@db.com Price/price relative 7080901001107/151/167/161/17China MobileHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -2.4 -2.7 -11.1 HANG SENG INDEX 2.0 8.8 22.4 Source: Deutsche Bank With CM having underperformed the HSI by ~20% YTD, we move the stock to our top pick among Chinese telcos. For a telco making 83% of the industry’s profit, CM’s current discount to peers (China and regional) appears unjustified. Given low expectations, we see significant rerating potential driven by: 1) solid earnings growth with the government likely to be more forgiving of stronger profit at the telcos; 2) improving pay-out, driving 13% p.a. dividend growth over the next three years, 3) potential for lower-than-expected capex at the FY. With CM trading on 9.1x FY17E PE ex-cash, investors are not paying much for the potential upside. Buy. Cheap valuation and low expectations CM currently trades on an 11% discount vs. its peers on an EV/EBITDA basis, compared to other dominant industry players, which can trade at up to 50-60% premiums (e.g., Indonesia and Thailand) due to their scale and cash flow generation. We think such a rerating can be delivered by better-than-expected earnings and dividend payout. We estimate that CM can easily deliver a 16% improvement to the bottom line via lower admin expenses and by aligning its depreciation policy with the peers and we expect CM to deliver a 3ppt increase in dividend payout each year as part of a wider effort to increase SOE payouts. Government to be more tolerant of industry profit growth We believe the government could be more forgiving on industry profit growth as part of an effort to save up for 5G investments and to facilitate CU’s recovery which may see CM start to deliver better NPAT growth than in recent years. Separately, we see the potential for a lower-than-expected capex, a special dividend and relaxation of spectrum re-farming restrictions as other potential catalysts that could see CM rerate over the next 12 months. Valuation and risks We derive our target price using a DCF valuation, with an allowance for a contribution from associates and cash. Our valuation uses 7.5% WACC and a 0% perpetual growth rate. Downside risks relate to regulation and competition. See p. 14. Distributed on: 16/07/2017 19:42:33 GMT0bed7b6cf11c 17 July 2017 Wireless China Mobile Page 2 Deutsche Bank AG/Hong Kong Model updated:13 April 2017 Running the numbers Asia China Wireless China Mobile Reuters: 0941.HK Bloomberg: 941 HK Buy Price (14 Jul 17) HKD 82.25 Target Price HKD 110.00 52 Week range HKD 80.30 - 99.00 Market Cap (m) HKDm 1,681,061 USDm 215,319 Company Profile China Mobile Limited provides a full range of mobile telecommunications services in all 31 provinces, autonomous regions and directly-administered municipalities in Mainland China as well as in Hong Kong via its wholly-owned China Mobile Peoples Telephone Co Ltd. Price Perfo