Chinese telecom sector:A case for long-term sustainable growth

澳门金沙国际js,Chinese telcos integral to 5G and economic developmentThe 5G white paper
released early this week by the CAICT, the regulator MIIT’sbrain trust,
further supports our view of the Chinese telcos’ long-term
growthprospects. While the paper envisages a higher capex spend under 5G
vs. 4G, italso forecasts a 7-8% p.a. revenue uplift from data
consumption and value-addservices, more than offsetting the capex lift.
The CAICT also highlighted theintegral role telecoms play in supporting
economic growth via both its ownrevenue contribution and providing for
other players along the value chain. Tofacilitate 5G development, we
expect a more restrained regulatory approach bythe government, which
would be supportive of sector growth.

    Valuation implication of CAICT forecastsIf we apply the CAICT’s
implied capex and revenue forecasts (assuming capexis RMB100bn p.a.
higher but revenue growth 4.5% p.a. higher), we arrive atvaluation
estimates that are 10-25% higher than our current estimates. Giventhat
the CAICT’s white paper presented one scenario among many
potentialoutcomes, we are not revising our forecasts at this stage.

    Message from CAICT more important than forecastsWe believe the
message from the CAICT is more relevant for telecom investors.

    That is, 5G is strategically important to China’s economic
development, andhence China will need to be at the forefront of 5G
development. This suggeststhat the telcos are likely to continue to have
higher capex intensity vs. theirglobal peers. That said, the operators
play an important role in stimulating theeconomy and in supporting the
telco value chain. Hence we infer from theCAICT’s comments that the
government will be more balanced in its regulatoryapproach, since
reducing the profitability of the telcos would hurt all theplayers along
the value chain and be a compounding drag on economicgrowth. We believe
this more considered and balanced approach is alreadyreflected in recent
policy measures.

    Sector should deliver solid growth without intrusive regulationsThe
telecom sector saw anaemic earnings growth in 2014 and 2015, hurt
byvarious regulatory requirements, such as VAT reform, tariff
reductions, speedupgrades, data carry-overs and roaming removal. These
measures have hurtcompetition and lowered investments, with China Mobile
(CM) pulling aheadon the 4G development and China Unicom (CU) slashing
its capex. With 2016a more normalised year in terms of regulatory
measures, we saw 12-13%underlying NPAT growth in China Telecom (CT) and
CM. Should regulatoryintervention be less heavy-handed in the future, we
believe the sector has solidmedium-growth prospects, which are not
reflected in current share prices.

    Valuation and risksWe base our sector valuation generally on a DCF
approach, which we applydue to the relatively predictable cash flow
profiles of Chinese telcos. We use7.5% WACC for CT and CM and 8.4% WACC
for CU. We use 0-0.5% perpetualgrowth rates to reflect population
growth. Upside risk: cost cuts. Downsiderisk: lower ARPU from
competition.

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