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1、Buy,Buy,Hold,th,Buy,Buy,Deutsche BankMarkets Research,AsiaChinaTelecommunications,IndustryChina telcos 2013outlook,Date12 December 2012Industry UpdateAlan Hellawell III,The political angleA question of political priorities.Buy CU and CT.As we peer into 2013,we believe the single greatest driving for
2、ce to thebusiness performance,and thus share prices,of Chinas three operators will betelecoms policy.We expect the MIIT and relevant govt organs single highestpriority will be to continue restructuring.Lower down the hierarchy would beelements such as promoting TD technologies.We thus expect CU and
3、CT toout-perform in 2013.,Research Analyst(+852)2203 Top picksChina Telecom(0728.HK),HKD4.28China Unicom(0762.HK),HKD12.38Companies FeaturedChina Mobile(0941.HK),HKD89.10,Recent Beijing,Shanghai trips suggest continued commitment to restructuringIn our first major set of visits through the telecoms
4、eco-system since the 18Party Congress,it became quite clear to us that the single greatest determinantin predicting the fate of each of Chinas three telecoms operators,namely,P/E(x)EV/EBITDA(x)Price/book(x),2011A 2012E 2013E9.8 11.7 11.44.7 5.1 4.61.9 2.0 1.8,regulatory policy,is like to remain orie
5、nted first-and-foremost toward furtherrestructuring.,China Telecom(0728.HK),HKD4.282011A 2012E 2013E,CM,Chinas leading operator,left to execute a challenging planWhile we continue to identify China Mobiles leadership in areas such as brandequity and operational excellence,we see these elements conti
6、nuing to erode,P/E(x)EV/EBITDA(x)Price/book(x),19.34.51.2,19.13.91.1,15.63.31.0,into 2013 as the operator bridles under a deteriorating 2G service,lack of aviable 3G alternative,and a 4G program with unsure commercial benefit,China Unicom(0762.HK),HKD12.382011A 2012E 2013E,through 2015.Conversely,Ch
7、ina Unicom offers in our mind at least 2-3 yearsof 3G/3.5G dominance,hindered only by the basic operational deficiencieswhich have plagued it for years.China Telecom delivers unrivaled transparency,P/E(x)EV/EBITDA(x)Price/book(x),69.76.01.6,36.34.51.1,22.83.81.1,in a most opaque market,albeit with m
8、ore modest evidence of the benefits ofrestructuring in its growth trajectory.Applying DCF in valuing Chinas three operatorsOur standard valuation methodology for the Chinese telcos is DCF given therelatively high predictability of cash flows.We use Deutsche Banks internalrisk-free(2.9%)and equity ri
9、sk premium(5.7%)rates for China and a company-specific beta and cost of debt ratios.Terminal growth rate is set at 0%for thethree telcos as we believe the companies will cease to deliver meaningfulgrowth in the out years.Risks involve changes in government policy(from 4Glicensing to mobile number po
10、rtability),competition(a sharp rise incompetition would drive down industry profitability),more/less generousdividend policy,higher/lower capex,etc._Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware that
11、 the firm may have a conflict of interest that could affect the objectivity of this report.Investors shouldconsider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,12 December 2012Telecommunic
12、ationsChina telcos 2013 outlookSubtle policy changes but bigcompany/stock implicationsRegulatory hierarchy of priorities drives much of our house-viewVery simply put,we view regulatory policy as the single greatest determinant to thebusiness and share price performance of Chinas three telco operator
13、s.Questionsranging from the reversal of China Mobiles fate as a forced donor of subscriber,revenue and profit market share to the allocation and timing of 4G licenses,all relate tohow the MIIT prioritizes its policies.Having recently returned from Beijing,we remainconvinced that the MIITs greatest p
14、riority is to continue to drive a re-balancing inChinas still very unbalanced telecoms industry.On more than a couple of occasionsduring our recent four-day trip through Beijing and Shanghai,references were made toa government mobile subscriber market share target of 50%for China Mobile.Theoperator
15、today still stakes a claim to more than 64%of Chinas mobile subscriber base,and we do not see that sinking toward 50%for five or six years on our modeling.Politics figuring in prominently to regulatory assumptionsRelated to the regulatory discussion,one of the more interesting and yet overlookedaspe
16、cts of Chinas telecom industry is the political dimension.This is somewhatsurprising given their relative size,the governments majority ownership across all threetelcos,the already established precedent of political intervention,the“nationalchampion”status of the companies and the importance of the
17、regulatory framework indetermining future profitability.So one of the key issues for investors is whether China Mobile is facing a period ofwaning political influence despite its sheer size.After all,it is possible that if politicalsentiment is starting to move against China Mobile,then the future r
18、egulatoryenvironment may become less conducive-as experienced in other markets,telcosdefined as dominant can face far more difficult regulatory environments whenregulators decide that the promotion of competition is more important than thepreservation of a politically-connected incumbent.There is,we
19、 believe,select evidence of China Mobiles declining political influence.Forexample,we believe the companys senior executives were absent from the 18thNational Party Congress in contrast to China Telecom and China Unicom.In fact,WangXiaochu,China Telecoms Chairman,recently became a Candidate Member o
20、f theCentral Committee,while China Unicoms Chairman,Chang Xiaobing,also attended the18th NPC.Both Unicom and Telecom detailed their 4G(LTE)progress during theCongress.In addition,China Mobiles political positioning is not necessarily helped by theretirement of Wu Bangguo who was seen as a supporter
21、of Xi Guohua,China MobilesChairman.Admittedly,Mr Xis previous experience as Vice-Minister of MIIT clearlysuggests a range of contacts with that Ministry but we view the retirement of WuBangguo as potentially key to the strength of China Mobiles relationships at thehighest echelons of government.Furt
22、hermore,China Mobiles management has,we believe,been distracted by theongoing substantial audit(involving hundreds of auditors)which only finished severalweeks ago.This audit has been reviewing multiple businesses and activities followingallegations of bribery against senior executives,the resignati
23、on of Lu Xiangdong(a Vice,Page 2,Deutsche Bank AG/Hong Kong,12 December 2012TelecommunicationsChina telcos 2013 outlookPresident)and previous comments by Wang Janzhous(the previous Chairman)thatsenior executives had violated the law and regulations.This has also led to changes ininternal process and
24、 management which may have disrupted the day-to-dayfunctioning of the company.We expect further announcements relating to the internalaudit,including associated actions,to be released over the near-term.As a result of China Mobiles weaker political position,we believe investors shouldsignificantly r
25、educe any expectations they may have with respect to an improveddividend payout or special dividend.Even if the senior management team wassupportive of such a move,we simply do not believe that the government wouldapprove an improved payout to foreign shareholders and in the current environment,we d
26、o not believe Mobiles senior management has the political clout to drive throughany such decision.In fact,it is possible that any previous effort to improve the dividend payout wasviewed negatively by government agencies and as such,was counter-productive.Furthermore,the build out of the TD-SCDMA ne
27、twork at the ParentCo level,which hadthe effect of“protecting”foreign investors from the lower returns of this investment,may also have been viewed negatively by government agencies and ministries(e.g.SASAC).So our expectations of an improved dividend payout or an accelerated shareholderreturn throu
28、gh special dividends or capital returns are rapidly dissipating anotherreason to underpin our relatively cautious view on the company.The obvious question,therefore,is what will Mobile do with its rapidly accumulatingcash position.In our view,it is highly likely that the company will revisit interna
29、tionalexpansion plans but instead of trying to buy an entire telco they will look to buyminority stakes.In part,this increased international expansion interest reflects thestatus of Mobile as a Chinese national champion there are few Chinese companieswhich clearly have the potential to expand intern
30、ationally in size.As such,we wouldnot be surprised if Mobile was under increasing pressure to expand internationally.Butwhile any such international M&A may be positive for China per se it is unlikely to beviewed particularly positively by foreign investors,especially those who have beenwaiting pati
31、ently for improved returns.A final area where policy appears to be moving against Mobile is with respect to theTD-LTE versus FD-LTE debate.China Telecoms Wang Xiaochu at the 18th NPC soughtto distance the company from any possible roll-out of TD-LTE as part of CTs 4G roll-outand our expectations are
32、 that Telecom will be allowed to progress with just FD-LTE,which has clear and sizeable international momentum.In contrast,China Mobiles TD-LTE efforts do not appear to be progressing especiallyeffectively.The terminal side in particular does not appear to be coming togetherparticularly coherently w
33、hile foreign vendors seem to be frequently reassessing theircommitment to infrastructure/network as,for example,Ericsson and Nokia Siemenseach only got a 2-3%share of recent orders.Perhaps the only good aspect of the current LTE discussion is that we believe capexspend should remain depressed throug
34、h to at least March when the new leadershipassumes their national positions.As such,we see a good opportunity to see how cashflows may trend post the current capex spike.In summary,we believe:,Deutsche Bank AG/Hong Kong,Page 3,12 December 2012TelecommunicationsChina telcos 2013 outlookThe government
35、 remains committed to restructuring the telecoms sector,acommitment which will benefit Unicom and Telecom over MobileIn particular,we would not be surprised if the intention is to reduce Mobilessubscriber share to 50%before reducing its negative bias towards MobileThe strength of Mobiles political r
36、elationships appear to have declined which a)significantly reduces the potential for improved shareholder returns;b)raises therisk of new international M and c)commits Mobile to TD-LTEAll these factors underpin our cautious view on Mobile into 2013 especially as weexpect these dynamics to become mor
37、e apparent through next year.Unicom facing favorable policy environment,but ongoing lack ofclarity and transparency persistsThe above discussion clearly reinforces Mobile as our least preferred Chinese telco aswe head into 2013.In terms of what we like,we recently met with China Unicom.Keyhighlights
38、 of the meeting included:Managements current focus going into 2013 is still on achieving top-line growth(acontinuation of the key 2012 objective).However,management does expect to tryand focus more on margin trends versus revenue growth than in 2012 and will alsotry to“smooth out”quarter-on-quarter
39、profit changes in contrast to previous yearsIn terms of the newly introduced 3G data plans(launched on 18 October),thecompany provided only very preliminary feedback but suggested that the initialresponse had not been particularly strong.These new plans are focused on 2Gsubs that may have a 3G phone
40、 and are priced at RMB10/month(100Mb/mo),RMB20(300Mb)and RMB30(500Mb).Theoretically,this may be incremental to 2GARPUs but the risk is that such subscribers give up more expensive GPRS plans totake the higher-end 3G data plans3G ARPU was down significantly in the 3Q12 given new campus promotions but
41、since many of the new 3G plans were converting 3G users,the net impact onblended ARPUs should be supportiveIn terms of costs,network maintenance costs should continue to decline as apercentage of revenues.However,inter-connection and sales and marketing,(excluding subsidies)may see less downward lev
42、erage.,Encouragingly,3G,marketing expenses relative to 3G service revenue are falling(excluding subsidies,the ratio was 21.1%for 9M12),but the level is still higher than the 2G ratio and theoverall ratio(excl subsidies,this was 16.2%for the first three quarters)In terms of 2013 EBITDA/NPAT expectati
43、ons,the company expects subsidies tosales to fall while 2012 EBITDA margin will likely be flat YoY.Total EBITDA thusshould rise in 2013(DB is forecasting a 14%YoY growth in 2013e EBITDA).Management also suggested that the current Consensus expectations for 2013eprofit were too high at approx RMB11bn
44、(for reference,DBs 2013e NPAT forecastis RMB9.5bn)Regarding capex,Unicom only spent RMB55 in first three quarters versus DBesRMB100bn forecast.As such,we expect a significant 4Q pick-up in capex spendespecially as urban coverage is very expensive and as such,their RMB100bn capexguidance for 2012e re
45、mains unchanged,Page 4,Deutsche Bank AG/Hong Kong,-,-,-,-,-,-,-,-,-,-,-,-,-,-,12 December 2012TelecommunicationsChina telcos 2013 outlook2013 operating metricsAnother year,another opportunity for CU to leverage favorable factorsWe present below the 2013 operating metrics of the three Chinese telcos
46、versusconsensus.As the table amply indicates,we envision China Unicom delivering thegreatest growth of the three operators from both a top and bottom-line perspective,thelatter largely due to an(admittedly long-delayed)operational leverage occurring as its3G network enjoys greater utilization.Figure
47、 1:2013 operating metrics of the three Chinese telcos versus consensusChina Mobile China Unicom China Telecom,China Mobile,China Unicom,China Telecom,Concensus,Concensus,Consensus,Operating revenue,592,281,282,053,306,449,595,960,287,703,310,646,YoY changeOperating expensesYoY change,6.9%335,6449.3%
48、,12.7%193,61410.5%,9.9%210,1511.8%,Operating profitYoY changeOperating margin,256,6363.8%43.3%,Same as EBITDASame as EBITDASame as EBITDA,96,29833.1%31.4%,97,94731.5%,Adjusted EBITDAYoY changeAdjusted EBITDA margin,259,7513.9%43.9%,88,43917.8%31.4%,105,9788.8%34.6%,258,70043.4%,85,87029.8%,EBITYoY c
49、hangeEBIT margin,154,6611.1%26.1%,18,10241.2%6.4%,27,69331.6%9.0%,18,3266.4%,30,4649.8%,Profit attributable to,equity shareholders,126,281,10,403,17,882,126,880,11,248,19,395,YoY change,2.5%,59.5%,22.6%,Net profit marginEPS-basic,21.3%6.29,3.7%0.44,5.8%0.22,21.3%6.27,3.9%0.48,6.2%0.25,Dividend payou
50、t ratio,43.0%,22.6%,31.2%,Source:Deutsche Bank,Bloomberg Finance LPWe present below a table showing the 2013 capex and handset subsidies for each ofthe three Chinese telcos.For China Mobile,we expect handset subsidies to account forabout 5.1%of operating revenues versus 4.7%in 2012.We regard a deepe
