Short-term issues mostly priced in, a better tomorrow ahead
We believe CKH offers investors a strong growth profile over the next threeyears, despite the diverse and defensive nature of many of its businesses,reflecting: 1) a sustained rebound in the European telecom business, 2) M&A,and 3) domestic consumption growth in emerging markets. In the short run,regulatory uncertainty around its acquisitions in the UK and Italy and theprospect of Brexit may affect share price performance. However, given therecent underperformance and with the stock trading on a FY16 PE of 11.6x,these risks appear mostly priced in and we believe this is a good value entrypoint for those with a longer time horizon looking for defensive growth; Buy.
　　Longer-term growth outlook strong
　　We are forecasting an 8.5% EPS CAGR over the next three years, driven by:
　　1) ~10% p.a. EBIT growth from the European telecom business, which hasreached critical mass of over 10% market share in all regions; and 2) ~12%EBIT growth from retail in China, driven by the government’s push to narrowlocal and overseas prices and boost domestic consumption. Furthermore, thestrong cash flow generation also provides the prospect for further acquisitionsand an increasing dividend payout to complement the organic growth.
　　Short-term headwinds / uncertainties may deter some
That said, there are some short-term hurdles to overcome. With 37% of EBITcoming from the UK and the Brexit vote on 23 June, the uncertainty and thepotential FX impact may affect CKH’s share price performance. On M&A, giventhe strong opposition from the UK regulators, we now think the regulatoryruling on the O2 deal on 19 May is unlikely to be favourable.
　　Low price to pay for a portfolio of quality assets
The share price seems to have factored in some of these downside risks withthe stock having now underperformed HSI by 8% in the last three months.
　　With the stock now trading at 11.6x FY16 PE, investors are paying a low pricefor a portfolio of well managed quality assets; Buy.
　　Valuation and risks
　　We value CKH using a combination of SoTP and DCF. Key downside risksinclude: HKD appreciation, higher borrowing costs and economic slowdown.