We revised down CCS FY23-25 earnings by 1.5-4.3% as we expect telcos to reduce their overall CAPEX by 5% in 2024 by shifting their investment towards cloud centric infrastructure. However, we see the change will enhance CCS market leadership in telecom infrastructure service (TIS) market as the primary contractor to telcos’ cloud networks, helping them to penetrate the non-telco market which also needs access to telco’s central cloud infrastructure, i.e. key internet platforms and major cloud application verticals. Reiterate BUY and raised target price from HK$4.9 to HK$5.05.
　　Key Factors for Rating
　　We expect 5% deduction in total telecom CAPEX in FY24 as telcos shift their investment from traditional telecom networks to cloud centric infrastructure. TIS service revenues at CCS might see negative impact from the overall CAPEX reduction. Therefore, we cut FY23-25 sales by 2.4%-6.4% and earnings by 1.5- 4.3% respectively.
　　However, we believe the Company’s dominant position in the market shift to cloud centric network will be enhanced. Being the primary design, engineering service provider of telco’s cloud infrastructure, we expect the Company to gain market share in the non-telco cloud market, as the AI/Cloud infrastructures will become more standardised not only on the telco networks, but also the non- telco networks, i.e. hosting from key internet gateways which may need to connect their proprietary AI/Cloud networks to telcos’ networks to gain access to critical network services (like data transmission, training and process).
　　Key Risks for Rating
　　Macroeconomic headwinds may slow down IT spending from enterprises and municipal governments.
　　Valuation
　　Reiterate BUY and raised target price to HK$5.05 based on our revised estimated earnings from FY23-25, as we roll over from FY23 to FY24, and move our target P/E multiples from 8.1x to 8.2x based on the share’s 10-year trading history.
　　Despite the sales and earnings cut, we see the Company’s dominance in Telecom Infrastructure Service market will be enhanced (though total CAPEX revised down), as the Company’s competitive strength on the increasing cloud centric network environment becomes stronger, which will not only help the Company solidify their market leadership in the telco market, but also facilitate their expansion into 3rd party market, i.e. IDC-AIDC required by non-telco platform players such as key internet players and key vertical players in AI applications such as finance, transportation and manufacturing.