China Communications
　　Services
　　Clear leader in AI/Cloud engineering and maintenance
　　Being the absolute leader in China’s IDC/AiDC engineering, CCS enjoy the booming demand for widespread construction of AI infrastructure, although the non-cloud portion of their TIS business was affected by telco CAPEX cut and slowdown in locally funded IT projects. We see the massive AI infrastructure buildout in China is only at the beginning, with domestically designed/manufactured GPU just entering into the market. With updated 2024/25 earnings, we lowered our target price from HK$4.96 to HK$4.93 and maintained 8.1x one year forward P/E. With impressive YTD performance, the share remains attractive closing at 5.8% dividend yield.
　　Key Factors for Rating
　　Chinese telcos are raising their AI Cloud CAPEX by 16% in 2024 to RMB113.5bn, led by China Telecom and China Mobile, both of which increased by 21% and 20% respectively, while reducing their non-Cloud CAPEX by 12% on average. Thanks to their implementation of 700 MHz radio network in low traffic areas, China Mobile enjoy higher savings by reducing their 2023 non-cloud CAPEX by 19% YoY, as the lower frequency band allows much large area of coverage for each base station. China Telecom recently launched a centralised server procurement project for 2024 to 2025. This centralised procurement project has 13 bid packages, with an estimated purchase volume of 156,000 units, and domestic server proportion would jump to 67.5%, significantly improved from 20% in 2020 and c.50% in 2023.
　　Earnings changes: we have revised down our 2024/25 earnings by 2.6% and 3.1% respectively as we factored in slower TIS growth due to the overall macro condition, and slowdown in telecom operator’s non-cloud capital investment as well as non-telco projects funded by some local governments.
　　Key Risks for Rating
　　Macro economy headwinds may slow down IT spending from enterprises and municipal governments.
　　Valuation
　　Reiterate BUY and lowered target price from HK$4.96 to HK$4.93 with minor revision of sales and earnings in FY24/25 and unchanged forward P/E at 8.1x and updated RMB exchange rate. Despite the impressive YTD share performance, we still expect 5.8% dividend yield with conservative earnings and payout assumptions.