2021 results in line with market forecast
China Telecom reported its 2021 results: Revenue rose 11.7% YoY to Rmb439.6bn, service revenue grew 7.8% YoY to Rmb402.8bn, and attributable net profit increased 24.5% YoY to Rmb25.9bn. The results are in line with market expectations.
　　Trends to watch
　　Basic telecom business: Rising volume and prices; steady improvement. The firm’s mobile business grew steadily in 2021, with mobile service revenue up 4.9% YoY to Rmb184.2bn. Its end-2021 mobile users reached 372mn, with 5G package penetration rate at 50.4%, and it ranked No.1 in the sector in new mobile users. Average revenue per user (ARPU) of mobile users rose 2.0% YoY to Rmb45.0 in 2021. For the family business, the firm upgraded its smart family business to comprehensive whole-home smart solutions. Its fixed-line and smart family service revenue rose 4.1% YoY to Rmb113.5bn, with smart family revenue up 25.1% and comprehensive broadband ARPU rising 3.4% YoY to Rmb45.9.
　　Rapid development in cloud-network integration; revenue doubles for e Cloud. The firm’s 2021 revenue from industrial digitalization rose 19.4% YoY to Rmb98.9bn, with its proportion in service revenue climbing 2.0ppt YoY to 24.6%. In line with China’s strategy of east-to-west transfer of computing resources, the firm expanded in data center, Data Center Inter-connect (DCI) network, computing and e Cloud to give full play to its advantages in cloud-network integration. Revenue of e Cloud rose 102% YoY to Rmb27.9bn in 2021, maintaining market leadership. We expect revenue of e Cloud to double yet again in 2022, and industrial digitalization to become an important growth driver.
　　Transformation in capex structure; interim dividend to allow shareholders to benefit from corporate growth. The firm’s 2021 capex rose 2.3% YoY to Rmb86.7bn, and China Telecom guided a 7.3% YoY increase to Rmb93bn in 2022. It also adjusted the structure of capex, with a rising proportion for industrial internet. The firm’s 2021 dividend per share is Rmb0.170, implying payout ratio at 60%. The firm announced plans to start paying interim dividends from 2022, and that it will gradually raise payout ratio to over 70% in 3 years. We think this will enhance shareholder returns, and allow them to benefit from corporate development.
　　Financials and valuation
　　Considering smooth progress in the firm’s cloud and digitalization strategy and rapid revenue growth of industrial digitalization, we raise our 2022-2023 revenue forecasts 3.3% and 2.7% to Rmb495.6bn and Rmb539.4bn, and raise earnings forecasts 6.7% and 8.2% to Rmb29.9bn and Rm33.7bn. H-share is trading at 7.5x 2022 and 6.7x 2023 P/E. A-share is trading at 11.8x 2022 and 10.5x 2023 P/E. For H-share, we maintain OUTPERFORM and our TP of HK$3.68 (9.7x 2022 P/E and 8.6x 2023 P/E), offering 28.2% upside. For A-share, we maintain OUTPERFORM and our TP of Rmb6.27 (19.2x 2022 P/E and 17.0x 2023 P/E), offering 62.4% upside.
　　Risks
　　Intensifying market competition; disappointing 5G development.