1Q22 results in line with our forecast
　　Revenue at China Telecom (CT) rose 11.9% YoY in 1Q22 to Rmb119.6bn; service revenue grew 9.9% YoY to Rmb110bn; and attributable net profit increased 12.1% YoY to Rmb7.2bn. The results are in line with our forecast.
　　Trends to watch
　　Penetration rate of 5G rapidly rising; smart-family business raising broadband ARPU. Mobile service revenue at CT rose 5.0% YoY in 1Q22 to Rmb49bn, and the number of mobile users increased 6.5% YoY to 380mn. The net number of 5G users rose 22.95mn QoQ to 210mn (vs. guided full-year net additions of 80mn), and the 5G penetration rate climbed 5.1ppt QoQ to 55.5%. The ARPU of mobile users fell 1.1% YoY to Rmb45.1 due to rapid YoY expansion of the user base. However, ARPU still rose 0.2% in 1Q22 vs. full-year 2021. Mobile service revenue maintained healthy growth, and we expect full-year mobile ARPU to continue steady growth. The 1Q22 revenue from wireline and smart family services rose 4.9% YoY to Rmb29.6bn. Notably, the revenue of smart family business rose 22.5% YoY, effectively boosting broadband ARPU to Rmb46.7 (up 0.9% YoY and 1.7% vs. 2021).
　　Implementation of cloud and digitalization strategy on track; industrial digitalization business maintaining swift growth. The 1Q22 revenue from industrial digitalization business rose 23.2% YoY to Rmb29.41bn, and the portion of in-service revenue climbed 2.9ppt YoY to 26.7%. We think that CT will continue to develop comprehensive smart solutions by leveraging its advantages in Tianyi Cloud, 5G private networks, and 5G integrated applications. We expect the firm’s industrial digitalization business to maintain rapid growth, and become a major earnings driver over the long term.
　　New infrastructure and R&D spending to enhance competitiveness. Operating expenses at CT rose 12.4% YoY in 1Q22 to Rmb110.5bn, driven by 1) optimizing network quality and moderate increase of investment in 5G and industrial digitalization; and 2) rising expenses for selling goods amid significant sales volume growth of terminals such as 5G handsets. CT also strengthened recruitment of high-tech human capital to facilitate development of core technologies such as cloud-network integration and 5G. Its 1Q22 R&D expense rose 56.8% YoY to Rmb1.1bn. We expect CT to accelerate independent innovation, cloud-network integration, and product upgrading, conducive to improving its long-term competitive advantages and technological expertise. We believe that this will boost revenue growth and expand valuation.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts. CT H-shares are trading at 7.5x 2022 and 6.7x 2023 P/E, and A-shares are trading at 11.8x 2022 and 10.5x 2023 P/E. We maintain OUTPERFORM for both H- and A-shares with TPs at HK$3.68 (9.7x and 8.6x 2022-2023e P/E) offering 28.2% upside, and Rmb6.27 (19.2x and 17.0x 2022-2023e P/E) offering 62.4%upside.
　　Risks
　　Market competition further intensifying; disappointing business transformation.