We maintain the TP at HK$5.15 and the investment rating as "Buy". Considering the steady improvement of its earnings and dividends, as well as the revaluation brought about by the rapid development of cloud business, we maintain the TP at HK$5.15 and the investment rating as "Buy". The TP represents 12.2x/ 10.9x/ 9.9x 2023-2025 PER.
　　China Telecom's （the "Company"） 1FY23 results were in line with our expectations, and profit will increase steadily. In 1Q23, revenue increased by 9.2% yoy to RMB130.6 billion, of which service revenue increased by 7.7% yoy. Among this, industry digitalization service revenue increased sharply by 18.9% yoy, and its proportion to total service revenue rose by 2.8 ppt yoy to 29.5%, and is expected to reach 35% in 2025.
　　Shareholders' net profit increased by 10.5% yoy to RMB7,984 million. The Company's traditional main business has already entered a stage of high-quality development; given that the majority of profit comes from traditional main business, we expect the Company’s profit growth to be stable. Besides, we expect the Company to still raise its dividend payout ratio, and dividend payout ratio will be about 70% in 2023, thus growth in dividend payout will be higher than growth of earnings.
We expect the Company's cloud business may exceed market expectations. The Company aims to expand its cloud business to reach RMB100 billion in 2023, higher than market expectations. Currently, market demand is still strong and the key issue is the Company’s own key core technical capability; the Company is expected to continue to strengthen its capabilities in cloud core technology, and plans to invest RMB19.5 billion in cloud resources in 2023. We expect the Company to invest heavily in research and development of core technologies, coupled with strong market demand, huge customer base, advantages of cloud-network integration, advantages in data security, as well as large-scale investments in computing power network; we expect that cloud business may exceed market expectations.
Catalysts: Increase in dividend payout and dividend payout ratio; promotion of data factor-related business.
Risks: Slower-than-expected growth of industrial digitalization business, mismatch between investments and benefits of industrial digitalization business