We maintain the TP at HK$5.00 and the investment rating as "Buy". Given steadily rising EPS and strong cash position, we expect the dividend payout to exceed market expectations in the future. Thus, we maintain the TP at HK$5.00 and the investment rating as "Buy". The TP represents 8.5x/ 7.7x/ 7.2x 2022-2024 PER.
We expect mobile service revenue and fixed-line broadband revenue to increase slightly yoy in 2022, while industry internet business revenue to achieve yoy growth between 25% and 30%. China Unicom's (the "Company") 1-3Q22 results were generally in line with our expectations. In 1-3Q22, Service revenue increased by 7.8% yoy, while sales of terminals increased by 10.0% yoy; the Company's total operating revenue increased by 8.0% yoy. Total operating expenses increased by 7.4% yoy; EBITDA as a percentage of service revenue decreased by 1.9 ppt yoy to 32.0% and EBITDA rose by 1.9% yoy. Shareholders' net profit was up by 21.2% yoy to RMB15,667 million. In 1-3Q22, mobile service revenue increased by 3.3% yoy, while 5G subscribers increased by 45.9 million YTD to reach 201 million. We expect 5G subscribers to still grow with the expanding coverage of 5G networks, however, we expect that the pulling effect from 5G on ARPU will not currently be significant and we expect mobile ARPU to be stable. Due to expected steadily rising numbers of mobile users, we expect mobile communications service revenue to grow steadily yoy in 4Q22. In 1-3Q22, fixed-line broadband access revenue increased yoy by 3.9%. We expect wireline broadband subscribers to still increase, while we expect fixed-line broadband ARPU to be relatively stable, thus we expect fixed-line broadband business revenue to increase slightly yoy. In 1-3Q22, industry internet business revenue rose by 29.9% yoy, and became the main driver of the Company's revenue growth. Looking inside industry internet business, Unicom Cloud accelerated its pace to achieve remarkable yoy growth of 142.0%, recording RMB26.87 billion. IDC revenue increased by 12.9% yoy to RMB18.613 billion. The Company is making good headway in developing its internet-of-things (IoT) business. The number of IoT terminal connections reached 366 million, while IoT revenue climbed significantly by 35.6% yoy to RMB6.168 billion. For big data services, the Company recorded revenue growth of 56.3% yoy. We expect the Company's continuous investment in cloud and strong market demand to enable the business to maintain strong growth. Following new opportunities from the "Eastern Data and Western Computing" initiative, the Company has been making efforts to offer an integrated computing network service and it has built a national advanced IDC system. The Company plans to further increase its computing power CAPEX and IDC cabinets. Thus, we expect IDC revenue to still grow steadily. Given the rising number of IoT connections, we expect growth rate of IoT revenue to still be high.
We expect the Company's future dividend payout to exceed market expectations. We expect operating expenses to still grow significantly. Overall, we expect that EBITDA as a percentage of service revenue will decrease yoy but EBITDA will increase steadily yoy, and shareholders' net profit will grow steadily. Given the expected steady cash position, we expect while the Company continues to improve its EPS, it will also raise its dividend payout ratios, and the dividend payout may exceed market expectations in the future.
Catalysts: Increase in dividend payout and dividend payout ratio.
Risk warning: Slower-than-expected growth of industry internet business; pressure from increased competition on ARPU.