Unicom reported 25.5% YoY increase in 3Q22 earnings that beat both BOCI estimates and market consensus, thanks to 25.8% YoY increase in industrial internet revenues and 139% YoY increase in cloud service, despite EBITDA margin pressure from the new businesses. Reiterate BUY, and we lowered our target price from HK$7.8 to HK$7.05 after factoring in lower RMB to HK$ exchange rate despite upward earnings revisions for FY22-24E. Dividend yield remains attractive at 8.2% for 2022.
　　Key Factors for Rating
　　Net profit increased by 25.5% YoY to RMB4.71bn, beating BOCI estimates by 17.6% and ahead of street consensus, with 6.7% YoY increase in service revenues to RMB78.7bn, 1.3% below our estimates. EBITDA margin declined 2.9ppts YoY to 32.2% in 3Q22 due to the rise of other operating expenses as well as personal expenses, which we believe is the result of lifted contribution of industrial internet and cloud services. Depreciation increased by 4.9% QoQ to RMB21.8bn for the quarter and declined by 5.8% on year-on-year basis.
　　Industry Internet revenue reached for RMB16.3bn in 3Q22, up by 25.8% year- on-year and accounting for 20.7% of service revenue for the quarter thanks to “Big Computing” strategy. CU continued to enrich cloud product categories and constructed digital government clouds and the digital transformation of some central SOEs. Cloud service revenue reached RMB8.17bn in 3Q22, up by 139% YoY and contributing 10.4% of total service revenues. IDC revenue reached RMB6.2bn, increased by 12.1% YoY.
　　“Big Data” data business also up 75.3% YoY to RMB873m, Unicom leveraged its advantages in data governance and data security to develop a product portfolio focused on digital government and digital finance.
　　Key Risks for Rating
　　Unicom share is currently under US sanction, and restricted market liquidity may have negative impact on the share performance.
　　Valuation
　　Reiterate BUY, our DCF based fair value declined from HK$7.8 to HK$7.05 despite upward earnings revision by 2.8%, 1.4% and 1.8% for FY22-24 due to lower RMB to HK$ exchange rate. Dividend yield remains attractive at 8.2% for 2022.
　　Heading
　　2022 3Q results review