16.5% YoY earnings growth in 2022 was in line with BOCI estimate and pre-announced market consensus. We expect the continued growth in industrial internet and cloud service to enterprise/government market will improve overall network utilisation. Further improvement in dividend payout supported by lower capex to sales ratio will enhance shareholder value and drive market re-rating. Reiterate BUY as our Chinese telco top pick while raising DCF based TP from HK$7.05 to HK$7.47.
　　Key Factors for Rating
　　Net profit increased by 16.5% YoY to RMB16.7bn, in line with BOCI estimate and street consensus while service revenue jumped 7.8% YoY, beating our estimate by 0.5%. Dividend payout ratio increased from 46% in 2021 to 50% in 2022.
　　Cloud Service revenue increased 121% YoY in 2022 to RMB36.1bn, as the company launched Version 7.0 with “cloud native and virtualised dual engine” base. Big Data revenues also increased 58% YoY to RMB4.0bn, with over 50% market share and such services were well integrated into the digital governments in over 20 provinces and 100 cities, serving over 25 central government ministries.
　　2023 capex will increase 3.6% YoY to RMB76.9bn but capex as a percentage of service revenues will decline to 22.9%.
　　Earnings change. We raised our 2023/24E earnings by 5.8% and 7.6% with minor cut in operating revenues as we expect lower handset sales with overall EBITDA margin unchanged since the new business growth from “to B” cloud and industry internet services will improve the overall network utilisation rate.
　　Key Risks for Rating
　　Supply chain disruption may hinder the company’s initiatives on cloud service and industrial internet businesses. US sanction on financial investment continues to overhang the company’s valuation.
　　Valuation
　　Reiterate BUY while raising DCF based target price from HK$7.05 to HK$ 7.47 as we revised up our 2023/24E earnings by 5.8% and 7.6%. Capex to sales ratio declined to 22.9%.
　　Key Highlights of this Report
　　2022 results review.
2023 investment outlook.