3Q22 earnings growth slowed to 0.7% YoY largely due to 7.7% YoY increase in depreciation, and the 1.9ppts YoY drop in EBITDA margin was also to blame as the company developed new cloud base businesses which carried lower margin compared with its traditional telecom service businesses. We have factored in further increase of depreciation at 12.9% YoY in 4Q, with full year 2022-24 earnings revised up by 2.6% to 2.1% respectively. We reduced our target price from HK$84.5 to HK$77.5 as we factor in lower RMB to HKD exchange rate with updated earnings. Dividend yield remains attractive at 8.1% based on current earnings and exchange rate.
Key Factors for Rating
3Q22 net profit increased by 0.7% YoY to RMB28.3bn, 8.3% lower than our estimates and below market consensus, largely due to 7.7% YoY increase in depreciation in our view. EBITDA margin declined by 1.9ppts YoY to 40.1% with EBITDA growth of 2.8% YoY, which also contributed to the slower earnings growth.
Service revenue maintained 7.8% YoY growth in 3Q22, in line with BOCI estimates. The group focused on deriving value from its “full-gigabit network and cloud-based applications” service, to transform its “Home” business towards HDICT (data, information and communications technology) solutions. Household broadband users increased by 8.94m in 3Q22, with stable ARPU of RMB34.8/month in 9M22.
Earnings updates: We factor in 9% YoY service revenue growth in 4Q22 to RMB194.65bn, with earnings growth at 2.4% YoY to RMB29.665bn, assuming 12.9% YoY increase in depreciation for the quarter. Our updated 2022-24E revenues were revised up by 2.6% respectively, with estimated earnings ticking up by 2.6%, 2.2% and 2.1%.
Key Risks for Rating
Government regulation on telecom tariff may have significant impact on the company’s revenues and earnings. Current US sanction on the company might also have negative impact on the share performance.
Valuation
Reiterate BUY, lower target price from HK$84.5 to HK$77.5 as we factor in lower RMB to HKD exchange rate with updated 2022-24E earnings.
