Earnings grew 8.4% YoY in 1H23, beating market consensus by 8.3%.
Interim dividend increased 10.5% YoY to HK$2.43 with full year commitment of 70% plus payout backed by excellent cash generation and stabling margin. We reiterate BUY and unchanged target price at HK$83.
Key Factors for Rating
1H23 net profit increased by 8.4% YoY to RMB76.173bn, 8.3% higher than market consensus （RMB70.28bn）， thanks to better-than-expected cost control.
EBITDA margin declined 0.4ppt YoY to 34.6% in 1H23 with EBITDA growth of 5.5% YoY, due to higher personnel expense and other operating expenses growth in associate with new product development for enterprise and industrial internet market in our view.
Operating revenue reached RMB530.7bn, up 6.8% YoY, with revenue from telecommunications services increasing by 6.1% YoY to RMB452.2bn. Among that, digital transformation revenue （including mobile cloud drive, smart home value-added business, industry cloud, IDC, ICT, IoT and other digitalisation related revenue） surged 19.6% YoY, boosting telecommunication services as the second growth curve and now accounting for 29.3% of service revenue （2022: 25.6%）。
Interim dividend up 10.5%YoY to HK$2.43 despite exchange rate fluctuation.
Management committed 70% or above dividend payout for full year 2023, backed by 43% increase in free cash in 1H23 to RMB79.1bn. Net cash generated from operating activities increased 9% YoY （higher than service revenue growth and net profit growth for the same period） to RMB160.5bn.
1H23 CAPEX reduced by 11.5% YoY to RMB81.4bn, while the company geared up to build new information infrastructure, develop leadership in computation network and expand the application of middle platform, including cloud based applications and big data.
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 share performance.
Valuation
Reiterate BUY, and our DCF based target price is unchanged at HK$83.
Despite the 30% year-to-date performance, we view the share attractive with expected 2023 full year dividend at 7.6%.