Macau telecom business will be the major earnings contributor in the future
CTM acquisition mostly funded by debt
Expect more collaboration with Citic Group's other telecom assets
Operator business draws more investor interest. Maintain BUY and TP of HK$3.20
Becoming a Macau Telecom operator. After the acquisition of CTM, 70% of Citic Telecom's earnings will be from CTM, and 13% and 17% from data and traditional telecom hub segments respectively. About half of CTM's revenue comes from handset sales, which is driven by Macau's tourism activities. Management expects CTM to deliver high single digit service revenue growth in the future.
Re-financing short-term loan with equity possible. The company has secured 100% debt financing or US$1.25bn at an average interest cost of c.5%to fund CTM acquisition. Only US$200m of the loan is short-term, with flexibility for re-financing with equity in the future.
More collaboration with Citic Group's other telecom assets. Mr. Luo Ning, a director of Citic Guoan Information Industry, has recently been appointed as a Non-Executive Director of Citic Telecom. This spells for further collaboration with Citic Telecom's other telecom assets. Future asset injection is also a possibility.
Maintain BUY. Given that only a small portion of the consideration will likely be funded by equity, the deal remains EPS accretive. Maintain BUY with TP of HK$3.2, based on 10x FY13 pro-forma earnings.