Two hot markets are better than one
CITIC Telecom offers investors the compelling proposition of Macau exposure, China data growth and potential asset injection from its telecom-laden parent. We believe most investors would chase any one of those stories, especially when priced at just 10x 2014 earnings and 4-5% dividend yield. We initiate coverage with a Buy and HK$2.80 TP, implying 18% potential upside, which combined with the 2013 4.2% yield, offers a potential total share return greater than 20%.
A Macau proxy
Having bought Macau’s CTM earlier this year, 2H13 will be the first full period of Macau profitability. That is boosting underlying group net profit and FCF to roughly US$100m p.a. CITIC Telecom, in our view, is now reaching institutional quality. With further acq uisitions likely ahead, we believe CITIC Telecom’s earnings quality will continue to improve.
China data growth potential
The acquisition of CEC in 2012 has accelerated the group’s data business. Its China focused data business is forecast to grow 30% to HK$1.2b in revenues this year, and should continue to grow helped by market growth, license scarcity and increased co-operation with its parent which holds a full telecom license. Furthermore, the company’s emerging cloud-business is based on internationally recognized industry stan dards, providing a potential advantage in targeting foreign corporations in China.
Initiating with Buy with HK$2.80 target price
We value the stock on DCF at HK$2.80 using a 9.1%% WACC and 0.5% terminal growth rate. While the TP up side underpins our Buy recommendation, we also highlight that increasing ties with CITIC Group augers well, increasing the potential for accretive M&A (which we do not include in the valuation). The main downside risks are China Mobile or others getting a Macau mobile licence, a downturn in Macau, interest rates rising or overpaying for M&A.