According to the Ministry of Industry and Information Technology of the PRC,number of broadband internet household users steadily increased to 175million, up 16.8% YoY.With Chinese Government speeding up thedevelopment of the Fiber-to-the-home (FTTH) system andincreasingspending in information technology consumption, optical fiberdeployment service industry should remain fast growing.
China U-ton Holdings (08232 HK) announced 1H13 results, revenueincreased 55.8% YoY to RMB127.8 million, net profit increased 22.6%YoY to RMB28.7 million, slightly below expectation. We think theCompany deliberately cut the contract pricefor optical fiber deploymentservicesto enter new markets, which did stimulate segmental revenue growth(up 77.9% YoY), but substantially reduced segmental gross margin (dropped17.9 ppts YoY). However, risks of further substantial decline in gross marginseemlow.
ReduceFY13-14EPS estimates by 12.5% and 4.3% to RMB0.049 andRMB0.066 respectivelybut revise up FY15 EPS estimate by 3.6% toRMB0.086. We think gross margin could recover in medium term butinvestors should also be cautious about low operating cash flow problems.We apply12.5x FY14PERto value the Company at HKD1.050per share.Maintain “Accumulate”.