Hong Kong Telecom is a leading four-network integrated service provider, providing fixed network, broadband, mobile communications and media entertainment services. FY21 revenue was HK$33.961 billion (+4.9% YoY), EBITDA margin was 37.5%, and net profit was HK$4.808 billion (-9.3% YoY). The adjusted free cash flow per share for FY21 was HK72.77 cents (+2.39% YoY). Given the good 5G penetration rate and cost control data, we expect FY22's adjusted free cash flow growth to remain stable, partially offsetting higher financial costs. We are the first to increase our holdings rating for Hong Kong Telecom, with a target price of HK$11.56.
FY21 adjusted free cash flow increased 2.4% year over year. Hong Kong Telecom's total revenue increased 4.9% year over year due to strong demand for fiber optic networks and continued rise in 5G penetration. Revenue from telecommunications services fell 2.4% year over year, but was offset by a 4.2% year-on-year increase in local data services, mainly driven by a 6% year-on-year increase in fiber optic home users. Due to the spread of the epidemic, households/businesses have accelerated their digital transformation, the APRU for home WiFi solutions has increased by HK$95, and demand for enterprise solutions has increased.
The mobile communications business continues to recover. Affected by at-home vaccination measures, global roaming revenue is still weak. The 5G popularity drive plan increased by HK$70. The 5G penetration rate for FY21 was 23%, while the management target was to reach 30% by the end of FY22. We believe mobile phone revenue increased 50.6% year over year as demand for 5G devices rebounded due to suppressed demand.
EBITDA's profit margins are stable, and savings are reinvested in new areas of growth. O2O sales channel optimization and accelerated digital transformation saved costs, resulting in a 9% year-on-year increase in operating expenses for telecommunications services/mobile communications. Cost savings are invested in new areas of growth, such as The Club/DrGo/Capture Rewards. Pay TV subscribers have also grown significantly, and we believe that in the face of price competition, quality content will help differentiate Hong Kong Telecom from other operators.
There are negative factors in terms of financial costs. We believe that total FY21 debt increased 3.3% year over year to US$5.626 billion, and that financial costs were higher than expected. We think a 1% increase in real interest rates could result in a reduction of FY22's adjusted free cash flow by about 3% after tax.
The rating for the first increase in holdings. We believe that Hong Kong Telecom's adjusted free cash flow is still healthy. Despite the high financial costs, we believe HKT can take advantage of the popularity trend of 5G and enter the neighboring OTT market. We expect adjusted free cash flow for FY22 to increase by 1.85% and reach our target price of HK$11.56, implying 9.6 times FY22 predicted EV/EBITDA and 16.6 times FY22 predicted earnings per share.