Investment highlight
For the first time, Hong Kong Broadband (01310) gives an outperform industry rating, with a target price of HK $16.80, corresponding to 12 times EV/EBITDA in 2020. The reasons are as follows:
Fixed network leader, stable customers. Hong Kong Broadband originated from home broadband services and had a market share of 35.8% by the end of 2019, ranking first in Hong Kong's fixed-line market. We believe that basic telecommunications services have the characteristics of capital-intensive and positive externalities, which will help leading companies to expand their competitive advantage in the market competition. Hong Kong Broadband is expected to consolidate its leading position and create a differentiated competitive advantage by virtue of its resource advantage (92.4% of users covered by optical fiber) and service advantage (broadband + fixed line + OTT multimedia content + virtual business mobile service), and achieve user ARPU enhancement while stabilizing market share.
Expansion is orderly and growth is expected. Hong Kong Broadband actively expanded its corporate customers and acquired WTT in 2019. The company's market share of corporate broadband customers climbed from 19.2% to 36.5% that year, and user quality significantly improved (user ARPU increased by 84.0% in the first half of 2020 compared with the same period last year). At the same time, through the acquisition of JOS, the company further strengthens the enterprise service capacity and provides enterprise comprehensive IT services with both hardware and software. We believe that with the improvement of enterprise information and the popularization of 5G industrial applications, enterprises' demand for "cloud, management and end" services will tend to converge, and broadband is expected to become a new ICT service provider with channel advantages, network advantages and technological advantages through continuous expansion and integration.
Efficient governance and rich dividends. Hong Kong Broadband actively implements the employee stock ownership plan to closely bind the company's development to employee incentives, and the unlocking conditions of the stock ownership plan are based on the dividend base (adjusted free cash flow) and are consistent with the interests of shareholders. Therefore, the company was able to actively expand and operate efficiently, significantly improve the company's profitability through a series of acquisitions, and share the development results with shareholders with a dividend policy of not less than 90% of the adjusted free cash flow, supporting the company's high return on investment and high valuation.
What is the biggest difference between us and the market? We believe that WTT and JOS, the two ICT companies acquired by the company, will consolidate the company's long-term competitiveness in the two dimensions of high-end customers and high-quality service capabilities, promote the company's transformation to integrated ICT services, and achieve dual expansion in performance and valuation.
Potential catalysts: the advent of 5G accelerates the digital transformation of enterprises and stimulates the demand for ICT services; the progress of newly acquired companies in coordination with existing businesses and personnel is accelerated.
Profit forecast and valuation
We estimate that the company's EPS from 2020 to 2022 will be HK $0.29, 0.53, 0.64 and CAGR will be 51.4%, respectively. The company's revenue and EBITDA will grow at a compound rate of 32.6% and 25.6% from 2020 to 2022, respectively.
For the first time, it covers the rating of outperforming industries, with a target price of HK $16.80, based on 12 times EV/EBITDA in 2020. The share price is currently trading at 9.3 times the 2020 EV/EBITDA, and our target price has 25.7% upside over the current price.
Risk.
The macro environment is uncertain; the synergy progress of the new acquisition target business is slower than expected; the industry competition intensifies, which damages the industry value; goodwill accounts for a relatively high risk.