We maintain China Unicom's (“Company”) target price of HK$7.66, with an investment rating of “Buy”. Due to continued improvements in dividend payout rates and potential growth opportunities in the data services business, we maintain China Unicom's investment rating as “Buy” with a target price of HK$7.66. Our target price corresponds to a price-earnings ratio of 10.2 times/9.3 times/8.5 times FY 2024-2026 and a 6.0%/7.1%/8.3% 2024-2026 dividend ratio.
Earnings for the first quarter of 2024 were slightly lower than expected, but we maintained double-digit earnings growth expectations for the full year. The company's service revenue and shareholders' net profit for the first quarter of 2024 were RMB89.043 billion (up 3.4% year on year) and RMB 5.613 billion (up 8.9% year on year), respectively. Profit growth was slightly lower than expected, mainly due to a decrease in net profit and other revenue attributable to joint ventures. However, operating profit increased 22.3% year over year. We believe the company's net profit will continue to grow steadily over the next few years, thanks to stable ARPU and easing depreciation pressure (capital expenditure is expected to drop significantly to RMB 65 billion year over year in 2024). We expect net profit to continue growing at double digits in 2024, with a dividend payout ratio of around 60% in 2024 and further increases in 2025 and 2026.
We expect the company to continue to increase shareholder returns and maintain high dividends. Based on the closing price on April 19, 2024, China Unicom's dividend rate for 2023 was 6.2%. Combined with steady profit growth, we expect operators to continue to increase the level of dividends. Based on the closing price on April 19, 2024, China Unicom's dividend rates for 2024, 2025, and 2026 are expected to be 7.6%, 9.0%, and 10.6%, respectively. We expect the rapid and steady growth of dividends to provide a good margin of safety for the company's stock price.
We expect cost reduction and efficiency gains to exceed market expectations. In 2024, the company plans to reduce capital expenditure by 12% year on year to RMB 65 billion, which means depreciation pressure will ease (depreciation and amortization expenses in 2023 account for 23.7% of total operating expenses). In addition, the company is also striving to improve operational efficiency, and employee benefit expenses and sales expenses are well controlled. As a result, we expect the company to achieve significant improvements in cost reduction and efficiency.
Catalysts: Increase in dividend payouts and dividend payout rates; promotion of data-related businesses.
Risk: Industrial Internet business is growing slower than expected; investment returns do not match.