We maintain a target price of HK$5.00 for China Telecom (the “Company”) and maintain an investment rating of “Buy”. Considering the steady increase in profits and dividends, as well as the opportunities brought by the rapid development of the cloud business, we maintain the company's target price at HK$5.00 and maintain the investment rating as “buy”. The target price corresponds to 12.7 times/11.7 times/10.8 times the 2024-2026 price-earnings ratio. The corresponding dividend rate for the 2024-2026 fiscal year is 5.7%/6.3%/7.0%.
China Telecom's profits have been growing steadily. In the first quarter of 2024, the company's service revenue and net profit were RMB124.347 billion (up 5.0% year on year) and RMB 8.597 billion (up 7.7% year on year), respectively, in line with market expectations. In the first quarter of 2024, mobile users and wired broadband users added 3.88 million and 2.06 million, respectively, while mobile ARPU and broadband hybrid ARPU increased slightly by 0.9% and 2.1%, respectively. Furthermore, due to its continued investment in industrial digitalization, industrial digitalization revenue further increased 10.6% year over year.
We expect dividends to grow steadily over the next few years. Due to the steady growth of the main business and good control of operating expenses, we believe that the company's net profit will continue to grow steadily in the next few years. The company plans to increase the dividend payout ratio to over 75% within three years from 2024. As a result, we are confident that dividends will grow steadily over the next few years. Based on the closing price as of April 23, 2024, China Telecom's dividend rate for 2023 was 5.8%. Combined with steady profit growth, we expect operators to continue to increase the level of dividends. Based on the closing price as of April 23, 2024, China Telecom's dividend ratio for 2024/2025/2026 is expected to be 6.5%, 7.2%, and 8.0%, respectively.
Catalysts: Increase in dividend payouts and dividend payout rates; promotion of cloud business.
Risk: The growth rate of the industrial Internet business is lower than expected; the investment and benefits of the industrial Internet business do not match.