Incident description:

China Telecom released its 2024 semi-annual report, 2024H1, and the company achieved revenue of 266 billion yuan, +2.8% over the same period last year. Among them, service revenue was 246.2 billion yuan, +4.3% year-on-year, and continued to be higher than the industry's growth rate; net profit to mother was 21.8 billion yuan, +8.2% year over year, net profit not returned to mother was 21.7 billion yuan, +6.0% year on year, and capital expenditure was 47.2 billion yuan.

Incident reviews:

1) The basic market for mobile and fixed network services is stable, and the number of users & ARPU both continued to grow by 2024H1. The number of mobile users of the company achieved a growth of nearly 10 million, and the number of users reached 0.417 billion, and mobile ARPU was +0.1 yuan year-on-year; the number of wired broadband users increased by 3.2 million, and the comprehensive ARPU was +0.1 yuan year-on-year. Looking at the composition of service revenue, mobile value-added and application business revenue was +17.1% year-on-year, growing faster than mobile communication services; smart home business revenue was +14.4% year-on-year, growing faster than broadband access, becoming an important force in maintaining the stability of the ARPU value of the company's services. In terms of mobile communications, the company's 5G network penetration rate reached 55%, satellite communication revenue +110% year-on-year, and mobile phone direct satellite users increased 67% compared to the end of 2023. In terms of smart homes, the company vigorously expanded multi-scenario applications. The number of smart users in the whole house reached 14.84 million, +72.2%; the number of FTTR users exceeded 6 million, an increase of 7.2 times over the previous year; and the number of Internet of View customers was +54%.

2) The growth rate of the production volume business was faster than the overall service revenue growth. Tianyi Cloud's leading position was stable, with production revenue reaching 73.8 billion yuan in the first half of 2024, +7.2% year over year. Tianyi Cloud continued to be the core driving force, with revenue of 55.2 billion yuan in the first half of the year, accounting for 22.4% of service revenue. Among them, Tianyi Cloud's public cloud revenue increased 26% year on year, and IaaS+PaaS market share increased 1.5pp year on year. The company's production and data business explores the digital potential of the industry and is deeply integrated and empowered. The number of government and enterprise customers increased by 12%, and the digital platform covered 15 types of industries, larger than 110 platforms, and covered a wide range of provinces across the country in the fields of urban grass-roots governance, smart tourism, smart medical care, and industrial Internet.

3) AI capabilities continue to empower internal and external capabilities, build an integrated intelligent computing service system to enable internal digital upgrading of AI, and establish 10 large internal models for functions such as automatic fault handling, cloud network maintenance, intelligent customer service, and network power saving, to effectively implement the quality and efficiency of the big model. We have established the industry-leading integrated intelligent computing service platform “Xiyang”, integrated 39 partner computing power 22EFLOPS, and own intelligent computing 21EFLOPS (+90.9% compared to the end of 2023) to provide one-stop heterogeneous computing power training and promotion service capabilities. To promote breakthroughs in the capabilities of the basic Big Star Model, the semantics, voice, and multi-modality models have all completed the “double filing” of algorithms and services. Through the Big Star Model, 32 major industry models have been launched, and more than 20 new server customers have been added. We believe that Tianyi Cloud is completing the transformation from a public cloud to an intelligent computing cloud, and that self-developed large-scale model products will continue to contribute new momentum to the growth of cloud computing.

4) Capital expenditure as a share of revenue declined. The focus was on investing in domestic computing power 2024H1. The company completed a cumulative capital expenditure of 47.2 billion yuan, +13.5% over the same period last year. Although the overall investment amount has increased, there have been significant changes in the structure. Among them, the industry invested 16.1 billion yuan, +36% over the same period, built a leading domestic fully liquid-cooled 10,000 card pool in Beijing-Tianjin-Hebei and Yangtze River Delta, and deployed reasoning pools in 31 provinces to accelerate the construction of a digital information infrastructure capability base to guarantee future monetization capabilities. The company plans to spend 96 billion dollars on capital in 2024, reducing its share of revenue to less than 20% (21.3% in 2023).

Annual outlook: The company strives for good annual revenue and EBITDA growth. The increase in net profit was higher than the increase in revenue. The dividend per share continued to rise to 0.1671 yuan in the first half of the year, +5% over the same period last year, the dividend ratio reached 70%, and plans to increase it to more than 75% within three years.

Profit forecast, valuation analysis and investment suggestions: The company's net profit for 2024-2026 is expected to be 33.354/36.356/39.209 billion yuan, up 9.6%/9.0%/7.8% year on year; the corresponding EPS is 0.36/0.40/0.43 yuan, and the PE corresponding closing price on August 21, 2024 is 17.0/15.6/14.4 times, respectively. We believe that the company's revenue and profit growth is steady, while the capital expenditure ratio continues to decline, and the dividend rate continues to increase There is still room for improvement in valuation compared to mainstream overseas operators, and the “buy-A” rating is maintained.

Risk warning:

The risk of a decline in the growth rate of users in the communications industry.

There is a risk that the growth rate will slow down due to the increase in Tianyi Cloud base and fierce market competition.

Risk that new intelligent calculation targets cannot be completed on time due to external policy restrictions or limited internal supply.