China Telecom released its 2024 three-quarter report: In the first three quarters of 2024, the company achieved operating income of 391.97 billion yuan, an increase of 2.9% over the previous year, and achieved net profit of 29.3 billion yuan to mother, an increase of 8.1% over the previous year. Looking at a single quarter, 3Q24 achieved revenue of 126 billion yuan, a year-on-year increase of 2.9%, and realized net profit to mother of 7.487 billion yuan, an increase of 7.8% year-on-year, in line with our previous expectations (7.434 billion yuan). We are concerned that Tianyi Cloud's competitiveness in the field of intelligent computing continues to improve. We are optimistic about the company's growth potential as the main force in domestic digital infrastructure construction and maintain a “buy” rating.

ARPU remains stable, and “network+cloud+AI+ application” expands simultaneously

By business, in the first three quarters of 2024, the company's mobile communication service revenue increased 3.2% year on year to 156.823 billion yuan, with a net increase of 14.9 million mobile users to 0.423 billion, 5G penetration rate reached 81.6%, and mobile user ARPU was 45.6 yuan, which remained stable; fixed network and smart home business revenue increased 2.9% year over year to 95.624 billion yuan, and broadband comprehensive ARPU reached 47.8 billion yuan, which remained stable.

In terms of digital business, the “network+cloud+AI+ application” layout continued to expand, with industrial digital business revenue increasing 5.8% year-on-year to 105.55 billion yuan. Tianyi Cloud covered the national public intelligent computing cloud pool layout with a “2+3+7+X” plan, focusing on building intelligent computing clusters with 10,000 cards in the two major regions of Beijing-Tianjin-Hebei and Yangtze River Delta regions to further enhance the company's competitiveness in the field of intelligent computing.

Profitability continues to improve and increase investment in scientific and technological innovation

In terms of profitability, in the first three quarters of 2024, the company's ROE increased 0.32 percentage points to 6.48% year on year, and net interest rate increased 0.37 percentage points to 7.49% year over year, mainly due to the company strengthening intelligent operation and promoting cost reduction and efficiency. Sales/management expenses decreased by 3.2%/0.6% to 39.4 billion yuan per cent compared to the first three quarters of last year, respectively. Furthermore, financial expenses fell 12.2% year on year to 0.518 billion yuan, mainly due to a decrease in interest expenses on leasing liabilities. As the company continues to increase its scientific and technological innovation efforts, R&D expenses increased 19.3% year over year to 8.75 billion yuan. We believe that the company's forward-looking investment in strategic emerging industries and future industries is expected to continue to provide growth momentum in the future.

Earnings are expected to continue to grow; maintain “buy” rating

According to the Ministry of Industry and Information Technology, domestic telecom business revenue increased 2.7% year-on-year from January to August 2024. Considering the slowdown in industry growth, we expect the company's 24-26 revenue to be 526.7/544.9/561.8 billion yuan (previous value: 544/576.6/604.1 billion yuan), and its net profit to mother for 24-26 is RMB 32.6/34.8/37 billion yuan (previous value: 33.7/37.41.1 billion yuan), which is expected BPS for 24-26 is $4.96/5.09/5.22. Considering the company's competitiveness and development prospects in the field of intelligent computing, the company was given 1.6 times the 2024 PB valuation (global average: 1.35), corresponding target price of 7.94 yuan; referring to the company's AH share premium rate of 49.17% in the past, H shares were given 1.07 times the 2024 PB valuation, and the corresponding target price was HK$5.80, maintaining the “buy” rating.

Risk warning: 1) ARPU improvements fell short of expectations; 2) 5G capital expenditure exceeded expectations; 3) competition intensified; 4) The company adopted a more conservative dividend policy.