Plan coming together

CITIC Telecom continues its emergence into a potentially substantial andexciting operator. CITIC Pacific shareholders recently approved the acquisitionof US$36bn of CITIC Ltd. assets. Telecom assets were left out of that deal, andappear set to me purchased by CITIC Telecom. We believe the eventualacquisition helps the company in five ways: 1) Selling inter-city bandwidth. 2)Allowing CITIC Telecom's data centres to connect server-to-server, at asubstantial cost saving. 3) Strengthening its cloud offering through having acomplete self-managed network. 4) Providing access to Hengqin Island. 5) As astepping stone to offering new services. We lift our target to HK$3.60.

CITIC asset shuffle to benefit CITIC Telecom

Once the CITIC Pacific asset injection is completed, CITIC Telecom is likely tomove ahead on agreeing a price for buying a stake in CITIC Networks of up to49% (under WTO rules). The recent HK$200m loan to CITIC Networks was astepping stone to such a transaction, allowing necessary network investmentand the development of a sales force.

Lifting price target to HK$3.60

We lift our price target to HK$3.60. The increased target reflects moving ourDCF to mid-2015, adding HK$0.20, as this year’s negative FCF rolls off. Ourtarget is lifted a further HK$0.40 for potential value add from corporate action.

Valuation and risk

Our HK$3.60 price target is DCF based using a WACC of 9.7% and terminalgrowth of 1%. Internet, Macau and cloud are three areas the market generallyrewards. At our target CITIC Tel would trade in line with the average sectorregional P/E of 18x. Key risks include: 1) Macau mobile roaming business losingshare. 2) Fixed line market share loss in Macau exceeding our forecasts whenthe new entrant launches. 3) Hubbing business declining faster than expected.