Outstanding results in a tough market

1H earnings grew 5.3% YoY with 7% dividend growth on the back of slowing traditional telecom services. Remarkable EBITDA margin was maintained with 21% CAPEX savings while massive build-out of 5G networks and AI calculating power networks was achieved. Despite the slowdown in traditional 2C centric telecom services, we maintain positive outlook on the company's significant AI/cloud driven 2B potentials. Reiterate BUY and lowered target price to HK$82 as we factored in slackening traditional telecom services.

Key Factors for Rating

Net profit increased 5.3% YoY to RMB80.2bn in 1H24, thanks to disciplined control over its OEPX and extended depreciation period. 1H EBITDA margin (EBITDA over Service revenue) declined by 0.6ppt YoY to 39.3% but improved HoH from 38.4% in 2H23. 2Q24 EBITDA margin improved significantly to 42.7%, up 7.1% QoQ, thanks to well-controlled personnel and selling expenses, despite the rapid growth of Cloud/AI services. Management expect a more stable EBITDA margin in the long run, supported by better commercialisation of the new businesses as they are gaining operating leverage from well- established foundation model and expanding usage of AI Agents in MaaS model.

Capex dropped 21.3% YoY to RMB64bn in 1H24 after adding 351k new base stations in 2024, indicating the efficiency gain as the company expand into lower frequency band. We expect CAPEX savings by the year end although management maintains its CAPEX target of RMB173bn for 2024.

Dividend increased by 7.0% YoY to HK$2.60 per share, while management reiterate their commitment for full-year 2024 dividend payout ratio to be higher than that of 2023.

Earnings change: given the slowdown in traditional telecommunication services and relatively high penetration for most 2C services, we trimmed down our forecasted service revenues for 2024-26 by 2.4-7.8%. Our estimated earnings were also revised down by 2.5-4% respectively.

Key Risks for Rating

Government regulation on telecom tariff may have a significant impact on the company's revenues and earnings. Current US sanction on the company might also have a negative impact on share performance.

Valuation

Reiterate BUY and cut target price from HK$83 to HK$82 as we rolled over our DCF model to 2024 with revised 2024-26 earnings and lower CAPEX as we factored in the savings from improved CAPEX efficiency as the company built up their RNC or radio networks in 700Mhz, where each of the new base stations can provide radio coverage as much as 3x more than their traditional 5G base stations deployed on much higher radio frequency.