china / hong kong industry focus china telecom sector industry focus china telecom sector page 4...

ASIAN INSIGHTS VICKERS SECURITIESed-TH / sa- DL

Steady capital spending on telecom infrastructure

• Regulators target Rmb1.2tr capex for 2016-2018,

higher than current expectations • Increasing capex from China Broadcast Network

and the private sector, which focus on fixed-line

networks • Expect 5G capex to kick off in 2018 • Our top pick is YOFC; upgrade FiberHome to BUY

China budgeted Rmb1.2tr telecom capex for 2016-2018. Regulators, MIIT and NDRC, jointly issued a “3-year action plan on the construction of information infrastructure”, which targets Rmb1.2tr capex in 2016-2018, i.e. c.Rmb400bn per year. This is higher than the targeted capex of Rmb700bn for 2016-17, i.e. Rmb350bn per year given by the State Council in the past. Total capex of the telecom sector reached c.Rmb430bn in 2016, dropping by c.5% from 2015’s c.Rmb454bn. In 2017, we expect the telecom sector's capex to be stable, supported by increasing capex on fixed-line networks. Fixed-line network capex increasing; 5G capex coming in 2018. We believe 4G capex has peaked off and will be partly offset by the increasing fixed-line network investment from China Broadcast Network (CBN) and the private sector. CBN has started tendering fibre network equipment and construction in different areas after obtaining its telecom operator licence in May 2016. MIIT has added c.100 cities open for the private sector to invest in the last-mile broadband business, driving the demand for fixed-line network equipment as well as customer-premise equipment. The next round of mobile capex will be from 5G network build-outs. The Chinese government currently targets to commercialise 5G network in 2020 and the capex should start in 2018. YOFC is our top pick. Our top pick is Yangtze Optical Fibre & Cable (YOFC, 6869.HK, BUY) as it is the key beneficiary of increasing demand for optical fibre cables supported by investment from CBN and the private sector. We have upgraded our rating for FiberHome (600498.CH, BUY) from FULLY VALUED to BUY with a higher TP of Rmb32.0 due to its improving growth outlook driven by fixed-line network investment. We also maintain BUY on CCS (552.HK, BUY) as it managed to expand into the government and corporate sectors. It also substantially improved free cash flows which support stronger balance sheet and dividend distribution.

HSI: 23,553 ANALYST Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

Recommendation & valuation

Company Pric e T argetPric e

Rec M k tCap

HK $ HK $ US$m

Yangtze Optical F ibre & Cable(6869 HK)

16.70 25.00 BUY 1,467

F iberhome Telecom(600498 CH)

25.70 32.00 BUY 3,897

China Comms.Sv s.(552 HK)

5.04 6.80 BUY 4,496

ZTE 'H'(763 HK)

12.36 16.00 BUY 8,873

ZTE 'A '(000063 CH)

15.57 17.40 BUY 8,873

Trigiant Group(1300 HK)

1.17 1.80 BUY 236

Source: Thomson Reuters, DBS Vickers

DBS Group Research . Equity

China / Hong Kong Industry Focus

China Telecom Sector

6 Mar 2017

Refer to important disclosures at the end of this report

Industry Focus


Rmb1.2tr budgeted on information infrastructure in 2016-2018 The Ministry of Industry and Information Technology (MIIT) and National Development and Reform Commission (NDRC) have jointly issued a “3-year action plan on the construction of information infrastructure” (《信息基础设施重大工程建设三

年行动方案》)(the action plan). The action plan targets Rmb1.2tr capex in 2016-2018, i.e. c.Rmb400bn per year. Compared to the target of Rmb700bn capex in 2016-17, i.e. Rmb350bn per year given by the State Council in 2015, we believe the budget in the action plan places higher pressure on the telecom sector for communication network build-outs. A list of 92 projects in six areas that will be pushed was also issued in the action plan. There are some projects belonging to China Broadcast Network (CBN) as well as private companies such as Dr.Peng (600804.CH, NR), in addition to the three major operators. As CBN and the private sector will mainly invest into the fixed-line networks, fixed-line network equipment providers such as Yangtze Optical Fibre and Cable (YOFC, 6869.HK, BUY) and FiberHome (600498.CH, FULLY VALUED) are likely to benefit.

Project investments of information infrastructure in 2016-2018 (Rmb bn)

Backbone network 49.5

Metropolitan Area Network 127.1

F ixed-line broadband access network 188.4

Mobile broadband access network 390.2

International communication network 25.6

Application infrastructure 121.4

T ot al 902 .2

Source: Companies, DBS Vickers

Expect overall capex to be stable in 2017 According to MIIT, total capex of the telecom sector reached c.Rmb430bn in 2016, dropping by c.5% from 2015’s c.Rmb454bn. China Mobile (CM, 941.HK, BUY), China Telecom (CT, 728.HK, BUY), and China Unicom (CU, 762.HK, HOLD) have a total capex budget of c.Rmb360bn in 2016, which is 19% less than that for 2015. We believe the decline from the three major operators was partly offset by the capex from CBN, Towerco and the private sector.

Capex of CM, CT and CU

050

100150200250300350400450500

FY09

A

FY10

A

FY11

A

FY12

A

FY13

A

FY14

A

FY15

A

FY16

F

FY17

F

FY18

F

China Mobile China Telecom China Unicom

RMB bn


In 2017, we expect the capex from the three major operators to decrease by 5-10%. However, we believe investments from CBN and the private sector will continue to increase and partly offset the decline from the three major telecom operators. We expect the total capex of the telecom sector to be stable in the coming year.

Telecom sector capex breakdown

Rmb bn 2015 2016 2017China Mobile 196 186 170China Telecom 108 97 90China Unicom 134 75 75Towerco 0-5 10-20 10-20China Broadcast Network 0 10-20 20-30Priv ate sector for last-milebroadband business

0-10 10-20 20-30

Others 10-20 20-30 20-30

Total 454 430 425

Source: MIIT, Companies, DBS Vickers

Industry Focus


Increasing investments from the private sector According to the action plan, total investment into the fixed-line broadband access network (last-mile broadband network) is Rmb188bn in 2016-2018 or Rmb63bn per annum. In 2017, we expect the investment from private capital to increase as MIIT added c.100 cities open for the private sector to invest in the last-mile broadband network in October 2016. The newly added regions are all cities in seven provinces (Liaoning, Fujian, Henan, Hubei, Guangdong, Shaanxi, Ningxia) and another 12 cities. Since the policy was implemented from March 2015 until February 2016, there were 61 cities allowing private capital investments into the broadband business and licensed to 148 private companies. More than Rmb10bn had been invested into the broadband network from the private sector during the period, according to MIIT. We estimate the investment will increase to more than Rmb20bn in 2017. Network build-outs of CBN We believe CBN will increase the fixed-line network investment from an estimated amount of Rmb10-20bn in 2016 to Rmb20-30bn in 2017 as it recently received its telecom licence which makes it the nation’s fourth telecom operator in May 2016. According to the action plan, CBN has projects to be completed by the end of 2018 in all six areas except for international communication network. In July 2016, CBN issued a technology white paper on cable TV FTTH network. In the same month, it entered into a strategic partnership with ZTE on building optical fibre network. In September 2016, the media reported that CBN in Guizhou tendered for 910k pieces of fixed-line network equipment and it targets to have 200k FTTH subs in rural areas in two years. CBN has also started tendering to construct its fibre network in other areas such as Hebei. 5G capex kicks off in 2018 The capex for 4G network is peaking off as China Mobile has completed network coverage in major areas. China Telecom and China Unicom have also started to share their mobile network to save capex. We estimate the number of BTS net-adds to decrease by 14% from 1,089k in FY15 to 941k in 2016. In 2017, we expect the number of BTS net-adds to further decline by 34% to 620k. The next round of mobile capex will be from 5G network build-outs. The Chinese government currently targets to commercialise the 5G network in 2020 and the capex should start in 2018. We expect spectrum with higher frequency to be deployed to build the 5G network. Higher frequency spectrum will require denser base stations due to its shorter transmission distance. Small cells may be

widely deployed and more optical fibres will be needed to connect the cell sites.

No. of telecom base stations in China

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY09

A

FY10

A

FY11

A

FY12

A

FY13

A

FY14

A

FY15

A

FY16

F

FY17

F

FY18

F

k units


Recommendation and valuation

We expect fixed-line network plays YOFC and FiberHome to benefit from the rising capex which focuses on fixed-line networks. YOFC is our top pick as it also benefits from the anti-dumping ruling by China against imported optical fibre preforms (preforms). We have also upgraded our rating for FiberHome from FULLY VALUED to BUY due to its improving growth outlook. For other players in the sector, we prefer CCS to ZTE and Trigiant as the former has a steadier growth outlook in the near term and encouraging free cash flow improvement. YOFC. We maintain our earnings forecast for YOFC. We have a BUY rating on YOFC as it is the major beneficiary of the anti-dumping ruling by China against imported preforms, which would lead to increased demand for domestic preforms, and an increase in product prices. The demand for optical fibre cables will be supported by increasing investments from CBN and the private sector on last-mile broadband networks in 2016-2018. YOFC’s valuation is attractive at c.10x FY17 PE as compared to its A-share peers trading at an average of 15x FY17 PE. We value YOFC at 15x FY17 PE which implies a target price of HK$25.0 per share, in line with its peers' average valuation.

Industry Focus


FiberHome. We have revised up the earnings estimates for FY17-18F by 6-8% due to improving growth outlook. We have upgraded the rating for FiberHome from FULLY VALUED to BUY with a higher TP of Rmb32.0. Our TP is pegged to 35x FY17F PE, which is higher than its historical average. We believe that the stock now has a greater re-rating potential as it is a key beneficiary of rising fixed-line network investment, in particular from CBN and the private sector. Together with its upstream fibre production capability, it now has higher earnings visibility. CCS. We have revised up our FY16-18F earnings estimates by 1-11% mainly due to higher growth assumptions for the domestic non-operator and overseas businesses. We also revised up our TP to HK$6.8 based on 15x FY17F PE (up from previous 10x) which is the higher end of its historical average. In our view, the stock deserves to trade at a higher multiple due to substantial free cash flow improvement which will support dividend (or even special dividend) distribution in the future.

ZTE. We revised down our earnings estimates by 2-4% for FY16-18F as we expect slower growth rates for the government and corporate and the consumer segments overseas, which were impacted by the US export restrictions. We believe that the export restriction imposed by the US will be resolved ultimately, but it will lead to share price volatility in the near-term. Current valuation is undemanding; uplifting of trade restriction will be a re-rating catalyst. We maintain BUY on ZTE-H share with a lower TP of HK$16.0 after rolling the valuation forward to 15x FY17F PE and incorporating a lower earnings and lower Rmb/HKD exchange rate. We also maintain BUY on ZTE-A share with a higher TP of Rmb17.4 after rolling the valuation forward to 18x FY17F PE. The A-H valuation premium of c.20% is in line with historical patterns. Trigiant. We revised down FY16F earnings by 58% after incorporating account receivables provision. However, we are positive on the earnings outlook going forward due to the increase in copper price. The current copper price level is more than 20% higher than the average level in 2016. We expect copper price to rebound to support core earnings recovery of c.10% in FY17F. Maintain BUY with a new TP of HK$1.8, or 8x FY17F PE.

Valuation

M k t PE PE Y ield Y ield P/Bk EV /EBIT DA ROE ROE

Currency Price Cap F iscal 17F 18F 17F 18F 17F 17F 18F 17F 18F

Company Name Code Local$ US$m Y r x x % % x x x % %

Hong K ong list ed

ZTE 'H'* 763 HK HKD 12.36 8,873 Dec 11.3 10.8 2.8 3.0 1.0 6.0 5.8 9.3 9.2

China Comms.Svs.'H'* 552 HK HKD 5.04 4,496 Dec 10.9 9.9 3.0 3.3 1.1 3.2 2.2 10.3 10.6

Trigiant Group* 1300 HK HKD 1.17 236 Dec 5.0 4.8 4.0 4.2 0.6 4.8 4.5 11.9 11.3

Yangtze Optc.F re 'H'* 6869 HK HKD 16.7 1,467 Dec 9.7 8.7 2.1 2.3 2.0 6.9 5.9 22.3 20.8

A - Shares

ZTE 'A'* 000063 CH CNY 15.57 8,873 Dec 16.1 15.3 2.0 2.1 1.5 8.3 8.0 9.3 9.2

F iberhome Telecom.Techs. 'A'* 600498 CH CNY 25.7 3,897 Dec 28.3 25.8 1.4 1.6 3.0 17.6 16.1 10.8 11.1

J iangsu Zhongtian Techs. 'A' 600522 CH CNY 10.98 4,879 Dec 12.8 10.6 0.7 0.7 1.9 8.1 7.2 15.8 15.9

Hengtong Optic-Electric 'A' 600487 CH CNY 20.5 3,688 Dec 11.1 8.2 1.2 n.a. 3.3 n.a. n.a. 29.5 27.5

Accelink Techs.'A' 002281 CH CNY 77.91 2,367 Dec 37.8 28.4 0.8 0.9 5.1 26.8 21.1 13.3 15.4

J iangsu Tongding Optic 'A' 002491 CH CNY 15.98 2,760 Dec 21.0 17.9 0.3 0.3 4.4 16.3 14.4 21.7 20.7

# FY17: FY18; FY18: FY19

Source: Thomson Reuters, *DBS Vickers


BUY

Last Traded Price ( 3 Mar 2017):HK$16.70 (HSI : 23,553) Price Target 12-mth: HK$25.00 (50% upside) Potential Catalyst: (1) Price increases for optical fibre products, and (2) capacity expansion Where we differ: We are more positive on margin expansion due to the price increase and capacity expansion Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2015A 2016F 2017F 2018FTurnover 6,731 7,807 9,318 9,688 EBITDA 881 1,162 1,531 1,731 Pre-tax Profit 632 867 1,175 1,313 Net Profit 571 770 1,043 1,165 Net Pft (Pre Ex) (core profit) 571 770 1,043 1,165 Net Profit Gth (Pre-ex) (%) 22.4 34.8 35.5 11.8 EPS (RMB) 0.89 1.13 1.53 1.71 EPS (HK$) 1.00 1.27 1.72 1.92 Core EPS (HK$) 1.00 1.27 1.72 1.92 Core EPS (RMB) 0.89 1.13 1.53 1.71 EPS Gth (%) (6.7) 26.7 35.5 11.8 Core EPS Gth (%) (6.7) 26.7 35.5 11.8 Diluted EPS (HK$) 1.00 1.27 1.72 1.92 DPS (HK$) 0.20 0.25 0.34 0.38 BV Per Share (HK$) 5.90 6.97 8.44 10.02 PE (X) 16.7 13.2 9.7 8.7 Core PE (X) 16.7 13.2 9.7 8.7 P/Cash Flow (X) 17.3 13.1 9.6 8.5 P/Free CF (X) 41.1 58.2 22.3 17.1 EV/EBITDA (X) 11.4 9.2 6.9 5.9 Net Div Yield (%) 1.2 1.5 2.1 2.3 P/Book Value (X) 2.8 2.4 2.0 1.7 Net Debt/Equity (X) 0.1 0.1 0.1 0.0 ROAE (%) 17.9 19.7 22.3 20.8

Earnings Rev (%): Nil Nil Nil Consensus EPS (RMB) 1.17 1.57 1.84 Other Broker Recs: B: 4 S: 0 H: 0

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Leading integrated optical fibre maker Leading integrated optical fibre maker benefitting from product price increases. Yangtze Optical Fibre and Cable (YOFC) is a leading Chinese optical fibre cable (cable) manufacturer with the capability to produce upstream products such as optical fibres (fibre) and optical fibre preforms (preform) with a global market share of c.20%. Optical fibre cables are widely used in telecom infrastructure. We initiate coverage on YOFC with a BUY rating as it is the key beneficiary of the anti-dumping ruling by China against imported preforms. Anti-dumping ruling increases domestic demand. Preform supply has decreased due to the anti-dumping ruling by China against imported preforms in August 2015. Imports used to account for c.40% of preform supply in China. The ruling will increase demand for domestic supply and benefit the local integrated cable manufacturers through price increases in preforms as well as fibres and cables. A-share listing a near-term catalyst. We forecast YOFC’s revenue to grow by 16% in FY16F and 19% in FY17F supported by increasing investments from China Broadcast Network and the private sector. Together with margin expansion, we forecast net profit to expand by 35% in FY16F and 36% in FY17F. The stock is trading at c.10x FY17F PE, which is at a c.30% discount to its A-share peers’ c.15x. As YOFC has announced its A-share listing plan, the shares have potential to re-rate. Valuation: Our TP of HK$25.0 is based on 15x FY17F PE, which is in line with its A-share peers. Key Risks to Our View:

Capex cuts from telecom operators. Declines in fixed-line network capex from telecom operators due to network investment levelling off or from regulatory changes will impact its earnings outlook Lifting of anti-dumping ruling. The lifting of the anti-dumping ruling against imported preforms into China could lead to oversupply and price pressure on fibre products. At A Glance

Issued Capital - H shares (m shs) 352 - Non H shrs (m shs) 331 H shs as a % of Total 52 Total Mkt. Cap (HK$m/US$m) 11,391 / 1,467 Major Shareholders China Huaxin Post & Telecom (%) 26.4 Wuhan Yangtze Communications (%) 17.6 Major H Shareholders (% of H-share) Draka Comteq B.V. (%) 51.2 Value Partners Group Limited (%) 9.0 H Shares-Free Float (%) 39.9 3m Avg. Daily Val. (US$m) 1.7

74

124

174

224

274

5.7

7.7

9.7

11.7

13.7

15.7

17.7

19.7

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16

Relative IndexHK$

Yangtze Optical Fibre and Cable (LHS) Relative HSI (RHS)

DBS Group Research . Equity 6 Mar 2017

China / Hong Kong Company Guide

Yangtze Optical Fibre and Cable Version 1 | Bloomberg: 6869 HK Equity | Reuters: 6869.HK


ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Yangtze Optical Fibre and Cable

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Capacity expansion. To meet the increased demand for domestic preforms, YOFC is planning to expand its capacity to meet customer demand. YOFC had 57m fkm (or 1,900-metric tonnes) annual production capacity of preforms as at the end of 2015. The company plans to expand its production capacity for fibres from 35m fkm as at the end of 2015 to 57m fkm by the end of 2017. For cables, the company currently has a 9.7m-fkm annual production capacity and it has been procuring products from its joint venture companies (total sales in FY15 was 26m fkm). By the end of 2017, the cable production capacity will increase to 17m fkm. Increasing average selling prices. Supply has dropped sharply due to the anti-dumping ruling by China against imported preforms. Before the ruling, imported performs accounted for c.40% of the total supply in China. The ruling would drive up the ASP for domestic preforms due to the tight supply. As preform is an upstream raw material in the optical fibre cable value chain, we expect supply for fibres and cables to be also constrained and lead to price increases. The increase in ASP should directly pass through to overall gross margins. Also, as more preforms and fibres are used for internal production, overall gross margins should increase. Increasing optical fibre demand. The three major Chinese telecom operators account for c.40% of YOFC’s total revenue. Growth will be driven by telecom operators’ capital expenditure on mobile backhaul and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile base station build-outs as well as FTTH development. New optical fibre demand is also driven by the increasing investments from China Broadcast Network and the private sector.

Sales volume of fibre and preform (k f km)

Sales volume of cable (k f km)

Gross margin (%)

ASP of preform (Rmb per fkm)

Source: Company, DBS Vickers

81,485

96,540 94,175

109,996 111,178

0

20000

40000

60000

80000

100000

120000

2014A 2015A 2016F 2017F 2018F

18,990

26,15028,345

30,900 30,900

0

5000

10000

15000

20000

25000

30000

35000

2014A 2015A 2016F 2017F 2018F

19.2 19.421.1

22.423.3

0

5

10

15

20

25

2014A 2015A 2016F 2017F 2018F

28.4

24.5

30

3537

0

5

10

15

20

25

30

35

40

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Healthy balance sheet despite increasing capex. As at the end of FY15, the company’s net gearing was 11%. To support its capacity expansion plan, we expect capital expenditure to increase from Rmb284m in FY15 to Rmb600m p.a. in FY16-17F. This will be supported by its strong operating cash flows of Rmb774m in FY16F and Rmb1,054m in FY17F. We forecast the company's net gearing to remain healthy at below 10% in the next few years. Share Price Drivers:

Increase in ASP. YOFC will benefit from price increase of fibre products driven by the stronger demand for domestic performs due to the anti-dumping ruling against imported preforms. Further increase in prices is positive to the company. Increasing optical fibre demand. The three major Chinese telecom operators account for c.40% of YOFC’s total revenue. Growth will be driven by telecom operators’ capital expenditure on mobile backhaul and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile base stations build-outs as well as FTTH development. New optical fibre demand is also driven by the increasing investments from China Broadcast Network and the private sector. A-share listing. On 23 December 2016, the company announced that it will apply to the China Securities Regulatory Commission (CSRC) for an A-share IPO to be listed on the Shanghai Stock Exchange. It plans to issue 75.8m new shares, representing 10% of the enlarged number of shares, and 18.65% of total number of A-shares in issue. We expect the IPO price for YOFC’s A-share listing to be benchmarked to its A-share peers which are trading at an average of c.15x FY17 PE. The success of the A-share listing should be a catalyst to trigger a valuation re-rating to narrow the valuation gap between the company and its A-share peers.

Key Risks:

Capex cuts from telecom operators. Declines in fixed-line network capex from telecom operators due to network investments levelling off or from regulatory changes will impact its earnings outlook. Lifting of anti-dumping ruling. The lifting of anti-dumping ruling against imported preforms into China could lead to oversupply and price pressures on fibre products.

Company Background:

YOFC is the largest optical fibre preform, optical fibre and optical cable supplier in China with 40%, 23% and 19% market shares respectively in 2015.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


0.9

1.0

1.0

1.1

1.1

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

RMBm

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 7x

+1sd: 8.5x

+2sd: 9.9x

‐1sd: 5.6x

‐2sd: 4.2x3.7

4.7

5.7

6.7

7.7

8.7

9.7

10.7

11.7


(x)

Avg: 1.57x

+1sd: 1.97x

+2sd: 2.36x

‐1sd: 1.18x

‐2sd: 0.79x0.7

1.2

1.7

2.2

2.7


(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Sales volume of fibre and preform (k f km) 81,485.0 96,540.0 94,175.0 109,996.0 111,178.3

Sales volume of cable (k f km) 18,990.0 26,150.0 28,345.0 30,900.0 30,900.0

Gross margin (%) 19.2 19.4 21.1 22.4 23.3 ASP of preform (Rmb per fkm)

28.4 24.5 30.0 35.0 37.0


Income Statement (RMB m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 5,677 6,731 7,807 9,318 9,688 Cost of Goods Sold (4,589) (5,427) (6,161) (7,234) (7,428) Gross Profit 1,088 1,304 1,646 2,085 2,260 Other Opng (Exp)/Inc (534) (627) (771) (932) (971) Operating Profit 554 677 874 1,153 1,289 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 28 80 120 150 150 Net Interest (Exp)/Inc (47) (125) (127) (128) (126) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 535 632 867 1,175 1,313 Tax (71) (74) (113) (153) (171) Minority Interest 2 12 15 20 23 Preference Dividend 0 0 0 0 0 Net Profit 466 571 770 1,043 1,165 Net Profit before Except. 466 571 770 1,043 1,165 EBITDA 696 881 1,162 1,531 1,731 Growth Revenue Gth (%) 17.6 18.6 16.0 19.4 4.0 EBITDA Gth (%) 12.1 26.7 31.8 31.7 13.1 Opg Profit Gth (%) 12.9 22.3 29.1 31.9 11.8 Net Profit Gth (%) 12.4 22.4 34.8 35.5 11.8 Margins & Ratio Gross Margins (%) 19.2 19.4 21.1 22.4 23.3 Opg Profit Margin (%) 9.8 10.1 11.2 12.4 13.3 Net Profit Margin (%) 8.2 8.5 9.9 11.2 12.0 ROAE (%) 21.6 17.9 19.7 22.3 20.8 ROA (%) 8.0 8.1 9.7 11.9 11.9

ROCE (%) 11.1 10.2 11.6 13.7 13.7 Div Payout Ratio (%) 22.8 20.8 20.0 20.0 20.0 Net Interest Cover (x) 11.7 5.4 6.9 9.0 10.2 Source: Company, DBS Vickers


Company Guide


Interim Income Statement (RMB m)

FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 2,635 3,042 3,050 3,682 3,678 Cost of Goods Sold (2,110) (2,480) (2,462) (2,965) (2,870) Gross Profit 525 562 588 716 807 Other Oper. (Exp)/Inc (239) (294) (279) (349) (366) Operating Profit 286 268 309 368 441 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 9 20 33 47 55 Net Interest (Exp)/Inc (49) 2 5 (129) (100) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 245 290 347 285 396 Tax (36) (35) (47) (27) (52) Minority Interest 1 1 4 8 11 Net Profit 211 256 305 266 355 Net profit bef Except. 211 256 305 266 355 Growth Revenue Gth (%) 32.0 7.5 15.7 21.0 20.6 Opg Profit Gth (%) 25.7 1.9 8.3 37.1 42.6 Net Profit Gth (%) 1.4 23.3 44.7 4.0 16.3 Margins Gross Margins (%) 19.9 18.5 19.3 19.5 22.0 Opg Profit Margins (%) 10.8 8.8 10.1 10.0 12.0 Net Profit Margins (%) 8.0 8.4 10.0 7.2 9.6 Source: Company, DBS Vickers

Balance Sheet (RMB m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 876 1,237 1,503 1,875 2,184 Invts in Associates & JVs 684 731 851 1,001 1,151 Other LT Assets 419 586 714 674 656 Cash & ST Invts 2,017 2,054 1,982 2,155 2,412 Inventory 697 678 746 820 903 Debtors 1,745 2,119 2,331 2,564 2,821 Other Current Assets 153 177 177 177 177

Total Assets 6,591 7,583 8,304 9,266 10,303 ST Debt

1,465 1,637 1,637 1,637 1,637 Creditors 700 852 938 1,031 1,134 Other Current Liab 419 488 488 488 488 LT Debt 1,019 821 821 821 821 Other LT Liabilities 76 53 53 53 53 Shareholder’s Equity 2,814 3,575 4,226 5,115 6,072 Minority Interests 98 157 142 121 98 Total Cap. & Liab. 6,591 7,583 8,304 9,266 10,303 Non-Cash Wkg. Capital 1,476 1,634 1,829 2,043 2,278 Net Cash/(Debt) (467) (403) (475) (303) (45) Debtors Turn (avg days) 104.6 104.8 104.0 95.9 101.4 Creditors Turn (avg days) 57.6 53.4 54.5 51.3 55.4 Inventory Turn (avg days) 57.9 47.3 43.4 40.8 44.1 Asset Turnover (x) 1.0 0.9 1.0 1.1 1.0 Current Ratio (x) 1.8 1.7 1.7 1.8 1.9 Quick Ratio (x) 1.5 1.4 1.4 1.5 1.6 Net Debt/Equity (X) 0.2 0.1 0.1 0.1 0.0 Net Debt/Equity ex MI (X) 0.2 0.1 0.1 0.1 0.0 Capex to Debt (%) 14.0 13.0 24.4 24.4 24.4 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers


Company Guide


Cash Flow Statement (RMB m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 535 632 867 1,175 1,313 Dep. & Amort. 114 124 168 228 291 Tax Paid (58) (54) (74) (113) (153) Assoc. & JV Inc/(loss) 0 (80) (120) (150) (150) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (396) (156) (194) (214) (235) Other Operating CF 6 84 127 128 126

Net Operating CF 200 551 774 1,054 1,192 Capital Exp.(net) (348) (319) (600) (600) (600) Other Invts.(net) (397) (93) 0 0 0 Invts in Assoc. & JV 0 (12) 0 0 0 Div from Assoc & JV 24 18 0 0 0 Other Investing CF 404 (102) 20 20 21 Net Investing CF (317) (508) (580) (580) (579) Div Paid (574) (106) (119) (154) (209) Chg in Gross Debt 886 (134) 0 0 0 Capital Issues 992 305 0 0 0 Other Financing CF (82) (99) (147) (147) (147) Net Financing CF 1,222 (33) (266) (301) (356) Currency Adjustments (1) 26 0 0 0 Chg in Cash 1,105 36 (72) 172 258 Opg CFPS (RMB) 1.22 1.10 1.42 1.86 2.09 Free CFPS (RMB) (0.30) 0.36 0.25 0.67 0.87 Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers

Analyst: Tsz Wang TAM CFA,

1

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Mar

-16

Ap

r-1

6

May

-16

Jun-

16

Jul-

16

Aug

-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

HK$S.No. Da te Clos ing 12-mth Ra ting

Pric e Ta rge tPri c e

1: 15-Feb-17 HK$17.80 HK$25.00 Buy


BUY (Upgrade from Fully Valued)

Last Traded Price ( 3 Mar 2017):RMB25.70 (CSI300 Index : 3,428) Price Target 12-mth: RMB32.00 (25% upside) (Prev RMB15.50) Potential Catalyst: Capex hike and business opportunities from overseas market Where we differ: We expect the fixed-line network investment to increase in the the next few years Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New Revise up earnings estimates by c.6-8% for FY17-

18F due to improved growth outlook A key beneficiary of rising fixed-line network

investment, in particular from CBN and the private

sector Upgrade from FULLY VALUED to BUY with a

higher TP of Rmb32.0

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2015A 2016F 2017F 2018FTurnover 13,490 17,539 21,455 24,063 EBITDA 1,051 1,305 1,556 1,723 Pre-tax Profit 762 981 1,186 1,301 Net Profit 654 848 1,026 1,125 Net Pft (Pre Ex) 656 848 1,026 1,125 Net Profit Gth (Pre-ex) (%) 20.9 29.4 21.0 9.7 EPS (RMB) 0.66 0.78 0.91 1.00 EPS Gth (%) 17.1 18.5 16.6 9.7 Diluted EPS (RMB) 0.63 0.75 0.91 1.00 DPS (RMB) 0.25 0.30 0.36 0.40 BV Per Share (RMB) 6.55 8.13 8.67 9.27 PE (X) 39.1 33.0 28.3 25.8 P/Cash Flow (X) 31.2 nm 127.2 33.6 P/Free CF (X) 135.9 nm nm 151.5 EV/EBITDA (X) 22.3 19.5 17.6 16.1 Net Div Yield (%) 1.0 1.2 1.4 1.6 P/Book Value (X) 3.9 3.2 3.0 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 10.0 10.6 10.8 11.1

Earnings Rev (%): 0.4 5.7 8.3 Consensus EPS (RMB) 0.84 1.07 1.26 Other Broker Recs: B: 9 S: 1 H: 2


Beneficiary of increasing fixed-line network investment A leading fixed-line network equipment provider in China. FiberHome is a leading Chinese telecom network equipment manufacturer after Huawei and ZTE (000063 CH) in China, focusing on fixed-line network products. We have a BUY rating on FiberHome as it will be a key beneficiary of rising fixed-line network investment, in particular from CBN and the private sector. Carriers’ network business is a major revenue contributor. Carriers’ network business account for c.60% of FiberHome’s revenue. In FY15, carriers’ network business grew c.27% to Rmb8.3bn. Meanwhile, segmental revenues for (i) optical fibre and cable, and (ii) data network increased by 24% and 31% y-o-y to account for 25% and 11% of total revenue in FY15 respectively. We expect the net profit to grow by 29% and 21% in FY16F and FY17F respectively. Key beneficiary of increasing investments from CBN and the private sector. CBN will increase its telecom infrastructure investment as it received its telecom licence (for fixed-line network) in May 2016, which makes it the nation’s fourth telecom operator. In addition, we expect the investment from private capital to increase as MIIT added c.100 cities open for the private sector to invest in the last mile broadband network. Valuation: We have upgraded the rating for FiberHome from FULLY VALUED to BUY with a higher TP of Rmb32.0. Our TP is pegged to 35x FY17F PE, higher than its historical average as it benefits from increasing fixed-line network capex from CBN and the private sector. Key Risks to Our View:

Capex cuts from telecom operators. Declines in capex from telecom operators due to network investment levelling off or from regulatory changes, e.g. network sharing as well as tower and facility sharing, will impact its earnings outlook.

At A Glance Issued Capital (m shrs) 1,046 Mkt. Cap (RMBm/US$m) 26,889 / 3,897

Major Shareholders Wuhan Fiberhome Tech (%) 46.6

Free Float (%) 53.4 3m Avg. Daily Val. (US$m) 21.8 ICB Industry : Technology / Technology Hardware & Equipment

82

102

122

142

162

182

202

222

10.1

15.1

20.1

25.1

30.1

35.1

40.1

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Relative IndexRMB

Fiberhome Telecommunication (LHS)

Relative CSI300 Index (RHS)



Fiberhome Telecommunication Version 5 | Bloomberg: 600498 CH Equity | Reuters: 600498.SS



Company Guide

Fiberhome Telecommunication


Earnings Drivers:

Telecom operators’ capex hike. Carriers’ networks account for c.60% of FiberHome’s revenue. FiberHome focuses more on fixed-line network equipment. Growth was mainly driven by telecom operators’ capital expenditure on mobile network’s backhaul and fixed-line network infrastructure. New demand is driven by (i) telecom network construction by China Broadcast Network (CBN), and (ii) increasing investment from the private sector on last mile broadband network. Expansion in overseas market driving strong export sales. Export business accounted for 21% of FiberHome’s revenue in FY15, and it registered a CAGR of 51% in FY12-15. FiberHome offers quality products that are comparable to international vendors, with more competitive pricing to penetrate into developing countries. It has completed a number of projects in the Philippines, Malaysia, Columbia and Indonesia. Since 2010, the value of communication equipment exported from China has been growing at a double-digit rate. FiberHome is the largest Chinese exporter of optical cable and is benefitting from the fibre network build-outs worldwide. We believe export sales will grow at a CAGR of 30% from FY16-FY18F to account for c.30% of total sales, vs. 21% of total sales in FY15. Earnings contribution from StarrySky. FiberHome increased its stake in Nanjing FiberHome StarrySky (StarrySky, 烽火星空) to 100% from 51% by acquiring the 49% equity stake from Lhasa Electronic Technology (Lhasa) in July 2015. Lhasa is providing profit guarantees of not less than Rmb128m/Rmb151m/Rmb175m/Rmb198m in FY14-17F for StarrySky. In FY15, the net profit from StarrySky was Rmb158m. The acquisition had enhanced earnings growth for FiberHome by c.15% in FY15. We do not anticipate further material acquisitions by the company in the near term.

Revenue growth rate

Gross margin


17.7

25.8

30

22.3

12.2

0

5

10

15

20

25

30

35

2014A 2015A 2016F 2017F 2018F

26.5 26.525.6 25.6 25.7

0

5

10

15

20

25

30

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Strong balance sheet with ample cash. FiberHome had a strong balance sheet with a net cash position of Rmb2,953m as at end-FY15, accounting for c.40% of its net book value. We forecast the company to maintain a net cash position in the coming years. Manageable capex expansion. We expect capex to rise from Rmb383m in FY15 to Rmb600m in FY16F and stay at the Rmb400m level in the following years. We believe this is manageable given the company’s high net cash level. Share Price Drivers:

Telecom operators’ capex hike. Carriers’ networks accounted for c.60% of FiberHome’s revenue. Growth will be mainly driven by telecom operators’ capital expenditure on mobile backhaul and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile base stations build-outs as well as fibre-to-the-home development. New demand is also driven by (i) telecom network construction by China Broadcast Network (CBN), and (ii) increasing investment from the private sector on last mile broadband network. Strong export sales. The export business accounted for 21% of FiberHome’s revenue in FY15, and it registered a CAGR of 51% in FY12-15. FiberHome offers quality products comparable to international vendors, with more competitive pricing to penetrate into developing countries. It has completed a number of projects in the Philippines, Malaysia, Columbia and Indonesia. Since 2010, the value of communication equipment exported from China has maintained a double-digit growth. FiberHome is the largest Chinese exporter of optical cable and is benefitting from the fibre network build-outs worldwide. We believe export sales will grow at a CAGR of 30% from FY16-FY18F to account for c.30% of total sales, vs. 21% of total sales in FY15.

Key Risks:

Capex cuts from telecom operators. Declines in capex from telecom operators due to network investment levelling off or from regulatory changes, e.g. network sharing as well as tower and facility sharing, will impact its earnings outlook.

Company Background:

FiberHome is a leading Chinese telecom network equipment manufacturer in China focusing on optical fibre network products. FiberHome’s parent company is FiberHome Technology Group which was established in 1974 and is directly affiliated to the State-owned Assets Supervision and Administration Commission of the State Council.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.7

0.7

0.7

0.8

0.8

0.8

0.8

0.8

0.9

0.9

0.9

0.00

0.05

0.10

0.15

0.20

0.25

2014A 2015A 2016F 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

2014A 2015A 2016F 2017F 2018F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 29.3x

+1sd: 35.3x

+2sd: 41.4x

‐1sd: 23.3x

‐2sd: 17.2x15.5

20.5

25.5

30.5

35.5

40.5

45.5

50.5

55.5

60.5

Mar-13 Mar-14 Mar-15 Mar-16

(x)

Avg: 3.15x

+1sd: 3.91x

+2sd: 4.68x

‐1sd: 2.39x

‐2sd: 1.63x1.4

2.4

3.4

4.4

5.4

6.4


(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue growth rate 17.7 25.8 30.0 22.3 12.2 Gross margin 26.5 26.5 25.6 25.6 25.7 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 10,721 13,490 17,539 21,455 24,063 Cost of Goods Sold (7,882) (9,909) (13,057) (15,958) (17,877) Gross Profit 2,839 3,581 4,482 5,497 6,186 Other Opng (Exp)/Inc (2,441) (3,031) (3,766) (4,564) (5,119) Operating Profit 398 549 716 933 1,067 Other Non Opg (Exp)/Inc 187 227 260 260 260 Associates & JV Inc 60 61 66 66 66 Net Interest (Exp)/Inc 20 (74) (61) (72) (91) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 2 (2) 0 0 0 Pre-tax Profit 667 762 981 1,186 1,301 Tax (33) (58) (69) (83) (91) Minority Interest (90) (50) (64) (78) (85) Preference Dividend 0 0 0 0 0 Net Profit 544 654 848 1,026 1,125 Net Profit before Except. 542 656 848 1,026 1,125 EBITDA 820 1,051 1,305 1,556 1,723 Growth Revenue Gth (%) 17.7 25.8 30.0 22.3 12.2 EBITDA Gth (%) 0.3 28.2 24.2 19.2 10.8 Opg Profit Gth (%) 0.2 38.1 30.4 30.3 14.3 Net Profit Gth (%) 4.8 20.2 29.7 21.0 9.7 Margins & Ratio Gross Margins (%) 26.5 26.5 25.6 25.6 25.7 Opg Profit Margin (%) 3.7 4.1 4.1 4.3 4.4 Net Profit Margin (%) 5.1 4.8 4.8 4.8 4.7 ROAE (%) 9.2 10.0 10.6 10.8 11.1 ROA (%) 3.7 3.8 4.0 4.1 4.1

ROCE (%) 4.6 5.7 6.4 7.3 7.9 Div Payout Ratio (%) 45.7 40.2 40.0 40.0 40.0 Net Interest Cover (x) NM 7.5 11.7 12.9 11.7 Source: Company, DBS Vickers


Company Guide



FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 4,995 5,726 6,119 7,370 7,714 Cost of Goods Sold (3,738) (4,144) (4,573) (5,336) (5,860) Gross Profit 1,257 1,582 1,546 2,035 1,854 Other Oper. (Exp)/Inc (1,039) (1,402) (1,226) (1,805) (1,531) Operating Profit 218 180 320 229 324 Other Non Opg (Exp)/Inc 57 130 63 164 66 Associates & JV Inc 33 27 34 27 32 Net Interest (Exp)/Inc 7 14 (24) (49) 1 Exceptional Gain/(Loss) 0 2 (3) 1 0 Pre-tax Profit 314 352 389 372 423 Tax (9) (24) (22) (36) (21) Minority Interest (31) (59) (40) (9) (14) Net Profit 274 270 327 327 387 Net profit bef Except. 274 268 330 326 387 Growth Revenue Gth (%) 15.2 19.9 22.5 28.7 26.1 Opg Profit Gth (%) 42.2 (26.3) 46.7 27.7 1.2 Net Profit Gth (%) (9.6) 24.9 19.4 21.0 18.4 Margins Gross Margins (%) 25.2 27.6 25.3 27.6 24.0 Opg Profit Margins (%) 4.4 3.1 5.2 3.1 4.2 Net Profit Margins (%) 5.5 4.7 5.3 4.4 5.0 Source: Company, DBS Vickers


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,446 1,915 2,266 2,386 2,476 Invts in Associates & JVs 43 49 49 49 49 Other LT Assets 753 821 836 848 858 Cash & ST Invts 4,101 4,183 4,737 3,908 3,647 Inventory 4,560 7,384 9,730 11,892 13,322 Debtors 4,011 3,761 4,890 5,982 6,709 Other Current Assets 518 966 1,047 1,125 1,176


1,152 1,230 1,230 1,230 1,230 Creditors 4,992 7,067 9,169 11,111 12,399 Other Current Liab 1,914 2,821 2,821 2,821 2,821 LT Debt 122 0 0 0 0 Other LT Liabilities 159 209 209 209 209 Shareholder’s Equity 6,200 6,859 9,167 9,783 10,457 Minority Interests 894 894 958 1,036 1,121 Total Cap. & Liab. 15,433 19,079 23,553 26,189 28,236 Non-Cash Wkg. Capital 2,185 2,224 3,677 5,066 5,988 Net Cash/(Debt) 2,826 2,953 3,507 2,678 2,418 Debtors Turn (avg days) 135.6 105.1 90.0 92.5 96.2 Creditors Turn (avg days) 229.5 227.0 231.6 236.3 244.5 Inventory Turn (avg days) 209.7 224.8 244.1 252.0 262.2 Asset Turnover (x) 0.7 0.8 0.8 0.9 0.9 Current Ratio (x) 1.6 1.5 1.5 1.5 1.5 Quick Ratio (x) 1.0 0.7 0.7 0.7 0.6 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 30.0 51.3 65.5 52.4 54.5 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 663 765 981 1,186 1,301 Dep. & Amort. 184 228 263 297 331 Tax Paid (33) (69) (69) (83) (91) Assoc. & JV Inc/(loss) (60) (61) (66) (66) (66) (Pft)/ Loss on disposal of FAs 4 4 0 0 0 Chg in Wkg.Cap. (51) (384) (1,453) (1,389) (922) Other Operating CF 114 336 244 283 309

Net Operating CF 821 819 (100) 228 862 Capital Exp.(net) (382) (631) (805) (644) (670) Other Invts.(net) 6 (170) 0 0 0 Invts in Assoc. & JV (105) (121) 0 0 0 Div from Assoc & JV 37 44 0 0 0 Other Investing CF 45 (46) 66 66 66 Net Investing CF (399) (924) (739) (578) (604) Div Paid (209) (311) (407) (479) (518) Chg in Gross Debt (125) (50) 0 0 0 Capital Issues 244 392 1,800 0 0 Other Financing CF (59) 84 0 0 0 Net Financing CF (149) 115 1,393 (479) (518) Currency Adjustments (4) 2 0 0 0 Chg in Cash 269 12 553 (828) (261) Opg CFPS (RMB) 0.90 1.21 1.24 1.43 1.58 Free CFPS (RMB) 0.45 0.19 (0.83) (0.37) 0.17 Source: Company, DBS Vickers


Source: DBS Vickers


1 2 3

18.0

20.0

22.0

24.0

26.0

28.0

30.0

32.0

Mar

-16

May

-16

Jul-1

6

Oct

-16

Dec

-16

Mar

-17

RMBS.No. Da te Clos ing

12-mth Ta rge t Ra ting

Pric e Pri c e1: 10-May-16 RMB23.48 RMB20.00 Fully Valued2: 20-May-16 RMB22.63 RMB16.00 Fully Valued3: 17-Aug-16 RMB26.53 RMB15.50 Fully Valued


BUY

Last Traded Price ( 3 Mar 2017):HK$5.04 (HSI : 23,553) Price Target 12-mth: HK$6.80 (35% upside) (Prev HK$4.50) Potential Catalyst: Capex hike; business opportunities from China Tower, non-telecom operators and overseas markets Where we differ:We are more positive on the earnings outlook driven by expansion into non-operator and overseas markets Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New • Revised up earnings forecasts for FY16-18 by 1-

11% for stronger growth from non-operator and

overseas markets • Expect strong free cash flows to support special

dividend distribution • Maintain BUY with a higher TP of HK$6.8 for its

improving growth outlook and free cash flows

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2015A 2016F 2017F 2018FTurnover 80,960 87,622 95,949 104,137 EBITDA 3,578 3,800 4,091 4,425 Pre-tax Profit 2,825 3,075 3,447 3,787 Net Profit 2,334 2,542 2,849 3,130 Net Pft (Pre Ex) 2,334 2,542 2,849 3,130 Net Profit Gth (Pre-ex) (%) 8.6 8.9 12.1 9.9 EPS (RMB) 0.34 0.37 0.41 0.45 EPS (HK$) 0.38 0.41 0.46 0.51 EPS Gth (%) 8.6 8.9 12.1 9.9 Diluted EPS (HK$) 0.38 0.41 0.46 0.51 DPS (HK$) 0.13 0.14 0.15 0.17 BV Per Share (HK$) 4.02 4.31 4.64 4.99 PE (X) 13.3 12.2 10.9 9.9 P/Cash Flow (X) 6.6 6.6 6.2 5.7 P/Free CF (X) 7.7 8.1 7.7 7.1 EV/EBITDA (X) 5.5 4.3 3.2 2.2 Net Div Yield (%) 2.5 2.7 3.0 3.3 P/Book Value (X) 1.3 1.2 1.1 1.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 9.8 9.9 10.3 10.6

Earnings Rev (%): 0.8 5.3 11.2 Consensus EPS (RMB) 0.37 0.41 0.45 Other Broker Recs: B: 6 S: 0 H: 4


Enriching customer portfolio Leading telecom infrastructure service provider. We rate China Communications Services (CCS) as a BUY on its improving growth outlook and free cash flows. CCS is a leading telecom infrastructure service provider in China. It is also engaged in business process outsourcing (BPO) as well as applications, content and other services (ACO). Business growth is mainly driven by operators’ network build-outs and increasing network maintenance expenditure, as well as expansion into non-operator markets. Stable growth with improving free cash flows. Telecom infrastructure services (TIS) revenue was the major growth driver in FY15 with a 15% y-o-y increase, accounting for 48% of total revenue. Free cash flow improved significantly to Rmb3,573m in FY15 from Rmb833m in FY14 mainly due to stricter control on the accounts receivable. We expect earnings to grow by 9% and 12% for FY16F and FY17F respectively, supported by expansion into non-operator markets. We also expect free cash flows to further improve to support a higher dividend payout. Expansion into non-operator and overseas markets. CCS provides nationwide services, and is continuously expanding its businesses into non-operator customers like government agencies, industrial customers and small and medium enterprises, with revenue contribution of c.28% in FY15. Moreover, the company has completed various turnkey projects overseas, and exports now account for c.4% of revenue. It will look to seize opportunities from the “one belt, one road” initiative and further expand into overseas markets. Valuation: We have a BUY rating on CCS with a target price HK$6.8, based on 15x FY17F PE up from previous 10x) which is the higher end of its historical average. In our view, the stock deserves to trade at a higher multiple due to substantial free cash flow improvement which will support dividend (or even special dividend) distribution in the future. Key Risks to Our View:

Capex cuts from telecom operators. Declines in capex from telecom operators due to network investments levelling off or from regulatory changes, e.g. network sharing as well as tower and facility sharing. This could result in a smaller addressable market for network infrastructure service providers.

At A Glance Issued Capital - H shares (m shs) 2,391 - Non H shares (m shs) 4,535 H shs as a % of Total 35 Total Mkt. Cap (HK$m/US$m) 34,907 / 4,496 Major Shareholders

China Telecom Group (%) 51.4 China Mobile (%) 8.8

Major H Shareholders (% of H-share) BlackRock, Inc. (%) 10.0

H Shares-Free Float (%) 100.0 3m Avg. Daily Val. (US$m) 4.9 ICB Industry : Technology / Technology Hardware & Equipment

53

73

93

113

133

153

173

193

213

2.3

2.8

3.3

3.8

4.3

4.8

5.3

5.8

6.3


Relative IndexHK$

China Communications Services (LHS) Relative HSI (RHS)



China Communications Services Version 4 | Bloomberg: 552 HK EQUITY | Reuters: 0552.HK



Company Guide

China Communications Services


Earnings Drivers:

Telecom operators’ capex and opex increase. Telecom infrastructure services (TIS) covers design, construction and project supervision on telecom networks and support systems. The TIS segment account for 40-50% of CCS’s revenue. Growth is mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. Capex hikes will generally be positive to demand for network infrastructure services. We expect another up-cycle relating to the development of 5G technology in FY18. CCS has been shifting its business from a capex-driven model to an opex-driven one. Revenue derived from network maintenance grew by 18% p.a. in the past two years. Management is confident that the momentum will continue. Market share gains through China Tower and CT-CU collaboration. CCS used to be part of CT and it has maintained a strong business relationship. We believe that CCS will gain market share through the establishment of China Tower and CT-CU collaboration: (i) Chinese telecom operators jointly established a tower company in 2014 for tower sharing in the future. CCS is exposed to more business opportunities from China Mobile (CM) and China Unicom (CU) through China Tower which inherited the preferential arrangement from CT. (ii) CT and CU have established a closer collaboration, in particular on the sharing of network infrastructure. CCS will be able to expand market share in CU by leveraging on the established relationship with CT. Proactive expansion into non-operator markets. CCS provides services across the nation, and is continuously expanding its businesses into non-operator customers like government agencies, industrial customers and small and medium enterprises, with revenue contribution of c.28% in FY15. The technical and service quality requirements are lower as compared to telecom operators which possess expertise in telecom networks. They are also relatively less price-sensitive. CCS enjoys a higher profit margin in the non-operator segment.

Domestic operator rev gth %

Domestic non-operator rev gth %

Gross Margin %


8.7

16.3

10

8 8

0

2

4

6

8

10

12

14

16

18

2014A 2015A 2016F 2017F 2018F

4.4

3

8.6

12.1

9.1

0

2

4

6

8

10

12

14

2014A 2015A 2016F 2017F 2018F

14.614.1 13.9 14 14

0

2

4

6

8

10

12

14

16

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Healthy cash position to support working capital. CCS’s net cash position was Rmb12bn as at the end of FY15. This would help CCS service its cash flow requirements due to the long working capital cycle of its operations. The company adopts a dividend payout ratio of 30%. Share Price Drivers:

Telecom operators’ capex hike. The TIS segment accounts for 40-50% of CCS’s revenue. Growth is mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile base station build-outs as well as fibre-to-the-home development. New demand is also driven by (i) telecom network construction by China Broadcast Network (CBN), and (ii) increasing investment from the private sector on last mile broadband network. Capex hikes will be positive to the share price. Contribution from China Tower. Increasing revenue contribution from China Tower would reaffirm the benefit from its preferential arrangement with CT, and that CCS is exposed to more business opportunities.

Key Risks:

Capex cuts from telecom operators. Declines in capex from telecom operators due to network investments levelling off or from regulatory changes, e.g. network sharing as well as tower and facility sharing. This could result in a smaller addressable market for network infrastructure services.

Company Background:

CCS is a leading telecom infrastructure service provider in China, with services covering design, construction and project supervision on telecom networks and support systems. It is also engaged in business process outsourcing and IT application services. CCS is 51% owned by China Telecom Group.


Capital Expenditure

ROE

Forward PE Band

PB Band


1.4

1.4

1.4

1.5

1.5

1.5

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2014A 2015A 2016F 2017F 2018F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 9.6x

+1sd: 11.5x

+2sd: 13.4x

‐1sd: 7.7x

‐2sd: 5.7x5.1

7.1

9.1

11.1

13.1

15.1


(x)

Avg: 0.98x

+1sd: 1.19x

+2sd: 1.39x

‐1sd: 0.78x

‐2sd: 0.58x0.5

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Domestic operator rev gth %

8.7 16.3 10.0 8.0 8.0

Domestic non-operator rev gth %

4.4 3.0 8.6 12.1 9.1

Gross Margin % 14.6 14.1 13.9 14.0 14.0 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 73,176 80,960 87,622 95,949 104,137 Cost of Goods Sold (62,495) (69,572) (75,404) (82,498) (89,513) Gross Profit 10,682 11,388 12,218 13,451 14,625 Other Opng (Exp)/Inc (8,151) (8,705) (9,324) (10,232) (11,115) Operating Profit 2,531 2,683 2,894 3,219 3,509 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 26 50 50 50 50 Net Interest (Exp)/Inc 74 92 131 178 227 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2,631 2,825 3,075 3,447 3,787 Tax (463) (487) (531) (595) (653) Minority Interest (18) (3) (3) (3) (3) Preference Dividend 0 0 0 0 0 Net Profit 2,150 2,334 2,542 2,849 3,130 Net Profit before Except. 2,150 2,334 2,542 2,849 3,130 EBITDA 3,397 3,578 3,800 4,091 4,425 Growth Revenue Gth (%) 6.9 10.6 8.2 9.5 8.5 EBITDA Gth (%) (2.9) 5.3 6.2 7.7 8.2 Opg Profit Gth (%) (5.7) 6.0 7.9 11.2 9.0 Net Profit Gth (%) (3.9) 8.6 8.9 12.1 9.9 Margins & Ratio Gross Margins (%) 14.6 14.1 13.9 14.0 14.0 Opg Profit Margin (%) 3.5 3.3 3.3 3.4 3.4 Net Profit Margin (%) 2.9 2.9 2.9 3.0 3.0 ROAE (%) 9.6 9.8 9.9 10.3 10.6 ROA (%) 4.3 4.2 4.2 4.4 4.4

ROCE (%) 8.8 8.7 8.8 9.2 9.3 Div Payout Ratio (%) 30.0 33.0 33.0 33.0 33.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers


Company Guide



FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 33,743 39,433 37,563 43,397 42,176 Cost of Goods Sold (28,920) (33,575) (32,387) (37,185) (36,784) Gross Profit 4,823 5,858 5,176 6,212 5,392 Other Oper. (Exp)/Inc (3,397) (4,754) (3,678) (5,027) (3,830) Operating Profit 1,426 1,105 1,497 1,186 1,562 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 11 14 12 38 35 Net Interest (Exp)/Inc 43 31 43 49 63 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,481 1,150 1,552 1,273 1,661 Tax (238) (225) (282) (206) (270) Minority Interest (5) (12) 0 (3) (5) Net Profit 1,238 913 1,271 1,063 1,386 Net profit bef Except. 1,238 913 1,271 1,063 1,386 Growth Revenue Gth (%) 4.3 9.2 11.3 10.1 12.3 Opg Profit Gth (%) (3.5) (8.4) 5.0 7.3 4.3 Net Profit Gth (%) (0.4) (8.4) 2.7 16.5 9.1 Margins Gross Margins (%) 14.3 14.9 13.8 14.3 12.8 Opg Profit Margins (%) 4.2 2.8 4.0 2.7 3.7 Net Profit Margins (%) 3.7 2.3 3.4 2.5 3.3 Source: Company, DBS Vickers


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 5,646 5,486 5,522 5,678 5,876 Invts in Associates & JVs 67 117 167 217 267 Other LT Assets 2,840 2,941 2,865 2,786 2,704 Cash & ST Invts 8,513 12,091 15,218 18,489 21,980 Inventory 2,421 2,884 3,028 3,180 3,339 Debtors 33,274 34,394 35,770 37,421 39,292 Other Current Assets 0 0 0 0 0


247 177 177 177 177 Creditors 26,241 28,391 31,230 34,353 37,788 Other Current Liab 1,891 3,221 3,264 3,328 3,387 LT Debt 39 34 34 34 34 Other LT Liabilities 801 880 880 880 880 Shareholder’s Equity 23,030 24,761 26,533 28,543 30,733 Minority Interests 513 449 451 454 457 Total Cap. & Liab. 52,761 57,913 62,570 67,771 73,458 Non-Cash Wkg. Capital 7,564 5,666 4,304 2,919 1,455 Net Cash/(Debt) 8,227 11,880 15,006 18,278 21,769 Debtors Turn (avg days) 158.9 152.5 146.1 139.2 134.4 Creditors Turn (avg days) 149.3 145.1 146.0 146.5 148.5 Inventory Turn (avg days) 13.8 14.1 14.5 13.9 13.4 Asset Turnover (x) 1.4 1.5 1.5 1.5 1.5 Current Ratio (x) 1.6 1.6 1.6 1.6 1.6 Quick Ratio (x) 1.5 1.5 1.5 1.5 1.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 273.5 307.4 414.4 453.7 492.5 Z-Score (X) 2.9 2.8 2.8 2.8 2.8 Source: Company, DBS Vickers


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 2,631 2,825 3,075 3,447 3,787 Dep. & Amort. 841 846 856 823 866 Tax Paid (524) (576) (487) (531) (595) Assoc. & JV Inc/(loss) (26) (50) (50) (50) (50) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (1,519) 1,101 1,319 1,321 1,405 Other Operating CF 206 542 (4) (4) (4)

Net Operating CF 1,609 4,688 4,709 5,006 5,409 Capital Exp.(net) (781) (650) (876) (959) (1,041) Other Invts.(net) (109) 1 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 78 64 64 64 64 Other Investing CF (65) (1,100) 0 0 0 Net Investing CF (877) (1,686) (812) (896) (978) Div Paid (942) (716) (770) (839) (940) Chg in Gross Debt 786 (77) 0 0 0 Capital Issues 0 0 0 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF (156) (793) (770) (839) (940) Currency Adjustments (23) 14 0 0 0 Chg in Cash 553 2,222 3,127 3,271 3,491 Opg CFPS (RMB) 0.45 0.52 0.49 0.53 0.58 Free CFPS (RMB) 0.12 0.58 0.55 0.58 0.63 Source: Company, DBS Vickers


Source: DBS Vickers


1 23

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-1

6

Au

g-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17



1: 14-Apr-16 HK$3.65 HK$4.50 Buy2: 20-May-16 HK$3.63 HK$4.50 Buy3: 25-Aug-16 HK$4.19 HK$4.50 Buy


H: BUY

Last Traded Price (H) ( 3 Mar 2017):HK$12.36 (HSI : 23,553) Price Target 12-mth (H): HK$16.00 (29% upside) (Prev HK$16.50)

A: BUY Last Traded Price (A) ( 3 Mar 2017):RMB15.57 (CSI300 Index : 3,428) Price Target 12-mth (A): RMB17.40 (12% upside) (Prev RMB16.50) Potential Catalyst: Capex hike and margin expansion Where we differ: Our FY16F and FY17F earnings are slightly higher than consensus due to more positive view on the business outlook Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New • Revised down earnings estimates by 2-4% for

FY16-18F due to slower growth for government

and corporate and consumer segments • Uplift of export restrictions imposed by the US will

be a catalyst for re-rating • Maintain BUY with TP adjusted by rolling the

valuation forward to FY17F and incorporating a

lower Rmb/HKD exchange rate

Price Relative

Forecasts and Valuation (H Shares) FY Dec (RMB m) 2015A 2016F 2017F 2018FTurnover 100,186 105,196 114,757 124,850 EBITDA 6,829 7,717 8,320 8,736 Pre-tax Profit 3,887 4,635 5,080 5,322 Net Profit 3,208 3,670 4,022 4,213 Net Pft (Pre Ex) 3,208 3,670 4,022 4,213 Net Profit Gth (Pre-ex) (%) 21.8 14.4 9.6 4.8 EPS (RMB) 0.77 0.88 0.97 1.02 EPS (HK$) 0.87 0.99 1.09 1.14 EPS Gth (%) 21.1 14.4 9.6 4.8 Diluted EPS (HK$) 0.72 0.99 1.09 1.14 DPS (HK$) 0.28 0.32 0.35 0.37 BV Per Share (HK$) 10.57 11.28 12.05 12.85 PE (X) 14.2 12.4 11.3 10.8 P/Cash Flow (X) 8.1 23.3 16.2 16.4 P/Free CF (X) 11.8 nm 140.3 156.3 EV/EBITDA (X) 6.9 6.3 6.0 5.8 Net Div Yield (%) 2.3 2.6 2.8 3.0 P/Book Value (X) 1.2 1.1 1.0 1.0 Net Debt/Equity (X) CASH CASH CASH 0.0 ROAE (%) 10.0 9.1 9.3 9.2 Earnings Rev (%): (4) (2) (2) Consensus EPS (RMB) 0.92 1.01 1.07 Other Broker Recs: B: 8 S: 2 H: 6 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Beneficiary of telecom network investment Leading Chinese telecom equipment manufacturer. We have BUY ratings on ZTE-H share (763.HK) and ZTE-A share (000063.CH) on the positive growth potential from carriers’ network business as well as expansion into government and corporate customers. ZTE is a leading Chinese telecom network equipment manufacturer and handset maker in China, with growth driven by (i) telecom operators’ capex, (ii) sales of consumer communication products, and (iii) government and corporate segment. Carriers’ network business is a major revenue contributor. Carriers’ network accounted for 50-60% of total revenue. Segmental revenue grew by 30% in FY15, mainly driven by 4G network build-outs. The China market contributed around 60% to segmental revenue. Meanwhile, segmental revenues for (i) government and corporate, and (ii) consumer increased by 18% and 13% y-o-y to account for c.11% and 32% of total revenue in FY15 respectively. We expect earnings to grow by 14% and 10% in FY16F and FY17F respectively. Expanding customer base and business scope. ZTE strives to expand into non-telecom operator markets. Its government and corporate segment includes smart city projects, information security, data centre and electric vehicle-charging business, etc. Driven by the fast development of over-the-top (OTT) content and IPTV business of telecom operators, sales of consumer products such as set-top boxes and routers is another key growth driver for ZTE. We believe that expansion in customer base and business scope is positive for long-term growth. Valuation:

We have a BUY rating on ZTE-H share and ZTE-A share. Our target price for ZTE-H share is based on 15x FY17F PE, which is below its historical average due to de-rating arising from a recent international trade dispute. Our target price for ZTE-A share is based on 18x FY17F PE. The A-H premium of c.20% is in line with historical patterns. Key Risks to Our View:

Capex cuts from telecom operators. Declines in capex from telecom operators due to network investment levelling off or from regulatory changes, e.g. network sharing as well as tower and facility sharing, will impact its earnings outlook Downside risk in handset profitability. The handset market is competitive and smartphones are now more or less commoditised products. Deterioration in profitability due to weaker sales or margins will negatively affect overall earnings growth.

At A Glance Issued Capital - H shares (m shs) 756 - Non H shares (m shs) 3,399 H shs as a % of Total 18 Total Mkt. Cap (HK$m/US$m) 68,966 / 8,873 Major Shareholders

Zhongxingxin (%) 30.5 Major H Shareholders (% of H-share)

BlackRock, Inc. (%) 9.0 Zhao Weiguo (%) 7.7 The Bank of New York Mellon Corporation (%) 5.8 Massachusetts Financial Services Company (%) 5.3 Baillie Gifford & Co (%) 5.1

H Shares-Free Float (%) 100.0 3m Avg. Daily Val. (US$m) 9.4 ICB Industry : Technology / Technology Hardware & Equipment

83

103

123

143

163

183

203

223

8.3

13.3

18.3

23.3

28.3


Relative IndexHK$

ZTE (LHS) Relative HSI (RHS)

90

110

130

150

170

190

210

7.2

12.2

17.2

22.2

27.2


Relative IndexRMB

ZTE-A (LHS) Relative CSI300 Index (RHS)



ZTE Version 4 | Bloomberg: 763 HK EQUITY | 000063 CH Equity | Reuters: 0763.HK | 000063.SZ



Company Guide

ZTE


Earnings Drivers:

Telecom operators’ capex hike. Carriers’ networks accounted for 50-60% of ZTE’s revenue. Growth was mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. Capex hikes will be positive to product demand. Thanks to the savings from tower sharing, we expect that the budget allocated to core network equipment to be stable in the next 2-3 years. We expect another up-cycle relating to the development of 5G technology in FY18. Smartphone shipments. Revenue from sales of smartphones represented c.70% of revenue from the consumer segment in FY15. It also contributed c.20-30% to total revenue. Smartphone shipment volume was c.56m units in FY15. Rising smartphone shipments will be positive to revenue, margins and earnings. The global smartphone market is competitive, and we expect 5-10% p.a. sales volume growth in the next few years. ZTE will continue targeting overseas markets (now accounting for c.70% of handset revenue). Sales of customer-premise equipment. Revenue from sales of customer-premise equipment (CPE) such as set-top boxes and routers represented c.30% of the revenue from the consumer segment in FY15. It grew by 40-50% y-o-y to account for c.10% of the total revenue in FY15. Driven by the fast development of over-the-top (OTT) content and IPTV business of telecom operators, we expect the sales of CPE to grow at a CAGR of 30%+ from FY16-18F. Expansion into government and enterprise segments. ZTE is expanding its customer base from telecom operators to government and corporate segments. Revenue from the government and corporate segment grew by 18% y-o-y to account for c.10% of the total revenue in FY15. Within the segment, revenue from smart city projects accounted for 60% of revenues in FY15 and c.80% of the smart city projects were domestic. Revenue from railway projects accounted for 40% of segmental revenue in FY15 and c.70% the projects were overseas. Going forward, ZTE will focus more on domestic projects which command higher margins. We expect the segment to grow at a CAGR of c.10% in FY17-18F. Cost control. The segmental gross margins for carriers’ networks, government and corporate as well as consumer segments were 35%, 39% and 16% respectively in FY15. Group gross and net margins were 29% and 3% respectively. Gross margin expansion will be positive to overall profitability through operating leverage. Carriers’ networks segment used to command higher margins along with new technology advancement and new product launches (e.g. 5G products). On the other hand, smartphone products in the consumer segment are more or less commoditised. Handset margins will remain weak in the absence of flagship products. Cost control is the key to maintaining stable margins.

Sales growth of carriers' networks (%)

Gross Margin %

Sales growth of consumer products (%)


-1.5

30.2

5 5 5

-2

3

8

13

18

23

28

33

2014A 2015A 2016F 2017F 2018F

29.1 29 29.3 29.2 29

0

5

10

15

20

25

30

35

2014A 2015A 2016F 2017F 2018F

28

13.3

5

1614.5

0

5

10

15

20

25

30

2014A 2015A 2016F 2017F 2018F


Company Guide

ZTE

Balance Sheet:

Healthy balance sheet with a net gearing of 8%. ZTE had net debt of around Rmb3bn, or a net gearing of 8% as at FY15. The company’s operating cash flow has improved partly due to faster accounts receivable collection. We expect net gearing to stay at the c.10% level in the medium term. Share Price Drivers:

Telecom operators’ capex hikes. Carriers’ networks accounted for 50-60% of ZTE’s revenue. Growth will be mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile base station build-outs as well as fibre-to-the-home development. Capex hikes will be favourable to share price. Expansion into enterprise and government customers. ZTE strives to expand into non-telecom operator markets. Its government and corporate segments include smart city projects, information security, data centre and electric vehicle-charging business, etc. Any positive development in non-telecom operator markets represents new growth potential.

Key Risks:

Capex cuts from telecom operators. Declines in capex from telecom operators due to network investments levelling off or from regulatory changes, e.g. network sharing as well as tower and facility sharing, will impact its earnings outlook. Downside risk in handset profitability. The handset market is competitive and smartphones are now more or less commoditised products. Deterioration in profitability due to weaker sales or margins will negatively affect overall earnings growth.

Company Background:

ZTE is a leading telecom network equipment manufacturer in China. It is the second largest Chinese carriers’ network equipment supplier; and one of the top 10 handset manufacturers in the world in terms of shipment volume.


Capital Expenditure

ROE

Forward PE Band

PB Band


0.7

0.7

0.7

0.8

0.8

0.8

0.8

0.8

0.9

0.9

0.9

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015A 2016F 2017F 2018F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2014A 2015A 2016F 2017F 2018F


RMBm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15.2x

+1sd: 18.7x

+2sd: 22.1x

‐1sd: 11.8x

‐2sd: 8.4x7.5

12.5

17.5

22.5

27.5


(x)

Avg: 1.61x

+1sd: 2.02x

+2sd: 2.43x

‐1sd: 1.2x

‐2sd: 0.79x0.7

1.2

1.7

2.2

2.7

3.2


(x)


Company Guide

ZTE

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Sales growth of carriers' networks (%)

(1.5) 30.2 5.0 5.0 5.0

Gross Margin % 29.1 29.0 29.3 29.2 29.0 Sales growth of consumer products (%) 28.0 13.3 5.0 16.0 14.5


Income Statement (RMB m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 81,471 100,186 105,196 114,757 124,850 Cost of Goods Sold (57,759) (71,093) (74,425) (81,230) (88,621) Gross Profit 23,712 29,093 30,770 33,527 36,229 Other Opng (Exp)/Inc (18,993) (24,112) (25,082) (27,354) (29,786) Operating Profit 4,719 4,981 5,689 6,173 6,443 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (53) 63 63 63 63 Net Interest (Exp)/Inc (1,128) (1,158) (1,116) (1,155) (1,183) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 3,538 3,887 4,635 5,080 5,322 Tax (810) (563) (834) (914) (958) Minority Interest (94) (116) (131) (144) (151) Preference Dividend 0 0 0 0 0 Net Profit 2,634 3,208 3,670 4,022 4,213 Net Profit before Except. 2,634 3,208 3,670 4,022 4,213 EBITDA 6,469 6,829 7,717 8,320 8,736 Growth Revenue Gth (%) 8.3 23.0 5.0 9.1 8.8 EBITDA Gth (%) 33.5 5.6 13.0 7.8 5.0 Opg Profit Gth (%) 52.8 5.6 14.2 8.5 4.4 Net Profit Gth (%) 94.0 21.8 14.4 9.6 4.8 Margins & Ratio Gross Margins (%) 29.1 29.0 29.3 29.2 29.0 Opg Profit Margin (%) 5.8 5.0 5.4 5.4 5.2 Net Profit Margin (%) 3.2 3.2 3.5 3.5 3.4 ROAE (%) 11.1 10.0 9.1 9.3 9.2 ROA (%) 2.5 2.7 2.8 2.9 2.8



Company Guide

ZTE


FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 37,697 43,774 45,899 54,288 47,757 Cost of Goods Sold (26,576) (31,183) (32,088) (39,005) (32,630) Gross Profit 11,121 12,591 13,810 15,283 15,127 Other Oper. (Exp)/Inc (8,937) (9,876) (11,237) (12,875) (12,239) Operating Profit 2,185 2,715 2,574 2,408 2,888 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (40) (13) (38) 101 (20) Net Interest (Exp)/Inc (500) (808) (574) (584) (411) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,644 1,894 1,962 1,925 2,458 Tax (473) (338) (310) (253) (519) Minority Interest (43) (51) (36) (80) (172) Net Profit 1,128 1,505 1,616 1,592 1,766 Net profit bef Except. 1,128 1,505 1,616 1,592 1,766 Growth Revenue Gth (%) 0.3 16.2 21.8 24.0 4.0 Opg Profit Gth (%) 50.7 42.4 17.8 (11.3) 12.2 Net Profit Gth (%) 263.9 43.7 43.2 5.8 9.3 Margins Gross Margins (%) 29.5 28.8 30.1 28.2 31.7 Opg Profit Margins (%) 5.8 6.2 5.6 4.4 6.0 Net Profit Margins (%) 3.0 3.4 3.5 2.9 3.7 Source: Company, DBS Vickers


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 8,747 9,583 10,734 12,042 13,275 Invts in Associates & JVs 461 561 624 686 749 Other LT Assets 14,756 15,430 15,972 16,482 17,052 Cash & ST Invts 18,357 28,035 27,047 26,503 25,850 Inventory 19,592 19,732 22,692 24,961 27,457 Debtors 30,400 29,987 34,485 37,933 41,727 Other Current Assets 17,941 21,261 24,449 26,894 29,584


20,348 17,799 17,988 18,134 18,295 Creditors 29,626 32,818 37,741 41,515 45,666 Other Current Liab 19,991 20,716 24,017 26,421 29,020 LT Debt 11,742 7,610 7,849 8,032 8,234 Other LT Liabilities 2,255 2,297 2,297 2,297 2,297 Shareholder’s Equity 24,879 38,981 41,613 44,460 47,387 Minority Interests 1,414 4,367 4,498 4,642 4,793 Total Cap. & Liab. 110,255 124,588 136,003 145,502 155,692 Non-Cash Wkg. Capital 18,316 17,445 19,867 21,853 24,081 Net Cash/(Debt) (13,733) 2,627 1,211 336 (679) Debtors Turn (avg days) 131.3 110.0 111.8 115.2 116.4 Creditors Turn (avg days) 178.1 164.4 177.7 182.8 184.2 Inventory Turn (avg days) 104.5 103.5 106.8 109.9 110.7 Asset Turnover (x) 0.8 0.9 0.8 0.8 0.8 Current Ratio (x) 1.2 1.4 1.4 1.4 1.3 Quick Ratio (x) 0.7 0.8 0.8 0.7 0.7 Net Debt/Equity (X) 0.5 CASH CASH CASH 0.0 Net Debt/Equity ex MI (X) 0.6 CASH CASH CASH 0.0 Capex to Debt (%) 3.3 6.9 8.8 9.5 9.4 Z-Score (X) 1.7 1.8 1.8 1.8 1.8 Source: Company, DBS Vickers


Company Guide

ZTE


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 3,538 4,304 4,635 5,080 5,322 Dep. & Amort. 1,803 2,087 1,966 2,085 2,231 Tax Paid (791) (824) (563) (834) (914) Assoc. & JV Inc/(loss) 53 (63) (63) (63) (63) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (4,296) (1,063) (2,983) (2,287) (2,516) Other Operating CF 794 1,200 (1,037) (1,173) (1,286)

Net Operating CF 1,102 5,640 1,955 2,808 2,775 Capital Exp.(net) (1,049) (1,765) (2,274) (2,483) (2,483) Other Invts.(net) (1,167) (1,192) (1,122) (1,224) (1,332) Invts in Assoc. & JV (33) (88) 0 0 0 Div from Assoc & JV 0 1 0 0 0 Other Investing CF 226 1,176 25 25 25 Net Investing CF (2,022) (1,869) (3,372) (3,683) (3,790) Div Paid 0 0 0 0 0 Chg in Gross Debt (1,310) 4,816 0 0 0 Capital Issues 254 2,834 0 0 0 Other Financing CF (860) (2,011) 429 330 362 Net Financing CF (1,916) 5,640 429 330 362 Currency Adjustments (52) (24) 0 0 0 Chg in Cash (2,888) 9,387 (988) (545) (653) Opg CFPS (RMB) 1.31 1.61 1.19 1.23 1.27 Free CFPS (RMB) 0.01 0.93 (0.08) 0.08 0.07 Source: Company, DBS Vickers


Company Guide

ZTE

H Share - Target Price & Ratings History

Source: DBS Vickers


A Share - Target Price & Ratings History

Source: DBS Vickers


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1: 19-Apr-16 HK$12.14 HK$17.00 Buy2: 20-May-16 HK$9.97 HK$16.50 Buy3: 26-Aug-16 HK$11.56 HK$16.50 Buy

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RMBS.No. Da te Clos ing

12-mth Ta rge t Ra ting

Pric e Pri c e1: 19-Apr-16 RMB14.41 RMB18.00 Buy2: 20-May-16 RMB13.36 RMB16.50 Buy3: 26-Aug-16 RMB14.70 RMB16.50 Buy


BUY

Last Traded Price ( 3 Mar 2017):HK$1.17 (HSI : 23,553) Price Target 12-mth: HK$1.80 (54% upside) (Prev HK$2.00) Potential Catalyst: Capex hike and copper price rebound Where we differ: We believe that the stock deserves a higher valuation Analyst Tsz Wang TAM CFA, +852 2971 1772 [email protected] Chris KO CFA, +852 2971 1707 [email protected]

What’s New Revising down FY16 earnings by 58% after

incorporating AR provision Current copper price level 20%+ higher than

average level last year Expect copper price rebound to support core

earnings recovery of c.10% in FY17 Maintain BUY with a new TP of HK$1.8, or 8x FY17 PE

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2015A 2016F 2017F 2018FTurnover 2,913 2,858 3,439 3,828 EBITDA 430 295 539 570 Pre-tax Profit 359 199 434 460 Net Profit 275 137 327 342 Net Pft (Pre Ex) 262 137 327 342 Net Profit Gth (Pre-ex) (%) (27.9) (47.6) 137.7 4.6 EPS (RMB) 0.19 0.09 0.21 0.22 EPS (HK$) 0.22 0.10 0.24 0.25 Core EPS (HK$) 0.21 0.10 0.24 0.25 Core EPS (RMB) 0.19 0.09 0.21 0.22 EPS Gth (%) (41.2) (54.8) 137.7 4.6 Core EPS Gth (%) (43.2) (52.5) 137.7 4.6 Diluted EPS (HK$) 0.22 0.10 0.24 0.25 DPS (HK$) 0.10 0.02 0.05 0.05 BV Per Share (HK$) 1.81 1.87 2.07 2.27 PE (X) 5.3 11.8 5.0 4.8 Core PE (X) 5.6 11.8 5.0 4.8 P/Cash Flow (X) nm nm 8.0 7.1 P/Free CF (X) nm nm 10.7 9.0 EV/EBITDA (X) 5.0 8.7 4.8 4.5 Net Div Yield (%) 8.4 1.7 4.0 4.2 P/Book Value (X) 0.6 0.6 0.6 0.5 Net Debt/Equity (X) 0.2 0.3 0.2 0.2 ROAE (%) 12.3 5.4 11.9 11.3 Earnings Rev (%): (58) (7) (7) Consensus EPS (RMB) 0.21 0.22 0.24 Other Broker Recs: B: 2 S: 0 H: 0 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Leading feeder cable supplier in China Excessive valuation discount. We rate Trigiant as a BUY with a TP of HK$1.8. The group is the largest feeder cable (a.k.a RF coaxial cable) supplier for telecom networks in China with 20%+ market share. The growth is driven by telecom operators’ continuous spending on network infrastructure. Trigiant’s profitability in the past few years was negatively affected by weak copper prices, but we remain positive on its long-term outlook. We believe that the market has placed an excessive valuation discount on the stock. Expect copper rebound to support ASP and earnings recovery. The feeder cable business has a pricing mechanism that protects gross margins in percentage terms with selling prices adjusted according to movements in copper prices. We notice that copper price is rebounding and the level in early 2017 is 20% higher than the average level in 2016. We expect that feeder cable’s ASP recovery will be a key earnings catalyst this year, In addition to single-digit volume growth as well as rising revenue contribution from optical cable product. Beneficiary of telecom network investments. Telecom operators’ network build-outs and broadband penetration will continue to support business growth. We expect single-digit volume growth p.a. for feeder cables in the medium term, in addition to ASP rebound. Moreover, we also expect sales of optical cable segment to grow by 10%+ through market share gain, with c.30% contribution to the group. We remain positive on the group’s overall outlook. Valuation: We have a BUY rating on Trigiant with a TP of HK$1.8, based on 8x FY17F PE, in line with the historical trading range of 8-10x of other telecom equipment suppliers. We believe that the current valuation discount to peers is excessive. Key Risks to Our View:

Capex cuts from telecom operators. Lower capex from telecom operators due to network investments levelling off or regulatory changes, e.g. network sharing as well as tower and facility sharing will be negative on the group’s earnings outlook. Copper price decline. Declines in copper prices will be negative to RF coaxial cable’s ASP, revenue and earnings.

At A Glance Issued Capital (m shrs) 1,564 Mkt. Cap (HK$m/US$m) 1,829 / 236

Major Shareholders Chairman Qian (%) 33.5 Eternal Asia (%) 18.0 Zhu Xujun (%) 12.8

Free Float (%) 35.7 3m Avg. Daily Val. (US$m) 0.1 ICB Industry : Industrials / Electronic & Electrical Equipment

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Relative IndexHK$

Trigiant Group (LHS) Relative HSI (RHS)



Trigiant Group Version 4 | Bloomberg: 1300 HK Equity | Reuters: 1300.HK



Company Guide

Trigiant Group


Earnings Drivers:

Feeder cable volume growth. Feeder cables (a.k.a.) RF coaxial cable is expected to account for c.50% of total revenue in FY16. Growth will mainly be driven by telecom operators’ capital expenditure on mobile network infrastructure, including base station construction and indoor coverage. We expect single-digit volume growth p.a. in the coming two years. Copper price rebound. The RF cable business has a pricing mechanism that protects gross margins in percentage terms, with selling prices adjusted according to copper price movements. However, the continuous decline in copper prices has led to lower ASP and revenue in the past few years. Copper price stabilisation and rebound will reverse the trend and is positive to earnings. Market share gains in new products. Trigiant is currently a small player in both the optical cable and flame retardant flexible cable segments with market share of less than 10% (vs. feeder cable’s market share of 20%+). Market share gains will be a key growth driver. Trigiant is a late entrant in both segments. Flame retardant flexible cables are used in the electricity systems in telecom base stations, and optical cables are applied in telecom infrastructure. The major customers of both products are also telecom operators. We expect market share gains from a low base, leveraging on its leading position in the feeder cable market.

Volume sales of RF coaxial cable (k km)

ASP (Rmb k)

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148 151163

171180

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2014A 2015A 2016F 2017F 2018F


Company Guide

Trigiant Group

Balance Sheet:

Healthy balance sheet with 21% gearing. Trigiant had net debt of Rmb527m or 21% net gearing as at end of FY15. The group’s cash flow is tight partly due to the long working capital cycle, but overall balance sheet remains healthy. The group has been adopting a 20% dividend payout policy starting from 1H16. Share Price Drivers:

Telecom operators’ capex hike. Business growth is mainly driven by telecom operators’ capital expenditure on mobile and fixed-line network infrastructure. The government’s policy direction on speed upgrades will support investments into mobile base stations build-outs as well as fibre-to-the-home development. Capex hikes will be positive to the share price. Copper price rebound. The group suffered from copper price decline in the past few years, which led to lower ASP and revenue. Copper price stabilisation and rebound will reverse the trend and is positive to earnings. Market share gains in new products. Trigiant remains a smaller player in optical cable and flame retardant flexible cable with market share of less than 10% (vs. feeder cable’s market share of 20%+). Market share gains will be a key growth driver.

Key Risks:

Capex cuts from telecom operators. Lower capex from telecom operators due to network investment levelling off or regulatory changes, e.g. network sharing as well as tower and facility sharing, will be negative on the group’s earnings outlook. Copper price decline. Declines in copper prices will be negative to selling prices of RF coaxial cable, revenue and earnings.

Company Background:

Trigiant is the largest feeder cable manufacturer in China with 20%+ market share in telecom network applications The company also produces flame retardant flexible cables and optical cables.


Capital Expenditure

ROE

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Avg: 7.9x

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‐1sd: 0.66x

‐2sd: 0.25x0.2

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2.2


(x)


Company Guide

Trigiant Group

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Volume sales of RF coaxial cable (k km)

147.7 151.0 163.1 171.2 179.8

ASP (Rmb k) 12.4 10.1 8.6 10.3 10.8 Gross margin (%) 22.3 22.3 21.0 20.2 19.3 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,658 2,913 2,858 3,439 3,828 Cost of Goods Sold (2,065) (2,263) (2,259) (2,746) (3,088) Gross Profit 593 650 599 693 741 Other Opng (Exp)/Inc (120) (247) (335) (187) (209) Operating Profit 473 403 265 506 532 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (37) (57) (66) (72) (71) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 5 13 0 0 0 Pre-tax Profit 442 359 199 434 460 Tax (73) (57) (33) (72) (76) Minority Interest 0 (27) (29) (36) (42) Preference Dividend 0 0 0 0 0 Net Profit 369 275 137 327 342 Net Profit before Except. 364 262 137 327 342 EBITDA 494 430 295 539 570 Growth Revenue Gth (%) 8.1 9.6 (1.9) 20.3 11.3 EBITDA Gth (%) 10.1 (12.9) (31.5) 82.9 5.6 Opg Profit Gth (%) 9.7 (14.9) (34.3) 91.2 5.0 Net Profit Gth (%) 17.7 (25.4) (50.1) 137.7 4.6 Margins & Ratio Gross Margins (%) 22.3 22.3 21.0 20.2 19.3 Opg Profit Margin (%) 17.8 13.8 9.3 14.7 13.9 Net Profit Margin (%) 13.9 9.4 4.8 9.5 8.9 ROAE (%) 21.3 12.3 5.4 11.9 11.3 ROA (%) 11.2 6.6 3.0 6.7 6.5



Company Guide

Trigiant Group


FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 1,353 1,305 1,490 1,423 1,336 Cost of Goods Sold (1,041) (1,024) (1,153) (1,110) (1,050) Gross Profit 312 281 337 313 285 Other Oper. (Exp)/Inc (56) (63) (81) (166) (173) Operating Profit 255 218 256 146 112 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (15) (22) (32) (25) (24) Exceptional Gain/(Loss) (47) 53 (27) 40 7 Pre-tax Profit 193 248 197 162 95 Tax (38) (34) (40) (17) (6) Minority Interest 0 0 (16) (10) (13) Net Profit 155 214 140 135 76 Net profit bef Except. 202 162 168 94 69 Growth Revenue Gth (%) 6.9 9.5 10.2 9.0 (10.4) Opg Profit Gth (%) 11.8 7.3 0.4 (32.8) (56.4) Net Profit Gth (%) (5.9) 43.7 (9.4) (37.0) (45.6) Margins Gross Margins (%) 23.0 21.5 22.6 22.0 21.4 Opg Profit Margins (%) 18.9 16.7 17.2 10.3 8.4 Net Profit Margins (%) 11.5 16.4 9.4 9.5 5.7 Source: Company, DBS Vickers


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 340 359 377 392 402 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 176 164 164 164 164 Cash & ST Invts 842 775 610 646 688 Inventory 155 96 107 118 127 Debtors 2,431 3,056 3,423 3,765 4,066 Other Current Assets 0 0 0 0 0


1,373 1,302 1,402 1,402 1,402 Creditors 366 418 468 515 556 Other Current Liab 74 39 39 39 39 LT Debt 0 0 0 0 0 Other LT Liabilities 70 39 15 53 58 Shareholder’s Equity 1,956 2,519 2,595 2,877 3,152 Minority Interests 106 132 161 197 239 Total Cap. & Liab. 3,944 4,450 4,681 5,084 5,447 Non-Cash Wkg. Capital 2,146 2,694 3,022 3,328 3,598 Net Cash/(Debt) (531) (527) (792) (757) (714) Debtors Turn (avg days) 279.0 343.7 413.7 381.4 373.3 Creditors Turn (avg days) 57.1 64.0 72.6 66.2 64.1 Inventory Turn (avg days) 24.8 20.5 16.6 15.1 14.7 Asset Turnover (x) 0.8 0.7 0.6 0.7 0.7 Current Ratio (x) 1.9 2.2 2.2 2.3 2.4 Quick Ratio (x) 1.8 2.2 2.1 2.3 2.4 Net Debt/Equity (X) 0.3 0.2 0.3 0.2 0.2 Net Debt/Equity ex MI (X) 0.3 0.2 0.3 0.3 0.2 Capex to Debt (%) 2.9 4.1 3.6 3.6 3.6 Z-Score (X) 2.3 2.4 2.2 2.5 2.6 Source: Company, DBS Vickers


Company Guide

Trigiant Group


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 442 359 199 434 460 Dep. & Amort. 21 28 30 33 38 Tax Paid (60) (70) (57) (33) (72) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (533) (592) (328) (306) (269) Other Operating CF 37 158 67 74 73

Net Operating CF (93) (116) (88) 202 230 Capital Exp.(net) (40) (53) (50) (50) (50) Other Invts.(net) 110 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (217) (168) 16 12 13 Net Investing CF (147) (221) (34) (38) (37) Div Paid (123) (163) (61) (45) (67) Chg in Gross Debt 457 (77) 100 0 0 Capital Issues 1 441 0 0 0 Other Financing CF (45) (117) (81) (84) (84) Net Financing CF 290 84 (42) (129) (151) Currency Adjustments 0 0 0 0 0 Chg in Cash 49 (254) (165) 36 42 Opg CFPS (RMB) 0.39 0.34 0.15 0.33 0.32 Free CFPS (RMB) (0.12) (0.12) (0.09) 0.10 0.12 Source: Company, DBS Vickers


Source: DBS Vickers


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1: 15-Mar-16 HK$1.49 HK$2.00 Buy2: 20-May-16 HK$1.31 HK$2.00 Buy

Industry Focus


PE & PB charts

Telecom equipment and infrastructure service providers PE & PB band chart

China Comservice (552 HK) PE band China Comservice (552 HK) PB band

Fiberhome Telecom (600498 CH) PE band Fiberhome Telecom (600498 CH) PB band

Trigiant (1300 HK) PE band Trigiant (1300 HK) PB band


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Industry Focus


Telecom equipment and infrastructure service providers PE & PB band chart

Yangtze Optical Fibre & Cable (6869 HK) PE band Yangtze Optical Fibre & Cable (6869 HK) PB band

ZTE -H (763 HK) PE band ZTE -H (763 HK) PB band

ZTE –A (000063 CH) PE band ZTE –A (000063 CH) PB band


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Industry Focus


DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 6 Mar 2017 12:31:39 (HKT) Dissemination Date: 6 Mar 2017 14:27:41 (HKT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”) and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments

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