See important disclosures, including any required research certifications, beginning on page 25 ■ Investment case We see CITIC Telecom (CTEL) shares providing exposure to a stable cash cow business, as well as a free call option offering significant upside potential. The cash cow is the CTEL’s 99% stake in Companhia de Telecomunicações de Macau (CTM), a diversified telecom operator in Macau. We believe this business generated some HKD1.5bn in EBITDA for CTEL in 2014 (c.80% of CTEL’s EBITDA). CTM has a dominant market share in Macau, and we view it as a stable business that will drive earnings growth of 11-16% pa for 2015-17E. In our view, the free call option is the possibility that CTEL will take a major equity stake in a related party, China Express Networks Company (CENC), which owns 2 valuable telecom assets: a basic telecom licence and a 32,000km fibre-optic network backbone. If, as we expect, CTEL seals the transaction, it will become the 4th (and likely last) company permitted to sell Internet bandwidth in China. Since quality bandwidth is scarce in China, we expect there to be significant demand, particularly from carrier- neutral IDC providers. ■ Catalysts 1) Upcoming launch of 4G services in Macau. CTM is one of 4 bidders that were recently awarded a 4G licence. We believe it will be among the first to launch 4G services and reach full coverage the earliest, hence allowing it to capture market share. 2) Acquisition of CENC. CTEL has signed a memorandum of understanding (MOU) with the parent of CENC for a potential equity investment. If an acquisition does materialise, CTEL’s target market and potential businesses should be substantially broadened. ■ Valuation We initiate coverage of CTEL with a 12-month target price of HKD3.80 and a Buy (1) rating. Our TP is based on a DCF of CTEL’s existing businesses, assuming a WACC of 9.8% and terminal growth rate of 2%. Hence, our valuation implies the call option is “free”. ■ Risks Key risks to our call: 1) the acquisition of CENC may not go through, and 2) possible erosion of CTM’s market share in Macau. Telecommunication Services / China 1883 HK 10 March 2015 CITIC Telecom International Initiation: free call option • CITIC Telecom has a stable cash cow business and a free call option with substantial upside potential, in our view • The company may become only the 4 th legally approved supplier of Internet bandwidth in China • Dividend yield of 4.4% for 2015E; initiating coverage with Buy (1) rating and 12-month target price of HKD3.80 Source: FactSet, Daiwa forecasts Telecommunication Services / China CITIC Telecom International 1883 HK Target (HKD): 3.80 Upside: 43.9% 9 Mar price (HKD): 2.64 Buy (initiation) Outperform Hold Underperform Sell 1 2 3 4 5 75 85 95 105 115 2.2 2.5 2.8 3.0 3.3 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Share price performance CITIC Tele (LHS) Relative to HSI (RHS) (HKD) (%) 12-month range 2.28-3.26 Market cap (USDbn) 1.14 3m avg daily turnover (USDm) 1.97 Shares outstanding (m) 3,356 Major shareholder CITIC Ltd. (59.2%) Financial summary (HKD) Year to 31 Dec 15E 16E 17E Revenue (m) 8,692 8,971 9,241 Operating profit (m) 1,312 1,449 1,603 Net profit (m) 793 923 1,063 Core EPS (fully-diluted) 0.235 0.274 0.315 EPS change (%) 10.8 16.3 15.2 Daiwa vs Cons. EPS (%) 0.6 6.9 n.a. PER (x) 11.2 9.6 8.4 Dividend yield (%) 4.4 5.1 5.9 DPS 0.116 0.135 0.156 PBR (x) 1.3 1.2 1.1 EV/EBITDA (x) 7.4 6.6 6.0 ROE (%) 11.7 12.7 13.6 John Choi (852) 2773 8730 j[email protected]Carlton Lai (852) 2532 4349 [email protected]How do we justify our view? How do we justify our view?
Transcript
See important disclosures, including any required research certifications, beginning on page 25
■ Investment case We see CITIC Telecom (CTEL) shares providing exposure to a stable cash cow business, as well as a free call option offering significant upside potential. The cash cow is the CTEL’s 99% stake in Companhia de Telecomunicações de Macau (CTM), a diversified telecom operator in Macau. We believe this business generated some HKD1.5bn in EBITDA for CTEL in 2014 (c.80% of CTEL’s EBITDA). CTM has a dominant market share in Macau, and we view it as a stable business that will drive earnings growth of 11-16% pa for 2015-17E. In our view, the free call option is the possibility that CTEL will take a major equity stake in a related party, China Express Networks Company (CENC), which owns 2 valuable telecom assets: a basic telecom licence and a 32,000km fibre-optic
network backbone. If, as we expect, CTEL seals the transaction, it will become the 4th (and likely last) company permitted to sell Internet bandwidth in China. Since quality bandwidth is scarce in China, we expect there to be significant demand, particularly from carrier-neutral IDC providers. ■ Catalysts
1) Upcoming launch of 4G services in Macau. CTM is one of 4 bidders that were recently awarded a 4G licence. We believe it will be among the first to launch 4G services and reach full coverage the earliest, hence allowing it to capture market share.
2) Acquisition of CENC. CTEL has signed a memorandum of understanding (MOU) with the parent of CENC for a potential equity investment. If an acquisition does materialise, CTEL’s target market and potential businesses should be substantially broadened.
■ Valuation We initiate coverage of CTEL with a 12-month target price of HKD3.80 and a Buy (1) rating. Our TP is based on a DCF of CTEL’s existing businesses, assuming a WACC of 9.8% and terminal growth rate of
2%. Hence, our valuation implies the call option is “free”. ■ Risks Key risks to our call: 1) the acquisition of CENC may not go through, and 2) possible erosion of CTM’s market share in Macau.
Telecommunication Services / China1883 HK
10 March 2015
CITIC Telecom International
Initiation: free call option
• CITIC Telecom has a stable cash cow business and a free call option with substantial upside potential, in our view
• The company may become only the 4th legally approved supplier of Internet bandwidth in China
• Dividend yield of 4.4% for 2015E; initiating coverage with Buy (1) rating and 12-month target price of HKD3.80
Source: FactSet, Daiwa forecasts
Telecommunication Services / China
CITIC Telecom International1883 HK
Target (HKD): 3.80Upside: 43.9%9 Mar price (HKD): 2.64
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CITIC Tele (LHS) Relative to HSI (RHS)
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12-month range 2.28-3.26Market cap (USDbn) 1.143m avg daily turnover (USDm) 1.97Shares outstanding (m) 3,356Major shareholder CITIC Ltd. (59.2%)
Overview of businesses ............................................................................................................. 22
Contents
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Growth outlook Revenue and net earnings outlook
While we forecast revenue to see a CAGR of 4.1% over the next 3 years, net earnings should see a much faster 14% CAGR, due to gross-margin expansion resulting from an improving revenue mix, operating leverage, and lower interest expenses through the gradual paydown of debt. Our forecasts do not explicitly take into account the upside potential of CTEL acquiring CENC. We believe that if the transaction does materialise, it will greatly improve the earnings outlook of CTEL.
Source: Company, Daiwa forecasts
Valuation PER comparison with Hong Kong/China telco peers
Based solely on CTEL’s existing businesses, the intrinsic value per share is HKD3.80, on our analysis. This suggests the market is placing zero value on the call option, ie, potential upside from the acquisition of CENC. In terms of forward PER, at 11.2x, the stock is trading well below the multiples of China and Hong Kong telecom operators.
Company: Ticker LTM FY1China Mobile* 941 HK 14.2 15.4China Unicom* 762 HK 19.5 16.4China Telecom* 728 HK 16.4 17.7Hutchtel HK 215 HK 21.8 18.9Smartone Telecom 315 HK 23.1 19.7PCCW Ltd 8 HK 10.9 14.4CITIC Telecom 1883 HK 12.4 11.2
Source: Bloomberg, *Daiwa forecasts
Notes: LTM=last 12 months
Earnings revisions Daiwa vs. Bloomberg consensus estimates
Our revenue and EBITDA estimates for 2015-16 are largely in line with those of the Bloomberg consensus, but our net income forecasts are 3-10% higher. We expect CTEL’s EBITDA margin to improve due to a larger earnings contribution from CTM and via operating leverage. There are no consensus forecasts for 2017E. If the acquisition of CENC does take place, we would expect material positive revisions to both the Bloomberg consensus forecasts and our forecasts.
CITIC Telecom is a telecoms operator in Asia with a range of different businesses. It holds 99% interest in Companhia de Telecomunicações de Macau, S.A.R.L. (“CTM”), the largest telecom operator in Macau. It also operates an international telecom hubbing business and provides IT solutions to enterprises such as VPN and data centre services.
CITIC Telecom has an appealing combination of businesses: a stable cash-generating telecom business in Macau, plus a “free” call option to become one of only 4 legal suppliers of Internet bandwidth in China. We believe the market has greatly undervalued the latter’s upside potential. We initiate coverage with a Buy (1) call and 12-month target price of HKD3.80.
Another major transformation in the works
An alternative bandwidth provider CITIC Telecom (CTEL) was listed on the Hong Kong Stock Exchange in 2006 as an intermediary of telecom operators around the world, primarily providing voice interconnection services for fixed-line and mobile carriers. Since then, through multiple asset injections and M&A deals, the company has transformed itself into a full-fledged telecom operator, offering services from mobile equipment sales to the provision of fixed-line broadband services. The biggest transformation took place in mid-2013, when the company increased its stake in Companhia de Telecomunicações de Macau (CTM), by far the largest telecom operator in Macau, from 20% to 99%. As a telecom operator with dominant market positions for fixed-line and mobile services, CTM’s business is a significant cash cow with stable revenue and much higher net margins than the traditional hubbing businesses that CTEL was previously known for. In fact, we estimate that CTM contributed around 80% of CTEL’s net profit in 2014. But the focus of our investment thesis is not on CTM’s telecom business. Rather, the upside in our investment case rests on the company entering another phase of
transformation: to become China’s 4th Internet bandwidth provider. Ever since the proliferation of the Internet in China over two decades ago, the state has strictly controlled the supply of bandwidth. Today, there are essentially only 2 legal suppliers of bandwidth — China Telecom (CT) and China Unicom (CU) — in the most populous country and largest Internet market in the world. Effectively, anyone (or enterprises such as Internet Service Providers [ISPs]) seeking to access the Internet must buy bandwidth from one of these 2 companies (usually both) in some form or another. The duopolistic nature of such an important market has caused bandwidth prices to soar while services have been subpar (China has notoriously patchy Internet performance). Our investment thesis on CTEL is structured as a base case with a significant call option. The call option is, in essence, the possibility that CTEL can change the way Internet access is provided in China and be a long sought-after alternative bandwidth provider to CT and CU. A key factor in realising the call option’s upside lies in the ability to gain control over 2 valuable assets: a basic telecommunications licence (BT licence) and a pre-existing fibre-optic backbone network. Importantly, we believe these 2 assets are well within reach for the company, as both are already owned by CITIC Networks, a wholly-owned subsidiary of CITIC Group, the parent company of CTEL. We detail a number of other reasons why we think CTEL would be able to acquire these 2 assets on page 10-11. In theory, if CTEL acquires the BT licence, the company can be a competitor in every business that CT and CU are involved in except for voice services, as specifically stipulated by its existing licence. But we believe this is unrealistic, and our investment thesis does not call for CTEL to become another CU or CT. Not only do many of the traditional telecom services, such as last-mile connectivity or data hosting services, feature low returns on investment, but CTEL would not have the financial resources to compete effectively, in our view. Instead, we expect CTEL to focus strategically on selling bandwidth from the 32,000km network backbone, which alone would be a significant new source of revenue that require no additional capital investment.
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CTEL: history of new businesses and business transformations
Source: Daiwa
Given the opportunity, we believe many customers would jump at the chance of buying bandwidth from CTEL, particularly the carrier-neutral Internet data centre (IDC) providers in China, which are usually the largest buyers of bandwidth from CT and CU. Some of the largest carrier-neutral IDC players include 21vianet (VNET US, USD17.73, Buy [1]) and Dr. Peng (600804 CH, not rated). Since bandwidth costs can make up a significant percentage of their costs, even if CTEL sells its bandwidth at a slightly lower cost than CT and CU, we expect demand from IDC players to be very strong, as their net margins have been squeezed over the years. A mutually beneficial partner for carrier-neutral IDCs Compared with the US and internationally, China’s IDC players and content delivery network (CDN) providers, such as ChinaCache (CCIH US, not rated), are significantly less profitable not only due to the high bandwidth costs, but also the lack of proper licences to provide a full range of services. One of the most important bottom-line drivers for US IDC businesses is interconnection or cross-connect services; but these cannot be legally provided by the IDC players in China without a BT licence. We believe cross-connect services are imperative for any data-centre business, as they carry very high gross margins and add value for customers. In its simplest form, a cross-connect is just a physical, direct connection between the data racks of 2 customers within a data centre. For the 2 customers, this allows data to be transferred between their servers in the fastest way possible (instead of routing externally through a network of networks, before coming back to same data server). For the data centre operator, the incremental cost is practically just an extra data cable, which means gross margins for cross-connect services can exceed 90%.
For most IDCs today, hosting services generate the bulk of revenues but are generally considered a basic and commoditised offering. As a result, hosting services are often not very profitable. This fact increases the importance of having interconnection or cross-connect services to bolster profitability, as is the case for EQIX. According to EQIX’s filings, it has gross margins of c.50% vs. VNET of c.30%, despite interconnection revenue contributing only 15% of total sales for EQIX. The management of EQIX has long characterised the continued expansion of the company’s cross-connect services as a major driver of the bottom line. CTEL currently operates 4 data centres, but only 1 of them is in Shanghai (it has 2 in Hong Kong and 1 in Macau), which greatly limits its ability to sell cross-connect to its clients. While the company could build IDCs in China, doing so would take vast sums of capital and require lots of time. A more likely scenario for CTEL, in our opinion, is through partnership agreements with existing IDC providers, like VNET and Dr. Peng. In partnering with CTEL, carrier-neutral IDCs would be able to offer high margin cross-connect services and would no longer need to wait for the China regulators to issue a BT licence.
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Industry tailwinds for continued Internet traffic growth
Demand side: robust growth in Internet users and traffic Growth in China’s Internet infrastructure and the demand for bandwidth ultimately comes down to the number of Internet users and the amount of Internet traffic generated per user. The number of Internet users in Chinas has surged over the past decade. According to the China Internet Network Information Centre (CNNIC), there were 649m Internet users in China at end-2014, vs. 277m in the US, making China by far the largest Internet market in the world. The number of Internet users in China has seen a CAGR of 11% over the past 5 years, while the penetration rate stands at 48% as of 2014 (vs. 79% in the US). Given continued population growth, urbanisation and improvements in Internet infrastructure, it is reasonable to assume that the number of Internet users in China will continue to rise in the coming years. According to iResearch Consulting Group’s estimates, there will be 730m Internet users in China by end-2018, implying a CAGR of 3% from 2015. China: Internet users and penetration
Source: CNNIC
The average time spent online by China’s Internet users has increased steadily in recent years and now stands at 25 hours per week. We believe the increase has been driven by a better overall user experience through improvements in Internet infrastructure coupled with the proliferation of new web content tailored for the China market, particularly video content. We estimate that China is already among the leading markets in terms of time spent by each user online — China is already ahead of the US figure of 23 hours per week, and we expect a further increase in the figure for China
given rising smartphone penetration across the country. Weekly average duration of Internet use per user in China (hour)
Source: CNNIC
We believe that continuously increasing Internet traffic, as well as consumers migrating to mobile Internet devices, is set to sustain a multi-year investment upcycle for all players in the Internet value chain in China. Supply side: under-developed Internet infrastructure is a tailwind Despite having the world’s largest population of Internet users (2.3x the number of Internet users in the US), China has among the world’s slowest Internet connection speeds. According to Akamai’s State of the Internet report for 3Q14, the average Internet connection speed in China was just 3.8Mbps, giving the country a global rank of 75. Global rank of average connection speeds Global Rank Country/Region Average Mbps YoY change1 South Korea 25.3 14%2 Hong Kong 16.3 29%3 Japan 15.0 9%10 Singapore 12.2 57%27 Taiwan 9.5 16%44 Australia 6.9 25%48 Thailand 6.6 39%71 Malaysia 4.1 27%75 China 3.8 32%77 Indonesia 3.7 149%101 Vietnam 2.5 22%
Source: Akamai
One reason for China’s low connection speeds is a marked lack of infrastructure investment relative to the size of the Internet market and its rate of growth. As an indication, according to the World Bank, there were an average of 4 secure Internet servers (servers that use encryption technology in Internet transactions) per 1m people in China in 2013, compared with 1,995 servers
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per 1m people in South Korea and 1,306 in the US. Hence, we see substantial room for the market to grow, driven by the government’s policies to encourage investment in Internet infrastructure. Number of secure Internet servers per 1m people in 2013
Source: World Bank
Another reason for the low Internet connection speeds is the way China’s Internet architecture is laid out. Unlike in the US, where there is typically a vast selection of Internet service providers (ISPs) and data centre providers, the market in China is largely a state-owned duopoly controlled by CT in the South and CU in the North. Whenever traffic needs to be exchanged between the 2 networks, it must go through one of 3 state-owned network access points (NAPs) (now more commonly known as Internet exchange points [IXPs]) in Beijing, Shanghai and Guangzhou. The result: severe traffic bottlenecks and slow connection speeds. CT and CU’s bandwidth supply duopoly in China
Source: 21Vianet
An emerging alternative to the 3 state-owned IXPs are large commercially run carrier-neutral data centres that
are connected with all major ISPs in China, such as a number of those operated by VNET and Dr. Peng. Our discussions with industry professionals suggest that exchanging traffic at private IXPs can significantly improve connection speeds. Hence, we highlight this factor as a potential demand driver and catalyst for a sustained Internet investment upcycle for carrier-neutral IDC s over our forecast horizon. Size of China’s Internet data centre market
Source: IDC quan
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A significant call option
We believe CTEL will take a major equity stake in China Express Network Company (CENC), which owns a basic telecommunications licence and a 32,000-km fibre-optic backbone network. Such a move would give CTEL a new bandwidth-selling business. Arguably the biggest risk is uncertainty over timing.
Eyeing 2 telecom assets with high scarcity value
CITIC Limited is the parent of CTEL, with a 59% equity stake, and is one of China’s largest state-owned conglomerates. CITIC Networks is a wholly-owned subsidiary of CITIC Limited and had operating income of CNY460m in 2013. The 2 assets that CITIC Telecom is eyeing are held by CITIC Networks and comprise: 1) 1 of only 4 BT licences ever to have ever been issued in China, and 2) a 32,000-km, 1000Gbps fibre-optic network known as the China Express Network (or Benteng Yihao). The BT licence is effectively the “mother of all licences” for value-added telecom services in China. It allows the licensee to engage in almost any telecom-related service nationwide. However, we note that the BT licence held by CITIC Networks specifically states that it cannot engage in voice services. The China Express Network connects all provincial cities across China, with the exception of Tibet, and has over 32 points-of-presence (PoPs).
China Express Network (Benteng Yihao) backbone
Source: CITIC Group
The stars seem to be aligned
As a result of several developments in the past 12 months, we are convinced that it is only a matter of time before CTEL acquires an ownership stake in CITIC Network’s 2 telecom assets. Telecom assets left out of major CITIC Group restructuring In August 2014, CITIC Pacific (267 HK, not rated and now renamed CITIC Ltd) acquired almost all of CITIC Group’s assets in a deal worth USD37bn. The transaction was in effect a back-door listing for the largest conglomerate in China. Notably, CITIC Networks, including its cable-TV businesses, was left out of the transaction. We view the exclusion of the group’s valuable telecom assets as a signal of the group’s intention to consolidate telecom assets. The most obvious candidate for future asset injection, in our opinion, is CITIC Telecom. MOU signed On 25 April 2014, CTEL entered into a non-binding MOU with CITIC Group and CITIC Networks stating that CITIC Networks would restructure and inject the business and assets of the China Express Network into a new company (China Express Network Company or CENC) that would be a wholly-owned subsidiary of CITIC Networks. The MOU also explicitly states that CITIC Group and CTEL would discuss the possibility of CTEL acquiring a major equity stake in CENC. While the MOU is non-binding, we believe it provides the clearest confirmation of CITIC Group’s intention to
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consolidate its telecom assets and position CTEL as the group’s one and only telecom company. We note that due to China’s accession to the World Trade Organization in 2001, CTEL would be able to acquire a maximum stake of 49% in CENC, but doing so would give de facto control over the assets, in our view. Arrival of Dr. Lin Zhenhui as CEO Due to the retirement of Mr. Yuen Kee Tong, Dr. Lin Zhenhui became CTEL’s new CEO on 1 January 2015. We believe the arrival of Dr. Lin will greatly increase the chances of a potential acquisition, as he has a 30-year career in telecoms, during which time he has established extensive ties throughout the industry. Indeed, Dr. Lin is generally credited for the rapid expansion of various geographic divisions at China Mobile. He was formerly the Deputy Managing Director of Guangdong China Mobile and the Chairman and General Manager of China Mobile’s Yunnan operations. Prior to joining CTEL, Dr. Lin was the Chairman of China Mobile Hong Kong Company Limited and the Chairman and Chief Executive Officer of China Mobile International Limited. Preparing for future integration through management agreement On the same day it entered into the non-binding MOU discussed above, CTEL entered into a binding MOU with CITIC Networks to provide management consultancy and technical services to CITIC Networks for an annual fee of CNY10m for a term of 2 years. Further, CTEL committed to provide CNY200m in funding for the operation of the China Express Network. We view this transaction as a first step in its preparation of the future acquisition of CENC. In our opinion, the management agreement will give CTEL an opportunity to learn the “ins and outs” of CENC and allow it to upgrade and/or align the technology specifications of the China Express Network to CTEL’s product offerings prior to an official acquisition. Moreover, the CNY200m in funding signifies to us there is now a deeper commitment between the 2 companies — one that would allow CTEL to mould the company into a stronger potential acquiree. Strong relationship with parent company We believe CITIC Group’s 59% ownership in CTEL has created a strong alignment of interests between the 2 companies. This is important because Dr. Peng (600804 CH, not rated), a major carrier-neutral data centre operator in China, signed a non-binding MOU
with CITIC Networks on 24 December 2013 potentially allowing it to take a 10% stake in the company, similar to CTEL’s MOU. We believe there is some confusion in the market as to the status of Dr. Peng’s potential investment. CTEL management has confirmed to us that, as of early March 2015, CITIC Networks had not executed the MOU and hence Dr. Peng had no equity interest in CITIC Networks. We believe Dr. Peng had originally intended to take a stake in CITIC Networks so as to secure a more attractive rate in leasing bandwidth from the company. In our opinion, it is highly unlikely that Dr. Peng will secure a stake in CITIC Networks, given the competitive relationship between CTEL and Dr. Peng. President of CITIC Networks appointed as Executive Director of CITIC Telecom In February 2013, Luo Ning, the Assistant President of CITIC Limited and Chairman of CITIC Networks, was appointed non-Executive Director of CITIC Telecom. In April 2014, Luo was re-designated as Executive Director of the company, a move that we see as paving the way for a closer integration between the 2 companies.
Benefits of owning the BT licence and network backbone
We see substantial benefits for CTEL if, as we expect, it acquires the 2 assets. In some respects, we believe such a move could be a game changer for CTEL. New bandwidth-reselling revenue With a BT licence, CTEL would be one of the few companies permitted to sell bandwidth, which would make it a long-awaited alternative to the duopolistic CT and CU. The company would be the 4th and last party legally permitted to supply bandwidth (at least until new BT licences are issued, if they ever are issued). While the pool of potential customers would effectively comprise any company requiring bandwidth, we believe CTEL’s initial focus would be major carrier-neutral IDC players which are major bandwidth buyers and resellers. For example, we believe 21Vianet would be a target customer, as it is one of the largest resellers of bandwidth for the 2 telecom companies (contributes 20% of hosting revenue), but 21Vianet’s management has mentioned that gross margins on this business are very slim. If CTEL offers VNET bandwidth at a slightly
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better price than CT and CU, we believe it would make sense for VNET to switch some of its bandwidth procurement to CTEL as doing so would: 1) give it higher margins, 2) provide its customers with better performance, and 3) reduce its dependency on CT and CU. Also, we believe the enterprise customers of carrier-neutral data centre providers would, when given the choice, be keen to use CTEL’s bandwidth, particularly customers involved in mission-critical industries such as financial institutions and stock exchanges. A “white knight” to China IDC and CDN providers In order for CTEL to leverage the BT licence fully, CTEL would need to have a vast network of IDCs in mainland China. This is CTEL’s weakness, as the company has only 1 IDC in China to date. The slow ramp-up is due to the company being awarded the necessary cross-regional IDC operating licence in China only in March 2014. Management noted that, instead of building its own IDC network from scratch, which would require vast amounts of time and capital, CTEL could either: 1) partner with existing IDC providers, or 2) acquire IDCs at attractive prices, given CTEL’s high bargaining power. Considering the scarcity of BT licences and the often-poor profitability of the IDC/CDN players in China, we see both options as viable strategies for CTEL. Most importantly, we think it would be mutually beneficial for the IDCs and CTEL to partner with each other, given the following factors. Engage in peering arrangements If it were to hold a BT licence, CTEL would be 1 of only 4 companies permitted to enter into peering arrangements. Peering is an agreement between 2 networks that allows for direct connections and the easy exchange of traffic. When 2 similarly sized networks peer with each other, such as CT and CU, traffic is typically exchanged for free (known as settlement-free), otherwise a compensatory transit fee may be involved. Peering is significant for many reasons, but perhaps the most important is resulting cost saving on network transit fees. Since peering arrangements eliminate the middlemen between 2 networks, traffic can be exchanged directly, ie, without having to route the traffic through multiple networks and paying transit fees along the way. In extreme cases, traffic between 2 networks physically next to each other in China may
first travel around the world due to poor interconnectivity and network configurations. Illustration of a peering arrangement
Source: Daiwa
Since peering typically means that traffic travels much shorter distances, skips public IXPs altogether, and minimises potential failure points through transit providers, it should appreciably improve the user experience (lower latency, faster connection speeds). We think it is highly unlikely that CT and CU will peer with VNET or Dr. Peng on an independent basis, as the latter have comparatively little traffic and data content. However, if enough IDC and CDN providers link up with CTEL, we believe it would make commercial sense for CT and CU to peer with CTEL at some stage. If this happens, CT and CU’s competitive advantage (vast network infrastructure, data centres and last-mile connections) should diminish gradually. Cross-connect (or interconnection) services Apart from cost savings, being able to peer opens the door to a new service offering and hence a new revenue stream: interconnection or cross-connect services. Cross-connect can be understood as taking peering to the most extreme – it is when 2 servers within the same physical data centre connect with each other via a dedicated cable. This arrangement should provide the fastest way for 2 customers to exchange traffic with each other, as it skips the public Internet altogether. Hence, cross-connects are in great demand by high-traffic customers in the US.
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Cross-connects are in high demand from customers with substantial traffic flow, such as video streaming sites. In the US, cross-connects are a default service offered at almost all data centres. We estimate that gross margins for cross-connects are in excess of 90%, since the majority of the cost is simply an additional fibre cable. In China, it is illegal to provide cross-connect services without a BT licence. Hence, the only way for IDC players to provide such a service would be to link up or partner with CTEL. Substantial cost savings in bandwidth fees Having unfettered access to its own 32,000km optical-fibre backbone would mean that CTEL would no longer rely on CT/CU for inter-provincial bandwidth. In our opinion, not only would this mean material cost savings from bandwidth fees, it would also result in significantly faster Internet connection speeds, given it would avoid public IXPs and congested circuits. While having its own network backbone would not mean CTEL could skip CT and CU altogether, since they have significantly larger networks and are dominant in last-mile connections, CTEL’s network would likely have much lower latency relative to those of CT and CU and hence offer a much-improved Internet connection experience. One-stop-shop solutions for enterprise customers If armed with a BT licence and backbone, CITIC Telecom has the potential to become the go-to Internet services provider for enterprise customers, in our view. In turn, we would expect a substantial improvement in the value proposition for enterprise customers, since CTEL would effectively be a full-solutions provider: cloud computing, security, connectivity and storage, all in one package. Enterprise customers are typically high-margin customers as they tend to prioritise quality of service over price. Expansion of CTM’s geographic market Hengqin is an island adjacent to Macau that is governed under Zhuhai City in China. Roughly 3 times the size of Macau, the island has experienced rapid development since being declared a special economic zone by the State Council of China in April 2009. Given Macau’s lack of land for development, the China government approved a plan in 2009 to lease 1 sq km of land on Hengqin for a new campus for the Macau University.
In September 2014, the Macau government submitted another proposal to lease an additional 10 sq km on Hengqin, which roughly equates to one-third of the land mass of Macau. If approved, we think this would immediately create new opportunities for CTEL’s entire spectrum of businesses: landlines, broadband, mobile coverage and enterprise solutions. With the BT licence, we think CTEL would be able to expand its services onto Hengqin and follow its clients onto the island, regardless of the outcome of the Macau government’s most recent proposal.
A win-win opportunity for all parties
While the opportunities for CTEL are extensive, we are mindful of the significant execution and regulatory risks involved in: 1) potentially disrupting the way the Internet industry works in China, 2) foraying into completely new businesses, and 3) expanding its presence in a tightly regulated telecommunications industry in mainland China. Nevertheless, the fact that having CTEL as a fourth player in the Internet bandwidth industry is a win-win for all parties involved (except for CT and CU) should limit any regulatory, political or competitive hiccups. Carrier-neutral IDC and CDN companies Given the duopolistic nature of bandwidth supply in China, bandwidth costs are likely one of the highest in the world for these companies and make up a significant portion of their costs. The lack of cross-connect services in China also removes a highly profitable income stream for IDCs. As shown in the table below, most IDC and CDN companies in China have much weaker operating margins than their US counterparts.
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China vs. global IDC/CDN providers (latest fiscal year) China IDC/CDNs Gross margin Operating margin 21Vianet Group Inc 30% 3% ChinaCache International 30% 3% Dr Peng Telcom & Media Group 58% 13% Wangsu Science & Technology 42% 22% Beijing Sinnet Technology 43% 30% Xiamen 35.com Technology 59% -6% Median 43% 8% Global IDC/CDNs Gross margin Operating margin Equinix Inc 51% 20% CoreSite Realty Corp n.a. 17% QTS Realty Trust Inc n.a. 20% Akamai Technologies Inc 70% 25% Rackspace Hosting Inc 67% 11% Telecity Group PLC 58% 29% Median 63% 20%
Source: Bloomberg
Government At the regulatory level, we believe the government is increasingly supportive of more competition in the broadband industry. A clear example of this is the issuance of a draft notice, “Opinions on open access to the broadband market”, in November 2014 by the Ministry of Industry and Information Technology (MIIT). The notice stipulated the opening of the broadband market to private companies and selected 16 cities (Taiyuan, Shenyang, Harbin, Shanghai, Nanjing, Hangzhou, Ningbo, Xiamen, Qingdao, Zhengzhou, Wuhan, Changsha, Guangzhou, Shenzhen, Chongqing and Chengdu) for a 3-year trial beginning on 1 March 2015. Separately, the MIIT launched a broader initiative known as “Broadband China” in August 2013 that outlined its strategy and target to make China a leader in international broadband accessibility. Some of the targets it set out included:
• 100% coverage of optical fibre-to-the-home (FTTH), or fibre-to-the-building (FTTB) completed in cities by 2015.
• Urban household broadband speeds reaching at least 20Mbps, and rural households having access to speeds of 4Mbps.
• For 2016-20, the government has stipulated that the gap between China’s broadband infrastructure level and that of developed countries must be narrowed, and broadband speeds in urban and rural households will need to reach 50Mbps and 12Mbps by 2020.
Consumers We expect consumers to be very supportive of CTEL’s entry into the China broadband market as such a move would enhance competition and greatly improve Internet usability and performance in China.
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CTM: how stable is this business?
The CTM business is a cash cow that provides a strong foundation for the company to explore and expand its other high-growth businesses. We believe the relative maturity of this business instils confidence in a stable cash flow stream and funding for a potential acquisition of CENC.
A significant cash flow generator
Established in 1981, Companhia de Telecomunicações de Macau (CTM) is the oldest telecoms operator in Macau with a dominant market position across all its telecom services: fixed-line services, mobile services and broadband. CTEL boosted its stake in CTM to 99% in June 2013 from 20%, after agreeing to buy 79% from Cable & Wireless Communications Plc and Portugal Telecom SGPS SA. The total cash consideration for the 79% stake was USD1.16bn (HKD9.06bn). While the Macau telecom market may appear mature and fully saturated, we believe there are various near-term opportunities that should drive increasing revenue for the company over the next 3 years. Nonetheless, our primary focus in our analysis of the CTM business is the stability of its existing cash flow streams, as this would support the growth of CTEL’s other faster growing businesses, such as its VPN businesses, and potentially a bandwidth selling business. In our opinion, CTM is a stable cash cow, and we estimate that it generated more than HKD1.5bn in EBITDA in 2014, or more than 75% of CTEL’s entire EBITDA for the year. In terms of earnings, CTM contributed over 80% of the CTEL’s bottom line in 2014. Given that CTM’s revenue is 100% derived from Macau, we believe its businesses opportunities are
largely influenced by: 1) the population growth of Macau, 2) the number of visitors to Macau, and 3) new infrastructure or development projects in Macau. Macau: population growth and visitor arrivals
Source: Macau Statistics and Census Service
Expected casino openings in Macau through 2017 Casino: Expected opening:Sands – The Parisian Soft opening in 4Q 2015Galaxy Macau Phase 2 27 May 2015Broadway Macau (previously Grand Waldo) 27 May 2015Melco Studio City 3Q 2015Wynn Palace 1H 2016MGM Cotai 3Q 2016SJM - Lisboa Palace 2H 2017
Source: Daiwa
Mobile services and equipment sales CTM was initially a monopoly in Macau for mobile services until 2001, when 3 other companies were awarded a licence (China Telecom, Hutchison and Smartone). Given its longest history, CTM is predominately the carrier of choice for Macau residents and has retained a leading position, with around 44% market share, in terms of subscriber numbers in 2014. Mobile services and equipment sales in total made up two-thirds of CTM’s sales in 1H14 (44% from handset sales and 21% from mobile services). Despite handset sales making up the largest chunk of revenue for CTM (40-50% of CTM sales), we expect relatively higher volatility in those numbers, since handset sales can be heavily influenced by the mobile phone launch pipeline in any given year. This segment is likely to exhibit strong cyclicality, whereby a strong year would likely coincide with the launch of a new generation of Apple iPhones. This was certainly the case over the past several iPhone releases, as the official launch of the iPhone in China was often months after the launch in Macau, and hence, saw an influx of Chinese tourists looking to be early buyers.
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LHS: Population (k) (LHS) RHS: Visitor Arrivals to Macau (m) (RHS)
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On the mobile subscription side, Macau’s mobile penetration is among the highest in the world at 281% at the end of 2013. This is due to the large number of pre-paid cards used, which are mostly bought by tourists. In 2014, we estimate that roughly 64% of the 814,100 mobile subscribers were pre-paid card users. As long as tourist numbers continue to rise, we expect the volume of prepaid card sales to follow. CTEL: prepaid subscribers and ARPU
Source: Company, Daiwa forecasts
CTEL: postpaid subscribers and ARPU
Source: Company, Daiwa forecasts
We are aware that there are concerns in the market regarding the impact of China’s anti-graft campaign on Macau visitor levels in the near term, particularly after disappointing earnings results from major casinos. Our gaming analyst, Jamie Soo, believes that 2015 will be much worse than 2014, and he forecasts a 22% YoY decline in gross gaming revenue for the year. However, in the case of CTM, we do not expect the anti-graft campaign to have a material negative impact on the company’s mobile subscription numbers, since the drop in tourist numbers seems to only be affecting high rollers or VIP customers of casinos, which make up a small minority of the total number of visitors.
On the contrary, we expect to see a slight acceleration in subscription revenue in the near term, driven by a likely increase in the average revenue per user (ARPU) of postpaid and prepaid cards, through the soon-to-be launched 4G services in the city. In November 2014, 6 companies, 1 of which was CTM, submitted a bid for a 4G licence. On 10 March 2015, the Bureau of Telecommunications Regulation announced that CTM, China Telecom, SmarTone and Hutchison were each awarded a license. China Mobile and U Hong were the two bidders that did not receive a license. Although four 4G licenses were granted, we believe there is a possibility that some of the players may not be able to meet the conditions set out by the government, including having at least 50% 4G coverage within 2015 and 100% coverage in 2016. We believe CTM has a leg up as it has already spent HKD100m in capex dedicated to 4G upgrades in 2014 and expects to spend a further HKD100m in 2015. Consequently, we expect CTM to be among the first to roll out 4G services, which may also be a catalyst to recapture market share. Broadband At the end of 2014, CTM had a 100% market share in broadband services in Macau. The company had a penetration rate of 83% in Macau, via a fibre-to-the-business coverage of 100% and 87% coverage for fibre-to-the-home. CTM broadband subscribers (000s)
Source: Company, Daiwa forecasts
Starting in 2015 however, CTM is longer a monopoly for broadband as the government awarded Companhia de Telecomunicações de MTel (MTel) a fixed-line licence in mid-2013. After 18 months of building out infrastructure, MTel announced that it had met the government’s condition to have network coverage of 30% of residential buildings in Macau, and launched
2013 2014 2015E 2016E 2017E 2018E 2019EResidential Business
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broadband sales in January 2015. As part of the conditions for its fixed-line licence, the government has also set a deadline of end-2016 for 70% network coverage and 100% by the end of 2018. Despite the new competition, we believe there is little threat to CTM in the near term as: 1) according to management, MTel does not yet have its own last-mile coverage, and hence still depends on CTM, 2) the company plans to compete with CTM through price, but still has lots of investments to make in order to reach 100% network coverage in Macau, and 3) it would take at least several years for MTel to create a track record and prove its network stability. Even in the longer term, it is unlikely MTel would have a major impact on CTM’s subscriber numbers, as was the case for PCCW (8 HK, not rated) in Hong Kong when Hong Kong Broadband Network (1310 HK, pending IPO) entered the market in 2002. Today, the 2 companies are effectively duopolies, and PCCW’s broadband subscriber and ARPU numbers have continued to constantly increase. Not only are the ARPU figures very telling of Macau’s expensive broadband rates relative to Hong Kong’s, on a dollar-to-dollar basis, Macau residents are also getting much lower bandwidth. However, as Macau has among the highest purchasing power parity gross national income (GNI) per capita (ranked 2nd in the world according to the World Bank as of 2013), Macau is ranked as having the most affordable fixed-broadband in the world measured as a % of GNI per capita. For this reason, we believe there is still plenty of room for CTM to raise prices (by offering higher bandwidth packages), and hence improve its ARPU. Countries with the most affordable broadband Internet
Fixed-broadband sub-basket
Rank Economy as % of GNI per capita
USD PPP$
1 Macao, China 0.32 17.27 23.372 Kuwait 0.37 14.11 21.763 Singapore 0.44 19.9 20.584 United Kingdom 0.48 15.63 12.85 Switzerland 0.54 36.68 21.866 Russia 0.54 6.28 10.957 Japan 0.57 21.73 18.898 Norway 0.60 50.89 30.519 Ireland 0.61 19.92 15.6710 Austria 0.63 25.43 22.111 Luxembourg 0.64 38.5 29.0412 Hong Kong, China 0.68 21.66 27.8513 United States 0.73 32.65 32.65
Source: International Telecommunication Union
Fixed-line voice services As we are seeing in most developed countries in the world, fixed line voice services are experiencing a structural decline, as evidenced by the decline in revenue. We expect this trend to continue, albeit that the decline should be limited to a single-digit percentage per year through 2016, as the launch of new hotels and casinos offsets some of the decline in numbers of residential fixed line subscribers. Data, enterprise solutions and others This segment includes the International Private Leased Circuit (IPLC) business and enterprise solutions for the government and casinos. Revenue for this business rose by 18% YoY for 2014, and should continue experiencing strong growth given the expected launch of 2-3 major casinos this year.
International telecom services (hubbing)
At the time of CTEL’s listing on the Hong Kong Stock Exchange in 2006, and until the consolidation of CTM in 2013, the company was largely a telecoms hub operator. This business acts as an intermediary between 500+ telecoms operators around the world, and helps connect either voice or short-message-service (SMS) traffic between one another. As traditional voice and SMS services are gradually being replaced by data-operated services such as email, voice-over-Internet-protocol (VOIP), online social networks and mobile messengers (Whatsapp, Wechat, Line, Kakaotalk, Viber, Skype, etc.), we believe CTEL’s hubbing segment is a sunset business. We expect revenue from voice hubbing to decline by a double digit percentage per year for the foreseeable future. SMS hubbing, on the other hand, will likely decline at a much slower pace, as the company has been pushing its Application-to-Person (A2P) services and there is still significant demand from enterprises for automated SMS services, such as airline confirmations, purchase order confirmations, banking transaction confirmations, etc.
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Financials, valuation and risks
Financials
Despite the significant upside potential for CTEL’s earnings by acquiring a major equity stake in China Express Networks Company, we have not explicitly incorporated the potential earnings upside into our forecasts, given that: 1) there is still significant uncertainty as to the timing of the acquisition, and 2) we believe there is no meaningful way of predicting the incremental revenue and earnings impact, given the company’s largely unprecedented business model in China (selling bandwidth and partnering with IDCs for cross-connects). Our base case represents the growth of CTEL’s existing businesses, which we expect will drive revenue growth of 6.2% YoY for 2015 and 3.2% YoY for 2016. Among the company’s 5 business lines, we forecast 3 (mobile sales and services, Internet services and enterprise solutions) to be positive revenue drivers, while its hubbing and fixed-line services businesses are gradual sunset businesses. CTEL: revenue forecast (HKDbn)
Source: Company, Daiwa forecasts
We forecast the adjusted EBITDA margin (excluding revaluation gains) to rise towards the 30% mark throughout our forecast period, driven by the increasing contribution from CTM and Internet services businesses, which both have higher margins than the declining international hubbing business. We
note that comparable telecom operators with diversified businesses, such as PCCW, China Unicom and China Telecom, all have EBITDA margins in the range of 30-33%. Consequently, we forecast a 14% CAGR from 2014-17 for CTEL’s adjusted diluted EPS. CTEL: adj. EBITDA margin and adj. diluted EPS
*Adjusted for the revaluation gain in 2013
Source: Company, Daiwa forecasts
After the consolidation of CTM, CTEL’s free cash flow jumped from HKD0.6bn in 2013 to HKD1.0bn in 2014. We forecast its free cash flow to improve significantly given the relatively minimal future capex plans (the main capex investment in 2015 is for 4G LTE infrastructure upgrades, but management expects only HKD100m to be spent, as another HKD100m in upgrades was already completed in 2014), and the operating leverage of the core telecom business. Historically, CTEL has opted not to use much financial leverage whenever possible, but this inevitably changed in 2013 as almost USD1.0bn of debt was raised to fund the acquisition of the additional 79% stake in CTM. Between March and June 2013, the company issued USD450m (HKD3.5bn) of 6.1% guaranteed bonds due in 2025, raised capital through a rights issue of HKD1.8bn, and entered into a loan facility agreement with a group of 11 banks for USD630m. The total cash consideration for the 79% stake was USD1.16bn (HKD9.06bn). 0
2
4
6
8
10
2013 2014 2015E 2016E 2017E 2018E 2019EMobile sales & services Internet servicesInternational telecom services Enterprise solutionsFixed line services
CTEL: net gearing and net debt/reported EBITDA ratio
Source: Company, Daiwa forecasts
At the end of 2014, CTEL had a net gearing ratio of 100%, down from 111% in 2013. Despite the HKD6.6bn in net debt, we are comfortable with the company’s debt situation, considering the HKD1.0bn+ of free cash flow per year and a higher than 4.0x interest coverage ratio throughout our forecast period. Note that if CTEL’s acquisition of CENC does materialise, we believe the entire acquisition will likely be funded via equity issuance. If we reference the MOU signed by Dr. Peng with CITIC Networks, which stipulates a price of at least CNY300m for a 10% stake (CTEL’s own MOU does not contain a price), we would expect the 49% stake to not be less than CNY1.5bn. At current prices, this would imply roughly 710m new shares or a 21% potential equity dilution. CTEL has consistently paid out an increasing absolute amount in dividends throughout its history. The company has distributed nearly 50% of earnings over each of the past 4 years, except for 2013, when the payout dropped to 27% due to the CTM acquisition. Management noted that it will aim for a sustained increase in the total amount of payout in dividends, and hence we expect the payout ratio to remain near the 50% level.
Dividend payout
Source: Company, Daiwa forecasts
Valuation
Given the significant uncertainties relating to the potential acquisition of CENC, we have opted not to incorporate any explicit upside forecasts until an acquisition actually materialises. Once an announcement is made, we expect there to be better visibility and more concrete plans with respect to the acquisition, which would then prompt us to revisit our forecasts. As the company has a distinctive mix of businesses and a history of changing identities (from hubbing to Macau telecom, and now potentially into a China Internet service provider), we believe there are no meaningful comparable companies that would allow for a valuation through multiples alone. Instead, we used a 2-stage 5-year DCF to arrive at a 12-month target price of HKD3.80 for CTEL’s existing businesses, using a WACC of 9.8% and a terminal growth rate of 2%. At the current share price, this equates to an upside potential of 44%, and hence implies that the call option from a potential CENC acquisition would be free. Further, our 12-month target price of HKD3.80 represents a target PER of 16.3x and a 9.5 EV/EBITDA multiple on our 2015 forecasts. In terms of PER, this is roughly the average trading PERs of its Hong Kong/China telco peers. If CTEL’s acquisition of CENC materialises, there would likely be a substantial rerating of CTEL’s stock. As an indication of the rerating potential, China IDC and CDN companies are trading at a median forward EV/EBITDA multiple of 12.6x vs. the 7.4x at which CTEL is trading currently.
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2013 2014 2015E 2016E 2017E 2018E 2019E
Net debt/equity Net debt to reported EBITDA
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Sensitivity analysis
Source: Daiwa estimates
Given the 44% potential return from the current share price to our 12-month target price, we initiate coverage of CTEL with a Buy (1) rating.
The CENC acquisition may not happen Much of the rerating potential in our thesis rests on CTEL acquiring a major stake in CENC. While we have listed many reasons why we think the acquisition will ultimately go through (pages 10-11), if for any reason it does not, our valuation of CTEL would be negatively impacted. Dilution from equity financing Even if the CENC acquisition does goes through, it is very likely that it would be funded through equity issuances, and hence may be dilutive to EPS. Multiple execution risks Given the diversified nature of CTEL’s business, there are numerous execution risks involved in not only growing new businesses, but maintaining existing ones. Some of these risks include:
• The execution ability of the new CEO, Dr. Lin Zhenhui. Dr. Lin replaced Mr. Yuen Kee Tong as CEO on 1 January 2015. Although Dr. Lin has a successful track record as CEO of China Mobile Hong Kong, he has yet to prove himself at CTEL.
• The ability of CTM to efficiently launch 4G LTE services and meet the conditions set out by the government (50% coverage by 2015 and 100% coverage by 2016).
• The ability to defend CTM’s broadband market share in Macau given MTel’s recent entry.
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Appendices
Overview of businesses
Voice hubbing • CTEL provides premium international voice
hubbing services to fixed line and mobile operators across the globe.
• It provides circuit switch voice service solution to cooperate customers under regional POPs around the world.
• The company handled around 6.1bn minutes of voice traffic in 2014, down from 7.0bn in 2013.
SMS hubbing • CTEL is one of the main international SMS carriers
to China’s mobile operators, carrying international SMS in and out of China to the rest of world. The company is the dominant provider of Hong Kong inter-operator SMS hubbing services.
• CTEL handled around 1.7bn messages in 2014, roughly flat from 2013.
• While the volume of consumer/retail or Person to Person (P2P) SMS messages is declining, CTEL has shifted its focus to Application to Person (A2P) hubbing, ie, automated airline SMS confirmations, iPhone purchase order confirmations, etc.
Mobile value added services (VAS) • Backend services that support Global Mobile
Virtual Network Operators (MVNO). In late December 2013, MIIT issued MVNO licences to 11 non-telco companies. This may serve as a new growth area for CTEL.
• SCCP Roaming Signalling Transit enables mobile operators to provide roaming services in overseas countries. CTEL also upgraded this service to support 4G LTE roaming services in 2013.
• Prepaid roaming provides interface between the operators and seamless connectivity between different prepaid technologies.
• Single IMSI Multiple Numbers (SIMN) enables partner operators’ subscribers to hold multiple foreign mobile phone numbers on a single SIM card.
Data services • CTEL provides instantaneous, reliable and secure
connectivity of the International Private Leased Circuit (IPLC).
• It was the first VPN service provider in Hong Kong to receive 3 ISO certificates, namely, ISO 9001 – Quality Management System, ISO 27001 – Information Security Management System and ISO 20000 – Information Technology Service Management System.
• It provides fully managed VPN services access to different cities or countries in Asia Pacific, including China, Australia, Japan, Malaysia, Singapore, Vietnam etc.
• CTEL’s flagship product is TrueCONNECT – a fully meshed MPLS VPN service that securely connects enterprise resources around the world. CTEL has expanded its Points of Presences (PoPs) to over 100+ locations globally.
• TrustCSI Managed Firewall Services (MFS) is a next generation firewall solution integrated with world-class managed security services.
• CTEL also has its own cloud computing and Infrastructure-as-a-Service (IAAS) solutions, known as SmartCLOUD.
Companhia de Telecomunicações de Macau (CTM) • A full service telecom operator in Macau with a
99% equity stake. The other 1% is owned by government-controlled Macau Post.
• Mobile voice and mobile broad band services with a market share of 44% in 2014 (in terms of subscribers).
• Fixed data and voice services for households and enterprises. Has 100% coverage for fibre-to-the-business and 87% for fibre-to-the-home in Macau. The company had in total 161,500 broadband subscribers at the end of 2014.
• It is also engaged in retail mobile phone and equipment sales.
Data centres • CTEL builds and operates data centres in Macau,
Hong Kong and China. • At the end of 2014, the company operated 4 data
IDCs (2 in Hong Kong, 1 in Macau and 1 in Shanghai) with a total of 2,332 racks.
• Both of CTEL’s Hong Kong data centres are tier-3 or above (99.982%+ uptime).
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Daiwa’s Asia Pacific Research Directory
HONG KONG
Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head
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Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.
Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. Thailand
This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any
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direct or consequential loss arising from any use of this research or its contents.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain
This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in
the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
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•
• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
• There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
