China Telecom Pivots Toward Industrial Internet and Still Looks Inexpensive; FVE up to HKD 5.00

In our view, no-moat China Telecom continues to be undervalued after reporting another strong result for 2021 with 7.8% services revenue growth and 19.2% earnings per share growth. The company is targeting double-digit revenue and net profit growth in 2022 and we don’t believe the Chinese telcos are known for setting themselves overly demanding targets. Cash flows were also strong with operating cash flows up 4% and free cash flow up 27% to CNY 57 billion. These strong cash flows, combined with the CNY 48 billion received from the A-share listing sees China Telecom’s balance sheet with net cash balance of CNY 59 billion at the end of 2021 from a net debt level of CNY 20 billion at the end of 2020. This has allowed China Telecom to pursue a more aggressive approach to dividends with the dividend payout ratio for 2021 increased to 60% from the previous 40% with a target of hitting 70% three years after its A-share listing. The company will also declare an interim dividend for the first time in 2022. Despite this, the company has room for buybacks in our opinion, and we would not be surprised if it bought back some Hong Kong-listed shares given they trade at a around 40% discount to the A-shares.