China Telecom Reports Solid First-Quarter Growth; Still Undervalued in Our View

In our view, no-moat China Telecom continues to be undervalued after reporting another solid first-quarter result with 11.9% revenue growth year-on-year, 9.9% services revenue growth year on year and 12.1% net profit growth year on year. In our view this puts the company on track to hit its target of double-digit revenue and net profit growth as outlined by management at the full year result in mid-March. Revenue growth was again driven by industrial digitization up 23.2% year-on-year and mobile revenues up 5% year-on-year. Mobile growth was driven by continued 5G customer growth with a 23 million 5G package customers added over the quarter and 5G penetration reaching 55.5% of the total base. We retain our forecasts and our fair value estimate for China Telecom of HKD 5.00. Our no-moat rating for China Telecom is also retained, which stems from its returns remaining below WACC. Its returns have remained below WACC for each of the past 10 years and we expect this to be the case in our forecast period despite our expectation that returns will improve. We forecast operating income to grow at an average of 8.7% per year over the next five years so our fair value factors in a slowdown from the current strong growth, despite the prospect of increased returns from the high investment in 5G network buildout over the past three years and planned investment in industrial digitization over the next three to five years.