China Telecoms Sector:Broadband Competition Intensifying;Downgrade CT to Neutral

CT cut to Neutral on CM broadband competitive hit; CM is top pick onbroadband and 4G growth — With CM turning aggressive in broadband after itsacquisition of Tietong, we expect its broadband subs share to jump to 25% in2018E, from 19% in 2015, and fixed broadband to be 5.7% of total service revenuein 2018E, from 3.1% in 2015. CT generates most of its EBITDA from fixed line (76%in 2016E), and thus is likely to be a bigger loser than CU from CM’s broadbandpush. As such, we downgrade CT to Neutral with a TP of HK$3.7 (was HK$4.5) andcut FY17-18E earnings by 5-7%. Our sector pick is CM (TP of HK$117, fromHK$115), and we also maintain a Buy on CU (TP of HK$11.5, from HK$12.0).

    Fixed broadband a new growth engine for CM — CM is being more aggressivein fixed broadband promotions in 2016 than before, as the service 1) reduces thechurn rate and selling costs with fixed/mobile bundling services; 2) creates growthdrivers like datacenter and IPTV services; 3) paves the way for entry into the SmartHome segment to tap the future internet VAS growth opportunity. CM’smanagement expects fixed broadband to be earnings accretive in future.

    CM’s broadband competitive hit to CT won’t be significant before 2017 — Inthe face of CM aggression, fixed-line market leader CT faces the risks of a gradualslowdown in broadband subs growth, ARPU pressure and higher selling costs todefend market share. However, the impact will not be significant until after 2017 asbroadband subs in China are normally locked into contracts of over one year andCM needs time to upgrade its nationwide broadband network. Strong growth in thefixed-line market could be a partial buffer for CT.

    Limited regulatory risks for CM’s broadband expansion — Chinese regulatorshave elevated broadband development as a national strategy. Developing thecountry’s broadband infrastructure has a much higher priority than balancing marketshares, in our view, which leaves room for CM to gain broadband share withoutfacing regulatory hurdles in the next two years.