July 30, 2014 CITIC Telecom International [1883.HK] · PDF fileJuly 30, 2014 The term...

July 30, 2014

The term “Big Data” has been widely used to describe the new ways of mass-volume

information and data analytics, often mentioned by government officials as a focal

area under the 12th Five Year Plan. Premier Li recently encouraged government

agencies to adopt the concept of “cloud computing” and “big data”. The supportive

stance for cloud computing from the central government has unlocked a new round of

investment on information technology (IT) spending, including Internet Data Centres

(IDC) where demand for centralized hosting is brisk. CITIC Telecom, a telecom

service provider which manages various IDCs in Hong Kong, is targeting the rapidly

growing China IDC market by offering fully integrated solutions to large enterprises.

The potential collaboration with sister company CITIC Networks for bandwidth

utilization resulting in cost-saving scale economy, together with a reliable cash

generator in wholly-owned Macau Telecom, CITIC Telecom, given its attractive yield

and compelling valuation relative to global IDC peers, offers a unique investment

proposition for investors seeking exposure to the China IDC market.

Three catalysts in one price. We view CITIC Telecom as 1) a growth stock proxy for

China’s Internet Data Centre segment; with 2) a stable cash-flow generation engine in

Macau Telecom; plus 3) an upside option for potential asset injection of CITIC

Networks. CTIL is trading attractively across all metrics: 8.1x EV/EBITDA; 11.2x PER;

and 4.5% dividend yield, given its growth prospects in IDC and its high cash-

generative ability. Using a sum-of-the-parts (SOTP) approach we believe the share

price has not fully factored in the potential from the IDC segment, which could be

worth 42% of our estimated equity value based on 20x PER FY15E. Comparatively,

global IDC shares are trading in a range between 22x and 58x PER FY15E, while

telecom operators in developed Asian markets are trading at an average of 8.6x EV/

EBTIDA FY14E. We initiate the stock with a BUY rating, with a target price of HK$3.60

per share or 27% upside, implying 14.2x PER FY14E, 9.3x EV/EBITDA FY14E, or

3.5% dividend yield FY14E.

CITIC Telecom International [1883.HK]

Price Performance

Market Cap US$1,223m

Shares Outstanding 3,337.6m

Auditor KPMG

Free Float 40.4%

52W range HK$2.03-3.02

3M average daily T/O US$1.0m

Major Shareholding CITIC Group (59.6%)

Matthew International Capital (7.1%)

Source: Company, Bloomberg

Samuel Chan, CFA — Senior Analyst

(852) 3698-6391

[email protected]

John Mulcahy— Head of Research

(852) 3698-6889

[email protected]

China Telecom Sector

Flourishing in new “Big Data” era - Initiate BUY

Source: CGIHK Research

BUY

Close: HK$2.83 (July 29, 2014)

Target Price: HK$3.60 (+27%)

0

20

40

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80

100

2

2.5

3

3.5

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Key Financials (HK$m) FY2013 FY2014e FY2015e FY2016e

Revenue 6,018.5 7,951.1 8,788.4 9,415.2

Change (yoy %) 67% 32% 11% 7%

EBITDA 1,263.0 1,993.6 2,183.2 2,367.0

Change (yoy %) 89% 58% 10% 8%

Net Profit (Reported) 1,067.5 842.7 963.4 1,028.1

Change (yoy %) 131% -21% 14% 7%

Net Profit (Recurring) 557.2 842.7 963.4 1,028.1

Change (yoy %) 21% 51% 14% 7%

EPS (Recurring) 0.191$ 0.253$ 0.289$ 0.308$

Change (yoy %) -1% 33% 14% 7%

DPS $0.100 $0.127 $0.144 $0.154

ROE (%) 11.6% 13.3% 14.2% 14.0%Payout Ratio (%) 52% 50% 50% 50%PER (x) 14.85 11.18 9.80 9.19 PBR (x) 1.34 1.45 1.34 1.24 EV/EBITDA (x) 12.90 8.05 7.21 6.43 Dividend Yield (%) 3.5% 4.5% 5.1% 5.4%FCF Yield (%) 14.58% 8.51% 7.79% 10.65%Net Gearing (%) 110.9% 101.3% 89.0% 75.6%

2

2

Investment Thesis

Transforming from telco services into IDC. CITIC Telecom International (CTIL), the overseas

telecommunication services arm of the CITIC Group, was formerly a provider of global voice and

SMS hubbing services in China inbound/outbound, Hong Kong, and international markets. Since

the acquisition of a stake in Companhia de Telecomunicacoes de Macau (CTM) in 2011 (fully

acquired by CTIL in 2013) CTIL successfully transformed into a major player in Macau

telecommunication services – a city witnessing exceptional growth thanks to the increasing working

population and the exploding tourism & gaming industries. Given its much stronger asset base and

a three-fold expansion in market capitalization over the past two years, CTIL is well positioned to

take another new step – the Internet Data Centre (IDC) segment in Greater China. The increasing

applications in cloud computing create extraordinary demand in high-powered, secure IDCs, where

CTIL is able to offer full solutions, from rack rental to cloud servicing, and also to international

corporate accounts at above-average margins, thanks to its strong relationship with its parent,

CITIC Group – the owner of China’s fourth largest optical fibre infrastructure (CITIC Networks). We

view CTIL as 1) a growth stock proxy to IDC segment; with 2) stable cash-flow generation engine

from CTM; plus 3) an upside option for potential asset injection of CITIC Networks after the CITIC

Group - CITIC Pacific restructuring.

Growing Demand for Internet Data Centre (IDC). Despite having the largest number of internet

users in the world, China’s connection speed is below international standards, given the lack of

investment on IT infrastructure. China’s capacity of internet data centres (IDC) - facilities used to

house servers and telecommunication systems, will need to grow at least 10 times to match the US,

and, according to IDC China Internet Data Centre Forecast and Analysis, China’s IDC market will

grow from $2bn in 2013 to almost $6bn by 2017. Presently managing three data centres in Hong

Kong / Macau with 2,362 racks, CTIL aims to penetrate China’s rapidly growing IDC market and

expand the total number of racks to 9,000 in the Greater China area by end-2015. By collaborating

with CITIC Group’s optical fibre telecom infrastructure in China, with attendant cost advantages,

CTIL can offer comprehensive solutions in the cloud computing sector at higher margins. We

expect CTIL’s data services division will grow at a compound annual growth rate CAGR of 51.4%

between FY13 and FY16E.

From hubbing operator to

telecom operator; and now

to IDC

CTIL a stock with growth +

yield + asset injection

themes

China IDC market needs to

grow by 10x to catch up to

US

Figure 1: CTIL’s Market capitalization — transforming into a mid-cap

Source: Bloomberg

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

in H

K$

m

Figure 2: China’s under-investment on IT Infrastructure

Source: Global Insight, Gartner, 21 Vianet

3

3

Macau Telecom — integrated cash-flow generator. After acquiring 100% ownership of

Companhia de Telecomunicacoes de Macau (CTM), CTIL now owns Macau’s largest

telecommunication network covering fixed line, broadband, and mobile. Despite a slowdown in

gaming revenue growth in 2014, population and household formation are still rising, with real gross

domestic product (GDP) growing at +12.5% YoY in 1Q14. Although the fixed-line market is

shrinking, and CTM’s monopoly position in the broadband market is set to be threatened starting

from 4Q14, we expect overall revenue excluding handset sales to grow steadily at 2% to 3% per

annum, thanks to rising mobile users, especially in prepaid cards – due mainly to the increasing

number of visitors from China and elsewhere. The cash-generative model is expected to bring in

pre-tax free cash flow of at least HK$750m a year, equivalent to 22 cents per share (~ 7.8% yield).

Near-term catalysts include: 1) New phone launch including iPhone6 boosting handset sales; 2)

grant of 4G license; 3) Hengqin development.

Injection of parent’s national major telecom infrastructure. Earlier this year CITIC Group

announced a major restructuring, injecting most group assets into CITIC Pacific [0267.HK; Not

Rated], and creating a new listed mega conglomerate. CITIC’s telecom assets, most notably CITIC

Networks, were left out from the transaction, and CTIL later announced a Memorandum of

Understanding (MOU) with CITIC Networks – the owner of a 32,000 km nationwide optical fibre

backbone network in China—for a potential injection. We view the potential injection of CITIC

Networks into CTIL as an excellent complement to CTIL’s growing IDC / cloud computing-related

businesses. The injection would give CTIL rights to use of a major national telecom infrastructure

resource, currently significantly under-utilized.

Undemanding valuation with bright prospects. CTIL is trading attractively across all metrics:

8.1x EV/EBITDA; 11.2x PER; and 4.5% dividend yield, given its growth prospects in the IDC sector

and its high cash-generative ability. Using a sum-of-the-parts (SOTP) approach we believe the

share price has not fully factored in the IDC potential, which could be worth 42% of our estimated

equity value based on 20x PER FY15E. Global IDC shares are trading between 22x and 58x PER

FY15E, while telecom operators in developed Asian markets are trading at an average of 8.6x EV/

EBTIDA FY14E. We initiate CTIL with a BUY rating, with a target price of HK$3.60 per share,

implying 27% upside.

Steady growth in service

revenue bringing consistent

cash flow

CITIC Networks

complements CTIL’s

growing IDC business

Assumption Equity Value (HK$m) Per Share Value

Macau Telecom (CTM) 8.5x EV/EBTIDA FY14E 6,135.6 1.84

Data Businesses (CPC) 20x PER FY15E 5,010.0 1.50

Hubbing DCF @ 5.3% WACC 860.5 0.26

Total 12,006.1 3.60

Figure 3: Sum-Of-The-Parts Valuation


4

4

China’s Internet Data Centre (IDC) demand. China’s internet users reached 632m in June 2014,

but the internet penetration rate is still half that of the US (42% vs. 80%). The large internet

population has led to enormous growth in internet traffic, expected to touch 11m terabytes (TB) by

2012. On the other hand, inadequate investment in IT infrastructure, due to the lack of centralized

hubs, poor network interconnectivity and strict government regulation, makes the average

connection speed of the country still well below the global developed market. The structural

demand for spending on IT infrastructure, together with higher adoption of cloud computing, big

data businesses, and increasing outsourcing of data centre services, creates enormous demand for

centralized facilities in housing computer system and servers. While China’s internet population is

the largest in the world, in terms of server and storage units per capita, China’s scale is a fraction of

the US. The resumption of IDC licensing by China’s Ministry of Industry and Information

Technology (MIIT) in 2012 has presented an opportunity for the supply side to respond. China’s

IDC market is expected to grow at 27.8% CAGR between 2014 and 2016.

China IDC market to grow

27.8% CAGR between 2014

and 2016

Figure 4: China has world’s largest internet user base…

Source: International Telecommunication Union (ITU), United Nations Population Division, Internet & Mobile Association of India, World Bank

Expansion of Internet Data Centre into China

632.0

279.8

243.2

109.3 107.884.4 71.7 67.1 57.0 55.4

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500.0

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700.0

China US India Japan Brazil Russia Germany Nigeria UnitedKingdom

France

in M

illio

n

Rank Country / Region Avg. Mbps

1 South Korea 14.0

2 Japan 10.8

3 Hong Kong 9.3

4 Latvia 8.9

5 Switzerland 8.7

6 Netherlands 8.6

7 Czech Republic 8.1

8 United States 7.4

9 Sweden 7.3

10 Finland 7.1

China 2.9

Source: Akamai, 21 Vianet

Figure 5: ...but connection speed is way below world standard…

4.97.3

10.2

17.1

21.1

26.3

32.9

41.7

54.8

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2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

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Y%

RM

B B

illio

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Source: IDC Quan

Figure 7: Demand for IDC Market in China driven by investment catch-up Figure 6: ...mainly due to lack of IT investment

Source: Global Insight, Gartner, 21 Vianet

5

5

IDC market in China. IDC operators are typically perceived as IT landlords, because most data

centres look alike and the key rental criteria are location and size, power supply, and network

speed—very similar to an office rental. This comparison is valid in some aspects, but there are key

differences in terms of product offerings between wholesale and retail customers. Wholesale

customers (IBM, Microsoft) require large areas of space for server storage, and IDC operators are

usually only responsible for providing space or basic racks for rental. However, retail customers (i.e.

SMEs) require less space, but may demand more value-added services including server rental,

virtual private networks (VPN), cloud computing services etc. In China, the IDC market is still limited

to domestic players, as policies strictly regulate foreign players from entering into the market.

China’s IDC operators are generally classified into two types, which also differentiate themselves

based on the business model and target customers:

Telecom carriers – IDCs operated by China’s “Big 3” telecom carriers. They usually lease

large areas of space to wholesale customers, at attractive pricing because of their cost

advantage over self-owned fibre optical networks. These operators usually do not provide

value-added services to customers, which may have their own requirement on specifications.

Telecom carriers command approximately 62% of the market, with China Telecom dominating

the southern part of China while China Unicom dominates the north.

Carrier-neutral – IDCs operated by independent third parties. Usually leased to retail

customers in the form of racks (sometimes called cabinets), and occasionally bundled with

value-added services depending on specifications. Taking 21 Vianet [VNET US; Not Rated],

the largest carrier-neutral IDC in China, as an example, the company offers hosting and related

services, VPN, cloud computing, and content delivery on top of simple data warehousing.

Carrier-neutral operators can own or lease the IDCs from telecom carriers, and they command

around 38% of the market, with names including Vianet [VNET US], Chinacache [CCIH US], Dr

Peng [600804 CH], China Net Centre [300017 CH], Beijing Sinnet [300383 CH] etc.

IDC operators differentiate

between wholesale and

retail model

21 Vianet is the largest

carrier-neutral IDC operator

Figure 7: China IDC market share, 2012

Source: IDC, 21 Vianet

China Telecom,

39%

China Unicom,

20%

China Mobile, 3%

21 Vianet, 12%

Other Carrier-Neutral,

26%

6

6

Because customers are concentrated in coastal cities, most IDCs, whether telecom carriers or

carrier-neutral, are in major cities including Beijing, Shanghai and Guangzhou, and development of

IDCs in second/third-tier cities is relatively slow with poor network coverage. Most carrier-neutral

IDCs thus fail to establish nationwide coverage. To encourage more IT investment from the private

sector, the Ministry of Industry and Information Technology (MIIT) resumed the licensing of IDC /

ISPs in December 2012. CTIL is one of the few players granted the new license to operate an IDC.

Because of national security foreign entities are prohibited from owning more than 50% of a value-

added telecommunications provider.

We summarize the key elements of IDCs as follows:

CTIL a new IDC player. CTIL, through its wholly-owned subsidiary CITIC Telecom International

CPC Limited (CPC), is an established provider of data services in Asia, offering comprehensive

information and communications technology solutions to multinational corporations and business

enterprises. CTIL set up its first IDC in Hong Kong in 2002, and the company has three main IDCs

in Hong Kong / Macau, with total racks of 2,362 by 2014. All new data centres will be of Tier III+

specification to cater to the needs of high-end customers.

To capture the growth opportunity in the IDC business, CTIL plans an aggressive expansion,

adding 6,500 racks over the next 18 – 24 months, so that by end-2016 the company will have 9,000

available racks in China, Hong Kong, and Macau, up by 280% from 2014. In Hong Kong, CTIL is

consolidating its existing IDCs into two mega IDCs, one in Kwai Chung and one in Ap Lei Chau,

paving the way for bigger capacity over the next few years.

In China, CTIL secured the China Internet Data Centre / Internet Content Provider (IDC/ICP)

license in March 2014, setting the stage for CTIL to officially expand into China’s IDC segment.

CTIL formed a partnership with Shanghai Science & Technology Network Communications (STNC)

to set up a cloud computing IDC in China. The first centre will occupy a total area of 14,000 m2, and

the first phase will cover 1,000m2, providing about 443 standard racks. SNTC currently operates

two IDCs in Shanghai with over 2,000 racks.

MITT resumed issuance of

IDC / ISP license in Dec,

2012

CTIL to expand available

racks by 280%

First centre will be launched

in Shanghai

Telecom Carrier Carrier-Neutral

Coverage China Unicom concentrated in northern China; China Concentrated in costal cities, nationwide coverage is rare

Business Model Wholesale (i.e. Internet portals) Retail (i.e. large enterprises and SMEs)

Location Self-owned, usually in large area Either leasing or self-owned

Connectivity Owns fibre-optical network Rents carrier’s network

Energy Efficiency Varies, subject to customer’s specifications Usually more efficient as electricity is part of cost

Value-Added Services Basic Cloud services, VPN, content delivery network

Cost Component Utility: 40% to 50% Utility 40% to 50%

Bandwidth Cost: 20% to 30%, usually pass-through

7

7

Besides Shanghai, CTIL plans to expand its coverage to other cities including Beijing, Guangzhou,

and Shenzhen. Within China, we expect CTIL will operate approximately 3,165 commercially-

available racks by end-2016, representing 36% of CTIL’s racks portfolio:

CTIL’s competitive advantage in IDC. Although CTIL is a new player in China’s IDC market, with

a scale much smaller than 21 Vianet’s 13,000 racks, we do not believe the late entry poses a

significant disadvantage to CTIL. Conversely, we see CTIL positioning as 1) an IDC operator

capable of offering full range of value-added services such as carrier-neutral, but also 2) enjoying

cost advantages comparable to backbone networks like telecom carriers:

Established experience as third-party IDC operator – CTIL has strong experience in

managing carrier-neutral IDCs in Hong Kong, by offering hosting services and comprehensive

solutions. CTIL is experienced in setting up new IDCs in various locations from commercial

buildings to industrial buildings, in recent years, to enhance their product offerings, and has

also unveiled a number of innovative products, including SmartCLOUDTM and TrustCSITM. We

believe CTIL is capable of leveraging its expertise in data services and of providing one-stop

solutions for mainland IDCs.

Strong customer base – CTIL owns a strong customer base including multinational

customers, which also need to strengthen their IT networks in China. CTIL is in a unique

position to provide data services in both domestic and overseas markets.

Unparalleled backbone network – CITIC Group, CTIL’s parent, is the owner of one of

China’s largest optical fibre networks, i.e. CITIC Networks, with 32,000 km covering all

provinces except Tibet. Currently, the network provides broadband services to selective cities

and customers, and is vastly under-utilized. By collaborating with CITIC Networks, there is a

distinctive advantage for CTIL over other carrier-neutral IDC operators. Most carrier-neutral

IDC operators pay telecom operators a cost based on bandwidth used, resulting in lower

margins if they cannot fully pass through the bandwidth cost to end-customers. CTIL’s reliance

on CITIC’s unparalleled backbone network will allow the company to offer similar services (to

other carrier-neutral providers) but at competitive cost. Collaboration with CITIC Networks will

be discussed later in this note.

CTIL is not a newcomer to

IDC

Relying on CITIC Networks a

distinct advantage on lower

bandwidth cost

Figure 9: CTIL racks portfolio


0

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4,000

6,000

8,000

10,000

2014E 2015E 2016E

Nu

mb

er o

f R

acks

Macau Hong Kong China

Growth 2014-2016: +280%

5%

88%

7%

15%

55%

15%

47%

36%

17%

2,362

5,562

8,762

8

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China’s carrier-neutral IDC operators are mostly small because IDC infrastructure is capital -

intensive and building up a nationwide scale is time-consuming. Nevertheless, besides

depreciation, other costs are mostly variable (i.e. electricity, bandwidth), so nationwide IDC

operators do not necessarily have absolute competitive advantage on operating leverage over new

entrants. CTIL can fund its growing IDC market penetration from other cash-generative units like

Macau Telecom (CTM), while enjoying lower variable costs arising from access to the backbone

network. CTIL can quickly penetrate the market with a meaningful market share, in our view. Our

model estimates CTIL will spend HK$1.2bn on its data business segment between 2014 and 2016.

Growth assumptions. We expect IDC will be a key growth driver within CTIL’s CPC division. We

conservatively assume a net monthly recurring revenue (MRR) of HK$7,800, HK$10,000, and

HK$8,000 per rack for CTIL’s China, Hong Kong and Macau IDC business, respectively, a discount

of 35% to other larger carrier-neutral players due to 1) uncertainty on the IDC revenue sharing

arrangement between CTIL and its Shanghai partner STNC; 2) possibility of promotional pricing on

new IDCs. Our forecast projects revenue growth from IDC and others to increase by 300% between

2013 and 2016, and the VPN segment will also enjoy above-average growth as more value-added-

services are provided.

In overseas market, EBITDA margin for IDCs can be as much as 40% when bandwidth costs are

borne by the customers. However, in China, taken 21 Vianet as an example, the margin is around

19% as a carrier-neutral. Our EBITDA margin of 19% prudently assumes a similar cost structure

on CTIL as other carrier-neutral operators, although we believe there will be upside to our forecast

if the collaboration with CITIC Network becomes clearer.

We value the division at HK$5bn, or HK$1.50 per share, by applying 20 times to its after-tax

earnings in FY15E, a 40% discount to other data servicing listed companies in China.

Nationwide IDC operators

do not have absolute

competitive advantage

EBITDA margin for overseas

IDCs as much as 40%

Figure 10: Revenue mix — CPC Division


FY14E FY15E FY16E

China

#s of Racks 165 1,665 3,165

MRR per Rack (HK$, net) 7,800 7,956 8,115

Utilization Rate 100% 70% 70%

Hong Kong

#s of Racks 2,079 3,079 4,079



Macau

#s of Racks 118 818 1,518



Figure 11: MRR & utilization rate


137 198 263 552

865 767

984 1,180

1,475

1,844

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500

1,000

1,500

2,000

2,500

3,000

FY12 FY13 FY14E FY15E FY16E

RM

B m

illio

n

VPN IDC & Others

904

1,181

1,444

2,027

2,709

9

9

Gaming and tourism driving demand growth. Underpinned by the growing gaming and tourism

sectors, Macau’s population, while highly connected by nature, grew from 484,000 in 2005 to more

than 600,000 by 2013. Economic output grew at a double-digit rate (year-on-year) in every single

quarter since 4Q12. The city drew 2.4m visitors per month in 2013, compared to 1.5m in 2005, of

which 64% were from China. We believe the gaming and tourism sectors will remain as Macau’s

key growth drivers, driving growth of the city’s telecommunication services.

Although the secular growth phase has passed and the Macau telecommunications industry is

more mature, CTM is a steady and solid business, because of its dominant position within the small

city. This cash-generative asset, fully integrated from fixed-line to broadband, mobile and enterprise

solutions, produces positive pre-tax free cash flow of more than HK$750m a year, equivalent to 22

cents a share. Before addressing each of the above segments in detail, the following table

summarizes the major opportunities and threats on CTM on short to medium term:

CTM to generate pre-tax FCF

of more than $750m a year

Figure 12: Macau population growth

Source: Statistics and Census Service, Macao SAR

Macau Telecom CTM—a stable cash-cow

0%

10%

20%

30%

40%

50%

60%

70%

80%

1,000

1,500

2,000

2,500

3,000

3,500

Mai

nla

nd

Ch

ina

Vis

ito

rs %

Tota

l nu

mb

er

of

Vis

ito

rs (

in K

)

Total Number of Visitors (LHS)

Mainland China Visitors % (RHS)

484

510

532543

533541

557

582

608

400

450

500

550

600

650

2005 2006 2007 2008 2009 2010 2011 2012 2013

CAGR: 2.9%

Figure 13: Number of monthly visitors

Source: Statistics and Census Service, Macao SAR

% of Revenue FY13 Opportunities Threats

Mobile 69% New series of high-end phone launch

Issuance of 4G license

Slowdown in prepaid subs growth

Broadband 9% Potential price hike on faster connection

speed

New entrant threatening its monopoly

position

Fixed-line 11% Booming commercial activities boosting

demand on commercial line

Decline in residential fixed-line subs

Enterprise Solutions 11% Increasing demand on data services by

government

Potential slowdown in gaming sector

Overall n.a. Hengqin development Any further outbreak in government

corruption scandal

10

10

Mobile segment: High penetration rate driven by prepaid card. Macau’s mobile penetration

rate is among the highest in the world, at 283%, even higher than Hong Kong’s 238%. This is

primarily due to a strong adoption of prepaid cards, mainly used by short-term visitors. Stripping out

prepaid subs, the penetration rate is more realistic at 98.3%. We expect subscription and prepaid

users will continue to increase steadily, driven by 1) rising population; 2) growing number of visitors.

Including handset sales, the mobile segment accounts for 67% of CTM’s total revenue.

CTM is the largest mobile operator in Macau, with a 45% market share, the rest including Hutchison

Tel, Smartone and China Telecom. However, operators can only provide 2G / 3G services as the

Macau government has not yet launched 4G. We expect the review process will resume as soon as

the election of the Macau SAR chief executive is completed in August and a preliminary framework

can be drawn up by 4Q14. 4G licensing, in our view, will present a major catalyst for CTM in 2015,

driving up service revenue as 4G-ready handsets can utilize the higher-speed network resulting in

higher data usage. In the nearer term, the launch of a series of high-end smartphones in 2H14 will

ignite a recovery of handset sales. We expect CTM’s handset revenue to increase by 5% and 20%

YoY in FY14E / 15E. Average revenue per user (ARPU) has been on a steady trend, up 8.8% YoY

in 2013. Our model assumes a mild ARPU rise of +2.6% in FY14E, and +4.6% in FY15E as the 4G

cycle kicks in.

High mobile penetration due

to strong adoption of

prepaid cards

4G licensing a catalyst for

2015

Launch of new smartphones

in 2H14 will help recovery in

handset sales

Figure 15: World mobile penetration rate

Source: wearesocial.sg

283

238

184

150 148130 125 120

112 110 110 109 106.6 10393 89

73

-

50

100

150

200

250

300

%


Prepaid Subs Growth 7.3% 6.0% 5.0% 5.0% 0.0%

Postpaid Subs Growth 5.7% 5.5% 5.0% 5.5% 5.0%

ARPU - Overall 102 111 113 119 123

ARPU - Postpaid only 170 189 199 213 224

Mobile Service Growth 6.4% 21.0% 8.5% 10.2% 8.5%

Handset Sales Growth 62.4% (17.5%) 5.0% 20.0% 0.0%

Figure 16: Mobile growth assumptions


-

1,000

2,000

3,000

4,000

5,000

6,000


RM

B m

illio

n

Data, Enterprise Solutions Services Fixed-Line RevenueBroadband Revenue Handset RevenueMobile Service Revenue

4,7794,562

4,727

5,2485,314

Figure 14: CTM revenue mix


11

11

Broadband segment: No immediate risk opening of the monopoly market. CTM has a

monopoly in Macau’s broadband / fixed-line market, with the penetration rate by households 82% in

FY13. Since 2012, the Bureau of Telecommunication Regulation in Macau has invited new players

to enter the broadband market. MTEL, a new group formed by a local entrepreneur with strong

experience in telecommunications, was awarded the second license, and the group is constructing

its network, with roll-out expected in 4Q14. While the breakup of CTM’s monopoly will undoubtedly

reduce its market share, we do not see the competitor posing an immediate risk to CTM’s dominant

position in the near term. CTM has been improving its cable network and aims to provide a higher-

speed, optical-fibre network to most commercial and residential customers. Fibre-to-buildings

connection reached 100% of households in 2013, and it is expected that fibre-to-home connections

will reach 100% of households by end-2014. It will take a few more years, and perhaps more capital

investment, for MTEL to match CTM’s existing coverage. Therefore, even though there is likely to

be some price cutting, the churn rate for the first two years should be low. We expect CTM’s market

share to decline to 95% by 2015, and to maintain market share of 70% over the long term.

A comparison with Hong Kong’s broadband market in early 2000s is an example of how

competition affected the market, when Hong Kong Broadband Network (HKBN) began providing

internet services to residential customers in 2002. Although Hong Kong broadband leader PCCW’s

market share dipped from 64% to 54% between 2001 and 2004, the number of PCCW broadband

subscribers actually increased by 98% as users switched from dial-up connections to broadband.

On the other hand, despite competitive rates offered by HKBN, PCCW’s ARPU was relatively stable

during the period at around $105. Surprisingly, 11 years later, overall broadband subs in HK

expanded exponentially, and PCCW’s ARPU has more than doubled to $234. It is apparent that

neither provider sacrificed margin by much.

We expect CTM’s broadband revenue to increase 3.3% in FY14E as new subs continue to grow in

the absence of competitors, while ARPU will marginally dip by 1%. Going into FY15E we expect

market share will start to moderate, resulting in a revenue decline of 1.3%.

CTM’s fibre-to-home will

reach 100% of households

by 2014

PCCW did not suffer by

much when HKBN came into

HK’s broadband market

Figure 17: Hong Kong broadband market

Source: OFCA, PCCW


Broadband Revenue

(HK$m) 444.4 483.6 499.7 493.1 471.3

Growth(%) 2.0% 8.8% 3.3% (1.3%) (4.4%)

ARPU 261.9 271.9 269.2 261.2 253.3

Growth (%) (0.3%) 3.8% (1.0%) (3.0%) (3.0%)

Market Share 99.7% 99.7% 99.0% 94.5% 88.0%

Figure 18: CTM — Broadband growth assumptions


0%

10%

20%

30%

40%

50%

60%

70%

80%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

%

Nu

mb

er o

f B

road

ban

d S

ub

s (K

)

PCCW (LHS)

Market Share (RHS)

12

12

Fixed-line: Mobile as substitute. Residential subs are on a downtrend as households

increasingly use mobile lines as a substitute, but commercial lines are growing steadily, in line with

growing business activity. We expect this trend to continue, with total residential subs decreasing

by 5% p.a., but commercial lines will increase by 2.2% p.a.. Fixed-line revenue is expected to drop

by 13.3% and 8.3% in FY14E and FY15E, respectively, due to: 1) declining residential subscribers;

2) decreasing fixed-line ARPU (-10% / -5% FY14E / FY15E)

Data enterprise solutions: strong spending from gaming sector and government. Revenue

rose 18% in 2013, driven by higher demand for leased lines and growth in professional services

from carriers, casino / hotel customers, banking and government. We expect the segment will grow

steadily at an annual 3% between 2014 and 2016.

Hubbing service: A sunset division. Hubbing service offers international voice and data flow

between operators, enabling routing services on voice and SMS where IDD or roaming agreements

were not in place between two operators. Before the acquisition of CTM, hubbing service was

CTIL’s main business, and it is divided into three segments.

Voice Hubbing (71% of division turnover) - Due to the change in communication technologies

into data-based traffic, voice hubbing service had intense pricing pressure which recorded

substantial volume and revenue decline in 2013.

SMS Hubbing (18% of division turnover) – Traditional inter-operator SMS traffic experienced a

decline due to similar reasons as voice, but segment revenue grew by 10.9%, mainly because

of a rebound in average revenue per message from HK$20c to HK$25c.

Mobile VAS (10% of division turnover) - The segment includes 4G LTE Roaming service,

Single IMSI Multiple Numbers, Prepaid Roaming Service, and Roaming Signaling Service.

Segment revenue went up by 16.2% YoY in FY13.

We believe the shrinkage of hubbing service is a structural issue, as faster speed of data

transmission allows users to communicate over-the-top instead of traditional telecom hub on voice

calls and messaging. We expect the revenue of hubbing service to decline by 25% and 18% in

FY14E / 15E, respectively.

Residential fixed-line users

switch to mobile

Shrinkage of hubbing

service a structural issue


Residential Subs Growth (4.5%) (5.0%) (5.0%) (5.0%) (5.0%)

Commercial Subs Growth 2.2% 2.2% 2.2% 2.2% 2.2%

Fixed-line Revenue 525.7 428.5 371.5 340.6 305.3

Growth (%) (12.2%) (18.5%) (13.3%) (8.3%) (10.4%)

ARPU 268 224 201 191 182

Market Share 99.6% 99.7% 99.0% 94.5% 88.0%

Figure 19: CTM — Fixed-line growth assumptions


Hubbing Service

13

13

What is CITIC Networks? CITIC Networks, also called China Express Network (奔腾一号), is one

of the few commercial-use backbone network resources in China. Originally for military use, CITIC

Group acquired the asset from CITIC Pacific in 2002 at a valuation of HK$2bn. CITIC Networks has

a 32,000km optical fibre network connecting all provincial cities across China (except Tibet). The

backbone network currently supports the following uses:

Broadband transmission for two 10GB bandwidth lines

Great Wall Broadband (长城宽带), acquired by A-share listed company Dr. Peng

VPN transmission for CITIC Bank / Huaxia Bank / CITIC Securities

Cable TV in various provinces including Hangzhou, Shenzhen, Wuhan, Suzhou, Nanjing

Asset injection potential. In April, CTIL entered into a memorandum of understanding (MOU) with

CITIC Group about the potential asset injection of CITIC Networks, one of the few assets that CITIC

Group left out from the restructuring between CITIC Group and CITIC Pacific announced earlier.

We believe the potential injection into CTIL is mutually beneficial, as 1) it is the intention of CITIC

Group and consistent with central government policy to restructure state owned enterprises (SOEs)

by transferring more assets into the listed company run by professional management; 2) CTIL will

secure a key telecommunications network by offering its IDC customers abundant bandwidth and

reliable connections in data transmission. We expect both parties will aim to complete the deal

after completion of the CITIC Group / CITIC Pacific restructuring.

We estimate the price tag for CITIC Networks at around HK$3bn, based on a non-binding MOU

between Dr. Peng and CITIC Networks over an investment of a 10% stake by the former into the

latter in December 2013 prior to the CITIC Group restructuring. According to the regulation, CTIL

can acquire a maximum 49% stake, or equivalent to approximately HK$1.5bn. The acquisition is

expected to be funded by share issuance to the parent, which currently owns 60% of CTIL. We

have not factored in any potential earnings impact from the injection into our model.

CITIC Networks were

acquired in 2002 at a

valuation of HK2bn

Potential injection would

give CTIL a key

telecommunications

network

Acquisition likely to be

funded by new shares

CITIC Networks

Figure 20: CITIC Networks coverage

Source: Dr. Peng

14

14

Income statement. We expect overall revenue for FY14e to grow by 32.6%, as CTM is

consolidated for a full year. CTM will continue to generate consistent earnings and cash flow, with

revenue (ex. handset sales) growing at 2.5% and 3.6% in FY14e / FY15e. On the other hand, CPC

(data services) segment will remain the key growth driver between 2013 and 2016—CAGR

estimated CAGR 57% - but will be partly offset by the declining performance of the hubbing service.

In FY15e / FY16e we estimate overall revenue growth will normalize to 10.5% / 7.1% YoY. For

EBITDA, as both CTM and CPC have better margins than traditional hubbing services, we forecast

the margin will expand from 21% to 25% in FY14e. Because of a substantial change in capital

structure post-acquisition, finance cost spiked to HK$444m in FY13. Eliminating the one-off finance

charge of HK$187m, we expect finance expense will be HK$338m and HK$369m in FY14E /

FY15E, factoring in a 50bps rate hike in 2015.

Balance Sheet. The acquisition of CTM in 2013 changed CTIL’s gearing from net cash into a net

gearing of 110%, and the listco also carries goodwill of HK$9.3Bn post-acquisition. Considering

CTM as highly cash flow generative, we are comfortable with CTIL’s loan repayment ability and the

interest coverage ratio of 3.4x. The split between floating-rate bank loans (~ 3% p.a.) / fixed-rate

coupon bond (6.1% p.a.) under long-term debt is about 58% / 42%, and the allocation should

continue. Capex is estimated at HK$670m and HK$900m for FY14e / FY15e, as we anticipate more

capex will be spent on IDC going into FY15e (HK$450m). Despite that, positive free cash flows will

persist at HK$860m and HK$784m for FY14e / FY15e.

CPC revenue to grow at

CAGR of 57%, but partly

offset by declining hubbing

services

We are comfortable with

CTIL’s interest coverage

ratio of 3.4x

Financial Analysis

Figure 21: Financial Highlights


FY2012 FY2013 FY2014e FY2015e FY2016e

RevenueCTM n.a. 2,464 4,727 5,248 5,314 Change (yoy %) n.a. n.a. 91.9% 11.0% 1.3% ex Handset Sales n.a. n.a. 2,595 2,690 2,756 Change (yoy %) n.a. n.a. n.a. 3.6% 2.5%CPC 904 1,181 1,444 2,027 2,709 Change (yoy %) 22.9% 30.7% 22.2% 40.4% 33.6%Hubbing Services 2,706 2,374 1,780 1,513 1,392 Change (yoy %) 9.9% -12.3% -25.0% -15.0% -8.0%Group 3,610 6,019 7,951 8,788 9,415 Change (yoy %) 12.9% 66.7% 32.1% 10.5% 7.1%

EBITDA MarginMacau Telecom 25.6% 33.1% 31.7% 29.8% 30.2%Data Services 22.2% 19.3% 17.8% 20.5% 21.4%Hubbing Services 13.4% 13.4% 13.4% 13.4% 13.4%Overall 18.5% 21.0% 25.1% 24.8% 25.1%

Depreciation & Amortization 154 417 647 675 759 % of Net PP&E 21.9% 31.7% 32.9% 30.2% 29.6%

Interest Expenses 3 444 391 409 430 % of Total Debt n.a. 5.8% 5.1% 5.3% 5.6%

Leverage RatioTotal Asset Turnover 0.80 0.57 0.48 0.50 0.52 Total debt / Total asset 2.14% 46.93% 45.29% 43.32% 41.66%Total debt / Total Equity 2.92% 124.70% 118.65% 109.51% 101.60%Net debt / Equity -7.45% 110.87% 101.26% 88.98% 75.62%Interest coverage (x) 113.87 1.74 3.44 3.69 3.74

15

15

CTIL has three distinct businesses: CTM is cash-generative; CPC is in a growth phase; and the

hubbing service is on a declining trend. We thus derive our valuation using a sum-of-the-parts

(SOTP) approach, assigning various multiples to different businesses to reflect the hidden value

more accurately. Our SOTP valuation implies a target price of HK$3.60, suggesting an upside of

27% from current level.

We assign a multiple of 8.5x EV / EBTIDA FY14e, mainly due to its dominant market positioning

across mobile and fixed-line markets, and the multiple is in line with the average of Asian telcos.

For CPC, the market tends to assign a rich multiple to Chinese IDC players, which are trading at an

average of 33x PER FY15e, with 21 Vianet (the largest IDC player) trading at 30.5x. Our

assumption of 20x PER FY15e prudently reflects the risk to CTIL as an IDC startup in China. On

hubbing, a discounted-cash-flow (DCF) valuation is employed with a terminal growth rate of -5%.

We do not feel that any conglomerate holding company discount should be applied since all of the

operations are telecom-related.

CTM

Market share decline in broadband segment faster than expected

Further delay in 4G licensing issuance

Slowdown in tourism growth

CPC

Demand slowdown for IDC as economy weakens

Postponement of asset injection plan

Hubbing

Decline in hubbing services faster than expected

China IDC players are

trading at 33x PER FY15e

Valuation

Assumption Equity Value (HK$m) Per Share Value

Macau Telecom (CTM) 8.5x EV/EBTIDA FY14E 6,135.6 1.84

Data Businesses (CPC) 20x PER FY15E 5,010.0 1.50

Hubbing DCF @ 5.3% WACC 860.5 0.26

Total 12,006.1 3.60

Figure 22: Sum-Of-The-Parts valuation


Key Risks

16

16

Peer Comparison: Asia Telecoms

Peer Comparison: Global IDC

Company Ticker Rating Price 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E

CITIC Telecom 1883 HK BUY 2.83 1,223 14.8 11.2 9.8 1.3 1.4 1.3 12.9 8.1 7.2 3.5 4.5 5.1 66.7 32.1 10.5 (1.4) 32.8 14.1 11.6 13.3 14.2 111 15.7

Developed Markets

HKT Trust 6823 HK NR 8.74 8,539 24.8 24.3 19.8 1.9 1.8 1.8 9.2 10.3 8.9 3.8 4.9 5.4 8.3 18.9 14.2 52.8 2.3 22.4 8.0 8.3 9.5 74 24.0

PCCW 8 HK NR 4.79 4,571 18.9 16.4 15.6 3.8 3.4 3.3 6.0 6.7 5.9 5.2 4.4 5.1 8 15.2 10.8 14 12.8 5.4 21.0 23.6 23.2 280 41.2

Smartone 315 HK NR 11.24 1,517 16.5 18.9 16.6 3.9 3.7 3.4 4.6 4.5 4.5 3.6 3.3 3.9 21.2 7.0 3.7 (18.0) (36.6) 14.3 27.7 21.2 22.4 3 24.6

Hutch Tel 215 HK NR 3.25 2,021 17.8 18.3 16.2 1.4 1.4 1.4 7.0 7.4 6.8 3.8 4.0 4.5 (17.8) 4.5 4.2 (24.6) (2.8) 13.0 8.3 8.1 8.7 38 15.0

Chunghw a Tel 2412 TT NR 91.6 23,722 17.9 19.2 19.6 2.0 2.0 2.0 8.8 8.8 8.7 6.0 2.6 4.9 3.6 0.3 1.3 - (6.8) - 11.0 10.3 10.1 (4) 0.6

Taiw an Mobile 3045 TT NR 92.6 10,575 16.0 16.6 17.0 5.5 4.5 4.5 9.1 9.2 9.0 5.6 6.1 5.8 11.2 5.0 4.7 5.9 (3.6) (2.3) 27.3 26.5 25.7 98 (4.6)

Far Eastone 4904 TT NR 63 6,853 17.5 17.9 18.2 2.8 2.8 2.8 8.5 8.4 8.1 3.4 3.8 3.8 1.1 3.0 3.5 11.1 (2.5) (1.7) 14.5 16.2 15.7 27 (2.5)

SingTel ST SP NR 4 51,373 17.2 16.5 15.4 2.7 2.5 2.4 12.4 14.1 13.7 4.3 4.5 4.8 (3.4) (6.6) 1.8 (12.1) 8.2 6.7 14.8 15.4 15.7 29 7.9

Starhub STH SP NR 4.22 5,861 19.6 19.0 18.1 87.8 67.0 51.5 10.6 10.3 9.9 4.8 4.9 5.0 (2.6) 3.0 2.6 2.9 1.4 5.0 587 386 312 509 (3.3)

M1 M1 SP NR 3.75 2,808 20.3 19.4 18.2 8.8 8.5 7.8 10.3 11.2 10.6 1.5 4.3 4.6 (6.4) 3.1 3.5 8.1 7.4 6.9 43.1 43.7 44.0 49 14.0

SK Tel 017670 KS NR 245000 19,303 11.8 10.6 9.4 1.3 1.3 1.2 10.2 11.5 9.9 3.8 3.8 3.9 1.9 5.6 3.8 16.3 11.3 13.0 13.0 12.6 13.3 34 6.3

NTT Docomo 9437 JP NR 1824 78,095 16.0 14.8 13.8 1.4 1.3 1.2 3.8 5.2 4.9 4.1 3.4 3.5 5.4 1.4 1.9 6.8 2.4 7.7 9.4 8.5 9.2 (2) 4.2

KDDI 9433 JP NR 6183 54,398 15.6 12.2 10.9 2.1 1.7 1.6 4.2 5.1 4.6 3.6 2.6 2.9 2.5 25.2 3.7 8.7 38.0 11.2 11.2 14.9 14.9 38 (4.1)

Telstra TLS AU NR 5.46 63,856 16.2 16.9 16.6 5.4 5.2 5.1 7.0 7.4 7.5 4.2 5.4 5.5 1.1 (0.8) (0.6) 11.6 4.4 1.6 31.7 31.2 30.3 98 3.3

Average 17.6 17.2 16.1 9.3 7.7 6.4 8.0 8.6 8.1 4.1 4.1 4.5 2.4 6.1 4.2 5.9 2.6 7.4 59.2 44.7 39.6 91 9.1

Developing Markets

China Mobile 941 HK NR 85.45 223,958 10.9 12.6 13.1 2.2 2.0 1.9 3.5 4.7 4.6 4.9 3.4 3.3 12.4 4.1 5.7 (5.9) (16.1) (3.9) 16.1 13.0 12.0 (52) 2.1

China Telecom 728 HK NR 4.34 45,322 14.7 14.1 13.0 1.3 1.2 1.2 3.5 3.6 3.4 6.1 2.4 2.7 14 5.9 6.7 22 3.9 9.2 6.5 6.5 6.9 33 2.8

China Unicom 762 HK NR 13.62 41,897 20.2 18.7 15.6 1.5 1.4 1.3 4.0 4.0 3.7 5.0 1.9 2.2 18.5 8.5 9.1 46.7 20.9 17.8 4.9 5.9 6.5 56 9.5

Maxis MAXIS MK NR 6.73 15,907 28.6 24.6 23.4 8.4 10.0 11.1 14.0 13.2 12.8 4.3 5.9 5.1 1.3 (2.3) 3.3 (4.9) 11.2 6.0 27.1 37.2 43.5 112 (7.3)

DiGi DIGI MK NR 5.69 13,931 22.1 22.6 21.6 66.9 63.2 61.2 12.8 14.1 13.3 4.8 4.4 4.6 5.9 4.9 4.8 41.3 12.0 4.8 370 284 290 51 13.5

Telekom Malaysia T MK NR 6.37 7,356 22.3 24.7 23.0 3.2 3.2 3.2 6.7 7.5 7.1 3.9 3.8 4.1 6.4 5.6 5.1 (19.8) (11.0) 7.1 14.4 12.7 13.4 45 13.3

Advance Info ADVANC TB NR 202 18,878 17.8 16.7 15.1 13.1 12.6 12.1 9.5 9.3 8.4 3.8 6.0 6.7 0.9 3.9 5.6 4.0 4.6 11.1 81.4 82.9 89.7 25 7.3

Total Access DTAC TB NR 101 7,517 24.0 19.4 16.3 7.3 7.1 7.1 8.6 7.8 6.9 3.3 5.5 6.3 5.9 (0.1) 4.4 (6.5) 21.2 18.8 31.3 40.0 47.6 79 13.4

True Corp TRUE TB NR 11.1 5,024 n.a. n.a. 142 39.5 7.0 6.2 11.8 11.2 9.5 n.a. - - 7.6 3.8 7.6 21.6 (235) (145) (104) (26.7) 16.2 1,584 58.7

PLDT TEL PM NR 3022 15,044 19.5 16.6 15.9 4.8 4.6 4.6 8.1 8.9 8.6 7.5 5.9 6.2 3.2 3.1 3.3 (2.0) 10.6 4.0 25.1 28.1 29.1 52 16.3

Globe Tel GLO PM NR 1762 5,387 31.8 17.8 16.2 5.7 5.4 5.1 7.3 7.4 7.0 4.0 4.5 5.0 10.1 6.5 6.7 (27.6) 61.5 9.8 11.5 29.4 30.6 149 4.8

Average 21.2 18.8 28.6 14.0 10.7 10.5 8.2 8.3 7.8 4.8 4.0 4.2 7.8 4.0 5.7 6.3 (10.6) (5.5) 44.0 46.6 53.2 194 12.2

Aggregate Average 18.9 17.6 21.2 11.0 8.7 7.9 8.2 8.5 7.9 4.4 4.1 4.4 7.2 6.2 5.1 5.8 (1.8) 2.2 50.9 44.3 44.4 135 10.6

YTD

Perf

(%)

PBR (x)Market

cap

(US$m)

EV/EBITDA Revenue Growth (%) Net

D/E

FY13

(%)

PER (x) Dividend yield (%) EPS Growth (%) ROE (%)

Company Ticker Rating Price 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E 2013 2014E 2015E

CITIC Telecom 1883 HK BUY 2.83 1,223 14.8 11.2 9.8 1.3 1.4 1.3 12.9 8.1 7.2 3.5 4.5 5.1 66.7 32.1 10.5 (1.4) 32.8 14.1 11.6 13.3 14.2 111 15.7

China IDC

21 Vianet VNET US NR 28.96 1,922 n.a. 47.8 30.5 0.8 0.7 0.6 28.8 21.6 14.3 n.a. - 0.1 29.0 44.2 43.0 (181) 121 57 (2.2) 10.0 14.2 (35) 19.6

ChinaCache CCIH US NR 13.14 333 n.a. 1,524 28.4 0.5 0.5 0.5 35.7 n.a. n.a. n.a. n.a. n.a. 35.6 31.1 28.9 101 3,118 5,262 (5.2) 0.2 10.0 (43) 37.7

Dr Peng 600804 CH NR 15.2 3,421 44.6 32.8 21.9 4.9 4.5 3.9 11.5 n.a. n.a. 0.7 1.1 1.5 127 38.5 28.9 100 32 50 10.0 12.7 16.6 (1) 2.7

Shanghai Wang 300017 CH NR 55.5 2,816 58.3 44.5 28.1 15.3 11.0 8.6 42.2 n.a. n.a. 0.2 0.4 0.5 48.0 61.4 51.1 128 n.a. n.a. 23.6 25.3 31.1 (50) 30.7

Beijing Sinet 300383 CH NR 45.94 811 47.0 74.0 57.1 11.0 6.1 6.9 n.a. n.a. n.a. 27.3 - - 20.6 25.2 26.2 21 (33) 24 10.9 13.1 15.0 4 144.1

Average 50.0 345 33.2 6.5 4.6 4.1 29.6 21.6 14.3 9.4 0.4 0.5 52.0 40.1 35.6 34.0 810 1,348 7.4 12.3 17.4 (25) 47.0

Hong Kong IDC

SunEVision 8008 HK NR 2.7 809 13.0 n.a. n.a. 1.9 n.a. n.a. 7.7 n.a. n.a. 3.8 n.a. n.a. 8.3 n.a. n.a. 17.8 n.a. n.a. 16.9 n.a. n.a. (38) 18.8

United States IDC

Equinix EQIX US NR 217.33 10,828 62.9 58.6 35.8 4.4 4.5 4.2 13.8 12.9 11.3 n.a. 1.6 3.4 14.1 11.8 10.7 (34.2) 45.8 64.9 4.0 6.7 10.0 137 18.6

Level 3 Comm LVLT US NR 44.91 10,660 54.0 30.0 25.4 7.5 5.7 4.5 10.6 9.8 8.7 n.a. - 0.0 (1.0) 2.4 5.6 (75.0) 132 20.2 (8.4) 22.5 24.1 548 37.0

Rackspace RAX US NR 30.91 4,391 52.9 45.8 34.7 4.1 3.3 2.8 11.9 6.8 5.6 n.a. - - 17.2 16.5 15.5 (19.2) 7.6 31.8 9.1 9.3 10.0 (18) (20.2)

Interxion INXN US NR 27.85 1,919 135 35.7 29.5 4.9 n.a. n.a. 11.7 12.4 10.8 n.a. - - 10.8 9.6 12.4 (78.7) 82.4 21.2 1.8 9.2 7.0 82 16.0

Coresite COR US NR 34.46 745 61.7 56.5 38.9 3.4 n.a. n.a. 13.8 n.a. n.a. 4.2 4.3 5.0 13.5 13.8 13.0 127 21.8 40.7 4.8 21.5 n.a. 33 3.5

Average 73.3 45.3 32.9 4.9 4.5 3.8 12.4 10.5 9.1 4.2 1.2 1.7 10.9 10.8 11.4 (16.0) 57.9 35.8 2.2 13.8 12.8 156 11.0

U.K. IDC

Telecity TCY LN NR 801 2,759 24.3 19.9 17.6 4.0 3.6 3.2 11.6 11.4 10.2 1.5 1.6 2.0 15.1 9.8 10.6 10.7 18.3 12.9 17.0 18.0 18.0 74 8.1

Australia IDC

IINET LTD IIN AU equity NR 7.43 1,125 20.7 18.0 15.4 3.7 3.4 3.1 7.0 7.2 6.5 3.8 3.0 3.5 13.2 6.5 4.5 58.2 8.7 17.1 19.9 19.5 20.9 95 14.3

M2 GROUP LTD MTU AU equity NR 5.975 1,013 20.0 12.9 11.6 3.6 3.2 3.0 12.7 8.4 7.5 5.2 4.3 5.0 73.2 50.4 4.7 5.9 40.9 11.7 18.1 25.1 25.3 93 (5.7)

NEXTDC LTD NXT AU equity NR 1.625 295 n.a. n.a. n.a. 1.4 1.4 1.4 n.a. n.a. 53.6 n.a. - - 2,612 6.4 70.8 (82.4) 87.7 (58.1) (1.1) (9.6) (4.2) (22) (28.9)

Average 20.4 15.5 13.5 2.9 2.7 2.5 9.8 7.8 22.5 4.5 2.4 2.9 900 21.1 26.7 (6.1) 45.8 (9.8) 12.3 11.7 14.0 55 (6.8)

Aggregate Average 46.9 144 27.5 4.5 3.8 3.4 16.6 11.0 13.6 5.6 1.5 1.9 194 24.0 22.4 6.2 265 398 8.2 13.1 15.1 61 19.5

EPS Growth (%) ROE (%) Net

D/E

FY13

(%)

YTD

Perf

(%)

Market

cap

(US$m)

PER (x) PBR (x) EV/EBITDA Dividend yield (%) Revenue Growth (%)

17

17

Financials Income Statement (HK$m) FY2012 FY2013 FY2014e FY2015e Cash Flow Statement (HK$m) FY2012 FY2013 FY2014e FY2015e

CTM - 2,464 4,727 5,248 Profit (loss) after tax 461 557 843 963

CPC 904 1,181 1,444 2,027 Depreciation & Amort. 154 415 647 675

Hubbing 2,706 2,374 1,780 1,513 Change in Working Capital (329) 705 (18) (2)

Revenue 3,610 6,019 7,951 8,788 Cash from Operation 287 1,677 1,472 1,636

Growth yoy% 12.9% 66.7% 32.1% 10.5% Capital Expenditure (160) (471) (670) (900)

Operating Expenses (2,943) (5,957) (6,605) (7,048) Change in Other Investing Activities 60 (8,780) (0) 1

EBITDA 667 1,263 1,994 2,183 Cash from Investing (101) (9,251) (670) (899)

Growth yoy% 33.1% 89.4% 57.8% 9.5% Debt Issuance / Repayment 139 7,559 0 -

Depreciation & Amortization (154) (417) (647) (675) Issuance / Repurchase of Comm Stock 1 1,883 - -

Interest Expenses (3) (435) (379) (392) Dividends Paid (229) (253) (526) (421)

Share of Profit from Associates / JV 159 82 1 1 Other Financing Activities (5) (506) 0 -

Exceptional Item(s) (6) 1,136 - - Cash from Financing (94) 8,683 (526) (421)

Income Tax Expense (40) (131) (126) (154) Foreign Exchange Rate Adj. 2 (3) - -

Net Profit (Reported) 461 1,068 843 963 Net Change in Cash 93 1,106 276 316

Growth yoy% 0.7% 131.4% (21.1%) 14.3%

Net Profit (Recurring) 461 557 843 963

Growth yoy% 0.7% 20.8% 51.2% 14.3%

Balance Sheet (HK$m) FY2012 FY2013 FY2014e FY2015e Ratios FY2012 FY2013 FY2014e FY2015e

ASSETS Growth Over Prior Year

Cash and Cash Equivalents 355 856 1,131 1,447 Revenue - CTM n.a. n.a. 92% 11%

Trade and Other Receivables 1,364 1,728 1,985 2,204 Revenue - CPC 23% 31% 22% 40%

Inventories - 127 167 185 Revenue - Hubbing 10% (12%) (25%) (15%)

Other Current Assets 4 16 16 16 Total Revenue 13% 67% 32% 11%

Total Current Assets 1,722 2,727 3,299 3,851 EBITDA 33% 89% 58% 10%

Net PP&E 742 1,884 2,052 2,421 Net Income 1% 21% 51% 14%

Intangible Assets 106 2,343 2,198 2,053 Payout Ratio % 50% 57% 50% 50%

Goodw ill 402 9,284 9,284 9,284

Interest in Associate / JV 1,496 6 6 6 Profitability

Other Long-Term Assets 212 198 198 198 Return on Assets % 10% 5% 5% 6%

Total Long Term Assets 2,958 13,715 13,738 13,963 Return on Common Equity % 14% 12% 13% 14%

Total Assets 4,680 16,442 17,037 17,813

Margin Analysis

LIABILITIES & EQUITY EBITDA Margin % 18.5% 21.0% 25.1% 24.8%

Trade and Other Payables 801 1,872 2,151 2,384 Operating Margin % 9.7% 12.9% 16.9% 17.2%

Short-Term Bank Borrow ings 100 100 100 100 Net Margin % 12.8% 9.3% 10.6% 11.0%

Other Current Liabilities 205 202 202 202

Total Current Liabilities 1,106 2,174 2,453 2,687 Asset Turnover

Long-Term Debt - 7,617 7,617 7,617 Total Asset Turnover 0.8x 0.6x 0.5x 0.5x

Other Long-term Liabilities 153 464 464 464 Fixed Asset Turnover 1.3x 0.7x 0.6x 0.6x

Total Liabilities 1,259 10,254 10,533 10,767 Accounts Receivable Turnover 2.7x 3.9x 4.3x 4.2x

Total Shareholder's Equity 3,433 6,163 6,480 7,022

Minority Interest (12) 25 25 25 Leverage

Total Equity 3,421 6,188 6,505 7,047 Total debt / Total asset 2.1% 46.9% 45.3% 43.3%

Total Liabilities And Equity 4,680 16,442 17,038 17,814 Net debt / Equity Net Cash 110.9% 101.3% 89.0%

Interest coverage (x) 113.9x 1.7x 3.4x 3.7x

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Disclaimer

This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited (“Galaxy International Securities”) and/or its group companies to any registration or licensing requirement within such jurisdiction.

This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness.

This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past perfor-mance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regard-ing future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision.

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China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies)’ market capitalization.

“As of the date of this report, China Galaxy International acts as the Compliance Advisor of the TERMBRAY PETRO-KING OILFIELD SERVICES LTD.”

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Explanation on Equity Ratings

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :

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