| | | | | Buy (Price target HK$6.20) | | UBS-S Research THESIS MAP | a guide to our thinking and what's where in this report | OUR THESIS IN PICTURES→ | | Q: Will opex-driven businesses become a revenue growth driver if industry capex enters a three-year downcycle? Yes. Despite our expectation that industry capex will likely experience a downcycle in the next three years, we believe the fast growth in opex-driven and non-operator businesses should drive revenue growth of 10.8%/9.5% in 2016/17. "Signal remains strong; reaffirm Buy" 5/27/2016→ Q: Will gross margin continue to decline in 2016/17? Yes. As the opex-driven businesses generally exhibit lower gross margins than the capex-driven businesses, we expect gross margins to continue to decline to 13.4%/12.8% in 2016/17. But the decline should slow down considerably after 2017 as operational leverage kicks in. "Signal remains strong; reaffirm Buy" 5/27/2016→ Q: Will free cash flow remain healthy? Yes. We attribute the significant FCF improvement to the KPI change, shifting from revenue growth to cash earnings. We expect the company to generate positive FCF of Rmb3.7/2.8bn in 2016/17. "Signal remains strong; reaffirm Buy" 5/27/2016→ | | With the strong growth from opex-driven businesses and expansion into the non-operator market, we believe CCS's business risk has largely diversified and is well hedged. Management's focus on profitability and cash flow in the past two years has led to a significant improvement in FCF. We believe the company's earnings quality and financial power have largely strengthened. | | 1) FY15 and H116 results reported by the company were strong, particularly on FCF. 2) The dividend payout increase in 2015 came out as an upside surprise, highlighting management's focus on shareholders' value. 3) Our recent channel checks with the large clients of CCS. | | 1) CCS is still a cyclical capex play on most investors' minds. The story of decoupling from capex is yet to be fully appreciated. 2) UBS earnings estimates are 4.2%/8.2%/9.3% higher than market consensus in 2016/17/18. 3) We believe the market underestimates the company's cash-flow-generating capability, and the improvement of cash flow management is still not well-known to the market. | | 
Value drivers
2017E | Core BPO revenue growth | Total revenue growth YoY | Gross margin | Net margin | AR days | HK$7.00 upside | 16.3% | 9.7% | 13.2% | 3.4% | 101 | HK$6.20 base | 15.8% | 9.5% | 12.8% | 3.0% | 102 | HK$4.30 downside | 14.8% | 9.2% | 11.9% | 2.2% | 104 | Source: UBS | | | | | |
more→ | | China Communications Services is the largest telecom infrastructure and support service provider in China. Its key services include telecom infrastructure construction, business... more → |
| | | OUR THESIS IN PICTURES | return ↑ | 
| We expect opex-driven business process outsourcing (BPO) and applications, content and other services (ACO) businesses to contribute to the company's future growth in a meaningful way | 
| The company’s telecommunications infrastructure services (TIS) and BPO market shares (value based) have demonstrated an increasing trend | 
| Revenue contribution from China Telecom (CT) declined from 48% in 2015 to 39% in H116, indicating the company is relying much less on CT's capex spending. | 
| We expect the gross margin will likely continue to decrease but the EBIT margin and net margin will likely remain stable | 
| Benefiting from the shortened accounts receivable period, the company's free cash flow improved significantly in 2015; we expect FCF will likely remain strong at Rmb3.7/2.8/2.5bn in 2016/17/18, respectively | 
| We expect CCS will raise its dividend payout to 36%/40%/43% in 2016/17/18 | 
| CCS used to trade at 12-15x PE in 2009-11, but de-rated to 7-9x PE in 2012-15. We would argue that with improving fundamentals, CCS deserves a rerating | Sources for exhibits above: Company data, Bloomberg, UBS estimates |
Structural transitions – shifting growth driver from capex to opexCCS's growth is shifting from capex-driven towards opex-driven Post CCS's H116 results on 25 August and the one-day non-deal roadshow (NDR) in Hong Kong on 26 August 2016, we are even more convinced about CCS's story. CCS reported strong H116 results of 12.3% revenue growth and 9.1% net profit growth, ahead of market expectations. We are more positive not only because both top-line and bottom-line growth accelerated, but also because the revenue mix is structurally improving: 1) CCS is decoupling from the Chinese telcos' capex cycle, and has increasingly reaped growth from opex-driven businesses. 2) CCS has been diversifying its business mix among the domestic telco clients, by gaining market share in China Mobile (CM), China Unicom (CU) and the Towerco. 3) CCS has witnessed accelerating growth from government and enterprise clients, as well as overseas markets. Bigger market opportunity for BPO, an opex-driven businessWe believe the BPO (business process outsourcing) business, an opex-driven business segment of CCS, could see higher upside potential than the TIS (telecommunication infrastructure services) business, which is capex-driven. As shown in Figure 1, CCS's BPO market share was 4.1% in 2015, much lower than TIS market share of 11.9%, which indicates a bigger business opportunity, particularly given the opex of three telcos is on structurally upward trend, compared with the cyclical ups and downs of telco capex. Figure 1: CCS's BPO market share has been much lower than that of TIS | 
| Note: The TIS market share is calculated as CCS TIS revenue/industry capex, and BPO market share is calculated as CCS BPO revenue/cash opex of three telcos.
Source: Company data, UBS-S |
Core BPO revenue grew 16.2% YoY in H116 Despite total BPO revenue only edged up 0.6% YoY in H116, core BPO (maintenance, facilities management, and supply chain) grew 16.2% YoY. Products distribution, the fourth part of BPO, declined 20.2% YoY as the company has been strategically exiting from this business. Management commented that the products distribution business is low end, low margin (only single-digit gross margin), but high risk (increasing bad debt risk, particularly given the economic downturn in China). We expect the company's BPO business structure will continue to improve. We estimate the core BPO revenue could grow 16.4%/15.8%/15.1% YoY in 2016/17/18, while product distribution revenue could decline 20.0%/18.0%/16.2% YoY in 2016/17/18. Figure 2: BPO business breakdown | (Rmb m) | H115 | H116 | YoY | as % of total rev | Maintenance | 4,341 | 4,958 | 14.2% | 11.8% | Facilities management | 1,779 | 1,920 | 7.9% | 4.6% | Supply chain | 3,043 | 3,770 | 23.9% | 8.9% | Core BPO | 9,163 | 10,648 | 16.2% | 25.3% | Products distribution | 6,887 | 5,496 | -20.2% | 13.0% | Total BPO | 16,050 | 16,144 | 0.6% | 38.3% |
| Source: Company data, UBS-S |
Diversifying revenue mixCCS is becoming less reliant on the capex cycle of Chinese telcos, particularly CT's capex • CCS gained market share in the domestic operator market in H116. Revenues from domestic operators other than CT grew 35.9% YoY in H116, while revenue from CT grew 3.7%. The revenue portion from CT dropped to 39.0% in H116 compared with 42.2% in H115, while the revenue portion from CM, CU, and the Towerco rose from 21.2% in H115 to 25.6% in H116. CCS reported total revenue growth of 12.3%, despite only 3.7% revenue growth from CT, which used to be CCS's most critical growth driver, indicating the company is relying much less on CT's capex. Figure 3: Revenues from CM, CU and Towerco have grown substantially and become the major revenue growth drivers YoY growth | H115 | H116 | Revenue from CT | 25.4% | 3.7% | Revenue from CM, CU and Towerco | 0.6% | 35.9% | Revenue from domestic operators | 15.9% | 14.4% |
Source: Company data • Towerco has proven to be a new revenue source rather than a threat. Management disclosed that revenue from the Towerco accounted for 3.4% of total revenue in H116, up from merely 0.7% two years ago. This largely relieved investment concerns on the Towerco's cannibalization effect on CCS. Historically, we have believed that Towerco is more of a client rather than a competitor to CCS. With less than 20,000 employees but the need to maintain close to 2m towers nationwide, the Towerco has to largely outsource the work to third-party vendors, among which CCS stands out with a strong brand name, high quality work, and a centralized platform, according to our channel checks. According to management, CCS now accounts for 33% market share in the Towerco, which management plans to raise to over 50% in the coming years. Figure 4: Revenues from CM, CU and Towerco accounted for an increasing portion of total revenue Revenue breakdown by customer groups | H115 | H116 | CT | 42.2% | 39.0% | CM, CU, and Towerco | 21.2% | 25.6% | Domestic non-operators | 32.4% | 30.3% | Overseas customers | 4.2% | 5.1% | Total | 100.0% | 100.0% |
Source: Company data • Revenues from domestic non-operator core businesses grew 31.4% YoY. The Chinese government's 13th Five-Year Plan (for 2016-20) brings substantial opportunities for the development of the informatization sector, in areas of transportation, Smart City, Data Centre, Utility Tunnel System, and power network reconstruction. For instance, investment in power distribution network during 2015-2020 is estimated to exceed Rmb2trn, according to the Chinese government. Management also indicated the gross margin of non-operator contracts is as good as, if not higher, than those of telcos. Figure 5: Domestic non-operators have become a meaningful growth driver to TIS and core BPO business segments Revenue breakdown in H116 | TIS | Core BPO | ACO | Domestic operators | 74.2% | 72.4% | 43.7% | Domestic non-operators | 19.3% | 26.2% | 53.7% | Overseas customers | 6.5% | 1.4% | 2.6% | Total | 100% | 100% | 100% | | | | | Incremental growth breakdown in H116 | | | | Domestic operators | 53.7% | 78.2% | 45.7% | Domestic non-operators | 39.7% | 22.9% | 50.3% | Overseas customers | 6.6% | -1.1% | 4.1% | Total | 100% | 100% | 100% |
Source: Company data • Revenues from overseas grew 35.9% YoY, rebounding from a 14.9% decline in 2015. In 2015, CCS initiated the "China-Africa Partnership Program in Trans Africa Information Superhighway" project ("China-Africa Project") and has gained strong support and recognition from the MII (Ministry of Industry and Information Technology) as well as the companies along the industrial value chain. Management estimates the contract value of the construction portion of the project to be US$15bn, accumulatively for the next five to eight years, of which CCS could gain a 20-30% share. The company has secured multiple sources of financing: Asia Infrastructure Investment Bank, Silk Road Fund, and national policy banks. Plus, the gross margin of overseas projects is higher than those of domestic ones, which could help to stabilize CCS's gross margin in the medium to longer term. Figure 6: We expect BPO and ACO businesses to be incremental revenue growth drivers | Contribution to incremental growth | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016E | 2017E | 2018E | TIS | 61.0% | 39.7% | 44.7% | 39.2% | 52.2% | 41.8% | 66.8% | 74.5% | 62.4% | 30.8% | Design | 13.2% | 7.3% | 8.1% | 8.5% | 7.7% | 7.2% | 12.5% | 14.7% | 12.4% | 6.2% | Construction | 42.7% | 28.9% | 33.0% | 26.9% | 40.2% | 30.7% | 50.2% | 55.4% | 46.5% | 23.2% | Supervision | 5.2% | 3.5% | 3.6% | 3.8% | 4.3% | 3.9% | 4.1% | 4.4% | 3.5% | 1.4% | BPO | 33.9% | 43.3% | 45.6% | 51.4% | 39.0% | 46.7% | 23.1% | 7.4% | 14.0% | 29.4% | Network maintenance | 17.4% | 13.3% | 12.0% | 14.7% | 6.8% | 26.8% | 20.7% | 17.6% | 23.5% | 40.8% | Distribution | 14.7% | 26.5% | 29.7% | 32.3% | 28.7% | 14.1% | -1.4% | -14.1% | -13.8% | -17.8% | Facility management | 1.8% | 3.6% | 3.9% | 4.4% | 3.6% | 5.9% | 3.8% | 3.9% | 4.4% | 6.4% | ACO | 5.1% | 17.0% | 9.6% | 9.3% | 8.8% | 11.5% | 10.1% | 18.1% | 23.6% | 39.7% | IT applications | 0.1% | 9.3% | 5.6% | 10.0% | -7.5% | 4.6% | 4.4% | 9.4% | 12.4% | 21.3% | Internet services | -1.1% | 3.3% | 0.6% | 0.1% | 12.0% | 1.5% | 0.6% | 1.8% | 2.2% | 3.4% | Voice VAS | 1.2% | 0.9% | 0.5% | 0.1% | 6.0% | 2.4% | 2.7% | 3.6% | 4.8% | 8.1% | Others | 5.0% | 3.4% | 2.9% | -0.8% | -1.7% | 2.9% | 2.4% | 3.3% | 4.2% | 6.9% |
| Source: Company data, UBS-S estimates |
Operational leverage to kick-in in 2017EGross margin under pressureGross profit and gross margin came out lower than expected in H116, due to higher-than-expected subcontracting costs, driven by increasing outsourcing activities by the company and rising labour costs in China. However, SG&A costs came in lower than expected, reflecting effective cost control by management. As a result, net margin remained stable compared with H115. All in all, EBIT margin and net margin remained stable in H116. • In H116, the company's direct personnel costs continued to decline 6.7% YoY, following a 1.8% decline in 2015. Direct personnel costs as a percentage of total revenues were 9.4%, representing a decrease of 1.9 percentage points from 11.3% in H115. The company has reduced its number of employees by 7.8/7.6% in 2014/15 (the data for H116 is unavailable, but we estimate a similar declining pace), by subcontracting its low-end businesses, and thereby minimizing personnel costs. We estimate direct personnel costs could continue to decline 0.4%/0.1% in 2016/17, and that these costs as a percentage of revenue could decrease to 9.7%/8.8%. • In H116, the cost of purchasing materials and telecommunications products declined 7.3% YoY, representing 22.3% of revenue, and a decrease of 4.7 percentage points from H115. This decline in H116 was mainly because the company effectively cut down the low-end Products Distribution business (under BPO) as mentioned above, thus reducing the cost of relevant telecommunications products. In 2016/17, we expect this cost item could decline 3.6%/1.9%, and that these costs as a percentage of revenue could decrease to 22.0%/19.7%. Rising subcontracting charges have been the main drag on gross margin • Subcontracting charges grew 35% YoY in H116, following 17.8%/23.5% growth in 2014/15, placing pressure on the company's gross margin. Subcontracting charges as a percentage of revenues were 46.0% in H116, representing an increase of 7.7 percentage points over 38.3% in H115. The strong growth in subcontracting charges was mainly derived from: 1) the company's increasing focus on high-end businesses and the outsourcing of certain low-end tasks; and 2) the rapid growth in the Network Maintenance business, which is labour-intensive in nature and demands for more subcontracts; and 3) the general rising trend of labour costs in China. We expect the same trend to continue, and thus expect this cost item to grow 25.2%18.9% YoY in 2016/17, representing 44.4%/48.2% of total revenue. But EBIT margin and net margin remained relatively stableDespite the decline in gross margin from 13.8% in H115 to 12.8% in H116, CCS's EBIT margin remained stable at 4.0% in H116 (compared with 4.2% in H115), mainly because the proportion of SG&A costs as a percentage of revenue declined from 10.5% in H115 to 9.8% in H116, benefiting from: 1) the economies of scale in business development; and 2) management's effective cost controls. We expect SG&A costs to grow 2.4%/2.3% in 2016/17, compared with total revenue growth estimates of 10.8%/9.5%, and its proportion as a percentage of revenue will likely further decrease to 10.6%/9.9%. Gross margin decline could slow down in 2017EWe expect gross margin to continue to decline in the next three years, but at a much slower pace starting from 2017. • One of the key reasons for the accelerating growth of subcontracting charges is the transferal of internal contract workers to outsourced vendors. As mandated by the Chinese government, CCS needs to reduce the contract worker portion to 10% of its total employee force, down from 20-30%. This transformation has caused some one-off compensation, which contributed to the fast growth of subcontracting changes. As this process should largely be finished in 2017, we expect the growth of subcontracting charges, the main drag to gross margin, will slow down. • The ACO business is a higher margin business, boasting high-teen gross margins compared with the low teens of TIS and BPO. We expect a 22.5% CAGR in ACO revenue during 2016-18, which is much faster than total revenue growth CAGR of 9.4%. Thus, we expect the portion of ACO as a percentage of total revenue could rise from 10.8% in 2015 to 15.1% in 2018, and the structural change of the revenue mix could help gross margin to stabilize in the medium to longer term. • The company has been scaling down the low-margin businesses such as Products Distribution. We expect dividend payout could be raisedContinuous improvement in free cash flow CCS's accounts receivable (AR) period lengthened from 96.7 days in 2009 to 136.9 days in 2014, as the domestic telcos increasingly delayed cash payments to their vendors. As a result, the company's free cash flow deteriorated from Rmb1.2bn in 2009 to a negative Rmb324m in 2013. CCS started to strengthen its accounts receivable management in 2014, and since then the company's AR period shortened from 135.6/136.9 days in 2013/14 to 124.1 days in 2015. Consequently, FCF improved from negative Rmb324m in 2013, Rmb833m in 2014 and Rmb3.6bn in 2015. Furthermore, FCF continued to improve by 15 fold to Rmb2.4bn in H116, representing 20% FCF yield on an annualized basis. Figure 7: CCS' AR days continued to decline in H116 | | Figure 8: FCF improved significantly in H116 | 
| | 
| Source: Company data | | Source: Company data |
We hosted a one-day NDR for the President and CFO of CCS in Hong Kong on 26 August 2016. Management attributed the significant FCF improvement to the revamp of key performance indicators (KPI) in 2015, shifting from revenue growth to cash earnings, free cash flow and AR as a percentage of revenue. We believe the cash flow improvement should be sustainable. The FCF turnaround is sustainable, in our view • Management stated it will continue to emphasize cash-related KPIs, which account for 90% weight already. We also talked with some provincial management, and they agreed that the new KPI system has largely improved operational efficiency and earnings quality. • Despite a typically lower gross margin, opex-driven businesses provide better cash payment terms than capex-driven businesses. As we expect opex-driven businesses to become an increasing growth driver, it should help the company to manage its working capital. • Non-operator customers, which the company aims to target for further expansion, offer shorter cash payment periods than operator customers. We expect the company to generate positive FCF of Rmb3.7/2.8bn in 2016/17, representing 15.2%/11.9% FCF yields respectively. We assume AR days to continue to decline till 2018, and then start to rise again but slightly. Rising dividend payoutIn March 2014, due to the negative free cash flow recorded by the company in 2013, management cut the dividend payout ratio for 2014 to 30%; down from the 40% level maintained since listing in 2006. We believe this negatively affected investment sentiment, and led to share price underperformance. For 2015, the company declared a special dividend of 3% on top of the 30% dividend payout, leading to a total dividend payout of 33%. We believe this reflects management's 1) willingness to return cash back to investors, and 2) confidence in future growth. During the H116 results briefing, management set a positive tone for dividend payouts. Hence, we raise our dividend payout assumption to 36%/40%/43% in 2016/17/18, up from 33% post the H116 results announcement. Now the stock trades at 2016/17 dividend yields of 3.4%/4.2%, respectively. Rerating on trackDerating in 2012-15 due to deteriorating fundamentalsCCS used to trade at higher multiples before 2012. The stock traded at 20-30x one-year forward PEs in 2007 and 2008, and traded at 12-15x one-year forward PEs in 2009-11, based on mid-teen top- and bottom-line growth. The stock de-rated and traded at 7-9x one-year forward PEs in 2012-15 for the following reasons: • Revenue growth slowed to 11.3% in 2013 and 6.9% in 2014, compared with a 16.8% CAGR in 2009-12 as the company relied heavily on CT's capex, which was in a downcycle. • The implementation of VAT (value added tax) in 2013/14 also impacted revenue and net profit negatively. • Net profit declined 7.0%/3.9% in 2013/14, compared with a 16.1% earnings CAGR in 2009-12. • FCF turned negative in 2013 due to inefficient deployment of FCF. • Management reduced the dividend payout from 40% to 30% in 2014. We expect further share price rerating despite share outperformanceWe forecast revenue and earnings CAGRs of 10.2% and 12.6%, respectively, in 2016-17, and we would argue CCS deserves a higher multiple. Despite CCS's significant outperformance with the share price up 62.2% YTD (compared with the Hang Seng Index up 7.6%), the stock still trades at an attractive valuation of 9.5x 2017E PE (4.5x on a cash-adjusted basis), and a 4.2% dividend yield, which has not fully priced in CCS's transformation in our view. We raise our price target from HK$5.50 to HK$6.20 and launch CCS as a UBS Key Call. We think the structural transition, improving FCF, and potential rise in dividend payout could well support a further rerating of the share price. Assuming a WACC of 9.5% and zero terminal growth, we derive our HK$6.20 price target based on a DCF methodology, which implies a 2017E PE of 12.5x and a 3.2% dividend yield.
| | | WHAT'S PRICED IN? | return ↑ | | 2016E | 2017E | 2018E | | UBS-e | Consensus | Diff% | UBS-e | Consensus | Diff% | UBS-e | Consensus | Diff% | Revenue (Rmb m) | 89,708 | 87,969 | 2.0% | 98,252 | 94,369 | 4.1% | 106,135 | 101,978 | 4.1% | Gross profit (Rmb m) | 12,027 | 12,087 | -0.5% | 12,571 | 12,985 | -3.2% | 13,113 | 13,945 | -6.0% | Gross margin (%) | 13.4% | 13.7% | -0.3% | 12.8% | 13.8% | -1.0% | 12.4% | 13.7% | -1.3% | Net profit (Rmb m) | 2,652 | 2,533 | 4.7% | 2,963 | 2,741 | 8.1% | 3,282 | 2,986 | 9.9% | EPS (Rmb) | 0.382 | 0.367 | 4.2% | 0.427 | 0.395 | 8.2% | 0.473 | 0.433 | 9.3% |
| Source: Bloomberg, UBS-S estimates |
| UBS revenue and earnings forecasts are ahead of market consensus
|
Business transition yet to be fully appreciated 1) CCS is still a cyclical capex play in most investors' minds. We think the decoupling from capex story is yet to be fully appreciated. 2) UBS revenue forecasts are 2.0%/4.1%/4.1% higher than market consensus in 2016/17/18, and earnings estimates are 4.2%/8.2%/9.3% higher. We believe the market is still concerned about the declining capex trend in China in the next few years but underestimates that the diversifying revenue mix could serve as a good buffer. 3) We believe the market underestimates the company's cash-flow-generating capability, and the improvement of cash flow management is still not well-known to the market. The company reported an historical high FCF of Rmb2.4bn in H116, higher than accounting earnings of Rmb1.4bn. Not only did the company report 9.1% YoY earnings growth in H116, accelerating from 8.3% growth in 2015, but also the quality of the earnings has improved as FCF has improved significantly. Our revenue and earnings forecasts are 2.0-4.1% and 4.2-9.3% higher than market consensus in 2016-18, respectively. But our DCF valuation model derives a price target of HK$6.20, 31% higher than the current market price, indicating the current share price implies lower FCF estimates. Thus, we believe the market underestimates the company's cash-flow-generating capability. 4) CCS is trading at a 9.5x 2017 PE and a 4.2% dividend yield. We estimate net cash by 2017 could account for 51% of CCS's market cap. On a cash-adjusted basis, CCS would trade at 4.5x 2017E PE. Despite that the share price has risen 62.2% YTD (compared with the Hang Seng Index's 7.6%), we believe the valuation is still attractive especially in a declining interest rate environment. 5) Based on our residual income model, capitalised current earnings account for 103% of the current share price, implying negative future growth is priced in. We believe the current share price has not fully factored in CCS's business transition and improving FCF.
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
Value drivers
2017E | Core BPO revenue growth | Total revenue growth YoY | Gross margin | Net margin | AR days | HK$7.00 upside | 16.3% | 9.7% | 13.2% | 3.4% | 101 | HK$6.20 base | 15.8% | 9.5% | 12.8% | 3.0% | 102 | HK$4.30 downside | 14.8% | 9.2% | 11.9% | 2.2% | 104 | Source: UBS | | | | | |
| CCS is trading
at HK$4.72
(as of 27 September) |
Risk to the current share price is heavily skewed (5:1) to the upside CCS is trading at HK$4.72 (as of 27 September). Upside (HK$7.00): In our upside scenario we assume higher core BPO revenue growth of 16.3% in 2017E, compared with 15.8% in our base case. In this case, total revenue growth in 2017E could accelerate to 9.7% (9.5% in our base case). Moreover, we assume a gross margin of 13.2% (12.8% in base case) and net margin improves to 3.4% (3.0% in base case) in 2017E. In this case, we expect earnings to grow 12.1% YoY and 2017E EPS to reach Rmb0.48 per share. Our upside fair valuation of HK$7.00 implies a 12.5x 2017E PE and a 2.7% dividend yield. Base (HK$6.20): We derive our HK$6.20 price target based on a 10-year DCF valuation with a WACC 9.5% and zero terminal growth. We raise our revenue forecasts to Rmb89.7/98.3bn in 2016/17, by 0.5%/1.9%, implying 10.8%/9.5% YoY growth, to reflect better growth in the core BPO business. We keep our gross margins unchanged at 13.4%/12.8% in 2016/17. We raise our earnings estimates to Rmb2.65/2.96bn in 2016/17 by 2.2%/4.4%, implying 3.0%/3.0% net margins, respectively. We hence raise our DCF-based price target from HK$5.50 to HK$6.20. Our price target implies a 12.5x 2017 PE and a 3.2% dividend yield. Downside (HK$4.30): The main downside risk would be a decline in infrastructure capex among the three telcos. CCS's top line could grow at a slower pace of 9.2% YoY in 2017E (9.5% in base case). This would exert pressure on margins. Gross margin could decline to 11.9% (12.8% in base case) in 2017E and net margin could slip to 2.2% in 2017E (3.0% in base case). We calculate zero growth in earnings and expect EPS to remain flattish at Rmb0.31 in this case. Our downside fair valuation of HK$4.30 implies an 11.9x 2017E PE and a 2.9% dividend yield. Figure 9: CCS – financial revisions | | 2016E | 2017E | 2018E | 2019E | 2020E | Total revenue (Rmb bn) | | | | | | Old forecast | 89.3 | 96.4 | 101.2 | 107.4 | 116.8 | New forecast | 89.7 | 98.3 | 106.1 | 116.7 | 130.8 | Revision (%) | 0.5% | 1.9% | 4.9% | 8.7% | 12.0% | Growth (%) | 10.8% | 9.5% | 8.0% | 10.0% | 12.1% | Gross profit (Rmb bn) | | | | | | Old forecast | 11.94 | 12.35 | 12.65 | 13.10 | 14.01 | New forecast | 12.03 | 12.57 | 13.11 | 13.98 | 15.25 | Revision (%) | 0.7% | 1.8% | 3.7% | 6.8% | 8.9% | Growth (%) | 5.6% | 4.5% | 4.3% | 6.6% | 9.1% | Gross margin (%) | | | | | | Old forecast | 13.4% | 12.8% | 12.5% | 12.2% | 12.0% | New forecast | 13.4% | 12.8% | 12.4% | 12.0% | 11.7% | Revision (%) | 0.0% | 0.0% | -0.1% | -0.2% | -0.3% | EBIT (Rmb bn) | | | | | | Old forecast | 3.18 | 3.47 | 3.74 | 3.98 | 4.46 | New forecast | 3.25 | 3.62 | 4.01 | 4.50 | 5.14 | Revision (%) | 2.2% | 4.3% | 7.1% | 13.0% | 15.4% | Growth (%) | 12.9% | 11.5% | 10.6% | 12.3% | 14.4% | EBIT margin (%) | | | | | | Old forecast | 3.6% | 3.6% | 3.7% | 3.7% | 3.8% | New forecast | 3.6% | 3.7% | 3.8% | 3.9% | 3.9% | Revision (%) | 0.1% | 0.1% | 0.1% | 0.1% | 0.1% | Capex (Rmb bn) | | | | | | Old forecast | 0.80 | 0.92 | 1.01 | 1.13 | 1.28 | New forecast | 0.81 | 0.93 | 1.06 | 1.17 | 1.37 | Revision (%) | 0.5% | 1.9% | 4.9% | 3.5% | 6.9% | Growth (%) | -0.5% | 15.6% | 13.7% | 10.0% | 17.7% | Net profit (Rmb bn) | | | | | | Old forecast | 2.59 | 2.84 | 3.06 | 3.26 | 3.65 | New forecast | 2.65 | 2.96 | 3.28 | 3.68 | 4.22 | Revision (%) | 2.2% | 4.4% | 7.2% | 13.1% | 15.6% | Growth (%) | 13.5% | 11.7% | 10.8% | 12.4% | 14.5% | EPS (Rmb) | | | | | | Old forecast | 0.37 | 0.41 | 0.44 | 0.47 | 0.53 | New forecast | 0.38 | 0.43 | 0.47 | 0.53 | 0.61 | Revision (%) | 2.2% | 4.4% | 7.2% | 13.1% | 15.6% | Growth (%) | 13.5% | 11.7% | 10.8% | 12.4% | 14.5% | FCF (Rmb bn) | | | | | | Old forecast | 3.72 | 2.78 | 2.62 | 1.86 | 1.71 | New forecast | 3.72 | 2.76 | 2.52 | 2.13 | 2.09 | Revision (%) | 0.0% | -0.6% | -3.7% | 14.4% | 22.2% | Growth (%) | 70.2% | -25.8% | -8.6% | -15.6% | -1.7% | As % of net profit | 140.4% | 93.3% | 77.0% | 57.8% | 49.6% |
| Source: UBS-S estimates | Figure 10: DCF valuation | 
| Source: UBS-S estimates |
| | | COMPANY DESCRIPTION | return ↑ | Market Cap | HK$32.7bn | Shares Outstanding | 6,926m (COM) | Industry | Telecom, Diversified | Region | China | Website | www.chinaccs.com.hk |
China Communications Services is the largest telecom infrastructure and support service provider in China. Its key services include telecom infrastructure construction, business process outsourcing, and application and content services. The company's main customers include Chinese telecom operators (especially China Telecom), government agencies and large enterprises in China. Industry outlook The telecom infrastructure and support services market in China is fragmented and CCS has been a competitive market leader. Growth in telecommunications infrastructure services (TIS) should be mainly driven by 4G deployment in China. Business process outsourcing (BPO) should benefit from a growing telco focus on customer needs and increasing outsourcing efforts. Applications, content and other services (ACO) are likely to be favoured due to rising mobile Internet use in China. | Revenues by segment (2015) 
| Source: Company data |
EBIT margin by segment | 2014 | 2015 | 2016E | 2017E | 2018E | TIS | 18.0% | 17.0% | 16.1% | 15.5% | 14.9% | BPO | 10.0% | 9.5% | 9.0% | 8.6% | 8.2% | ACO | 18.3% | 17.7% | 17.2% | 16.7% | 16.2% |
| Source: Company data, UBS-S estimates |
|
| | | | China Communications Services (0552.HK) | | | | | | | | | | | Revenues | 68,459 | 73,176 | 80,960 | 89,708 | 10.8 | 98,252 | 9.5 | 106,135 | 116,717 | 130,794 | Gross profit | 10,378 | 10,682 | 11,388 | 12,027 | 5.6 | 12,571 | 4.5 | 13,113 | 13,985 | 15,252 | EBITDA (UBS) | 3,574 | 3,466 | 3,672 | 4,026 | 9.6 | 4,381 | 8.8 | 4,773 | 5,292 | 5,980 | Depreciation & amortisation | (799) | (841) | (846) | (804) | -5.0 | (784) | -2.5 | (791) | (819) | (861) | EBIT (UBS) | 2,775 | 2,626 | 2,826 | 3,223 | 14.0 | 3,597 | 11.6 | 3,982 | 4,473 | 5,119 | Associates & investment income | 14 | 26 | 50 | 26 | -48.6 | 26 | 0.0 | 26 | 26 | 26 | Other non-operating income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net interest | (11) | (20) | (51) | (58) | -13.6 | (58) | 0.0 | (58) | (58) | (58) | Exceptionals (incl goodwill) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 2,779 | 2,631 | 2,825 | 3,190 | 12.9 | 3,564 | 11.7 | 3,949 | 4,440 | 5,086 | Tax | (493) | (463) | (487) | (538) | -10.4 | (602) | -11.8 | (667) | (750) | (860) | Profit after tax | 2,285 | 2,168 | 2,338 | 2,652 | 13.5 | 2,963 | 11.7 | 3,282 | 3,690 | 4,226 | Preference dividends and Minorities | (47) | (18) | (3) | (4) | -13.5 | (4) | -11.7 | (4) | (5) | (6) | Extraordinary items | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net earnings (local GAAP) | 2,238 | 2,150 | 2,334 | 2,648 | 13.5 | 2,959 | 11.7 | 3,278 | 3,685 | 4,221 | Net earnings (UBS) | 2,238 | 2,150 | 2,334 | 2,648 | 13.5 | 2,959 | 11.7 | 3,278 | 3,685 | 4,221 | Tax rate (%) | 17.7 | 17.6 | 17.3 | 16.9 | -2.3 | 16.9 | 0.1 | 16.9 | 16.9 | 16.9 |
| | | | | | | | | | | EPS (UBS, diluted) | 0.32 | 0.31 | 0.34 | 0.38 | 13.5 | 0.43 | 11.7 | 0.47 | 0.53 | 0.61 | EPS (local GAAP, diluted) | 0.32 | 0.31 | 0.34 | 0.38 | 13.5 | 0.43 | 11.7 | 0.47 | 0.53 | 0.61 | EPS (UBS, basic) | 0.32 | 0.31 | 0.34 | 0.38 | 13.5 | 0.43 | 11.7 | 0.47 | 0.53 | 0.61 | Net DPS (Rmb) | 0.13 | 0.09 | 0.11 | 0.14 | 23.8 | 0.17 | 24.1 | 0.20 | 0.24 | 0.30 | Book value per share | 3.11 | 3.23 | 3.48 | 3.78 | 8.4 | 4.09 | 8.4 | 4.42 | 4.78 | 5.18 | Average shares (diluted) | 6,926.02 | 6,926.02 | 6,926.02 | 6,926.02 | 0.0 | 6,926.02 | 0.0 | 6,926.02 | 6,926.02 | 6,926.02 |
| | | | | | | | | | | Cash and equivalents | 7,472 | 8,513 | 12,091 | 15,520 | 28.4 | 17,807 | 14.7 | 19,586 | 20,912 | 22,108 | Other current assets | 32,684 | 35,695 | 37,278 | 37,192 | -0.2 | 39,144 | 5.3 | 41,141 | 45,581 | 51,454 | Total current assets | 40,156 | 44,208 | 49,369 | 52,712 | 6.8 | 56,951 | 8.0 | 60,727 | 66,493 | 73,562 | Net tangible fixed assets | 4,687 | 4,539 | 4,332 | 4,241 | -2.1 | 4,307 | 1.6 | 4,492 | 4,762 | 5,140 | Net intangible fixed assets | 303 | 353 | 372 | 364 | -2.3 | 369 | 1.4 | 384 | 404 | 436 | Investments / other assets | 2,864 | 3,027 | 3,204 | 3,469 | 8.3 | 3,733 | 7.6 | 4,016 | 4,308 | 4,685 | Total assets | 48,010 | 52,127 | 57,277 | 60,785 | 6.1 | 65,360 | 7.5 | 69,619 | 75,966 | 83,823 | Trade payables & other ST liabilities | 25,687 | 28,131 | 31,612 | 33,095 | 4.7 | 35,481 | 7.2 | 37,436 | 41,278 | 46,363 | Short term debt | 54 | 247 | 177 | 177 | 0.00 | 177 | 0.00 | 177 | 177 | 177 | Total current liabilities | 25,740 | 28,378 | 31,789 | 33,272 | 4.7 | 35,658 | 7.2 | 37,613 | 41,455 | 46,540 | Long term debt | 52 | 651 | 684 | 684 | 0.0 | 684 | 0.0 | 684 | 684 | 684 | Other long term liabilities | 171 | 189 | 231 | 231 | 0.0 | 231 | 0.0 | 231 | 231 | 231 | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities (incl pref shares) | 25,963 | 29,218 | 32,704 | 34,187 | 4.5 | 36,573 | 7.0 | 38,528 | 42,370 | 47,455 | Common s/h equity | 21,531 | 22,396 | 24,124 | 26,146 | 8.4 | 28,331 | 8.4 | 30,630 | 33,131 | 35,897 | Minority interests | 515 | 513 | 449 | 452 | 0.8 | 456 | 0.9 | 461 | 466 | 471 | Total liabilities & equity | 48,010 | 52,127 | 57,277 | 60,785 | 6.1 | 65,360 | 7.5 | 69,619 | 75,966 | 83,823 |
| | | | | | | | | | | Net income (before pref divs) | 2,238 | 2,150 | 2,334 | 2,648 | 13.5 | 2,959 | 11.7 | 3,278 | 3,685 | 4,221 | Depreciation & amortisation | 799 | 841 | 846 | 804 | -5.0 | 784 | -2.5 | 791 | 819 | 861 | Net change in working capital | (2,203) | (471) | (238) | 1,025 | - | (98) | - | (533) | (1,257) | (1,665) | Other operating | 1,977 | 198 | 1,935 | 602 | -68.9 | 626 | 4.0 | 612 | 800 | 1,034 | Operating cash flow | 2,811 | 2,718 | 4,876 | 5,079 | 4.2 | 4,271 | -15.9 | 4,148 | 4,047 | 4,451 | Tangible capital expenditure | (809) | (795) | (812) | (807) | 0.5 | (933) | -15.6 | (1,061) | (1,167) | (1,373) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (acquisitions) / disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other investing | (200) | (82) | (874) | (98) | - | (124) | - | (149) | (170) | (212) | Investing cash flow | (1,009) | (877) | (1,686) | (906) | 46.3 | (1,057) | -16.7 | (1,211) | (1,338) | (1,585) | Equity dividends paid | (1,007) | (942) | (716) | (770) | -7.5 | (953) | -23.8 | (1,184) | (1,409) | (1,695) | Share issues / (buybacks) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other financing | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Change in debt & pref shares | (391) | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Financing cash flow | (1,398) | (942) | (716) | (770) | -7.5 | (953) | -23.8 | (1,184) | (1,409) | (1,695) | Cash flow inc/(dec) in cash | 404 | 899 | 2,474 | 3,403 | 37.6 | 2,261 | -33.6 | 1,754 | 1,300 | 1,171 | FX / non cash items | (2,078) | 141 | 1,104 | 26 | -97.7 | 26 | 0.0 | 26 | 26 | 26 | Balance sheet inc/(dec) in cash | (1,674) | 1,040 | 3,578 | 3,429 | -4.2 | 2,286 | -33.3 | 1,779 | 1,326 | 1,196 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
China Communications Services (0552.HK) | | | | | | | | | P/E (local GAAP, diluted) | 12.1 | 9.7 | 8.4 | 10.6 | 9.5 | 8.6 | 7.6 | 6.7 | P/E (UBS, diluted) | 12.1 | 9.7 | 8.4 | 10.6 | 9.5 | 8.6 | 7.6 | 6.7 | P/CEPS | 9.0 | 6.9 | 6.2 | 8.1 | 7.5 | 6.9 | 6.2 | 5.5 | Equity FCF (UBS) yield % | 7.5 | 9.2 | 20.1 | 15.2 | 11.9 | 11.0 | 10.2 | 10.9 | Net dividend yield (%) | 3.3 | 3.1 | 3.9 | 3.4 | 4.2 | 5.0 | 6.0 | 7.4 | P/BV x | 1.3 | 0.9 | 0.8 | 1.1 | 1.0 | 0.9 | 0.8 | 0.8 | EV/revenues (core) | 0.3 | 0.2 | 0.1 | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | EV/EBITDA (core) | 5.2 | 3.6 | 2.6 | 3.4 | 2.5 | 1.8 | 1.3 | 1.1 | EV/EBIT (core) | 6.7 | 4.7 | 3.4 | 4.3 | 3.0 | 2.2 | 1.5 | 1.3 | EV/OpFCF (core) | NM | 5.6 | 3.7 | 3.3 | 3.2 | 2.7 | 2.4 | 2.3 | EV/op. invested capital | 1.5 | 0.9 | 0.8 | 1.3 | 1.1 | 0.9 | 0.6 | 0.6 |
| | | | | | | | | Market cap. | 26,780 | 20,917 | 20,261 | 28,112 | 28,112 | 28,112 | 28,112 | 28,112 | Net debt (cash) | (7,243) | (7,491) | (9,423) | (12,945) | (15,803) | (17,835) | (19,388) | (19,388) | Buy out of minorities | 515 | 513 | 449 | 452 | 456 | 461 | 466 | 471 | Pension provisions/other | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total enterprise value | 20,053 | 13,939 | 11,287 | 15,619 | 12,765 | 10,737 | 9,189 | 9,195 | Non core assets | (1,467) | (1,588) | (1,640) | (1,769) | (1,925) | (2,110) | (2,318) | (2,571) | Core enterprise value | 18,586 | 12,351 | 9,646 | 13,851 | 10,840 | 8,627 | 6,871 | 6,624 |
| | | | | | | | | Revenue | 11.3 | 6.9 | 10.6 | 10.8 | 9.5 | 8.0 | 10.0 | 12.1 | EBITDA (UBS) | -6.2 | -3.0 | 5.9 | 9.6 | 8.8 | 9.0 | 10.9 | 13.0 | EBIT (UBS) | -9.1 | -5.4 | 7.6 | 14.0 | 11.6 | 10.7 | 12.3 | 14.4 | EPS (UBS, diluted) | -7.0 | -3.9 | 8.6 | 13.5 | 11.7 | 10.8 | 12.4 | 14.5 | Net DPS | -24.7 | -28.0 | 19.4 | 23.8 | 24.1 | 19.1 | 20.3 | 22.0 |
| | | | | | | | | Gross profit margin | 15.2 | 14.6 | 14.1 | 13.4 | 12.8 | 12.4 | 12.0 | 11.7 | EBITDA margin | 5.2 | 4.7 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5 | 4.6 | EBIT margin | 4.1 | 3.6 | 3.5 | 3.6 | 3.7 | 3.8 | 3.8 | 3.9 | Net earnings (UBS) margin | 3.3 | 2.9 | 2.9 | 3.0 | 3.0 | 3.1 | 3.2 | 3.2 | ROIC (EBIT) | 23.1 | 19.5 | 22.2 | 29.5 | 35.8 | 39.5 | 41.6 | 43.1 | ROIC post tax | 19.0 | 16.0 | 18.3 | 24.5 | 29.7 | 32.8 | 34.6 | 35.7 | ROE (UBS) | 10.7 | 9.8 | 10.0 | 10.5 | 10.9 | 11.1 | 11.6 | 12.2 |
| | | | | | | | | Net debt / EBITDA | (2.1) | (2.2) | (3.1) | (3.6) | (3.9) | (3.9) | (3.8) | (3.6) | Net debt / total equity % | (33.4) | (33.2) | (45.7) | (55.1) | (58.9) | (60.2) | (59.7) | (58.4) | Net debt / (net debt + total equity) % | (50.2) | (49.8) | (84.2) | NM | NM | NM | NM | NM | Net debt/EV % | (39.6) | (61.7) | NM | NM | NM | NM | NM | NM | Capex / depreciation % | 101.3 | 94.5 | 96.0 | 100.5 | 119.1 | 134.1 | 142.6 | 159.6 | Capex / revenue % | 1.2 | 1.1 | 1.0 | 0.9 | 1.0 | 1.0 | 1.0 | 1.1 | EBIT / net interest | NM | NM | 55.0 | 55.2 | 61.6 | 68.2 | NM | NM | Dividend cover (UBS) | 2.5 | 3.3 | 3.0 | 2.8 | 2.5 | 2.3 | 2.2 | 2.0 | Div. payout ratio (UBS) % | 40.0 | 30.0 | 33.0 | 36.0 | 40.0 | 43.0 | 46.0 | 49.0 |
| | | | | | | | | TIS | 32,036 | 34,008 | 39,209 | 45,399 | 49,876 | 52,370 | 56,559 | 63,347 | BPO | 29,012 | 31,215 | 33,014 | 33,521 | 35,162 | 37,705 | 40,788 | 44,260 | ACO | 7,411 | 7,953 | 8,737 | 10,788 | 13,214 | 16,060 | 19,369 | 23,187 | Others | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total | 68,459 | 73,176 | 80,960 | 89,708 | 98,252 | 106,135 | 116,717 | 130,794 |
| | | | | | | | | Consolidated | 2,790 | 2,651 | 2,876 | 3,248 | 3,623 | 4,008 | 4,499 | 5,145 | Others | (14) | (26) | (50) | (26) | (26) | (26) | (26) | (26) | Total | 2,775 | 2,626 | 2,826 | 3,223 | 3,597 | 3,982 | 4,473 | 5,119 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation+31.4% | Forecast dividend yield3.4% | Forecast stock return+34.8% | Market return assumption9.1% | Forecast excess return+25.7% |
| Valuation Method and Risk Statement We derive our price target based on a 10-year DCF valuation methodology.
We believe the key risk factors for China Communications Services include the following: 1) The Chinese economy is entering a "new normal" era and growth in the telecom industry is decelerating. After the 4G rollout peaks in 2017-18, the company could be facing a revenue growth decline. 2) Pricing pressure is rising, as operators are centralising procurement and tightening marketing expenses. 3) Uncertainties regarding foreign expansion. Required Disclosures This report has been prepared by UBS Securities Co. Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 27 September 2016 10:58 AM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 47% | 32% | Neutral | FSR is between -6% and 6% of the MRA. | 38% | 25% | Sell | FSR is > 6% below the MRA. | 15% | 21% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 30 June 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities Co. Limited: Jinjin Wang, CFA. UBS AG Hong Kong Branch: Navin Killa. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | China Communications Services | 0552.HK | Buy | N/A | HK$4.68 | 26 Sep 2016 |
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. China Communications Services (HK$) 
Source: UBS; as of 26 Sep 2016 |
Additional Prices: China Mobile (HK) Ltd, HK$95.20 (26 Sep 2016); China Unicom Ltd., HK$9.38 (26 Sep 2016); China Telecom, HK$3.94 (26 Sep 2016); Source: UBS. All prices as of local market close. | Global Disclaimer This document has been prepared by UBS Securities Co. Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. Global Research is provided to our clients through UBS Neo and, in certain instances, UBS.com (each a "System"). It may also be made available through third party vendors and distributed by UBS and/or third parties via e-mail or alternative electronic means. 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