中国电信(00728.HK)：Potential foray into the Philippines a manageable risk for now

Rating Buy 

Price target - 12mth (HKD) 4.55 

Foray likely to occur at the parent company level

 The Philippine government has indicated that the Chinese government has “selected” China Telecom to enter the Philippines telecom sector as a third player. Our Philippines telecom analyst believes that, despite potential efforts by the Philippine government to assist in the process, the financial viability of a third operator is daunting due to a number of hurdles (note here). Our base case is that such investment will occur at the parent company level for CT, similar to that of China Mobile’s Pakistani business and, hence, we leave our valuation and rating unchanged. While it may somewhat tarnish CT’s reputation and result in management distraction, we think this is mostly reflected in the current share price.

Risks balanced for now and tail risk manageable CT will most likely need to partner with the local company Philippine Telegraph and Telephone which indicated to Reuters on 21 Nov that due to the national constitution’s 40% cap on foreign ownership, a local operator would need to be sought for any foreign operators. With Globe (second largest operator) spending RMB4-5bn p.a. in capex (vs CT’s RMB89bn in FY17) and given CT’s parent receives RMB5.4bn p.a. from the listco in dividends each year, we think it is within CT parentco’s financial resources to invest in the Philippines. The tail risk is that CT invests in the Philippines via the listed entity; however, given CT’s minority share and the relatively small investment size, we think such risk should be manageable. Furthermore, we need to balance this tail risk with a positive potential that, should the investment occur at the parentco level, the listco may need to increase its payout ratio to help fund it.