CHINA COMMUNICATIONS SERVICES(552.HK)：RISING AIDC DEMAND TO OFFSET TELECOM CAPEX CUT-格隆汇

机构：中银国际
研究员：Michael MENG/Constance ZHANG

　　Earnings decreased 4.4% YoY in 2H24, below our estimates, with non- telco enterprise and international market sales driving top line and telco-related revenues, which continued to feel pressure from reduced CAPEX. Rising AiDC orders in 2025 and International ACO contracts are likely to drive future growth. Stable margin underpins steady FCF improvement that may support increasing shareholders return in the future. Reiterate BUY, target price revised down to HK$4.87 as we maintained 8.1x 1 year forward PE. Being the national champion in AiDC design and construction, we expect the rising demand will offset the declining CAPEX from traditional telecom business.
　　Key Factors for Rating
　　2H24 earnings decreased 4.4% YoY to RMB1.5bn, below our estimates, on the back of 0.2% revenue growth to RMB75.6bn, dragged by reduced CAPEX investment from domestic telco operators. By segment, TIS (telecommunications infrastructure) services declined by 2.5% YoY (50.1% of total revenue in 2024), mainly due to cautious investments by domestic telco operators and company’s active control over low-value projects, which offset the solid growth in overseas markets. Revenues from BPO (business process outsourcing) declined 2.4% YoY, mainly due to company’s active control over low-margin projects, which offset the solid growth of ACO services at 10.6% YoY in 2H24. New contracts from strategic Emerging Business increased by 30%, accounting for 37% of the new contracts signed.
　　Company focuses on “CAPEX+OPEX+Smart Applications” strategy to offset the challenges posed by the decline in CAPEX investment from domestic telco operators. Overseas market remains a key growth region delivering 22.3% YoY growth to RMB4.2bn, mainly driven by the incremental revenue contribution from the Middle East and Asia Pacific, and management expects the two regions and Latin America (starting 2024) would continue to contribute incremental sales and lift the overseas market.
　　GPM remained largely stable YoY in 2H24, thanks to active control over low-margin projects, and management expects the trend to continue with active control over its low-margin projects.
　　Key Risks for Rating
　　Macroeconomic headwinds may slow down IT spending from enterprises and municipal government.
　　Valuation
　　Reiterate BUY, target price reduced from HK$4.93 to HK$4.87 while maintaining our 8.1x target PE and roll over to 2025E.