CHINA UNICOM(00762.HK)：1Q2024 EARNINGS SLIGHTLY BELOW EXPECTATION BUT EXPECTED TO MAINTAIN HIGH FULL YEAR GROWTH MAINTAIN "BUY"-格隆汇

机构：国泰君安国际
研究员：Gin Yu

We maintain China Unicom's (the "Company") TP at HK$7.66 and the investment rating as "Buy". Due to the continuous improvement in dividend payout and potential growth opportunities in the data service sector, we maintain the investment rating as "Buy" and TP at HK$7.66. Our TP corresponds to 10.2x/ 9.3x/ 8.5x FY24-FY26 PER, and corresponds to 6.0%/ 7.1%/ 8.3% FY24-FY26 dividend yield.
1Q2024 earnings were slightly lower than expectations, but we maintain our full-year double-digit earnings growth forecast. The Company's service revenue and shareholders' net profit in 1Q24 were RMB89,043million (+3.4% yoy) and RMB5,613 million (+8.9% yoy) respectively. The earnings growth was slightly below expectations, mainly due to the decrease in share of net profit of joint venture and other income. Operating profit, however, increased by 22.3% yoy. We believe the Company's net profit will continue to grow steadily over the next few years, thanks to the steady ARPU, as well as easing pressure on depreciation (CAPEX is expected to significantly decrease yoy to RMB65 billion in 2024). We expect net profit to still grow by double-digit percentage in 2024, and we expect that the dividend payout ratio in 2024 will be about 60% and will further increase in 2025 and 2026.
We expect the Company to continue to increase shareholder returns and maintain high dividends. Based on the closing price as of 19 April 2024, the dividend yield for China Unicom in 2023 was 6.2%. Combined with stable profit growth, we expect that operators will continue to increase their dividend payout levels. Based on the closing price as of 19 April 2024, the estimated dividend yield for China Unicom in 2024/ 2025/ 2026 is expected to be 7.6%, 9.0%, and 10.6%, respectively. We expect the high and stable growth of dividends will provide a good safety margin for the Company's stock price.
We expect the cost reduction and efficiency improvement results will exceed market expectations. In 2024, the Company plans to cut its CAPEX by 12% yoy to RMB65.0 billion, which means easing pressure on depreciation (depreciation and amortization expenses accounted for 23.7% of total operating expense in 2023). Additionally, the Company also strives to increase its operating efficiency, while its employment benefit expenses as well as selling and marketing expenses are under good control. Therefore, we expect that the Company will achieve significant improvements in cost reduction and efficiency improvement.
Catalysts: Increase in dividend payout and payout ratio; promotion of business data related business.
Risks: Slower-than-expected growth in industry internet business; mismatch between investments and returns.