UBS lowers target prices for China Telecom and China Unicom, expects limited dividend growth for telecom stocks

UBS report indicates that the performance of the three major telecommunications companies in mainland China in the fourth quarter of last year did not meet expectations. Affected by macroeconomic headwinds and ongoing investments in artificial intelligence (AI), the growth rate of net profit was lower than expected. The outlook for this year remains challenging, as the telecommunications industry is under heavy pressure to meet multiple objectives, including improving the return on equity or cash recovery rate assessed by the State-owned Assets Supervision and Administration Commission; fulfilling social responsibilities by shortening the accounts payable days to upstream suppliers; the impact of changes in value-added tax policies on revenue and profits of traditional telecommunications businesses, while needing to accelerate the transformation to non-traditional telecommunications businesses; the dynamic changes in the competitive landscape due to the rapid development of artificial intelligence technology; and new business plans such as satellite and quantum communications. The bank believes that the dividend growth potential for telecommunications stocks is limited, and the negative impact of value-added tax should have already been reflected in the stock prices, as the stock prices have cumulatively fallen by 5% to 15% this year.

The bank also stated that the predicted dividend yield for the H shares of the three major telecommunications companies in mainland China is between 6% and 7%, which is still higher than the after-tax target return rate of 4% to 5% for insurance investors, which should provide support for the stock prices. The bank has lowered its net profit forecast for the three major telecommunications companies this year by 10% to 20% to reflect the impact of value-added tax and assumes that subsequent net profit will only grow by a low single-digit percentage.

The bank maintains a "neutral" rating on the H shares of China Mobile (00941.HK), China Telecom (00728.HK), and China Unicom (00762.HK), with a preference for China Mobile H shares, due to its higher net profit margin compared to peers and a smaller impact from value-added tax on profits; ample cash flow is expected to support a higher dividend payout ratio. The table below lists UBS's latest investment ratings and target prices for the three major telecommunications companies:

Stock│Investment Rating│Target Price

China Mobile (00941.HK)│Neutral│81 HKD

China Telecom (00728.HK)│Neutral│5.5 HKD->5.1 HKD

China Unicom (00762.HK)│Neutral│8.1 HKD->7.5 HKD