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TELECOM & INTERNET | Staff Reporter, Hong Kong
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Recent price weakness in Hong Kong telecom services pointed at tactical strategies

But it's an opportunity to accumulate.

It has been noted that in relation to Hong Kong's telecom services, noise from various telcos’ tactical strategies (versus any underlying shift in fundamentals) is the only reason to explain recent price weakness, especially in wireless stocks.

According to a research note from Barclays, 1H results (due August) should reaffirm the positive momentum from tariff hikes and reflect better competitive dynamics in the
numbers.

The possibility of further earnings upgrades will depend on further tariff hikes though, which Barclays thinks are more likely than not into the year.

Here's more from Barclays:

Noise from telcos’ tactical strategies, no shift in fundamentals: The noise includes: 1) HKBN reaffirming its focus on subscriber additions in broadband; 2) HKT bundling SIM cards with broadband contracts; and 3) HKBN’s fixed line voice offer at a significant discount to HKT’s.

We will monitor trends but do not see any of these as disrupting the currently value-accretive sector dynamics.

Wireless stocks have been weak: Both HTHK and SmarTone have come off c11% since April. The sector overall has underperformed the Hang Seng Index as well by an average of 15% – the worst performer being SmarTone.

We see this recent weakness as an opportunity to accumulate these stocks and we reiterate our Overweight ratings.

1H15E results to reaffirm positive mobile market momentum: We expect all mobile operators to benefit from: 1) solid sequential service revenue growth on a higher proportion of subscribers moving on to tiered data plans at higher tariff points; and 2) seasonally stronger equipment sales and thus equipment EBITDA given our channel checks suggesting that the iPhone6/6 Plus have continued to sell well into 1Q15.

Wireless: Further earnings strength possible: We see the tariff hikes that were effective as of 2H14 as driving 3-5% organic revenue growth for 2015 and 2016 – these
are in our estimates though.

We see further earnings strength as possible, but depending on: 1) higher discipline in reining in low-end SIM-only plans that then raise average realizations across the board; and 2) further tariff hikes, which we see as likely
given operators want to improve returns in a consolidated marketplace.

Broadband: HKBN’s overtures are as expected: HKBN has reaffirmed a higher subscriber share target (from 35% currently to 45%) and its aspiration to have a similar
scale to HKT in five years’ time.

This should not be new to investors following HKBN’s strategy. We are intrigued by the recent (discounted) fixed-line offer though and will watch to see if this drives any changes in consumer behaviour in what has been a very sticky fixed line market for HKT in Hong Kong.
 

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