China: Telecom Servicespg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/1/28/3491b... · The Goldman Sachs Group, Inc. Global Investment Research Market Potential Price upside/downside China

January 28, 2014

China: Telecom Services

Equity Research

CM and CT rush to LTE launch; still cautious on Chinese telco stocks

LTE build-out driving capex upside at CM and CT

China Mobile (CM) and China Telecom (CT) have both accelerated LTE

deployment after the issuance of TD-LTE licenses on Dec 5. CM revised its

target date for 500K LTE base stations covering 340 cities from 2015 to

2014. CT plans for 200K LTE base stations and capex of Rmb100 bn in 2014,

above GSe of Rmb85bn. CM has already launched LTE commercial service

in 16 cities, while CT will launch in 1Q14. China Unicom (CU) is still focused

on 42Mbps HSPA+, but we think it could also switch to LTE in 2014.

2014 subsidy battle brewing for iPhone6 and LTE smartphones

Bloomberg reported a muted response to CM’s iPhone5S/5C launch on Jan

17, but we expect strong demand for a potential iPhone6 in 2H14. We

expect CM and CT to achieve their ambitious LTE smartphone targets of

100mn and 36mn in 2014, respectively, on the likely availability of a

Rmb1,000 model by mid-2014. CM has offered competitive LTE tariffs vs.

CU/CT’s 3G, and we expect CM’s handset subsidy to increase by 72% yoy

to Rmb48bn in 2014 for iPhone and LTE. We also expect CM to gain market

share (mostly from CU), if CT can launch FDD-LTE smartphones in 1Q14.

Our supply chain checks indicate that Hi-Silicon and VIA plan to launch a

CDMA/LTE product in March. Mediatek, meanwhile, plans to add CDMA to

its 3G and LTE SOCs in late 2014, enabling Rmb299 CDMA smartphone and

Rmb1,000 CDMA/LTE smartphone in 2014 – incrementally positive to CT, in

our view.

Remain cautious due to downside risks to earnings and cash div

We adjust our 2013E-15E EPS by -11% to +6% and 12m TPs by -3%/0%/-8% for

CM, CT, and CU due to changes in interconnection charges, LTE capex, and

subsidies. MVNO and VAT tax reform may commence in 2Q14, in our view,

but with limited earnings impact. Potential yoy declines in CM’s earnings

(-19%) and DPS (-19%), both 15% below Reuters consensus, are negative near-

term catalysts. We see limited earnings downside risks for CU, but it is losing

its network advantage to CM and CT amid ongoing de-rating. We see CT’s

earnings up 14%/13% in 2013/2014 (4%/8% below Reuters consensus) on

additional LTE spending, and expect FDD-LTE and Mediatek’s CDMA solution

to enhance its competitiveness and drive re-rating from its current low

valuation level (12X 2014E P/E and 3.1X EV/EBITDA vs. Asia peer average of

16X and 6.7X). We are cautious on Chinese telco stocks: maintain Buy on CT

and Neutral on CM and CU.

GS COVERAGE OF CHINESE TELCOS

Note: prices as at close of January 23, 2014.

Source: Datastream, Goldman Sachs Global Investment

Research

CHINA TELCOS GLOSSARY

Source: Goldman Sachs Global Investment Research

RELATED RESEARCH

China: Telecom Services: 2014 Outlook: LTE & regulatory

changes the key drivers; Buy CT, November 14, 2013

Donald Lu, Ph.D +86(10)6627-3123 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with

companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Lingling Hu +86(10)6627-3520 [email protected] Beijing Gao Hua Securities Company Limited

The Goldman Sachs Group, Inc. Global Investment Research

Market Potential

Price upside/downside

China Telecom 0728.HK Buy HK$3.66 HK$4.7 HK$4.7 0% 28%China Unicom 0762.HK Neutral HK$10.26 HK$13.0 HK$12.0 -8% 17%China Mobile 0941.HK Neutral HK$77.00 HK$90.0 HK$87.0 -3% 13%

% change

Company Ticker RatingOld

12m TP12m TP

Terminology Note

LTE Long Term Evolution, one of the 4G cellular technologies

TD/FDD LTE

Time Division / Frequency Division Duplex LTE, two LTE

standards

TD-SCDMA

Time Division Synchronous Code Division Multiple Access,

one of the 3G technologies, self-developed by China, used

by CM

WCDMA

Wideband Code Division Multiple Access, one of the 3G

technologies, used by CU

HSPA+

The upgraded version of WCDMA, can reach the speed of

21Mbps or 42Mbps

CDMA EVDO

Code Division Multiple Access - Evolution-Data Optimized,

one of the 3G technologies, used by CT

MVNO

Mobile Virtual Network Operator, a wireless service provider

who does not own its own network infrastructure

SOC

System-on-chip, single-chip solution which integrates

multiple functional components (baseband, application

processor, connectivity etc) for lower cost

January 28, 2014 China: Telecom Services

Goldman Sachs Global Investment Research 2

CM set to gain market share through LTE in 2H2014

CM started accepting pre-orders for iPhone5S/5C on Dec 25, 2013 and launched the

phones/packages on Jan 17, 2014. Current average subsidy levels across its packages are

slightly below those of CT and CU (Exhibit 1). Before CM’s launch, both CT and CU offered

various discounts on their iPhones to secure customers. For example, CT cut contract

prices by up to Rmb1,288 for its Rmb189 and Rmb289 packages, increasing the subsidy as

a % of service revenue from 42% to 68%. CU also lowered its iPhone price by Rmb800 for

certain packages, lifting its subsidy level from about 50% to 65%. According to Bloomberg,

the public response to CM’s iPhone5S/5C has been muted. We attribute this to the launch

happening late in the iPhone5S/5C’s product cycle, the small screen of the iPhone5S/5C,

and the current poor coverage of CM’s TD-LTE network. However, we expect strong

demand for a potential iPhone6 in 3Q14 in light of CM’s subsidy and improving TD-

LTE coverage, as well as potential for a larger screen size. CM currently has over 45mn

iPhone users, almost none of whom have enjoyed handset subsidy. Barring a severe

supply shortage, we expect CM to sell 20mn iPhones in 2014.

CM announced nationwide unified 4G packages on Jan 13, 2014 (Exhibit 2). CM allows

customers to choose various combinations of voice minutes and data allowance plus the

optional SMS/MMS, providing more flexibility in choosing voice/data allocation compared

with previous fixed bundled packages (Exhibit 3). In addition, CM allows up to four

terminals to share one package. On tariffs, we note that CM’s 4G package offers much

lower rates than its current 2G/3G packages (using Go-Tone as an example), and is

very competitive against CU and CT’s 3G packages, especially for high data usage

(Exhibit 4).

Both CM and CT have announced aggressive LTE terminal marketing plans in 2014.

CM targets 100mn TD-SCDMA and 100mn TD-LTE terminals, while CT aims for 64mn EVDO

and 36mn LTE terminals. We expect both companies to achieve their targets thanks to the

likely availability of a Rmb1,000 three-mode LTE smartphone for both CM and CT in 2H2014

supported by Mediatek’s potential LTE SOC launch. As a result, we believe LTE promotion

and competition will drive subsidies up, especially for CM following its iPhone launch in

Jan. We raise our CM subsidy forecast from Rmb34bn to Rmb48bn (+72% yoy) in 2014

and expect CT to maintain its subsidy as % of wireless revenue in 2014.

Mediatek and VIA are collaborating in the CDMA/EVDO smartphone market. In early

January, ZTE announced an “octo-core” (eight-core) EVDO smartphone at a high-profile

event attended by the chairmen of CT, ZTE, Mediatek, and VIA Technologies. In addition,

Mediatek announced that it will launch an integrated three-mode 3G SOC and a five-mode

LTE SOC (system-on-chip) including EVDO, by licensing VIA’s EVDO in 3Q14 and 4Q14,

respectively. We believe Mediatek’s participation in CDMA should help to reduce costs in

the CDMA market. We anticipate below-Rmb300 CDMA smartphones and Rmb1,000 FDD-

LTE/CDMA smartphones coming to the market in 2H2014, based on our checks with some

smartphone makers. We would view this development as incrementally positive to CT.

We expect CM to gain high-end market share, mostly from CU, in 2H2014 for the

following reasons: 1) Both CT and CU have reported that CM’s aggressive LTE marketing

campaign had affected their 3G growth in December, even before CM’s LTE network is

ready. We attribute the phenomenon to CM’s strong distribution channel and influence, its

superior voice coverage, and abundant dual-SIM users. 2) TD-LTE smartphones are only

one year behind 3G smartphones in terms of price performance. 3) CM is one year ahead

of CT and potentially two years ahead of CU in LTE deployment. CT should benefit from

being the first FDD-LTE service provider, as well as from Mediatek’s presence in the CDMA

supply chain in 2014. 4) CM’s handset subsidy is likely to increase faster than those of CT

and CU.



Exhibit 1: CM’s iPhone subsidy is slightly lower than those of CT and CU Comparison of current iPhone subsidy among CM, CT, and CU (subsidy as % of service revenue

that the customer contributes within the contract period)

Source: Company data.

Exhibit 2: CM 4G packages offer various combinations of

data and voice CM nationwide unified LTE packages

Exhibit 3: Customers have more flexibility in allocating

data and voice allowance Different combinations of data and voice for CM 4G packages

Note: Bubble size represents amount of monthly payment,

ranging from Rmb88 to Rmb688.



37%

42%40%

57%

42% 42%

38%

51%49%

0%

10%

20%

30%

40%

50%

60%

Free handset ~Rmb180

monthly

~Rmb280

monthly

China Mobile China Telecom China Unicom

Rmb Data Rmb Voice (mins)40 400M 48 200

50 600M 58 300

70 1G 88 500

100 2G 168 1,000

130 3G 238 2,000

180 5G 328 3,000

280 10G 408 4,000

Data packages (A) Voice packages (B)

88

158

238

368

688

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0 2,000 4,000 6,000 8,000 10,000 12,000

Vo

ice (m

in)

Data (MB)



Exhibit 4: CM’s 4G tariff is lower than its own 2G/3G tariffs and competitive against 3G

tariffs of CU and CT. Comparison of tariff packages

Note: Bubble size represents amount of monthly payment.


Exhibit 5: We expect a potential iPhone launch and LTE promotion to drive substantially

higher subsidies for CM in 2014E Handset subsidies at CM, CT, and CU*

* CU uses different accounting treatment for subsidy than CM and CT; its effective subsidy is higher than its reported subsidy on an apples-to-apples comparison basis. We multiply its reported subsidy by 2X for an apples-to-apples comparison.

Source: Company data, Goldman Sachs Global Investment Research.

0

500

1000

1500

2000

2500

0 500 1000 1500 2000 2500

Vo

ice

(min

)

Data (MB)

CM 4G

CM GoTone(2G.3G)

CU 3G

CT 3G

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2009 2010 2011 2012 2013E 2014E 2015E

Rm

b m

n

CM CU CT



Raising CM and CT capex in 2014E for accelerated LTE deployment

We bring forward our LTE capex forecasts to 2014 from 2015/2016 due to CM and CT’s

accelerated LTE rollout plan. CM’s 200K LTE base station plan for 2013 has been delayed to

1Q14 due to a late start, but CM now targets to build 500K LTE base stations in 2014,

instead of 2015 as originally scheduled. CT plans to deploy 200K LTE base stations in 2014,

covering 300 cities, and launch LTE commercial service in 1Q2014. CU still plans to roll out

LTE gradually, and has maintained its original guidance to spend no more than Rmb10 bn

per year on LTE in the next couple of years. It plans to focus on HSPA+ 42Mbps network

upgrade in 1H2014.

We update our CM LTE capex forecasts to Rmb62bn in 2014 (from Rmb41bn), Rmb30bn in

2015 (Rmb41bn) and Rmb25bn in 2016 (Rmb41 bn). Our revised CT LTE capex estimates

are Rmb55bn (from Rmb34bn), Rmb40bn (unchanged) and Rmb32bn (Rmb40bn). We

expect telecom equipment vendors such as ZTE and Fiberhome to benefit from increasing

capex in 2014, but the long-term impact of capex brought forward should be neutral.

Exhibit 6: We bring forward our LTE capex forecasts to 2014 due to CM and CT’s aggressive LTE rollout plan

China Telco capex forecast revisions

Source: Company data, Goldman Sachs Global Investment Research.

(Rmb bn) 2011A 2012A 2013E 2014E 2015E 2016E 2011A 2012A 2013E 2014E 2015E 2016E

China Mobile Group total capex 159.7 178.3 210.4 226.5 183.5 171.3 159.7 178.3 220.4 208.8 195.9 188.5 yoy% 6.3% 11.6% 18.0% 7.6% -19.0% -6.6% 6.3% 11.6% 23.6% -5.3% -6.2% -3.8%

China Mobile listco capex 128.5 127.4 180.2 199.3 158.8 147.9 128.5 127.4 190.2 177.8 169.3 163.5 2G and core network 105.4 57.5 34.2 32.5 30.8 29.3 105.4 57.5 34.2 30.8 29.2 27.8 CM TD-SCDMA 12.0 20.9 22.2 10.0 6.0 5.4 12.0 20.9 22.2 15.0 9.0 8.1 CM LTE - 5.0 31.5 62.0 30.0 25.0 - 5.0 41.5 41.0 41.0 41.0 Listco Transmission Capex 23.1 35.7 59.0 57.8 52.7 50.1 23.1 35.7 59.0 57.8 52.7 50.1 Other capex (Building, infra, IT etc) - 29.3 55.5 47.1 45.2 43.5 - 29.3 55.5 48.2 46.4 44.6 Other group capex(Railcom etc) 19.2 30.0 8.0 17.1 18.7 18.0 19.2 30.0 8.0 15.9 17.6 16.9

China Unicom total capex 76.7 99.8 80.0 82.0 88.0 87.1 76.7 99.8 80.0 82.0 88.0 87.1 yoy% 9.2% 30.2% -19.8% 2.5% 7.3% -1.1% 9.2% 30.2% -19.8% 2.5% 7.3% -1.1%

China Unicom mobile capex 36.7 58.1 48.5 52.5 60.1 59.9 36.7 58.1 48.5 52.4 60.0 59.8 2G and other wireless 15.3 20.4 21.4 22.1 22.4 22.0 15.3 20.4 21.4 22.0 22.3 21.9 WCDMA 21.4 37.7 25.1 20.4 17.7 14.9 21.4 37.7 25.1 20.4 17.7 14.9 LTE - - 2.0 10.0 20.0 23.0 - - 2.0 10.0 20.0 23.0

China Unicom fixed-line capex 40.0 41.6 31.5 29.5 28.0 27.2 40.0 41.6 31.5 29.6 28.0 27.2 Note: Other capex of CU is allocated into mobile and fixed line proportionally to revenue mix.

China Telecom total capex 71.6 72.5 80.6 99.5 82.2 72.9 71.6 72.5 80.6 85.2 87.5 84.2 yoy% 2.2% 1.4% 11.2% 23.4% -17.4% -11.3% 2.2% 1.4% 11.2% 5.7% 2.6% -3.8%

China Telecom total wireless capex 22.0 18.8 30.0 63.0 46.0 37.0 22.0 18.8 30.0 44.0 48.0 46.0 CDMA 2G+EVDO (parentco before 2013) 22.0 18.8 20.0 8.0 6.0 5.0 22.0 18.8 20.0 10.0 8.0 6.0 LTE 10.0 55.0 40.0 32.0 10.0 34.0 40.0 40.0

China Telecom total fixed line capex 49.6 53.7 50.6 36.5 36.2 35.9 49.6 53.7 50.6 41.2 39.5 38.2

Total China capex 307.9 350.6 371.0 408.0 353.7 331.3 307.9 350.6 381.0 376.0 371.4 359.8 yoy% 6.0% 13.9% 5.8% 9.9% -13.3% -6.3% 6.0% 13.9% 8.7% -1.3% -1.2% -3.1%

New Old



Inexpensive among Asia peers, but Chinese telcos still have

meaningful downside risks in earnings and cash dividends

We adjust our revenue and earnings forecasts to reflect the impact from asymmetric

interconnection charges, LTE spending and subsidies.

We estimate the implementation of asymmetric interconnection will impact

CM/CT/CU’s earnings by an average of -5%/+8%/+13% per year from 2014E

onwards.

We raise our LTE capex forecasts for CM and CT by around Rmb20bn each in 2014,

leading to 1%-4% higher depreciation forecasts in 2014 and 2015.

In light of CM and CT’s accelerating LTE development, we raise our 2014/2015

subsidies estimates by 40%/24% for CM and 5%/4% for CT.

Based on the above, we adjust our earnings forecasts by -11% to +6% over 2013-2015 for

CM/CT/CU (see Exhibit 7 for details). We lower our 12-month, DCF-based SOTP target price

for CM from HK$90/US$58 to HK$87/US$56 due to lower earnings forecasts driven by

lower interconnection revenue and higher subsidies. We maintain our 12-month, DCF-

based SOTP target price for CT of HK$4.7/US$60 as lower interconnection costs are offset

by higher LTE related cost. We lower our 12-month, DCF-based SOTP target price for CU

from HK$13.0/Rmb4.0/US$16.7 to HK$12.0/Rmb3.7/US$15.4 due to lower revenue growth

forecasts reflecting our expectations for long-term market share loss.

We view potential yoy declines in CM’s earnings (-19%) and DPS (-19%) in 2014E, both 15%

below Reuters consensus, as negative near-term catalysts. CU has limited earnings

downside risks, in our view, but is losing its network advantage to CM and CT amid

ongoing de-rating. We estimate CT’s earnings will rise 14%/13% in 2013/2014, 4%/8% below

Reuters consensus which reflects our expectation of additional LTE spending, but expect

FDD-LTE and Mediatek’s CDMA solution to enhance CT’s competitiveness and drive re-

rating from the current inexpensive valuation levels (12X 2014E P/E and 3.1X EV/EBITDA vs.

Asia peer average of 16X and 6.7X). We are cautious on the Chinese telco stocks and

maintain Buy on CT and Neutral on CM and CU.

Risks to our investment thesis include:

1. China Mobile: Upside: Faster-than-expected LTE sub growth with high ARPU; Downside:

Acceleration of voice ARPU decline.

2. China Unicom: Upside: Better-than-expected operating leverage; Downside: Competition

and market share loss to CM/CT post LTE launch.

3. China Telecom: Downside: Delay in obtaining an FDD-LTE license.



Exhibit 7: We adjust our estimates to reflect the impact from asymmetric interconnection

charges, updated LTE targets and LTE network deployment plan Estimate revisions breakdown for CM, CT and CU

Source: Goldman Sachs Global Investment Research.

Exhibit 8: Our earnings estimates are generally below consensus due to our concerns on

OTT threat, margin pressure and rising depreciation Our estimates vs. Reuters’ consensus

Source: Reuters, Goldman Sachs Global Investment Research.

China Mobile(0941.HK)New Old Diff. New Old Diff. New Old Diff.

Revenue (Rmb mn) 630,607 631,012 -0.1% 679,238 668,821 1.6% 738,473 719,196 2.7%Service revenue (Rmb mn) 593,330 593,512 0.0% 625,119 629,924 -0.8% 682,896 678,957 0.6%EBITDA(Rmb mn) 248,293 247,992 0.1% 229,541 245,787 -6.6% 239,209 244,370 -2.1%EBITDA margin 39.4% 39.3% 7bps 33.8% 36.7% -296bps 32.4% 34.0% -159bpsNet income (Rmb mn) 125,267 124,417 0.7% 101,389 113,300 -10.5% 97,492 105,609 -7.7%EPS (Rmb) 6.24 6.19 0.7% 5.05 5.64 -10.5% 4.85 5.26 -7.7%

China Unicom (0762.HK)All recurring ex upfront conn fee New Old Diff. New Old Diff. New Old Diff.Revenue (Rmb ,mn) 294,220 296,468 -0.8% 324,584 326,913 -0.7% 349,708 352,659 -0.8%Service revenue (Rmb, mn) 237,693 238,806 -0.5% 257,161 259,876 -1.0% 274,712 277,542 -1.0%EBITDA (Rmb mn) 86,400 86,376 0.0% 95,021 93,881 1.2% 100,049 98,978 1.1%EBITDA margin 29.4% 29.1% 23bps 29.3% 28.7% 56bps 28.6% 28.1% 54bpsNet income (Rmb mn) 11,559 11,543 0.1% 15,622 14,776 5.7% 17,784 16,988 4.7%EPS (Rmb) 0.49 0.49 0.1% 0.66 0.63 5.7% 0.75 0.72 4.7%EPS A share (Rmb) 0.18 0.18 0.1% 0.25 0.24 5.7% 0.28 0.27 4.7%

China Telecom (0728.HK)All recurring ex upfront conn fee New Old Diff. New Old Diff. New Old Diff.Revenue (Rmb ,mn) 319,203 321,592 -0.7% 348,025 349,398 -0.4% 377,072 378,671 -0.4%Service revenue (Rmb mn) 282,089 283,609 -0.5% 305,467 306,938 -0.5% 330,427 331,346 -0.3%EBITDA before leasing fee(Rmb mn) 96,405 97,167 -0.8% 104,169 104,081 0.1% 112,167 111,761 0.4%EBITDA margin 30.2% 30.2% -1bps 29.9% 29.8% 14bps 29.7% 29.5% 23bpsEBITDA (Rmb mn) 96,405 97,167 -0.8% 104,169 104,081 0.1% 112,167 111,761 0.4%EBITDA margin 30.2% 30.2% -1bps 29.9% 29.8% 14bps 29.7% 29.5% 23bpsNet income (Rmb mn) 17,051 17,626 -3.3% 19,293 20,526 -6.0% 23,567 24,792 -4.9%EPS (Rmb) 0.21 0.22 -3.3% 0.24 0.25 -6.0% 0.29 0.31 -4.9%

2013E 2014E 2015E

2013E 2014E 2015E

2013E 2014E 2015E

China Mobile(0941.HK)

GS Consensus Diff. GS Consensus Diff. GS Consensus Diff.

Total revenue (Rmb mn) 630,607 617,616 2.1% 679,238 657,881 3.2% 738,473 696,484 6.0%

EBITDA(Rmb mn) 248,293 253,948 -2.2% 229,541 250,346 -8.3% 239,209 257,819 -7.2%

EBITDA margin 39.4% 41.1% -174bps 33.8% 38.1% -426bps 32.4% 37.0% -462bps

Net income (Rmb mn) 125,267 126,264 -0.8% 101,389 118,601 -14.5% 97,492 117,477 -17.0%

Listco Capex (Rmb mn) 180,200 189,202 -4.8% 199,349 187,440 6.4% 158,802 179,312 -11.4%

as % of revenue 29% 31% -206bps 29% 28% 86bps 22% 26% -424bps

China Unicom (0762.HK)


Revenue (Rmb ,mn) 294,220 292,460 0.6% 324,584 329,759 -1.6% 349,708 360,975 -3.1%

EBITDA (Rmb mn) 86,400 84,960 1.7% 95,021 96,401 -1.4% 100,049 105,562 -5.2%

EBITDA margin 29.4% 29.1% 32bps 29.3% 29.2% 4bps 28.6% 29.2% -63bps

Net income (Rmb mn) 11,559 10,872 6.3% 15,622 15,512 0.7% 17,784 19,107 -6.9%

Total capex (Rmb mn) 80,000 84,164 -4.9% 82,000 86,204 -4.9% 88,020 87,563 0.5%

as % of revenue 27% 29% -159bps 25% 26% -88bps 25% 24% 91bps

China Telecom (0728.HK)


Revenue (Rmb ,mn) 319,203 320,461 -0.4% 348,025 350,470 -0.7% 377,072 378,558 -0.4%

EBITDA (Rmb mn) 96,405 96,747 -0.4% 104,169 104,774 -0.6% 112,167 113,979 -1.6%

EBITDA margin 30.2% 30.2% 1bps 29.9% 29.9% 4bps 29.7% 30.1% -36bps

Net income (Rmb mn) 17,051 17,752 -4.0% 19,293 20,892 -7.7% 23,567 23,780 -0.9%

Listco Capex (Rmb mn) 80,639 75,848 6.3% 99,498 80,986 22.9% 82,185 81,590 0.7%

as % of revenue 25% 24% 159bps 29% 23% 548bps 22% 22% 24bps

2013E 2014E 2015E

2013E 2014E 2015E

2013E 2014E 2015E



Exhibit 9: Chinese telcos are trading at a discount to Asian peers Asian telco comp

Note: *denotes stock is on our regional Conviction list. Prices at close of January 23, 2014. All target prices mentioned above are on a 12-month basis.

Source: Datastream, Bloomberg, Goldman Sachs Global Investment Research.

Exhibit 10: Chinese telcos valuations are attractive in

terms of growth adjusted EV/EBITDA... 2014E EV/EBITDA vs. 2015E EBITDA growth of Asian telcos

Exhibit 11: ...as well as growth adjusted P/E 2014E P/E vs. 2015E EPS growth of Asian telcos

Source: Datastream, Goldman Sachs Global Investment Research.

Source: Datastream, Goldman Sachs Global Investment Research.

Last Target Mkt Cap 2013E/15E CAGRFCFE Yld

FCFF Yld RFR ROE ROA ROIC CROCI

Company Rating fx Price Price (US$mn) Sales EBITDA NI 2014E 2015E 2014E 2014E 2015E 2014E 2014E 2014E 2015E 2014E 2014E 2014E 2014E 2014ETelstra Corp. Neutral A$ 5.17 4.75 56,254 1.1% 1.4% 2.3% 15.5x 15.2x 18.3x 6.9x 6.7x 6.1% 7.1% 5.4% 5.4% 4.1% 1.3% 31% 10.8% 29.8% 9.9%Hutchison Telecomm. Australia Neutral A$ 0.08 0.03 986 0.0% -0.1% NM NM NM NM NM NM 1.7% 2.3% 0.0% 0.0% 4.1% -4.1% -29% -15.0% 3.9% NMChorus Limited Neutral NZ$ 1.43 1.52 467 -4.7% -7.9% -24.1% 7.9x 12.4x 33.8x 4.6x 5.5x -8.5% 3.9% 5.2% 7.0% 4.6% 0.7% 13% 3.8% 8.8% 5.5%Telecom Corp. of New Zealand Neutral NZ$ 2.39 2.40 3,600 -0.5% 0.5% 1.7% 13.4x 12.6x 16.2x 5.0x 4.9x 7.0% 7.3% 6.8% 7.0% 4.6% 2.2% 21% 8.7% 39.4% 7.5%China Mobile (HK) Neutral Rmb 77.00 87.00 199,502 8.2% -1.8% -11.8% 11.9x 12.4x 8.3x 3.7x 3.4x 0.8% 1.1% 3.6% 3.5% 4.6% -0.9% 12% 8.6% 10.9% 14.6%China Telecom Buy Rmb 3.66 4.70 38,178 8.7% 7.9% 17.6% 12.0x 9.8x 17.0x 3.2x 2.8x -0.1% 0.0% 3.1% 3.8% 4.6% -1.4% 7% 3.4% 6.2% 7.6%China Unicom Neutral Rmb 10.26 12.00 31,448 9.0% 7.6% 24.0% 12.1x 10.6x 19.8x 3.3x 3.1x 5.5% 2.8% 3.3% 3.8% 4.6% -1.2% 7% 2.8% 4.7% 6.4%PCCW Limited Neutral HK$ 3.53 3.20 3,309 2.9% 3.1% 5.1% 11.7x 11.3x 20.4x 5.4x 5.1x 21.3% 14.3% 4.8% 4.7% 2.4% 2.4% 22% 4.1% 15.8% 8.5%HKT Trust Neutral HK$ 7.77 7.00 6,426 1.7% 2.7% 30.4% 18.8x 16.5x 26.7x 8.8x 8.6x 7.9% 6.6% 5.8% 5.8% 2.4% 3.4% 9% 3.9% 31.6% 6.8%HTHK Neutral HK$ 2.90 2.90 1,801 3.2% 2.6% 2.4% 10.9x 10.8x 13.1x 5.6x 5.3x 11.9% 10.4% 6.9% 6.9% 2.4% 4.5% 11% 5.9% 19.7% 9.8%

SmarTone Neutral HK$ 8.77 11.00 1,172 -3.5% 1.4% 0.8% 10.6x 10.5x 12.2x 3.4x 3.3x 21.6% 20.4% 5.7% 5.7% 2.4% 3.3% 26% 8.5% 64.8% 14.9%

Bharti Airtel Buy Rs 314.65 410.00 20,250 8.1% 10.7% 44.8% 16.4x 12.8x 22.9x 5.9x 5.2x 5.0% 7.8% 0.5% 1.1% 8.7% -8.2% 13% 4.8% 17.6% 8.2%

Bharti Infratel Neutral Rs 168.05 165.00 5,111 7.1% 8.6% 17.9% 19.7x 17.7x 17.7x 5.5x 5.1x 5.7% 7.5% 5.3% 5.9% 8.7% -3.3% 10% 6.0% 9.2% 11.2%

Idea Cellular Buy Rs 154.20 205.00 8,238 12.6% 18.8% 43.7% 15.9x 12.4x 17.4x 5.4x 4.5x 9.2% 14.3% 0.6% 1.0% 8.7% -8.0% 18% 8.5% 24.4% 13.1%

Reliance Communications Neutral Rs 133.90 132.00 4,449 8.4% 10.4% 57.3% 12.2x 7.9x 26.6x 7.4x 6.2x 14.2% 12.1% 0.7% 1.3% 8.7% -7.9% 8% 2.8% 7.5% 8.5%

Tata Communications Sell Rs 304.05 150.00 1,395 7.6% 11.4% NM NM 90.1x NM 6.4x 5.9x 2.0% 4.5% 1.5% 1.5% 8.7% -7.2% 2% 0.2% 4.1% 12.6%

Indosat Neutral Rp 4,120 4,200 1,844 5.8% 5.9% NM 30.2x 20.5x 47.6x 3.2x 2.9x 6.2% 7.5% 1.8% 2.5% 8.7% -6.8% 5% 1.6% 5.5% 8.9%

PT XL Axiata Neutral Rp 5,200 4,700 3,656 8.4% 11.2% 49.6% 24.0x 16.7x 31.0x 5.9x 5.1x 5.7% 5.4% 2.5% 3.6% 8.7% -6.2% 13% 5.5% 9.2% 10.0%

Telekomunikasi Indonesia Buy Rp 2,225 2,700 18,474 6.7% 7.7% 7.1% 14.0x 13.0x 13.6x 7.1x 6.5x 10.7% 11.6% 5.4% 6.5% 8.7% -3.3% 26% 13.2% 25.9% 16.5%

KDDI Neutral ¥ 6,055 5,600 52,505 2.3% 3.7% 12.5% 14.5x 13.4x 15.6x 5.3x 5.1x 9.0% 9.8% 2.2% 2.3% 0.6% 1.5% 13% 7.4% 12.5% 8.3%

Nippon Telegraph & Telephone Neutral ¥ 5,673 6,000 62,340 -0.2% 2.0% 2.0% 10.9x 9.8x 16.1x 3.6x 3.5x 12.1% 9.5% 3.1% 3.3% 0.6% 2.5% 7% 2.9% 6.7% 4.2%

NTT DoCoMo Buy ¥ 1,694 1,850 71,484 -0.2% 3.7% 7.5% 12.2x 11.4x 11.4x 4.1x 3.9x 8.2% 8.9% 3.8% 4.0% 0.6% 3.1% 10% 7.7% 14.6% 9.5%

Softbank Buy ¥ 8,173 10,000 94,867 10.6% 7.7% 16.9% 24.4x 18.3x 37.2x 7.6x 7.0x 0.7% 4.9% 0.5% 0.5% 0.6% -0.2% 22% 2.8% 21.5% 9.0%

Astro Malaysia Buy RM 2.95 3.20 4,601 10.4% 14.1% 27.7% 29.6x 20.7x 33.7x 9.2x 8.2x 8.8% 6.7% 3.4% 4.8% 4.3% -0.9% 101% 7.4% 26.8% 16.1%Axiata Group Neutral RM 6.53 5.10 16,736 5.2% 6.1% 7.6% 18.6x 17.0x 20.2x 8.3x 8.0x 4.6% 7.0% 3.8% 4.1% 4.3% -0.5% 15% 7.0% 18.5% 11.3%Digi.com Neutral RM 4.73 4.20 11,035 4.2% 4.9% 5.3% 21.0x 20.3x 20.9x 11.3x 10.9x 3.6% 5.5% 4.8% 4.9% 4.3% 0.5% 670% 41.5% 231.2% 23.8%Maxis Berhad Sell* RM 7.00 5.30 15,761 3.2% 3.6% 6.6% 23.3x 22.1x 26.3x 12.6x 12.4x 5.0% 4.2% 5.7% 5.7% 4.3% 1.5% 39% 12.9% 120.4% 12.6%Telekom Malaysia Sell RM 5.50 4.60 5,904 3.7% 3.0% 7.5% 23.9x 23.5x 27.8x 6.6x 6.4x 4.5% 5.3% 4.0% 4.0% 4.3% -0.3% 11% 3.6% 7.2% 4.4%Philippine Long Distance Neutral P 2,796 3,000 13,328 3.6% 4.5% 9.7% 14.8x 13.5x 16.5x 8.1x 7.7x 8.1% 8.2% 6.8% 7.4% 4.3% 2.5% 27% 10.0% 19.0% 11.5%Globe Telecom Neutral P 1,761 1,450 5,151 5.5% 5.6% 3.7% 22.6x 16.0x 27.4x 7.1x 6.7x 6.4% 8.3% 5.0% 4.9% 4.3% 0.7% 23% 6.9% 10.7% 8.4%KT Corp Neutral W 30,150 37,000 7,311 NM NM NM 6.1x NM 14.4x 3.8x NM 9.7% 6.8% 7.1% NM 3.7% 3.4% 10% 3.8% 8.5% 6.4%LG UPlus Neutral W 10,450 5,400 4,237 NM NM NM 10.2x NM 17.0x 4.2x NM 6.2% 6.2% 2.6% NM 3.7% -1.0% 11% 4.1% 7.7% 8.8%SK Telecom Neutral W 215,000 149,000 16,122 NM NM NM 10.7x NM 14.4x 4.9x NM 7.1% 6.7% 4.4% NM 3.7% 0.7% 12% 5.7% 13.3% 8.3%M1 Ltd Neutral S$ 3.38 3.10 2,443 3.3% 3.1% 3.4% 18.6x 18.2x 19.9x 10.3x 9.9x 4.8% 4.5% 4.3% 4.4% 2.5% 1.8% 41% 16.7% 30.1% 11.3%Singapore Telecommunications Neutral S$ 3.50 3.69 43,643 2.4% 2.6% 12.0% 12.8x 11.6x 14.3x 6.7x 6.4x 5.9% 9.8% 5.1% 5.8% 2.5% 2.6% 17% 10.7% 23.3% 7.9%StarHub Neutral S$ 4.24 3.55 5,702 2.8% 2.4% 1.4% 19.3x 18.8x 20.2x 10.0x 9.6x 5.9% 4.6% 4.7% 4.7% 2.5% 2.2% 400% 20.3% 88.7% 13.6%Chunghwa Telecom Sell NT$ 91.80 84.00 23,562 -0.5% 2.9% 2.2% 17.8x 17.2x 17.6x 8.5x 8.2x 4.1% 5.2% 5.6% 5.8% 1.7% 4.0% 11% 9.1% 14.0% 6.9%Far EasTone Telecomm. Buy NT$ 60.80 68.00 6,555 3.9% 6.3% 0.4% 16.1x 16.2x 17.5x 7.8x 7.3x 7.2% 6.9% 6.8% 6.8% 1.7% 5.2% 17% 10.5% 31.7% 8.8%Taiwan Mobile Neutral NT$ 91.10 104.00 10,311 5.5% 6.5% 6.6% 13.5x 13.3x 14.9x 8.2x 7.7x 6.7% 7.8% 7.4% 7.5% 1.7% 5.8% 36% 15.6% 59.5% 16.1%Advanced Info Service Buy Bt 215 300 19,444 5.3% 12.5% 14.5% 15.2x 13.4x 15.7x 9.2x 8.3x 6.2% 4.0% 6.6% 7.4% 4.0% 2.6% 93% 33.5% 64.3% 16.9%Total Access Communications Neutral Bt 99.00 103.00 7,131 3.6% 11.5% 11.1% 18.8x 16.5x 20.7x 7.9x 7.0x 6.2% 7.6% 4.3% 4.9% 4.0% 0.3% 34% 11.8% 26.9% 12.7%Intouch Group Buy Bt 72.50 102.00 7,071 10.8% 18.6% 17.6% 13.1x 11.3x 13.1x NM NM 1.2% 1.2% 7.4% 8.4% 4.0% 3.5% 76% 34.2% 5.2% 11.0%True Corp. Sell Bt 7.55 5.25 3,337 7.1% 17.0% -30.8% NM NM NM 9.7x 8.8x -1.1% -3.0% 0.0% 0.0% 4.0% -4.0% NM -5.8% 0.9% 8.1%

Average 43 917,143 4.5% 6.1% 11.3% 16.1x 16.7x 20.3x 6.6x 6.4x 6.6% 7.1% 4.2% 4.5% 4.2% -0.1% 46% 8.6% 28.0% 10.4%

FF MC WTD 43 917,143 4.7% 4.3% 8.2% 15.8x 13.7x 19.6x 6.1x 5.6x 5.8% 7.1% 3.5% 3.5% 2.7% 0.8% 29% 7.8% 22.8% 10.0%

Kor

eaS

ing

Ta

iwan

Tha

iH

KIn

dia

Indo

Japa

nM

ala

yP

hi

Real Yield

AU

/NZ

Ch

ina

P/EP/E x Cash EV/EBITDA Div Yld

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

0% 5% 10% 15% 20% 25%

2014E E

V/E

BIT

DA

EBITDA yoy growth in 2015E

EV/EBITDA vs. EBITDA growth

China MobileChina Unicom

China Telecom

PCCW Limited

Hutchison Telecom HK

SmarTone

Bharti Airtel

Idea Cellular

Reliance Communications

Tata Communications

Indosat

PT XL Axiata

Telekomunikasi Indonesia

KDDI

Nippon Tel

NTT DoCoMo

Softbank

Advanced Info Service

Total Access Communication

Far EasTone

Taiwan Mobile

Chunghwa Telecom

0.0

5.0

10.0

15.0

20.0

25.0

-10% 0% 10% 20% 30% 40% 50% 60% 70%

2014

E P

/E

earnings yoy growth in 2015E

P/E vs. earnings growth

China Mobile

China Unicom

China TelecomPCCW

Hutchison Telecom HK

SmarTone

Bharti Airtel

Idea CellularKDDI

Total Access Comm.StarHub

Chunghwa Telecom

M1Ltd

FarEasTone

Taiwan Mobile

SingTelNTT DoCoMo

Nippon Tel

Advanced info



Exhibit 12: China Telecom valuation is most attractive among three telcos in China

China telco comp

Note: Prices as of close of January 23, 2014

Source: Datastream, Goldman Sachs Global Investment Research

Company Ticker Ratings Market Target Market

capPrice Price US$ bn 2013E 2014E 2015E 2013E 2014E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E

China Mobile (HK$) 0941.HK Neutral 77.0 87.0 196.6 9.8 12.1 12.5 -3.8% 1.5 1.4 15.8% 11.9% 10.7% 3.3 3.6 3.3 4.5% 3.6% 3.5%

China Unicom (HK$) 0762.HK Neutral 10.3 12.0 31.3 16.4 12.1 10.7 13.8% 0.9 0.8 5.3% 6.9% 7.5% 3.7 3.3 3.1 2.4% 3.3% 3.7%

China Telecom (HK$) 0728.HK Buy 3.7 4.7 38.4 13.6 12.0 9.9 22.2% 0.8 0.8 6.2% 6.7% 7.8% 3.3 3.2 2.8 2.8% 3.1% 3.8%

Average 13.3 12.1 11.0 10.7% 1.1 1.0 9.1% 8.5% 8.7% 3.4 3.4 3.1 3.2% 3.3% 3.7%Median 13.6 12.1 10.7 13.8% 0.9 0.8 6.2% 6.9% 7.8% 3.3 3.3 3.1 2.8% 3.3% 3.7%STD 3.3 0.1 1.4 13.3% 0.4 0.3 5.8% 2.9% 1.8% 0.2 0.2 0.2 1.1% 0.3% 0.2%

P/E (X) EV/EBITDA Cash div yieldROEP/B (X)15E EPS growth



Financial Advisory disclosure

Goldman Sachs is acting as a financial advisor in connection with an announced strategic

matter involving the following company or one of its affiliates: Mediatek Inc.



Disclosure Appendix

Reg AC

We, Donald Lu, Ph.D and Lingling Hu, hereby certify that all of the views expressed in this report accurately reflect our personal views about the

subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

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GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Donald Lu, Ph.D: China Technology, China Telecoms. Lingling Hu: China Technology, China Telecoms.

China Technology: Accelink Technologies, Anhui USTC iFLYTEK, AutoNavi Holdings Ltd., Beijing Ultrapower Software, Comba Telecom Systems,

Fiberhome Telecom Tech, GoerTek Inc., Hangzhou Hikvision Digital Technology Co., Ltd., Hermes Microvision, Inc., Hunan Talkweb Information

System, MStar Semiconductor, Mediatek, Nationz Technologies, NavInfo Co, Parade Technologies Ltd, Shenzhen Tat Fook Technology, Sunny

Optical Technology Group Co Ltd, Sunsea Telecommunications, TSMC, TSMC (ADR), United Microelectronics (ADR), United Microelectronics Corp.,

ZTE Corporation (A), ZTE Corporation (H), Zhejiang Crystal-Optech Co., Zhejiang Dahua Technology Co., Ltd..

China Telecoms: China Communication Services, China Mobile (HK), China Mobile (HK) (ADR), China Telecom, China Telecom (ADR), China Unicom,

China Unicom (ADS), China United Network Communications.

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs has received compensation for investment banking services in the past 12 months: China Mobile (HK) (HK$74.95) and China Telecom

(HK$3.58)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: China Mobile (HK)

(HK$74.95), China Telecom (HK$3.58) and China Unicom (HK$10.06)

Goldman Sachs had an investment banking services client relationship during the past 12 months with: China Mobile (HK) (HK$74.95), China

Telecom (HK$3.58) and China Unicom (HK$10.06)

Goldman Sachs makes a market in the securities or derivatives thereof: China Mobile (HK) (HK$74.95), China Telecom (HK$3.58) and China Unicom

(HK$10.06)

Goldman Sachs is a specialist in the relevant securities and will at any given time have an inventory position, "long" or "short," and may be on the

opposite side of orders executed on the relevant exchange: China Mobile (HK) (HK$74.95) and China Unicom (HK$10.06)

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 54% 14% 53% 45% 36%

As of January 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,637 equity securities. Goldman Sachs assigns stocks

as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell

for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.



Price target and rating history chart(s)

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China Telecom (0728.HK)

4.74.8

54.6

4.7

55.1

5.45.55.35.4

3.00

3.50

4.00

4.50

5.00

5.50

6.00

40

45

50

55

60

65

70

75

80

Goldman Sachs rating and stock price target history

Stock Price Currency : Hong Kong Dollar

Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2013.

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.

Rating

Price target

Price target at removal

Covered by Donald Lu, Ph.D,as of Jan 5, 2011

Not covered by current analyst

Jan 1, 2011 N

MSCI China

Inde

x P

rice

Sto

ck P

rice Jan 5 Mar 8 May 23

B NF

BM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2011 2012 2013

China Mobile (HK) (0941.HK)

909192105

100105

10095

84

8582

81

8287

60

70

80

90

100

110

40

45

50

55

60

65

70

75

80





Rating

Price target




Jan 1, 2011 B

MSCI China

Inde

x P

rice

Sto

ck P

rice Jan 5 Mar 8 May 23

N BF

NM A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2011 2012 2013

China Unicom (0762.HK)

1313.3

1313.414

14.715.2

16.2

15.514.5

13

8.00

10.00

12.00

14.00

16.00

18.00

40

45

50

55

60

65

70

75

80





Rating

Price target




Jan 1, 2011 B

MSCI China

Inde

x P

rice

Sto

ck P

rice Jan 5

FN

M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D2011 2012 2013



Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer

to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial

terms used in this report, are available from Goldman Sachs International on request.

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