Hong Kong: Telecom Servicespg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/3/11/59109de8-dc0b-417… · Hong Kong: Telecom Services Equity Research CSL acquisition FCF accretive: Prefer HKT

March 11, 2014

Hong Kong: Telecom Services

Equity Research

CSL acquisition FCF accretive: Prefer HKT among HK telcos

HKT’s pending acquisition of CSL signals industry consolidation

The HK mobile industry stands to benefit from HKT’s proposed US$2.4bn

acquisition of CSL in the longer term, in our view, as it would reduce

competitive intensity in Asia’s highest penetrated mobile market. The deal

is pending regulatory approval after receiving PCCW and HKT

shareholders’ approval (99.98%) at the EGM on Feb 28. The acquisition

could also potentially remove the overhang of the upcoming spectrum re-

auction, which we would see as an industry-wide positive. HKT

management estimates 10%-15% opex synergy on the combined mobile

business after full integration, or US$596mn-934mn in savings by our

estimate, which we believe is achievable for an in-market consolidation.

This amount of savings would lower CSL’s implied EV/AFF to 18.2x-21.0x

from 24.8x for 2015E (vs. 17.8x for HKT on the announcement date).

HKT remains our preferred HK telco; raising TP to HK$8.90

HKT is our preferred HK telco on its pricing power in FTTH and fixed-line

telephony. In 4Q13, HKT raised its fixed line telephony monthly rate by

64% to HK$180 for private residential units (c.46% of HK) when contracts

are renewed. We estimate HKT has a 70% share in the 1.1mn private

residential segment; assuming 5% churn, this implies additional revenue of

HK$109mn/286mn in 2014E/15E as 24-month contracts roll over. Coupled

with stable 2H13 revenue on higher broadband prices and lower CAC, we

raise our 2014/15 AFF estimates by 8%/9%. Lastly, we roll forward our DCF

and raise our 12-month target price by 27% to HK$8.90 (including HK$0.90

per share of synergy benefits). Our PCCW SOTP-based target price rises

13% to HK$3.60. Stay Neutral on both.

Cut SmarTone and HTHK estimates; rolling forward valuations

SmarTone: We cut FY14E-16E EPS by 30%-38% on continued service

revenue decline and higher opex on expanded network capacity. We roll

our DCF valuation forward and our 12-month target price declines 9% to

HK$10.0. Maintain Neutral. HTHK: We cut 2014E/15E EPS by 37%/38% as

we factor in worse-than-expected revenue pressure and higher taxes

starting 2014 and introduce 2016E EPS of HK$0.17. We roll our DCF

forward and our revised 12-month target price drops 10% to HK$2.60.

Maintain Neutral.

HONG KONG TELECOM VALUATION COMPS

Prices in HK$, as of market close of March 7, 2014.

Source: Bloomberg, Goldman Sachs Global Investment

Research.

KEY RISKS

HKT: Upside: Higher-than-expected fiber and mobile

growth; Downside: Merger doesn't receive regulatory

approval, regulatory pressure on fixed-line, higher-than-

expected fixed-line disconnection, high interest rate

environment.

PCCW: Upside: Stronger-than-expected IT solutions and pay

TV business; Downside: reinvestment risk.

SmarTone: Upside: Continued market share gain; Downside:

Further roaming revenue decline, greater-than-expected

handset subsidies.

HTHK: Upside: stronger-than-expected growth in the

enterprise and carrier segment; Downside: price

competition in mobiles as the industry slows.

Piyush Mubayi +852-2978-1677 [email protected] Goldman Sachs (Asia) L.L.C. 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.

Tina Hou +852-2978-0178 [email protected] Goldman Sachs (Asia) L.L.C.

The Goldman Sachs Group, Inc. Global Investment Research

12-Mo. Market Up/Down TotalName Ticker Rating Tgt Px Price Side ReturnPCCW 0008.HK Neutral 3.60 3.75 -4% 2%HKT Trust 6823.HK Neutral 8.90 8.25 8% 14%HTHK 0215.HK Neutral 2.60 2.61 0% 4%SmarTone 0315.HK Neutral 10.00 9.20 9% 12%

Name 2014E 2015E 2014E 2015E 2014E 2015EPCCW 13.0x 11.5x 5.6x 5.2x 6.0% 6.8%HKT Trust 22.7x 16.5x 8.9x 8.5x 5.9% 6.0%HTHK 15.6x 15.6x 6.4x 6.3x 4.8% 4.8%SmarTone 15.8x 16.3x 4.5x 4.5x 3.8% 3.7%

Name 2014E 2015E 2014E 2015E 2014E 2015EPCCW 22.1% 23.4% 18.1% 19.9% 9.7% 9.8%HKT Trust 7.7% 10.7% 39.3% 35.2% 7.4% 7.5%HTHK 7.2% 7.1% 14.6% 13.2% 7.7% 7.2%SmarTone 19.6% 17.7% 68.8% 73.6% 13.2% 11.7%

P/E EV/EBITDA Div Yld

ROE ROIC CROCI

March 11, 2014 Hong Kong: Telecom Services

Goldman Sachs Global Investment Research 2

HKT’s pending acquisition of CSL signals potential industry

consolidation and improved market dynamics

Regulatory approval last remaining obstacle for merger

On Dec 20, 2013, HKT announced that it had entered an agreement with CSLNW (Telstra

owns 76.4%, New World 23.6%) to acquire the entire share capital of CSLNW for

US$2.425bn (HK$18.87bn). At its EGM on Feb 28, 2014, HKT received shareholders’

approval (99.98%) for the proposed acquisition. Completion of the acquisition remains

conditional upon the approval of OFCA, Hong Kong’s telecommunications regulator. The

sale agreement includes a non-competition clause that requires both Telstra and New

World not to engage in any direct or indirect mobile wireless core operations (including

WiFi) in Hong Kong for three years from the date of the deal completion.

The acquisition will be initially funded by a US$2.5bn 18-month bridge loan from Standard

Chartered Bank at an interest rate comparable to HKT’s current bank loan facilities, or just

below 3%. Management indicated that it intends to refinance the bridge loan quickly after

deal close with a combination of debt and equity.

24.8x EV/AFF for CSL drops to 18.2x-21.0x on synergy gains

Management targets to reduce the operating expenses of the combined mobile businesses

by 10% to 15% after full integration of the business. Synergies should come from:

a) Removal of overlapping base stations.

b) Replacement of backhaul transmission network lease with HKT’s own

infrastructure.

c) Network and spectrum sharing should generate economies of scale and lower

both capex and maintenance spending.

d) Retail/distribution channel optimization as the rental leases expire in up to 2-3

years and related cost savings from the streamlining process. PCCW/HKT has 48

retail outlets throughout Hong Kong. Adding the 32 One2free stores and nine

1O1O stores, the combined HKT/CSL entity will have a reach of 89 stores. In

comparison, HTHK has 60, CMHK 45 and SmarTone 32.

e) Improved bargaining power in equipment/content procurement and administrative

cost savings.

Other gains could potentially accrue on the revenue side from:

a) CSL’s bundling of its services with those of the fixed-line carrier, a proven strategy

to lower churn in other markets.

b) We believe the benefits of CSL’s superior brand position and a robust network

more than offset the risks from ‘bill shock’.

Lastly, and rather unusually, since CSL used to be a part of HKT a decade ago, we

believe the risks around execution are meaningfully lower than would be otherwise.



Exhibit 1: HKT/CSL combined entity would have 89 stores Hong Kong telcos retail outlets

Source: Company data.

The deal translates to 9.2x CSL’s FY13 (June year-end) EBITDA. The multiple would drop to

5.7x if we were to use HKT’s handset amortization policy. In contrast, the multiple being

paid for Hong Kong wireless companies (i.e. SmarTone – the only publicly listed pure

wireless operator in HK) is 3.6x 2014E EV/EBITDA while the Asia Pacific telecom average

multiple is 6.8x. A comparison with the five M&A transactions in Hong Kong since 2000

shows that the 9.2x EV/EBITDA multiple is below the 11.6x historical average. Recent

acquisitions in the EU and the US imply a lower average multiple of 6.8x.

As a result of the range in multiples, we estimate AFF based multiples are a better way to

look at the transaction. Based on CSL’s FY13 (June YE) normalized adjusted funds flow

(AFF) of HK$760mn, the proposed acquisition implies an EV/AFF of 24.8x compared to

HKT’s 2013 EV/AFF of 17.8x (Dec 24, 2013). Further, including synergy benefits, multiples

would improve to 18.2x-21.0x from 24.8x. We believe this should be factored into

valuations in cases where in-market consolidation also involves the incumbent fixed-line

telco. Factoring in synergy gains from this merger would lower the EBITDA multiple for

CSL from 9.2x to 8.1x-8.6x, or from 9.2x to 5.7x on HKT’s handset accounting.

Hong Kong Kowloon New Territories TotalPCCW/HKT 9 15 24 48

One2free 8 11 13 32

1O1O 3 3 3 9

HKT+CSL 20 29 40 89HTHK 14 24 22 60

CMHK 8 15 22 45

SmarTone 10 10 12 32



Exhibit 2: Historical transactions in Hong Kong and recent transactions globally 9.2x implied EV/EBITDA is lower than historical average of 11.6x in Hong Kong, but higher than recent global average of 6.8x


CSL’s capex should level off post 4G investment

CSL remains one of the few telcos in the world that has successfully positioned two brands

across one network. It has outperformed the Hong Kong mobile industry over the past 30

months in terms of both mobile service revenue and EBITDA growth. We attribute CSL’s

success to its revitalized branding and positioning aided by its first-mover advantage, as it

launched LTE services in Nov 2010. Its high-end 1010 brand and mass market one2free

brand have captured different segments of the Hong Kong population.

CSL has spent a cumulative HK$3.88bn on capital expenditure over the past five years

(compared to SmarTone’s HK$3.75bn). We estimate capex should level off from the 2012

peak of HK$930mn as we believe the company’s 4G investment cycle is largely behind us.

CSL’s network is supported by the most spectrum holdings across multiple spectrum

bands.

Hong Kong TransactionsEV/EBITDA

Announcement Date Target Target Country Acquirer (Last FY)Mar 2006 New World PCS Hong Kong Telstra Corporation 7.3xOct 2005 China Resources Peoples Hong Kong China Mobile Hong Kong Company

Telephone Company 6.4xJun 2005 Sunday Communications Hong Kong PCCW 19.0xJun 2002 CSL (40%) Hong Kong Telstra Corporation 6.7xFeb 2001 CSL (60%) Hong Kong Telstra Corporation 18.5x

Average 11.6x

Other Recent TransactionsEV/EBITDA

Announcement Date Target Target Country Acquirer (Last FY)AsiaJan 2013 Companhia de Macau CITIC Telecom International Holdings 8.5x

Telecomunicações de MacauEuropeJul 2013 E-Plus Gruppe Germany Telefónica Deutschland Holding 6.3xJun 2013 Telefónica Ireland Ireland Hutchison 3G Ireland 6.0xFeb 2012 Orange Austria Telecommunication Austria Hutchison 3G Austria 6.9xDec 2011 Orange Communications Switzerland Matterhorn Mobile Holdings 6.5x

USJul 2013 Leap Wireless International US AT&T 6.7xJan 2013 Allied Wireless US AT&T 8.0x

Communications CorporationOct 2012 MetroPCS Communications US T-Mobile USA 5.5x

Average 6.8x



Exhibit 3: Mobile service revenue yoy growth CSL has outperformed the HK wireless industry over the past

30 months not only in revenue growth…

Exhibit 4: HK wireless EBITDA yoy growth

… but also in EBITDA growth

Source: Company data, Goldman Sachs Global Investment Research.


Exhibit 5: Mobile subscriber net adds (‘000) CSL has been the beneficiary of MNP

Exhibit 6: Current spectrum allocation (MHz) CSL holds the most spectrum among HK wireless carriers


Source: OFCA.

Implication of acquisition on HKT’s balance sheet

Net debt/EBITDA to 3.6x from 2.8x

We expect consolidated net debt/EBITDA for the enlarged entity to rise to 3.6x from HKT’s

current ratio of 2.8x as of Dec 2013, assuming HKT raises US$2.5bn debt to finance the deal

and acquires CSL. Thereafter, leverage should gradually decline to 3.1x in 2015E as

synergy gains filter through and combined EBITDA rises at a CAGR of 7% over 2013-2015E

while the debt level remains stable.

Debt profile

On Dec 23, 2013, S&P placed HKT’s ‘BBB’ long-term corporate credit rating on negative

credit watch following the announcement of the CSL acquisition. S&P aims to resolve the

credit watch in 1Q14 by either affirming the rating or lowering the rating by no more than

one notch, which would not alter interest costs meaningfully, in our view. We expect the

credit rating agencies to focus on the cash flow outlook, refinancing risk were there to be a

credit issue in the market in the next 18 months, and HKT’s ability to cut operating costs

‐60%

‐40%

‐20%

0%

20%

40%

60%

Mobile service revenue yoy growth

HKT HTHK CSL SmarTone CSL vs. Industry

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

Reported EBITDA yoy growth

HKT HTHK CSL SmarTone CSL vs. Industry

(50)

‐

50

100

150

200

250

300

350

400

Mobile subscriber net adds ('000)

HKT HTHK CSL SmarTone

0

20

40

60

80

100

120

140

2.5/2.6GHz

2.3GHz

1.9/2.1GHz

1800MHz

850/900MHz



and capex by: a) HKT providing CSL backhaul; b) cutting staff where there is an overlap; c)

bundling products to lower churn; d) negotiating better with vendors; e) lowering capex;

and f) potentially lower regulatory payments. It should also help that the new company

would be larger/more dominant in mobiles in particular.

Exhibit 7: We estimate implied net debt/EBITDA for the enlarged entity will decline from

3.6x in 2013 to 3.1x in 2015E Selected consolidated financial metrics


EBITDA (HK$ mn) (Dec YE) Jun 2013 2013 2014E 2015EHKT 7,772 7,901 8,347 8,715 CSL (Telstra) 2,057 2,186 CSL (HKT) 3,290 3,530 3,962 4,297 HKT+CSL (Telstra) 9,829 10,087 HKT+CSL (HKT) 11,062 11,431 12,309 13,012 13,012 13,012 13,012 HKT+CSL (HKT, w/ 10% mob. synerg 11,062 11,431 12,309 13,525 13,525 13,525 13,525 HKT+CSL (HKT, w/ 20% mob.) 11,062 11,431 12,309 13,872 13,872 13,872 13,872 HKT+CSL (HKT, w/ 30% mob.) 11,062 11,431 12,309 14,302 14,302 14,302 14,302

Net debt/(cash) (HK$ mn) Jun 2013 2013 2014E 2015EHKT 21,923 21,888 21,392 21,056 21,056 21,056 21,056 Acquisition 18,867 18,867 18,867 18,867 18,867 18,867 18,867 CSL (paid out Telstra) (1,296) (1,150) (941) (910) Equity raised 3,900 5,850 7,800 Current Market Cap 52,932 52,932 52,932 52,932 52,932 52,932 52,932 % dilution 7% 11% 15%HKT+CSL 40,790 40,755 40,259 39,923 36,023 34,073 32,123

AFF Jun 2013 2013 2014E 2015EHKT 2,726 2,901 3,114 3,174 3,174 3,174 3,174 CSL (HKT) 760 815 915 993 993 993 993 HKT+CSL (HKT) 3,486 3,716 4,029 4,167 4,167 4,167 4,167

Net debt/EBITDA Jun 2013 2013 2014E 2015EHKT 2.8x 2.8x 2.6x 2.4xCSL (Telstra) -0.6x -0.5xCSL (HKT) -0.4x -0.3x -0.2x -0.2xHKT+CSL (Telstra) 4.1x 4.0xHKT+CSL (HKT) 3.7x 3.6x 3.3x 3.1x 2.8x 2.6x 2.5xHKT+CSL (HKT, w/ 10% mob. synergy) 3.0x 2.7x 2.5x 2.4xHKT+CSL (HKT, w/ 20% mob.) 2.9x 2.6x 2.5x 2.3xHKT+CSL (HKT, w/ 30% mob.) 2.8x 2.5x 2.4x 2.2x

EV/EBITDA Jun 2013 2013 2014E 2015EHKT 9.4x 9.3x 8.8x 8.4xCSL (Telstra accounting) 9.2xCSL (HKT accounting) 5.7xHKT+CSL (HKT) 8.3x 8.1x 7.5x 7.1xHKT+CSL (HKT, w/ 10% mob. synergy) 6.8xHKT+CSL (HKT, w/ 20% mob.) 6.6xHKT+CSL (HKT, w/ 30% mob.) 6.4x

EV/AFF Jun 2013 2013 2014E 2015EHKT 26.9x 25.2x 23.5x 23.1xCSL 24.8x 23.1x 20.6x 19.0xHKT+CSL 26.4x 24.8x 22.8x 22.1x

2015E

2015E

2015E

2015E



Exhibit 8: HKT’s debt profile


in HK$ millions, Y/E DEC 2011 2012 2013 2014E 2015EShort-term loans (HKD) 31 8,462 - - -

Interest rate (%) 4.7% 3.9% 3.9% 3.9% 3.9%

US$500 mn guaranteed notes, due 2013 3,881 - - Interest rate (%) - 6.0% 6.0% 6.0% 6.0%Interest expense 232 116 -

Long term debtUS$500 mn guaranteed notes, due 2015 3,867 3,861 3,861 3,861 - Interest rate (%) - 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%Interest expense 203 203 203 203 101

US$500 mn guaranteed notes, due 2016 3,979 4,016 4,016 4,016 4,016 Interest rate (%) - 4.25% 4.3% 4.3% 4.3% 4.3% 4.3%Interest expense 166 170 171 171 171

3-5 year HK$23.8 bn revolving & term facilities 11,743 7,767 12,679 12,679 21,027 Interest rate (%) - HIBOR + 155-175 bps 2.2% 2.2% 3.2% 4.1% 4.8%Interest expense 319 215 327 520 809

US$500 mn guaranteed notes, due 2023 (on Mar 8, 2013) 3,466 3,466 3,466 Interest rate (%) - 3.75% 3.75% 3.75% 3.75%Interest expense 53 130 130

Total long-term bank loansUS$500 guaranteed notes, due 2013 3,881 - - - - US$500 mn guaranteed notes, due 2015 3,867 3,861 3,861 3,861 - US$500 mn guaranteed notes, due 2016 3,979 4,016 4,016 4,016 4,016 3-5 year HK$23.8 bn revolving & term facilities 11,743 7,767 12,679 12,679 21,027 US$500 mn guaranteed notes, due 2023 (on Mar 8, 2013) - - 3,466 3,466 3,466 Total LT bank loans 23,470 15,644 24,022 24,022 28,509 Weighted interest rate 3.6% 3.6% 3.8% 4.3% 4.6%Weighted interest expense 920 704 753 1,023 1,211

TOTAL DEBT 23,501 24,106 24,022 24,022 28,509 Interest rate 5.4% 3.7% 3.8% 4.3% 4.6%Gross interest expense (incl int. capitalised) 1,575 869 918 1,023 1,211



Exhibit 9: HKT P&L drivers Fixed broadband and mobile are the key drivers


Implications of spectrum re-auction: positive for FCF, dividend

With its Share Purchase Agreement, conditional upon the successful completion of the CSL

acquisition, HKT also proposed:

(1) It would not seek to renew 2x15MHz of 3G spectrum when the HKT and CSL licenses

expire in 2015, i.e. voluntarily return an additional 2x5MHz of 3G spectrum apart from the

2x10MHz OFCA is proposing to take back and put into re-auction in 2H14; and

(2) It would not participate in the 3G spectrum re-auction.

We believe this could remove an overhang for the Hong Kong telcos’ as the market has

been expecting hefty auction payments in light of the recent 4G spectrum license payments

in HK$ mn 2012 2013 2014E 2015E 2016E 1H12 2H12 1H13 2H131. Local telephony

Lines in service (000s) 2,646 2,651 2,655 2,658 2,661 2,641 2,646 2,651 2,651

ARPU (HK$) 107 108 109 114 119 106 108 106 110

Revenue 3,401 3,434 3,488 3,652 3,814 1,680 1,721 1,680 1,754 yoy 0% 1% 2% 5% 4% 2% -1% 0% 2%

2. Data revenueFTTH subs (000s) 304 419 519 594 644 226 304 362 419 Broadband subs (000s) 1,567 1,567 1,569 1,572 1,574 1,540 1,567 1,567 1,567

Broadband ARPU (HK$) 322 344 357 369 379 311 338 334 353

Revenue, data 6,055 6,460 6,729 6,959 7,150 2,875 3,180 3,140 3,320 yoy 7% 7% 4% 3% 3% 8% 5% 9% 4%

3. International revenue 5,247 6,711 7,248 7,712 8,107 2,188 3,059 3,222 3,489 yoy 25% 28% 8% 6% 5% 0% 52% 47% 14%

4. Other revenue 3,663 3,370 3,176 3,015 2,893 1,682 1,981 1,588 1,782

yoy -9% -8% -6% -5% -4% -4% -12% -6% -10%5. Mobile revenue

Subs (000s) 1,645 1,654 1,661 1,667 1,672 1,605 1,645 1,652 1,654

ARPU (HK$) 129 134 137 140 143 118 135 137 130

yoy 19% 3% 3% 2% 2% 16% 19% 17% -4%

Revenue 2,466 2,647 2,734 2,805 2,864 1,133 1,333 1,360 1,287

yoy 25% 7% 3% 3% 2% 23% 27% 20% -3%

TOTAL REVENUE 21,081 22,832 23,557 24,297 24,952 9,715 11,366 11,071 11,761 yoy 6% 8% 3% 3% 3% 2% 10% 14% 3%

EBITDATSS 7,126 7,264 7,702 8,064 8,394 3,467 3,659 3,522 3,742

Mobile 736 851 875 898 917 342 394 441 410

Total, net of other 7,669 7,901 8,347 8,715 9,049 3,736 3,933 3,839 4,062 EBITDA margin

TSS 38.8% 36.4% 37.3% 37.8% 38.2% 41.2% 36.8% 36.6% 36.2%Mobile 29.8% 32.1% 32.0% 32.0% 32.0% 30.2% 29.6% 32.4% 31.9%Total 36.4% 34.6% 35.4% 35.9% 36.3% 38.5% 34.6% 34.7% 34.5%

NET PROFIT 1,610 2,460 2,328 3,209 3,708 778 832 1,189 1,271

Net finance cost (805) (833) (911) (1,090) (871) (355) (373) (239) (450) change 699 (28) (78) (179) 218 307 (18) 134 (211)

CAC (amortized) (1,524) (1,408) (1,309) (1,257) (1,207) (571) (953) (651) (757)

EBITDA less CAC

Fixed 6,476 6,628 7,080 7,440 7,770 3,223 3,253 3,203 3,425

Mobile (70% CAC) (331) (135) (42) 18 72 (58) (273) (15) (120) EBITDA less CAC 6,145 6,493 7,038 7,458 7,842 3,165 2,980 3,188 3,305 EBITDA Margin, CAC Adj 29.1% 28.4% 29.9% 30.7% 31.4% 32.6% 26.2% 28.8% 28.1%

Capex + License fee (2,101) (2,175) (2,268) (2,309) (2,341) (1,017) (1,084) (1,049) (1,126) % sales 10.0% 9.5% 9.6% 9.5% 9.4% 10.5% 9.5% 9.5% 9.6%

Working cap (441) (397) (355) (348) (350) (340) (101) (309) (88) % sales 2.1% 1.7% 1.5% 1.4% 1.4% 3.5% 0.9% 2.8% 0.7%

Acquisition (211) - - - - - (211) - -

Adjusted funds flow 2,672 2,901 3,114 3,174 3,658 1,430 1,242 1,484 1,417 change 285 229 213 60 484 395 (188) 242 (67)



in the region. Price/MHz was as high as US$55mn in Korea when KT paid this sum for

15MHz in the 1800MHz spectrum band in 2013. Auctions in Taiwan that ended in Oct 2013

saw Chunghwa paying US$29mn/MHz for 30MHz in the 1800MHz band. In comparison,

OFCA’s bidding price guidance range of HK$66-86mn per MHz, or US$8.5-11.1mn is below

the US$12mn regional average and significantly lower than the high end.

Exhibit 10: Recent 4G spectrum license auctions in the region OFCA’s bidding price guidance range of HK$66-86mn per MHz, or US$8.5-11.1mn is below the

US$12mn regional average and significantly lower than the high end

Source: NCC, KCC, OFCA, IDA, Bloomberg.

In addition, with possibly five bidders reduced to three and the extra 2x5MHz spectrum to

be given back by HKT/CSL, we expect the final bidding prices to be within the regulator’s

guidance. This is a positive for the telcos’ FCF and dividend payment, in our view.

Auction Spectrum Price Price Price/MHz Price/MHz/Pop/YrTime Frequency Expire Result (lc mn) (US$ mn) (US$ mn) (US$)

Taiwan 2013 90MHz (700MHz) 2030 APT: 20MHz 6,415 216 11 0.029 FET: 20MHz 6,810 229 11 0.031 Foxconn: 20MHz 6,810 229 11 0.031 TWM: 30MHz 10,485 353 12 0.031

60MHz (900MHz) 2030 Taiwan Star: 20MHz 3,655 123 6 0.016 CHT: 20MHz 3,320 112 6 0.015 Foxconn: 20MHz 2,370 80 4 0.011

120MHz (1800MHz) 2030 TWM: 30MHz 18,525 623 21 0.056 CHT: 20MHz 10,070 339 17 0.045 FET: 20MHz 12,790 430 22 0.058 FET: 20MHz 11,715 394 20 0.053 CHT: 30MHz 25,685 864 29 0.077

Korea 2011 10MHz (800MHz) 2021 KT: 10MHz 261,000 236 24 0.048 20MHz (1800MHz) 2021 SKT: 20MHz 995,000 899 45 0.092 20MHz (2100MHz) 2021 LGU+: 20MHz 445,500 403 20 0.041

2013 50MHz (1800MHz) 2021 SKT: 35MHz 1,050,000 954 27 0.070 KT: 15MHz 900,000 818 55 0.139

40MHz (2600MHz) 2021 LGU+: 40MHz 479,000 435 11 0.028 Hong Kong 2013 50MHz (2.5/2.6GHz) 2028 SmarTone: 20MHz 640 82 4 0.038

CSL: 10MHz 310 40 4 0.037 CMHK: 10MHz 300 39 4 0.036 Genius (HTHK+HKT) : 10MHz 290 37 4 0.035

2012 90MHz (2.3GHz) 2027 21 ViaNet: 30MHz 150 19 1 0.006 CMHK: 30MHz 170 22 1 0.007 HTHK: 30MHz 150 19 1 0.006

Singapore 2013 150MHz (1800MHz) 2030 M1: 40MHz 64 51 1 0.014 SingTel: 60MHz 96 77 1 0.014 StarHub: 50MHz 80 64 1 0.014

120MHz (2.5GHz) 2030 M1: 40MHz 40 32 1 0.009 SingTel: 40MHz 40 32 1 0.009 StarHub: 40MHz 40 32 1 0.009

Average 12 0.036



Exhibit 11: OFCA’s hybrid approach to re-assignment of the spectrum in 1.9-2.2GHz band HKT/CSL proposes to return an additional 2x5MHz of spectrum to OFCA conditional on the deal

Source: OFCA, Company data.

HKT/CSL implications for industry: positive for data monetization

HKT’s pending acquisition of CSL represents the latest step in the long-drawn industry

consolidation in HK. With five major mobile service providers – namely HTHK, HKT,

SmarTone, CSL, and CMHK – vying for 7.2 million subscribers, Hong Kong’s mobile market

is one of the most fragmented and competitive in the region, based on HHI (Herfindahl–

Hirschman Index) score for both 2013 mobile service revenue and mobile subscriber

numbers. Sustained high-level competitive intensity threatens the ability of the industry to

push through tiered plans, in our view.

Exhibit 12: HK scores among the lowest in DM Asia HHI score – based on mobile service revenue (2013)

Exhibit 13: HK scores among the lowest in DM Asia HHI score – based on mobile subscriber (2013)



HKT CSL SmarTone Hutchison14.8 MHz 14.8 MHz 14.8 MHz 14.8 MHz

S1 S2 S3 S4 S5 S6 S7 S8 S9 S10 S11 S12

Slots to be offered to existing 3G operators under the right of first refusal

Slots would be made available for re-auction

Slots voluntarily returned by HKT if merged with CSL.

0

1,000

2,000

3,000

4,000

5,000

6,000

HHI score ‐ based on mobile service revenue (2013)

0

1,000

2,000

3,000

4,000

5,000

6,000

HHI score ‐ based on mobile subscriber (2013)

March 11, 2014

Goldman Sachs Global Investment Research

Exhibit 14: Hong Kong ranks the highest

Mobile penetration (2013)

Source: Company data, Bloomberg, Goldman Sachs GlobResearch.

If the acquis

five to four,

from 1,946 t

see telcos c

This could l

monetizatio

observed in

3Q11 and 3Q

In K

3Q

In S

15%

usa

for

Exhibit 16: M1’s data ARPU growth accel

4Q13 from 15% in 3Q12 M1 data ARPU yoy%


0%

40%

80%

120%

160%

200%

Mobile penetration (2013)

across Asia

Exhibit 15: Growth started to d

Hong Kong mobile service reven

bal Investment


sition is approved by the regulator, the number of com

, which would lead to an improvement in the HHI score

to 2,638. Even ahead of the final regulator approval, w

competing more rationally with the introduction of tiere

ead to reaccelerated mobile data revenue growth on b

on, and potentially higher margin in line with the positi

n both Korea and Singapore in 2013, where tiered prici

Q12, respectively.

Korea, SKT’s blended mobile ARPU growth improved t

11.

Singapore, M1’s mobile data ARPU growth accelerated

% in 3Q12. Telcos are also reporting higher average sm

age of up to 2.5GB, and more subscribers exceeding th

extra usage.

erated to 28% in

Exhibit 17: SKT’s blended ARPU

3Q11 to 3% in 2Q13 SKT blended ARPU yoy %

Source: Company data

‐10%

‐5%

0%

5%

10%

15%

20%

Mobile service reven

HK$ mn

Hong Kong: Telecom Services

11

decelerate in 1H12

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we have already started to

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martphone monthly data

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‐

2,000

4,000

6,000

8,000

10,000

12,000

nue yoy growth

yoy %



HKT remains our preferred telco in Hong Kong: raising 12-month

TP to HK$8.90 on fixed-line pricing power

After four effective price hikes in its fixed broadband offering since 2012, HKT’s residential

fixed broadband revenue grew 9% yoy on 7% higher ARPU in 2013, and management

expects ARPU increases to continue over the next two years as subscribers recontract or

until HKT's broadband rates are on par with other international markets. In 4Q13, HKT

implemented a HK$70/month hike to HK$180/month for deluxe/high-end private residential

units, a significant 64% increase in its fixed-line telephony monthly charge for private

residential units when contracts are renewed. Mass market pricing remains unchanged at

HK$110. We estimate HKT has a 70% market share in the 1.1 mn private residential

segment in HK. Factoring in a 5% disconnection rate on the price hike, we estimate HKT’s

revenue could rise by HK$109mn/286mn in 2014E/15E, as 24-month contracts roll over.

As of 1H13, HKT had about 7% mobile revenue market share, the second smallest after

China Mobile Hong Kong among the five major operators. After the acquisition of CSL, the

combined market share would rise to about 29%, bringing it almost on par with SmarTone

(33%) and HTHK (32%). We estimate 10%-15% opex synergy from the acquisition and the

deal to be AFF accretive, translating to US$596mn-934mn synergy gains. We are not

consolidating the financials of HKT and CSL until the merger receives regulatory approval.

Off a low base, HKT has been able to grow its mobile ARPU for the past two years, with

only CSL surpassing that pace of growth in 2H13. HKT’s ARPU has exceeded HTHK and has

caught up to CSL, reinforcing our confidence in continued growth and outperformance.

The mobile segment also turned profitable in 2013 as customer acquisition cost (CAC)

declined to 5.8% of revenue in 2013 from 7% in 2012 on lower handset subsidy.

Exhibit 18: Blended mobile ARPU (HK$)

Exhibit 19: Blended mobile ARPU yoy %



Scenario analysis

We present our target price progression and theoretical value for HKT’s shares post the

CSL acquisition. Our theoretical values are based on the assumption that after the deal

closes, the company conducts a US$750mn rights issue at a 10% discount to current

market price.

‐

50

100

150

200

250

300

350

1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

Blended Mobile ARPU HKT HTHK CSL SmarTone

‐30%

‐20%

‐10%

0%

10%

20%

30%

1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

Blended Mobile ARPU yoy %HKT H3 CSL SmarTone



Exhibit 20: The deal could potentially deliver US$596mn-934mn synergy gains 12-month target price and theoretical value progression

Priced as of market close on March 7, 2014.

Figures in HK$ mn, unless otherwise stated (theoretical value/TP is per share).

Source: Goldman Sachs Global Investment Research.

Based on our sensitivity analysis of synergy gains, rights issue pricing discount, and

amount of equity raised, the theoretical value could range between HK$7.94 and HK$9.45.

Exhibit 21: Theoretical value range of HK$7.94-HK$9.45

Sensitivity analysis to synergy gains

Figures in HK$ mn, unless otherwise stated (theoretical value is per share).


Previous DCF Fixed-line CSL Equity Post Target Price Roll Over Price Hike Acquisition Raised Synergy

Enterprise value 66,194 68,870 72,078 91,578 91,578 98,864 Net debt 21,225 20,750 20,750 40,250 34,400 34,400 Equity value 44,969 48,120 51,328 51,328 57,178 64,463 Equity raised 5,850 @ discount to spot price 10% 8.25 7.43 # of new shares 788 788 # of shares 6,416 6,416 6,416 6,416 7,204 7,204

Theoretical value (HK$) 7.00 7.50 8.00 8.00 7.94 8.90 vs. previous TP 7.1% 14.3% 0.0% -0.8% 11.3%

EV change (HK$ mn) 2,676 3,208 19,500 - 7,285 EV change (US$ mn) 343 411 2,500 - 934

Sensitivity to synergy gainsEnterprise value 98,864 98,864 98,864 98,864 Net debt 34,400 34,400 34,400 34,400 Equity value 57,178 57,178 57,178 57,178 Synergy gain (US$ mn) 0 467 934 1,401 Synergy gain (HK$ mn) 0 3,643 7,285 10,928 EV + synergy gain 57,178 60,821 64,463 68,106

# of shares 7,204 7,204 7,204 7,204

Theoretical value 7.94 8.44 8.90 9.45



Exhibit 22: Theoretical value range of HK$8.89-HK$9.05 Sensitivity analysis to discount to current share price

Priced as of market close on March 7, 2014.



Exhibit 23: Theoretical value range of HK$8.89-HK$9.07

Sensitivity analysis to equity raised



Valuation

HKT: We raise our 2014E/15E AFF estimates by 8%/9% to factor in the fixed-line price hike

and lower CAC, roll forward DCF by one year and raise our 12-month target price to

HK$8.90 (including HK$0.90 per share of synergy benefits) from HK$7.00. Our rating

remains Neutral. Key risks: Upside: Higher-than-expected fiber and mobile growth;

Downside: Merger doesn't receive regulatory approval, regulatory pressure on fixed-line,

higher-than-expected fixed-line disconnection, high interest rate environment.

PCCW: After incorporating our new HKT assumptions, EPS estimates change by -4%/+4%

in 2014E/15E and PCCW’s 12-month SOTP-based target price rises by 13% to HK$3.60, with

an unchanged 45% holding company discount. We stay Neutral. Key risks: Upside:

Stronger-than-expected IT solutions and pay TV business; Downside: reinvestment risk.

Sensitivity to discount to current share priceEnterprise value 98,864 98,864 98,864 98,864 Net debt 34,400 34,400 34,400 34,400 Equity value 64,463 64,463 64,463 64,463 Spot price 8.25 8.25 8.25 8.25 Discount to current share price 0% 5% 10% 15%Issue price 8.25 7.84 7.43 7.01

# of shares 7,125 7,162 7,204 7,250


Sensitivity to equity raisedEnterprise value 98,864 98,864 98,864 98,864 Net debt 38,300 36,350 34,400 32,450 Equity value 60,563 62,513 64,463 66,413 Equity raised (US$ mn) 250 500 750 1,000 Equity raised (HK$ mn) 1,950 3,900 5,850 7,800

# of shares 6,679 6,941 7,204 7,467




Exhibit 24: PCCW SOTP valuation (HK$ mn, except per share figures)

Source: Bloomberg, Company data, Goldman Sachs Global Investment Research.

HK wireless growth rates slowing

Both SmarTone and HTHK reported 2H13 earnings that were weaker than we

estimated due to three factors:

1) Subs are switching from subsidized handset plans to SIM-only plans. Due to

the absence of killer handsets in a market with high smartphone penetration,

business models that center on the sale of ‘star’ handsets are under duress.

2) High margin roaming revenue remains under pressure. In SmarTone’s case, we

estimate roaming revenue declined 19% yoy as it dropped from 18% of service

revenue in 2H12 to 15% in 2H13.

3) Margins under pressure due to higher depreciation for 4G network. EBIT margin on service revenue for SmarTone dropped 600bps yoy and 320bps

hoh to 15.5% in 2H13.

SmarTone: Cutting target price by 9% to HK$10.0

Valuation: We cut FY14E-16E EPS estimates by 30%-38% on continued service revenue

decline and higher opex and depreciation as a result of expanded network capacity and

traffic. We roll forward our DCF valuation by one year and our 12-month target price

declines to HK$10.0 from HK$11.0. Maintain Neutral.

Key risks: Upside: Continued market share gain; Downside: Further roaming revenue

decline, greater-than-expected handset subsidies.

HTHK: Target lowered by 10% to HK$2.60

We cut our 2014E/15E EPS by 37%/38% as we factor in worse-than-expected revenue

pressure and mobile tax payment starting 2014. We introduce 2016E EPS of HK$0.17. We

roll forward DCF by one year and our 12-month DCF-based target price declines by 10% to

HK$2.60. Maintain Neutral.

Key risks: Upside – stronger-than-expected growth in the enterprise and carrier segment;

Downside – price competition in mobiles as the industry slows.

Owned Holdco EBITDA ValuePCCW (%) discount (x) (HK$m) to PCCW HK$/shHKT 63.0% 57,102 35,975 4.96Rights issue (3,686) -0.51

PCCW Group, ex HKT, ex PCPD IT 8.0 5,412 5,412 0.75 Media 8.0 4,472 4,472 0.62 Other/cash 2,975 0.41PCCW group (ex HKT, ex PCPD) 12,860 1.77

PCPD 74.5% 2,405 1,792 0.25

NAV 46,941 6.47 Less discount to NAV 45% (21,123) (2.91)

NAV, less holdco 25,817 3.60



Exhibit 25: HKT/CSL pro-forma income statement (HK$ millions)


Income statement 2012 2013 2014E 2015E 2016EService revenue 24,325 26,799 28,270 29,566 30,651

yoy % 10.2% 5.5% 4.6% 3.7%Handset sales 3,870 4,295 4,561 4,789 4,978

yoy % 11.0% 6.2% 5.0% 3.9%Total sales/revenues 28,195 31,095 32,831 34,356 35,629

yoy % 10.3% 5.6% 4.6% 3.7%

COGS (11,036) (12,376) (12,637) (13,163) (13,569) Total COGS (11,036) (12,376) (12,637) (13,163) (13,569)

Gross profit 17,160 18,719 20,193 21,192 22,060 yoy % 9.1% 7.9% 4.9% 4.1%Gross Margin 60.9% 60.2% 61.5% 61.7% 61.9%

SG&A (6,561) (7,288) (7,884) (7,667) (7,964) Total operating expense (6,561) (7,288) (7,884) (7,667) (7,964) EBITDA 10,599 11,431 12,309 13,525 14,096

yoy % 7.8% 7.7% 9.9% 4.2%

Depreciation (2,720) (2,628) (2,693) (2,763) (2,821) Amortization (3,689) (4,308) (4,478) (3,731) (3,799)

EBIT (operating profit) 4,191 4,495 5,139 7,030 7,476 yoy % 7.3% 14.3% 36.8% 6.3%

Interest income 33 42 37 30 103 Interest expense (949) (983) (1,057) (1,230) (1,084)

Net interest income/expense (916) (941) (1,020) (1,200) (981) Profit/loss on disposal of assets (pre-tax) 1 13 - - - Share of results in jointly controlled entities (79) 50 - - - Other non-operating income/expense 18 84 - - - Non-operating income/(loss) (977) (794) (1,020) (1,200) (981) Pre-tax profit 3,215 3,701 4,119 5,831 6,495

yoy % 15.1% 11.3% 41.5% 11.4%- - - - -

Income taxes (647) (219) (687) (886) (1,000) Minority interest (61) (56) (56) (71) (81) Net income to shareholders 2,507 3,426 3,376 4,873 5,414

yoy % 36.7% (1.5%) 44.3% 11.1%



Exhibit 26: HKT/CSL pro-forma balance sheet (HK$ millions)


Exhibit 27: HKT/CSL pro-forma cash flow

(HK$ millions)


Balance sheet 2012 2013 2014E 2015E 2016E

Cash and equivalents 3,837 3,284 2,687 7,480 2,890 Net receivables 3,804 3,455 3,865 4,256 4,640 Inventory/stocks 1,062 1,095 1,105 1,112 1,118 Other current assets 3,749 4,423 4,423 4,423 4,423 Current assets 12,451 12,258 12,080 17,271 13,071 Gross PP&E/Fixed assets 47,599 50,655 53,747 56,860 59,942 Less accumulated depreciation (30,656) (33,446) (36,110) (38,830) (41,593) Net PP&E/Fixed assets 16,943 17,209 17,638 18,029 18,349 Gross intangibles 52,829 53,780 53,664 54,371 55,057 Accumulated amortization (7,202) (9,503) (12,554) (15,736) (19,015) Net intangibles 45,628 44,277 41,109 38,634 36,042 Total investments 1,163 2,371 4,258 6,298 9,958 Other long-term assets 648 683 683 683 683 Total assets 76,832 76,798 75,768 80,916 78,104 Accounts payable 2,779 2,762 2,880 2,971 3,042 Short-term debt and current portion of long-term debt 8,462 - - - - Other current liabilities 7,740 7,639 7,771 7,905 8,024 Current liabilities 18,981 10,401 10,650 10,875 11,066 Long-term debt 15,644 24,022 23,139 27,626 23,610 Deferred Tax Liabilities 1,831 1,811 1,888 1,995 2,118 Other long-term liabilities/creditors 2,972 3,190 3,190 3,190 3,190 Total long-term liabilities 20,447 29,023 28,217 32,811 28,918 Total liabilities 39,428 39,424 38,867 43,686 39,984

Common stock (includes par value, capital surplus, and treasury) 31,196 35,818 35,818 35,818 35,818 Retained earnings 6,005 1,336 808 1,065 1,875 Total common equity 37,201 37,154 36,626 36,883 37,693 Minority interest (balance sheet) 204 220 275 347 427 Total shareholders funds/equity 37,405 37,374 36,901 37,230 38,120

Total liabilities and equity 76,832 76,798 75,768 80,916 78,104

Cash flow statement 2012 2013 2014E 2015E 2016E

Pre Tax Income (ex Minority, preferred shares) 3,154 3,645 4,064 5,759 6,414 Income pre-preferred share dividends 3,154 3,645 4,064 5,759 6,414 Minority interest add-back 61 56 56 71 81 Depreciation and amortization add-back 6,408 6,936 7,170 6,495 6,620 Customer Acquisition Costs - Cash Spent (1,490) (1,408) (1,309) (1,257) (1,207) Net income from associates and jointly controlled entities 79 (50) - - - Cash Taxes Paid (203) (331) (390) (538) (621) (Increase)/decrease in working capital (237) (298) (303) (307) (318) Other operating cash flow items 2,329 391 1,188 1,364 1,203 Cash flow from operations 10,101 8,795 10,142 10,720 11,315 Capital expenditure (2,643) (2,956) (3,077) (3,103) (3,089) Investments (1,790) (1,999) (1,887) (2,039) (3,661) Other investment cash flow items (2,276) (43) (44) (52) (51) Cash flow from investing (6,709) (4,997) (5,008) (5,195) (6,801)

Dividends paid (common and preferred) (1,901) (3,476) (3,905) (4,103) (4,118) Share repurchase/issue (change In common stock) (39) - - - - Increase/(decrease) in short-term debt 3,617 (8,462) - - - Increase/(decrease) in long-term debt (3,992) 8,378 (883) 4,487 (4,016) Change in minority interest (41) - - - - Other financing cash flow items (714) (983) (1,057) (1,230) (1,084) Cash flow from financing (3,070) (4,429) (5,731) (732) (9,104)

Total cash flow 322 (632) (597) 4,793 (4,589)



HKT Trust: Summary financials

Profit model (HK$ mn) 12/13 12/14E 12/15E 12/16E Balance sheet (HK$ mn) 12/13 12/14E 12/15E 12/16E

Total revenue 22,832.0 23,557.3 24,296.8 24,952.4 Cash & equivalents 2,134.0 1,746.5 6,570.3 1,801.1

Cost of goods sold (10,117.0) (10,102.6) (10,413.7) (10,650.8) Accounts receivable 3,000.0 3,354.8 3,702.5 4,052.4

SG&A (4,814.0) (5,107.4) (5,168.0) (5,252.7) Inventory 1,018.0 1,018.0 1,018.0 1,018.0

R&D -- -- -- -- Other current assets 3,319.0 3,319.0 3,319.0 3,319.0

Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 9,471.0 9,438.4 14,609.8 10,190.5

EBITDA 7,901.0 8,347.3 8,715.1 9,048.9 Net PP&E 14,399.0 14,445.1 14,529.2 14,629.4

Depreciation & amortization (4,700.0) (4,604.9) (3,721.2) (3,666.8) Net intangibles 39,936.0 38,711.7 38,329.3 37,966.3

EBIT 3,201.0 3,742.3 4,993.9 5,382.1 Total investments 1,457.0 1,457.0 1,457.0 2,957.0

Interest income 36.0 32.0 26.2 98.6 Other long-term assets 556.0 556.0 556.0 556.0

Interest expense (869.0) (942.7) (1,116.1) (970.0) Total assets 65,819.0 64,608.2 69,481.3 66,299.2

Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0

Others 147.0 0.0 0.0 0.0 Accounts payable 1,803.0 1,803.0 1,803.0 1,803.0

Pretax profits 2,515.0 2,831.6 3,904.0 4,510.6 Short-term debt 0.0 0.0 0.0 0.0

Income tax (16.0) (467.2) (644.2) (744.3) Other current liabilities 5,354.0 5,485.5 5,619.7 5,738.6

Minorities (39.0) (36.9) (50.9) (58.8) Total current liabilities 7,157.0 7,288.5 7,422.7 7,541.6

Long-term debt 24,022.0 23,139.0 27,626.0 23,610.0

Net income pre-preferred dividends 2,460.0 2,327.5 3,209.0 3,707.6 Other long-term liabilities 3,835.0 3,912.2 4,018.7 4,141.7

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 27,857.0 27,051.2 31,644.7 27,751.7

Net income (pre-exceptionals) 2,460.0 2,327.5 3,209.0 3,707.6 Total liabilities 35,014.0 34,339.8 39,067.4 35,293.3

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 2,460.0 2,327.5 3,209.0 3,707.6 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 30,623.0 30,049.5 30,144.2 30,677.4

EPS (basic, pre-except) (HK$) 0.38 0.36 0.50 0.58 Minority interest 182.0 218.9 269.8 328.6

EPS (basic, post-except) (HK$) 0.38 0.36 0.50 0.58

EPS (diluted, post-except) (HK$) 0.38 0.36 0.50 0.58 Total liabilities & equity 65,819.0 64,608.2 69,481.3 66,299.2

DPS (HK$) 0.45 0.49 0.49 0.57

Dividend payout ratio (%) 117.9 133.8 98.9 98.7 BVPS (HK$) 4.77 4.68 4.70 4.78

Free cash flow yield (%) 7.1 8.3 8.7 9.3

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E

Sales growth 8.3 3.2 3.1 2.7 CROCI (%) 7.2 8.0 8.3 8.1

EBITDA growth 3.0 5.6 4.4 3.8 ROE (%) 8.0 7.7 10.7 12.2

EBIT growth 7.4 16.9 33.4 7.8 ROA (%) 3.7 3.6 4.8 5.5

Net income growth 52.8 (5.4) 37.9 15.5 ROACE (%) 6.3 6.0 8.1 8.6

EPS growth 52.8 (5.4) 37.9 15.5 Inventory days 35.9 36.8 35.7 34.9

Gross margin 55.7 57.1 57.1 57.3 Receivables days 51.4 49.2 53.0 56.7

EBITDA margin 34.6 35.4 35.9 36.3 Payable days 68.0 65.1 63.2 61.8

EBIT margin 14.0 15.9 20.6 21.6 Net debt/equity (%) 71.5 71.2 69.8 71.1

Interest cover - EBIT (X) 3.8 4.1 4.6 6.2

Cash flow statement (HK$ mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E

Net income pre-preferred dividends 2,460.0 2,327.5 3,209.0 3,707.6

D&A add-back 4,700.0 4,604.9 3,721.2 3,666.8 P/E (analyst) (X) 19.2 22.6 16.4 14.2

Minorities interests add-back 39.0 36.9 50.9 58.8 P/B (X) 1.5 1.8 1.7 1.7

Net (inc)/dec working capital (382.1) (354.8) (347.7) (349.9) EV/EBITDA (X) 8.8 8.9 8.5 8.3

Other operating cash flow (1,457.0) (158.0) 100.1 4.9 EV/GCI (X) 0.7 0.8 0.8 0.7

Cash flow from operations 5,359.9 6,456.6 6,733.4 7,088.2 Dividend yield (%) 6.1 5.9 6.0 6.9

Capital expenditures (1,980.0) (2,073.0) (2,113.8) (2,145.9)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 0.0 0.0 0.0 0.0

Others (42.6) (44.3) (52.4) (1,551.1)

Cash flow from investments (2,022.6) (2,117.3) (2,166.3) (3,697.0)

Dividends paid (common & pref) (2,731.0) (2,901.0) (3,114.3) (3,174.4)

Inc/(dec) in debt (84.0) (883.0) 4,487.0 (4,016.0)

Common stock issuance (repurchase) 0.0 0.0 0.0 0.0

Other financing cash flows (789.3) (942.7) (1,116.1) (970.0)

Cash flow from financing (3,604.3) (4,726.7) 256.6 (8,160.4)

Total cash flow (267.0) (387.5) 4,823.7 (4,769.2) Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



PCCW Limited: Summary financials


Total revenue 27,317.0 28,679.4 30,008.8 31,248.9 Cash & equivalents 5,509.0 5,049.0 2,958.1 5,294.4


SG&A (2,735.0) (2,686.0) (2,788.9) (2,593.3) Inventory 1,199.0 1,257.5 1,314.0 1,365.9


Other operating profit/(expense) (3,438.0) (3,376.4) (3,505.7) (3,259.8) Total current assets 17,579.0 17,348.3 15,478.9 18,018.5

EBITDA 8,033.0 8,852.0 9,311.3 10,397.6 Net PP&E 24,625.0 24,914.0 25,275.6 25,683.3


EBIT 3,462.0 4,607.6 5,210.8 6,137.9 Total investments 1,244.0 1,244.0 1,244.0 1,244.0

Interest income 80.0 96.8 88.7 52.0 Other long-term assets 3,446.0 3,446.0 3,446.0 3,446.0

Interest expense (1,111.0) (1,138.1) (1,021.8) (945.3) Total assets 53,937.0 53,161.2 50,991.8 53,149.8


Others 834.0 0.0 0.0 0.0 Accounts payable 2,118.0 2,221.3 2,321.2 2,412.8



Minorities (1,170.0) (880.8) (1,206.9) (1,391.4) Total current liabilities 10,658.0 10,550.1 10,949.1 11,315.5

Long-term debt 29,074.0 27,542.0 23,694.0 23,694.0

Net income pre-preferred dividends 1,885.0 2,097.0 2,365.0 2,987.8 Other long-term liabilities 5,572.0 5,572.0 5,572.0 5,572.0


Net income (pre-exceptionals) 1,885.0 2,097.0 2,365.0 2,987.8 Total liabilities 45,304.0 43,664.1 40,215.1 40,581.5


Net income 1,885.0 2,097.0 2,365.0 2,987.8 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) (HK$) 0.26 0.29 0.33 0.41 Minority interest (554.0) (268.2) 343.8 1,140.2



DPS (HK$) 0.20 0.22 0.25 0.32





EBITDA growth 3.2 10.2 5.2 11.7 ROE (%) 21.0 22.1 23.4 27.3

EBIT growth 2.9 33.1 13.1 17.8 ROA (%) 3.6 3.9 4.5 5.7

Net income growth 13.5 11.2 12.8 26.3 ROACE (%) 12.9 12.0 13.7 16.4

EPS growth 13.6 11.2 12.8 26.3 Inventory days 31.8 32.6 32.6 32.6






Net income pre-preferred dividends 1,885.0 2,097.0 2,365.0 2,987.8


Minorities interests add-back 1,170.0 880.8 1,206.9 1,391.4 P/B (X) 2.8 2.8 2.6 2.4

Net (inc)/dec working capital 163.0 (126.0) (121.7) (111.7) EV/EBITDA (X) 6.1 5.6 5.2 4.5

Other operating cash flow 1,835.0 926.8 1,321.0 1,220.0 EV/GCI (X) 0.7 0.6 0.6 0.6



Acquisitions (977.5) (958.7) (939.0) (915.6)


Others (36.6) (31.7) (36.9) (33.8)


Dividends paid (common & pref) (1,445.0) (1,518.7) (1,697.4) (1,992.5)

Inc/(dec) in debt 2,609.0 (1,532.0) (3,848.0) 0.0


Other financing cash flows (1,706.0) (1,733.1) (1,616.8) (1,540.3)

Cash flow from financing (542.0) (4,783.8) (7,162.2) (3,532.8)

Total cash flow 5,460.9 (460.0) (2,090.9) 2,336.3 Note: Last actual year may include reported and estimated data.




Hutchison Telecommunications Hong Kong Holdings: Summary fin


Total revenue 12,777.0 12,756.2 12,849.0 12,978.2 Cash & equivalents 209.0 633.0 1,090.0 75.3


SG&A (783.0) (815.5) (845.0) (868.9) Inventory 171.0 170.7 172.0 173.7

R&D -- -- -- -- Other current assets 0.0 0.0 0.0 0.0


EBITDA 2,674.0 2,639.3 2,657.1 2,695.7 Net PP&E 10,509.0 10,733.3 10,958.5 11,187.7


EBIT 1,339.0 1,278.1 1,273.5 1,289.3 Total investments 715.0 715.0 715.0 2,215.0

Interest income 21.0 24.1 73.0 125.8 Other long-term assets 1,479.0 1,479.0 1,479.0 1,479.0

Interest expense (181.0) (199.0) (199.0) (199.0) Total assets 21,005.0 21,354.0 21,755.1 22,194.4


Others (12.0) 0.0 0.0 0.0 Accounts payable 3,981.0 3,986.5 4,016.0 4,051.8


Income tax (77.0) (132.4) (172.1) (200.7) Other current liabilities 14.0 14.0 14.0 14.0

Minorities (174.0) (164.5) (171.1) (181.3) Total current liabilities 3,995.0 4,000.5 4,030.0 4,065.8

Long-term debt 4,571.0 4,571.0 4,571.0 4,571.0

Net income pre-preferred dividends 916.0 806.3 804.3 834.2 Other long-term liabilities 1,103.0 1,103.0 1,103.0 1,103.0


Net income (pre-exceptionals) 916.0 806.3 804.3 834.2 Total liabilities 9,669.0 9,674.5 9,704.0 9,739.8


Net income 916.0 806.3 804.3 834.2 Preferred shares 0.0 0.0 0.0 0.0





DPS (HK$) 0.14 0.13 0.13 0.13




Sales growth (17.8) (0.2) 0.7 1.0 CROCI (%) 9.0 8.2 7.8 7.4

EBITDA growth (11.1) (1.3) 0.7 1.5 ROE (%) 8.3 7.2 7.1 7.2

EBIT growth (22.4) (4.6) (0.4) 1.2 ROA (%) 4.4 3.8 3.7 3.8

Net income growth (24.6) (12.0) (0.2) 3.7 ROACE (%) 8.2 7.2 7.0 6.6

EPS growth (24.6) (12.0) (0.2) 3.7 Inventory days 17.2 15.8 15.9 16.0






Net income pre-preferred dividends 916.0 806.3 804.3 834.2


Minorities interests add-back 174.0 164.5 171.1 181.3 P/B (X) 1.6 1.1 1.1 1.1

Net (inc)/dec working capital (691.0) 8.8 14.7 15.0 EV/EBITDA (X) 8.3 6.3 6.2 6.5

Other operating cash flow 1.0 0.0 0.0 0.0 EV/GCI (X) 0.8 0.5 0.5 0.5



Acquisitions (343.0) 0.0 0.0 0.0


Others 6.0 0.0 0.0 (1,500.0)


Dividends paid (common & pref) (929.0) (627.3) (603.9) (611.9)

Inc/(dec) in debt 800.0 0.0 0.0 0.0


Other financing cash flows (8.0) 0.0 0.0 0.0

Cash flow from financing (137.0) (627.3) (603.9) (611.9)

Total cash flow 27.0 424.0 457.0 (1,014.7) Note: Last actual year may include reported and estimated data.




SmarTone: Summary financials


Total revenue 12,066.5 12,744.0 13,129.2 13,408.0 Cash & equivalents 655.1 371.3 316.4 321.5

Cost of goods sold (6,214.4) (7,156.7) (7,618.0) (7,863.5) Accounts receivable 398.9 421.3 434.0 443.2

SG&A (381.9) (341.5) (336.4) (338.3) Inventory 103.2 118.8 126.5 130.5



EBITDA 2,989.2 2,651.7 2,646.0 2,690.5 Net PP&E 3,185.6 3,551.7 3,665.8 3,673.5


EBIT 1,128.7 842.7 844.3 846.0 Total investments 0.0 0.0 0.0 0.0

Interest income 18.7 56.1 31.8 27.1 Other long-term assets 102.6 102.6 102.6 102.6

Interest expense (139.5) (188.5) (188.5) (243.0) Total assets 9,628.1 10,000.4 10,275.8 11,999.8


Others 7.5 7.5 7.5 7.5 Accounts payable 776.8 941.8 994.7 1,024.7

Pretax profits 1,015.4 717.8 695.1 637.6 Short-term debt 65.2 65.2 65.2 65.2


Minorities (5.2) 6.0 5.8 5.3 Total current liabilities 2,696.1 2,861.1 2,914.0 2,944.0

Long-term debt 2,529.6 2,529.6 2,529.6 4,029.6

Net income pre-preferred dividends 843.2 605.8 586.6 538.1 Other long-term liabilities 1,354.5 1,354.5 1,354.5 1,354.5


Net income (pre-exceptionals) 843.2 605.8 586.6 538.1 Total liabilities 6,580.2 6,745.2 6,798.1 8,328.1


Net income 843.2 605.8 586.6 538.1 Preferred shares 0.0 0.0 0.0 0.0





DPS (HK$) 0.66 0.35 0.34 0.31





EBITDA growth (0.1) (11.3) (0.2) 1.7 ROE (%) 27.7 19.6 17.7 15.3

EBIT growth (17.4) (25.3) 0.2 0.2 ROA (%) 9.9 6.2 5.8 4.8

Net income growth (17.6) (28.2) (3.2) (8.3) ROACE (%) 27.6 13.6 12.7 10.8

EPS growth (18.1) (28.4) (3.2) (8.3) Inventory days 10.5 5.7 5.9 6.0






Net income pre-preferred dividends 843.2 605.8 586.6 538.1


Minorities interests add-back 5.2 (6.0) (5.8) (5.3) P/B (X) 5.0 3.0 2.8 2.6

Net (inc)/dec working capital (20.8) 127.0 32.5 16.8 EV/EBITDA (X) 5.7 4.4 4.5 4.9

Other operating cash flow (30.1) 353.5 (7.5) (7.5) EV/GCI (X) 1.2 0.7 0.6 0.6


Capital expenditures (1,255.3) (991.4) (759.7) (654.8)

Acquisitions 0.0 0.0 0.0 0.0


Others (3,583.7) (1,789.2) (1,344.4) (2,887.7)


Dividends paid (common & pref) (997.7) (392.5) (358.3) (338.9)

Inc/(dec) in debt 2,528.6 0.0 0.0 1,500.0


Other financing cash flows (6.5) 0.0 0.0 0.0

Cash flow from financing 1,530.9 (392.5) (358.3) 1,161.1

Total cash flow (622.9) (283.8) (54.8) 5.1 Note: Last actual year may include reported and estimated data.




Disclosure Appendix

Reg AC

We, Piyush Mubayi and Tina Hou, 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.

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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)

Piyush Mubayi: Asia Pacific Media, Asia Pacific Telecoms.

Asia Pacific Media: Astro Malaysia Holdings Berhad, Autohome Inc, Baidu.com, Inc., CJ E&M Corporation, Changyou.com, Ctrip.com International,

Daum Communications, Dish TV India, NAVER Corporation, NCSOFT, New Oriental Education & Technology Group Inc. (ADR), Qihoo 360

Technology Co. Ltd., Qunar.com, SINA Corporation, Sohu.com, SouFun Holdings Limited, Sun TV Network, TAL Education Group, Television

Broadcasts, Tencent Holdings, Vipshop Holdings Limited, Xueda Education Group, Youku Tudou Inc., Zee Entertainment Enterprises.

Asia Pacific Telecoms: Advanced Info Service PCL, Axiata Group Bhd, Bharti Airtel, Bharti Infratel Ltd, Chunghwa Telecom, Digi.com, Far EasTone,

Globe Telecom, HKT Trust, Hutchison Telecommunications Hong Kong Holdings, Idea Cellular, Indosat, Intouch Group, KT Corp, KT Corp (ADR), LG

UPlus, M1 Ltd, Maxis Berhad, PCCW Limited, PT XL Axiata, Philippine Long Distance, Philippine Long Distance (ADR), Reliance Communications, SK

Telecom, SK Telecom (ADR), Singapore Telecommunications, SmarTone, StarHub, Taiwan Mobile, Tata Communications, Telekom Malaysia,

Telekomunikasi Indonesia, Total Access Communications, Tower Bersama Infrastructure Tbk PT, True Corp.

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: SmarTone (HK$9.00)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: HKT Trust (HK$8.30),

Hutchison Telecommunications Hong Kong Holdings (HK$2.61), PCCW Limited (HK$3.78) and SmarTone (HK$9.00)

Goldman Sachs had an investment banking services client relationship during the past 12 months with: HKT Trust (HK$8.30), Hutchison

Telecommunications Hong Kong Holdings (HK$2.61), PCCW Limited (HK$3.78) and SmarTone (HK$9.00)

Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: HKT Trust (HK$8.30) and

PCCW Limited (HK$3.78)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: HKT Trust (HK$8.30) and PCCW Limited (HK$3.78)

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

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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)

Regulatory disclosures

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HKT Trust (6823.HK)

7

6.35

6.055.95

4.00

5.00

6.00

7.00

8.00

9.00

16,000

18,000

20,000

22,000

24,000

26,000

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 Piyush Mubayi,as of Jan 2, 2012

Not covered by current analyst

Hang Seng Index

Inde

x P

rice

Sto

ck P

rice Jan 2 Feb 4

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

PCCW Limited (0008.HK)

3.2

2.92

2.872.82

3.5

2.00

2.50

3.00

3.50

4.00

4.50

5.00

16,000

18,000

20,000

22,000

24,000

26,000





Rating

Price target


Covered by Piyush Mubayi


Hang Seng Index

Inde

x P

rice

Sto

ck P

rice Jun 3 Jan 2

N NRF


2011 2012 2013

Hutchison Telecommunications Hong Kong Holdings (0215.HK)

2.9

2.7

2.5

2.00

2.50

3.00

3.50

4.00

4.50

5.00

7,000

8,000

9,000

10,000

11,000

12,000

13,000





Rating

Price target




MSCI Hong Kong

Inde

x P

rice

Sto

ck P

rice

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

SmarTone (0315.HK)

11

13.510.9

5.00

7.00

9.00

11.00

13.00

15.00

17.00

19.00

7,000

8,000

9,000

10,000

11,000

12,000

13,000





Rating

Price target




Apr 3, 2011 to S from N

MSCI Hong Kong

Inde

x P

rice

Sto

ck P

rice Jun 21

NF


2011 2012 2013



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Hong Kong: Telecom Servicespg.jrj.com.cn/acc/Res/CN_RES/INDUS/2014/3/11/59109de8-dc0b-417… · Hong Kong: Telecom Services Equity Research CSL acquisition FCF accretive: Prefer HKT