SmarTone Telecommunications:Despite earnings drop,dividend news should buffer share price volatility

Financial highlights. For 1HFY16 (year end is June 30), SmarTone reportedtotal revenue of HK$10.2bn (+17.9% y-y; 1HFY15: +32.8% y-y), EBITDA ofHK$1.4bn (-6.3% y-y; 1HFY15: +9.0% y-y) and net profit of HK$403m (-13.5%y-y; 1HFY15: +49.8% y-y). Recall, SmarTone raised its payout ratio to 75%(from 60%) in 2HFY15. As a result, the interim DPS is 27 HK cents (1HFY15:27 HK cents).

Positive: SmarTone announced FY16 DPS will stay at 60 HK cents (sameas FY15), which we believe should buffer any share price volatility. In theresults announcement, the company indicated, barring unforeseencircumstances, FY16 DPS will remain unchanged from that in FY15. Webelieve that even through 1HFY16 financial results may not be spectacular,the assurance of a flat DPS should serve as a buffer against any share pricevolatility.

Negative: Launch of iPhone 6S (in Sept 2015) did not help hardwaresales in a similar way to the iPhone 6 (Sept 2014). When the iPhone 6 waslaunched in Sept 2014 (1HFY15), we note hardware sales jumped 58.4% y-y.

However, we believe the iPhone 6S was not extremely popular withconsumers, therefore hardware sales for 1HFY16 grew only 25.7% y-y.

Mixed: No update on appointment of a permanent CEO. At the investorconference call, the company did not shed any additional light on the searchfor a permanent CEO. In our view, the overhang created by the vacant CEOposition remains.