HKT Trust:Above expectations,Buy mobile ARPU recovery at 7.3%div.yield

What surprised us

2H EBITDA (+8% yoy) / EPS (+18% yoy) / DPS (+23% yoy) were above ourestimates. The beat was led by strong mobile service revenue (+10% yoy,vs. -1% yoy in 1H) and a rapid capex decline (-21% yoy) thanks to thecompleted network integration. Mobile: Postpaid ARPU sequentiallyrecovered to HK$233from a sequential drop in 1H (HK$228). Managementattributed this to increased adoption of high-end tariffs (e.g. data top-upplans; premium brand 1010). The CEO said the ARPU growth rate is notslowing, although some headwinds remain in low-end segments. Postpaidsubs net add also showed a recovery (+24K), after continued net lossessince the merger with CSL in 2014. Mobile service EBITDA marginexpanded to 61% from 59% a year ago. Broadband: Broadband Networkrevenue maintained steady growth (+3.4% yoy, vs. +3.3% yoy in 1H) onfiber upgrades. Management did not comment on HKBN’s price hike plansthis year (reported by Hong Kong Economic Journal, Jan. 12). Capex: 2Hmobile capex fell 43% yoy, marking 9.6% of mobile service revenue, vs. 14to 19% during the network integration period in the last 2years. Accordingto management, such capex efficiency is enabled by its robust fixednetwork. Dividend: The board proposed 2H DPS of 34.76HKc (61.85HKcfor FY16). Ex-dividend date is March 24.

What to do with the stock

Buy on attractive dividend yield (7.3% for 2017E) and improvingmobile ARPU growth profile. We expect mobile postpaid ARPU growthrate to accelerate (+3.0% yoy in 2H17E, vs. +1.3% yoy in 2H16on exitARPU), driven by rising adoption of high-end tariffs and the enhancedmarketing efficiency post the network integration. We raise 2017E-20E EPSby 1to 4% and DPS by 1to 7%, reflecting the results. Our DCF-based 12mTP remains HK$13.00. Key risks: Lower ARPU growth; higher interest rates.