What surprised us.
CKH’s FY16 net profit came in at HK$33.3bn. Excluding its share in Husky’sasset disposal gain and HTA loss, core net profit fell 8% yoy to HK$30bn, inline with our estimate dragged by forex. In local currency terms, EBITDAgrew 2% yoy (vs. -2% in 1H16), with improved results from ports (+2% vs.
-1% in 1H16 on stabilized volume in 2H) and retail (+3% vs. +2% in 1H16with accelerated store adds +8% and steady SSS +1.0%). H3G performedwell, with EBITDA +15% yoy (vs. +12% in 1H16), helped by 2-monthcontribution from the Wind Tre JV in Italy and steady 4-8% growth in othermarkets, except UK where AMPU fell in 2H16. CKH has declared a totalDPS of HK$2.68 (+5%) implying steady 31% payout. With strong FCF (+20%to HK$24bn) and 39% net debt in GBP benefiting from its depreciation, netdebt to net capital improved to 20.7% (vs. 23.3% at end-1H16).
Key takeaways: (1) Aside from contribution from existing operations (weestimate HK$4.5bn attributable profit to CKH in FY16PF), CKH sees furtherupside from Wind Tre JV by targeting to realize 90% of the �700mn annualcost synergy by 2019 and �800mn cash inflow from sale of spectrum plusroaming agreements over next 5 years. This should more than make up forpotential loss to Iliad after its entry by end-2017. (2) CKH attributes furtherdeterioration in Watson China’s SSS (-10.1% in FY16, vs. -8.5% in 1H16) topoor performance of 1,400 mature stores (out of 2,929 in total). Averagenew store payback remains attractive at 9 months. After implementingstrategic programs on store revitalization, they see early signs of success,with SSS decline narrowed to -5% in Jan-Feb.
What to do with the stock.
On results, we raise our FY17-19E EPS by 1-2% and 12m NAV-based TP toHK$119.3 (from HK$118). With less drag from forex and oil price, wemodel 25/11% core EPS growth for CKH in FY17/18E helped by the telcomerger and see upside to consensus estimates. Reiterate CL-Buy. Keyrisks: weaker EUR/GBP; severe macro downturn and political uncertainties.
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