Sector

Rating

Price targetHK$1.06

52wk H-L (HK$) 1.81-1.02

Market cap (HK$) 2,618.1.5m

Shrs outstanding 2,469.9m

Main ownership

12/16A 12/17A 12/18E 12/19E

EPS(HKD) 0.06 0.01 0.01 0.02

P/B(x) 0.8 0.7 0.6 0.5

P/E(x) 17.2 95.6 87.3 55.0

EV/EBITDA 10.2 59.5 50.6 36.5

Div. yield(%) 0.8 n.a n.a n.a

ROE(%) 4.3% 0.8% 0.7% 0.6%

ROA(%) 1.6% 0.3% 0.3% 0.4%Sources: Company data, Bloomberg, Anli research

Sources: Bloomberg as of 28 Mar, 2018

Fig.1: Valuation comps

P/B(x)

2017A 2018E 2019E 2017A

2342 HK COMBA TELECOM SY 334 1.06 95.6 87.3 55.0 0.7 0.3 0.8 -1.9 -17.8 -29.3763 HK ZTE-H 18,648 25.55 18.7 16.8 14.4 2.7 3.6 15.7 -1.9 71.0 -12.9947 HK MOBI DEVELOPMENT 112 1.07 n.a 10.7 9.5 0.6 -2.1 -4.0 -2.7 -22.5 -28.21155 HK CENTRON TELECOM 31 0.29 1.4 n.a n.a 0.1 4.5 7.4 -13.4 -50.0 -38.3552 HK CHINA COMM SER-H 1,294 4.47 9.1 8.3 7.5 0.9 4.1 9.9 3.5 -11.0 -14.7Average 31.2 30.8 21.6 1.0 2.1 6.0 n.a n.a n.a

002792 CH TONGYU COMMUNI-A 967 26.95 28.1 35.9 28.1 3.3 9.3 14.3 5.3 -33.5 -24.2300597 CH JILIN JLU COMMUN 602 15.78 50.9 n.a n.a 7.8 11.0 17.3 6.5 -45.6 -24.4002194 CH WUHAN FING -A 828 9.22 n.a n.a n.a 3.2 -21.1 -27.6 4.3 -19.0 -10.7300050 CH DINGLI COMMUNI-A 767 8.60 39.9 26.9 20.0 1.7 4.1 5.1 9.1 -26.5 9.3300310 CH GUANGDONG EAST-A 1,520 10.69 46.6 38.0 27.7 2.7 5.4 6.7 12.8 -26.7 -7.8Average 41.4 33.6 25.3 3.7 1.7 3.2 n.a n.a n.a

CSCO US CISCO SYSTEMS 205,612 42.68 20.2 16.4 14.9 4.0 -1.1 -2.5 0.6 25.5 11.4JNPR US JUNIPER NETWORKS 8,336 24.25 14.7 13.5 11.3 1.9 3.1 6.4 0.5 -12.7 -14.9IBM US IBM 139,935 151.91 11.5 11.0 10.7 8.0 4.7 32.1 2.0 -13.0 -1.0Average 15.5 13.6 12.3 4.6 2.2 12.0 n.a n.a n.a

Source: Bloomberg as of 28 Mar 2018, Anli research

March 28, 2018

Comba Telecom (2342.HK); Wireless & growing data capacity demands by

Chinese carriers; BUY

Key data

TMT

BUY

HK$1.5

TUNG LING FOK (32.79%)

Kimmy Tong/+852 23235118/kimmytong@anli.com.hk

Price performance

Research Analyst

Key indicator forecast

Price (HK$/shr) as of 28 Mar, 2018

Px % chg.

YTDROA (%) ROE (%)

P/E(x)

A share TMT

International TMT

Px % chg.

WTD

Px % chg.

1 yr

H share TMT

Ticker Company name Mkt Cap (US$m) Last Price

FY2017 results hit bottom, but small cells solution will be the next growth driver. Combaposted a negative net profit growth in FY2017 at -82% YoY to HK$27.4m. This was mainly due tolower 4G wireless network demands from Chinese carriers as 4G network build-outs are nearcompletion. Further, we saw a significant drop in revenue contribution from antennas & subsystemsand the service segments at -4.1% and -14.9% YoY, respectively. However, we are surprised by thesurge in the small cells solution segment, which is included in the network systems business, makinga third of the segment’s revenue. We predict this to be the next growth driver for Comba given 5Gmobile network upgrades, and cost cutting measures in small cells for better network capacity andservice coverage extensions. Management foresees small cells solution to grow at least 50% inrevenue for FY2018E.

Management predicts revenue contribution from Chinese carriers will bottom out in FY2018E.China Unicom carried out a mixed-ownership reform to increase network capacity - though the plandelayed China Unicom’s business, cutting its CAPEX to around 46% in 2017, which dragged ChinaUnicom’s contribution to Comba. However, China Unicom plans to increase CAPEX this year by 19%to RMB50bn resulting in a large cutback in network investments. Thus, we may see a turnaround andmay enhance Comba’s profitability.

R&D expenses increase as 5G mobile network develops. Comba’s latest 5G developmentupdates include product enhancement, innovative solutions, network trials, and partaking in ChinaMobile’s 5G Joint Innovation Centre. We think Comba takes on a defensive stance in China’sTelecom industry as 5G innovation & development rises.

Operating business revenue will double in upcoming years. In FY2016, Comba acquired a 51%interest of ETL for a consideration of US$91.8m, a top three telecom operator in Laos, covering 17provinces including the capital of Vientiane. ETL has a full license with 1,200 BTS and 1msubscribers. ETL’s revenue contributed 1.7% for Comba’s operating business, and is expected togrow given US$110m capital input for 4G LTE network development. This development is expectedto be completed in 1H19, and revenue contribution will show by FY2019E. Since the capital isfinanced by Laos ETL, Comba will be the guarantor and no borrowings will be needed.

We reiterate our “BUY” rating with a TP of HK$1.5/shr, implying a 41.5% upside. Despitedecreased profits in FY2017, we believe Comba will stabilize, given the following moves: 1) 19%increase in China Unicom’s CAPEX post investment cuts due to a mixed-ownership reform; 2)Ramping up of ETL, which will double Comba’s operating business in upcoming years; 3) Demandincrease of small cells solution in China & cost cutting measures; 4) 5G concept stock. Key risks:High CAPEX from Laos’ network expansion; Currency risk; Delayed tender bid schedules for wirelessnetwork equipment from China’s telecom operators; Longer than expected transitional phase to 5Gnetwork solutions.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

0

5000

10000

15000

20000

25000

30000

35000

HK$/shrPtsHangseng Index (LHS)

Comba (2342 HK) (RHS)

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Source: Company data, Anli research estimates Source: Company data, Anli research estimates

Source: Company data, Anli research Source: Company data, Anli research

Source: Company data, Anli research Source: Company data, Anli research

Source: Company data, Anli research

Fig.4: Revenue contribution from Chinese carriers & enterprise

from "China Tower" decreased significantly

Fig.5: Antennas & subsystems revenue contribution decreased

given lower demands

Fig.8: Comba increased bank borrowings, reaching 11% of net

gearing ratio

Fig.6: China's 4G network near completion dragged down

Comba's revenue growth

Fig.7: R&D expenses is ticking up in preparation for China's

5G development

March 28, 2018

Fig.2: We stay rather conservative due to the volatility of

wireless network CAPEX

Fig.3: Margins plunged due to CAPEX reduction in 4G

operators

2,616 3,092

2,502 2,397 2,638 2,389 2,174

1,848

1,142 1,004 885 1,005

337 286 393 221

93

-

1,000

2,000

3,000

4,000

FY14 FY15 FY16 FY17

HK$mRevenue breakdown by business

Antennas & subsystems Services Network system Others Operator business

2.9% 3.4% 3.8%6.0%

7.6% 7.0% 9.1%9.2%

11.7%12.4% 11.9%

10.3%

0%

20%

40%

60%

80%

100%

FY14 FY15 FY16 FY17

Cost structure breakdown

R&D costs Selling and distribution expenses

Administrative expenses Finance costs

Taxation charge Other expenses

1558.7 1558.11651

1370.8 1366.8

1582.4

FY12 FY13 FY14 FY15 FY16 FY17

Company bank borrowings

Bank borrowings(HK$m)

48%

31% 29% 30%

14%

26% 26%

15%17%

23% 20%23%20%

17% 18%

24%

1%3%

7% 7%

0% 0% 0% 2%0%

20%

40%

60%

FY14 FY15 FY16 FY17

Revenue breakdown by clients

CM CU CT International customers Enterprise ETL

85.1% 74.3% 64.6%

5% 6%10%

6% 4% 5%

0%

20%

40%

60%

80%

100%

FY15 FY16 FY17

Revenue breakdown by region

PRC Asia Pacific Americas EU Middle East Others

6,733.2 6,770.9

5,954.3 5,563.7

6,013.9

6,735.5

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY14 FY15 FY16 FY17 FY18E FY19E

HK$mCompany revenue

26.1%28.3% 29.0%

25.8%24.1%

25.5%

3.0%4.9% 4.2%

0.9% 1.1% 1.4%2.2% 3.1% 2.6%

0.5% 0.5%0.7%

0%

5%

10%

15%

20%

25%

30%

35%

FY14 FY15 FY16 FY17 FY18E FY19E

Margins analysis

Gross margin(%) Operating margin(%) Net margin(%)

2

FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E

5,954.3 5563.7 6,013.9 6,735.5 PP&E 538.0 1106.9 1,217.6 1,339.3

(4,225.9) (4,126.7) (4,564.0) (5,020.4) Goodwill & intangibles assets 237.9 1101.5 1,186.4 1,279.7

1,728.4 1,437.0 1,449.9 1,715.1 Others 691.9 368.9 426.1 466.9

173.7 123.0 135.3 148.9 Non-current asset 1,467.8 2577.3 2,830.1 3,085.9

(227.6) (331.3) (347.9) (417.5) Inventories & trade receivables 5,200.4 5883.1 6,471.3 7,118.4

(1,253.7) (1,086.2) (1,075.3) (1,239.8) Others 688.3 1020.4 919.6 1011.6

Other expenses (119.1) (41.5) (41.0) (49.2) Restricted bank deposits 178.2 234.8 281.7 309.9

Share of results of JV (0.1) (0.9) - - Cash 1,420.2 1176.1 1,058.5 1,164.4

Share of results of an associate (2.3) (1.5) (1.6) (0.2) Current asset 7,487.1 8314.4 8,731.1 9,604.3

Operating profit 299.2 98.6 119.4 157.3 Total assets 8,954.9 10,891.7 11,561.2 12,690.2

Finance cost (47.0) (47.9) (54.1) (64.9) Trade & other payables 3,999.1 4745.5 4,557.2 5,012.9

PBT 252.2 50.7 65.3 92.4 Current tax payable 11.2 - - -

Income tax (99.7) (29.2) (35.0) (44.3) Short-term loans 693.7 1088.5 1,197.3 1,317.1

Minority interest (0.1) 5.7 (0.2) (0.4) Others 70.5 69.9 83.9 83.9

Net Profit 152.4 27.2 30.1 47.7 Current liabilities 4,774.5 5903.9 5,838.4 6,413.9

Long-term loans 673.2 493.9 543.3 597.6

FY16 FY17 FY18E FY19E Deferred tax liabilities 14.2 162.5 178.7 178.7

YoY growth Total liabilities 5,461.9 6,560.3 6,560.4 7,190.2

Revenue -12.1% -6.6% 8.1% 12.0% Total equity 3,493.0 4,331.4 5,000.8 5,500.0

Gross profit -9.7% -16.9% 0.9% 18.3% Minority interest (55.5) (565.2) (565.2) (565.2)

Operating profit -23.3% -67.1% 21.1% 31.7% Shareholders capital 3,437.5 3,766.2 4,435.6 4,934.8

Net profit -28.5% -82.1% 10.7% 58.5%

Margin analysis Cash flow (HK$m) FY16 FY17 FY18E FY19E

Gross margin(%) 29.0% 25.8% 24.1% 25.5% Profit before tax 252.2 50.7 65.3 92.4

Operating margin(%) 5.0% 1.8% 2.0% 2.3% Depreciation 76.6 108.3 119.1 131.0

Net margin(%) 2.6% 0.5% 0.5% 0.7% Amortization 65.7 13.8 15.2 16.7

COGS/sales(%) 71.0% 74.2% 75.9% 74.5% Interest income (7.9) (11.7) (12.9) (14.1)

SG&A/sales(%) 21.1% 19.5% 17.9% 18.4% Working capital changes 25.6 162.4 243.6 267.9

R&D/sales(%) 3.8% 6.0% 5.8% 6.2% Others 127.1 27.7 (32.1) (40.7)

CFO 539.3 351.2 398.2 453.2

Ratios FY16 FY17 FY18E FY19E Income tax paid (127.6) (29.2) (32.1) (32.1)

Net gearing(%) net cash 11.0% 15.0% 15.0% NCFO 411.7 322.0 366.1 421.1

Current ratio(x) 1.6 1.4 1.5 1.5 CAPEX (52.5) (63.0) (75.5) (83.1)

ROE(%) 4.3% 0.8% 0.7% 0.6% Others (483.3) (6.4) (35.2) (38.7)

ROA(%) 1.6% 0.3% 0.3% 0.4% CFI (535.8) (69.4) (110.7) (121.8)

Inventories days 133 120 120 132 Dividends paid (70.2) (33.0) - -

Receivable days 239 274 302 332 Increase in debt 9.5 475.4 648.1 712.9

Payable days 266 291 271 298 Others (46.7) (47.9) (54.1) (64.9)

Source: Company data, Anli research estimates CFF (107.4) 394.5 594.0 648.0

Net change of cash (231.5) 647.1 849.4 947.2

FCF 359.2 259.0 290.6 338.0

Company description

March 28, 2018

Balance Sheet (HK$m)

Comba Telecom: Annual financial summary

Profit and Loss (HK$m)

Revenue

SG&A expenses

Research and development costs

Earning growth drivers

COGS

Gross profit

Other income and gains

Comba Telecom (2342.HK) primarily serves as a wireless solutions provider to its customers in the PRC through its national sales and servicesnetwork. The company also offers antennas and subsystems, wireless access, and wireless enhancement to customer worldwide, and has its ownR&D facilities, manufacturing base, and sales and services teams.

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March 28, 2018

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