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Dr.Peng Group:Feeling the after-effects of a growth binge;initiating with Sell

发布时间:2016-11-17    研究机构:德意志银行

Squeezed by telco operatorsWhile Dr. Peng has seen strong growth in the past 4 years via acquisitions anda market share grab in the fixed broadband market, we think its competitiveadvantages are quickly being eroded as major telcos step up their broadbandand IPTV offerings. The company is offsetting this by accelerating itsbroadband roll-out, a move that is resulting in a sharp decline in its ARPU and asignificant D&A headwind in the next 3 years. We forecast the company todeliver EPS growth of 9% p.a. on relatively optimistic assumptions but remain28% below the consensus forecast in FY18. Trading on ~40x FY16E NPAT and~10x EV/EBITDA, we see no reason to be in the stock. Sell.

Competitive advantages quickly being erodedChina Mobile’s aggression in the fixed broadband market is forcing the otheroperators to lift their game – China Telecom and China Unicom are offeringfree speed upgrades, improving their customer service and accelerating theirIPTV sign-ups. With 70% of the nation now on fiber (up from 34% 2 years ago),Dr. Peng’s fiber broadband plans are no longer a differentiating proposition.

We estimate the company had to drop its prices to as low as RMB40/mth fornew sign-ups, which could see its ARPU decline 18% in FY16 and 14% inFY17. Despite subscribers growing 34% YoY, net profit in the first 9 months of2016 grew only 2%, a significant deceleration from the 30%+ in prior years.

D&A increase could be a significant headwindDr. Peng accelerated its fiber roll-out across the nation, which saw its capexrise to 47% of revenue in FY15, a level higher than those for most global telcos.

We think such a spending level is excessive as Dr. Peng has yet to generate anEBITDA higher than capex in any of the past 4 years. With the companyneeding to generate ~11% p.a. EBITDA growth just to offset the D&Aheadwind and consensus forecasting 22% p.a. NPAT growth in the next 3years, we see significant downside risk to consensus forecasts.

Valuation and risksWe value Dr. Peng based on the mid-point of our peer-based valuation andDCF (WACC 7.7%; TGR 1%). Risks relate to market share, tax rate, regulation,and margins.

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