China’s economic growth sank to 6.5% in 3Q 2018, the slowest pace since 2009. Stock market has plunged by 23.28% in Dec comparing to the beginning of the year, triggered by market bubble burst, fears of decelerating, debt expansion and currency depreciation followed by inflation which incentives capital flight. At the beginning of the year, China has announced a further tax cut and budget deficit of fiscal loosening, reduction of interest rate and reserve requirements of monetary loosening to stimulate consuming and economy. Tariffs increasing on exports imposed by the trade war shows a slower trend on exports.
China’s economic reform maintains services industry stronger than manufactory. Telecom sector is considered solid and defensive by its conservative nature during volatility. The current bear market implies a further monetary loosening by reducing interest rate and reserve requirements to decelerate economy. Weak exports due to the potential tariff increase by the trade war and currency depreciation, budget deficit followed by surplus indicates the future space for fiscal loosening. Capex cycle 2019 starts with 5G with a cost of $220b. As the leading carrier with 5G corporation, CHU’s 5G standards will incorporate with domestic equipment and EV tech supporting future exports. As the world’s second largest economy, future market appears to be more China and tech-focused. China stocks had a substantial gain in 2019 with nearly 18% year to date.
As the leading mobile carrier in China, CHU had strong performance with revenue (43.59b) grew by 9.12% yearly, more than double the pace of the industry. EBITDA and free cash flow both grew by 5%, EPS increased about 40% in 4Q 2018. CHU is expected a 60.5% earnings growth for the current year. P/B ratio 0.79x, supported by PEG ratio of 0.27 indicates its undervalued and the potential growth. With the sector growth outperforming the overall economy, we recommend buy CHU.
Our catalysts for recommendation include the outperformance of Telecom sector relative to the overall recovery of the economy, strengthened by the government supports in financial system from monetary and fiscal loose. Risks are underperformance of the sector and the economy from expectation, monetary or fiscal tight. However, strong growth potential in Tele sector and its solid nature, as well as the fiscal and monetary support imposed by the recent surplus and the trade war all creating more upside catalysts than downside risks.
[CHU USD 11.71] [Market Cap 36.69 USDbn] [Telecom]
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.