Local investors seeking safe haven stocks after a miserable 2022 would do well to place their bets on China's three state-owned telecom giants whose fortunes are expected to shine in the Year of the Rabbit.
After ending the year more than 15 percent lower, Hong Kong stocks have got off to a rousing start this month with the Hang Seng Index up by more than 13 percent and headed toward the 23,000 mark.
But prospects for the benchmark index remain uncertain amid the threat of a global recession and fears that China's economy won't fully recover anytime soon.
Still, there are safe spots to be found on the market for those who want stable returns, such as mainland telecom operators.
They have a solid business model, less external exposure, large cash flows and high dividend yields, making them an attractive proposition, according to analysts and investment bankers.
And with communications now an indispensable part in our daily lives, their services will always be in demand, much like consumer staples.
CHINA MOBILE
As dividend stocks, China Mobile (0941), China Unicom (0762) and China Telecom (0728) offer yields of between 5 and 9 percent.
China Mobile is the mainland's biggest telecom provider and its annual dividend payout and dividend yield are forecast at HK$4.63 per share and 8.28 percent respectively by Morningstar.
Furthermore, the state-owned operator plans to raise its distributed profit to 70 percent of its net profit in three years while its dividend returns have been growing in recent years, with the board introducing interim dividends in 2021 to attract more investors.
The company's finances are in good shape with profit margins remaining above 13 percent and the debt-to-equity ratio further reduced to 4.63 percent.
In addition, it has cash reserves of over HK$422 billion with the ability to make mergers and acquisitions, and increase dividends.
Morgan Stanley sees China Mobile's estimated earnings per share gradually increasing at HK$5.91, HK$6.39 and HK$6.64 for 2022, 2023 and 2024 respectively.
And with Hong Kong's bourse recovering on the back of China's exit from zero-Covid and expectations of a rebound in consumption, China Mobile has risen by 20 percent to HK$56.7 from last year's low of HK$47.25 on October 31. Also, in early January, China Mobile recorded net inflows for five consecutive days via Stock Connect worth HK$2.62 billion.
China International Capital Corporation (3908) rates the stock as outperforming with a target price of HK$75.
CHINA UNICOM
State-owned China Unicom delivered earnings per share of 47 HK cents for fiscal 2021 and a dividend of 25.6 cents per share with a payout ratio of 46 percent while its interim dividend last year jumped by over 30 percent to 19.1 HK cents from 14.4 HK cents in the same period in 2021.
Morningstar estimates the operator's annual dividend payout at 30 HK cents.
The company's positive financial condition is also strong support for its stock. China Unicom expects the year-on-year growth rate of its net profit for 2022 will reach a three-year high, while the depreciation expenses of fixed assets will continue to be reduced in the future.
Many investment banks have given it a buy rating with an average 12-month target price of HK$8.93.
Besides, its shares have soared by nearly 30 percent to HK$5.59 in the past two months amid reopening sentiment.
CHINA TELECOM
State-owned China Telecom's declared an interim dividend for the first time last year of 12 HK cents per share with a dividend payout ratio of about 60 percent, and promised to raise the ratio to 70 percent this year.
Its annual dividend payout and dividend yield are forecast at 34 HK cents per share and 9.03 percent.
Furthermore, its business outlook is positive.
Late last year, the operator used around 5.6 billion yuan (HK6.4 billion) of idle funds for investments, reflecting its healthy cash flow and strong financing ability, and also launched 5G services in Macau after winning an eight-year 5G license.
China Telecom is also active in cloud computing services, which is crucial to the development of China's digital economy. Its cloud service platform ranks third in China and accounts for an 11 percent share in a market that is expected to be worth 1 trillion yuan by 2025.
CICC expects China Telecom's cloud service revenue could jump by several times this year.
Besides, Singapore's sovereign wealth fund GIC has increased its holdings in China Telecom over the past two years to 15.04 percent.
Goldman Sachs maintains a buy rating on China Telecom and has raised its target price to HK$4.2 from HK$4, believing that China's push towards national cloud computing and data trading will be key to the stock's growth.
The investment bank points out that its shares performed well last year, climbing over 30 percent year-on-year and expects its dividend yield will be 8 percent this year.
Since November 1, China Telecom's stock has risen by about 36 percent to HK$3.76.
TECH TRUST
Some analysts, however, remain cautious.
Conita Hung Lai-ping of Tiger Faith Asset Management points out that the three telecoms recovered slower than other sectors when the HSI significantly rebounded more than 6,000 points from its lowest level in October last year.
The investment strategy director feels their traditional business models are not attractive enough to investors nowadays and says further upward movement mainly hinges on their development trends amid China's surging digital economy.
And this could be why these telecom firms are joining hands with China's private tech giants.
Last November, China Mobile's subsidiary Shanghai Mobile signed an agreement with JD.com's (9618) fintech unit JD Technology to help it digitize its local government business.
China Unicom, meanwhile, expects its revenue from cloud services to surge 1.4 times and exceed 30 billion yuan (HK$33.53 billion) for last year, and it has renewed its cooperation agreements with Tencent (0700), JD.com, Alibaba (9988) and Baidu (9888).
Moreover, China Mobile and Tencent last year got the green light to set up a joint-venture focusing on internet data centers, content delivery networks and edge computing, using augmented reality and machine learning to analyze bulk data.
Overall, Hung believes China Mobile and China Telecom are top choices for retail investors looking for stable returns, as the former has the largest estimated dividend yield among the three rivals while the latter's business is healthier.
While China Unicom has surged nearly 30 percent in two months, its estimated annual dividend yield has fallen to about 5.5 percent, the lowest among the three operators.
Meanwhile, latest statistics show China Mobile has 975 million customers including 595 million 5G clients while China Telecom and China Unicom have 263 million and 212 million 5G users respectively.
In addition to solid projections, the operators stand to benefit from state support for the sector. China's Minister of Industry and Information Technology Jin Zhuanglong recently said policies and measures would be introduced in 2023 to promote the development of advanced information infrastructure, accelerate the construction of 5G and gigabit optical networks, and promote the research and development of 6G technology.
