Citic Telecom: Interim Dividend Maintained (OTCMKTS:CCTTF)

Elevator Pitch

I maintain my Neutral rating on Hong Kong-listed Macau telecommunications services provider Citic Telecom International Holdings Ltd. (OTC:CCTTF) [1883:HK].

This is an update of my prior article on Citic Telecom published on March 20, 2020. Citic Telecom’s share price has increased by +9% from HK$2.33 as of March 19, 2020 to HK$2.54 as of September 14, 2020, since my last update. Citic Telecom trades at 5.8 times consensus forward FY 2021 EV/EBITDA, and it offers a consensus forward FY 2021 dividend yield of 9.1%.

Citic Telecom maintained its interim dividend of HK$0.05 for 1H 2020, which is the same as what was paid out for 1H 2019, despite an increase in capital expenditures from HK$154 million in 1H 2019 to HK$479 million in 1H 2020.

Looking ahead, Citic Telecom’s outlook for 2H 2020 and beyond is dependent on the easing of travel restrictions for Mainland Chinese visitors, and the continued growth of its Southeast Asian enterprise solutions services business. Also, the strong growth in messaging services revenue for Citic Telecom’s international telecommunications services business segment might not be sustainable going forward, if an increasing number of companies do not rely on SMS for transaction confirmation and authentication services in the future.

While Citic Telecom’s forward dividend yields are attractive, the stock is not as cheap on a forward EV/EBITDA basis. Taking into account all of the above-mentioned factors, I think that a Neutral rating for Citic Telecom is justified.

Readers have the option of trading in Citic Telecom shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker CCTTF, or on the Hong Kong Stock Exchange with the ticker 1883:HK. For those shares listed as ADRs on the OTCBB, note that liquidity is low and bid/ask spreads are wide.

For those shares listed in Hong Kong, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Hong Kong Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $1.3 million, and market capitalization is above $1.2 billion, which is comparable to the majority of stocks traded on the US stock exchanges.

Institutional investors which own Citic Telecom shares listed in Hong Kong include The Vanguard Group, Dimensional Fund Advisors, Matthews International Capital Management, and Norges Bank Investment Management, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity, or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.

Interim Dividend Maintained For 1H 2020

Citic Telecom reported its 1H 2020 financial results on August 18, 2020, and the company maintained its interim dividend of HK$0.05 for 1H 2020, which is the same as what was paid out for 1H 2019. This was in line with Citic Telecom’s earlier comments at its FY 2019 earnings call on March 3, 2020, where the company mentioned that “we will actively consider the interests of shareholders and try our best to maintain a stable growth” in dividend payout.

On the flip side, this is the first time in six years that Citic Telecom did not raise its interim dividend per share since 2014. Also, Citic Telecom did not commit to an increase in full-year dividends for FY 2020 at the company’s 1H 2020 results briefing on August 18, 2020, but stressed that the company’s dividend payout will be satisfactory as long as future results are good. Nevertheless, market consensus expects Citic Telecom’s dividends per share to increase from HK$0.200 in FY 2019 to HK$0.215 and HK$0.231 for FY 2020 and FY 2021, respectively.

Citic Telecom’s Historical Dividend Payment Track Record

Source: Citic Telecom’s 1H 2020 Results Presentation Slides

On the positive side of things, Citic Telecom’s financial position remained healthy, as the company’s net debt-to-equity ratio or net gearing improved slightly from 35% as of December 31, 2019 to 34% as of June 30, 2020. Citic Telecom’s relatively low net gearing should allow the company to at least maintain its dividends for full-year FY 2020 (as compared to FY 2019), but its 2H 2020 financial performance and capital expenditures are also key factors that could have an impact on its dividend payout in 2H 2020.

Decent Financial Performance For 1H 2020

Citic Telecom announced its financial results for the first half of the year on August 18, 2020, and the company’s 1H 2020 financial performance was decent.

The company’s telecommunications services revenue, excluding sales of mobile handsets and equipment, grew +11.3% YoY from HK$3,615 million in 1H 2019 to HK$4,025 million in 1H 2020. Citic Telecom’s core net profit attributable to shareholders increased by +5.3% YoY from HK$489 million to HK$515 million over the same period, excluding revaluation gains or losses on investment properties.

Specifically, revenue for the enterprise solutions, international telecommunications services, and internet services business segments increased by +13.3%, +39.0% and +4.2% YoY, respectively in 1H 2020. This was partially offset by segment revenue declines of -20.1% and -14.9% YoY for Citic Telecom’s mobile services and fixed line services businesses, respectively.

A key growth driver for the international telecommunications services business was messaging services which saw a +137.3% YoY increase in revenue to HK$560 million in 1H 2020. Although SMS (short message service) does not seem to be as popular with consumers as they were before (disrupted by free alternatives such as LINE and WhatsApp), Citic Telecom managed to capitalize on new revenue opportunities associated with transaction confirmation and authentication services. But there is no certainty that companies will continue to rely on SMS for transaction confirmation and authentication services in the future.

Also, it was a positive surprise that enterprise solutions revenue increased by +13.3% YoY to HK$1,718 million in 1H 2020, despite the economic fallout brought about by COVID-19. In the company’s 1H 2020 results announcement, Citic Telecom attributed the strong performance of the enterprise solutions business to “higher project revenue from government, resorts and other enterprises” and “growth in enterprise solutions services in Southeast Asia and Mainland China” outside its home market Macau.

On the negative side of things, revenue for Citic Telecom’s mobile services business decreased by -20.1% YoY from HK$617 million in 1H 2019 to HK$493 million in 1H 2020. This was largely the result of lower roaming revenue, as the number of the company’s prepaid mobile subscribers dropped by -22.8% YoY from 562,000 as of end-1H 2019 to 434,000 as of end-1H 2020. International travel restrictions put in place to combat COVID-19 are the key reason for Citic Telecom’s significantly lower roaming revenue on a YoY basis in 1H 2020.

Separately, revenue for Citic Telecom’s fixed line services business declined by -14.9% from HK$114 million in 1H 2019 to HK$97 million in 1H 2020. But this was to be expected, considering the structural decline in demand for fixed IDD and fixed residential lines.

2H 2020 Outlook Dependent On Easing Of Travel Restrictions For Mainland Chinese Visitors

Sell-side analysts expect Citic Telecom’s revenue (including sales of mobile handsets and equipment) and core net profit attributable to equity holders to grow by +4% and +5% YoY to HK$9,393 million and HK$1,052 million, respectively in FY 2020. In comparison, the company’s headline revenue (including sales of mobile handsets and equipment) and core net profit grew by +0.2% and +5.3% YoY to HK$4,384 million and HK$515 million, respectively in the first half of the year. This suggests that Citic Telecom’s financial performance in 2H 2020 should be relatively steady.

Notably, the Individual Visit Scheme or IVS, that grants individual Mainland China tourists visas for travel to Macau and Hong Kong, will resume on August 26, 2020 and September 23, 2020, for Guangdong and China, respectively, as per media reports. The IVS was previously suspended in end-March 2020 as part of efforts to combat COVID-19, and there are expectations that the resumption of IVS will be key in drawing Mainland Chinese tourists (and gamblers) back to Macau. As mentioned earlier, the decline in roaming revenue was the key reason for the -20.1% YoY decrease in segment revenue for the company’s mobile services business.

Apart from the easing of travel restrictions for Mainland Chinese visitors, Citic Telecom’s enterprise solutions services business in Southeast Asia is another bright spot for the company. In the company’s 1H 2020 results announcement, Citic Telecom referred to the Southeast Asian enterprise solutions services business as “an emerging important business segment of the Group” and noted that its “Pacific Internet brand has been enjoying growing influence in” the region. At its recent 1H 2020 results briefing, Citic Telecom did not rule out the possibility of accelerating the company’s expansion in Southeast Asia via partnerships or mergers & acquisitions.

Capital Expenditures And 5G

Citic Telecom’s capital expenditures increased from HK$154 million in 1H 2019 to HK$479 million in 1H 2020. Of the HK$479 million in capital expenditures for the first half of the year, approximately HK$268 million was attributable to 5G investments.

Citic Telecom completed the first phase of the company’s 5G network construction in 1H 2020, and Macau now has full outdoor 5G coverage. The company guided at its 1H 2020 earnings call that full-year FY 2020 5G capital expenditures should be in the HK$400-500 million range, as compared to HK$268 million in 5G capital expenditures incurred in 1H 2020.

Valuation

Citic Telecom trades at consensus forward FY 2020 and FY 2021 EV/EBITDA multiples of 6.1 times and 5.8 times, respectively based on its share price of HK$2.54 as of September 14, 2020, In comparison, the stock’s five-year and 10-year mean consensus forward next twelve months’ EV/EBITDA multiples were 7.2 times and 7.1 times, respectively.

Citic Telecom offers consensus forward FY 2020 and FY 2021 dividend yields of 8.5% and 9.1%, respectively.

As per the peer valuation comparison table below, Citic Telecom is not the cheapest stock among its peers based on forward EV/EBITDA multiples, but it offers the highest forward dividend yields.

Peer Valuation Comparison For Citic Telecom

Stock Consensus Current Year EV/EBITDA Consensus Forward One-Year EV/EBITDA Consensus Current Year Dividend Yield Consensus Forward One-Year Dividend Yield
HKT Trust and HKT Limited (OTCPK:HKTTY) (OTCPK:HKTTF) [6823:HK] 9.7 9.3 6.5% 6.7%
SmarTone Telecommunications Holdings Limited (OTCPK:STTFY) (OTC:STTFF) [315:HK]. 2.2 2.1 5.9% 5.3%
HKBN Group Limited (OTC:HKBNF) (OTC:HKBNY) [1310:HK]. 11.3 9.9 5.2% 6.4%
Hutchison Telecommunications Hong Kong Holdings Ltd (OTCPK:HTHKY) (OTCPK:HTCTF) (OTCPK:HUTCY) [215:HK] 0.58 0.57 3.4% 2.9%

Source: Author

Risk Factors

The key risk factors for Citic Telecom include a longer-than-expected time taken for the easing of travel restrictions for visitors from Mainland China traveling to Macau, higher-than-expected 5G capital expenditures, and an unexpected cut in the company’s dividends in the future.

Note that readers who choose to trade in Citic Telecom shares listed as ADRs on the OTCBB (rather than shares listed in Hong Kong) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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