H-shares have a 5-6% dividend yield + AI potential! JP Morgan is optimistic about the three major telecom operators

JP Morgan believes that the three major telecom operators in China are no longer just traditional high-yield dividend stocks, but are growth stocks with huge potential in AI.

According to the Wind Trading Desk, JP Morgan's report first covers the three major operators (China Mobile, China Telecom, China Unicom) and gives them all an "Overweight" rating, believing they have dual appeal. On one hand, H-shares offer a stable dividend yield of 5-6%, which is highly attractive in the current low-interest-rate environment. On the other hand, their rapidly growing cloud and data center businesses are benefiting from the rise of China's AI industry, and are expected to usher in a new round of accelerated revenue growth and valuation reassessment.

The report's Sum-of-the-Parts (SOTP) valuation method shows that if the cloud business is valued separately, the current stock prices of the three major operators' H-shares have potential upside of 11% to 95%. The report is particularly optimistic about H-shares due to their significant discount of 29-35% compared to A-shares.

China Telecom is the top choice, H-shares outperform A-shares

JP Morgan gives all three major operators an "Overweight" rating but provides a clear stock selection order: China Telecom-H > China Unicom-H > China Mobile-H.

China Telecom-H (top pick): Seen as the "cloud target stock" among the three major operators. Its cloud business revenue scale (CNY 114 billion) and revenue proportion (24% of 2024 service revenue) are both industry-leading. The report believes that with the development of China's AI industry, China Telecom will become the biggest beneficiary, with the greatest potential for valuation multiple adjustments and business incremental growth.

China Unicom-H (alpha stock): Defined as an "alpha stock" due to its fastest growth expectations. The report predicts that from 2025 to 2027, its compound annual growth rate of dividends per share (13%) and profit growth rate (5%) will be the fastest among the three.

China Mobile-H (defensive top choice): As the largest operator by market capitalization, its business is the most defensive, and it has the highest expected dividend yield in 2025 (6.0%). It is an ideal stock for long-term investors seeking stable returns.

The report emphasizes that it is more optimistic about the operators' H-shares rather than A-shares. The main reason is that H-shares currently have a significant discount of 29-35% compared to A-shares, which means H-shares offer a higher implied dividend yield

Steady Dividends and AI Imagination Space

The report believes that the investment logic of telecom operators has shifted from a single "high dividend" to a dual-driven model of "high dividend + AI growth."

First, as high-yield stocks, their attractiveness remains. The dividend yield of the three major operators' H-shares reaches 5-6%, far exceeding the 1.7% yield of China's 10-year government bonds. At the same time, the dividend payout ratio of operators continues to rise, with China Mobile and China Telecom both committing to increase their payout ratios to over 75% within three years starting from 2024. The report expects the average annual compound growth rate of dividends per share for the three major operators to reach 9%. Healthy cash flow (with free cash flow/dividend ratio above 1.5 times) provides a solid guarantee for sustained dividends.

Secondly, AI will drive further valuation adjustments. The digital business of enterprises (cloud, data centers, etc.) has become the second growth curve for operators, accounting for 20% of total service revenue. In recent years, the revenue growth of this business segment has far exceeded that of traditional telecom services. The report believes that as operators of key infrastructure, telecom operators dominate the Chinese cloud/data center market (with a combined market share of over 50%). The further development of AI in China will directly drive the growth of demand for cloud and intelligent computing centers (AIDC), leading to a renewed acceleration in revenue and an increase in valuation multiples.

JP Morgan uses a sum-of-the-parts (SOTP) valuation method, estimating that if the cloud business is independently valued against Kingsoft Cloud's 3.5 times sales ratio, the stock prices of China Mobile-H, China Telecom-H, and China Unicom-H have potential upside of 11%, 78%, and 95% respectively.

Fundamental Improvement: Competition Eases, Capital Expenditure Optimized

The profitability of operators is entering a sustainable growth channel. The report expects that from 2025 to 2027, the compound annual growth rate of the combined profits of the three major operators will reach 5%. This is driven by several core factors:

• Healthy competitive landscape: Regulatory policies have shifted from the past focus on "speeding up and reducing costs" to encouraging innovation and 5G applications. The likelihood of price wars among operators is extremely low, leading to a healthier industry competition that ensures stable revenue for traditional businesses.

• Capital expenditure optimization: The peak of 5G investment has passed (peaking in 2020-2021), and the proportion of industry capital expenditure to revenue has decreased from 23% in 2020 to 16% in 2024, with further declines expected to 9% in 2025. The reduction in capital expenditure directly lowers depreciation pressure, becoming a major driver of profit growth

• State-owned enterprise reform dividends: The assessment indicators of the State-owned Assets Supervision and Administration Commission focus on financial indicators such as profit growth and return on equity (ROE), prompting operators to pay more attention to high-quality development and the improvement of profitability.