Revenue and net profit slide
   
Saving on SG&A offsetsDr. Peng reported a 7% decline in net profit in 1Q17 with revenue down 1% YoY and gross profit margins down 6ppts. Net adds of 440k were also the slowest in the last four quarters, despite an enlarged customer base, while broadband coverage roll-out has also slowed, up ~2m QoQ. Some of the net adds slowdown could be driven by seasonal factors (e.g. Chinese New Year), although we continue to believe that Dr. Peng’s earnings are challenged by increased competitive intensity posed by the other three major operators. We retain Sell.
   
Saving on SG&A offsets, but could result in future top-line slowdown
   
The 6ppts decline in gross profit margins was partially offset by an 18% decline in sales and marketing expenses. As a result, net profit was down only 1ppt. However, the cut in sales and marketing expenses is likely to result in further slowdown in future top-line growth.
   
Valuation and Risks
   
We value Dr. Peng on the mid-point of 2017E peer-based valuation and DCF (WACC 7.7%, TG 1%). Risks relate to mkt share, tax rate, regulation & margins.