Slower top-line growth, rising D&A, ARPU under pressure; retaining SellDr. Peng’s FY16 result highlighted the concerns we had with the companyregarding competitive squeeze from domestic operators and increasing D&Apressures. Revenue growth decelerated to 6% in 2H16, driven by a 23% fall inARPU. Despite the top line slowing, FY16 net profit grew 7% and was helpedby a sharp pull-back in sales & marketing expenses in 2H16. D&A grew 21%YoY and will continue to pressure earnings in the years ahead, as it is only50% of capex in FY16. We continue to see headwinds on the revenue front andwith earnings growth slowing to a single-digit rate, we find it difficult to justifythe current FY17 PER of 35x; Sell.
   
Slowdown even more apparent looking at the quarterly trendsThe quarterly data show an even more dramatic slowdown in Dr. Peng’soperating performance, with revenue growing only 2% in 4Q16 and grossprofit margin sliding to 56% from 58% in the first three quarters of 2016. Whilenet profit did grow materially off a very low 4Q15 base, the operating trendsreinforced our concerns around competitive pressures in fixed broadband.
   
Management acknowledged these issues at the results announcement andindicated that its key defense against China Mobile’s aggression has been togrow in subscriber scale, reduce prices and increase spend on sales &marketing and network investments. We believe this process still has someway to play and is likely to pressure Dr. Peng’s top line in the near term.
   
Earnings changesWe have reduced our earnings forecasts in line with the lower-than-expectedFY16 results. The EPS impact was less than the NPAT reduction as the equityraising announced in January was revised down in March.
   
Valuation and risksWe value Dr. Peng based on the mid-point of our peer-based valuation andDCF. Risks relate to market share, tax rate, regulation, and margins.