HONGKONG Telecom can expect an annual profit growth of about 14 per cent in the next two years against a slow increase in operating costs, according to a brokerage report. Merrill Lynch said the utility company's 17.5 per cent profit rise for the year ended March 31 was above its forecast of 15.1 per cent. It said the discrepancy between its estimate and the actual earnings was mainly due to the lower than expected growth in the company's operating costs and a lower effective tax rate. Merrill Lynch said it had revised upwards its estimate on Hongkong Telecom's net profit for the current financial year from $8.36 billion to $8.6 billion, which represent a 14 per cent rise over last year's earnings. It said it expected lower growth in operating costs of 10.3 per cent, against the original estimate of 11.3 per cent and a lower effective tax rate of 13.8 per cent. It also predicted Hongkong Telecom would register a further 14.7 per cent rise in profit to $9.88 billion for the next financial year. In recommending the stock, the brokerage said the company offered an attractive dividend yield of about 3.9 per cent on 1995 earnings. It said Hongkong Telecom's planned video-on-demand and cable television services were important steps for the company in entering the digital superhighway and other related services. According to Merrill Lynch, Hongkong Telecom's competitive advantages are its existing infrastructure, which would allow it to install a fully interactive system in Hong Kong at a cost substantially lower than other new telecom players. Hongkong Telecom and Cable & Wireless recently signed an agreement with China's Ministry of Posts and Telecommunications on a joint venture to develop, install and maintain international submarine cables. Merrill Lynch said the appointment of Linus Cheung as chief executive of Hongkong Telecom should strengthen the company's connections in China. It said the company's management indicated it was actively pursuing eight to 10 telecom projects in China. Recent reports said China's telecommunications authorities were planning to increase its telephone exchange capacity from its existing 42 million lines to 140 million lines by 2000. Merrill Lynch said Hongkong Telecom would be a major beneficiary of this development although there were doubts about whether China could achieve that target by then.