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China Tower Corporation Limited [0788.HK]
China Tower Corporation Limited (China Tower) is the world’s largest telecommunications tower
infrastructure service provider. According to an F&S Report, as at 31 Dec 2017, China Tower
ranked first among global telecommunications tower infrastructure service providers in terms of the
number of sites, the number of tenants, and revenue; and China Tower’s market share in the tele-
communications tower infrastructure industry in China was 96.3% in terms of the number of sites
and 97.3% in terms of revenue as at 31 Dec 2017. China Tower will benefit from steady growth in
the telecom business and fast growth in non-telecom-related business. We forecast revenue CAGR
of 6.2%, EBITDA CAGR of 5.3%, and net profit CAGR of 27.9% in 2017-2020E. Telco revenue will
maintain gradual growth with a CAGR of 4.4% in 2017-2020E. We believe that the major growth
drivers of China Tower are: a) 4G network expansion, b) 5G roll-out, c) usage of towers by non-
telecommunications users, d) a high sharing ratio, and e) M&A. News flow on 5G development and
increasing marketing activity are share price catalysts. Despite recent share price underperfor-
mance, we believe the current valuation of 6.1x 2018E EV/EBITDA offers a good entry point. Initi-
ate with BUY with a target price of HK$1.45 (based on 7.2x 2018E EV/EBITDA, lower than that of
its global peers).
Proxy for rising data traffic. According to the F&S Report, from 2017 to 2022, the size of the
telecommunications tower infrastructure market China is expected to increase steadily from
RMB70.6b to RMB109.1bn, representing a CAGR of 9.1%. In addition, the number of tenants
in the telecommunications tower infrastructure market in China is expected to increase from
2.8m in 2017 to 4.9m in 2022, representing a CAGR of 11.9%. The number of TSP tenants is
expected to increase from 2.8m in 2017 to 4.5m in 2022, representing a CAGR of 10.2%.
China Tower is one of the major beneficiaries the rising data traffic flow.
Non-telecom business expected to drive growth. China Tower is expanding its customer
base to reduce reliance on telecommunications services providers, so we expect to see wider
application of its towers, given the development of new technologies such as IoV and IoT.
China Tower is actively pursuing DAS projects in commercial buildings, large venues, sub-
ways and high-speed railways, covering a cumulative length of more than 13,000km of high-
speed railways and 1,900km of subways, as well as large venues with an aggregate area of
more than one billion square meters. We expect revenue from non-telco customers to grow
rapidly, at a CAGR of 545% in FY17-20E. Non-telco customers will contribute 2.2% of total
revenue by FY20E, up from 0.2% in FY17.
Manageable risk of industry restructuring. We share the view that news flow on industry
restructuring at the telecom operator level might create concerns about China Tower. Howev-
er, at this stage, there is no confirmation of the news flow. If this is the case, it will take time
for the deal to be completed, and China Tower should have enough time to mitigate the im-
pact.
Not expensive compared with its overseas peers. China Tower is valued at 6.1x 2018 EV/
EBITDA, which doesn’t look particular expensive compared to that of its global peers. The
Chinese government is taking the lead in 5G development, and China Tower will be one of the
main 5G development names in the global tower industry. After listing, China Tower is a siza-
ble telecommunications name with a growth angle, trading at a discount to its global peers.
We share the view that investors might take a wait-and-see approach to China Tower, given
the current market environment. China Tower’s unexciting post-IPO share price performance
offers a good opportunity for patient investors.
Mark Po, CFA — Senior Analyst
(852) 3698-6318
markpo@chinastock.hk
Alex Li — Analyst
(852) 3698-6256
alexli@chinastock.hk
Wong Chi Man, CFA — Head of Research
(852) 3698-6317
cmwong@chinastock.hk
TMT Sector
Hardware
Towering strength. Initiate with BUY
BUY
Close: HK$1.16 (Oct 18, 2018)
Target Price: HK$1.46 (+25.5%)
Share Price Performance
Market Cap US$26,043m
Shares Outstanding176,008m
Auditor PwC
H-Free Float 80.9%
52W range HK$1.03-1.30
3M average daily T/O US$61.7m
Major Shareholding China Mobile (27.9%),
China Unicom (20.7%),
China Telecom (20.5%)
October 19, 2018
Source: Bloomberg, CGIS Research
Sources: Company, CGIS Research estimates1000
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(HK$ million)(HK$)Turnover (RHS)Price (LHS)
Key Financials(in RMBm)201620172018E2019E2020E
Revenue55,997.068,665.072,441.377,090.782,146.2Change (YoY %)536.2 22.6 5.5 6.4 6.6
EBITDA32,743.840,567.842,717.644,556.247,344.5EBITDA Margin %58.5 59.1 59.0 57.8 57.6
Net Profit76.0 1,943.02,336.93,226.94,059.0Net Margin %0.1 2.8 3.2 4.2 4.9
EPS (Basic)0.000.010.010.020.02Change (YoY %)(102.1)2,456.620.3 36.2 25.8
DPS $0.000$0.000$0.000$0.007$0.009
ROE (%)0.1 1.5 1.5 1.8 2.2 Dividend Yield (%)- - - 0.74 0.93
PER (x) 2,265.288.6 73.7 54.1 43.0 PBR (x)1.4 1.3 1.0 1.0 0.9
FCF Yield (%)-21.16%-5.73%-3.53%1.21%3.44%
Capex (m)(70,156.0) (46,364.0) (41,961.2) (34,180.6) (31,940.3) Free cash flow per share(0.25)(0.07)(0.04)0.01 0.04
Net Gearing (%)25.7 102.9 48.1 46.6 42.81) A leading player with a visible business model
China Tower operates in China and faces no competition from foreign telecommunications
tower infrastructure companies. China Tower competes only in the telecommunications
tower infrastructure industry in China. According to an F&S Report, China Tower is in the
leading position in China’s telecommunications tower infrastructure industry. As at 31 Dec
2017, China Tower’s market share in the telecommunications tower infrastructure industry
in China was 96.3% in terms of the number of sites. The Company’s major businesses,
namely macro cell, small cell and DAS, face different competitive landscapes in the China
market. As at 30 Sep 2018, the Company operated and managed 1.9m sites and served
about 2.9m tenants. China Tower is the leader in the macro-cell business in China’s tele-
communications tower infrastructure industry. According to the F&S Report, as at 31 Dec
2017, more than 200 small telecommunications tower infrastructure companies were active-
ly participating in the China market. These companies are engaged mainly in regional busi-
ness, serving part of the local subsidiaries and branches of the big three Telecommunica-
tions Services Providers (TSPs). As at 31 Dec 2017, the largest of the smaller tower com-
panies had about 17,260 sites and had established branches in a number of provinces.
Like other utilities, tower companies in the telecom industry operate a simple business mod-
el, leasing tower assets (macro cell and small cell) to services providers (telecom and non-
telecom). Compared with their customers, tower companies face fewer operating risks,
such as network management, technology upgrades (such as 4G to 5G) and monetization
of services. The visibility of tower companies’ business is much higher than that of their
customers. We also believe that China Tower’s position in the China market allows the
Company to minimize contract renewal risks, and the costs of replacing a tower infrastruc-
ture service provider is higher for TSPs, which also face the risk of affecting network cover-
age after a change in tower infrastructure services providers. China Tower’s quality custom-
ers provide solid assurance of predictable and stable sources of revenue and cash flow.
After the price cu