China is accelerating the development of 5G technology to counter the economic slowdown arising from the China-US trade war and the Covid-19 outbreak. 5G network, data centres and telecommunication facilities were identified as new infrastructure projects to stimulate growth.   

Against this backdrop, China Tower Corp Ltd (HKG: 0788) could be a key beneficiary from the increased network and capital expenditure. 

In this article, we will take a closer look at China Tower’s business profile, growth history, earnings trend, and how it rides on the 5G tailwind. 

Business Overview 

China Tower is the world’s largest telecommunications tower and infrastructure assets provider. It was listed on the Hong Kong stock exchange raising HK$58 billion in an IPO in Aug 2018. 

China Tower operates almost two million tower sites that span across 31 provinces and municipalities in China. According to its IPO prospectus, the group monopolises China’s telecommunication tower infrastructure sector with a 97% market share. 

The group operates in the following three segments:

  • Tower – provide site space such as towers, shelters, and cabinets to host customers’ antennas and cell equipment that increase coverage of wireless network. In urban areas with dense population, small cell equipments are deployed to further boost coverage. 
  • Distributed Antenna Services (DAS) – provide indoor DAS to customers to achieve strong wireless network coverage in buildings and tunnels.
  • Trans-Sector Site Application and Information (TSSAI) – provide site resource, maintenance, and power services to support clients from diverse sectors to build up different types of wireless communication network

China Tower DAS and TSSAI segment illustration. Source: IPO Prospectus

China Tower’s customers include China’s big three telecommunication service providers: China Mobile, China Unicom, and China Telecom. Its TSSAI business mainly caters to customers from the environmental protection, digital television, satellite positioning, energy, and marine sectors. 

Latest Financials 

China Tower maintained steady revenue growth in the financial year ended Dec-2019.  Revenue was up by 6.4% to reach RMB76.4 billion. The operating profit of RMB11.2 billion was 12.6% higher than 2018. 

Revenue from the Tower business segment increased by 4.1% to RMB71.4 billion. The DAS and TSSAI segments, despite constituting a small share of revenue, saw strong revenue growth of 46% and 70% respectively. 

The Tower Tenancy Ratio which measures the number of tenants hosted by its tower space grew to 1.62 tenants per site. This is a 4.5% growth that shows better efficiency by the group’s tower assets in hosting tenants’ equipment.

Source: 2019 Annual Results Presentation

Cash flow remained healthy as net cash from operations amounted to RMB49.9 billion, 9.6% higher than 2018. 

Balance Sheet Strength

China Tower’s capital structure improved with a fall in borrowings and an increase in cash balance. As a result, the gearing ratio dropped to 38.5% from almost 40% in 2018. The group’s balance sheet strength has improved from a gearing of above 50% in 2017 due to stronger operations and debts repayment.  

Profitability Trend

China Tower has seen steady growth in revenue and operating income which increased at 10.9% and 30.5% per annum, excluding the year 2015 with an operating loss. 

As the group expanded, contribution from higher-margin segments and a more efficient operation helped increase its operating margin from below 10% to the current 14.7%. 

Source: Self-compiled from IPO prospectus and 2019 annual report

Cash Flow Trend

Net operating cash flow increased at an annual rate of 21.8% per year, in line with the annual growth rate of operating income. This signifies that China Tower runs a healthy business with strong cash conversion ability.

Source: Self-compiled from IPO prospectus and 2019 annual report

Opportunities

China has placed 5G network and infrastructure development as the nation’s top priority to cushion the impact of the Covid-19 outbreak. The Ministry of Information Technology has urged telecommunication companies to speed up the construction of 5G networks. 

With the big three telecommunication companies committing to 5G network capital expenditure, demand for tower site resources will grow. This will increase the group’s Tower segment revenue as the telcos are its key customers. 

Besides telcos, the advancement of diverse technology sectors such as smart city solutions, Internet of Things, and cloud networks will require more pervasive network coverage with stronger signals. This bodes well for the group’s TSSAI segment.  

Also, China Tower faces little competition in an industry with a high entry barrier. Existing firms do not have the scale and geographical spread of its tower sites to meet customers’ needs. New players will need substantial capital expenditure and investment in capabilities and relationships to acquire new customers quickly. 

Weaknesses

With tower sites and network equipment being critical assets, any damage caused by unforeseen incidents such as natural disasters or complete power outage will disrupt China Tower’s service to its customers. This will result in significantly higher repair expenses and loss of revenue. 

Another investment risk is the group’s heavy dependence on sales from China Mobile, China Unicom, and China Telecom. According to the IPO prospectus, the three companies accounted for 99.8% of revenue for the year 2017. Any decision to operate its own tower assets by the three telcos will severely impact China Tower’s topline. 

Shareholding Structure

However, that seems unlikely as all three telecom companies are main shareholders of China Tower. China Tower is majority-owned by the big three communication companies with about 68% stake in its total shareholding. 

Public shareholders own 26% of China Tower via its H shares listed on the Hong Kong exchange. 

Source: 2019 Annual Report

Conclusion

There seem to be many favourable factors lined up for China Tower. These include the national acceleration towards the 5G network, a monopolistic position, a large business scale and high barriers of entry.

However, its share doesn’t come cheap. According to Bloomberg, it’s price-earnings ratio is currently 52.5 times. 

Investors who wish to partake in the growth of China’s telecommunication market may consider China Tower as a growth stock. However, because of its high valuation, do consider the downside too if earnings do not meet expectations.

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