We maintain China Tower's (the "Company") TP at HK$1.20 and the investment rating as "Buy". We forecast FY24-FY26 EPS to be RMB0.065/ RMB0.076/ RMB0.124, respectively. As the depreciation of a large number of towers will expire in 4Q25, which will provide ample room for profit release, we expect the dividend level to rise significantly in 2026; thus, we maintain the investment rating as "Buy" and TP at HK$1.20. Our TP corresponds to 16.9x/ 14.3x/ 8.8x FY24-FY26 PER, representing 4.1%/ 5.0%/ 8.1% dividend yield in FY24-FY26.
Despite impact from the new service framework agreements, China Tower still recorded a steady earnings growth in FY23. Due to discounts on existing orders and rising co-location discount rate on new orders, revenue of tower business declined by 2.8% in 2023. However, despite the impact from new agreements, shareholders' net profit still grew by 11.0% yoy to RMB9,750 million in 2023. Going into 2024, the yoy impact of the new agreement on the discount rate of the tower business will disappear, plus the three major operators are expected to maintain moderate 5G base station construction, the tower business revenue is expected to improve slightly yoy.
Depreciation on the existing tower assets acquired in 2015 will expire by 4Q25, which will provide strong drive for the profit growth in 2026. In Oct. 2015, the Company acquired assets of about RMB203.5 billion from the three major telecom operators, and approximately half of them are tower assets which have a deprecation period of 10 years (these towers can still be used normally, but require repair and maintenance expenditure), while China Tower's self-built tower have a deprecation period of 20 years. In 4Q25, deprecation on these existing tower assets with a 10-year deprecation period will expire, while China Tower uses the straight-line method for deprecation. The deduction in depreciation expense is expected to be far higher than the required repair and maintenance expenditure. Therefore, we expect a significant increase in shareholders' net profit in 2026.
We expect the dividend payout in 2026 and afterwards to exceed market expectations. The Company's dividend level is basically linked to the shareholders' net profit in the year, and due to our forecast of an explosive shareholders' net profit growth in 2026, coupled with the solid cash flow in the future, we believe the Company will maintain its high dividend payout ratio. As a result, we believe dividend payout in 2026 and beyond will exceed market expectations.
Catalysts: Rising dividend payout; faster-than-expected growth of "Two Wings" business.
Risks: Slower-than-expected growth of "Two Wings" business; slower-than-expected 5G construction; the management may choose to lower dividend payout ratio in 2026