Key points of investment
Incident: On March 18, China Tower announced its 2023 results. In 2023, the company achieved operating income of 94.09 billion yuan, an increase of 2.0% over the previous year, and achieved net profit of 9.750 billion yuan, an increase of 11.0% over the previous year.
Total revenue continues to grow, and profitability continues to increase: in 2023, the company achieved revenue of 94.09 billion yuan, an increase of 2% over the previous year. Carrier business revenue was 82.163 billion yuan, down 1.0% year on year; of these, tower business revenue was 75.023 billion yuan, down 2.8% year on year; room division business revenue was 7.140 billion yuan, up 22.5% year on year.
Zhilian's business revenue was 7.283 billion yuan, an increase of 27.7% over the previous year. Energy business revenue was 4.214% billion yuan, up 31.7% year on year. The overall level of sharing was raised, and the average number of tenants at tower business stations increased to 1.79. Operating efficiency increased steadily, and EBITDA reached 63.551 billion yuan. Profitability continued to increase, with profit attributable to the Company's shareholders of 9.750 billion yuan, an increase of 11.0% over the previous year.
The main operating costs are declining, and future profit margins are opening up: the company's biggest cost item is depreciation of site capital. From 2019 to 2023, it accounted for 50% + of revenue and 60% + of operating expenses. According to the company's prospectus, the company began to acquire tower assets from the three major operators and commenced operations in 2015, and the settlement of some of the existing towers was postponed until 2018. The depreciation period for existing tower assets is 10 years. Considering that some of the existing towers began to depreciate before the transaction, 2021 was the high point of the company's depreciation expenses, and subsequent depreciation expenses continued to improve. In addition, the depreciation period for the company's new stations was extended from 10 to 20 years. Future depreciation expenses are manageable, and the company's profit margins are opened up.
Two-wing business - rapid development opens up new market space: The two-wing business mainly includes smart connectivity business and energy business, which account for 12.2% of revenue. The smart link business mainly reuses existing site resources, turning a “communication tower” into a “digital tower”. There is no need for large-scale capital expenses, and the marginal revenue results are remarkable, which can further drive the value of site resources to increase. The energy business mainly includes electricity exchange and backup services. The scale of the instant delivery market is expanding while the penetration rate of light electric vehicles is increasing, and the power exchange market space is broad. According to Sullivan data, the domestic electric two-wheeler power exchange market has a compound annual growth rate of 41.62% from 2023 to 2026.
Carrier business is stabilizing, and room division products drive development: The company obtains rental income from operator rental site resources, mainly including tower and room division services. According to the 2023 performance data, the tower business accounted for 79.8% of revenue, and the room division business accounted for 7.6% of revenue. Together, the two accounts for 87.4%. Among them, the continuous expansion of the indoor division business coverage area has led to rapid revenue growth in this field. At the end of 2022, the company signed a new round of commercial pricing agreements with the three major operators, and the execution period is 2023-2027. Due to the implementation of the new pricing agreement involving specific matters such as billing system upgrades and adjustments, full order data verification, and service standard discussions, the company's receivables repayment in the first half of the year were under pressure. In the second half of the year, due to the full implementation of the agreement, the repayment situation improved. The company's free cash flow in the second half of the year reached 2,392 billion yuan, which changed from negative to positive compared with the first half of the year. It is expected that tower revenue will continue to improve in the future. Looking ahead to 2024-2027, the company's operator business is expected to resume steady growth under the “5G+ room division” resource endowment advantage.
Investment advice: As a leading domestic communications tower infrastructure, the company will focus on operator business to accelerate the development of energy and smart connectivity businesses. It is expected to fully benefit from the development of the digital economy and instant delivery industry in the future. Based on the 2023 results announcement, we expect the company's 2024-2026 revenue to be 984/1027/106.6 billion yuan, up 4.6%/4.4%/3.8% year on year, net profit to mother of 107/120/13.2 billion yuan, up 10.1%/12.2%/9.8% year on year, corresponding EPS to 0.06/0.07/0.08 yuan and PE 15.1/13.4/12.2, giving a “gain” rating.
Risk warning: Cost reductions fall short of expectations; smart connectivity and energy business expansion fall short of expectations; room division business development falls short of expectations; tower business revenue falls short of expectations.