We maintain China Tower's (the "Company") TP at HK$1.20 and the investment rating as "Buy". The depreciation of a large number of towers will expire in 4Q2025, thereby increasing net profit. As such, we do not think the Company will reduce its dividend payout ratio, so we expect the dividend amount to increase 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.
China Tower recorded solid 1QFY24 results, in line with market expectations. The Company recorded 1QFY24 revenue of RMB23,974 mn (+3.3% yoy) and shareholders' net profit of RMB2,784 mn (+11.1% yoy), in line with market expectations. Due to the rising number of tower sites and tower tenants, revenue of tower business recorded a slight increase in 1Q24. Due to the strong demand for indoor coverage and strong growth of smart tower business, as well as the effective control of operating expenses, we expect the Company to maintain the double-digit percentage net profit growth in 2024.
Depreciation of the existing tower assets acquired in 2015 will expire by 4Q2025, which will provide strong drive for profit growth in 2026. The depreciation occupies an absolutely dominant position in the Company's operating expenses, while the proportion of depreciation and amortization to total revenue in 2023 was 52.2%. Thus the deprecation has a significant impact on the Company's profitability. 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 has a deprecation period of 20 years. In 4Q2025, deprecation on these existing tower assets with a 10-year deprecation period will expire, while China Tower uses 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.
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.