We maintain a target price of HK$1.20 for China Tower (the “Company”) and maintain an investment rating of “Buy”. Significant tower depreciation will expire in the fourth quarter of 2025, increasing net profit. At the same time, we don't think the company will reduce its payout ratio, so we expect a significant increase in dividends in 2026. Therefore, we maintain the company's investment rating as “buy” with a target price of HK$1.20. Our target price corresponds to 16.9 times/14.3 times/8.8 times the 2024-2026 price-earnings ratio, which is equivalent to 4.1%/5.0%/8.1% dividend yield for the 2024-2026 fiscal year.
China Tower recorded solid results for the first quarter of the 2024 fiscal year, in line with market expectations. The company's revenue for the first quarter of fiscal year 2024 was RMB 23.974 billion (up 3.3% year on year), and net profit for shareholders was RMB 2,784 billion (up 11.1% year over year), in line with market expectations. Tower business revenue increased slightly in the first quarter of 2024 due to an increase in the number of tower sites and tenants. We expect the company to maintain double-digit net profit growth in 2024 due to strong demand for indoor coverage, strong growth in the Tower Smart Connect business, and effective control of operating expenses.
The depreciation period for existing tower assets acquired in 2015 will expire in the fourth quarter of 2025, which will provide a strong impetus for profit growth in 2026.
Depreciation absolutely dominates the company's operating expenses. In 2023, depreciation amortization accounted for 52.2% of total revenue, so depreciation had a significant impact on the company's profitability. In October 2015, the company acquired assets of about RMB 203.5 billion from the three major telecom operators, of which about half were tower assets with a depreciation period of 10 years (these towers can still be used normally, but maintenance costs must be paid), while the depreciation period for China Tower's self-built towers is 20 years. These existing tower assets with a 10-year depreciation period will be depreciated in the fourth quarter of 2025, while China Tower uses a straight-line depreciation method. Depreciation deductions are expected to be much higher than required repairs and maintenance costs. As a result, we expect a significant increase in net shareholder profit in 2026.
Catalyst: Increased dividend payments; the “two wings” business is growing faster than market expectations.
Risks: The “two wings” business is growing slower than expected; 5G construction is slower than expected; management may choose to lower dividend payout rates in 2026.