Key points of investment
Shareholders are customers. Revenue is stable but prices are under pressure. China Tower was formed by restructuring the tower assets of China Mobile, China Unicom, and China Telecom, and became the monopolist of the domestic tower industry, with a market share of 96.3%. The three major domestic operators are both the company's shareholders and the company's main customers, and long-term contracts guarantee stable revenue. The company's product prices are based on a cost addition method, taking into account shared discount adjustments. This means that prices are under pressure from shareholders, which limits the increase in profit margins.
Sharing+social tower, tower resource reuse opens up profit space. The establishment of China Tower means that the domestic tower business model has changed to independent operation, which is conducive to increasing the sharing rate of communication towers, that is, improving the efficiency of asset use. In 2015-17, the average number of site tenants was 1.28, 1.40, and 1.43, respectively. There is still room for the future. The company also proposed the integration of “communication towers” and “social towers.” On the one hand, turning the “social tower” into a “communication tower” has reduced the investment and construction costs of the tower; on the other hand, the “communication tower” is used to complete the function of a “social tower” to provide various services to users in other industries. The income of the “Social Tower” is not restricted by shareholders and customers, which is conducive to further improving asset efficiency and opening up future profit margins.
5G will bring about increased demand for base stations, and revenue will usher in new growth. 5G requires the deployment of more intensive base stations due to its technical characteristics, which means that a larger number of towers are needed, and at the same time, the existing communication towers also need to be equipped with new equipment. In the 5G era, the number of towers operated by China Tower will further increase, and the total revenue of China Tower is expected to usher in a new increase. At the same time, under the new concept of integrating “social towers” and “communication towers,” the quality of income will also be further improved.
Investment advice: Assuming that China Tower's IPO sells 25% of shares and raises $8-10 billion, the corresponding valuation of net assets at the end of 2017 is $24-30 billion, and PB is approximately 1.26-1.58 times. China Tower's ROE in 2017 was about 1.5%. Although the current ROE is still at a low number of units, considering the company's unique market position and profit elasticity, we think it is reasonable when the valuation is 1.2 times the PB corresponding to net assets at the end of 2017. At this point, the total valuation after corresponding financing is about US$31-33 billion. That is, within the valuation range of 31-33 billion US dollars, investors are advised to subscribe.
Risk warning: Revenue is too dependent on the three major operators; cross-industry business development falls short of expectations; and capital expenditure pressure for 5G network construction is high.