20181019-中国银河国际证券-中国铁塔-00788.HK-Towering_strength._Initiate_with_BUY_41页_2mb

Summary of China Tower Corporation Limited [0788.HK]

Core Content

China Tower Corporation Limited is the world's largest telecommunications tower infrastructure service provider, with a dominant market position in China. As of December 31, 2017, it held 96.3% of the market share in terms of the number of sites and 97.3% in terms of revenue. The company is positioned to benefit from the steady growth of the telecom business and the fast-growing non-telecom-related business, particularly driven by the expansion of 4G and 5G networks, the use of towers by non-telecom users, a high sharing ratio, and M&A activities.

Main Points and Key Information

1. Growth Drivers

• 4G and 5G Expansion: China Tower is well-positioned to benefit from the ongoing expansion of 4G and the future rollout of 5G networks.
• Non-Telecom Business: The company is expanding into non-telecom sectors such as IoT, big data, and artificial intelligence, with non-telco revenue expected to grow at a CAGR of 545% from FY17 to 2020E.
• High Sharing Ratio: The ability to share infrastructure with multiple tenants increases profitability and reduces costs.
• M&A Opportunities: Strategic acquisitions are expected to enhance market share and revenue.
• Government Policies: Support for "Cyber Power," "Digital China," and "Smart Society" initiatives is expected to boost demand for IoT and data infrastructure.

2. Financial Outlook (2017–2020E)

• Revenue CAGR: 6.2%
• EBITDA CAGR: 5.3%
• Net Profit CAGR: 27.9%
• Non-Telco Revenue Contribution: Expected to rise from 0.2% in FY17 to 2.2% by FY20E.
• Revenue Growth in 2018: China Tower reported a 6.1% YoY revenue growth in Jan-Sep 2018, exceeding initial expectations.
• EBITDA Margin: Improved to 59.1% in Jan-Sep 2018, higher than the full-year forecast.
• Net Profit Growth: Achieved 16.7% YoY growth in Jan-Sep 2018, significantly outperforming the forecasted 3.5%.

3. Market Position and Competitive Landscape

• Dominant Position in China: No foreign competitors in the Chinese market, with a strong presence among the Big Three TSPs (China Mobile, China Unicom, China Telecom).
• TSP Tenants: As of 30 June 2018, China Tower had 21,045 TSP tenants for its small-cell business and 45,674 non-telco tenants.
• Diversified Business Model: Offers macro-cell, small-cell, and DAS services, as well as TSSAI services, which include infrastructure, maintenance, power, and data collection.

4. Operational Efficiency and Cost Management

• High Operational Efficiency: China Tower manages over 120 towers per technician, supported by advanced IT and sensor systems.
• Cost Control: The company has managed to reduce costs through co-location and site sharing, with 71% of new leases from TSPs based on co-location by June 2018.
• CAPEX Management: The company is expected to lower capital expenditure and improve the efficiency of site construction and expansion.

5. Investment Rationale

• Valuation: Currently valued at 6.1x 2018E EV/EBITDA, which is considered a good entry point compared to global peers.
• Target Price: HK$1.46, based on a 7.2x EV/EBITDA multiple, offering a 25.5% upside from the close price of HK$1.16 on October 18, 2018.
• Strategic Partnerships: Signed strategic agreements with Alibaba and major power grid operators, enhancing its position in the 5G era and diversifying its service offerings.
• Dividend Potential: Expected to increase from 0.74% to 0.93% by 2020E, with DPS expected to rise from HK$0.007 to HK$0.009.

6. Asset Structure and Leverage

• Gearing Ratio: Net gearing ratio is expected to decrease from over 100% in 2017 to 48% in 2018, due to the use of 30% of IPO funds to repay bank loans.
• Capital Expenditure: The majority of IPO funds (60%) will be used for CAPEX, primarily for new site construction and augmentation.
• Comparative Advantage: Despite high gearing, China Tower's EBITDA margin is comparable to global peers, and its operational efficiency is higher than that of its overseas counterparts.

7. Industry Risks and Mitigation

• Industry Restructuring: Potential concerns from news flow on telecom industry restructuring, but no confirmation yet. The company believes it has time to mitigate any impact.
• Stable Revenue Streams: Long-term agreements with major TSPs ensure stable and predictable revenue and cash flow.

Key Financials (in RMBm)

Investment Recommendation

• Rating: BUY
• Reason: Strong market position, growth in non-telecom business, operational efficiency, and attractive valuation.
• Conclusion: China Tower is a key player in the telecommunications tower infrastructure industry and is well-positioned for growth in both telco and non-telco segments. Its current valuation presents an opportunity for patient investors.