Date of Report: 10 October 2024
Broker: OCBC Investment Research

Company Overview
China Tower Corporation is the world’s largest telecommunications (telco) tower infrastructure service provider, holding a dominant market position in China with a 97% revenue market share. The company, incorporated in Beijing on 15 July 2014, was listed on the Main Board of the Hong Kong Stock Exchange on 8 August 2018, raising approximately HKD 58.8 billion. It officially became a constituent stock of the Hang Seng Index on 10 December 2018.

The company principally engages in the construction, maintenance, and operation of towers, and it also manages ancillary facilities like shelters, power supply, air conditioners for base stations, and indoor distributed systems. Additionally, it outsources the maintenance of base station equipment.

Investment Thesis
China Tower Corporation is well-positioned to benefit from China’s push to develop world-leading telecommunications infrastructure. However, several factors temper its appeal:

• High global interest rates have reduced the attractiveness of dividend-yielding stocks with slow growth prospects, which includes China Tower.
• The company’s pricing power over its major customers (who are also shareholders) is limited, which may suppress long-term margins.
• Despite strong data growth supporting telco CAPEX, the company faces challenges in terms of its customers’ network-sharing efforts to reduce CAPEX.

Stock Performance and Dividend Yield

• As of 9 October 2024, China Tower’s stock has achieved a 37% total return year-to-date (YTD), surpassing the Hang Seng Index’s 26% gain.
• Renewed investor interest was driven by the revival of the State-Owned Enterprises (SOE) reform theme and news about a potential exemption from dividend taxes for individual investors on Hong Kong stocks.
• China Tower offers a forecasted dividend yield of about 5.5%, lower than the China Telco and China Energy companies, which range from 6.5% to 7.5%.

Financial Performance
China Tower reported the following financial results:

• Revenue: CNY 94,009 million (FY23), expected to grow to CNY 98,383 million (FY24) and CNY 103,125 million (FY25).
• Operating Profit: CNY 14,502 million (FY23), expected to increase to CNY 16,861 million (FY24) and CNY 19,944 million (FY25).
• Net Profit: CNY 9,750 million (FY23), forecasted to grow to CNY 10,812 million (FY24) and CNY 13,156 million (FY25).

Key financial ratios:

• Operating Margin: 15.4% (FY23), projected to rise to 17.1% (FY24) and 19.3% (FY25).
• Net Profit Margin: 10.4% (FY23), increasing to 11.0% (FY24) and 12.8% (FY25).
• Dividend Yield: 3.8% (FY23), expected to rise to 4.5% (FY24) and 5.6% (FY25).

Market Position and Defensive Cashflows
China Tower has an effective monopoly in the Chinese market with over 95% market share, supported by long-term contracts with telco customers, which creates stable and predictable cash flows. The high switching costs for customers and the state ownership of the company contribute to its limited competition. These factors support China Tower’s position as a defensive stock.

ESG Concerns
In June 2024, China Tower’s ESG rating was downgraded due to weaknesses in its corporate governance. With the state holding 47.7% voting power and representatives on the board, there are concerns that this could limit the influence of other investors.

Potential Catalysts
Several factors could drive future growth for China Tower:

• Stronger-than-expected tower demand
• Accelerated 5G roll-out in China
• Faster growth in non-telco business segments

Risks to Investment
The key risks to China Tower’s investment outlook include:

• Delays in telco capital expenditure (CAPEX) rollouts in China.
• Possible price cuts during contract renewals.
• High customer concentration, which exposes the company to risks of mergers or consolidations among telco clients.

Valuation
OCBC Investment Research has fine-tuned its estimates and raised China Tower’s fair value from HKD 1.04 to HKD 1.15. Despite the company’s defensive cashflows and strong market position, the limited pricing power and competitive pressures from network sharing remain concerns for long-term margin sustainability.