Strategy Note /
China

Why China Tower stock dropped in 2020

  • Cooperating with China's 3 TSPs means not only solid relationships but also less bargaining power & possible low margin

  • Supported by the Chinese government and the three TSPs, China Tower is definitely a company to watch

  • Increasing the tower tenancy ratio is key to improve its profitability

EqualOcean
5 May 2021
Published byEqualOcean

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The telecoms tower behemoth's shares have been sliding since the beginning of 2020 – we explain why.

China  Tower

On November 27, at the World 5G Convention, Jilu Tong, the chairman of China Tower (00788:HK), said that his company had built over 700,000 5G base stations in China, 97% of which were transferred from existing 4G sites. It means the company has helped operators complete the target they set at the beginning of 2020 a month early. However, in contrast with such remarkable performance, the stock kept falling throughout the whole of 2020.

China Tower has a strong moat…

Competition and user stickiness do not seem to be responsible for the decline. China Tower is the largest communication tower service provider in the world. Supported by the Chinese government, it was founded by China Mobile (00941:HK, CHL: NYSE), China Unicom (600050: SH, 00762: HK, CHU: NYSE), and China Telecom (00728: HK, CHA: NYSE) in 2014. In August 2018, the company listed its shares on the Hong Kong stock exchange with an issue price of HKD 1.26 per share, raising over HKD 50 billion, making it the largest IPO since 2010 in Hong Kong Exchange. The company is located in the midstream of the communication industry chain. Its profit model is based on providing services to tenants and collecting stable rental income. The major downstream customers are China's three major telecommunications service providers (TSPs). The company signs long-term service agreements with customers, with the service period of its products usually being five years.

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The number of tower stations and tenants in China is far ahead of other countries. Meanwhile, tower resources are highly concentrated in certain entities the world. There are only a dozen companies that own more than 20,000 towers, and they take 80% of the market share. Among all the tower companies, China Tower has built over 60% of the communication towers globally (in September 2020) and the amount has reached 2.02 million, which is 11 times the number of the second winner, AMT. The number of its tenants is also far more than that of other comparable companies, with a total of 3.34 million in 2019, 10 times that of the second player, American Tower.

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…but low profitability seems to be an issue

Cooperating with China's three TSPs not only means solid relationships but also less bargaining power and possible low margin business.

In the third quarter of 2020, the revenue of China Tower reached CNY 60.22 billion, up 5.6% year-on-year, and the net profit reaches CNY 4.56 billion, up 17.8% year-on-year. Tower business contributed CNY 54.80 billion in revenue, only 2.2% higher than that for the same period in 2019. Doing business in a field with great investment potential (5G technology), the growth of the tower business is unfavorable. Unlike tower business, the indoor distributed antenna system (DAS) business contributes CNY 2.63 billion, surging 36.9% year-on-year, while the Trans-sector site application and information (TSSAI) business and energy operation business contribute CNY 2.61 billion, soaring 92.8% year-on-year, both maintaining a high-speed growth trend.

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Although China Tower's revenue is much higher than that of its global competitors, its net profit is much lower than theirs, which seems to be the direct reason for the continuous decline of its stocks. In 2019, China Tower's revenue reached USD 10.98 billion, 1.45 times that of AMT, but it only gained CNY 5.22 billion (about USD 750 million) in net profit, less than half of AMT's net profit (USD 1.89 billion). In 2018, the company extended the amortization period of tower assets from 10 years to 20 years to relieve the impact on short-term profits. However, though its net margin increased from 3.6% to 6.7%, the ratio was still further lower than its competitors like AMT (24.1%), which deteriorated the momentum of its stock.

Explaining China Tower's poor stock performance

Supported by the Chinese government and the three TSPs, China Tower is definitely a company to watch. Although it is a beneficiary of the countrywide 5G rollout, the share price of China Tower has been declining since the beginning of 2020. Apart from the superficial reason that the growth of the company's core tower business is not as expected, we think there are two core reasons...

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