China Tower released its 1H23 results, posting revenue and NP growth of 2.2% and 14.6% YoY. The sales from the legacy business （81% of total revenue） declined by 2.9% YoY, mainly due to additional pricing discount under the new Commercial Pricing Agreement （the number should grow 3.4% YoY under previous agreement）。 Their DAS and Two Wings business grew double-digit （30.4% in 1H23）； however, the impact is minimal given their revenue contribution is less than 20%. Looking forward, we expect China Tower’s overall growth will be in low single digits, affected by continuous cost optimization in major China telecoms. Maintain HOLD with TP at HK$0.89.
Cost optimization from China telcos will continue to weigh on legacy tower business growth. This segment’s sales grew 3.4%/1.8% YoY in 2021/22. We tracked a key indicator to estimate China telco’s tower leasing burden （figure 2）， which clearly showed a declining trend. Therefore, we expect the tower sales will decline low single-digit （2.4%/3.6% YoY） in 2023/24E, factoring in the new pricing discount. DAS and Two Wings business （smart tower business and energy operations） may grow at double- digit. However, we think these segments do not have a meaningful impact on total revenue. Overall sales of the Company is likely to be flat （2.1%/1.9% YoY for 2023/24E）。
Company’s free cash flow under temporary pressure due to new pricing agreements with China telcos and heavier capex. Free cash flow plunged by more than 105% in 1H23 to RMB-1.27bn as the Company’s accounts receivable surged by more than 50% in 1H23 compared to FY22. Meanwhile, Company’s capex grew by 41.1% YoY in 1H23 as it accelerated investments in the Two Wings business segments and ongoing constructions. However, mgmt. suggests the temporary cash flow pressure is unlikely to impact its full year dividend pay-out. We expect the Company’s cash flow condition to return to normal level in 2H23-2024 as we are currently in the beginning phase of the new pricing agreements.
Maintain HOLD with TP adjusted to HK$0.89, based on 2.7x FY24 EV/EBITDA, which is ~1SD below 1-year forward EV/EBITDA multiple, as we think the overall growth for China Tower is limited.