2H23 earnings grew 13% YoY and beat BOCI estimate despite higher colocation discounts offered upon new lease agreement. 32% YoY revenue increase in energy storage and battery replacement business in FY23 indicates greater earnings potential in our view, as the Company’s energy business is reaching the economies of scale. Reiterate BUY and trim target price from HK$1.34 to HK$1.30 as we adjust FY24-25 estimated sales and earnings.
　　Key Factors for Rating
　　2H23 net profit increased by 13% YoY to RMB5.2bn, beating BOCI estimate by 9.8% despite weaker topline after the implementation of new rental agreement with tariff adjustment.
　　Revenue of DAS business increased by 21% YoY in 2H23 to RMB3.9bn, slightly below our forecasts while energy storage and battery replacement operation grew 32% YoY in FY23 and extended product/service offerings.
　　2H23 EBITDA increased by 2% YoY to RMB31.5bn while EBITDA margin remained flat YoY at 66.3%, despite the lower revenues since the implementation of new lease contract, although operating cashflow declined to RMB21.3bn due to payment delay from telecom operators as their payment systems were re-adjusted to new tariffs. Management reaffirms the temporary and one-off nature of the payment delay, indicating rapid recover after the billing system changes in 2024.
　　CAPEX in FY23 increased by 21% YoY to RMB31.7bn, with 54% used on new site construction and augmentation, and 27% on site replacement and improvement. Management expects full year FY24 CAPEX to remain at a similar level. Full year dividend for 2023 is declared to be RMB0.03739 per share, representing 75% of the FY23 earnings compared with 72% in FY22.
　　Key Risks for Rating
　　Tower rental revenues contribute the majority of the Company’s earnings, and therefore is dependent on telco’s network expansion plan.
　　Valuation
　　Reiterate BUY and trim target price from HK$1.34 to HK$1.30 as we adjust our 2024/25 estimated sales and earnings. We see the accelerated energy saving and battery replacement business as a potential earnings driver as the Company’s operation is reaching the economies of scale.