The three domestic telcos (China mobile, China Unicom, & China Telecom, all close partners to China Tower), have all released their 1H24 earnings, from which we have noted stable tower-related spending despite 1) a decline in overall capex (5.4% decline projected for FY24E by the trio) and a shift in investment focus from 5G network deployment to cloud/compute capability enhancement, 2) slower growth in telcos’ communication service revenue (CM/CU/CT: 2.5%/2.1%/4.3% YoY in 1H24), and 3) continuous cost control with a lower COGS expense ratio (CM/CU/CT: -2.0ppt/-0.8ppt/-0.1ppt in 1H24) and lower SG&A expense ratio (CU/CT: -1.2ppt/-0.5ppt, except a 0.6ppt increase for CM in 1H24). We expect China Tower’s legacy business to remain stable with +1% YoY growth in 2024/25E, and DAS/Two Wings businesses to grow double- digit. Besides, mgmt. has decided to increase shareholder returns by announcing an interim dividend (RMB0.0109 in DPS). Maintain HOLD with adj. TP at HK$0.95, as we project the company’s overall revenue growth to be modest (2%/4% YoY for 2024/25E) and the current valuation is fair.
Legacy business remained stable. Tower segment contributed 79% of revenue in 1H24. Quarterly sales were flat during the past quarters (1.7%/0.3% QoQ in 1Q/2Q24). Per Bloomberg, China telcos’ revenue is expected to grow only by a mid-single digit for 2024/25. We expect the ongoing cost optimization from China telcos will continue to weigh on China Tower’s legacy business. We project its tower business to maintain a similar level in 2024/25, with 1.2%/0.8% YoY revenue growth.
DAS and Two Wings business (Smart tower and Energy operations) may grow at double-digits. Smart Tower/Energy operations revenues increased by 17.6%/2.4% YoY in 1H24. Specifically, Tower Monitor Business revenue increased by 20.9% YoY to RMB2.5bn, contributing 63% to Smart Tower’s revenue. Energy segment also benefitted from the battery exchange business, with revenue up by 18.4% YoY.
Maintain HOLD with TP revised to HK$0.95, based on 3.1x FY24 EV/EBITDA, equivalent to ~0.5SD below 3-year forward EV/EBITDA multiple, as we estimate the overall growth for China Tower should be mild (4.1%/3.9% for 2024/25E). We believe the three telcos will continue to maintain cost controls. Their legacy communication services only grew low- to mid-single digit in 1H24; however, the tower-related expenses paid by the trio accounted for 88% of China Tower’s revenue in 1H24. We revised up 2024/25E EPS by 1%/17%, on a lower D&A expense ratio (50.4%/49.2% for FY24/25E vs. 53.7%/52.2% for 2022/23) and other cost optimization measures.