China Tower (中國鐵塔) – China’s biggest (and therefore the world’s biggest) telecommunications tower service provider – is planning an IPO in August on HKEX under the stock code 788:HK.
According to its prospectus, China Tower owns and operates the vast majority of mobile infrastructure in China, with a commanding 97.3% market share by revenue. It predominantly provides cell tower services, i.e. tower space for hosting antennae and equipment, and related services such as power, maintenance, and data.
Its main customers are the telco oligopoly in China, which are China Mobile (941:HK), China Telecom (724:HK), and China Unicom (762:HK), each also owns a significant stake in China Tower, and together they own the pre-IPO company in its entirety.
This should be worth emphasizing for potential investors – given the company is majority owned by its customers, realistically the company will not be able to charge maximum value for its services despite claims of arm’s-length price negotiations. Also, given the 3 China telecom companies are majority state-owned, this makes China Tower also majority state-owned, which comes with idiosyncratic risks associated with state-owned enterprises such as conflict of interest between shareholders and the public good.
The IPO will offer 43,115M shares to the public at the maximum subscription price of $1.58HKD, which will represent 25% of the company, with the remaining 75% still controlled by the big-three telcos. Assuming the IPO is fully subscribed at the maximum price, the company will be worth $272.5B HKD.
Let’s calculate the Owner Earnings of this massive infrastructure business and decide if we’re getting a good deal.
The portion of capital expenditure spent on upkeeping their existing infrastructure is well disclosed in the prospectus, as the second and third items on this breakdown table:
We can calculate owner earnings for the last two years by backing out depreciation from their reported earnings and adding in maintenance capex (2015 was an incomplete year without any revenue until Q4).
Another important point disclosed in the prospectus is that they recently entered into a price renegotiation with their customers (the big-three) to reduce cost margin from 15% to 10% starting in 2018. The negative impact of this price reduction was clearly disclosed, so we should include it in our estimate of recurring owner earnings going forward.
|Revenue||Net Profit||Depreciation||Maintenance CapEx||Owner Earnings||EPS (HKD)|
* Adjusted for impact of price renegotiation and applied average maintenance capex from 2016-2017
With recurring owner earnings of 0.162/share, earnings yield works out to be 10.3% based on maximum IPO price, which is superb. This analysis ignored all future growth. Independent research cited by the prospectus estimates a 9.1% CAGR of tower infrastructure demand in China, and when that comes it will be all gravy.
I find this IPO to be attractively priced so I’ve subscribed to some through my broker, waiting to be allocated in early August. As always, do your own due diligence.