China Tower IPO could be the largest since 2010
China Tower, a Chinese state-owned wireless infrastructure operator, has filed for an initial public offering that could be the biggest since 2010. Neither the timing nor a fund raising target has been released yet, but rumours hint at a $10 billion raising.
China Tower was formed by combining the transmission facility assets of China Mobile, China Unicom, and China Telecom in 2015 as part of a broader plan to reform the nation’s state-dominated wireless industry. The company is the world’s largest owner of telecom tower infrastructure, per the prospectus.
China Mobile, the world’s largest wireless carrier, owns a 38% stake in China Tower, along with China Unicom and China Telecom, which each hold stakes of about 28%. China Reform Holdings, a state-owned investment fund, holds the remaining 6%.
Other than being shareholders, the three carriers also pay leasing fees to use China Tower’s facilities.
|China Tower Valuation (RMB mn.)|
|Market value 255,844||Revenue 68,665|
|Cash 7,852||Site operating lease charges 11,336|
|IPO proceeds 63,961||Repairs and maintenance 6,156|
|Debt 139,053||Employee benefits 4,229|
|Enterprise value 323,084||Other operating expenses 6,587|
|EBITDA Margin 59%|
When you consider China Tower as a giant telecom stock with a monopoly position, the attraction is reasonably obvious. Couple this with superior organic growth prospects in the world’s second-largest economy along with an expanding middle class in both size and wealth. Wage growth in China has risen for approximately two decades and as consumers become wealthier, the ability to afford wireless services increases.
Additionally, increasing demand for internet-of-things applications will increase mobile data traffic, providing a necessity for telecom operators to increase demand for mobile towers. This is reflected in China Tower’s profitability which improved noticeably in 2017: the company made a profit of 1.9 billion yuan ($299 million) last year and posted an EBITDA margin of 59% (comparable to US peers), compared with 76 million yuan in 2016 and a loss of 3.6 billion yuan in 2015.
It is expected that Chinese telecom companies will be commercially launch 5G networks in 2020 and trials will commence in 2019. This means operators will need to strengthen their networks with further equipment, smaller cells, and distributed antennae. This should accelerate China Tower’s growth from these segments which in 2017 only contributed around 2% to revenue.
Looking at China Tower’s valuation, on a relative basis the stock may trade at a discount to US peers. If we compare the debt adjusted valuation metric EV/EBITDA, the valuation disparity to US peers is apparent. We have considered the company filing’s and our estimations suggest an EV/EBITDA of 8.01, assuming a market value of $40 billion and IPO proceeds of $10 billion.
This seems cheap compared to a median 19.2 EV/EBITDA of US telecom leaders. However, compared to China’s telecom leaders, our estimation suggests a valuation premium.
In summary, the stock looks cheap compared to US peers, with accelerating profits and room for further expansion and growth prospects. The catch is that China Mobile is a state-owned enterprise; we could argue that this is a positive in the sense that a state-sponsored wireless infrastructure operator should operate as an effective monopoly, and being on the same side as the state could be reassuring. The downside is that SOEs are often used to advance government policy goals which may not necessarily align with the interests of shareholders (for example, state pressure on the company to reduce data fees).
Given the influence of the state, the concerns of private shareholders may not be a priority for the company. For that reason, income chasers who see telecom stocks as bond proxies may want to persist with the more established US and European names. For investors hunting value, however, the discount compared to US fellows could be attractive.
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