China Tower IPO could be the largest since 2010

China Tower IPO could be the largest since 2010

Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

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 255,844Revenue 68,665
Cash 7,852Site operating lease charges 11,336
IPO proceeds 63,961Repairs and maintenance 6,156
Debt 139,053Employee benefits 4,229
Enterprise value 323,084Other operating expenses 6,587
EBITDA Margin 59%
EBITDA 40,357
EV/EBITDA 8.01

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.

China Tower
Source: Author

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. 

 

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.