China Tower Corporation has been a strong performer throughout the coronavirus crisis. The company’s chairman, Tong Jilu, told investors that its operations had been barely impacted by it when he presented the telecommunication company’s fourth quarter results on March 18. At least 90% of China Tower employees were at work, he added.
The Hong Kong-listed stock should offer a safer haven than most during the market turmoil that has accompanied the pandemic. As the installer and operator of the nation’s telecom towers, it has a guaranteed customer base (China Mobile, China Unicom and China Telecom) and a stable stream of long-term income.
In turn, China Tower pays out a generous and rising dividend. Indeed, its full-year dividend for 2019 was fixed at a 60% payout, up five percentage points from 2018.
And then there is the additional profit growth that the 5G revolution is supposed to provide.
So why is China Tower’s stock price down more than a quarter from its April 2019 high of HK$2.20? Its shares did make a brief comeback after hitting a low of HK$1.59 in early December but they then resumed their decline in line with the Hang Seng China Enterprises Index.
Although China Tower has three “sticky” customers, it is extremely dependent on their business. When China Unicom and China Telecom announced that they would be partnering in their 5G roll out last September, financial analysts calculated that this would reduce base station construction by 30%, hitting China Tower’s bottom line.
The group’s tower business accounted for 93% of the Rmb76.5 billion ($10.78 billion) in revenue booked in the last financial year. HSBC, one of the more bearish analysts on the stock, highlights how dependent China Tower is on this revenue stream, despite its efforts to diversify into other areas. The bank says that margin expansion depends on China Tower’s ability to boost revenue per tenant via equipment additions, or increase the number of tenants per tower. Yet 5G is being built on top of much of the existing 4G network (the company said that 97% of the 161,000 5G base stations it built in 2019 were bolted onto existing resources).
This year China Tower will be building a lot more of the 5G base station network. China Unicom and China Telecom are planning for 250,000 new base stations by the end of the third quarter and China Mobile plans to roll out 300,000 more over the course of the full 12 months. China Tower is also hopeful of signing up some new business when it delivers a further 50,000 base stations ordered by radio stations and TV channels.
At the end of 2019, China Tower offered a total of 1.994 million tower sites, up 3.6% from 2018. It also says it is improving the efficiency of its network by growing the tenancy-sharing ratio (when different service providers rely on the same infrastructure). More than 80% of new tenancy demands were satisfied through colocation, it said in its earnings statement. Tong said it is still on course to achieve the 1.72 (operators per site) target it set itself for 2022 when it floated on the Hong Kong Stock Exchange in April 2018.
Another longer-term driver on margins is its energy business. In 2019 it set up a new company, Energy Tower Corp, and tasked it with procuring lithium-iron phosphate batteries to replace the low density lead-acid batteries that are used in much of the telecom network.
Energy Tower will initially focus on finding older batteries that are still fit for alternative usage, mostly as a source of back-up power. Batteries in privately-owned cars are not anticipated to be replaced at regular intervals but the replacement cycle in commercial fleets is expected to be shorter, for instance. An active market in ‘second-life’ batteries is already emerging, many of which still have 70% to 80% of their initial capacity but are no longer adequate for the driving ranges promised by newer models. For a company like China Tower, they are a perfect back-up supply.
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