Since its inception in July 2014, China Tower Corporation (CTC) broke even in 2016, becoming profitable in the last quarter of the year as it seeks to IPO by the end of 2017 in a best-case scenario. As a state-owned giant, CTC has flexed its muscles considerably in mobilising governmental resources to improve site acquisition, as well as set industry pricing benchmarks. TowerXchange takes a look back at what CTC has accomplished in 2016 as it shepherds the country deeper into 4G and eventually 5G.
Centralised planning
Over the almost three-year period since CTC’s inception, 501,000 less towers were built than would have been necessary before they were shared, with considerable savings in land use and investments. Specifically, in 2016, an estimated 236,000 less towers were built after CTC identified overlapping search rings from the three MNOs. In one example, the three MNOs requested a total of 1,701 sites as part of their initial planning for last year’s G20 Summit district in Hangzhou. However, this was reduced to 1,367 sites through CTC’s centralised planning and coordination, increasing the speed of rollout and achieving 100% tower sharing for the area.
The creation of CTC has allowed rapid deployment of base transceiver stations in China, with all three MNOs exceeding their 4G base transceiver stations net add targets in 2016, according to a Nomura report. China Mobile added 1.51mn 4G base stations last year, up from the target of 1.4mn. Meanwhile, China Unicom added 740,000 4G base stations and China Telecom added 890,000.
Recent CTC figures show China Mobile’s total number of sites growing from 753,000 pre-CTC to an estimated 1,108,000 for 2016, while China Unicom increased from 388,000 sites to 691,000 and China Telecom from 246,000 to 605,000.
China Tower Corporation helps MNOs accelerate 4G rollout
4G base station new adds in 2016
China’s site growth pre- and post-China Tower Corporation
china-growth-and-ctc.png Site acquisition
As part of its efforts to enhance nationwide 4G coverage and rollout, CTC has received the support of both state and provincial governments in providing greater and easier access to sites. Strategic partnerships were signed with 26 provincial governments while 191 cities are making public resources available to support CTC site acquisition. Various policies around land use, zoning, environmental design, and permitting were also enacted, all with the aim to integrate telecom planning and infrastructure such that CTC would be able to better secure, build, and maintain sites.
In the province of Hubei, 1,158 out of 1,447 challenging sites were addressed through the help of the local government. In the province of Henan, a list of close to 800 sites were directly allocated to various local level governments for problem solving, tackled from both policy and documentation perspectives. Demonstrable results were said to be achieved thanks to the involvement and project management of local authorities. Similarly in Xiaxi, the provincial government issued memos to its various cities and towns to aid the execution of 326 urgent and difficult sites.
With various local governments opening up their buildings for sites, along with their active and direct role in site acquisition, CTC was able to make considerable headway in 2016 in securing some historically tough but key sites. At the same time, it was paving the way for future coverage needs in new and growing regions.
Most recently, CTC established a project team to oversee developments of China’s hottest “Xiongan New District.” Located in the province of Hebei but with close proximity to Beijing and Tianjin, the district will initially be 100km², eventually expanding to 2,000km². There is talks of this being the equivalent of China’s Silicon Valley and as a secondary capital city, where non-core state entities could be moved. CTC will be looking to implement tower designs that are safe, green, and aesthetically pleasing in the new district, to enable connectivity for smart city developments and IoT.
Design standardisation
CTC has worked to standardise tower design, whittling down what used to be over a thousand variations down to eight major categories, with 90 standard tower designs. Shelters were also revamped, with designs that better blend in with the various cultural and physical needs of all the different types of sites across the country, whether urban or rural. The beautification efforts are in part to help increase public acceptance with telecom sites. The standardisation of towers and shelters has helped CTC to decrease installation time by 30%, improving speed to market.
Operational efficiency
According to CTC, it now operates 1.84mn sites, with 1.188mn surveillance units installed. These surveillance units are comparable to what TowerXchange would call remote monitoring systems (RMS) at other cell sites. Through its centralised platform and the cloud, CTC is monitoring, collecting and analysing various KPIs from all the sites. CTC describes it as a true IoT platform that is anchored around its people, processes, data, and things (tower, shelters, batteries, et cetera). The platform allows for greater efficiency in addressing any potential issues on site, as the platform would trigger the alarm, then send a ticket straight to a local frontline staff for visit and inspection. Its data and analytics capabilities also allow CTC to adjust A/C controls in real-time, optimise battery performance at each site, plan preventive maintenance, and more.
The platform currently has 70,109 registered users, with an average of 126,214 ticket orders per day and 6.5bn data points.
Tower sharing
Prior to the establishment of CTC, tower sharing was around 20% in the country. By the end of 2016, total tower sharing reached 40%, with the new towers at 70% based on stats shared by CTC chairman and general manager, Liu Aili. In some regions, tower sharing amongst the three operators were supposedly as high as 91%, and at 100% along high speed and subway lines.
One local media reported 68.1% sharing rate for all sites completed in 2016 by CTC, with a tenancy ratio of 1.39 across the portfolio by the end of the year.
In 2016, CTC successfully delivered on 657,000 out of 691,000 total tower related requests from the three MNOs.
Tower leasing formula
In July 2016, CTC finalised its leasing and pricing agreements with China Mobile, China Telecom, and China Unicom. The pricing formula takes into account factors such as standardised construction costs, depreciation, maintenance expense, cost markup, and co-sharing discounts. The formula to be used for “newly-added telecommunications towers” is:
Product price = base price × (1 – co-sharing discount rate 1) + (site cost + electricity input cost) × (1 – co-sharing discount rate 2)
Base price = (standardised construction cost × (1 + impairment rate) + maintenance expense) × (1 + cost markup rate) useful lives of depreciation
Due to the variance in construction costs across different geographical areas in China, the 31 provinces are divided into four categories with a different adjustment rate for each. The impairment rate and cost mark up rate are fixed at 2% and 15% respectively. The maintenance expense is to be adjusted based on the final actual price. The site cost and electricity input cost are either priced on a lump sum or itemised basis.
On new towers, a 20% discount will be applied for sites shared by two lessees and a 30% discount for those shared among three lessees, with the first sole occupier (“anchor tenant”) benefitting from a further 5% discount. When it comes to site cost and electricity, a co-sharing discount of 40% will be applied for two lessees and 50% for three lessees. Again, the anchor tenant would enjoy an additional 5% discount.
With this pricing formula, CTC set the benchmarks for lease rates in the country. Initial calculations at the time were around CNY¥26,000 per tower on an annual basis or CNY¥2,166 pcm (US$325 based on forex in July 2016).
TowerXchange’s calculation of CTC revenue per tower from each MNO in 2016
ctc-revenue-per-tower.png Financial performance
China Mobile’s networking leasing costs to CTC for 2016 was CNY¥28.1bn, with 1.11mn towers rented, while China Unicom paid CNY¥19.5bn to access 690,000 towers, and China Telecom spent CNY¥14.0bn for the rental of 610,000 towers, according to a Nomura March 2017 report.
CTC chairman and general manager Liu Aili also reported CTC breaking even last year, with a net profit of CNY¥80mn. Goldman Sachs noted CTC becoming profitable in Q42016, with EBITDA at 59%. Moving forward, CTC is expected to enjoy operating leverage from tenancy ratio growth as the three MNOs continue to rapidly deploy their 4G networks.
Road to IPO
Since 2016 it has been well publicised that CTC was targeting to IPO by the end of 2017. In late March it was confirmed the initial listing will be in Hong Kong, with domestic A-share perhaps to come later, with no specific timelines in place. The premium on listing price for A-share is apparently significantly higher than a HK listing, however, one industry source noted it could be the perceived prestige and quality that has CTC pursuing HK to start.
The appetite from international investors seems mixed, with potential concerns on the true value of the entity and its state association, but also the appeal of a mega infrastructure vehicle in a country with over 1.8mn towers. Some analysts have cautioned that the growth potential in China may flatten out in three to five years, with other industry sources suggesting that CTC was originally formed to manage and optimise O&M, rather than tower construction. The talks around new business models include electric vehicle (EV) charging stations and outdoor advertising, though to date the core focus has been on maximising end-to-end efficiency, while setting the business model for tower leasing in the country.
