China Tower Corporation’s valuations from inception to future IPO

China Tower Corporation (CTC), the world’s largest towerco, had stated its ambition to IPO since 2016, with TowerXchange previously reporting in early May the initial target date of late 2017 could get pushed to early 2018, and with Hong Kong seemingly confirmed as the desired bourse. Once veiled in secrecy on its financials, the investment community and industry gained greater clarity following CTCs asset-backed note (ABN) in December 2016. On the heels of CTC’s anniversary in July and ahead of its IPO, TowerXchange has put together a comprehensive guide from the initial asset transfer that took place in October 2015 to key considerations ahead.

The wheels have been in motion for CTC’s initial public offering for quite some time now, with another milestone being its three-year anniversary. It was reported by Reuters in June 2017 that CTC had picked China International Capital Corp Ltd (CICC) and Goldman Sachs to lead its IPO in Hong Kong, with final confirmation pending board approval. It also noted more banks could be added to the final IPO sponsor team.

Estimated valuations for the largest towerco in the world in the past few months range from US$33bn to US$56bn.

This is a unique market where threat from “competitors” is limited given CTC is expected to generally maintain greater than 95% market share, in spite of the presence of the 200+ independent towercos that also serve the three MNOs; political support is strong, and costs to build are favourable thanks to well-managed purchasing. There is the supposed annual escalator of ~2% on tower lease rates, with roughly the same rate as well on opex and maintenance capex to reflect inflation. Growth on the telecom infrastructure side will no doubt continue as China marches on with 4G rollouts and prepares itself for 5G, as well as provide coverage along key infrastructure developments such as highways, subways, and high speed rail.

On the flip side, CTC has one of the lowest lease rates in the world, with generous discounts as additional tenants come on board. 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 costs 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.

Current contracts are reportedly for a five-year period, which means there is a chance the tower lease rate escalator, which had the input of the MNOs, could be renegotiated. While all the MNOs have stakes in CTC, all four organisations are effectively SOEs, so it remains unlikely lease rates would ever reach some of the figures associated with CTC’s towerco peers in other markets. China Unicom’s mixed reform ownership would (for the time being) still see majority ownership remain in the government’s hands.

What makes CTC unique also is that its formation was mandated at the highest level, to engender a culture of “co-build, co-share.” The three MNOs did not have much choice in this matter. Through sharing efficiencies and economies of scale, the towerco was to save on land resources and investments, plus optimise tower building, operations, and maintenance in the country. This would allow the acceleration of 4G rollout nationwide (and eventually 5G) through centralised planning, and potentially level the playing field between market leader China Mobile, and the other two operators China Unicom and Telecom.

In comparison, most of the operator-led towercos/infracos elsewhere (e.g. INWIT, Telxius) were created as a balance sheet re-engineering exercise, as a means to reduce growing debts amidst shrinking margins and pressure to prop up their owners’ share prices with dividends.

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There is no other towerco like CTC in the world, and evident not just to outsiders but also the players themselves.

In a television appearance in December 2016, Liu Aili, Chairman and General Manager of CTC was interviewed alongside senior representatives from the three MNOs and government. When the host asked the three MNO executives to describe their relationship to the towerco during the two years of CTC’s existence, this is how each answered (translation by TowerXchange):

China Telecom (Ke Ruiwen): We have a competitive and partnership relationship.

China Unicom (Zhao Guanlu): We are like brothers. During our operations in the past, us three brothers had been competing/racing, and after getting a little tired we realised something seemed to be missing. A platform was missing. The creation of the company [CTC] is the emergence of said platform. Four makes a party. There’s more stability since [CTC].

China Mobile (Dong Xi): I think we are like friends.

A top government official also agreed with the description of “brothers,” elaborating that CTC was born out of the three MNOs’ assets and now also serves the three.

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As TowerXchange previously wrote, the transfer of China Mobile, China Unicom and China Telecom’s towers to CTC reportedly yielded an average of just US$22,000 per site, significantly below replacement cost. But an asset transfer between entities all fundamentally State-owned (and owned by each other) is a poor valuation benchmark. The low transfer cost reflects the depreciation of an inventory which included many 10+ years old towers, many of which were built to gain market share and with less of a view toward longevity and structural capacity, so significant improvement capex may be required. The low price point also reflects the mixed bag of assets being transferred, inclusive of everything from substantial ground based towers, a great many monopoles, rooftops, and even small Wi-Fi offload sites.

At the time, around October 2015, China Daily had reported the transfer of CNY¥203.5bn (~US$31.5bn) worth of telecommunication tower assets, while the Wall Street Journal noted analysts valuing the venture at CNY¥214bn (~US$33.1bn). An article from the Mobile World Live cited yet another estimate at CNY¥230bn (~US$35.6bn).

More specifics emerged out of a March article this year in Chinese media Caixin, which noted actual asset transfers taking place on 14 October, 2015, whereby 1.52mn towers changed hands, for a value of CNY¥231.4bn. This would translate to ~ CNY¥152,000/tower or US$23,5000/tower*, roughly in line with TowerXchange’s previous reporting.

As part of the carve out, China Telecom (which had the least number of towers out of the three MNOs) received only equity as part of the deal (29.9%), while China Mobile and China Unicom received both equity (40% and 30.1% respectively) and a combined CNY¥91.9bn (~US$14.2bn) in cash. The Caixin article also noted that the original agreements required CTC to pay all outstanding payments and interests to China Mobile and China Unicom by the end of 2017.

Around the same time, China Reform Corporation also injected a further CNY¥7.7bn (~US$1.2bn) in cash for a 6% stake, diluting the three MNOs shares to 38%, 28.1% and 27.9%. China Reform’s exact investment was confirmed this year by a trusted source exclusively to TowerXchange.

For most of its existence, CTC’s financials were not made public, with industry analysts piecing together information between the lines of the disclosures of the three MNOs. However, in December 2016, CTC issued its first asset-backed note (ABN) with China Merchants Bank as the lead underwriter. This lifted the veil on the towerco’s numbers, apparently just for the first half of 2016. Nonetheless, it provided more clarity for the investment community in making sense of a towerco unlike any other. The 1-year ABN at 2.86% per year allowed CTC to raise CNY¥5bn on the back of its receivables from the three operators.

Following the ABN, Bernstein Research released a report in late December 2016 suggesting a valuation then for CTC between CNY¥215bn or US$33.3bn (based on discounted cash flow value) and CNY¥365bn or US$56.5bn (using a similar EV/EBITDA to Bharti Infratel). The report also highlighted a key factor that would affect CTC’s financials: “We also believe towerco is likely to change its depreciation rate from 10 years (which is what the operators historically used) to 20 years. Twenty years (or more) is in-line with normal international practice,” wrote Chris Lane, senior research analyst and head of Asia-Pacific telecommunications.

In April 2017, a Goldman Sachs report estimated CTC was worth about ~US$54bn, with a 30% discount to international peers.

Most recently in June, Reuters reported “a 10-20% stake sale could generate between US$5bn to $10bn,” effectively placing valuation at US$50bn. TowerXchange estimates tower count to be around 1.75mn at that time, implying value per tower of ~ US$28,570.

When CTC finalised its leasing and pricing agreement with the three MNOs in July 2016, it set the benchmark for lease rates in the country.

CTC lease rates are significantly lower than anywhere else in the world, with initial estimates around CNY¥26,000 per tower on an annual basis or CNY¥2,166 pcm (US$335). This figure is surprisingly low and suggests a business model calibrated in favour of creating value for the MNOs.

For year-end 2016, lease rates paid by the three MNOs ranged between CNY¥1,913 (US$296) to CNY¥2,355 (US$365), according to data by Nomura.

Like India, when additional tenants are added to Chinese towers, existing tenants’ leases are discounted.

As noted earlier in this report, there is also an escalator, “an inflation adjustment factor” which is common in tower agreement contracts.

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 70% of new towers shared, based on stats quoted 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.

Local Chinese 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 an exclusive interview with the People’s Post and Telegraph in August 2017, Liu Aili noted tower sharing has rapidly increased from 14.3% to 73% over the three years of CTC’s existence. More specifically, sharing between new builds for China Mobile, China Telecom and China Unicom have grown from 3.6% to 48.6%, 36.6% to 90.1%, and 20.9% to 92.4% respectively.

While a listing on the domestic A-share market could prove more valuable in generating higher valuations and therefore raise more money, there is speculation that a HK listing is perceived to be more “prestigious and better quality.” In addition, not only is the waiting list long for China’s two main boards (Shenzhen and Shanghai), CTC also does not meet the criteria for positive net profits in the last three years, as it only broke even and became profitable in Q4 2016.

Someone recently asked whether CTC had ever considered listing on the US stock exchanges. Whilst an interesting question, the conversation from the get go was always between China and HK. A US-listing could prove more complicated than CTC may be prepared for at this stage; there are political implications to consider; plus given its structure, CTC’s financials could pale in comparison to the likes of its “peers” American Tower, SBA Communications and Crown Castle. The fact that investors within the US market may be better educated about the tower industry may actually be a deterrent as the State-towerco’s fundamental philosophy and operating principles differ from private, independent towercos.

CTC is part of the growing global trend of MNO-led tower carve outs, wherein many MNOs seek to maintain majority control while monetising a minority stake. Out of the top 20, six towercos (including CTC) are partnerships between two or more MNOs. In fact, only CTC and Indus Towers in India have three MNOs each as shareholders: CTC is a joint venture between China Mobile, China Telecom, and China Unicom, while Indus was formed through a partnership between Bharti Airtel, Vodafone, and what is now Idea Cellular.

Compared to Indus Towers, CTC is different in that the three MNOs and CTC are all state-owned enterprises (SOEs) as opposed to private, independent enterprises, which further complicates the relationships between towerco and the three MNOs, who are both shareholders and clients.

TowerXchange has compiled the world’s top 20 MNO-led towercos and joint infracos by site count, including insights into their monetisation strategies, with China tower Corporation (CTC) sitting at the top of the list.

For more details, read “The rise of the operator-led towerco.”

Back in October 2015, the range of estimated value for tower assets transferred to China Tower Corporation from the three MNOs were between CNY¥203bn to CNY¥230bn (~US$31.5bn to 35.6bn). Seventeen months later, more specifics of the actual transaction were reported, pegging an asset transfer of 1.52mn towers at CNY¥231.4bn (~US$35.8bn) and per tower value of CNY¥152,00 or roughly US$23,500.

Fast forward to the last few months, where greater clarity into the financials of CTC are available, and some of the growth achieved can be measured. Valuations for China Tower Corporation based on various industry sources are now in the range of CNY¥215bn to CNY¥365bn (US$33.26bn to US$56.46bn). For the time being, TowerXchange is inclined to use the figures from the June Reuters article, which suggests a valuation of US$50bn and our calculated estimate of US$28,570/tower.

Ignoring forex for the time being, this demonstrates an estimated value of US$23,500/tower at time of asset transfer to an increase of US$29,000/tower over a span of 20 months. For comparison, Malaysia-based OCK Group’s acquisition of the SEATH portfolio in Vietnam in December 2016 averaged US$25,355/tower, whereas edotco’s recent acquisitions in Pakistan have averaged US$127,000 (Tower Share/Tanzanite) and US$72,000 (PMCL/Jazz). It’s important to remind readers that cost per tower is a pretty savage metric, taking no account of lease rate or term, and to circle back to the uniqueness of the Chinese market which means that it has no direct global comp.

For the time being, while debt-laden CTC is eager to IPO soon to raise some much needed cash and ease the pressure on interest charges, the process will likely be delayed to the first quarter of 2018 at the earliest. But CTC remains diligent and charges on with its efforts to expand revenue sources and lower costs through diversification, energy management and standardisation

Note: Unless expressly indicated, all CNY to USD figures have been converted at the rate of 1USD to 6.46CNY (August 2017).