China Tower Corporation completed the world’s biggest IPO in two years in August 2018, and is poised to be a critical enabler of 5G through macro and micro sites, site based information and IoT services. This article reviews CTC’s KPIs, highlights four distinct business models within the corporation, and shares CTC’s forecasts for the growth of the tower market in China.
China Tower Corporation (CTC), the world’s largest tower company, raised US$6.9bn in an IPO on the Hong Kong stock exchange, making it the largest market debut since 2016. The state-owned, Beijing-based company, commands 97.3% of the revenue from the infrastructure network that supports China’s mobile communications. CTC sold shares at HK$1.26 each, valuing the company at HK$217bn (US$27.6bn). In doing so, CTC brought to market approximately 25% of their enlarged share capital.
The CTC IPO was keenly priced to attract sufficient demand from investors, with shares priced at the bottom end of a range that had topped out at HK$1.58 a share. The IPO price represents a 7.1x multiple of CTC’s adjusted EBITDA for 2018.
CTC’s IPO attracted private and state-backed investors that bought a combined US$1.4bn portion of the deal. Chinese private equity group Hillhouse Capital took a US$400mn stake and Alibaba took US$100mn. Other investors included state-owned Industrial and Commercial Bank of China, China National Petroleum Corporation and SAIC HK. New York-listed OZ Management absorbed a US$300mn stake.
The joint sponsors for the China Tower float were CICC and Goldman Sachs. Bank of America Merrill Lynch and JP Morgan were joint global co-ordinators and joint book runners.
CTC revenue, profit (after tax) and tenancy ratio growth 2015-17
The vision behind creating CTC
With the rapid growth of internet communications in China, the State-owned Assets Supervision and Administration of the State Council (SASAC) and the Ministry of Industry and Information Technology (MIIT) prompted the carve-out of CTC, a joint venture initially between the country’s three MNOs, to promote a culture of infrastructure sharing in China. This is referred to by Chinese stakeholders as the ‘co-build, co-share’ philosophy. CTC was formally created on 15th July, 2014 to consolidate and share China’s existing towers, to construct shared additional towers, and to save land and tower resources.
In 2015 CTC absorbed 1.44mn ‘legacy’ towers from China’s three MNOs, with a prevailing tenancy ratio of around 1.1x, increasing this to 1.28x by the end of that same year. Three years later, CTC has built over half a million towers which, after decommissioning, scaled their portfolio to just over 1.898mn towers at the time of the IPO, leasing-up the portfolio to a tenancy ratio of 1.43x (increased to 1.92mn towers and 1.49x tenancy ratio by Q318).
CTC now has over 15,000 employees.
CTC claims their market share in the domestic telecommunications tower infrastructure industry is 96.3% in terms of number of sites, although TowerXchange believes CTC to be even more dominant, owning 97.5% of the country’s towers, reflecting the existence of a fragmented ecosystem of ~200 independent towercos in China than own just under 50,000 towers in total.
CTC has 97.5% market share in terms of site count
The fragmented structure of China’s ~50,000 tower independent sector
CTC’s revenue has reached RMB68.6bn with RMB1.9bn gross profit for its tower business, where just 0.38% of revenues were from micro sites as opposed to macro towers.
Chinese tower market forecast to increase from 2.8mn tenants on 1.954mn towers today to 4.5mn tenants on 2.78mn towers by the end of 2022
CTC commissioned a report by Frost & Sullivan, which forecast a steady increase from China’s 2.8mn tenants today, to 4.5mn by 2022 (CAGR of 10.2%). This would drive the country’s prevailing tenancy ratio to 1.62x. Adding forecast TSSAI customers, that tenancy ratio would further rise to 1.72x by the end of 2022.
Analysing Frost & Sullivan’s forecasts, TowerXchange would suggest that China’s total site count will rise from today’s 1.95mn to 2.78mn by 2022. Assuming CTC maintains it’s current 97.5% market share, this suggests their balance sheet will include 2.71mn towers with and 4.4mn telecom tenants, plus 270,000 TSSAI tenants by the end of 2022. 70,0000 towers would be in the hands of what we think will be an increasingly consolidated independent towerco sector – indeed by 2022 we may start to see CTC selectively acquiring independent towercos in China.
Frost & Sullivan forecast the total tower market size in China rising from RMB70.6bn to RMB109.1bn (CAGR of 9.1%).
The development of CTC’s pricing mechanism
CTC lease pricing is negotiated at arm’s length between the towerco and its three MNO partners and principle shareholders. See the pricing principles set out in the equation below
There is a CPI-linked escalator allowing maintenance costs and site fees to be adjusted annually.
The discounts for co-locating tenants on CTC towers, already the highest TowerXchange has seen in the world, were upwardly renegotiated at the turn of 2017. As of January 2018 and through 2020, base price discounts for second tenants rose from 20% to 30%, and from 30% to 40% with the addition of a third tenant. In addition the anchor tenant base price discount was increased from 25% to 35% with the addition of a second tenant, rising to 45% with the third tenant. Had these same discounts been applied to year ending December 31 2017, CTC’s operating revenue would have been decreased by 6%.
The four principal businesses of CTC
By 2022 the number of wireless communication users in China is expected to reach 1.56bn. To serve this massive and growing market, CTC is engaged in four distinct categories of sharing-oriented businesses:
Tower lease up: The core of their business for the foreseeable future, CTC provides and shares ground and vertical real estate on almost 1.9mn towers with China’s three MNOs, providing a full service inclusive of maintenance and power services.
Small cells: CTC has a relatively new small cell business unit which turned over RMB257mn in 2017, representing 0.37% of CTC’s total turnover. CTC has over 20,000 small cell tenants on a little over 16,000 sites at time of writing.
DAS: CTC works with the three Chinese MNOs to build Distributed Antenna Systems (DAS) in buildings and tunnels. At the end of 2017, CTC had 16,978 DAS sites, generating RMB1.3bn (up from RMB0.4bn in 2016), representing just under 2% of total operating revenues.
Trans-sector site application and information business (TSSAI): CTC’s TSSAI business provides site resources services and site-based information services to meet diverse needs of various customers including CCTV, outdoor advertising, satellite signal augmentation, earthquake, environmental and meteorological monitoring. Launched in 2016, TSSAI revenues have increased from RMB19mn in 2016, to RMB169mn in 2017, and RMB374mn in the first half of 2018 alone!
Comparing the 2017 operational revenues of CTC’s four businesses (RMB millions)
While DAS and small cells represented just 2.2% of CTC’s revenue in 2017, both categories are growing fast, and 5G will accentuate that growth. While government policy dictates that China’s ‘Big Three’ telecom service providers will ‘in principle’ discontinue constructing their own towers and DAS in key venues, there is no restriction on the construction of small cells or DAS in other locations, meaning there is no guarantee that all of China’s DAS and small cells will be deployed by CTC.
The fortunes of CTC remain intrinsically linked to those of the ‘Big Three’ telecom service providers in China (China Mobile, China Telecom and China Unicom), who accounted for 99.4% of CTC’s revenue at the end of 2017 (down from 99.8% the previous year). As such, one of the principle risks faced by CTC is the potential merger of China Telecom and China Unicom.
What’s next?
China is racing to the 5G era, with fibre and IoT deployment booming. Since 2015, China has outspent the U.S. by US$24bn in 5G infrastructure and has built over half a million new cell sites, while the U.S. has built fewer than 30,000 in the same time frame. In China, demand for 5G sites is expected to be several multiples greater than demand for 4G sites. With 97.5% of China’s existing passive infrastructure network, CTC will take the lead in rolling out the infrastructure of 5G to build and manage 5G macro and micro sites across China.
Meanwhile, CTC continues to look beyond their core macro tower business model, and has partnered with China’s two major power grid operators, State Grid Corp. of China and China Southern Power Grid Co., Ltd to lease up their transmission towers to telecom tenants. CTC plan to work with more power grid operators to extend the “co-build, co-share” philosophy to include electricity transmission towers.
The sharing of transmission towers, a breakthrough in resource sharing between the utility and telecommunication industries, will not only speed up the construction of 5G, but also lower the construction costs of communication base stations.
The sheer scale of their domestic market suggests CTC will remain focused on China for the next five to eight years. However, CTC has not precluded exploring opportunities within the ‘One Belt, One Road’ initiative, exemplified shortly after the IPO when China Tower announced a partnership with the government of Laos, in a joint venture controlled and 70% owned by CTC.
How and what CTC buys
CTC has its own online procurement platform. All the procurement and supplier activities are conducted either through this platform, which has an open bidding and quoting process, or through conventional bidding and quoting processes governed by Chinese law and regulation, still managed through CTC’s IT system.
CTC acquires construction, O&M, towers and shelters, ancillaries, power equipment, air conditioning and DAS through their e-procurement platform. Suppliers can register on the platform for free, as long as they hold a valid manufacturing license in China (for product providers), are registered with the State Administration for Industry and Commerce of China (SAIC), and pass a third-party audit. Some smaller suppliers are not on the platform, but instead work through those that are and act as subcontractors.
China Tower continues to develop the platform with a newly created credit score and e-invoice system within the platform.
CTC is responsible for both primary and backup power at all their cell sites, governed by their “e-maintenance model”, and cycles battery banks extensively to avoid premium rate grid tariffs. CTC is leading the way in the recycling of EV batteries to replace lead-acid batteries at cell sites.
Over 1.4mn of CTC’s sites are remotely monitored. CTC uses proprietary platforms for operational workflow and infrastructure lifecycle management.
CTC has driven down their cost of maintenance from 10.3% of operating revenue to 9% between 2016 and 2017.
