Decelerating 5G Expansion Will Erode Core Tower Value

Key Takeaways

• Softer 5G rollout, asset sharing, and technology alternatives weaken core tower revenue, exerting pressure on pricing and margins.
  
• Dependency on top telecom clients and lackluster diversification hinder growth prospects and leave earnings vulnerable.
  
• Expansion into smart infrastructure, digital energy, and efficiency initiatives diversifies revenue and profitability, supporting investor returns and enhancing China Tower's resilience amid telecom network evolution.

Catalysts

Provides telecommunication tower infrastructure services in the People's Republic of China.

• The pace of 5G base station construction is decelerating, with new site additions dropping from 568,000 in 2023 to 412,000 in 2024, and management guiding for stable or lower capital expenditure ahead. This slowdown points to diminishing new tower demand, directly capping long-term revenue growth from the core tower business as network expansion matures.
  
• Over 95 percent of new 5G deployments are co-located, meaning telecom operators are maximizing shared infrastructure rather than building new dedicated sites. This increasing asset sharing reduces the need for greenfield expansion and places persistent pricing pressure on China Tower's rental rates, threatening both top-line growth and future EBITDA margins.
  
• Customer concentration risks remain acute, as nearly all revenue is derived from China Mobile, China Unicom, and China Telecom. As these consolidated state-backed operators move toward further network sharing and government-driven cost controls, China Tower's bargaining power continues to erode, likely resulting in margin compression and stalling earnings growth.
  
• The company's attempts to diversify through new energy services and digital infrastructure have not yet delivered substantial revenue, and face slow take-up as well as high development costs. Continued underperformance or inability to scale these new businesses would cement China Tower's dependence on its stagnating core, constraining overall revenue diversification and future ROE.
  
• Technology advancements such as private 5G networks, small cells, and satellite communications are accelerating, giving operators and enterprises alternatives to traditional macro towers. Over time, this will steadily undermine China Tower's core asset utilization, driving lower occupancy, shrinking revenue per site, and further dampening long-term profitability.

China Tower Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on China Tower compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming China Tower's revenue will grow by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.1% today to 14.9% in 3 years time.
• The bearish analysts expect earnings to reach CN¥16.1 billion (and earnings per share of CN¥0.92) by about June 2028, up from CN¥11.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, down from 17.1x today. This future PE is lower than the current PE for the HK Telecom industry at 14.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

China Tower Future Earnings Per Share Growth

Risks

• Sustained investment and innovation in upgrading towers to digital and smart infrastructure, as well as expanding DAS and edge computing, positions China Tower to benefit from the continued need for densification and modernization of telecom networks, which can support persistent revenue and profit growth.
  
• Double-digit growth in the Smart Tower and energy businesses, driven by digital transformation, green mobility, and integrated energy services, provides China Tower with new, fast-rising revenue streams that diversify earnings beyond the traditional tower rental business, potentially leading to higher top-line growth and improved margins over time.
  
• Increasing tenancy ratios and enhanced colocation, supported by the expansion of 5G and future network deployments, suggest that China Tower will continue to realize greater utilization and efficiency from existing assets, which can drive higher return on assets and support stable or growing operating profit.
  
• Effective cost controls, digital transformation, and process automation are leading to improving EBITDA margins and strong operating cash flow, which strengthens the company's net profitability and helps maintain robust free cash flow to fund dividends and future investments.
  
• A proactive shareholder return policy, including increasing the dividend payout ratio and a share consolidation, demonstrates management's confidence in sustained profitability and may drive higher investor demand, supporting upward pressure on the share price.

Valuation

• The assumed bearish price target for China Tower is HK$10.09, which represents two standard deviations below the consensus price target of HK$13.48. This valuation is based on what can be assumed as the expectations of China Tower's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$16.32, and the most bearish reporting a price target of just HK$9.53.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥107.9 billion, earnings will come to CN¥16.1 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of HK$11.7, the bearish analyst price target of HK$10.09 is 15.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.