CICC Maintains “Outperform Industry” Rating for China Tower, Raises Profit Forecast
Zhitong Finance APP has reported that CICC, a leading Chinese investment bank, has released a research report maintaining its “outperform the industry” rating for China Tower (00788). The bank cites good cost control in the first half of the year as the main reason for this positive outlook. CICC also maintains its revenue forecast unchanged for 2023/24 but has lowered the maintenance cost for the same period. As a result, the bank has raised its profit forecast for 2023/24 by 3% to 9.47 billion yuan and 10.72 billion yuan respectively. The target price for China Tower’s stock is set at HK$1.2.
China Tower reported a revenue of 46.46 billion yuan in the first half of 2023, with a net profit of 4.84 billion yuan. This represents a year-on-year growth of 14.6% in net profit, exceeding the bank’s expectations. The revenue was in line with expectations while maintenance costs were lower than anticipated, contributing to the strong profit performance.
CICC highlighted several key points in its report. Firstly, it noted that indoor distribution revenue for China Tower experienced rapid growth, compensating for a slight decline in tower revenue. In the first half of 2023, operator business revenue reached 40.91 billion yuan, a decrease of 1.1% compared to the previous year. This decline was attributed to shared discounts resulting from a new pricing agreement. However, China Tower saw a 24.4% increase in revenue from indoor distribution, driven by an expansion in the number of tenants in tower stations. CICC believes that the strong growth in indoor distribution revenue will lead to steady growth in operator business revenue.
The report also focuses on China Tower’s two-wing business, which encompasses digital governance and initiatives related to the “dual carbon” policy. In 1H23, the company’s two-wing business revenue reached 5.36 billion yuan, a year-on-year increase of 33.7%. This growth was led by the Zhilian business, which focuses on digital governance in key industries such as forestry and land. Additionally, energy business revenue saw a significant increase of 38.5%, driven by power replacement and backup services. CICC expects the two-wing business to maintain high growth due to the strong growth potential of the digital economy and the “dual carbon” policy.
CICC also praised China Tower’s cost control measures, as well as a decrease in depreciation and amortization expenses. In the first half of 2023, the company’s EBITDA increased by 0.2% year-on-year to 32.02 billion yuan. With refined operations and lower costs and expenses, China Tower achieved a 16.0% operating profit margin, outperforming the bank’s expectations. CICC remains optimistic about the company’s profitability and expects it to continue increasing.
However, the report does highlight some risks. CICC warns that maintenance costs, site operation, and support costs could exceed expectations in the second half of the year, potentially impacting profitability. It also mentions the possibility of new business development falling short of expectations.
In terms of cash flow, China Tower faced temporary pressure due to adjustments related to the new business pricing agreement. Net operating cash flow for 1H23 decreased by 63.1% to 11.56 billion yuan compared to the previous year. This was mainly due to the need to confirm order details with operators in various provinces and the upgrade and adjustment of the billing system. Capital expenditure in 1H23 increased by 41.1% to 12.82 billion yuan, primarily driven by increased investment in site construction and renovation. As a result, free cash flow for 1H23 fell by 105.7% year-on-year to -1.267 billion yuan. CICC anticipates that the company’s cash flow may gradually improve in the second half of the year as the adjustments related to the new business pricing agreement are completed.
Overall, CICC’s research report reinforces its positive outlook on China Tower, citing good cost control, strong growth in the two-wing business, and profitability exceeding expectations.