Private capitalists generally welcome opportunities to invest in state-controlled industries because of the massive upside potential that can be realised through market-driven reforms.
In reality, however, many investors choose not to take these opportunities as they do not always translate into investment gains -- at least in the short-to-medium term.
It is a conundrum that will likely gnaw away at the minds of private investors as they are invited in the coming weeks to buy shares in the world’s largest telecom tower operator.
China Tower Corporation (CTC) is likely to launch an initial public offering in Hong Kong this week. While the size of the fundraising is yet to be finalised, investment bankers are aiming for a deal of between $8 billion and $10 billion, which would make it the world’s largest IPO since Alibaba’s $25 billion float in 2014.
For telecom specialists, CTC’s looming floatation is more than just a large IPO; it is a symbolic move for Beijing to inject private capital into the state-controlled tower company as part of its mixed-ownership reform of state-owned enterprises.
Such reform has already been undertaken in the telecoms industry after China Unicom, one of the country’s three state-backed telecommunications service providers, raised $11.6 billion in private capital last year.
With CTC’s IPO Beijing is now taking the reform a step further by introducing retail investors as well as institutional investors.
BACKGROUND
CTC was founded in 2014 by bringing together the tower assets of the country's “Big 3” telcos -- China Mobile, China Unicom and China Telecom own 38%, 28.1% and 27.9% of CTC, respectively.
Setting up CTC was a big step in China’s decades-long reform of its telecommunications industry as Beijing split telecom operations from tower infrastructure ownership, thereby freeing up capital for the telcos as the country accelerated plans to introduce next-generation 5G mobile technology.
For the telecom industry as a whole, the move to consolidate tower assets also reduced redundancies and the overall cost of building out China’s wireless mobile network. According to CTC, it has cut China’s overall tower investment by Rmb107 billion ($16.1 billion) and spared some 18.5 square kilometres of land.
In some respects, CTC was borne out of the communist belief in sharing resources. Chairman Jilu Tong has said the establishment of CTC underscored state efforts to share China’s tower infrastructure with society, as opposed to sharing only among the telcos.
But it is doubtful whether it has made any difference at all since China’s telecommunications industry has historically been dominated by the Big 3. Beijing has also never granted any private telecom licenses on fears it might lead to the leakage of sensitive information and undermine national security.
So rather than breathe new life into the sector through the power of competition, the Chinese government has in fact strengthened the monopolistic characteristics of the already monopolistic telecom sector through CTC, which now controls over 97% of the country’s telecom towers.
As such, CTC’s establishment raises the barrier to entry for would-be private telcos since it means they will hardly have any bargaining power with the sole owner and price setter of tower resources.
On the flip side, CTC’s monopoly in the tower sector benefits its investors by giving it greater pricing power and making it easier to raise lease rates. Whether that sits comfortably with the communist ethos alluded to by the company's chairman is another thing.
According to New Street Research, China’s cell tower lease rates are currently among the lowest in the world at about $750 per month, while the US leads at about $2,000.
PROXIES
CTC will set a precedent for Asia’s telecommunication industry as the first state-backed tower company to list on a stock market. China will also be the third Asian nation with pure-play listed tower companies alongside India and Indonesia.
Potential Investors seeking a reference for CTC’s valuation will look to the likes of India’s Bharti Infratel and to Indonesia’s Protelindo and Tower Bersama, which are trading at 8.4 times, 7.6 times and 10.9 times EV/Ebitda on a 2018 full-year basis, respectively.
CTC’s fair value is largely in line with its peers. CICC, one of the joint sponsors of the IPO, has given CTC a fair value of $32.8 billion to $42 billion, which translates to around 9 times to 10.5 times EV/Ebitda this year.
Another joint sponsor Goldman Sachs has come up with a richer estimate of $40.5 billion to $51.1 billion.
Still, the valuation should be fairly in line with the Indian and Indonesian tower companies after factoring in the discount that usually comes with an IPO.
However, CTC’s scale is hardly comparable with other tower operators, seeing as it has some 1.87 million telecom towers, according to its preliminary prospectus. That is 15 times larger than Indus Towers, India’s largest tower company with 120,739 towers.
There are only 11 operators in the world with more than 10,000 towers, according to consulting firm TowerXchange.
As reported earlier, CTC’s highly visible cash flows and earnings make it an ideal defensive play at a time when global equities continue to retreat on trade war fears.
