China Tower Corporation (CTC) is set to offer stock market investors in Hong Kong a rare alternative against the recent spate of technology listings as it readies what could be the world’s largest initial public offering in four years.
Hoping to raise up to HK$68.1 billion ($8.7 billion), the world’s largest telecom tower company triggered plans on Monday to sell 43.1 billion shares, or 25% of its enlarged share capital, at an indicative price range of HK$1.26 to HK1.58 per share.
As it stands, CTC will test investor sentiment for what is a typical old-economy company – characterised by a heavy-asset business model, a stable and predictable cash flow, and consistent earnings.
In the primary markets, old economy companies have largely been out of favour since last year when Hong Kong hosted a number of innovative technology startups with high growth potential. These included loss-making internet companies such as China Literature, Razer, Yixin, Ping An Healthcare & Technology and Xiaomi.
However, the fact most of these tech IPOs have fared poorly in the after-market has reignited hopes for old economy companies like CTC.
Counterintuitively, CTC has perhaps picked a good time to list: investors FinanceAsia have spoken to expect CTC to trade well against a backdrop of broader market weakness given growing trade war fears and the Chinese currency's recent depreciation.
With its highly predictable cash flow, CTC is an ideal defensive play that is less exposed to market volatility. Its monopoly status in the Chinese telecom industry also implies that it would not be directly impacted in the unlikely event of an intensified trade war between China and the US.
CTC’s resilience is underlined by the fact that it feels able to sell its deal close to the valuation it pitched to investors in the early stages of the IPO process. Should it be able to price its IPO at the top of the price range, CTC will be valued at $34.7 billion on a pre-greenshoe basis and $36 billion post-shoe – compared with the $40 billion valuation it pitched throughout the IPO marketing process.
That is in huge contrast to smartphone maker Xiaomi, which was only able to strike a $52 billion valuation on the back of a $100 billion target when it sealed its IPO late last month.
Chinese state-owned enterprises have a notorious history of relying on large cornerstone investors to support their IPOs in Hong Kong, which has been criticised as causing an opaque price discovery process that leads to, in many cases, underperformance and weak liquidity post-IPO.
One salient example is Postal Savings Bank of China, which received 77% of its proceeds from cornerstone investors in its $7.4 billion IPO two years ago, giving it the unwanted record of the highest cornerstone participation in a benchmark Hong Kong IPO.
CTC is coming up with an even larger deal at $8.7 billion, but it is getting only $1.42 billion-worth of pre-deal commitments from cornerstone investors. These together will account for only 16.4% to 20.5% of the total IPO, depending on where it prices.
That would make it one of the lowest cornerstone ratios for a Chinese SOE listing in some years.
The biggest among the 10-strong cornerstone investors participating are private asset managers Hillhouse Capital and Och-Ziff Capital, which have agreed to invest $400 million and $300 million, respectively.
Other cornerstone investors include Darsana Capital ($175 million), Alibaba ($100 million), CNPC Capital ($100 million), Invus Group ($100 million) and Beijing Haidian District State Owned Capital Operation and Management Center ($98.5 million).
ICBC Asset Management, Sinomach and SAIC Motor have also each committed $50 million.
With 1.87 million towers, CTC dominates its national market and is easily the world's biggest owner of telecoms towers. Its nearest rival, Indus Towers of India, has 120,739 towers.
However, CTC offers foreseeable earnings growth too thanks to the country's concerted efforts to build out the 5G wireless infrastructure needed for next-generation technologies such as artificial intelligence and connected cars.
China is currently seen at the forefront of the 5G race. China’s Ministry of Industry and Information Technology estimates that Rmb2.8 trillion ($411 billion) will be invested in developing 5G mobile networks through 2030; about 50% more than the US, its nearest rival.
As a result, the second-largest economy is tipped to own the biggest share of 5G connections globally – up to 40% by 2025, GSMA, the global trade organisation for mobile network operators, forecasts.
“[So] CTC is unlikely to be a high-beta stock like PSBC because it will grow organically as China needs to build more towers for 5G,” a senior investment banker working on the IPO told FinanceAsia. “CTC is the most direct investment for anyone that believes in China’s 5G push.”
In its marketing material, CTC highlights 5G development as a major growth opportunity, saying that it will benefit from increased network density and higher demand for in-building coverage solutions.
CTC is scheduled to close institutional bookbuilding on July 30 and list on August 8.
Joint sponsors of the IPO are CICC and Goldman Sachs. Joint global coordinators are Bank of America Merrill Lynch and JP Morgan.
Source: Company listings