ASSET INJECTION
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China Mobile

Massive telecoms asset injection planned for China's Big Three network operators

PUBLISHED : Tuesday, 07 April, 2015, 7:30am
UPDATED : Tuesday, 07 April, 2015, 8:06pm

Nearly a million network towers on the mainland are expected to be injected into a state-owned telecommunications infrastructure-sharing joint venture, allowing China’s three major network operators to book an estimated 148 billion yuan (HK$187.59 billion) one-time gains in total from the bold government-led asset injection.

It is a milestone development that analysts expect to spur continued growth in the world's second-largest telecommunications services market behind the United States, despite concerns about economic slowdown on the mainland.

In July last year China Mobile, China Unicom and China Telecom together formed the new joint venture called China Communications Facilities Services Corp -- renamed as China Tower Company last September -- to handle the construction, maintenance and operation of telecommunications network towers and certain auxiliary infrastructure across the country.

Although the central government has not announced exactly how the asset-infusion plan for the venture would be accomplished, the Ministry of Industry and Information Technology, the mainland’s top telecoms industry regulator, as well the three operators are working on an August 15 deadline "for some corporate action involving the tower company", analysts at Barclays said in a research note.

"We are taking the view that all ground-based towers of all three operators are to be injected into the tower company at one go," said Anand Ramachandran, the report's lead author and head of Barclays' telecommunications, internet and media equity research for Asia, excluding Japan.

"We estimate the number of towers at 999,000 among the three telecommunications network operators as of the end of last year."

Barclays also projected that China Mobile, the world's largest wireless network operator by number of subscribers, had 540,000 towers in the same period. China Unicom had 279,000 such towers, while China Telecom had 180,000.

"Based on our mid-range replacement value of 250,000 yuan per tower, we estimate one-time extraordinary gains of 81 billion yuan, 25 billion yuan and 42 billion yuan for China Mobile, China Telecom and China Unicom, respectively," Ramachandran said.

None of the three operators have disclosed the number of towers they own, so analysts' estimates have varied.

In a report published in February, Bernstein Research calculated the number of towers to be at 765,000, up from its previous estimate of 200,000. It assumed the cost of each tower at 330,000 yuan.

Bernstein’s senior analyst Chris Lane pointed out in the report that rooftops have no towers. "Operators use various types of brackets to attach their antennae [to rooftops]. These, generally, are small and cannot be shared," Lane said.

What China Mobile, China Unicom and China Telecom have reported are the number of their mobile base stations. At the end of last year, the three operators had combined base stations of about 3.52 million.

After asset injection in the joint venture company is completed, use of all the towers will be shared between the three operators.

According to Barclays, each operator could end up paying from 30,000 yuan to 40,000 yuan in rental charge per tower annually. All three operators, however, would benefit from lower capital expenditure moving forward.

Bernstein's Lane said operators have suggested that towers, on average, account for roughly 6 per cent of mobile capital spending.

"If the operators save 6 per cent of mobile capex, we expect the savings to total roughly 76 billion yuan over the next five years," Lane said.

As China Mobile shifts its 4G network expansion plans to the mainland's rural areas, it is expected to require a significant number of new towers built by the joint venture. Based on company guidance, China Mobile will have 1 million 4G base stations by the end of this year.

Both China Unicom and China Telecom are expected to focus on their separate metropolitan 4G network deployments.

Both China Mobile and China Unicom have not included any tower-related spending in their respective capital expenditure budgets for this year. China Mobile had a 200 billion yuan capital spending guidance, while Unicom was guided for 100 billion yuan.

China Telecom, meanwhile, has made a 6-billion-yuan provision in tower-related construction this year, in case the joint venture cannot fully meet tower build-out demand. Its total capital spending budget this year is 107.8 billion yuan.

The mainland telecommunications services market recorded overall revenue of 1.13 trillion yuan last year.