Struggling operator Unicom likely to shine with China Tower IPO
China Unicom, the world’s sixth-largest wireless network operator by number of subscribers, is predicted to profit the most from the highly anticipated public listing of state-backed China Tower Corp, the mainland telecommunications industry’s infrastructure-sharing joint venture, analysts said.
Their forecast followed the reaffirmation made last month by China Tower chairman Liu Aili that the company was keen to pursue an initial public offering by the end of next year.
China Tower was established by China Mobile, Unicom and China Telecom in July 2014 to be responsible for all the construction, maintenance and operations of their telecommunications network towers and auxiliary infrastructure across the mainland.
“Unicom would see the biggest benefit from that listing,” Bernstein Research senior analyst Chris Lane told the South China Morning Post.
That represents much-needed good news for investors of struggling Unicom, which had been losing subscribers as it lagged China Mobile and China Telecom in 4G network development. It has also seen negative profit growth in the past several quarters.
“Any higher valuation of the tower company would have a bigger impact on Unicom’s lower overall market capitalisation,” Lane said.
Bernstein calculated that China Tower, in which the three operators pay tower usage fees, was worth about 215 billion yuan, based on its discounted cash flow, which is a valuation method used to assess the future value of an investment.
“Assuming no current value is being attributed, a listing at 215 billion yuan would increase Unicom’s value per share by 28 per cent,” Lane said.
It would compare favourably against an estimated 20 per cent rise for China Telecom’s value per share and a 5 per cent lift for China Mobile.
Unicom, which recorded 262.58 million total mobile subscribers at the end of October, had a market capitalisation of HK$232.29 billion as of Friday.
Those figures pale in comparison to the HK$1.71 trillion market capitalisation in the same period for China Mobile, the world’s largest wireless network operator, which also had 845.82 million total subscribers as of October 31.
China Telecom had a market capitalisation of HK$305.12 billion as of Friday and 213.91 million mobile users at the end of October.
Lane pointed out that increased profitability of China Tower would also have the most substantial impact on Unicom, which has had lower profits than its two mainland peers since last year.
He said market speculation was rife that China Tower’s existing 10-year computation for the depreciable life of the three operators’ network towers would be changed before its share offer.
“Most tower companies globally use at least [a computation of] 20 years to depreciate their towers,” he said. “We agree the change ... would make sense and assume this is likely to happen.”
Bernstein estimated such a change, if it was adopted today, would see China Tower become immediately profitable with four billion yuan in earnings this year and nine billion yuan next year, compared to a small 100 million yuan profit this year and 1.5 billion yuan next year under the current 10-year depreciation computation.
Joel Ying, a Nomura research analyst, said in a report earlier this month that China Tower “should help China Unicom boost its earnings” over the next few years.
Nomura estimated that Unicom would see its net profit hit 684 million yuan this year, down from 3.47 billion yuan last year, as the operator continued to post disappointing earnings for the past three quarters.
Based on their China Tower asset contributions, China Mobile has a 38 per cent share, Unicom has 28.1 per cent and China Telecom has 27.9 per cent. State asset management firm China Reform Holding has a 6 per cent share.