Materials, IPO & Equity Analyst

Venkat Ramana Nandyal

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

<a href="https://www.smartkarma.com/entities/27037" target="_blank" data-smartkarma-citation="entities:27037:1">China Tower Corp Ltd (1409417D HK)</a> is a tower infrastructure company with a market share of almost 100% in China.  <a href="https://www.bloomberg.com/news/articles/2018-05-15/china-tower-files-for-hong-kong-ipo-that-may-raise-10-billion" target="_blank">According to Bloomberg report</a>, China Tower is expected to raise US$10B. In this note, we focus on main concerns from the point of view of minority shareholders that needs to be addressed by the management.<ol><li>Conflict of Interest: The major shareholders are also the major customers of the China Tower (CTC), we do not believe that this conflict of interest will abate post IPO. The minority shareholders would rightly be concerned when the customers of the China Tower decide dividends, capital allocations and other major policies affecting their interests. #</li><li>Profitability: CTC had posted &lt;3% net profit historically, and its revenue from top 3 customers and shareholders account for nearly 100%. We do not believe that the CTC is exercising its pricing power compared to its global peers. Management needs to assure minority shareholders that it has plans to improve its profitability in excess of the cost of capital and not pursue a strategy which will destroy value.</li><li>Cashflow Generation: CTC has not generated free cash flow in since formation in 2014. In its prospectus, CTC has indicated that its capex cycle is almost complete, and it would reap the rewards in short to mid-term. GER believes that the telecom industry is in the threshold of implementing 5G and expect an uptake in capex. We expect CTC to provide capex guidance for implementing 5G as it will have a significant impact on the future cash flows and valuations.</li><li>Cash Burn to Continue: We believe that proceeds from IPO would be used to repay nearly ~US$15B of debt that is due in the next 12 months. We believe that CTC would need to borrow further to meets its capex program if the management embarks on implementing 5G.</li></ol>

China Tower Corp Ltd (1409417D HK) is a tower infrastructure company with a market share of almost 100% in China.  According to Bloomberg report, China Tower is expected to raise US$10B. In this note, we focus on main concerns from the point of view of minority shareholders that needs to be addressed by the management.Conflict of Interest: The major shareholders are also the major customers of the China Tower (CTC), we do not believe that this conflict of interest will abate post IPO. The minority shareholders would rightly be concerned when the customers of the China Tower decide dividends, capital allocations and other major policies affecting their interests. #Profitability: CTC had posted &lt;3% net profit historically, and its revenue from top 3 customers and shareholders account for nearly 100%. We do not believe that the CTC is exercising its pricing power compared to its global peers. Management needs to assure minority shareholders that it has plans to improve its profitability in excess of the cost of capital and not pursue a strategy which will destroy value.Cashflow Generation: CTC has not generated free cash flow in since formation in 2014. In its prospectus, CTC has indicated that its capex cycle is almost complete, and it would reap the rewards in short to mid-term. GER believes that the telecom industry is in the threshold of implementing 5G and expect an uptake in capex. We expect CTC to provide capex guidance for implementing 5G as it will have a significant impact on the future cash flows and valuations.Cash Burn to Continue: We believe that proceeds from IPO would be used to repay nearly ~US$15B of debt that is due in the next 12 months. We believe that CTC would need to borrow further to meets its capex program if the management embarks on implementing 5G.

China Tower IPO Preview: Feeble Safeguards for Minority Shareholders