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Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

China Unicom Hong Kong (Adr) / Equity Bottom-Up

<ul><li>All three Chinese telecom service companies have announced that all of their tower assets are to be sold to China Tower Corp., a move which we believe will generate value for the China telcos.</li><li>The acquisition price paid by China Tower will be approximately CNY 116.4 billion, CNY 63.2 billion and CNY 34.3 billion for China Mobile, China Unicom and China Telecom, respectively. The companies will book pretax, pre-expense gains of approximately CNY 19.5 billion, CNY 9.7 billion and CNY 5.1 billion, respectively, given that the appraised values are higher than the book values.</li><li>However, the rates at which the companies will lease the tower assets back from China Tower are still being negotiated, and this is key for determining a forward-looking valuation for China Tower. This true forward-looking value may well differ from the acquisition price, given that the acquisition price is based on replacement value.</li><li>We see China Tower Corp. as potentially generating value for the listed telecom companies in two main ways. First, it will encourage sharing of both existing and new towers, which should lower the capital intensity of the whole industry. We estimate that this could be worth 2%-5% of the valuations of the existing Chinese telcos. Second, China Tower could see a valuation uplift similar to those seen in other international markets, as rental payments that are valued on a relatively lower rating within the telcos are valued more highly in the tower company.</li></ul>Analyst:&nbsp;Dan BakerFull report below the fold...

All three Chinese telecom service companies have announced that all of their tower assets are to be sold to China Tower Corp., a move which we believe will generate value for the China telcos.The acquisition price paid by China Tower will be approximately CNY 116.4 billion, CNY 63.2 billion and CNY 34.3 billion for China Mobile, China Unicom and China Telecom, respectively. The companies will book pretax, pre-expense gains of approximately CNY 19.5 billion, CNY 9.7 billion and CNY 5.1 billion, respectively, given that the appraised values are higher than the book values.However, the rates at which the companies will lease the tower assets back from China Tower are still being negotiated, and this is key for determining a forward-looking valuation for China Tower. This true forward-looking value may well differ from the acquisition price, given that the acquisition price is based on replacement value.We see China Tower Corp. as potentially generating value for the listed telecom companies in two main ways. First, it will encourage sharing of both existing and new towers, which should lower the capital intensity of the whole industry. We estimate that this could be worth 2%-5% of the valuations of the existing Chinese telcos. Second, China Tower could see a valuation uplift similar to those seen in other international markets, as rental payments that are valued on a relatively lower rating within the telcos are valued more highly in the tower company.Analyst:&nbsp;Dan BakerFull report below the fold...

Tower Company Information Will Likely Be a Potential Stock Catalyst