China Tower’s US$6.9 Billion IPO is a Part of China’s 5G Plan

China Tower Corporation (CTC) was formed in 2014 from the combined tower assets of China Mobile, China Unicom, and China Telecom. It is the world’s largest towerco, operating and managing 1.9 million towers that serve 2.7 million tenants as of December 2017, according to the company. China Mobile, China Unicom, and China Telecom currently own a 38%, 28.1%, and 27.9% stake respectively in CTC; state-owned asset manager China Guoxin Holdings owns the remaining 6%.

In 2018 CTC raised US$6.9 billion in its Initial Public Offering (IPO) on the Hong Kong stock exchange, valuing the company at about US$27.6 billion. This was the world’s largest IPO in the last two years and the largest in China since Alibaba’s US$25 billion IPO in 2014. CTC plans to use a major portion (60%) of the proceeds to update its existing towers and to build additional towers as it accelerates 5G network construction.

The Chinese Mobile Network Operators (MNOs) are expected to build 5G networks for large-scale deployment starting in 2020. These MNOs will use the existing tower sites for basic 5G coverage, but since the range of 5G signals is less than that of 4G (for equivalent radiated power at the same site), many more sites will be required. As a result, MNOs are expected to densify 5G using 5G small cells and Distributed Antenna Systems (DASs). Consequently, China is expected to invest a total of US$400 billion in 5G over the next five years; by the end of 2022, the number of 5G base stations in the Chinese market will be approximately 2.4 million, according to CTC.

With 1.9 million towers CTC owns and operates more towers than the rest of the world combined. By comparison, the United States—with only 200,000 towers—is dwarfed by CTC’s 1.9 million towers. Major towercos such as American Tower own 170,000 towers globally, with 40,000 domestic towers and 1,700 DASs. Crown Castle’s US portfolio includes 40,000 towers and 60,000 small cells. If we look at other markets with populations similar to China’s, Bharti Infratel in India operates only 92,000 towers; in Europe, Cellnex owns and operates 28,000 towers.

The reason this makes sense for the Chinese telecom industry is that the MNOs must now share towers and infrastructure instead of each duplicating, building, and operating their own network. This is a large saving in capital expenditure, as colocation reduces the site acquisition and construction costs and will also lead to shortened network build-out times. As 5G is deployed more densely than 4G, this demand for colocation and sharing will only increase. CTC expects their tenancy ratio of 1.43 in 2017 to increase to 1.72 by the end of 2022. By comparison, American Tower reported an average tenancy of 1.9 at the end of 2017; this implies that CTCs plans have sufficient headroom to grow.

In addition to standard macro, small cell, and DAS segments, CTC operates a Trans-Sector Site Application and Information (TSSAI) segment. It is the TSSAI segment which reveals a potentially lucrative way to monetize CTC’s enormous tower and site resources, in addition to the existing tower and DAS segments. This cross-industry business integrates site resources, transmission lines, data platforms, and a variety of third-party devices to provide customers with information services for data collection, aggregation, analysis, and application, according to the company. The TSSAI business is driven by the Internet of Things (IoT), big data, and Artificial Intelligence (AI). CTC’s customers include government authorities in charge of environmental protection; broadcasting and digital television; and forestry, marine, and power companies. The company also uses its tower sites for advertising and video surveillance satellite earth stations and is planning a network of Electric Vehicle (EV) charging stations.

In comparison to other towercos these are innovative uses of the asset, and we believe this rise of the TowerCo as a Service business model is a sign of things to come.

CTC does not compete with Western towercos but offers an example of maximum asset leverage (towers, DAS, fiber) for profitability and Return on Investment (ROI) gains. Of course, Western towercos do the same and are responding to new spectrum becoming available, such as C-Band and millimeter wave for 5G and FirstNet and OnGo in the United States. Western towercos are also anticipating sharp increases in network densification required by 5G by investing in fiber and small cells and collaborating with municipalities for access to public rights of way and sharing assets. Western towercos have the advantage in profitability now with a higher occupancy or tenancy. A first or anchor tenant generates a gross margin of 40% and an ROI of only 3%, but when colocating a second or even a third tenant on existing tower or fiber assets, the business becomes lucrative. According to American Tower, a gross margin of 73% and an ROI of 13% for two tenants and a gross margin of 83% and an ROI of 24% for three tenants are typical expectations. ABI Research expects Western towercos to continue this trend as they respond to the same dynamics in the mobile industry. We do not see that CTC will offer any time to market advantage for China versusthe United States as we approach the time to 5G’s commercialization, as many in the press have reported.

Except for EV charging stations (which we believe is a business case worthy of consideration by Western towercos), other services becoming available in this Towerco as a Service model are to be found in edge computing colocation services, where network compute, storage, and networking are disaggregated to the base of the tower or at wireless aggregation hubs. This is a prerequisite for the implementation of 5G low latency services.

A US bellwether is Crown Castle, a company that operates 40,000 towers, 60,000 small cells, and 65,000 route miles of fiber and is collaborating with VaporIO to augment the role of the tower as the industry disaggregates data center functionality to the edge of the network for ultralow latency, virtualization, and hyperlocal content caching and distribution. The company’s Kinetic Edge platform plans dense compute per square foot at the tower sites or in wireless aggregation hubs as it anticipates the low latency demands of 5G’s Ultra Reliable Low Latency Communications (URLLC) where the tower will become the new data center.