China creates operator-led towerco

Is this the start of the largest towerco in the world?

Read this article to learn:

  • The creation and structure of China Communications Facilities Corporation
  • All of China’s BTS sites, including tens of thousands of new towers for 4G, will run through the towerco from 2015
  • The potential future injection of hundreds of thousands of existing towers into the towerco
  • Limited opportunities for foreign investors prior to a future partial IPO
  • An estimated Chinese tower count

Reset your diaries. This is day zero for the Chinese telecom tower industry. With the creation of China’s first towerco, China Communications Facilities Services Corporation Limited, as a shared entity owned by China Mobile (40%), China Unicom (30.1%) and China Telecom (29.9%), we share some commentary from Sanford C. Bernstein, plus TowerXchange’s own analysis.

In August 2014 the structure of a new towerco for China was announced. China Communications Facilities Services Corporation Limited will initially focus on build to suit, but all of China’s legacy towers could potentially be injected into the entity in the future.

Liu Aili, who is also Vice President of China Mobile, will serve as Chairman of the Board at China Communications Facilities Services Corporation, while Tong Jilu will, who is also Vice General Manager of China Unicom, will serve as General Manager.

China Mobile is the leading mobile operator of China with over 760mn subscribers. It is the largest mobile telco by market cap. So far, China Mobile hasn’t engaged significantly with the infrastructure sharing model. China’s other two national operators, China Unicom and China Telecom, have shared towers on a case by case basis.

Estimated current tower count for China

 china-base-stations

The Ministry of Industry and Information Technology (MIIT) has had the objective of promoting infrastructure sharing since 2008, and the 4G network rollout has created the impetus for the towerco to launch. In fact, both the Government and MIIT have recognised the huge investment needed to deploy new sites in rural areas and increase coverage and capacity in urban areas via in-building solutions.

As reported by Chris Lane, Senior Research Analyst, Telecommunications for the Asia Pacific region at Sanford C. Bernstein, the newly formed towerco is likely to focus on greenfield projects in its first operational phase, effectively becoming the BTS branch of the three Chinese MNOs.

The operators’ estimated 600,000+ existing towers, a vast portfolio valued at around US$30bn, could be injected into China Communications Facilities Services Corporation Limited, bulking up the towerco for a potential future partial IPO, undoubtably creating the largest towerco in the world.

Sanford C. Bernstein has recently issued a research note focused on China’s new towerco and its impact on the Chinese telecom market in which it noted that a capex slowdown is likely to occur from 2015, when China Mobile starts to deploy 4G in rural areas. To date 4G coverage in urban areas is substantial and a China Mobile executive has recently commented that 400,000 of the 500,000 4G base stations targeted for year end 2014 have already been deployed. MIIT is likely to leverage the towerco to to bring high speed LTE connectivity to rural areas and smaller towns.

Quoting Sanford C. Bernstein Ltd.: “Investors should note that this is not a commercial deal between the operators and a professionally managed tower company. […] We expect the operators to simplify the process, standardize pricing and write leases contracts with favourable rates. MIIT has already stated that the lease fees will be set ‘low’ by International standards. We assume existing towers are purchased at replacement value (i.e. construction cost) and that leases are set to generate returns of 10%-16% IRR even if they attract less tenants than hoped for.”

As an operator-led towerco, China Communications Facilities Services Corporation invites comparisons with entities such as Bharti Infratel rather than purely commercial, truly independent towercos like American Tower. Nonetheless, this development is extremely important for the vendor community as all of China’s new builds and associated equipment requirements will be funnelled through the towerco, probably via existing subcontractor China Comservice and it’s various regional subsidiaries.

TowerXchange foresee limited near-term opportunities for foreign investors to participate in China’s towerco until an IPO takes place and, for the time being, the newly formed towerco remains focused on value creation for the Chinese MNOs only. With the new entity set to start deploying sites in 2015, we look forward to reporting on any new developments relevant for our readers.

One Comment

As an operator led Towerco – China communications facilities services corporation invites for a better comparison with India’s largest Towerco – Indus Towers Ltd, rather than Bharti Infratel. Indus Towers Ltd is a professionally managed Towerco, launched in 2008, the evolution narrative which played out for Indus since 2008, is very interesting, despite fierce shareholder pressures, Indus established an identity of its own, primarily due to good governance and efficient shareholder expectation management. Remains to be seen if CMFSC manages the same way.

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