Earnings Alert: 1H22 results in line; Two Wings business rapidly expanded 46.5% y-o-y
- 1H22 EBITDA grew by 2.5% y-o-y, in line with market expectations
- Revenue increased by 6.6% y-o-y, with contribution from non-tower business expanding 3.5ppts y-o-y to 15.1%
- Tower tenants increased by 62k in 1H22, with tower tenancy ratio, reaching 1.72x
- Maintain BUY for benefiting from 5G network buildouts and rapid expansion of new business with a TP of HK$1.3
1H22 results highlights
Operating revenue grew by 6.6% y-o-y to Rmb45.5bn, driven by a 3.9% increase in the TSP business and a 46.5% increase in the Two Wings (Smart Tower and Energy) business.
Compared to Dec 2021, the number of tower sites increased by 11k to 2,049k and the total number of tower tenants increased by 62k to 3,521k, with the tower tenancy ratio increasing from 1.70x to 1.72x. Revenue per tower site increased by 3.3% y-o-y to Rmb20k.
EBITDA increased by 2.5% y-o-y to Rmb32bn, with the EBITDA margin contracting 2.8ppts y-o-y to 70.3%. Net profit increased by 22.2% y-o-y to Rmb4.2bn. Net margin expanded 1.2ppts y-o-y to 9.3%.
We expect the tower business to grow at a low single-digit rate in FY22. The net addition of 5G base transceiver stations (BTS) accelerated from 134k in 1Q22 to 295k in 2Q22. The net addition is expected to be lower in 2H22 compared to 1H22, as MIIT has maintained the target of 600k for 2022. The retirement of non-5G BTS (42k in 1H22) would also affect tower business revenue.
The DAS and Two Wings business will continue to be the key growth drivers. The strong demand for indoor coverage for buildings, high-speed railway tunnels, and subways will continue to drive the growth of the DAS business. The Two Wings business, namely the smart tower business and energy business, will benefit from the “Digital China” strategy and national “dual carbon” goals, respectively.
2Q22 EBITDA margin recovered to 71.2% from trough in 1Q22, mainly due to the additional repairment and maintenance expenses for extending the useable life of assets over the depreciation period in 1Q22. We expect the EBITDA margin in 2H22 to be similar in 2Q22, as the benefits from increasing tower tenancy ratio might partly be offset by a rising contribution from the Two Wings business, since the overall EBITDA margin of the Two Wings business is lower than that of the TSP business.
CAPEX in 1H22 decreased by 12.3% y-o-y to Rmb9bn due to effective CAPEX control and slower construction progress under the impact of the pandemic. Management expects CAPEX to speed up in 2H22, while full-year CAPEX as a percentage of revenue will be similar to FY21 and the total CAPEX will not exceed the initial budget of Rmb$30bn.
Renewal of the Commercial Pricing Agreement with the three telcos that will expire by the end of 2022 is in progress. No details were disclosed at the current stage.
We have kept our EBITDA forecast largely unchanged for FY22 and FY23. We forecast EBITDA to grow by 3.4%, 5.3%, and 4.2% for FY22, FY23, and FY24, respectively. We maintain BUY on the counter with a TP of HK$1.3, with valuation rolled over to FY23. Our TP is based on 4x FY23 EV/EBITDA (previously 4x FY22 EV/EBITDA), in line with its historical average.