9M22 EBITDA below market expectations; expect margin to recover in FY23
9M22 results highlights
Operating revenue grew by 6.3% y-o-y to Rmb68.7bn, driven by a 3.4% increase in the TSP business and 47.6% increase in the Two Wings (TSSAI and Energy) business. The growth in revenue is lower than the market’s expectations of 7%-8% due to slower growth in the tower business (0.8% in 3Q22, vs. 2.3% y-o-y in 1H22) and a further decline in revenue in the “other” segment (-12.5% in 3Q22, vs. -3.1% y-o-y in 1H22).
Compared to Dec 2021, the number of tower sites increased by 14k to 2,052k and the total number of tower tenants increased by 76k to 3,535k, with the tower tenancy ratio increasing from 1.70x to 1.72x.
9M22 EBITDA increased by 0.4% y-o-y to Rmb47.5bn, lower than the market expectation of 4%-5%, with the margin contracting 4.1ppt y-o-y to 69.1%. 3Q22 EBITDA growth recorded a decline of 3.7% y-o-y. This sluggish EBITDA was due to increased maintenance and repair expenses.
Net profit increased by 21.7% y-o-y to Rmb6.4bn. Net margin expanded 1.2ppt y-o-y to 9.3%.
Maintenance and repair expenses started to increase in 1H22 and continued in 3Q22. This should be a one-off for FY22, and we expect the margin to recover to its normal level in FY23.
Looking ahead, 5G network buildout remains the key driving force for the tower business; and we expect tower revenue to grow at a low single-digit rate in FY22 and onwards.
The DAS and Two Wings businesses will continue to be the key growth drivers. We expect demand for the in-depth coverage of buildings and tunnels with wireless communications to remain robust. In addition, the smart tower business and energy business will continue to benefit from the “Digital China” strategy and national “dual carbon” goals, respectively. We forecast non-tower revenue to grow c.40% y-o-y in FY22.
We keep our revenue largely unchanged but cut our EBITDA forecast by 2.1%, 0.7%, and 0.7% for FY22, FY23, and FY24, respectively, with lower EBITDA margin assumptions due to higher operating costs demonstrated in this results period. We forecast EBITDA to grow by 1.2%, 6.8%, and 4.2% for FY22, FY23, and FY24, respectively. We maintain BUY on the counter with TP of HK$1.30 (unchanged). Our TP is based on 4x FY23 EV/EBITDA, with the target multiple unchanged and in line with its historical average.