UBS has released a research report indicating that CHINA TOWER (00788) delivered mixed results for the fourth quarter of last year. While revenue and net profit met expectations, EBITDA fell short, primarily due to increased maintenance costs associated with upgrading older towers. Although significant depreciation savings were realized starting last October, following the full depreciation of tower assets acquired from telecom operators in 2015, weak telecom operator capital expenditure amid macroeconomic challenges, coupled with rising maintenance expenses, have constrained revenue and EBITDA growth. The bank has changed its valuation methodology from a target dividend yield to a dividend discount model to better reflect the dividend trajectory resulting from changes in distributable net profit from 2026 to 2028. Consequently, the target price has been reduced from HK$13.5 to HK$11.6, implying a projected 2026 dividend yield of 6%, which aligns with that of mainland telecom stocks. The rating has been lowered from "Buy" to "Neutral."
Management anticipates a decline in EBITDA this year, with stabilization expected by 2027, mainly driven by increased maintenance costs for upgrading older towers—estimated to rise by RMB 4 to 5 billion. Capital expenditure for the current year is projected to remain largely stable, focused primarily on site upgrades and investments in the "Two Wings" business. These investments are expected to offset the positive contribution to net profit from fully depreciated towers. The group has proposed a dividend payout ratio of 77% of distributable net profit for this year, equivalent to 90% of reported net profit, similar to the 76% ratio in 2024 and in line with UBS's expectations. CHINA TOWER aims to achieve a full payout of reported net profit by 2028.
UBS forecasts that net profit will increase by 31%, 5%, and 0% year-on-year for 2026, 2027, and 2028, respectively. Dividend per share is projected to grow by 31%, 7%, and 9% over the same period. Based on the bank's calculations, dividends will represent approximately 55% to 70% of free cash flow, providing sufficient coverage for dividend distributions. UBS has lowered its revenue and EBITDA forecasts for CHINA TOWER for the current and next year by 1% to 6%, reflecting weak telecom operator capital expenditure and rising maintenance costs in a challenging macroeconomic environment. Net profit forecasts have been slightly adjusted in accordance with updated depreciation guidance.
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