Thanks to the outbreak of Covid-19, Chinese technology stocks have been the best-performing companies so far in 2020. However, surprisingly, China Tower Corporation Ltd (SEHK: 788), the backbone of these technology stocks, hasn’t been performing well. The share price of China Tower has dropped by 15% since the beginning of the year. And the forward –

Thanks to the outbreak of Covid-19, Chinese technology stocks have been the best-performing companies so far in 2020.

However, surprisingly, China Tower Corporation Ltd (SEHK: 788), the backbone of these technology stocks, hasn’t been performing well.

The share price of China Tower has dropped by 15% since the beginning of the year. And the forward price-to-earnings (PE) ratio has come down from around 40x to 30x.

In this article, I’ll explain why I think this provides a good entry window for investors to buy into this stock.

Solid results

China Tower just announced its first-half results, and they continued to look solid with all key metrics having achieved growth.

Its first-half revenue increased by 5% year-on-year, thanks to the improving tenancy ratio from 1.58 to 1.64.

The tenancy ratio is defined as a fraction of the total number of operators sharing towers and total number of sites present.

The global average tenancy ratio is around 2. As such, there should be room for further growth in China Tower’s tenancy ratio and revenue, as it catches up with the global average.

Its profitability has also increased more significantly by 17%, thanks to the decreasing finance costs as the company’s capital structure improves.

Undervalued

China Tower is trading at its historical low and at a discount to its global peers. Its shares currently trade at around 30x forward PE, which is the lowest since its listing in 2018.

Since China Tower is the only listed Chinese tower company, I’ll compare its valuation to the global peers, American Tower (NYSE: AMT) in the US and Cellnex Telecom, S.A. (BME: CLNX) in Europe. Both are telecom network infrastructure providers.

As different telecoms companies will likely have different capital structures, we will focus on enterprise value (EV)/EBITDA instead of PE ratio.

China Tower is trading at 7x EV/EBITDA while American Tower and Cellnex Telecom are trading at 25x and 30x, respectively. China Tower therefore trades at a 70-80% discount to its global peers.

The engine of the future

Frankly, it’s not an over-exaggeration to say that without 5G networks, there will be no future of technology.

Forget about autonomous driving, AI, and blockchain, if there’s no 5G. China Tower is a leading player in a leading country in this 5G global race.

There are more than 200 companies providing telecommunication infrastructure services in China. And China Tower has a formidable position with a market share of above 90%. Simply put, it is a monopoly.

If there’s one thing that we’ve learned from Covid-19, in addition to washing hands and wearing face masks, is that technology is critical. Furthermore, its adoption will only accelerate from now on.

Wars are not won on bravery but on new techniques, or in our case, technologies.

The Chinese government will only speed up the 5G rollout and its development in order to have a strategic advantage over this. The growth potential is tremendous.

Foolish conclusion

What China Tower does is not half as sexy as the household names in the tech sector.

But essentially, it is a monopoly in a sector that powers the future of humankind, and is trading at a historical low and at a discount to the global peers. The investment case is obvious.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung doesn’t own shares of any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020