'Sky's the limit' scenario does not apply to China TowerBusiness | Ivan Tong 26 Apr 2019
I think China Tower (0788) did a great job choosing its stock code, integrating tech giant Tencent (0700) and bourse operator Hong Kong Exchanges and Clearing (0388).
The world's largest telecoms tower operator has stayed in the good books of retail investors ever since its first trading day last August and its stock price has risen over 80 percent since then.
Recently, some market participants advised investors to buy this 5G-related stock as China Tower will benefit from the commercial launch of 5G services in the mainland next year, and they believe the investment strategy of "buying expensive stocks is better than buying nothing at all."
In fact, this strategy has a lot of problems. The pitfalls of just buying what is expensive, not what is proper is not alien to retail investors.
Tencent was considered as one of the must-buy stocks in the recent past, with market players saying that it was worth investing at any price.
But it did not turn out the way they expected.
Shares of Tencent fell to HK$250 last October, after South African shareholder Naspers reduced its stake in March 2018, before making a recovery to around HK$400 lately.
Investors who bought Tencent above HK$400 a year ago must have been spooked, including those lucky ones who continued to hold their stocks during Tencent's downward spiral.
There is a difference between investment advice and trading advice. It is alright to suggest a stock to investors if those who give the suggestion are bullish on the stock's long-term investment prospects.
However, they should not make their opinion look like trading advice because index heavyweights such as Tencent could be volatile, and investors who buy these stocks at a wrong price level could suffer a big loss during the adjustment period.
Actually, China Tower is a good stock and a potential winner amid the 5G competition between China and the United States. Whilst America is using all ways and means to ban ZTE (0763) and Huawei Technologies from international 5G networks, its clampdown on these national champions has made China ever more determined to develop its domestic 5G market.
As a state-owned telecoms giant, China Tower does not have to expand its overseas market as actively as Huawei, so I believe the stock holds good promise.
5G will be more than 20 times faster than 4G and will propel the development of the Internet of Things in China.
China Tower is not only a 5G-related stock but also represents the hard work put into China's economic growth. Its shares have kept climbing higher since its debut as investors are optimistic about 5G development.
As I mentioned before, "buying expensive stocks is better than buying nothing" is a pseudo-proposition, but we cannot use it in China Tower's case. Its stock prices hit a new high at HK$2.33 some days ago but it has been under selling pressures after major shareholder Wellington Management reduced its stake for the first time by HK$170 million last week.
The stock further fell 5.70 percent to HK$2.15 yesterday, as Chinese and Hong Kong stocks markets slipped.
There are reasons for the price slump.
1) Wellington Management's sale of China Tower's shares has dealt a psychological blow to investors.
2) Institutional investors have investment needs to sell stocks with high revenue ahead of the Labor Day holiday and China Tower is at a greater risk of a price correction as it has risen too much.
3) Brokers have lowered China Tower's short-term rating and at the same time it looks like to be a "too bad to be true" scenario.
China Tower's valuation level seems a bit high, and its price-to-earnings ratio is more than 60 in terms of expected earnings in 2019.
I reckon the downward pressure will continue until after Labor Day, so long-term investors are advised to wait and see.
A young company, China Tower was established in July 2014 to minimise overlapping investments in telecoms towers among China's three telecom giants - China Mobile (0941), China Unicom and China Telecom (0728) - who are customers and shareholders of China Tower.
However, China Tower has to take on the government's task of resource sharing.
Its economic benefits will be constrained because resource sharing means bigger discounts for the big three, and China Tower cannot set a higher rental price.
This a real problem that investors should take into consideration instead of just expecting they will benefit from the launch of 5G services in China.
Ivan Tong is Editor in Chief of The Standard