1H26 results: D&A roll-off drove earnings amid revenue decline; Maintain HOLD

1H26 results: D&A roll-off drove earnings amidrevenue decline; Maintain HOLD ChinaTower released its 1H26 results.Revenue declined 1.8%YoY toRMB48.7bn,andTower business revenue fell 6.7% YoY on telcos’ networkoptimization. During the period,DAS / Two Wings businessrevenueincreasedby 9.2%/ 14.2%,rampingup to27% of total revenue (1H25: 23%). Netprofitwent up by30.1% YoY to RMB7.5bn, with net margin up 3.8pptsYoY to 15.4%,primarily driven by a lower D&A expense ratio (39.3% of revenuein1H26vs.51.6% in 1H25), asacquired tower assets were fully depreciated with theadjustment to the estimated useful lives of DAS assets.TheCompany declareda 1H26dividend of RMB0.19per share,up 44.3% YoY,increasing shareholderreturns.Maintain HOLD, with TP adjusted to HK$11.50. TargetPriceHK$11.50(Previous TPHK$12.10)Up/Downside23.5%Current PriceHK$9.32 China Semiconductors Kevin ZHANG(852) 3761 8727kevinzhang@cmbi.com.hk Towerbusiness decline deepened;while DAS and Two Wingsbusinesssustained growth.By segment,Tower revenue (72% of1H26revenue) fell 6.7% YoY to RMB35.3bn in 1H26 (FY25:-0.3% YoY),duetotelcos’ network optimization, simplified base station upgrades, and the CT-CU unified 4G network arrangement. Tower sites grew 2.5% YoY to 2.17mn,while TSP tenants declined 0.4% YoY and the average tenancy ratio slippedto 1.78 (1H25: 1.81).Mgmt.guidedTower revenue to resume growth from2027E,drivenby the 15th Five-Year Plan's target of 55 5G base stationsper 10,000 people by 2030E. DAS revenue(10% of1H26 revenue)grew9.2% YoY to RMB5.1bn, and within Two Wings(16% of1H26 revenue),Smart Tower/Energy grew 12.8%/17.3% YoY to RMB5.3bn/RMB2.6bn;Weexpect the overall revenue to be RMB100bn/104bn in 2026E/2027E(flat/4.0% YoY, vs. BBG consensus 102bn / 103bn)with the towerbusiness under near-term pressure and DAS and Two Wings drivinggrowth. Aaron GUO(852) 3916 3715aaronguo@cmbi.com.hk D&A roll-off drove earningswith a higher OpEx,cash flow deterioratedfromreceivablesbuildup.D&A declined 25.2% YoY to RMB19.1bn in1H26, and we expect the tailwind to persist in 2H26E (FY26E D&A:-20.8%YoY).1H26 EBITDA declined by 11.6% YoY to RMB30.3bn.EBITDAmargin was 62.1%, 6.9pptslower than 1H25, asrepairs and maintenancecosts rose 19.0% YoY and other OpEx went up by 41.6% YoY, whichwasprimarily driven byhigher bad debt provisions amid the receivables build-up, increasing cost relevant to Two Wings business andintegrated service.CFO declined 75.1% YoY to RMB7.1bn on a receivables build-up, and FCFturned negative at-RMB4.5bn (1H25: +RMB16.3bn). Maintain HOLD, with TP adjusted to HK$11.5 (previous:HK$12.1),based on 3.68x2027E EV/EBITDAas we roll over ourvaluation base,with the multiple kept at~1SD above its 5-year average forwardmultiple.GiventheflattoplineandEBITDAdownsidethis year(flat/-7.6%YoY in 2026E by our estimates),together withpressure on receivablescollection, we slightlyrevisedownour 2026E/2027E EBITDA forecasts by2.7%/0.8%to reflect continued industry headwinds and lagging legacybusiness.Upside risks include better-than-expected macro recovery,increased spending from the domestic telcos, and further shareholder returnenhancement.Downside risksinclude continued cost optimization fromdomestic telcos, and deteriorating dividend payout ratio, etc. Source: FactSet Focus Chart Source:Company data,CMBIGMestimates Source:Company data,CMBIGMestimates Source:Company data,CMBIGMestimates Source:Company data,CMBIGMestimates Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark over next 12 months:Industry expected to perform in-line with the relevant broad