The rise in global data consumption is one of the most important social and economic trends of the 21stcentury, with massive implications for the way people work, socialise and interact. However, the nascent growth of the “internet of things” and the scope for communication between enabled devices at every level will create a demand for data that will, in time, dramatically exceed the data used in human interactions.
As infrastructure investors, we are hugely excited by the investment opportunities for assets and networks which will enable this growth in global connectivity. We see potential for growing long-term returns which will be resilient to wider macroeconomic cycles. Fixed fibre networks will provide the backbone of this connectivity, augmented by mobile networks adopting 5G technology through infrastructure including traditional towers, small cells and Distributed Antenna Systems (DAS) which will boost data coverage in dense demand areas including stadiums, tunnels and transportation hubs such as airports and railway stations.
The most straightforward way to invest in this data revolution is through the telecom towers stocks, where network operators have sold or de-merged towers and masts to create independent operators of these assets. With high barriers to entry given environmental concerns, and significant synergies from infrastructure sharing, the value and utilisation of towers will continue to increase.
An example is American Tower, a US$74bn market capitalisation stock listed in the US which is a leading global consolidator with over 170,000 towers spread across the USA, Europe, Latin America and India. In addition, we have recently added China Tower to our portfolio. China Tower is majority-owned by the three Chinese mobile operators: China Mobile, China Telecom and China Unicom. In 2015 these operators consolidated their tower, small-cell and DAS assets in this new infrastructure vehicle, creating a company with almost two million towers in China, representing a 96% market share as at the end of Q3 2018. In 2018, the owners sold a 27% stake through an IPO in the Hong Kong market. The Chinese government is very focused on growing connectivity in the country, and China Tower will benefit both from the growth of existing networks and the roll-out of domestic 5G beginning later this year. The stock has performed well since the IPO, but we see significant growth potential at an attractive valuation.
There is also a very interesting opportunity to invest in telecom network operators at current valuations. Unlike tower stocks, telecom operator stocks have been poor performers over recent years, with onerous regulation promoting aggressive competition structures which have weighed heavily on returns. There are very valid concerns for these stocks, with the recent 5G spectrum auction in Italy suggesting spectrum costs could consume significant amounts of cash going forward and jeopardise any recovery in return on capital metrics for operators in European markets. The share price of industry bellwether Vodafone has fallen by around 40% over the last year as markets have fixated on high spectrum costs and revenue pressures, assuming that the return on capital will continue to deteriorate, pressuring shareholder returns and forcing management to cut the dividend payout.
While we appreciate these concerns, we take a more constructive long-term view, informed by the data revolution and the need for countries and regions to ensure they have sufficient high-speed connectivity to compete in the global economy over the next decades. We see the tenor of regulation shifting, away from the laser-focus on keeping prices low for consumers and towards incentivising operators to invest in both fibre and mobile data networks.
We have invested in network operators in the USA, Europe, Japan and South East Asia as we see a potential revenue inflection, driven by supportive regulation, a more constructive competitive environment and huge underlying demand for data connectivity.
Overall, we view the telecommunications sectors, including both towers and networks operators, as a potential secular growth area with the data revolution providing a degree of immunisation from wider macro-economic travails. Encouragingly, while the fourth quarter of 2018 proved challenging for global equity markets, we noted that the stock prices of a number of telecommunication stocks across the globe including American Tower, Telkom Indonesia, Chunghwa Telecom and Verizon rose during the quarter. Valuations across the sector are attractive, and we believe this will be a profitable sector for investors over the next decade with underlying demand and growing returns potentially leading to both capital growth and sustainable dividend payouts.
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