1H22 results in line with our expectations China Tower announced its 1H22 results: Revenue grew 6.6% YoY in 1H22 to Rmb45.48bn and 6.2% YoY in 2Q22 to Rmb22.85bn, and attributable net profit rose 22.2% YoY in 1H22 to Rmb4.22bn and 15.9% YoY in 2Q22 to Rmb2.04bn, in line with our expectations. Trends to watch Expansion of DAS business and increasing sharing ratio of tower sites drive the steady growth of the operator business. In 1H22, revenue from the operator business increased 3.9% YoY to Rmb41.35bn. Revenue from the distributed antenna system (DAS) business rose 32.0% YoY to Rmb2.75bn driven by continuous business expansion. Thanks to the steady increase in the sharing ratio (number of tenants per tower) of tower sites, revenue from the tower business grew 2.3% YoY to Rmb38.59bn. China Tower has strived to facilitate resource sharing. As of end-June, the firm built a total of 1.54mn 5G base stations, over 97% of which were achieved through resource sharing. The sharing ratio per tower rose from 1.60 at end-2021 to 1.62 as of end-June 2022. We expect the expansion of the DAS business and increasing sharing ratio of existing tower sites to drive the steady growth in revenue from the operator business. Focusing on key industries; Two Wings business offers a strong growth driver. Two Wings business contributed 8.8% of the firm’s total revenue in 1H22 and 45.4% of the incremental revenue. Specifically, revenue from the trans-sector site application and information (TSSAI) business grew 39.4% YoY to Rmb2.58bn, mainly driven by growth in revenue from key industries such as environmental protection. Digital tower business contributed 61.3% of the total TSSAI business revenue in 1H22. Revenue from the energy business increased 61.3% YoY to Rmb1.43bn. Thanks to the robust development of the power exchange business, revenue from this segment accounted for 56.2% of the firm’s total energy revenue in 1H22. We believe that China Tower will focus on key industries and boost the rapid development of the Two Wings business amid various favorable policies. EBITDA margin under short-term pressure; development of Two Wings business to drive up profit margin in the long term; maintain capex guidance for 2022. The firm’s EBITDA margin fell 2.8ppt YoY to 70.3% in 1H22. We attribute this to: 1) increasing investment in R&D of AI algorithms and rising expenses related to new product marketing; and 2) a short-term increase in maintenance costs due to the expiration of useful life of some fixed assets. We expect the expansion of the Two Wings business to drive recovery in the firm’s EBITDA margin over the long term. As the COVID-19 headwinds have weighed on construction progress, the firm’s capex declined 12.3% YoY to Rmb9.09bn in 1H22. However, given the improving COVID-19 conditions and robust demand for 5G base station construction, we maintain our capex guidance of Rmb30bn for 2022. Financials and valuation We leave our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 18.3x 2022e and 16.3x 2023e P/E. We maintain OUTPERFORM and our TP of HK$1.20 (21.8x 2022e and 19.4x 2023e P/E), offering 18.8% upside. Risks Development of new businesses disappoints; COVID-19 headwinds weigh on tower construction.