同途不同命 - chinastock.com.hk · industry. During China Mobile’s annual results presentation, management introduced an idea to charge 5G tariffs in a multi-dimensional mode

行业报告电信│香港│2019 年 4 月 8 日

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电信行业同途不同命

■ 在本报告中，我们根据 2018 年业绩和最新的行业发展概述了中国的电信行业。我们还

提供了有关中国 5G 发展的最新信息。

■ 我们认为，鉴于三家电信运营商的资本开支指引，市场对中国 5G 发展主题的兴趣有所

降温。但是，我们认为随着市场重置预期，现在是重新关注该行业的良机。我们仍然认

为，中国的 5G 发展是一个多年期和涉及多行业的投资主题。但是在短期内，我们建议

投资者选择性地买入供应链的股份，因为一些公司将受到供需动态短期内变动的影响。

■ 我们再次提出四个阶段的投资周期主题，同时我们看好资本支出前周期股份，包括中兴

通讯[0763.HK]和中国铁塔[0788.HK]。中通服[0552.HK]业绩后股价调整，带来了重新

关注的机会。然而，一些上游股份，尤其是长飞光纤光缆[6869.HK]等光纤股份，将由

于供需形势不利而受到负面影响。我们还认为浪潮国际[0596.HK]、亚信科技[1675.HK]

和神州控股[0861.HK]等软件股将在中期内受益。由于估值较低，电信运营商有机会补

涨。

业绩公布期结束，行业表现回顾 2018 年业绩期已结束。在审视过中国电信企业的年报及参加业绩发布会和小组会议后，我

们对行业（服务和设备供货商）进行全面分析。本报告中，我们会提供 5G 发展的一些新进

展，并评估中国电信行业的产业链，揭示市场的一些变化。无线设备相关股（包括中兴通讯

[0763.HK]及京信通信[2342.HK]）在年初至今跑赢同业，而亚信科技[1675.HK]、中国通信

服务[0522]和长飞光纤光缆[6869.HK]则表现较差。

电信运营商的资本支出将于 2019 年恢复增长中国三大电信运营商的总资本支出在 2018 年下降至人民币 2,869.4 亿元，2019 年的资本支

出总预算为人民币 2,859 亿元至人民币 3,031 亿元，同比增长为-0.362％至+ 5.632％。资

本支出预计将在 2019 年的 5G 预商用阶段恢复增长。虽然受到 5G 投资成本高昂和「提速

降费」政策进一步实施的压力，但电信运营商正将这些压力转嫁到上游供货商。这或令电信

设备行业子行业的供需格局出现变化。

资本支出前周期相关股份的股价整固，带来了重新关注的机会资本支出前周期相关股票将受益于 5G 推出。但它们的 2018 年业绩并没有带来惊喜，相反

我们注意到业绩后这些股份出现获利回吐。不过，非电信业务为这些股票提供了增长动力。

我们仍看好中国铁塔和中通服。

中国的电信设备制造商将继续保持强势即使没有 5G，电信设备供货商(特别是与无线相关的股票)亦将受益于 2019 年的资本支出

上升周期。鉴于资讯相关支出和数据流持续快速增加，以及 5G 行业持续发展，设备制造商

将受益于新的行业机会。

上游无线设备及光学设备供应商将面临下游的激烈竞争和压力在短期内，个别中国供应商市场将面对更激烈的竞争；光纤市场是典型的例子，当中长飞光

纤光缆在近日的中国移动光纤招标中流失了市场份额。

电信行业非硬件分部是另一受益者电信非硬件市场将成为另一个受益者。在 5G 时代，非硬件公司将迎来对系统升级和转型的

需求。5G 时代的网络切片也将为电信非硬件行业创造巨大机遇。在中国移动的年度业绩报

告中，管理层提出了一个以多维模式收取 5G 资费的想法。例如，电信运营商可以通过数据

速率/宽带、功能/网络切片或延迟时间来收取 5G 资费。像这样的新解决方案也将为电信非

硬件行业提供巨大的机会。由于电信软件系统极为复杂，且具有很高的行业进入门槛，因此

具有良好往绩记录的公司将从行业发展中受益。

香港

分析员

布家杰, CFA

T (852) 3698 6318 E [email protected]

李哲瀚 T (852) 3698 6256 E [email protected]

王志文, CFA T (852) 3698 6317 E [email protected]

https://cn.linguee.com/%E4%B8%AD%E6%96%87-%E8%8B%B1%E8%AF%AD/%E7%BF%BB%E8%AD%AF/%E6%97%A0%E7%BA%BF%E7%94%B5.html

Sector Note Telecommunications│Hong Kong│April 8, 2019

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Telco - Overall Same path but different results ■ In this report, we provide an overview of China’s telecommunications sector based

on 2018 results and the latest industry developments. We also provide the latest update on 5G development in China.

■ We share the view that interest in China’s 5G development has cooled down somewhat, given CAPEX guidance by the three telecom operators. However, we believe that expectations have been re-set and that it is a good time to re-visit the industry. We reiterate the view that 5G development in China is a multi-year, multi-industry investment theme. But we have turned more selective on the supply chain in the short term, as some players will suffer from short-term changes in the supply–demand dynamic.

■ We also reiterate the 4-stage investment cycle theme and prefer early CAPEX cycle names, including ZTE [0763.HK] and China Tower [0788.HK]. The post-results share price correction of CCS [0552.HK] provides a re-visit opportunity. However, some upstream names, especially optical fibre names such as YOFC [6869.HK], will suffer from the unfavourable supply–demand situation. We also think software names such as Inspur [0596.HK], AsiaInfo [1675.HK] and DC Holdings [0861.HK] will benefit in the medium term. The telecom operators may play catch-up given their lower valuation.

Review after the results season The 2018 annual results season has ended, so we provide an overall view of the China telecommunications sector (both services and equipment suppliers) after going through their annual results and attending their results presentations and small group meetings. In this report, we provide some updates on 5G development and examine the industry chain of the China telecommunications sector, revealing some changes in the market. Wireless names, including ZTE [0763.HK] and Comba [2342.HK], have outperformed YTD, while AsiaInfo [1675.HK], CCS [0522] and YOFC [6869.HK] have underperformed. Telecom operators’ CAPEX to resume in 2019 Total CAPEX of China’s big three telecom operators decreased to RMB286.94bn in 2018, and their total CAPEX budget in 2019 is RMB285.9bn–RMB303.1bn, representing a YoY increase of -0.362% to +5.632%. CAPEX is expected to resume growth in 2019 in conjunction with the 5G pre-commercial stage in 2019. Telecom operators are passing on the pressure of high 5G investment and further implementation of the “Speed Upgrade and Tariff Reduction” policy to upstream suppliers. This may cause a change in the supply–demand dynamic of sub-segments of the telecom equipment industry. Share price consolidation provide a revisit opportunity for early CAPEX cycle names The early CAPEX names will benefit from the 5G roll-out. But their 2018 results didn’t offer a positive surprise, and we noted profit-taking activity after the results announcements. However, non-telecom business offers growth potential for those names. We still like China Tower and CCS. China’s telecommunication equipment manufacturers will continue to be strong Even without 5G, the telecom equipment suppliers, especially wireless-related names will benefit from the CAPEX upcycle in 2019. Equipment manufacturers will benefit from new opportunities for development, given sustained rapid growth in information spending and data flow, and the ongoing progress of the 5G industry. Upstream wireless and optical suppliers will suffer from intense competition and pressure from downstream Competition in the selective Chinese supplier market will be more intense in the near term; optical fibre is a typical example, shown by YOFC’s loss of market share in the latest China Mobile tender for optical fibre. Telecom non-hardware market another beneficiary The Telecom non-hardware market will be another beneficiary. In the 5G era, non-hardware companies will see demand for system upgrades and transformation. Network slicing in the 5G era will also create great opportunities for the telecom non-hardware industry. During China Mobile’s annual results presentation, management introduced an idea to charge 5G tariffs in a multi-dimensional mode. For example, telecom operators could charge the 5G tariff by data speed/broadband, by function/network slicing, or by time delay. New solutions like this would also provide great opportunities for the telecom non-hardware industry. Telecom software systems are extremely complex and have high entry barriers, so companies with a proven track record will benefit.

Hong Kong

Analysts Mark Po, CFA T (852) 3698 6318 E [email protected] Alex Li T (852) 3698 6256 E [email protected] Wong Chi Man, CFA T (852) 3698 6317 E [email protected]

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Telecommunications│Hong Kong Telco - Overall│April 8, 2019

Figure 1: Telecom business supply chain

SOURCES: CGIS RESEARCH

Operators

Design, construction,and maintenance

IT Services

Infrastructure services

China Mobile [0941.HK]China Unicom [0762.HK]

China Telecom [0728.HK]China Broadcasting Network [unlisted]

AsiaInfo [1675.HK]Huawei [unlisted]

Whale Cloud [unlisted]Shenzhen Tianyuan DIC Info [300047.CH]

Neusoft [600718.CH]CCS [0552.HK]

Si-Tech Info [300608.CH]GuoChuang [300520.CH]

BOCO Inter-Telecom [600289.CH]DC Holdings [861.HK]

Optical Fiber Cable

Optical Networks Equipment Manufacturer

Corning [GLW.US]YOFC [6869.HK]Hengtong [600487.CH]Furukawa Electric [5801.JP]Fiberhome [600498.CH]Futong [unlisted]Futong Xinmao [000836.CH]Prysmian [PRY.IM]Sumitomo Electric [5802.JP]Zhongtian Tech [600522.CH]Fujikura [5803.JP]Tongding Inter [002491.CH]SDG Information [000070.CH]Etern [600105.CH]Potevio Fasten [unlisted]Tongguang [300265.CH]Trigiant [1300.HK]Nanfang Communication [1617.HK]

Huawei [unlisted]Nokia [NOKIA.FH]Ciena [CIEN.US]ZTE [0763.HK]Fiberhome [600498.CH]

Optical Fiber Preform

Optical Component

YOFC [6869.HK]Corning [GLW.US]Prysmian [PRY.IM]Shin-Etsu Chemical Co Ltd [4063.JP]Furukawa Electric [5801.JP]Sumitomo Electric [5802.JP]Hengtong [600487.CH]Fujikura [5803.JP]Zhongtian Tech [600522.CH]Tongding Interconnection [002491.CH]Sumitomo Electric Industries [5802.JP]FUJIKURA [5803.JP]

II-VI [IIVI.US]Finisar [FNSR.US]Broadcom [AVGO.US]Lumentum [LITE.US]Accelink [002281.CH]AAOI [AAOI.US]NeoPhotonics [NPTN.US]Sumitomo Electric [5802.JP]Fujikura [5803.JP]Furukawa Electric [5801.JP]Hisense Broadband [unlisted]Zhongji InnoLight [300308.HK]O-Net [0877.HK]Acacia [ACIA.US]Raycus Fiber Laser [300747.CH]JDSU [JDSU.US]FIT Hon Teng [6088.HK]

Optical Wireless

Wireless System(Base Station)

Radio Frequency (RF) System

Huawei [unlisted]ZTE [0763.HK]Ericsson [ERIC.US]Nokia [NOK.US]Datang Telecom [600198.CH]

CCS [0552.HK]Runjian Communication [002929.CH]Eastone Century [300310.CH]Huaxing Chuangye [300025.CH]Super Telecom [603322.CH]

Hengtong [600487.CH]ZhongTongGuoMai [603559.CH]JLU Com Design [300597.CH]China U-Ton [6168.HK]Inspur [0596.HK]

China Tower [0788.HK]

Antenna & Feeder System

Antenna

PCB

FeederHuawei [unlisted]Comba Telecom [2342.HK]CommScope [COMM.US]Tongyu [002792.CH]MOBI [0947.HK]Shenglu [002446.CH]Jianbotong [unlisted]Kathrein [unlisted]Hongxin ComTech [unlisted]Amphenol [APH.US]RFS [unlisted]

Filter

Telecoms Equipment Manufacturers

Power Amplifier

Active Passive

RF subsystem

Shennan Circuits [002916.CH]WUS Printed Circuit [002463.CH]Fastprint Circuit [002436.CH]Shengyi Tech [600183.CH]

Fingu Electronic [002194.CH]Tat Fook [300134.CH]GrenTech [GRRF.US]MOBI [0947.HK]Dongshan Precision [002384.CH]Chunxing Precision [002547.CH]Canqin Electronic [unlisted]

Qorvo [QRVO.US]Skyworks [SWKS.US]Broadcom [AVGO.US]Sanan Optoelectronics [600703.CH]Haite High-tech [002023.CH]

Trigiant [1300.HK]Hengxin Tech [1085.HK]Zhongtian Tech [600522.CH]Fiberhome [600498.CH]Futong Showa [unlisted]Tongding Inter [002491.CH]YOFC [6869.HK]Wutong Holding [300292.CH]Hansen Tech [unlisted]Lianchuang Optoele [600363.CH]

3


Chinese telecommunications names have outperformed YTD HK-listed Chinese telecommunications related names, in general, have outperformed the market YTD. In terms of share-price performance, HK-listed Chinese telecommunications shares, on average, are up 19.9% YTD, outperforming the HSI’s 15.8%. Wireless names such as ZTE (61.8%) and Comba {45.7%} have outperformed YTD, but AsiaInfo (-9.1%), CCS (0.5%) and YOFC (0.7%) have underperformed. Our preferred names, including ZTE, O-Net, Inspur and China Tower, have outperformed the sector and the HSI YTD. YOFC has been under pressure since our rating and earnings downgrade. In general, the shares of telecom operators have underperformed, especially China Mobile, as the market was disappointed with its stable payout ratio. We share the view that interest in China’s 5G development has cooled down somewhat, given the CAPEX guidance by the three telecom operators. However, we note that expectations have been re-set and believe it is a good time to re-visit the industry. We reiterate the view that 5G development in China is a multi-year, multi-industry investment theme. But we have turned more selective on the supply chain in the short term, as some players will suffer from a short-term change in the supply–demand dynamic. We also re-iterate the 4-stage investment cycle theme and prefer early CAPEX cycle names, such as ZTE and China Tower. The post-results share price correction of CCS provides a re-visit opportunity. However, some upstream names, especially optical fibre names such as YOFC will suffer from the unfavourable supply–demand situation. We also think software names such as Inspur, AsiaInfo and DC Holdings will benefit in the medium term. The telecom operators may play catch-up, given their lower valuation.

Figure 2: YTD share price performance

SOURCES: CGIS RESEARCH, BLOOMBERG

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

12/18 01/19 01/19 01/19 01/19 01/19 02/19 02/19 02/19 02/19 02/19 03/19 03/19 03/19 03/19 03/19 04/19

China Mobile China Unicom China Telecom China Tower CCSAsiainfo Inspur ZTE YOFC O-NetComba Mobi Trigiant

2342.HK

1300.HK

788.HK

763.HK

762.HK877.HK596.HK947.HK728.HK

552.HK6869.HK

1675.HK

941.HK

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5G Update China started the 5G pre-commercial stage this year, and there have been frequent news reports about 5G pre-commercial applications. 2020 will mark the first year of China’s 5G commercialization.

In January 2019, Mr. Miao Wei, Minister of China’s MIIT, said that the 5G temporary licenses will be granted during the year, which will enable large-scale networking access to some major cities and regions, and accelerate the industrialization process and network construction of terminals. Operators have also speeded up their 5G deployment. On 31 January 2019, China Mobile announced plans to lease 500 5G base stations.

On March 28, 2019, at the Boao Forum for Asia, Mr. Miao Wei said that China will grant 5G licenses this year with consideration of the maturity of terminal devices, but it will take some time to achieve large-scale 5G commercialization because it will take time to improve the 5G network.

Figure 3: 5G device availability

Note: The figure shows device availability for Non-Standalone 5G NR, with the exception of the 3.5GHz band, where Standalone is also shown.

SOURCES: CGIS RESEARCH, ERICSSON

According to the Global Mobile Suppliers Association (GSA), as at mid-March 2019, it had identified a) 7 announced form factors (phones, hotspots, indoor Customer Premise Equipment (CPE), outdoor CPE, modules, snap-on dongles/adapters and USB terminals); b) 23 vendors that had announced available or forthcoming 5G devices; c) 33 officially announced devices (plus regional variants), including 12 phones, 5 hotspots, 8 CPE devices, 5 modules, 2 snap-on dongles/adapters and 1 USB terminal; and d) 5G chipsets from 5 vendors (Huawei, Intel, Mediatek, Qualcomm and Samsung).

Huawei’s Global Industry Vision (GIV) predicts that the percentage of global population living in areas covered by 5G networks will reach 58% by 2025.

The Ericsson Mobility Report predicts that 5G coverage will be available to 40% of the world’s population by the end of 2024, with about 1.5bn 5G enhanced mobile broadband subscriptions and 4.1bn cellular IoT connections. According to Ericsson, global major 5G network deployments are expected from 2020 on.

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Figure 4: Mobile subscriptions by technology forecast by Ericsson

SOURCES: CGIS RESEARCH, ERICSSON

Most telecom operators will start to deploy 5G NR using 4G core networks, and as new use cases with higher requirements on network slicing are required, for example, they will upgrade to a 5G core network.

Figure 5: 5G cycle from NOKIA’s point of view - The 5G cycle has already begun, with 5G radio access network (RAN) upgrades

in ‘first-mover’ markets, such as the US, South Korea, China and Japan. As well as radio, these networks need high-capacity connectivity to data centres, requiring backhaul network expansion.

- With the networks built, operators will then need fixed-wireless access to expand “last-mile” connectivity. In due course, ‘fast-follower’ countries will commence 5G roll-outs.

- By this point, ‘first-mover’ countries will already have entered the second stage of the 5G evolution. Here, the focus will shift to network virtualization and edge cloud, and smart network fabrics will be required to connect these edge clouds.

- Network slicing will follow, triggering a need for enhanced software that can control networks with a high degree of automation.

- Simultaneously, many enterprises will choose to build their own private networks, meeting bespoke performance, reliability and security requirements. These networks will leverage the same end-to-end technologies as CSPs, but on a smaller scale. They will need to be plugged into national and global networks, creating a seamless ‘whole’, driving even greater network traffic and shifting the cycle back to the beginning.

SOURCES: CGIS RESEARCH, NOKIA

The 4G network will expand continuously in width and depth to remove blind spots in coverage as the quality of mobile network services continues to improve.

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Telecom Operators Telecom operators’ CAPEX and OPEX are the source of funds for the whole telecom industry. The total CAPEX of China’s big three telecom operators decreased to RMB286.94bn, and the total 2019 CAPEX budget is RMB285.9bn–RMB303.1bn, representing a YoY increase from -0.362% to +5.632%. CAPEX is expected to resume growth in 2019 along with the 5G pre-commercial stage in 2019. Further implementation of the “Speed Upgrade and Tariff Reduction” policy was mentioned again in the Report on the Work of the Government (2019), and telecom operators are expected to continue to pass the pressure on to the upstream suppliers.

We maintain the view that telecom operators may play catch-up, given their lower valuation and telecom operators’ comments on 5G CAPEX in 2019. To a certain extent, we think China Mobile’s share price weakness might offer a revisit opportunity. Having said that, as we discussed earlier, our preference for Chinese telecom operators is China Unicom [0762.HK] > China Telecom [0728.HK] > China Mobile [0941.HK].

Figure 6: CAPEX of the Big Three Telecom Operators

CAPEX (RMB bn)

China Mobile China Unicom China Telecom 2018 2019E YoY 2018 2019E YoY 2018 2019E YoY

5G only 0 <17.2 n.a. 0 6~8 n.a. 0 9 n.a.

5G excluded 167.1 149.9 -10.3% 44.9 50 ~ 52

11.4% ~

15.8% 74.94 69 -7.9%

Total 167.1 149.9

~ 167.1

-10.3% ~

0% 44.9 58 29.2% 74.94 78 4.1%

SOURCES: CGIS RESEARCH, COMPANY DATA

Figure 7: CAPEX of Telecom Operators

SOURCES: CGIS RESEARCH, Wind, Company data

China Mobile [0941.HK; NOT RATED] China Mobile’s revenue increased to RMB736.8bn in 2018, up 1.8% YoY, and its net profit increased to RMB117.8bn, up 3.1% YoY. The total number of 4G customers reached 713m in 2018, 380m of whom were VoLTE (Voice over LTE)

0

5,000

10,000

15,000

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45,000

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150

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250

300

350

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450

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

China Mobile China Unicom China Telecom AT&T (RHS) Verizon (RHS) T-Mobile (RHS)

RMB bn USD m

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customers. Mobile ARPU reached an industry-leading level of RMB53.1. Regarding 5G development, China Mobile will build 30,000–50,000 base stations in 2019. China Mobile initiated the 5G Joint Innovation Industry Fund to facilitate end-to-end 5G industry adoption. This fund-raising body supports the ideas of Dr. Zhang Yunyong, head of China Unicom Research Institute, who made a proposal regarding 5G development for discussion during the 2019 CPPCC National Committee, pointing out that the main problem facing 5G network construction is capital funding. One of Dr. Zhang’s recommendations is to increase fund subsidies and guide the participation of social capital to study and set up a special fund for 5G industrial development, and provide necessary financial subsidies for the construction of 5G networks. This would allow the earlier involvement of social capital than in the development of earlier networks, and 5G development may focused more on the IIoT (Industry Internet of Things) in the early stages.

China Unicom [0762.HK; NOT RATED] China Unicom’s service revenue increased to RMB263.7bn in 2018, up 5.7% YoY, outperforming the industry average growth rate of 3.0%, and its net profit increased to RMB10.2bn, up 458% YoY. In 2018, China Unicom’s 4G subscriber base saw net addition of 45.05m to 220m, and its mobile billing subscriber ARPU was RMB45.7. By contracting out reforms, China Unicom’s Yunnan branch drew investment of RMB1.2bn in 2018, and its revenue growth outperformed the industry average of the province by 13ppt. China Unicom decided to replicate and expand to certain districts, but not across the board. Regarding 5G development, China Unicom is actively conducting 5G field tests and exploring industry applications in key cities, and promoting the maturity of both the NSA and SA value chain. China Unicom will leverage its additional 900MHz of 2x5MHz spectrum resources to vastly enhance the depth and width of its 4G network coverage. China Unicom will also simplify its network with software-defined radio (SDR), improve coverage for NB-IoT, and roll out VoLTE services across the whole network to lay the foundation for voice service in the 5G era. (China Unicom is the last of the big three telecom operators to develop VoLTE).

China Telecom [0728.HK; NOT RATED] China Telecom’s operating revenue increased to RMB377.1bn, up 3.0% YoY, and its net profit increased to RMB21.2bn, up 13.9% YoY. At end-2018, it had 242m 4G subscribers, representing net addition of 60.39m. For 5G development, although China Telecom maintains that standalone (SA) is the goal and direction, it said it would expedite industry chain maturity and conduct scale trials in SA and non-standalone (NSA) concurrently in the early stages, indicating the financial pressure of 5G SA. China Telecom will progressively expand the scale of network trials and the pilot project of 2B/2C applications.

China Broadcasting Network [unlisted] On Nov 22, 2018, Nie Chenxi, Director of the National Radio and Television Administration, said that the MIIT has agreed to add China Broadcasting Network to the 5G operator list, and the company is in the progress of applying for a license. On Mar 21, 2019, China Broadcasting Network signed separate strategic cooperation framework agreements with CITIC Group and Alibaba Group [BABA.US]. They will form a strategic alliance in the national cable TV network’s integration, development, transformation, upgrading, product development and operations management, and they will actively transform the broadcasting network into a new type of media convergence transmission network, digital cultural communication network, digital economic infrastructure network, and national strategic resource network. The China Broadcasting Network will leverage its advantages in spectrum, technology and industry, and its valuable content resources and cultural creativity advantages to construct a 5G mobile interactive broadcast television network.

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Network design and construction The early CAPEX names will benefit most from the 5G roll-out. However, their 2018 results didn’t offer a positive surprise and we noted profit-taking activity after the results announcement. The non-telecom business offers growth potential for these names. We still like China Tower and CCS.

CCS [0552.HK; NOT RATED] CCS’s revenue increased to RMB106.2bn in 2018, up 12.3% YoY, driven by the domestic non-telecom operator market and the OPEX business of the domestic telecom operators, and its net profit increased to 2.9bn, up 6.9% YoY. The results show that CCS successfully overcame the adverse impact of the decline in CAPEX, intensified market competition, and declining value of the domestic telecommunications sector, with its overall operating performance remaining stable. CCS is deepening its internal and external collaboration, and improving its business ecosystem, and won’t pursue a high gross profit margin in the short term. CCS management has strong confidence in the growth potential, projecting double-digit growth in revenue. CCS has been included in the “Double Hundred” candidate list for SOE reforms, and management said it will take this opportunity to drive long-term sustainable growth through internal reforms and mixed-ownership reforms to introduce strategic partnerships. China Tower [0788.HK; BUY; HK$2.15] China Tower’s operating revenue increased to RMB71.82bn in 2018, up 4.6% YoY. EBITDA reached RMB41.77bn, up 3.5% YoY. The EBITDA margin remained at a satisfactory level of 58.2%. Net profit reached RMB2.65bn, up 36.4% YoY. As at the end of 2018, the Company managed 1.9476m sites, up 4.0%, and served 3.0092m tenants, up 12.0%, representing a tenancy ratio of 1.55, up 0.11ppt. We maintain the view that the major growth drivers of China Tower are: a) 4G network expansion, b) 5G roll-out, c) usage of towers by non-telecommunications users, d) a high sharing ratio, and e) M&A. China Tower announced a plan to adopt a Restricted Share Incentive Scheme, which should incentivize employees and be good for the Company’s long-term growth.

Figure 8a: Number of base stations of 2G, 3G, 4G, and NB-IoT Figure 8b: Number of users of 2G, 3G, 4G, and 5G

SOURCES: CGIS RESEARCH, MIIT, Public news SOURCES: CGIS RESEARCH, Wind, iResearch

The market may have concerns about a) the independence of China Tower as an SOE and a subsidiary of the three big telecom operators, and b) the shutting down of 2G and 3G networks, which may put pressure on the Company’s tower business. However, this effect should be manageable. For concern a), as an SOE reform demonstration, China Tower will benefit, since it can leverage social resources to extend its business scope. As for concern about shutting down 2G and 3G base stations, telecom operators already started their antenna integration, by using multi-band and multi-system antennas, for example. In Henan province, for example, according to the Henan Communications Administration, as at the end of 2016, Henan had about 81,000 3G base stations. Henan Unicom has at most one third of them, or about 27,000. According to

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Henan Unicom, 11,565 base stations are qualified to use 3G+4G multi-band antennas, and as at the end of 2016, Henan Unicom had already replaced 44% of them. We believe the effect of shutting down 2G and 3G networks is already partially reflected in China Tower’s past performance, and we believe the effect will be alleviated by increasing the number of 4G and 5G base stations and other demand, like IoT (NB-IoT and LoRa).

Non-hardware Network slicing in the 5G era will provide great opportunities for the telecom non-hardware industry. During China Mobile’s annual results presentation, China Mobile management introduced the idea of charging 5G tariffs in a multi-dimensional mode. For example, telecom operators could charge the 5G tariff by data speed/broadband, by function/network slicing, or by time delay. New solutions like this would also provide great opportunities for the telecom non-hardware industry.

AsiaInfo [1675.HK; NOT RATED] AsiaInfo’s revenue from its software business increased to RMB5,192.0m in 2018, up 7.6% YoY. AsiaInfo’s net profit decreased to RMB204.2m, down 39.1% YoY, and its adjusted net profit increased to 602.2m, up 29.9% YoY. AsiaInfo is the largest telecom software (BSS+OSS+MSS) provider in China and the largest BSS software provider in China. AsiaInfo is increasing its input in its telecom operator business to take advantage of 5G opportunities. AsiaInfo has also diversified beyond the telecom industry to the cable TV, postal and financial services industries and made some significant breakthroughs in 2018. AsiaInfo will adopt a profit appropriation guideline of no less than 40% of annual available net profits starting 2019.

Inspur [0596.HK; BUY; TP: HK$5.84] Inspur’s revenue increased to HK$2,442.6m in 2018, up 24.3% YoY, and its net profit increased to HK$324.0m, up132.8% YoY. The strong 2018 results were attributable to: a) steady growth and good economies of scale in the Company's main management software business; b) the contribution from Inspur Tianyuan, which was acquired in Aug 2019; and (c) substantial growth in the share of profit from investment associates. Inspur Tianyuan, formerly known as Inspur Communication Information, is principally engaged in software development and services in relation to the communications industry and transportation industry, as well as big data services business. Inspur is one of the important partners of China Mobile in the OSS business, and it also provides services for China Unicom and China Telecom. The market might have concerns about the IT services industry, including Inspur, because of an activist’s report on Kingdee [0268.HK], released on Mar 18, 2019. However, some arguments, such as the VAT refund and government subsidies, are not new, and are common industry practices. We maintain that concerns about industry practices are somewhat overdone.

Equipment suppliers We share the view that in the 5G construction period, upstream suppliers will experience pressure. Normally, suppliers can either: a) sell products direct to telecom operators through operators’ centralized procurement, or b) sell products to telecom equipment manufacturers that build complete networks for delivery to telecom operators. However, considering the huge 5G CAPEX, downstream telecom operators and equipment manufacturers are inclined to reduce the cost by using the latter. There are two reasons for this: a) from a business perspective, the operators’ desire to shift the continuing bargaining pressure onto equipment manufacturers; and b) from the technology perspective, changes in 5G patterns and architecture. Due to the increasing complexity of 5G technology, some suppliers’ bargaining power will be weakened. Suppliers will

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need to seek tighter cooperation with equipment manufacturers that hold the 5G standards and patents and have the capability to do the R&D.

As both the rate and frequency increase, 5G’s 3.5 GHz, and 6 GHz+ frequency bands will be higher than the existing 3G/4G frequency bands, which makes the coverage range smaller and requires more base stations. It is expected that the coverage radius for a single 5G base station will be substantially smaller than that for a 4G base station with the same power in the same environment, so operators will need denser deployment of 5G base stations. Transferring the workload to equipment manufacturers that will build complete networks will be a cost-effective way of doing this.

Also, the 5G base stations will heavily adopt active antennas, which are considered the next stage in the evolution of cellular site architecture. In an active antenna, the radio is integrated into the antenna and the radio functionality is distributed across the antenna elements. Specifically, an active antenna unit (AAU) is the integration of the traditional RRU and the antenna. AAU’s advantages are a) less feeder loss, which enhances coverage; and b) AAU’s compact design, which simplifies base station deployment and speeds up MBB service time to market.

Figure 9: Cell site architecture evolution

SOURCES: CGIS RESEARCH, CommScope

In the 5G era, there will be radio access network (RAN) changes. The 4G RAN architecture consists of an Evolved Packet Core (EPC), a Baseband Unit (BBU), and a Remote Radio Head (RRH). In the evolution from 4G/LTE to 5G new radio (NR) transport architecture, the main change is that the original BBU function in 4G/LTE is split into three parts: a central unit (CU), a distributed unit (DU), and a remote radio unit (RRU). The CU mainly provides the non-real-time wireless high-level protocol processing function, such as radio resource management and dual connection. This can use a general hardware platform, and be deployed together with mobile edge computing. A DU mainly processes physical layer functions and real-time HARQ flow through a dedicated equipment platform or a general dedicated hybrid platform. The appropriate CU/DU split between real-time and non-real-time functions is important in 5G for several reasons. On the DU side, for example, the use of Massive MIMO and associated beam-tracking and beam-switching techniques requires highly accurate time estimation to support mobility, which points toward distributed real-time ratio functions as optimal. Elsewhere, centralized functionality makes more sense. The 5G RAN will consist of overlapping cells with multiple connectivity to the device and the network – for example, C-Band small cells and sub-6GHz macro cells will combine to provide end-user service. This will need some kind of access network selection function that is hosted in the CU by the central controller – i.e., the non-real-time part of a cloud RAN architecture – which has a view of the overall network state.

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Figure 10: Evolving from single-node in 4G to split-function architecture in 5G

SOURCES: CGIS RESEARCH, ITU

Due to all these changes in 5G technology, it is getting harder for suppliers to maintain their independence. One event shows how the market situation has changed. Kathrein, a leading antenna and filter supplier, announced on Feb 25, 2019 that it intends to sell its antenna and filter business to Ericsson, in view of the strategic options and intensifying global competition in the mobile communications sector. The deal is expected to close in Q3 2019.

In such situations, equipment manufacturers are most likely to benefit, given their scarcity both domestically and internationally. Unlike the efficient optical fibre market (see below), there are only a few domestic equipment manufacturers in China. Huawei and ZTE are the two most successful and powerful, followed by Datang and Fiberhome, which have a small market share. Although Nokia and Ericsson could enter the Chinese market, they won’t have a big market share in China because of their limited competence and national marketing problems.

Equipment manufacturers will benefit from new opportunities for development, given sustained rapid growth in information spending and data flow and ongoing progress in the 5G industry. Specifically, such opportunities will be underpinned by: 1) the pre-commercial launch of 5G in major countries around the globe to prepare for large-scale 5G commercialisation; 2) 5G-driven transformation towards digitalisation, resulting in higher operating efficiency and enabling business innovation and upgrading; and 3) the innovative development of new applications in tandem with the gradual launch of chips, modules and terminals in a sophisticated industry chain driven by 5G commercialisation.

Also, unlike the 2G era, when there were two global standards (GSM and CDMA), the 3G era, when there were three global standards (WCDMA, CDMA2000, and TD-SCDMA), or the 4G era, when there were two global standards (LTE-TDD (TD-LTE) and LTE-FDD), there is only one unified global standard in the 5G era (5G New Radio, or 5G NR). So equipment manufacturers will not face the risk of picking an unwelcome standard. Again, because it is a unified global standard that cannot be skipped, there is no risk of moving to 6G immediately. That is to say, the present ranking or presence of equipment manufactures will contribute directly to their performance in next 5–10 years.

According to IPlytics, Chinese companies Huawei, ZTE, CATT and Oppo, South Korean companies Samsung and LG, US companies Qualcomm and Intel, European companies Ericsson and Nokia, and Japanese company Sharp are the 11 major 5G patent holders. We have a strong confidence that ZTE will have a strong leadership position and performance in the 5G era.

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Figure 11: Number of 5G SEPs (standard essential patents) (families) declared to ETSI

Ranking Patent owner Sources A B

1 Huawei 1529 1970

2 Nokia (including Alcatel-Lucent) 1397 1471

3 Samsung 1296 1316 4 ZTE 1208 1029 5 Ericsson 812 1444 6 QUALCOMM 787 1146 7 LG Electronics 744 1448 8 Intel 550 583

9 Datang

(China Academy of Telecommunication Technology)

545 543

10 Sharp 468 495 11 Oppo 118 12 Fujitsu 20 13 InterDigital 18 154 14 Sony 14 15 MediaTek 13 16 Apple 12 12

Source A is IPlytics’s report published in Feb 2019. Source B is CAICT’s report showing the results by end of 2018.

SOURCES: CGIS RESEARCH, IPlytics, Public news

ZTE [0763.HK; BUY; TP: HK$25.99] We see opportunities for ZTE. It had a net loss of RMB6,984m in 2018 vs. net profit of RMB4,568m in 2017. ZTE’s turnover was RMB85,513m in 2018, down from RMB108,815m in 2017 because of the export ban by the US government. Turnover in its carrier business dropped 10.5% YoY to RMB57,076m in 2018, and its gross margin was flat YoY at 38.8%. ZTE’s consumer business reported a 45.4% YoY decline in revenue to RMB19,210m in 2018, and its gross margin dropped from 14.6% in 2017 to 11.4% in 2018. ZTE’s government and corporate business reported a 6.1% YoY decline in turnover to RMB9,228m in 2018, and its gross margin dropped slightly from 28.2% in 2017 to 27.5% in 2018. Based on our discussion with management, the Company’s operating performance in Q1 2019 is expected to pick up because of investment by Chinese telecom services providers. We believe that ZTE is one of the few HK- and A-share-listed names best positioned to benefit from the CAPEX upcycle. ZTE management shares the view that the active antenna system will be adopted for the 5G roll-out, so we believe wireless equipment suppliers such as ZTE will benefit. According to news reports on Apr 1, 2019, ZTE had signed more than 30 commercial contracts for 5G. In addition to wireless equipment, ZTE has invested in new technologies that will allow it to benefit from the adoption of new technologies, like NB-IoT.

Huawei [unlisted] Huawei’s 2018 revenue increased to RMB721.2bn in 2018, up 19.5% YoY, and its net profit increased to RMB59.3bn, up 25.1%YoY. Huawei management expects it to continue to achieve double-digit growth in revenue in 2019. As at the end of February 2019, Huawei had signed more than 30 commercial contracts for 5G, and shipped more than 40,000 5G base stations to markets around the world.

Nokia [NOK.US; NOT RATED] In 2018, Nokia signed three separate framework agreements for a combined value of EUR2bn with China’s big three telecom operators. The agreements will increase network speed and capacity and improve reliability across China, while

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introducing new network capabilities as operators evolve toward 5G. The number of customers already engaged with Nokia on 5G is rapidly reaching the 100 mark. According to news reports on Apr 1, 2019, Nokia has already signed 30 commercial contracts for 5G.

Ericsson [ERIC.US; NOT RATED] According to news reports on Apr 2, 2019, Ericsson had signed more than 18 commercial contracts for 5G.

Optical communications YOFC [6869.HK; SELL; TP: HK$17.51] [601869.CH; SELL; TP: RMB24.06] YOFC’s revenue increased to RMB11,360m in 2018, up 9.6% YoY, and its net profit increased to RMB1,489m, up 17.4% YoY, but YOFC’s outlook is cloudy. According to YOFC’s 2018 results announcement, there is an oversupply of optical fibre and optical fibre cable, which with China Mobile’s latest tender for optical fibre will have a negative effect on YOFC’s revenue and profitability. Specifically, China Mobile released the results of its 2019 optical fibre centralized procurement on Mar 12, 2019. Surprisingly, YOFC ranked no.6 in the tender, with a market share of only 4.39% (vs. No.1 with over a 10% market share in the previous two tenders). In the 5G era, supplier market patterns will change. As shown in figure 1, the optical fibre market is efficient, which means optical fibre suppliers with lower market entry barriers will suffer in the 5G era because of operator cost control. In the long term, YOFC’s growth will be supported by new product development, such as ULL optical fibre, which is expected to be used to upgrade the main trunk of the optical fibre network of Chinese telecom operators. Nevertheless, we believe that the market might wait for confirmation of demand for new products before re-rating YOFC.

O-Net [0877.HK; BUY; TP: HK$5.63] O-Net’s revenue increased to HK$2,516.4 in 2018, up 23.6% YoY. Its gross profit margin dropped from 35.7% in 2017 to 31.3%, due to slower consumer electronic product sales. Its net profit increased to HK$261.8m, up 25.3% YoY. O-Net’s 2018 results confirm our view that it should deliver solid EPS growth in 2018–2020, driven by: a) market share gains, b) new product launches, and c) an expanding customer base. O-Net will be a beneficiary of the global 5G roll-out, given its strong customer base. O-Net’s product portfolio and research direction accurately position its development. We believe that O-Net’s 2018 results will be a good reference for investors to re-build confidence in the Company.

Wireless In the 5G era, competition in the Chinese supplier market will be more intense, because the average selling price (ASP) of products will continue to fall. The market will become larger and revenue for the winners will rise, with the help of increasing shipments for a larger number of base stations and new technology like Massive MIMO, but they may see pressure from low profit margins.

Meanwhile, continued investment by the global telecommunications industry remained focused on 4G networks, digital communication, optical transmission and broadband access, which help the supplier companies’ international business. According to Ericsson, LTE became the dominant mobile access technology at the end of 2017. In terms of build-out and subscription uptake, LTE is the fastest-deployed mobile communication technology to date. It took just 5 years for LTE to cover 2.5bn people, compared to 8 years for WCDMA/HSPA. Several drivers are increasing the speed of LTE deployment. With the expected growth of IoT services, there is higher demand for geographical coverage, as sensor networks are installed in places with low

https://b2b.10086.cn/b2b/main/viewNoticeContent.html?noticeBean.id=545704

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population density, such as agricultural and forested areas. LTE population coverage is currently over 60 percent and is forecast to grow to more than 85 percent in 2023. The number of LTE subscriptions has also continued to grow strongly and is forecast to reach 5.5bn by the end of 2023. The number of WCDMA/HSPA subscriptions was expected to decline slightly in 2018. However, the technology is still expected to account for around one-fifth of all subscriptions by 2023.

The 4G network further penetrated the market to become the dominant network for mobile broadband communication. Powerful countries like China, US, South Korea, and Japan will purchase 5G + 4G, but other countries like Mexico and most Southeast Asian countries are still focusing on 3G and 4G.

Comba [2342.HK; NOT RATED] Comba’s revenue increased to HK$5,663.3m in 2018, up 1.8% YoY, and its net loss was HK$171.4m, down from a net gain of HK$27.4m in 2017. Comba’s revenue in mainland China decreased to HK$3,722.0m, down 15.0% YoY, due to decreasing investment by China’s big three telecom operators. The results showed that stronger sales to international customers alleviated pressure in the domestic market. During the results presentation, investors indicated concern about whether Ericsson’s acquisition of Kathrein would have a negative effect on Comba’s business. Comba management indicated that it would have an effect.

MOBI [0947.HK; NOT RATED] MOBI’s revenue decreased to RMB1257.2m in 2018, down 11.6% YoY, and its net profit increased to RMB16.7m, up 134.4% YoY. As in the 1H 2018 overview, a combination of the impact of the ZTE incident (the activation of a denial order by the US Commerce Department on ZTE), operator procurement delays and a decline in demand resulted in MOBI’s sales to domestic equipment manufacturers decreasing 49.3% YoY. MOBI’s overseas revenue increased to RMB410.6m, up 47.1% YoY, which helped alleviate pressure from the domestic market. One investor concern raised during the results presentation was MOBI’s R&D progress on filters, which is a hot topic in the 5G investment theme. Management said it had shipped 4G filters, but mentioned only that the Company would promote their development as telecom equipment manufacturers required.

Trigiant [1300.HK; NOT RATED] Trigiant’s 2018 revenue increased to RMB3,469.2m in 2018, up 14.8% YoY, and its net profit increased 24.7% YoY to RMB345.5m. The market has concerns about demand for feeder lines in the 5G era since the 5G base station structure will change. But the fact that 4G and 5G will exist concurrently in the long term eased some of the concerns. Whether Trigiant can successfully increase revenue from business other than feeder cable will become a key aspect of its future performance.

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同途不同命 - chinastock.com.hk · industry. During China Mobile’s annual results presentation, management introduced an idea to charge 5G tariffs in a multi-dimensional mode