20220916-招银国际-China_5G_Sector_Expect_telecom_names_continue_to_show_strength_in_broad_market_weakness_20页_1mb

China 5G Sector Summary

Core Content

This report provides an analysis of the China 5G sector, focusing on domestic and global telecom capital expenditure (capex) trends, the impact on the supply chain, and the investment outlook for key players such as ZTE (763 HK) and China Tower (788 HK). It highlights the defensive nature of the telecom sector amid macroeconomic uncertainties and outlines the potential for growth in non-RAN markets.

Main Points

1. Domestic 5G Deployment

• 5G BTS Deployment:

  • Over 454k 5G base transceiver stations (BTS) were added in the first seven months of 2022, indicating ~72.5% of the full-year target was met.
  • China Mobile revised its target upwards to 750k 5G BTS for 2022, up from previous estimates of 640k–650k.
  • The delayed 5G tender in 2022 may impact supply chain sales in Q3 2022, particularly for PCB suppliers like Shennan (002916 CH) and Shengyi Electronics (688183 CH).

• Capex Trends:

  • Domestic telcos' capex intensity peaked at 22.7% in 2020 and declined to 17.8% in 2022.
  • Capex is expected to remain stable in 2023E, but 5G capex is projected to decline by 2.6% YoY.
  • Telcos are shifting focus to higher-growth areas such as industrial digitalization, IDC, and cloud resources.

• Market Share and Growth:

  • ZTE is expected to gain market share in both RAN and non-RAN markets.
  • ZTE's revenue is forecasted to grow ~12.2% YoY in 2022, with double-digit growth expected in the next two years.
  • ZTE's GPM is projected to improve to 36.1% in 2022, with a slight decline in subsequent years due to non-carrier business growth.

• Dividend and Share Repurchase:

  • China telcos are expected to increase dividend payout ratios to 70% within three years.
  • China Mobile repurchased HK$866mn in February 2022, showing a favorable dividend yield and potential for share repo.

Key Players and Outlook

ZTE (763 HK)

• Investment Outlook:

  • Expected to outperform peers due to market share gains in both RAN and non-RAN segments.
  • The delayed 5G tender may hinder short-term growth, but long-term prospects remain strong.

• Valuation:

  • Target price (TP) was lowered to HK$25 due to lack of 5G catalysts.
  • Maintained BUY rating, with 11.4x FY23E P/E close to the 2-year average forward P/E.

• Revenue and Profitability:

  • Revenue growth is expected to be ~12.2% YoY in 2022, with double-digit growth in the following years.
  • Gross margin is projected to improve in 2022, then gradually decline due to non-RAN growth.
  • Operating margin and net margin are expected to remain stable or slightly improve.

China Tower (788 HK)

• Business Overview:

  • The company's core tower business is expected to grow at a mid-single-digit rate.
  • Non-tower business (such as DAS, TSSAI, and energy) is projected to grow at a double-digit rate, but contribution to total revenue is limited.

• Valuation:

  • Current valuation is 2.7x EV/EBITDA, which is 1 SD below the 2-year forward EV/EBITDA multiple.
  • Maintained HOLD rating with unchanged TP of HK$1.01.

• Catalyst:

  • The renewal of tower lease contracts with China telcos in H222 could reduce expenses for telcos, but growth is expected to be limited due to weak bargaining power.

Global Telecom Capex Outlook

• Asia:

  • Capex has reduced in 1H22 after heavy 5G investments in China and South Korea.
  • Thailand and Indonesia are expected to increase 5G investments in the future.
  • Capex intensity is 14.7% in 2022, showing a downward trend.

• Americas:

  • Capex increased due to resumed 5G projects and Sino-US tensions.
  • Capex intensity is 14.4% in 2022, showing growth in 2023E.

• Europe:

  • Capex intensity is the highest, but growth is weak due to economic pressure.
  • Capex declined by 11.4% YoY in 2022, with gloomy outlook for future spending.

• MEA (Middle East and Africa):

  • Capex intensity is 12.5% in 2022, with mixed YoY growth.

• Overall Global Capex:

  • Total global telecom capex is expected to remain stable in 2023E, with no clear upward trend.

Summary of Key Trends

• 5G Deployment:

  • China's 5G network has reached significant coverage, but capex growth is slowing.
  • Stalled mobile ARPU growth is driving telcos to invest in higher-growth areas.

• Supply Chain Impact:

  • Delayed 5G tenders may reduce Q3 2022 sales for PCB suppliers.
  • Shennan and Shengyi Electronics are expected to experience YoY sales decline.

• Investment Strategy:

  • The telecom sector is viewed as a defensive play with high dividend yield and potential for share repurchase.
  • ZTE is a key beneficiary of global 5G spending and non-RAN growth.
  • China Tower is expected to see limited growth due to weaker bargaining power and slow revenue growth.

Conclusion

The China 5G sector remains resilient despite economic headwinds, with telcos maintaining stable capex and dividend yields. ZTE is expected to gain market share in both RAN and non-RAN markets, while China Tower faces growth constraints. Global 5G deployment is slowing in Asia but increasing in the Americas, with Europe showing gloomy outlook. The overall outlook is positive for the telecom sector, especially for defensive plays with strong cash flow and growth potential.