A lot of talks over the past several months have been around the US-China trade tensions as well as the US's ban on technology sales to Huawei. But while the development of trade negotiations is the one that has occupied the headlines, China is not deterred in its 5G rollout.
In fact, the government has recently granted domestic telecom operators 5G licenses, and its plan is to launch 5G in 40 Chinese cities this year.
This move will give China better national 5G coverage compared to the US. Already, operators have started on the third phase of 5G tests, and both domestic and international players have joined the field trials, with the aim of launching pre-commercial 5G products.
According to a white paper by the China Academy of Information and Communications Technology, 5G technologies are expected to generate CNY 6.3trn (USD 947bn) worth of economic output, and to create 8m new jobs in China by 2030.
"The rollout of 5G cellular network technology in China has never been a matter of if, but when," according to UBS CIO Global Wealth Management. It added that the US ban will not stop 5G's arrival in China.
As Beijing's determination lies in the technology's potential to transform key innovative industries, including autonomous vehicles, smart cities, artificial intelligence, internet of things, cloud, etc, CIO believes committing early to development has given China and its tech leaders an edge.
This means that now is actually a good entry point to ride the 5G wave, CIO believes.
Select 5G-related upstream A-share names are trading at an average price/earnings to growth ratio of 31x now compared with 37x before the US-China trade war began, and they will benefit in the early stages of the 5G rollout. In fact, their earnings are likely to grow at a double-digit pace thanks to a strong contribution from 5G-related businesses.
For down-stream players, on the other hand, the earnings cycle may be 3-5 years behind. CIO expects them to generate low-single digit percentage of revenue from 5G products in the first 3-5 years of 5G expansion.
Of course, US-China relations remain the big uncertainty, and how much China's 5G development will be affected by the ongoing tensions.
CIO's base case suggests that a trade deal will be reached around the US presidential election campaign period so that China will roll out 5G in one year. In a no-deal scenario and a full Huawei ban, however, this would mean that China has to postpone its 5G rollout by two years or longer.
"We think 5G will be rolled out in China in 2019 and it will boost the sector's valuation to an around 35x price-to-earnings ratio (PER), implying over 36% upside for related stocks.
"In the worst-case scenario – i.e. if 5G is delayed more than two years, related 5G stocks would be de-rated to 1.8 standard deviations below their historical average. We would envision a more than 20% of drop in share prices due to a double-digit earnings downgrade and a low-teen multiple derating," CIO noted.
ByUBS
