中國(guó)5G：提升國(guó)家基礎(chǔ)設(shè)施

1、EQUITIESCHINAFebruary 2019Colin HYPERLINK / Upgrading the national infrastructureThe next phase of Chinas digitalisation has implications and scale well beyond the foreseeable 5G business casesWe continue to like China Tower (Buy) as a play on this national infrastructure upgradeInitiate Hold on Chi

2、na Communications Services: strategic focus on non-telecom operator markets is positive but the valuation premium underestimates the pressures onmarginsDisclaimer & Disclosures: This report must be read with the disclosures and the analystcertifications in the Disclosure appendix, and with the Discl

3、aimer, which forms part of itTHIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA (THE PRC) (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Why read this report?China will launch 5G commercial services in 2020; we remain cautious on consumer applications for 5G, but

4、we see potential in the enterprise and government markets.The continuing digitalisation process means that corporates, industries and vertical businesses will have greater demand for telecom infrastructure.We estimate the size of the markets for those parts of Chinas telecom industry that will be af

5、fected by 5G projects; and we list our stock picks in those segments.This report replaces the version of the same date and title to correct the rating of China Communication Services on page 42 (should be Hold).Executive summary5G and Digitalisation 2.0 in ChinaDigitalisation has transformed all asp

6、ects of Chinas society over the last two decades. Policy support and the upgrading of consumption patterns have both played a vital role but so too has the evolution of telecom technologies, in particular 3G, 4G and FTTH (fibre-to-the-home). We expect the focus to shift from the consumer sector to t

7、he corporate sector and the government. The next round of digitalisation what we call Digitalisation 2.0 is coming and will have a profound impact on China in the long term. A vital part of this process is the emergence of fifth-generation mobile technology (5G). While we are relatively cautious on

8、consumer applications for 5G, large-scale commercialisation is expected in China in 2020, creating opportunities for many companies in the value chain. This report discusses the potential impact and opportunities the early stages of 5G will bring right across Chinas economy.Caution on 5G shouldnt ob

9、scure the many opportunitiesWhatever you might think about the impending arrival of fifth-generation mobile technology (5G) revolution or evolution there is no doubt that in China a lot is happening and a lot of money is going to be spent. In fact, it is an official national priority. Our global tel

10、ecom team has a cautious view of 5G, in particular regarding the mass consumer business case. It is also unclear whether 5Gs capabilities will translate into faster revenue growth for telecom operators (see HYPERLINK /R/10/v6tqbcj 5G: Whats the use?, March 2018). Some Asian countries, particularly J

11、apan, Korea and China, are expected to launch 5G commercial services around 2020, raising concerns overdone, in our view (see HYPERLINK /R/10/TxLmxkk 5G in Asia: Generation Gap, May 2018) that cash returns may decline as capexrises.While all of the above are indeed reasons to be cautious, it is, non

12、etheless, true that, beyond telecom operators, there are many investment opportunities related to 5G and the digital upgrade process under way in China. In this report we examine the investment case for telecom infrastructure during the early stage of 5G and the new phase of digitalisation. In doing

13、 so we highlight three key companies for exposure to the telecom infrastructure market in China: China Tower (788 HK, HKD1.62, Buy, TP HKD1.95), China Communication Services (552 HK, HKD7.82, initiate at Hold, TP HKD6.71), and AsiaInfo Technology (1675 HK, HKD8.59, Buy, TP HKD15.00).Telecom infrastr

14、ucture opportunities for early 5G cycleare few technologies as much attention from different as technology is expected to create three Machine Communication and Ultra Reliable and Low Latency according to the UNs Union our global team believes the case for 5G is, And believe 5G create only limited n

15、ew revenue in the consumer sector for telecom Some and in Europe, are pushing the launch of in China, regulators and are pushing In 2018, the Chinese Party Central Committee and the State Council and development of an as one of the for 2019. of Industry and Information announced in January that Chin

16、a had the phase of 5G ready for come to the market and 5G be issued to operators by the end of this Chinas large market, this We believe the telecom infrastructure market the very upstream of the whole 5G value chain offers good investment opportunities for three main reasons: support from many leve

17、ls of Chinas government: Infrastructure investment has been, to a large in China and this equally the case for technology. In December the Central Working Conference (CEWC) highlighted5Gasakeythemeandcommittedtoin“newNational and Reform has this investment on the the internet of and We the clear pol

18、icy support translate into new for telecomisthefoundationfortheBesides, each other in the of “new strong support for Broadly Chinas to become a leading country in IT and internet to existing there are signs of a potential fiscal on the “new Corporate-oriented Digitalisation 2.0 requires telecom infr

19、astructure: The ongoing shift in China of digitalisation from the consumer sector to the corporate sector which we call Digitalisation 2.0 is creating new demand for telecom infrastructure. For instance, the Smart City initiative in China needs certain new components added to existing telecom infras

20、tructure. It also requires additional construction, extension of fibre lines, and more specialised network maintenance. Chinas sheer size creates more opportunities for the telecom infrastructure market: Though we are taking a cautious view on telcos capex in the 5G era, the amount is still much gre

21、ater than that for operators in other countries (2020e capex/sales: China Mobile 27% (941 HK, HKD82.35, Buy, TP HKD88.00), SK Telecom 13% (017670 KS, KRW261,000, Buy, TP KRW332,000), NTT DoCoMo 15% (9437 JP, JPY2,552, Reduce,TP JPY2,300). There is going to be a long business application process for

22、5G, in our view. Scalable 5G telecom infrastructure is a prerequisite for application discovery in China, given the countrys geographic and populationsize.Key segments of telecom infrastructureExhibit 1: Key segments of the telecom infrastructure market (RMB)Source: HSBC estimatesWe key of of to is

23、set is is We estimate the market for these four segments will generate over RMB1.8trn in revenue from 2018 to 2023. Telecom operators are mostly the investment channels for telecom infrastructure. As such, the opportunities offered by the telecom infrastructure market are largely reflected in the Bi

24、g 3 (China Mobile, China Unicom, and China Telecom) operators capital expenditure (capex) and operating expense(opex).Exhibit 2: Growth outlook for the telecom infrastructure market (RMBbn)137151137151153154119128133101581882702076742275802489862788943183338235030025020015010050-leasingNetworkSource

25、: Company data, HSBC estimates Telecom construction: This appears to be cyclical across both 3G and 4G. The 5G investment pace will likely be more moderate but will follow largely a similar pattern. We estimate the peak of telecom construction will arrive in 2020-21 and gradually cool down but conti

26、nue at a rather high level after 2021. Network maintenance: This market is generating stable growth as telecom networks continue to scale up and the Big 3 operators are outsourcing more maintenance work to third-party service companies. We expect the segment to record a 6.7% CAGR in 2018-23. Tower l

27、easing: The formation of the tower leasing segment is largely associated with the establishment of China Tower (788 HK, HKD1.62, Buy, HKD1.95). The company enjoys a favourable regulatory environment with prioritised access to new business opportunities. We estimate the segment will register a 7% CAG

28、R in 2018-23 and the market size in terms of revenue will exceed RMB100bn. Telecom software: This segment is the smallest but has the fastest growth. The demand for telecom software upgrades and replacement mainly stems from changes in telecom business models, the emergence of new business cases, an

29、d the need to improve network and operational efficiency. We forecast the segment to record an 11% CAGR in 2018-23.We prefer opex-related segments early in the investment cyclethere are still some around potential business cases still look vague from the We believe segments, leasing and have higher

30、are also the Digitalisation 2.0 in China. the Big 3 operators have their invest in a in the 5G era, may pressure and segments. Cost on opex is certainly also Big 3 Despite this, in fact, a measure to control As such, it create more market space for Our investment ideasChinaTower(788HK,TPHKD1.95)isou

31、rcompanyforopportunities in telecom We like China for four reasons: 1) 5G spectrum in China, making available, could help China achieve capex savings; 2) China a uniquely regulatory 3) initiatives enable company to benefit from in China; and 4) high in cash earnings, and yield target price of (from

32、is a function of higher margin estimates and net debtestimates.We initiate coverage on China Communication Services (552 HK, HKD7.82, Hold, TP HKD6.71). China Communication Service (CCS) is the largest integrated service provider in the telecom construction and network maintenance segments. CCS also

33、 engages in system integration, property management, software design, and other related IT and telecom services. The telecom sector currently contributes c70% to total revenue. Apart from the telecom sector, CCS is also rapidly increasing its presence in non-telecom sectors. The companys strategic f

34、ocus and efficient execution make it well-positioned to benefit from Digitalisation 2.0 across China. However, the company is facing a number of challenges, among which pressure on margins stands out. We believe a long-term solution for margin is needed to support sustainable growth going forward. W

35、e forecast CCSs revenue to record an 11.5% CAGR in FY17-20 and a 9.2% CAGR in net profit during the same period. Near-term catalysts include operators announcements for 5G strategy and tenders for 2019 construction projects.We also highlight AsiaInfo Technologies (1675 HK, HKD8.59, Buy, TP HKD15.00)

36、 as a key company for exposure to the telecom software sector. The company has the largest market share (25%) in terms of revenue generated in 2017. We expect revenue to grow from RMB4.8bn to RMB6.1bn in FY17-20, representing an 8.1% CAGR. We forecast a FY17-20 gross profit CAGR of 11.7% and a net p

37、rofit CAGR of 18.8%.Exhibit 3: Three-year relative share price performance of key telecom infrastructure companiesFeb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18ChinaTowerCCSAsiaInfoSource: Bloomberg, HSBCValuationRisksChina Tower 788 HKCurrent price:China Tower 7

38、88 HKHKD1.62Target price:BuyHKD1.95BuyUpside:20.4%We use DCF as our valuation methodology to better reflect cash flow the capital-intensive businesses. Our DCF inputs include a WACC of 6.1%, the components of which are a RFR of 3.0%, a beta of 1.0, and an ERP of 5.0%, a COD of 5.5%, a debt-to-capita

39、l ratio of 48%, and a terminal growth rate of 1.0%. This approach returns a target price of HKD1.95, implying 20.4% upside from the current share price, and an 8.0 x EV/FY19e EBITDA. We have a Buy rating on the stock.Colin Liu* | HYPERLINK mailto:colin1.r.liu.hk colin1.r.liu.hk | +852 2822 3165 The

40、Hongkong and Shanghai Banking Corporation LimitedKey downside risks: full merger of China Unicom (762 HK, HKD8.95, Buy, TP HKD11.50) and ChinaTelecom (728 HK, HKD4.26, Buy, HKD4.60); lower- than-expected tenancy growth due to slower network rollout by operators; lower-than-expected lease rentals at

41、the time of lease renewal; higher-than-expected raw material and labour costs; higher-than-expected site leasing fees; higher-than-expected outsourcing service fees; and RMB depreciation could decrease the value of China Towers dividend.China Communication Services552 HKChina Communication Services5

42、52 HKHKD7.82Target price:HKD6.71HoldDownside:Hold14.2%AsiaInfo Technologies 1675 HKCurrent price:AsiaInfo Technologies 1675 HKHKD8.59Target price:BuyHKD15.00BuyUpside:74.6%We use DCF as our valuation methodology to reflect the cash return of the businesses. Our DCF inputs include: a beta of 1.0, a R

43、FR 3.0%, an ERP 5.0%, a COD of 5%, a debt-to-capital ratio 0%, leading to a WACC of 8.0%. We assign a 1.0% terminal growth, the same as for Chinas telcos. This approach returns a target price of HKD6.71, implying 14.2% downside from the current share price. The current valuation is rich at 2 SD abov

44、e the five-year average. We have a Hold rather than a Reduce rating on the stock because we believe CCSs fundamentals remain strong, expansion into non-telecom markets is well on track, and 5G-related projects will start contributing to top-line growth from 2020. The current valuation is rich and ha

45、s priced in most positive factors.Colin Liu* | HYPERLINK mailto:colin1.r.liu.hk colin1.r.liu.hk | +852 2822 3165 The Hongkong and Shanghai Banking Corporation LimitedWe use DCF as our valuation methodology as we believe it is appropriate for businesses with stable cash flows. Our DCF inputs include

46、a RFR of 3%, an ERP of 5.0%, a beta of 1.4, a COD of 4.5%, and a debt-to-capital ratio of 30%. We apply a terminal growth rate of 1.0%. This approach returns a target price of HKD15.00, implying 74.6% upside from the current share price. We have a Buy rating on the stock.Colin Liu* | HYPERLINK mailt

47、o:colin1.r.liu.hk colin1.r.liu.hk | +852 2822 3165 The Hongkong and Shanghai Banking Corporation LimitedKey upside risks: faster-than-expected 5G rollout in China; blockbuster 5G business applications emerge earlier than expected; stronger-than-expected demand from the non-operator market; and unexp

48、ected favourable changes in the revenue mix.Key downside risks: slower-than-expected 5G rollout in China; higher-than-expected labour and material costs in China; stronger-than-expected competitive pressure; and unexpected cash flow pressure from operators.Key downside risks: changes in the telecom

49、operator business; risk from evolving regulation of personal data protection and privacy concerns in China; slower-than- expected 5G rollout; higher-than-expected competition in the non-telecom sector; and higher-than-expected R&D spending on 5G.Priced at 8 February 2019Source: Bloomberg, HSBC estim

50、ates*Employedbyanon-USaffiliateofHSBCSecurities(USA)Inc,andisnotregistered/qualifiedpursuanttoFINRAregulationsChinas Digitalisation 2.0 Digitalisation 1.0 in China contributed to the worlds largest 4G and fibre-to-the-home (FTTH) network, substantially changing daily life Monetisation of existing ap

51、plications has been extensive, with little space left to generate new growth Vertical business-focused Digitalisation 2.0 is around the corner, and so is 5G in China; what are the long-term implications?5G in contextDigitalisation has been one of the most significant social and economic themes in Ch

52、ina over the last two decades. The evolution of telecommunications technology has made profound changes to every aspect of life in China from the media to personal communications to the fundamental organisational structures of business institutions and from the way people socialise to the conduct of

53、 national security. This social transformation has also been one of the most successful investment themes over the period. We believe digitalisation in China is reaching a critical point. Monetisation of existing applications has been stretched. Many companies are starting to focus on corporate-orie

54、nted digitalisation markets rather than on mass consumers. At the same time China is approaching the 5G era. Different stakeholders are trying to take advantage of certain specific features of 5G to create vertical sector-focused business scenarios. However, the truth is that business cases related

55、to 5G are still vague and in the drawing room, rather that out there being tested. The revenue potential for telecom operators is not clear (see HYPERLINK /R/10/TxLmxkk 5G in Asia: Generation Gap, May 2018).Does this mean the telecom operators, the 5G executors, will be unable to benefit from the ch

56、anges? It is very difficult to reach a judgement that applies to every segment of the TMT industry across the whole country. However, the big picture reveals that 5G is arriving just as China is unveiling a new phase of digitalisation. There are some long-term technology and investment implications

57、that we cannot afford to ignore regardless of the outlook for 5G. By the same token, historically, 3G could hardly be described as a successful investment case in Chinas TMT space, let alone TD-SCDMA. However, 3G in fact laid out a large part of the foundation for 4G, which ushered in the era of mob

58、ile broadband worldwide.Chinas Digitalisation 1.0 towards the end of monetisationChina started Digitalisation 1.0 from the mid-2000s by introducing mobile communication and residential broadband services to the mass consumer. The underlying technologies are 3G, 4G, xDSL and FTTH/P. They gave birth t

59、o the internet industry in China and boosted the development of mobile internet applications. Residential broadband opened up a new era for family entertainment. More recently, wireline and wireless networks created the concepts and applications for the internet of things (IoT) and cloud computing.

60、By November 2018, China had achieved 4G penetration of 74.3% and a FTTO/H penetration rate of 89.9%. Though some areas, such as IoT and the cloud, are still growing fast, monetisation of most existing business has reached the point of maturity.Exhibit 4: Chinas Digitalisation 1.0Source: MITT, HSBCCh