Remains a key driver of investment

■ On average, shares prices of the telecommunications-related names were up 9.8%, outperforming the HSI’s -14.3% on a YTD basis. Upstream component names underperformed downstream names.
■ China had built 1.159m 5G base stations as at the end of 3Q21, and had 623.7m 5G package customers as at the end of 1H21, leading all countries.
■ Despite concerns about a slowdown in investment, we remain constructive on midstream names, such as telecom equipment manufacturers (ZTE [0763.HK; ADD] and YOFC [6869.HK; ADD], downstream applications (AsiaInfo [1675.HK; ADD]), and others, such as CCS [0552.HK; ADD] and China Tower [0788.HK; ADD], as ICT infrastructure remains one of key investment drivers.

The share price performance of Chinese telecom-related names have outperformed the market YTD. Telecom operators reported a pick-up in revenue growth (faster non-telecom revenue growth). Midstream equipment manufacturers like ZTE and YOFC outperformed, especially since our last sector update, because of ZTE’s improving margin and YOFC’s improving ASP. Upstream suppliers still underperformed because of concern about pricing power.

China’s 2021 5G construction target on track

China had 623.7m 5G package customers as at the end of 3121, up 26.0% qoq, 445m (71.3%) of them 5G network customers, up 28.1% qoq. As at the end of 3Q21, China had built 1.159m 5G base stations. Although China slowed down its 5G construction in 1H21, it resumed and accelerated construction in 3Q21. We believe China is on track to deliver its 5G construction target for 2021. After considering factors such as co-building and co-sharing, low-frequency re-farming, we do not expect the CAPEX of Chinese telecom operators to increase significantly in 2022F. But 5G will be a longer-term development, focusing more on applications for toB scenarios, and investment is expected to be sustained. Although 5G toC applications, such as the metaverse, will take more time to develop, we are optimistic about their prospects. We expect the Internet of Things and cloud computing, which are the underlying supporting technologies for the metaverse to usher in new development momentum.

Investment in information and communications infrastructure will significantly increase

According to The Development Plan of the Information and Communications Industry during the 14th Five-Year Plan Period, China’s cumulative investment in information and communications infrastructure increased from Rmb1.9tr during the 12th FYP period to Rmb2.5tr during the 13th FYP period and will significantly increase to Rmb3.7tr during the 14th FYP period. The plan highlights some investment targets: 1) communications network infrastructure (5G, F5G-1000M fiber optical network, mobile IoT), 2) data and computing infrastructure (data centers, AI, blockchain), 3) converged infrastructure (industrial internet, C-V2X), 4) digital applications (cloud computing, digital services), and 5) cybersecurity.

Rerating potential for Chinese telecom operators

We see rerating potential for telecom operators, as we expect more investor interest and confidence in them when they return to the A-share market. The development of better toB business growth supports their top and bottom lines. We believe there will be more and more spin-offs and other capital market activities launched by telecom operators going forward because their emerging businesses have strong growth potential and deserve a higher multiple than that of the traditional telecom business.