We hosted a China Tech Corporate Day in Shenzhen on 17 Sep, and met with 5 A/H listed companies and 2 experts on telecom and 5G chipset. Overall, both industry and investors are positive on 5G and related opportunities, and we expect China 5G network and smartphones to ramp faster than expected given China govt. push, OEMs competition and consumers’ video demand. Our top picks are Sunny Optical (2382 HK), Q-tech (1478 HK), Luxshare (002475 CH) and Tongda (698 HK). Below is our key takeaways.
- Initial 5G BTS coverage set to accelerate with "Co-build, co-share". Industry expert stated that China 5G BTS deployment has accelerated since 5G license issuance, and telco operators will initially focus on geographical coverage rather than capacity upgrade in next 2-3 years. Therefore, total number of 5G BTS required may only reach 70% of total 4G BTS at early stage. We believe “Co-build, co-share” could reduce capex burden, improve investment efficiency and boost 5G sub penetration in the near term, while in longer term, China telcos will explore opportunities in “ToB” enterprise segment, especially in industrial internet and IoT market.
- 5G smartphone ecosystem is ready; 5G SoC in 2Q20E to drive adoption. All companies indicated that both smartphone brands and supply chain are well prepared for 5G flagship model launches since 2Q19. First wave of 5G phones in 3Q19E (e.g. NEX 3 5G, Mi 9 5G) will all adopt discrete 5G modem solution with retail pricing range of RMB5k-8k, while second wave will come with 5G SoC in late 2019 and early 2020 during CES and MWC. Major 5G SoC (ie. Qualcomm, Samsung) will be commercially available in 2Q19E, driving 5G phone cost to RMB3K in 2Q20E and RMB2k by 4Q20E.
- Component: Huawei recovery on track; All eyes on 5G upgrade. Mgmt. stated Huawei order has been recovering in past two months given China share gain and US 90-day license, but concerns remain for overseas shipment and pace of spec upgrade (esp. semi) after inventory depletion in FY20E. For casing/antenna/battery/structured components, major suppliers expect 5G-driven upgrade will boost ASP growth and volume ramp in FY20E.
- Upcoming catalysts from Mate 30 and iPhone shipment; Focus on share gainers and 5G plays. Following recent sector rally, we believe sector re-rating will continue ahead of 5G tariff launch. Upcoming catalysts include Huawei Mate 30 launch, iPhone shipment and 5G tariff launch in Oct. We continue to like Sunny Optical/Q-tech for share gains and multi-cam earnings visibility, Luxshare for TWS/5G upgrade and Tongda for leadership in glastic casing.
