To support economic growth amid COVID-19 outbreak, China government announced to accelerate new infrastructure investment, which will focus on seven areas including 5G, data center, ultra-high voltage, NEV charging facilities, AI, intercity high-speed rail/ urban rail transit and industrial internet. We believe this signals more policy support ahead, especially after National People’s Congress meetings in Mar/Apr, which will be major positive catalysts to 5G and data center supply chain in our view. Overall, we believe equipment vendors (ZTE, Comba), PCB players, (SSC, SY Tech), and optical component suppliers (Innolight, Accelink) are well positioned to benefit from 5G/ datacenter large-scale deployment in FY20-22E.
- New infra investment focus on innovation and new use cases. We believe China is seeking more targeted investments in projects that facilitate innovation and improve weak areas in social development. We expect a new wave of investments into 5G network and datacenter, which are two key fundamental infrastructure to support emerging applications in industrial internet, AI, autonomous driving and Smart City.
- China 5G BTS build on track despite COVID-19; Expect 600-700k 5G BTS in FY20E. Both MIIT and Chinese telecoms recently announced to maintain its 5G development goals in FY20E, aiming to build at least 550k 5G BTS in FY20E (vs 150k in FY19). Recent CM and CU/CT 5G BTS tenders also suggested that 5G CAPEX will be backend-loaded in 2H20E, and we expect potential upside to its conservative target as 5G SA BTS supply chain and power consumption issues will be gradually resolved in 2H20E. Overall, we expect 600k-700k 5G BTS add in FY20E.
- Multi-year IDC growth driven by 5G new applications, AI adoption and cloud migration. We believe 5G data traffic/new applications, enterprise cloud migration and AI adoption will continue to boost data centre demand for data processing and storage. In next few years, we believe data centre expansion and infrastructure upgrade will offer significant upside to data centre supply chain.
- Positive to equipment and optical component supply chain. Major 5G network beneficiaries include ZTE (763 HK) for 5G network equipment, China Tower (788 HK) for accelerated 5G BTS build, Comba (2342 HK) for small cells and SSC (002916 CH)/SY Tech (600183 CH) for 5G BTS PCB upgrade. Major IDC beneficiaries include Innolight (300308 CH) for optical modules, Inspur Electronic (977 CH) for database server, and Sinnet (300383 CH)/ GDS (GSD US) for IDC centres.
