We initiate coverage on China 5G supply chain with a positive view, as we believe technology localization, multi-year 5G investment cycle, policy support and robust data traffic growth will bode well for domestic leaders during 5G upcycle. In this report, we conducted an in-depth analysis on 5G technology trends, competitive landscape, near-term growth drivers and structural beneficiaries. We believe pessimistic sentiment on slower 5G rollout and US-China tensions in 2H20 have been reflected in stock prices. Sector valuation now come to a reasonable level of 33.8x FY21E P/E from 40.1x in recent peak, and we recommend to accumulate sector leaders with high growth visibility, strong positioning and technology leadership. Our top picks are ZTE-H, Innolight, Sunway and Shengyi Tech.
Global tech decoupling to accelerate domestic substitution. We believe US-China tensions will continue in medium term and Chinese companies are poised to accelerate supply chain localization in next few years. In near term, we expect China 5G network players such as Huawei and ZTE will gradually diversify their supply chains, which will boost R&D and product launches from domestic leaders, and strengthen their competitiveness in the long term.
China 5G and new infrastructure initiative to fuel new chapter of growth. We expect recent US restrictions will have limited impact on China 5G rollout roadmap thanks to Huawei’s inventory build-up, accelerated semi localization and ZTE share pick-up. We forecast China 5G BTS net-adds to reach 600k/ 800k/1.0mn in FY20/21/22E, and domestic leaders are well placed to capture this multi-year opportunities. We expect upcoming 3rd phase of 5G BTS tenders and new infrastructure policy will be positive catalysts in near term.
Structural opportunities in equipment, PCB, optical transceivers and antenna. 5G networks require new architecture and advanced technology to support faster data speed and rising internet traffic. These structural changes will drive volume growth and content upgrade in key segments including network equipment, PCB, optical transceivers and antenna.
Near-term re-rating on easing US-China tension; Our top picks are ZTE, Innolight, Sunway and Shengyi Tech. Most 5G plays retreated 40-50% since 3Q20 due to slower 5G rollout and trade tensions, and sector valuation is now reasonable at 33.8x FY21E P/E. Our BUY calls are ZTE-H/A and Innolight for 5G rollout, share gain and robust data growth, and Shengyi on localization and content growth. We like Sunway for antenna/RF/wireless charging upgrade. We have HOLD on China Tower for telco opex pressure and limited near-term catalysts, and Shennan Circuits for ASP pressure and earnings downside.
