China MIIT recently announced China has built global largest 5G network with 718k BTS YTD (330k co-built co-share), largely in-line with our estimate. We expect China telco operators will initiate third phase of 5G BTS tenders in next few weeks, and 5G BTS net-adds will reach 800k in FY21E. Overall, we believe China 5G deployment will keep moderately advanced pace in 2021, and we recommend to revisit sector leaders who will benefit from 5G investment cycle, rising penetration of 5G smartphones and increasing internet traffic. Our top picks are ZTE-H, Innolight, Sunway and Shengyi Tech. Upcoming catalysts include 3rd phase of 5G BTS tenders, operators’ 2021 capex budget and 4Q20 earnings.
- China 5G BTS net-add on track to reach 600k in FY20E. MIIT announced total 5G BTS net-adds is 588k as of mid-Dec, in line with our estimate of 600k. Current 5G network has made 5G services available in all Chinese cities at prefecture level and above. Total number of 5G BTS for China Mobile and China Unicom/China Telecom reached 390k/330k, and we estimate Huawei /ZTE accounted for 56%/31% market share in China.
- Expect FY21E 5G BTS net-add to reach 800k-1mn. Recent media news (e.g. China Daily) reported 5G BTS net-adds could reach 1mn in FY21E (vs 800k our est.), and we expect potential upside can come from further reduction of 5G equipment procurement cost. While official plan is not announced yet, we reiterate our optimistic view on 5G supply chain given unchanged positive tone of “moderately advanced 5G deployment in China”. We believe 5G network will play a critical role as a foundation to promote development of digital ecosystem and industrial IoT.
- Positive on sector leaders benefiting from 5G CAPEX cycle. We believe major beneficiary is equipment vendors and its supply chain, as over 50% of Chinese operators’ capex budget will be invested on 5G equipment and 5G-related investment. We also expect CBN to build 200k-400k 5G BTS for 700MHz network in FY21E, which offers further upside for suppliers. Our top pick is ZTE-H given its leading market position, global share gain and reasonable valuation. We also favor Innolight for 400G upgrade, 5G rollout, share gain and robust data growth, and Shengyi Tech on localization and content growth. We also like Sunway for antenna/RF/wireless charging upgrade. Risks include slower 5G deployment, weaker capex from cloud giants and higher ASP pressure.
