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Our high-conviction portfolio to invest in 5G.

As we have written many times in the past 18-months, 5G is a modern-day equivalent of the moon race writ large. The multi-trillion-dollar global buildout of 5G wireless is one of the largest infrastructure projects ever, and the most important technology race of the next five years, as it will likely determine the winners of the 21st century (see reports).

Asian 5G suppliers are seeing booming new orders. For instance, for the first time, Huawei became the largest customer of Taiwan Semiconductor Manufacturing Corporation (TSMC), overtaking Apple last year.

Fifth-generation networks are a key-enabling technology, promising data speeds 10 to 100 times faster than 4G LTE networks and 1 to 5 millisecond latency, higher security, and increased reliability. The convergence of low-cost 5G, AI, and quantum computing along with the IoT sets the foundation for new industries that could upend many business models.

Source: 13D

The global rollout of 5G is accelerating. There were 50 operational 5G-commercial networks in 27 countries at the end of 3Q19, up from 31 commercial 5G networks in 17 countries at the end of 2Q19. By the end of October 2019, 328 operators in 109 countries had announced plans that they are investing in 5G.

Asia is leading in the deployment of 5G at scale. South Korea reached 5 million 5G subscribers by year-end 2019, with 80% coverage of the nation.

China launched the world’s largest 5G network in 50 cities at the end of October, reaching three million subscribers by year-end 2019. China is on-track to extend its 5G networks to cover all of its 300 prefectural-level cities by year-end 2020, according to China’s Ministry of Industry and Information Technology (MIIT).

Chinese telecom operators have already installed 126,000 5G base stations across the country. By 2025, China is expected to have 600 million 5G subscribers, representing about 40% of the global total, calculates GSMA.

Ericsson estimates that 5G will account for 2.6 billion subscriptions and generate 45% of total mobile-data traffic by 2025. Factors that will determine whether 5G can reach its full potential, include the regulatory approach taken by nations on next generation networks and carriers’ ability to monetize 5G. Helping carriers generate higher ROI is a key strategy of Huawei, which has helped to fuel their growth in recent years.

Huawei is leading the region’s 5G deployment and is reconfiguring its supply chain to reduce its reliance on U.S. technology. Huawei began manufacturing base stations using non-U.S. components in October 2019. In early December, Huawei introduced the Mate 30 phone that contains no U.S. chips.

What is the best way to invest? 5G deployment remains in its early stages, and many new winners and losers will follow as global competition intensifies. There are many potential ways to invest in 5G—infrastructure, technology enablers, wireless operators leading the rollout, and companies leveraging 5G for a competitive advantage. In the current phase of the buildout, we recommend investing in 5G infrastructure and technology enablers. President Trump’s sanctions on tech companies in 2019 stalled the performance of some key 5G suppliers, but represents an opportunity to accumulate positions in leading companies.

In this first issue of 2020, we are focusing on our favorites.

Asian suppliers are now positioned to gain market share. Our top picks in Asian infrastructure and equipment suppliers are:

  • MediaTek (2454 TT, 435.50 TWD) - provides system-on-chip solutions for wireless communications. MediaTek has been investing in 5G for a few years and is now one of the top-ten patent owners in next generation wireless technology.

    MediaTek sees 5G as a growth driver for their business, and recently introduced “Dimensity,” a family of system-on-chips (SoC) with an integrated 5G modem for premium and standard mobile phones. The SoC supports dual carrier aggregation, provides 30% more coverage, reduced power consumption, and runs faster compared to peers. Bloomberg Intelligence estimates that the new chip could capture a 40% market share in new generation handsets launching in China.

    MediaTek is expected to launch three more 5G SoCs this year, creating a strong “sub-6” GHz spectrum 5G chip portfolio. MediaTek will also be one of the only three chipmakers providing application processor chips this year. MediaTek trades at 13.0 times consensus FY20 EV/EBITDA, below its historical trailing average of 14.0 times.

  • Murata Manufacturing (6981 JP, 6805 JPY) – is a leading developer of ceramic-based advanced electronic components, communication and power supply modules. 5G deployments call for growing demand for smaller and higher density electric circuits with monolithic ceramic capacitors (MLCCs), which is boosting Murata’s growth prospects.

    Murata recently developed the world’s first multi-layer ceramic capacitor for the base stations and mobile phones. 5G base stations are expected to use up to 10-times more MLCCs than 4G. Additionally, greater demand for smaller, higher density capacitors with increasing semiconductor content in smartphones will boost Murata’s business.

    5G networks will also create opportunities for Murata's radio frequency (RF) parts and modules, including “MetroCirc”, a multilayer resin substrate fueling revenue growth. Murata trades at 11.5 times consensus cash flow, below its median of 13.0 times.

  • Comba Telecom Systems Holdings (2342 HK, 2.26 HKD) – provides wireless coverage solutions in China and throughout Asia, including repeaters, antennas, and RF passive accessories. The company is increasing its R&D expenditure by nearly 25% to accelerate the launch and commercialization of new 5G products.

    Comba is also focusing on developing massive MIMO (Multi-input-multi-output) and beamforming 5G antenna capabilities. Comba has the largest antenna testing facility in China. The 5G rollout will also need co-deployment of indoor networks in large facilities for better signal reception, boosting demand for Comba’s small cell products and other coverage solutions. Comba trades at 7.5 times free cash flow, below its historical average of 10.0 times.

  • TSMC (2330 TT, 336.50 TWD) – is a global leader in contract chip manufacturing and is one of Huawei’s major suppliers. TSMC is also one of only two companies, globally, to manufacture seven-nanometer chips for integrated circuits that power most advanced smartphones. TSMC is starting to produce technologically more advanced five-nanometer chips this year, and is also investing in cutting-edge three-nanometer technology.

    TSMC’s capex commitment of $15 billion to boost capacity in FY2019-2020 to meet rising 5G-related semiconductor demand is the largest since 2010. The increasing China localization trend and the need for more silicon content per 5G phone along with advanced packaging technology will boost TSMC’s revenue. TSMC is trading at 10.3 times EV/EBITDA, below a Bloomberg peer group of 14.4 times.

  • ZTE (763 HK, 26.65 HKD) - is a global telecom equipment provider that is well-positioned to capitalize on rising 5G base station demand. ZTE has secured 35 commercial 5G network supply contracts, and has established 5G cooperation agreements with more than 60 mobile network operators around the world.

    ZTE is rapidly expanding its order book for 5G network equipment. In 2018, ZTE was the fourth-largest base station supplier in value terms with a 13% worldwide market share. By 2023, ZTE’s market share could rise to 23%, calculates Chinese research firm Guanyan Tianxia. ZTE’s Axon 10 Pro 5G, released last year, became the first commercial 5G smartphone to be launched in China, Northern Europe and the Middle East, notes SCMP. ZTE trades at 13.4 times cash flow, below its historical forward average of 14.8 times.

The chart below shows the relative strength of the profiled stocks normalized to the BlueStar 5G Communications Index (BFIVGTR). In the weeks ahead, we will explore the investment outlook in-depth for our 5G recommendations.

Source: Bloomberg




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