Is there 96% PCB profit left in the year of 5G construction still "dominating" the base station industry chain?

Since February 3, the A-share market continued to rebound, and according to the growth of the first level of the Wind industry, telecom services rose as high as 46%, ranking the first among the major sectors, again leading the two markets. At the same time, ZTE shares rose nearly 60 yuan to a record high, with a total market value of more than 200 billion yuan, causing the market "uproar". Indeed, telecom plate and ZTE rising, and 5G commercial use has a great deal of relevance.

Although the epidemic has had a certain impact on the domestic communication industry chain and the construction of 5G network in the first quarter, 5G, as a new infrastructure, plays a role of stable investment. With the resumption of work in the next three quarters, operators' bidding is "swarming", and the wave of 5G construction infrastructure is starting. In the tide of 5G construction, there is a set of data that attracts our attention. In 2018, the base station industry chain was in a state of loss as a whole, with the highest reported loss of 226 million yuan in the middle of 2018. However, in 2019, the overall performance of the base station industry chain has been "rising tide and lifting all boats", and in the third quarter of 2019, the base station industry as a whole made 537 million yuan. More importantly, among the sub-industries, the overall net profit of PCB industry has been "leading the way". As 5G speeds up, we need data to lead the way!

New 5G infrastructure to be 'emphasized' in 2020

The year 2020 will be the key year for China's 5G network construction, and 5G network has become a key area mentioned in the recent intensive deployment of "new infrastructure" in the central government.

The Political Bureau of the Communist Party of China (CPC) Central Committee met on Feb 21 to push forward the development of biomedicine, medical equipment, 5G network and industrial Internet.

On February 22, the Ministry of Industry and Information Technology held a teleconference to accelerate the development of 5G and do a good job in the resumption of work and production in the information and communication industry. The conference stressed the need to accelerate the pace of 5G commercial use and seize the development opportunities of 5G in online education, online medical treatment, telecommuting and other businesses.

On March 4, the Standing Committee of the Political Bureau of the CPC Central Committee met to increase investment in public health services and emergency supplies, and speed up the construction of new infrastructure such as 5G networks.

Benefiting from 5G commercial use, telecom business revenue bottomed out in Q3 2019 and rebounded

Since the third quarter of 2019, the growth rate of monthly telecom business revenue has bottomed out and picked up. In December 2019, the revenue of telecom business was 106.1 billion yuan, an increase of 3.1% year-on-year. The growth rate of telecom business revenue in the second half of the year is significantly better than that in the first half of the year, which is estimated to mainly benefit from the reduction of data tariff and the commercial use of 5G.

In the global telecom equipment market, Huawei is the "number one", while ZTE is recovering strongly

Dell'Oro Group, the world's leading market research agency, has released its 2019 global telecom equipment market report. According to the data, the top five vendors in terms of revenue share in the global telecom equipment market in 2019 were Huawei (28%), Nokia (16%), Ericsson (14%), ZTE (10%) and Cisco (7%).

Notably, ZTE's revenue share increased by about 2% in 2019, reflecting a strong recovery since the first half of 2018.

Dell'Oro Group said Ericsson's global equipment market share was stable, while Cisco and Nokia each lost 1 percentage point of market share compared with 2018. Huawei and ZTE, two Chinese equipment vendors, both gained revenue shares in the global telecoms equipment market, while Cisco of the US and Finland's Nokia declined.

The focus of 5G is still on "600,000 base stations", which only 26,000 were built in February

The construction of 5G base stations has become a hot investment direction this year. Previously, the three major operators and a number of local governments have disclosed a significant number of 5G construction plans.

Recently, the three major operators have said that they will complete the task of 5G network construction ahead of schedule in 2020. According to the public data, China Mobile is expected to build 300,000 5G base stations in 2020, and China Unicom and China Telecom will jointly share 250,000 5G base stations. With the promotion of 5G in China's radio and television industry, the total number of 5G base stations will probably exceed 600,000 by the end of 2020.

Meanwhile, judging from the number of 5G base stations in 2019, the commercial use of 5G was officially launched in June last year, and more than 130,000 5G base stations had been built nationwide by the end of the year. Another data shows that the three major operators have opened about 156,000 5G base stations nationwide. In other words, the number of base stations opened in February before 2020 is 26,000 less than that in 2019. Similarly, 96% of the annual expected base stations will be completed in the 10 months after 2020. Therefore, the impact of the epidemic on China's 5G will only be in the first quarter, while the base station construction will be released in the second and third quarters.

PCB industry profits dominate the 5G industrial chain

As one of the new infrastructure, 5G has a prominent strategic position. Since the outbreak of the pandemic, the construction of 5G networks has slowed down. However, as 5G has been mentioned several times at the national level recently, its development has attracted much attention, and equipment bidding has restarted, which will accelerate the scale construction of 5G.

After the large-scale start of 5G construction, we need big data to give us objective investment direction. According to the data of Wind, the net profit of PCB industry has "led the way" for two consecutive years. Even in 2018, when the whole Wind base station industry chain suffered losses, the net profit of PCB listed companies still maintained a rapid growth. In 2018, when the base station industry only had a profit of 40 million yuan, pcb industry chain companies as a whole still reached more than 600 million yuan. In the Wind high-frequency PCB plate, the net profit growth of Shanghai Electric Company is much higher than that of other companies, followed by Shennan Circuit and Shengyi Technology.

From the current point of view, in the current 5G construction period, the profits mostly stay in the PCB industry, while the RF, antenna, network optimization and other industries have not started. As time goes by, whether the profits will change with the progress of 5G development, we will wait and see...

Most brokerages are optimistic about 5G construction in 2020, especially antennas, RF devices (PCB, RF chips, filters, etc.) and optical modules of the upstream industry chain. Dongguan Securities pointed out that 5G, as a part of the new infrastructure, has a prominent strategic position and will continue to receive attention. At present, the bidding work of operators has restarted, and the construction of 5G network is expected to return to normal level. In addition, there is still some room for operators to increase investment in 5G construction plans. Pay attention to communication equipment vendors and their suppliers.

Sinolink Securities believes that 5G construction in 2020 will not be affected by the epidemic, but under the background of the central government's adjustment of 5G to drive the economy and achieve industrial upgrading, 5G related investment is expected to increase, and the annual construction of 5G base stations is expected to exceed expectations. From the perspective of the industrial chain, subsectors such as upstream antennas, RF devices (PCB, RF chips, filters, etc.) and optical modules will benefit from the construction of 5G base stations first.