2017 is the turning point year with three main investment themes: 5G, Internet of Things and optical communications

[[179940]]

In 2017, the capital expenditure of global operators will reach a turning point, which is relatively optimistic but with uncertainties. We believe that the overall communication industry should be better in 2017 than in 2016, mainly due to policy promotion: the mixed ownership reform of operators is included in the first batch of pilot lists, the introduction of Internet giants or direct traffic management and data management transformation, and the comprehensive formation of a "cloud-pipe-end" closed loop, which is expected to reshape the industry; and the promotion of the technology cycle: the 5G standard is in the key stage of formulation, and overseas operators will simultaneously achieve commercial use in the second half of the year. In addition, there are the following two reasons:

1. The capital expenditure of global market operators has reached a turning point this year, and the growth rate has bottomed out. We expect that the global communication equipment market will still have a slight decline of 3% in 2017, but capital expenditure is expected to bottom out and rebound in the second half of the year, with the expansion of 4.5G networks, and the investment in 5G and the Internet of Things beginning to increase;

2. Domestic manufacturers have increased their market share and now occupy half of the global market (in the wireless communications market, Huawei ranks first with a market share of 35%; ZTE has been rising steadily, increasing its market share from 6% in 2010 to 12%), with impressive performance.

At the same time, there are also uncertainties: (1) The capital expenditure of the three major domestic operators continues to decline, and there is uncertainty about China Mobile's FDD license and radio and television wireless network investment. The performance of companies mainly focusing on the domestic market may be under pressure; (2) The absolute valuation of the communications sector is at the historical median, but after the market adjustment in 2016, the valuation relative to the broader market is at a historical low.

In 2017, both wireless and wired broadband fields in the domestic traditional communications market will usher in new opportunities:

(1) The formulation of 5G standards has entered a critical stage. Domestic enterprises such as Huawei, ZTE and other major equipment manufacturers have begun to have the core voice. Their global market share will continue to increase in the future. At the same time, patent licensing will also change from corporate expenditure to income;

(2) The Internet of Things will have tens of billions of new connections, becoming the next trillion-dollar market for operators. NB-IOT will be officially commercialized in 2017, LTE-V will be fully frozen in March 2017, and trial commercialization will begin in the second half of the year. Even 5G will be first applied to smart cities and transportation fields;

(3) In terms of optical communications, China Mobile continues to focus on fixed-line broadband. In 2016, the number of users exceeded that of China Unicom for the first time, and in 2017 it will approach the total number of users of China Telecom. The demand for optical devices and optical fiber cables remains strong. With the surge in network traffic, the demand for optical transmission equipment is also worth more than tens of billions of yuan.

One of the main investment lines: 5G

5G (Fifth Generation) is the abbreviation of the fifth generation of mobile communications. The Internet of Things is taken into consideration in the formulation of 5G standards. According to the 3GPP schedule, 5G will determine the early standards of Release 15 in September 2018 under the leadership of 3GPP, and the final standards of Release 16 will be determined in late 2019 to early 2020. However, there are now various signs that 5G may arrive earlier than expected!

Compared with 4G networks, on the 5G terminal side: emphasis is placed on improving the capabilities of chips and antennas, and a variety of terminals are coming one after another; on the network side: C-RAN, D-RAN, and macro base station networking methods are more diverse, and the core layer is flatter; on the content side: VR, 4K, the Internet of Things, etc. have become killer applications.

We estimate that the total investment in my country's 5G network will reach 650 billion yuan, an increase of more than 60% compared with 4G. In 2017, 5G investment will focus on two directions: the theme can focus on the 3GPP meeting this year; the growth investment opportunities can focus on 5G technology layout and global scale 4.5G construction for 5G and the wireless network optimization of the three major operators for 5G.

The second main investment line - Internet of Things

In the Gartner technology maturity curves in 2014 and 2015, IoT technology reached the top, and IoT platform technology appeared in the curve in 2016. With the freezing of NB-IOT and LTE-V in the 3GPP protocol, two of the three scenarios for 5G networks are IoT applications. The IoT industry has finally welcomed the participation of communication operators, and its first large-scale commercial use is imminent.

NB-IoT is the first operator-level communication protocol for the Internet of Things. At present, 3GPP has officially approved NB-IoT that supports Band 70. my country's operators are very active in the implementation of NB-IoT. The three major operators have stated that NB-IoT will be commercialized on a large scale in 2017, and a series of technologies such as LoRa, SigFox, Ingenu, and NWave have become active to varying degrees. NB-IoT will be used in low-energy, low-information, and massive sensor networks, including: ① Smart home services represented by smart meter reading services for water, electricity, and gas; ② Smart city services represented by post boxes, trash cans, street lights, sewers, and parking space management; ③ Smart tracking services represented by express delivery, pets, animal husbandry, and tracking of children and the elderly; ④ Smart medical services represented by wearable health devices; ⑤ Small-scale, long-term data collection cases or periodic control applications in other industrial fields.

Applications such as Mobike, which have recently attracted attention, are also important stages for NB-IoT to perform.

The Internet of Vehicles proprietary protocol LTE-V2X will be frozen in March 2017, which may set off a theme investment boom. LTE-V is my country's V2X technology with independent intellectual property rights. It was proposed by Huawei, Datang and other companies. The Ministry of Industry and Information Technology is promoting intelligent networking, and it is likely to adopt LTE-V. LTE-V is beneficial to the Internet of Vehicles and autonomous driving industry chain. (1) Internet of Vehicles industry chain: The terminal-side vehicle-mounted terminal equipment (including LTE-V communication module, Beidou/GPS navigation module) will benefit first, with great flexibility and a scale of 100 billion yuan; on the network side, the main equipment manufacturers are optimistic; on the service side, the Internet of Vehicles platform and UBI insurance are mainly optimistic. (2) Autonomous driving industry chain: The main beneficiaries are sensors such as radars and cameras and high-precision maps. In addition, attention can be paid to the upgrading and transformation of roadside traffic facilities.

Investment Theme 3: Optical Communications

Optical fiber and cable: The core reason for the current recovery in optical fiber and cable prices is that China Mobile's access network construction has driven the demand for optical fiber and cable and the import of preform rods has shrunk due to anti-dumping. In 2017, the domestic manufacturers' optical fiber preform production capacity of 8,000 tons corresponds to 240 million core kilometers of optical fiber supply. Considering the three demand scenarios of pessimism, neutrality and optimism, the year-on-year growth rates of optical fiber and cable demand in 2017 were 0%, 10% and 20% respectively, and the corresponding supply and demand gap rates were 0, 9.09% and 16.67% respectively. Compared with the supply and demand gap rate of 25% in 2016, the supply of optical rods has gradually converged, and the gap still exists. In August 2017, the two-year anti-dumping period of the Ministry of Commerce for optical fiber preform rods expired. At present, the market generally expects that the anti-dumping will be extended with a high probability. Pay attention to the order procurement trend of China Mobile in the second half of 2017.

Optical module: Traffic explosion drives module upgrade, and data communication becomes a growth engine under the cloud computing trend. With the access, metropolitan area, and backbone markets making efforts alternately (4.5G drives base station optical modules to upgrade from 6G/10G to 25G, 10G GPON and EPON will become the mainstream of access network, 100G will sink to metropolitan area network, and 400G may be commercialized on backbone network scale in 2018), the telecommunications market is expected to maintain steady growth in the next few years; the data communication market is growing rapidly driven by the cloud computing trend, and the demand for 100G is booming. According to Infonetics, 65% of the current 10G/40G/100G demand in the market already comes from data centers.