With spending of the three major operators declining, has China's 5G construction slowed down?

In 2020, China's 5G network construction developed rapidly, with more than 580,000 new 5G base stations added throughout the year, covering all prefecture-level cities. On this basis, the Ministry of Industry and Information Technology proposed to build more than 600,000 new 5G base stations in 2021, with a total target of 1.2 million stations, to accelerate 5G coverage in major cities.

However, the Japanese media Nikkei Asian Review recently questioned China's 5G construction speed. The report said that in the first half of 2021, China's major telecom operators' spending on 5G networks and other infrastructure fell by 25%, and pointed out that "they had previously identified this period as the peak period for building new high-speed networks."

In response to Japanese media reports, Observer.com checked the financial reports of the three major operators and China Tower and found that in the first half of the year, the capital expenditure of the four state-owned telecom operators did decline by 25.3%, and the number of newly built 5G base stations also fell by 34% compared with the same period last year.

But does this mean that the three major operators have slowed down the pace of 5G construction?

Observer.com contacted four telecom operators, and they all said that 5G base stations did not encounter the chip shortage problem reported by Japanese media.

As for why capital expenditure was reduced in the first half of the year, China Mobile revealed that it was because the issue of co-building the 700MHz frequency band with China Broadcasting and Television was still under negotiation, and investment was slightly delayed compared to last year. At present, the company's 5G 700M wireless network main equipment bidding was completed in July. China Telecom and China Unicom said that they were mainly interested in controlling the investment rhythm, improving equipment utilization efficiency, and waiting for 5G technology and standards to become more mature. At the same time, co-construction and sharing also saved considerable costs for both parties; China Tower said that construction and delivery remained normal and the completion progress exceeded expectations.

Looking ahead to the second half of the year, all four companies revealed that they will maintain their full-year investment plans and focus on 5G network construction in the coming months. If the expenditures are completed as planned, the capital expenditures of the four companies in 2021 will reach 370.6 billion yuan, which is basically the same as last year (370.2 billion yuan). Based on the data in the first half of the year, Guancha.com calculated that the capital expenditures of the four companies in the second half of the year will reach 233 billion yuan, a year-on-year increase of 25.3%; the number of new base stations will reach 439,000, a year-on-year increase of 18%; 630,000 new 5G base stations will be built throughout the year, which is consistent with the goals of the Ministry of Industry and Information Technology.

Spending of the four major telecom companies declined in the first half of the year: co-construction and sharing save costs

As the August financial reporting season begins, China's four major state-owned telecommunications companies (China Mobile, China Unicom, China Telecom and communications infrastructure service provider China Tower) have successively disclosed their operating conditions in the first half of the year.

Guancha.com checked the semi-annual report and found that in the first six months of 2021:

• China Mobile's revenue was RMB 443.6 billion, up 13.8% year-on-year; net profit was RMB 59.1 billion, up 6.0% year-on-year; cash flow from operating activities was RMB 161.618 billion, up 1% year-on-year; mobile user ARPU (Average Revenue Per User) was RMB 52.2, up 3.8% year-on-year;
• China Unicom's revenue was 164.17 billion yuan, a year-on-year increase of 9.2%, and its net profit was 9.17 billion yuan, a year-on-year increase of 21.1%; cash flow generated from operating activities was 50.66 billion yuan, a year-on-year increase of 5%; mobile user ARPU reached RMB 44.4, a year-on-year increase of 8.5%.
• China Telecom's revenue was 219.237 billion yuan, a year-on-year increase of 13.1%; net profit was 17.743 billion yuan, a year-on-year increase of 27.2%; cash flow from operating activities was 67.635 billion yuan, a year-on-year increase of 3.6%; mobile user ARPU reached RMB 45.7, a year-on-year increase of 2.9%
• China Tower's revenue in the first half of the year was 42.673 billion yuan, a year-on-year increase of 7.2%; net profit was 3.457 billion yuan, a year-on-year increase of 16.1%; net cash flow from operating activities was 24.238 billion yuan, a year-on-year decrease of 10.5%.

Calculation shows that the four major national telecommunications companies achieved a total revenue of 869.7 billion yuan in the first half of the year, a year-on-year increase of 12.4%; a net profit of 89.5 billion yuan, a year-on-year increase of 11.5%; and a net cash flow from operating activities of 327.9 billion yuan, a year-on-year increase of 2.1%.

2020 is the year when China's 5G network began to be built on a large scale. The number of new 5G base stations built by operators reached 580,000, and all cities were covered by 5G. Regarding the 5G construction in 2021, Xiao Yaqing, Minister of Industry and Information Technology, proposed at the end of 2020 that the construction and application of 5G networks will be promoted in an orderly manner in 2021, 5G coverage in major cities will be accelerated, and more than 600,000 new 5G base stations will be built.

The Ministry of Industry and Information Technology called for accelerated 5G coverage, and key performance indicators also improved, but the capital expenditures of the four companies declined in the first half of the year.

The financial report shows that in the first half of 2021, China Mobile's capital expenditure was 86 billion yuan, a year-on-year decrease of 14.9%, and 5G-related capital expenditure was 50.2 billion yuan, a year-on-year decrease of 9.1%; China Unicom's capital expenditure was 14.28 billion yuan, a year-on-year decrease of 45%; China Telecom's capital expenditure was 27 billion yuan, a year-on-year decrease of 37.4%; China Tower's capital expenditure was 10.36 billion yuan, a year-on-year decrease of 27.6%.

The Japanese media Nikkei Asian Review, which has long been concerned about the development of China's industry, also noticed this change. They pointed out in their report that the total capital expenditure of China's four major telecommunications companies in the first half of 2021 was 137.65 billion yuan, a year-on-year decline of 25.3%. In comparison, the figure was 184.23 billion yuan in the same period last year and 151.13 billion yuan in the same period of 2019 (before the large-scale construction of 5G networks).

What this means is simply to question whether China's 5G construction progress has slowed down.

In response to the issue of "decline in capital expenditure", China Unicom Chairman Wang Xiaochu mentioned the company's joint construction and sharing of infrastructure with China Telecom when answering questions from Nikkei at the 2021 mid-year results briefing, and he said that this "has achieved a lot of achievements."

Observer.com noticed that China Unicom disclosed in its semi-annual report that through the joint construction and sharing of 4G/5G networks, it has saved both parties considerable network costs such as tower usage fees, electricity bills and network maintenance fees, and has also made significant contributions to achieving the carbon peak and carbon neutrality goals.

China Telecom Chairman Ke Ruiwen revealed more detailed data last week. He said that since 2019, China Unicom and China Telecom's "co-construction and sharing" plan for jointly building and using 5G infrastructure has saved both parties more than 86 billion yuan, and the two parties will also expand co-construction and sharing to the existing 4G network, which has saved more than 24 billion yuan. "The dividends of co-construction and sharing are indeed expanding."

New 5G base stations decreased by 34% in the first half of the year

The joint construction and sharing of operator infrastructure was the tone set in the early stages of China's 5G license issuance. It not only saves costs and reduces duplicate investment, but also allows operators to complement each other's strengths.

However, Observer.com further reviewed the financial reports and found that the cost savings from joint construction and sharing are only one aspect. The decline in capital expenditure of the four telecom companies is mainly related to the relatively small number of newly built 5G base stations in the first half of the year.

The financial report shows that in the first half of 2020, China Mobile built 138,000 new 5G base stations, and China Unicom and China Telecom built a total of 150,000 new 5G base stations; in the first half of 2021, China Mobile built 111,000 new 5G base stations, and China Unicom and China Telecom built a total of 80,000 new 5G base stations.

A simple calculation shows that the number of newly built base stations by the three major operators in the first half of the year fell by 34% year-on-year.

The number of newly built 5G base stations is even less than during the epidemic last year. Is China's 5G construction progress really slowing down?

The stock market is very sensitive to this signal. After China Telecom disclosed its capital expenditure data on the evening of August 10, ZTE, a telecom equipment company that has not yet disclosed its semi-annual report, saw its A-shares and H-shares plummet the next day. Huawei's financial report released on August 6 showed that the company's operator business revenue in the first half of 2021 was 136.9 billion yuan, a year-on-year decrease of 14.2%, compared with 159.6 billion yuan in the same period last year.

Of course, the blockade by the United States in foreign markets is also an important reason for the decline in Huawei's operator business revenue. In June this year, the global overall telecommunications equipment market report for the first quarter of 2021 released by market research firm DELL'Oro Group showed that Huawei still ranked first with a market share of 27%, but it was down about 5 percentage points from 2020.

To further understand the reasons for the decline in capital expenditures in the first half of the year, Guancha.com called China Unicom's board secretary's office, who said that the decline in capital expenditures in the first half of the year was mainly due to the slowdown in 5G investment progress. At present, the relevant standards or technologies of 5G are still being further improved, and "if we want to build it, we must build the best."

China Telecom's statement was similar. A person from the company's investor relations department told Guancha.com that the reduction in capital expenditure in the first half of the year was mainly to control the investment progress and improve the utilization efficiency of resources and equipment.

Information provided by China Mobile to Observer.com shows that the company's chairman Yang Jie said at the mid-term performance meeting that 700MHz is jointly built and shared by China Mobile and China Broadcasting Corporation, which involves cooperation between the two parties and requires a lot of negotiation. "This will delay the time a little bit, so the investment amount may be slightly delayed in the first half of the year compared to last year."

"China Mobile will actively promote the construction of 5G networks by rationally utilizing 700MHz." Yang Jie said that China Mobile is indeed in the peak period of investment, but the company's spending will not surge.

The 700MHz frequency band is known as the "golden frequency band" and is owned by China Radio and Television. Compared with the 2.6GHz, 3.5GHz and 4.9GHz frequency bands of the three major operators, the 700MHz frequency band has a lower frequency and has the advantages of low signal propagation loss, wide coverage, strong penetration and low networking cost.

Since the 700MHz frequency band is the traditional radio and television system frequency band, on April 2, 2020, the Ministry of Industry and Information Technology issued a notice to adjust the frequency usage plan of the 700MHz frequency band and use it for 5G communications.

At the beginning of the issuance of 5G licenses, the plan for China Mobile and China Broadcasting Corporation to jointly build the 700MHz 5G network was determined.

In May 2020, China Mobile and China Broadcasting Corporation signed a 5G co-construction and sharing cooperation framework agreement: jointly invest in the construction of a 700MHz 5G wireless network in a 1:1 ratio, and jointly own and have the right to use 700MHz 5G wireless network assets.

Screenshot of China Mobile's 2021 first half financial report

Base stations have not encountered chip shortages, and operators will focus on the second half of the year

Amid the global chip shortage, Japanese media have also raised questions about the chip supply issues of Chinese operators as they see a decline in spending by Chinese telecom operators.

On August 19, the Nikkei Asian Review reported that China Telecom's reduced spending was partly due to the global chip shortage that affected the production of cars and many other products. The report also quoted Liu Guiqing, deputy general manager of China Telecom, as saying that the chip shortage caused delays in the delivery of some network equipment, affecting the company's 5G network construction, and "this problem did exist in the first half of the year."

However, Guancha.com learned from China Telecom's investor relations department that the company's 5G base station equipment has not been affected by the chip shortage. The cloud resource servers are mainly affected by the chip shortage. The procurement and construction progress is slower than expected. At present, the progress has been accelerated through multi-party communication, and it is expected to be deployed on a large scale in the second half of the year. He also said that the company's annual capital expenditure plan of 87 billion remains unchanged. At present, China Telecom has completed the centralized procurement of 2.1GHz 5G base stations with China Unicom, and the centralized procurement of 3.5GHz 5G base stations is also in progress.

China Unicom also stated that the company maintains its full-year capital expenditure target of 70 billion yuan and will focus on 5G in the second half of the year. In the 2021 semi-annual report, the company stated that it expects 2020-2022 to be the peak period for 5G investment, and the company will increase the co-construction and sharing of 5G and 4G; the capital expenditure plan for 5G in 2021 is about 35 billion yuan, and the target for available 5G base stations by the end of the year is about 700,000, with about 320,000 new available 5G base stations (240,000 new stations in the second half of the year).

Observer.com found that on August 1, the results of the 2021 China Telecom and China Unicom 5G SA construction project wireless main equipment (2.1G) joint centralized procurement project were announced. The overall ranking of the winning candidates was from 1st to 4th, namely Huawei, ZTE, Datang Mobile, and Ericsson. A total of approximately 242,000 base stations were purchased, of which Huawei had the largest share of 53.1%.

A communications industry expert told Observer.com that base station chips are different from mobile phone chips. The technology is more mature and the usage is relatively small. Unlike mobile phones, which have shipments of hundreds of millions of units, there should be no chip shortage problem in the base station main equipment field.

"There is no problem due to the impact of chips," Yang Jie, chairman of China Mobile, said in response to Japanese media at the performance meeting, pointing out that China Mobile's capital expenditure in the first half of this year was a normal amount. "Because we plan to invest 183.6 billion yuan for the whole year, and the first half of the year is basically close to 50%, which is a reasonable and normal investment process.

Judging from the data, China Mobile's capital expenditure plan for 2021 is expected to increase by 1.7% compared to 2020, but will decline by 14% compared to the peak of 4G construction in 2014 (213.5 billion yuan).

On July 18, China Mobile disclosed the winning results of the centralized procurement of 5G 700M wireless network main equipment, with a total procurement scale of 480,000 stations. Data shows that Huawei is the first candidate in all three bid packages, accounting for about 60% of the share; ZTE is the second candidate, accounting for about 30% of the share; Shanghai Nokia Bell, Datang Mobile, and Ericsson (China) are also selected, but their shares are relatively low.

In addition, Guancha.com learned from China Tower that the company mainly provides infrastructure support for operators, including communication towers, computer rooms, power supply equipment, etc., and these facilities use relatively few chips. Therefore, the company's construction progress in the first half of the year was not affected by the chip shortage, and construction and delivery remained normal, with completion progress exceeding expectations.

China Tower Chairman Tong Jilu recently said the company was focusing on effective management of capital expenditure, adding that the decline in capital expenditure reflected the "construction speed of operators".

In March this year, he mentioned at the performance meeting that the company will strictly control capital expenditures in the future, and it is expected to arrange capital expenditures of about 30 billion yuan in 2021. The main component is the new construction and shared transformation of sites based on 5G, which is expected to be about 18.4 billion yuan, a significant drop from last year.

In terms of total amount, the four state-owned telecom companies plan to spend 370.6 billion yuan in 2021, which is basically the same as last year (370.2 billion yuan). Among them, the capital expenditure of the four companies in the second half of the year will reach 233 billion yuan, a year-on-year increase of 25.3%; the number of newly built 5G base stations will reach 439,000, a year-on-year increase of 18%.

The three major operators will gather in the A-share market

Japanese media pointed out that in the first half of this year, the three major operators' reduced spending gave them more abundant cash flow and helped increase shareholder dividends.

The 2021 semi-annual report shows that China Unicom will pay a dividend of 0.12 yuan per share in the first half of the year, and will consider increasing the current 40% dividend payout ratio together with the year-end shareholder rewards. The company's chairman Wang Xiaochu mentioned the "continued good control of capital expenditures." China Telecom said in its semi-annual report that it will start paying semi-annual dividends in 2022 and increase the dividend payout ratio from 40.3% last year to more than 70% in 2023. China Mobile raised its interim dividend by 6.5% to HK$1.63 per share after fully considering profitability, cash flow and future development needs.

Nikkei said lower capital expenditures and higher dividends have boosted analysts and investors' interest in Chinese telecom operators. Some analysts believe that 4G network construction is more profitable for infrastructure and mobile phone manufacturers than for operators.

Edison Lee, an analyst at Jefferies in Hong Kong, believes that even without considering the participation of China Telecom and China Unicom in the 700MHz 5G sharing and co-construction, the capital expenditure of Chinese telecom operators will begin to decline from 2022 (after the peak of 5G construction). He rated all three operators as "buy".

Since the New York Stock Exchange delisted China's three major operators in January this year, China Telecom and China Mobile have successively launched plans to return to the A-share market.

On August 20, China Telecom officially landed on the A-share market, with an issue price of RMB 4.53 per share. As of the close, the company's stock price rose 34.88%, with a total market value of 558 billion yuan. If the over-allotment option of this A-share issuance is fully exercised, the net amount of funds raised by China Telecom in this issuance will be 53.727 billion yuan, which is the largest IPO in the A-share market in the past decade; on August 18, China Mobile also disclosed its A-share listing prospectus. The company plans to raise 56 billion yuan this time, which is expected to exceed the fundraising scale of China Telecom; China Unicom was listed on the Shanghai Stock Exchange as early as 2002, and it was the only telecommunications operator in China that was listed in Hong Kong, New York and Shanghai at that time.

After China Mobile completes its A-share listing, the three major operators will all be listed on the A-share market.

In the first half of the year, the mobile customers of the three major operators all increased. The financial report disclosed that as of the end of June 2021, China Mobile's mobile customers reached 946 million, a net increase of 3.59 million, of which 5G package customers reached 251 million, a net increase of 86 million; China Telecom's mobile users reached 362 million, a net increase of 11.47 million, 5G package users reached 131 million, and the penetration rate reached 36.2%; China Unicom's mobile billing users improved from 8.95 million lost in the same period last year to a net increase of 4.65 million, with a total of 310 million, 5G package users reached 113 million, and the penetration rate reached 36.5%.

A communications industry expert told Observer.com that China's share of 5G standard essential patents currently ranks first in the world, and enterprise-centered 5G patents account for one-third of the world's total 5G patents. In the past two years, telecom operators have continued to increase their efforts in 5G network construction. As of the end of June 2021, China has opened 961,000 5G base stations, ranking first in the world in terms of the number of base stations, while other countries may only have 200,000 to 300,000 5G base stations in total.