In the post-epidemic era, what is the effect of 5G infrastructure investment?

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Looking back at 2020, "5G" must be one of the key words.

The post-epidemic era has given rise to an explosion of demand for various online scenarios such as remote office, telemedicine, online grocery shopping, live e-commerce, etc., which has greatly stimulated the rapid development of the digital economy. The development of the digital economy is inseparable from the support of powerful network communication technology. 5G, with its low latency, low power consumption, high speed, and high reliability, is undoubtedly favored by the market. On March 4, 2020, the Standing Committee of the Political Bureau of the CPC Central Committee formally proposed a new infrastructure construction strategy. Seven major sectors, including 5G infrastructure, artificial intelligence, and data centers, continued to heat up with the help of policies. It can be seen that 5G infrastructure, which ranks first in the new infrastructure, is undoubtedly the focus of future investment layout under the dual blessing of market demand and policy support, coupled with the catalysis of the epidemic scenario.

Therefore, this article mainly reviews the economic driving effect of 5G investment in the post-epidemic era and attempts to provide subsequent investment recommendations.

5G Investment

First, let’s take a look at the current investment status of my country’s 5G industry.

The lockdown, shutdowns and other measures caused by the outbreak of the epidemic in China at the beginning of 2020 had a significant negative impact on my country's economic development. Therefore, as an infrastructure investment, 5G construction will theoretically effectively promote the development of upstream and downstream enterprises in the industrial chain and drive my country's economic growth. According to the announcement of the three major operators, the investment in 5G network construction by operators in 2020 will reach 180.3 billion, accounting for about 54% of the total capital expenditure budget. As of December 18, 2020, my country has built and opened 718,000 5G base stations, and 330,000 5G base stations have been jointly built and shared, far exceeding the expected plan, and the number of 5G terminal connections has exceeded 180 million.

Table 1 5G network planning of the three major operators in 2020

Source: Operator announcements, Huaxin Consulting

Network construction is continuous. With reference to the 4G network construction process, since the issuance of 4G licenses in 2013, the three major operators have invested a total of about 850 billion yuan in the construction of 4G networks. Compared with 4G network construction, 5G requires more base stations and a higher construction cost per station. According to the "2020 China 5G Economic Report", my country's total investment in 5G networks from 2020 to 2025 is expected to reach 1.5 trillion yuan. The current 5G investment is just getting started, and with the formal establishment of China Radio and Television, 700MHz is expected to be invested in 5G network construction, stimulating the enthusiasm of operators. Therefore, it is predicted that in the next few years, operators will continue to maintain high investment to achieve national coverage, and the high investment in 5G infrastructure will also have a continuous driving effect on my country's economic growth.

Source: iResearch Consulting Group, Huaxin Consulting Group

5G investment driving effect

1. Income-driven

The communications industry is a typical heavy asset industry, relying on a large number of base stations, equipment, etc. to build mobile networks. Operators, as investors, need to invest a lot of manpower/money/materials. Looking back at the construction of the 4G network, without considering the operating costs, it took operators nearly three years to make the cumulative revenue greater than the cumulative investment. Similarly, looking at 5G construction, the number of base stations on the cost side has increased, and the construction cost of a single base station has increased; on the revenue side, the current C-end 4G users’ demand for migration to 5G is not as urgent as the 3G users’ demand for migration to 4G in the past, and more users are still waiting to see 5G due to tariffs, network quality and other reasons. The growth of C-end 5G users may not be as fast as the 4G growth rate; from the B-end, the current 5G and industry integration is still in the pilot run-in, and there is a cultivation cycle, and the proportion of B-end revenue in the early stage may not be high.

Although 5G costs are high and initial revenue growth may be slow, resulting in a longer investment payback period, we must also pay attention to the increase in demand for national online scenarios under the catalysis of the epidemic, the vigorous development of the digital economy and the joint support of new infrastructure policies. Taking into account various factors, it is expected that 5G revenue may usher in a growth inflection point, shortening the investment payback period to a certain extent.

Source: iResearch Consulting Group, Huaxin Consulting Group

2. User value pull

During the epidemic, disease control measures such as remote work and live classes forced people to resume work and production online. The increase in online scenarios and the explosive demand for mobile access traffic are obviously huge challenges for 4G networks. 5G's low latency and high speed can greatly reduce this pressure. After 5G commercialization, the number of 5G users and DOU in my country continued to rise, and the decline in ARPU narrowed.

In terms of users, as of the end of the third quarter of 2020, China Mobile's 5G user base reached approximately 114 million, a net increase of 111 million compared to the end of 2019; China Telecom's 5G user base reached 65 million, a net increase of 60 million compared to the end of 2019; China Unicom has not yet announced the number of 5G users, but according to Wang Xiaochu, chairman of China Unicom, the market share of China Unicom's 5G users will be greater than the domestic market share of China Unicom's overall users. Therefore, it is predicted that the number of domestic 5G users will be close to 200 million.

Source: Operator quarterly reports, compiled by Huaxin Consulting

In terms of DOU, the DOU of 5G users is nearly twice that of 4G users. In December 2019, the DOU of China Mobile's 5G users reached 16.9GB; in March 2020, the DOU of China Telecom's 5G users also reached 13GB.

In terms of ARPU, the decline of China Mobile and China Telecom narrowed, while China Unicom increased slightly, and the overall ARPU change trend improved. As of the end of the third quarter of 2020, China Mobile's ARPU was 48.9 yuan, and China Telecom's ARPU was 44.4 yuan. Although the ARPU of China Mobile and China Telecom both declined year-on-year, the decline narrowed; China Unicom's ARPU was 48.9 yuan, a slight increase year-on-year.

At present, the number of incremental users in the mobile communications market has basically peaked. How to tap the value of existing users more efficiently and with higher quality has become a new growth point for operators. As an emerging market, 5G is an important layout for operators to transform their roles from "channels" to "platforms", especially to deepen their presence in vertical industries. In 2020, the number of users of 5G packages of China Mobile and China Telecom increased significantly, and the development of the online economy also boosted the effect of 5G on DOU and ARPU. As 5G infrastructure and industrial ecology are gradually improved, the DOU demand of 4G/5G users will be further improved, and the ARPU of operators' users is expected to see significant growth. In addition, with the popularization of 5G, future fixed-line services will bring operators more possibilities to provide high value-added services.

3. Value-driven by relevant stakeholders

From the perspective of the 5G construction life cycle, it mainly follows the "planning-construction-operation-maintenance" process, involving multiple entities such as design institutes, equipment vendors, and construction units. Through the analysis of the procurement and bidding data of operators' 5G network planning, equipment, and engineering construction in the past two years, the 28 effect is significant. Under the large-scale 5G infrastructure, the design institutes under the operators (such as China Mobile Design Institute, China Communications Service Consulting, Huaxin, etc.), comprehensive equipment vendors such as Huawei/ZTE/Ericsson, and "old-fashioned" communication construction companies (such as China Communications Service System and China Mobile Construction) have absolute advantages in the fields of planning, equipment, and construction, and have a high cumulative share of winning bids. The head companies have enjoyed the absolute dividends of the 5G new infrastructure, and the tail companies may just get a share of the 5G dividend.

5G follow-up investment suggestions

1. Promote 5G new infrastructure in multiple stages

The development path of each new generation of mobile communication technology generally goes through the stages of proposing demand and technical indicators, formulating technical evaluation methods, researching technical specifications, technical evaluation, product development and testing, network deployment, operation and application. 5G is no exception, which also determines that its network deployment is a long-term and continuous process, requiring the government, operators, equipment manufacturers, terminal manufacturers, construction units and other participating entities to continuously work together to promote 5G new infrastructure from multiple stages such as network deployment, operation and application.

2. Accelerate R&D innovation and update 5G technology

Currently, 5G has R15, R16, and R17 standards. R15 is mainly for eMBB and basic uRLLC applications, and can meet the basic functions of 5G; R16 is based on the R15 standard, and strengthens the MIMO, dual connection and other functions of R15, and is mainly for vertical industry applications; R17 is based on the R16 standard, and is mainly to strengthen existing functions and expand new functions, and has not yet been completed. Therefore, operators and equipment manufacturers should ensure continuous R&D investment, first, to ensure the completion of the R17 standard as scheduled, second, to realize the new features of R16 as soon as possible, and third, to promote the maturity of network slicing and edge computing solutions to serve vertical industries. Through the development and iteration of 5G technology, the technology will be promoted to mature, higher quality mobile networks will be provided, and the development of industry applications will be enabled, so as to realize the 5G "vision" as scheduled.

3. Reduce costs, accurately deploy and optimize maintenance in stages

Due to the large number of 5G sites, high price per site, and high energy consumption per site, both the construction cost and the operating cost are high, and cost reduction cannot be ignored. In terms of construction cost, the current China Telecom adopts a co-construction and sharing approach. The cooperation between China Mobile and Radio and Television is currently suspended. If they work together, both sides will win, but if they split up, both sides will suffer. The effect of cost reduction still needs to be observed. In terms of operating cost, the government should actively coordinate the reduction of electricity unit price, operators should intelligently shut down 5GAAU channels, equipment vendors should reduce base station power consumption, and tower companies should promote the conversion of indirect power supply to direct power supply. In addition, operators should also fully conduct a survey on users' needs for upgrading to 5G, deploy accurately in stages, avoid the situation of long-term low business of 5G base stations, improve base station utilization, and reduce the proportion of low-traffic cells. In the later maintenance stage, a smooth feedback channel should be established between users and operators, and user opinions should be fully considered to optimize the network and service quality.