The 5G process will not be interrupted, and the short-term impact of the epidemic on the optical communications industry is controllable

During the past Spring Festival, the novel coronavirus (COVID-19) spread rapidly in China. In order to control the spread of the epidemic, various regions have taken measures including suspending some transportation, extending the Spring Festival holiday, and delaying the resumption of work. Wuhan Optics Valley, where the epidemic broke out, is a gathering place for my country's optical communication industry, with important companies in the optical communication industry chain including Huawei, ZTE, FiberHome, Accelink, HGTECH, and Changfei.

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Therefore, since the outbreak of the epidemic, the impact of shutdowns and suspensions on the optical communication industry has become the focus of attention in the industry. If there were no impact from the epidemic, this year would have been the first year of 5G scale development in my country, and the health of the optical communication industry chain directly determines the construction of 5G.

Before the Lunar New Year, China Mobile released a large SPN 5G bearer order, and China Telecom's 5G bearer bidding was officially launched. The bearer network itself is an optical network. Under the influence of the epidemic, which happened in a major optical communication industry center, CITIC Construction expects that China's 5G bidding may be delayed, but CITIC Construction also stated that it will not affect the scale of 5G construction in 2020.

Inventory can effectively cope with the impact of shutdowns

The outbreak of the epidemic coincided with the Spring Festival, and the production capacity of various manufacturers was not at full capacity, which to some extent alleviated some of the impact caused by the epidemic. In addition, in terms of the resumption of work, most parts of the country will resume work on February 10, and Hubei will resume work on February 20. In the short term, the impact will be about 10-20 days compared with previous years.

In this regard, through research and communication, China Merchants Bank Research believes that the existing inventory of most optical communication companies can effectively cope with the impact of shutdowns. From the inventory of each company, different product lines have maintained an inventory level of 1-3 months. Combined with the normal production of some production capacity during the Spring Festival, the existing inventory can effectively cope with the short-term problem of late start. After the normal start, it can effectively restore normal production levels and ensure the normal delivery of orders in the optical communication supply chain.

In this regard, Hu Changfei, general manager of Huagong Zhengyuan, a leading 5G optical module company, pointed out in a previous conference call that based on current statistics, the increase in production capacity, the number of key workers returning to work and the cycle can meet current delivery needs, and the company has reserved a normal 1-1.5 months of safety stock.

In addition, for the optical fiber and cable industry, from the perspective of bare fiber, CRU still believes that the inventory in the domestic market has reached 24 million core kilometers. Therefore, in the short term, the impact of this epidemic on the supply of optical fiber and cable is limited. In addition, the domestic "five giants" of optical fiber have long-term layouts overseas and can fully call on overseas resources to meet market demand.

Some optical communication companies have started work in an orderly manner

February 10th was the first day of official resumption of work in many parts of the country. On this day, while actively fighting the epidemic, some optical communication companies, with the approval of local government departments, are resuming work and production in an orderly manner, under the premise of making careful arrangements and deployments for epidemic prevention and control.

As for optical fiber and cable companies, Changfei's subsidiary, Changfei Lanzhou, resumed work on February 8, and Changfei Shenyang resumed work on February 10; Hengtong Group's subsidiaries resumed production safely and smoothly on February 10; Zhongtian Technology Group also resumed work on February 10 after passing the resumption of work acceptance of the municipal and county-level epidemic prevention and control working groups; Tongding Interconnect resumed work on February 10 after filing and approval by government departments.

As for optical device companies, including Mentech Optics, Innolight Technologies, Tianfu Communications, Source Photonics, and NeoPhotonics, they have all resumed work and production in an orderly manner after meeting the local government's requirements for resumption of work.

Although Hubei is an important center of the optical communication industry, from a national perspective, on the one hand, part of the production capacity of these companies is also scattered in multiple regions including Shenzhen, Suzhou, Dongguan, etc.; on the other hand, the entire optical communication industry chain companies are spread across the country. After the orderly resumption of work and production, although full load operation cannot be guaranteed in a short period of time, the production capacity problem will be further resolved after the epidemic stabilizes.

5G demand remains unchanged and will accelerate development after the epidemic

Under the influence of the epidemic, it is inevitable that the performance of most listed optical communication companies in the first quarter will shrink. However, according to Academician Zhong Nanshan's prediction that the epidemic may end before April, my country's 5G construction will be on track. China Merchants Bank Research believes that in the face of economic downward pressure and the impact of the new crown epidemic, it is expected that 5G investment may grow further in 2020.

Wei Leping once predicted that according to the independent networking of 3.5G, the required outdoor macro base stations are at least twice that of 4G. If the collaborative networking of 3.5G+1.8G/2.1G is adopted, the required outdoor macro base stations are at least 1.2 times that of 4G. At the same time, indoor coverage needs to rely on tens of millions of small base stations. It can be seen that a large number of optical fiber interconnections are still required between various 5G base stations. Although the scale cannot be compared with the previous FTTx, the overall demand for optical fiber and cable in the 5G era is relatively stable.

In terms of optical devices, the industry estimates that the total demand for 5G fronthaul optical modules in the domestic market in 2020 will be around 10 million. Of course, in addition to fronthaul, there will also be a considerable demand for midhaul and backhaul optical modules. At the same time, driven by the Ministry of Industry and Information Technology's "Double G and Double Increase", the demand for next-generation PON modules cannot be underestimated. This is also an important reason why the capital market has poured in during the 5G cycle.

Although it is an indisputable fact that the overall speed of 5G construction will slow down in the first quarter of this year, and the centralized procurement of 5G equipment by the three major operators will be postponed accordingly, the demand for 5G will not be disrupted, and the wheel of 5G industry development will not stop. Therefore, the epidemic will have an impact on the optical communication industry, but it will be short-lived. After the epidemic, spring will surely come.