The global 5G race has set off a powerful rally in Chinese telecom stocks. And what we’re seeing now may just be the beginning of exceptional opportunities for savvy investors, analysts and traders say. As countries around the world race towards a 5G future of driverless cars and wired homes, Chinese telecommunications equipment makers and suppliers are scrambling to make their mark. Chinese network operators are set to spend hundreds of billions of dollars on buying new 5G base stations over the next few years to build the next generation of telecom networks. This means massive orders for main equipment vendors to build them, with the top players – privately held Huawei Technologies and Hong Kong-listed ZTE – set to snap up the bulk of them. The money will then trickle down to their suppliers of an array of telecom components. The prospect drove a jaw-dropping 75 per cent surge in a gauge compiled by Wind of 76 China-listed, 5G-related stocks over the past six months. That dwarfs the 22 per cent rise in the benchmark Shanghai Composite Index over the same period. One leading stock is Shenzhen-listed Wuhan Fingu Electronic Technology, which has soared 408 per cent since it said it was providing customers – its biggest client is the telecom giant Huawei – radio frequency devices to conduct 5G field trials in October. Its rival Suzhou Chunxing Precision also has jumped by 194 per cent since October after making a similar announcement. The market fervour in 5G has even led to mysterious surges in completely unrelated stocks. Shanghai-listed Eastern Communications skyrocketed 800 per cent from October to March, forcing it to make several warnings to say it was not involved in any 5G business. Traders labelled it a yaogu – “monster stock” – meaning that the surge was entirely a result of speculative capital and deviated from the fundamentals. But the real deals have plenty more room to climb, many investors and analysts say, with the market still not yet grasping what a massive growth driver 5G is to the telecom sector. “We have only made 10 steps in a journey of hundreds of steps,” said Zhan Guoqiang, investment director of Yabuli Investment, a private equity firm focusing on telecoms based in Shenzhen. A seasoned stocks investor backed by his own capital, Zhan started investing in 5G stocks in June. “From a long-term perspective, everything has only just started,” he said, adding that stock prices “could triple or even quintuple” for leading companies in the 5G era. There are sceptics, who warn of the potential impact on companies and their share prices if tensions continue to flare between the US and China, Beijing changes its supportive 5G policies, and companies suffer from the massive investment costs of the totally new sector. But others say when all the investment and construction is done and the 5G networks are up and running, a host of new applications will spring up to revolutionise industries from autonomous driving to smart health care. New markets worth trillions of dollars will be created, and people’s lives will be completely changed, analysts say. US focus on blocking China’s 5G technology misses bigger manufacturing risk Stocks are already rising in innovative sectors that will benefit from 5G, such as edge computing, a form of cloud computing to analyse data, and the internet of things. On top of that, Chinese telecom companies could become world leaders in 5G, unlocking vast overseas markets. The government has recently accelerated its pace in rolling out supportive policies and regulatory changes to develop 5G, prompted in part by the US campaign to contain Chinese telecom giants Huawei and ZTE amid security concerns. 2019 an ‘inflection point’ for industry Telecom companies are set to enter an unprecedented upwards cycle as China embraces 5G, experts say. Telecoms are a cyclical industry. In China, companies’ revenue and profits are driven by the cycle in capital expenditures by three big national network operators. Their spending peaked and bottomed out, as telecom systems went from the first generation (1G) – represented by the first handheld mobile phones – to the fourth generation (4G), which enabled things like faster video streaming. Now the industry is being hauled out of the trough as the rapid growth in 4G investments draws to an end with 5G on the horizon. US catches up with China in 5G readiness as race heats up for ultra-fast mobile networks The network operators announced in March they will spend a total of over 30 billion yuan (US$4.5 billion) this year on developing 5G. Their spending will peak in the next two to three years and far exceed the past spending on 4G, which totals about 800 billion yuan, according to analysts. Guotai Junan Securities projects a 1.5 trillion yuan in total investments in 5G, while Everbright Securities estimates 1.2 trillion yuan. TF Securities say the size could be anywhere between 1.7 times to 6 times that of 4G investments, depending on the development plans. “The year 2019 is an inflection point for the industry,” said Zhao Liangbi, telecom analyst at Guotai Junan. “Companies will benefit more from the peak of this 5G cycle than from 4G.” This is because the unique features of 5G – such as the 10 times to 100 times jump in transmission speed and the drastically lower lag time – required a complete overhaul of the system. Network operators need to install a lot more base stations – as much as twice the number of 4G stations in the estimate by TF Securities – that will also be a lot more expensive to make, which means bigger business for station builders and their suppliers. Huawei and ZTE together occupied more than two thirds of the 4G base station market. The market for 5G is likely to be three times that of the 4G, according to Guotai Junan. Suppliers of components that are of greater demand and higher significance to 5G networks will also see their revenue soaring, analysts say. Optical module makers, for example, could have their revenues quadrupling, while that of antenna makers and radio frequency devices producers could expand to over twice their current sizes, according to Guotai Junan. From scepticism to high hopes Behind the ground-shifting change is the Chinese government’s determination that the country takes a leading role in the 5G future. So far, South Korea and Verizon in two cities in the US – Minneapolis and Chicago – have jumped out early, rolling out smartphone 5G earlier this month. Meanwhile, the US government’s targeting of ZTE and Huawei last year hurt more than just the two companies. It beat down Chinese investors’ confidence in the entire sector – the telecom sector plunged 38 per cent in the first 10 months of 2018, lagging behind the overall market that lost 21 per cent. The actions by the US prompted China since October to move faster on testing 5G technology and making regulatory progress ahead of market expectations. The government in December confirmed the allocation of the 5G spectrum to network operators, who later surprised investors by announcing faster plans to launch the commercial use of 5G this year. The industry and information technology minister said in March that 5G licenses will be given out within this year. “The pace at which the policies rolled out far exceeded my expectations,” said Xing Zhongheng, a professional investor based in Shanghai who has over a decade of experience working in the telecom industry. How US went from telecoms leader to 5G also-ran without challenger to China’s Huawei “The market has transformed from scepticism and doubts to confidence and high hopes,” he said. Investors and analysts expect network operators to get the licenses and commercially launch 5G services in the third or fourth quarter, after test launching in big cities as soon as in June or July. This means that operators would start purchasing equipment as soon as in the second half of this year, and the income from 5G will materialise for telecom companies and reflect on their financial statements later this year or early next year. The earnings performance will determine which telecom stocks will outshine, Xing said, because investors are all making bets based on guesses and estimates now. To Xing, Shinzhen-listed Suzhou Shijia Technology looks like one of the most promising stocks in the sector. Two years ago, the company acquired Suzhou Perfect Electronics Technology, a major manufacturer of base station filters and supplier to ZTE. It is the most focused on the making of filters among its peers, he said. Zhan of Yabuli Investment is most confident with his investment in Shenzhen FRD Science and Technology, a leading maker of antennas that supplies Huawei and is listed on the Shenzhen Stock Exchange. It has a good strategic planning in the sector through three successful acquisitions of companies specialising in key technologies of 5G components, he said. Furthermore, the telecom supply chain is increasingly shifting into China, analysts say, even though Huawei and ZTE buy key components from overseas. The Chinese government has attached a higher significance to self-reliance in technology, and Huawei is tightening its control over the supply chain to foster domestic suppliers, analysts at Guosheng Securities wrote in a report dated April 7. “Domestic telecom suppliers are rising,” analysts led by Song Jiaji wrote. “Investors can be more optimistic about 5G.” To good to be true? Despite the rosy picture, the sector could face three potential threats, according to Guotai Junan’s analysts Zhao Liangbi and Zhuang Yu. Any intensification of the US-China trade war, or additional US efforts to contain Huawei and ZTE, could harm their business and their suppliers, they said. ZTE was forced to suspend operations when the US banned American companies from selling goods to it temporarily last year. On top of that, companies could suffer the cost of trial and error, something Chinese firms did not need to worry about in the past because they only adopted technologies when they were mature. But 5G is completely new to everyone and China is standing at the same starting line with the rest of the world, which means companies need to spend time and resources to meet the requirements of the new technology. Furthermore, any change in the government’s supportive policies could slow down the sector’s growth. And many investors are sober-headed, too. Xing said he will wait until year-end earnings to come out to decide which stocks are really benefiting from 5G. Yabuli Investment’s Zhan echoed Xing in the cautious optimism. “Right now, 5G is surrounded by a haze, and people see beauty in that. But will everything turn out to be as beautiful as we imagined? Not necessarily,” he said.