Operators beginning to incur real costs for 5G. Operators in Korea and
Australia have already purchased 5G spectrum at auction. In China, on
7 December 2018, the MIIT issued allocations of mid-band 5G spectrum to
the three China telcos for nationwide ‘trials’, and in Japan allocations are to
be awarded in March 2019. Operators are therefore beginning to incur real
costs for 5G, in the form of spectrum fees and, in 2019, capex.
■ End use cases still not convincing. There still seems to be no pressing
need for nationwide 5G coverage for ‘mass market’ consumers, in the way
that video, e-commerce and gaming were facilitated by 4G. This suggests
that a gradual rollout using a ‘hotspot’ approach would be the least
damaging strategy for profitability, but this strategy is unlikely to be
acceptable in Japan, Korea or China. We expect returns on invested capital
(ROIC) to decline in Japan, China, Australia and Hong Kong over FY19-24.
Factoring in expected spectrum costs in Hong Kong, we lower our target
prices for SmarTone, HKT Trust and HTHK by 9.1%, 1.1% and 3.2%,
respectively, to HK$11.15, HK$13.05 and HK$3.05, respectively.
■ Overweight 4G ‘market repair’ situations. The proximity of real costs
(spectrum fees and capex) —in contrast with a lack of clarity over the
monetization of 5G—leads us to adopt a relatively cautious stance on
telcos in China, Australia, Korea and Japan. Our top OUTPERFORM calls
—namely DTAC, PT Telkom and SingTel—have exposure to markets that
look set to adopt a gradual ‘hotspot’ approach to 5G rollout, while they
enjoy improving 4G competitive dynamics. China Tower Corp (CTC) is
likely to prove the ‘winner’ from 5G over-investment in China.
