CM shows prudence on 5G, capex to decline in 2018, challenging for equipment vendors

Key takeaways from CM H117 results reinforce our cautious view on capex

1) During the result presentation, China Mobile (CM)'s management stated clearly that while the company will closely follow up the technology development of 5G, investment return and commerciality is the first priority in deciding 5G capex timing and size. 2) CM's wireline broadband business grew favourably in H117, with revenue up 50% yoy and ARPU up 4.6% yoy. We believe this is the result of the headquarters being focused on the quality rather than quantity of wireline broadband business. We hence expect CM's aggressive fibre broadband network rollout should slow down starting from 2018, given its household coverage will reach 70% nationwide by 2017E. This reinforces our cautious view on fibre demand and fibre producers in China.

Technology development and business model are two key bottlenecks of 5G

According to the management, CM will closely follow up the technology development of 5G and stay as a forerunner global wide. However, the standardization of 5G technology will only be finalized at the end of 2018, 5G chipset won't be available until 2019 and the business monetization model is not clear. Thus CM will stick to the original timeline of field testing in 2017&18, pre-commercial trials in 2019, and commercial launch in 2020. Management confirms that despite the accelerating NB-IoT rollout, capex in 2017 will remain unchanged at Rmb176bn and will continue to decline in 2018.

Capex to decline in H217 and 2018

CM spent Rmb85.3bn capex in H117, up 2.8% yoy, which implies CM's capex will decline 13% yoy in H217E, as capex spending was more upfront loaded in 2017 (capex in H117 as 48.5% of full year guidance) vs. 2016 (capex in H116 as 44.3% of full year spending), and capex in 2017 is 6% less than that in 2016. We expect CM's capex to decline to Rmb169bn in 2018E, down 4% yoy. We particularly remain cautious on the fiber demand in China, as CM's management has very much emphasized on the quality of wireline broadband business, by including wireline revenue and ARPU into KPI for the first time. After both demand and prices rose in 2016-17, we expect fibre demand and prices to start to decline in 2018, a turning point of the fibre industry in China. We reiterate our Sell rating on ZTE and Hengtong Optic Eletric (HTGD).