Who will Benefit from the Largest Global 4G / LTE Deployment in China?

China Mobile Market - Network GearUnlike in India where Reforms are driven solely by Agenda Driven Politics with Motive of Heavy Corruption, China has created a niche market for itself. They have created a eco-system of Network Gear Manufacturers which include top brand names such as ZTE, Huawei and China Communication Services. Over the next 12 months the Big 3 Operators China Mobile, Unicom and Telcom will start 4G/LTE capex cycle which would negatively impact their near-term earnings and could drive vendors’ re-rating on faster earnings growth. Long term, LTE could save data costs of Chinese telcos and drive data usage.

Chinese telcos will increase by 7% in 2013 and 4% in 2014, driven by LTE and transmission network capex. We expect total LTE capex to almost double in 2014 and grow by 9% in 2015. The State Council has issued two circulars to encourage broadband penetration growth and information consumption since August, which provide a favorable regulatory environment to support vendors’ growth. We expect industry transmission network and LTE capex to continue to grow in
2014 and 2015. LTE capex could grow by 99% in 2014 and by 9% in 2015. Each operator needs to upgrade/expand its transmission networks using PTN or IP RAN technologies to support LTE that has c.100Mbps theoretical data speed.

We expect CCS’ key addressable market, telecom infrastructure capex, to grow faster than telcos’ capex growth in 2014-15E. Fast infrastructure capex growth of CT (the largest customer of CCS with over 40% revenue contribution) is the key revenue driver of CCS. ZTE’s earnings growth will be mainly driven by margin recovery, as it is expanding market share in CM’s transmission network and has booked the majority of the loss-making overseas projects. ZTE could improve margins of its LTE sales for future network expansion and upgrade contracts.

In this backdrop, Infrastructure vendor CCS will see faster top-line growth than industry capex growth, on our analysis, mainly driven by CT’s surging infrastructure capex. Equipment vendor ZTE will, in our view, see growth drivers from margin recovery
and market-share gain in transmission network capex.