Answering market doubts: How to continue to develop the 5G industry under various uncertainties
We believe that 5G development should be viewed separately at home and abroad. Huawei and ZTE lead the world in 5G technology and commercial capabilities. It is difficult for external issues such as trade to shake Huawei's leading advantage in communication equipment.
Domestically, the Ministry of Industry and Information Technology announced that it will issue 5G commercial licenses in the near future, which shows that the progress of my country's 5G construction has not been significantly affected. After receiving the license, operators can carry out 5G commercial use, which may even be earlier than the previous commercial target of 2020. The early construction of the network is beneficial to Huawei. Huawei is currently fully prepared for commercial use and has shipped about 20,000 base stations in a single month. ZTE is also expected to benefit from domestic 5G construction. Nokia and Ericsson may have a lower share in domestic 5G construction due to relatively slow preparations.
Note on practical research report: This research report was published on June 5, but on June 6, my country directly issued 4 5G commercial licenses instead of the initial trial operation of 4G License, this will mean that we directly skip the 5G trial operation and directly enter large-scale commercial use. This unexpected action also shows our determination to break through in 5G.
Overseas, some operators such as Europe's decision on whether to use Huawei's 5G equipment will lead to a slowdown in 5G construction, while Japan and other countries' abandonment of using Huawei equipment may lead to a decline in Huawei's 5G share. In addition, due to the large overseas stock of 4G networks, high cost performance, and high replacement costs, Huawei's overseas 4G share will not decline significantly in the short term.
However, the first batch of 5G network construction mainly focuses on China, the United States, Japan and South Korea, and 5G itself in Europe and other countries is not urgent. Therefore, we believe that at this time, my country’s 5G licenses are good for Huawei and ZTE. . However, we should track the possible further reaction of the United States to my country’s 5G license.
Chart 1: Communication base station structure
However, 5G also brings opportunities and challenges. The core is: technological change drives the market scale to increase, and the independent controllability of semiconductors is the key to breakthrough
The main risks in communication base station construction come from both the customer and the supply chain. We believe that China's 5G progress is faster than overseas, which will benefit the domestic industrial chain. However, my country still has shortcomings in the semiconductor field (chips, etc.), which urgently need to be independently controlled.
Opportunities and Challenges 1: Independent controllability in the semiconductor field is the main direction for breakthrough. From a supply chain perspective, there are shortcomings in the semiconductor field, and independent control is the solution.
Mainland Chinese suppliers are 1) strong in the antenna sector and 2) have a certain market position in radio frequency front-ends such as PA/LNA and filters, but there is still a lot of room for import substitution.
3) Links with large room for domestic substitution are mainly in the semiconductor field, including PA, baseband chips, digital chips, analog chips, power chips, etc. Compared with 4G, the performance improvement of 5G depends largely on the design and selection of chips. We believe that independent controllability in the chip field is the key to breakthrough in the construction of 5G base stations in my country.
Opportunities and Challenges 2: 5G characteristics drive increased demand for base station components such as PCBs, antenna oscillators, PAs, and dielectric filters.
The high-frequency and high-speed characteristics of 5G drive changes in the materials and processes of PCB/CCL, antennas, PAs, and filters. Multi-channel/large bandwidth mainly drives the usage of PCBs, antennas, PAs, switches, filters, etc. Significant improvement.
The scale of the global communications equipment market fluctuates with technology upgrades, and the global wireless telecommunications network is currently experiencing a turning point in the development from 4G to 5G. With the arrival of the 5G construction period, the market size is increasing.
Taking the base station and wireless communication equipment market as an example, Gartner predicts that from 2018 onwards, the global wireless equipment market will show an upward trend. According to data from Gartner, Chinese manufacturers Huawei and ZTE ranked first in terms of market share in the communications equipment market in 2018, with Huawei ranking first with a share of 27%.
From a technical perspective, Huawei and ZTE have achieved technological overtake in 5G through professional accumulation in the 4G era. At the patent level, Huawei and ZTE rank first and fifth in the world in terms of 5G patent ratio. In terms of commercialization, Chinese companies also lead the world. In May 2019, Huawei announced that it had shipped more than 100,000 5G base stations, and ZTE also stated in April that its cumulative shipments of 5G base stations exceeded 10,000.
According to GSA statistics, as of 4Q18, the number of global 4G users reached 3.99 billion. Global 4G penetration varies across continents. The countries that will really deploy 5G in the early stages will mainly be countries with high 4G penetration rates such as South Korea, the United States, China, Japan, the Middle East and some countries in Europe. The GSA predicts that by 2023, there will be an estimated 1.3 billion 5G users worldwide.
As of early April 2019, there were 720 4G operators worldwide and 116 operators were preparing to provide 4G services. In terms of 5G, 224 operators in 88 countries have started testing, trials, commercial trials or commercial use of 5G networks. Among them, 39 operators are in trial or commercial use, and 15 operators are in commercial use.
Huawei estimates that there will be 6.5 million 5G base stations and 2.8 billion users worldwide in 2025, covering 58% of the world’s population. Based on our research and judgment on the industry chain, we believe that 2019 will be the first year for 5G base station shipments, and China will become the main force in 5G construction in the next three years.
? China: The three major operators are enthusiastic about building 5G networks across the country. Beijing has built 4,700 5G base stations as of late May and will achieve 5G coverage within the Fifth Ring Road by the end of the year; Shanghai Telecom will build more than 3,000 5G base stations in 2019 and 10,000 5G base stations by the end of 2021; Guangdong has built There are more than 14,200 5G base stations, including more than 7,100 5G base stations in Guangzhou. Guangdong Mobile has launched 5G networks in 21 cities in the province; Hubei Mobile will invest 1 billion yuan in the province in 2019 to build 2,000 5G base stations; Shandong China Unicom announced during the year that it has officially launched 5G trial networks in 16 cities in the province.
? South Korea: The three major operators KT, SK, and LGU started nationwide 5G operations on April 3, 2019, with the number of users exceeding 260,000 in a single month. At that time, LG U*** had installed approximately 11,800 5G base stations, and its main suppliers included Huawei. And KT and SK suppliers include Ericsson and Samsung.
? United States: 5G uses 28GHz, 24GHz, 37GHz, 39GHz and 47GHz for 5G deployment. At the end of May, the United States completed its second spectrum auction. Currently, 5G in the United States is mainly used for home wireless broadband access. Recently, the US FCC stated that it will approve the merger of Sprint and T-Mobile, the third and fourth largest wireless operators in the country. The merged operator will use 130MHz bandwidth in the mid-band, which can be considered for 5G deployment. Current providers of 5G equipment in the United States include Ericsson, Nokia and Samsung.
? Japan: 5G is also under construction, and "Asahi Shimbun" reports that services are expected to be available in the spring of 2020.
According to the Asahi Shimbun, Japan's three major operators NTT Docomo Inc., KDDI Corp., SoftBank Group Corp. and emerging operator Rakuten Mobile Inc. will mainly choose 5G equipment from Ericsson, Nokia, Samsung and local companies.
? Europe and the Middle East: Some operators are conducting 5G trials and commercial trials. For example, European operator Telia will launch 5G services in 1-2 European countries. Middle Eastern operator Etisalat will launch 5G services in 300 cities in 1H19.
From Huawei's perspective, the communication equipment industry chain is a joint development of software and hardware. The goal is to combine boards and cards to form a system and achieve commercial use through testing. In the design and manufacturing of boards, the raw materials mainly include various types of chips and PCB boards, which are processed into commercial boards through OEM. In the process of PCB design and chip design, software development environments such as EDA need to be used.
At present, there is a large room for domestic substitution in the industry segment
? Chip segment: The performance and stability requirements of the base station communication system have led to very stringent chip selection.
?EDA and other development environment links: We believe that Huawei will mainly achieve production through existing purchased software.
?Test environment link: Similar to development environments such as EDA, test instruments and meters are mainly provided by overseas manufacturers, but some of them, such as Rohde & Schwarz, are non-U.S. companies.
How do Chinese manufacturers respond
? Rely on inventory in the short term. Huawei's chip design company HiSilicon is already very mature, and its EDA, test environment and other scales can support existing research and development. The chip shortcomings are difficult to solve in the short term and need to be dealt with in the short term through inventory. However, after the ZTE incident in 2018, Huawei has become more relaxed in preparing inventory. The scale of raw materials has increased from 19 billion yuan at the end of 2017 to 35.4 billion yuan at the end of 2018. Taking FPGA as an example, Huawei continues to accumulate FPGA inventory through channels, resulting in 4FQ19, FPGA provider Xilinx communications segment revenue reaching a record high.
?Long-term reliance on localization. Chip design requires constant investment and trial and error. A number of companies have emerged in the domestic industry chain that can provide alternative solutions in related industry chains. Through continuous polishing, localization is more likely.
4G’s share is difficult to shake
Base stations themselves are considered to be an area of ??insufficient competition in the procurement systems of operators such as China Mobile. An important reason is that existing network base stations require constant maintenance and upgrades. It is difficult to change the existing network base station supplier. Huawei ranks among the top two in the field of 4G base stations, serving operator customers all over the world. It is difficult to judge the sustainability of the current situation. Existing 4G customers will need to invest a lot of capital expenditure if they change suppliers. For Huawei's existing customers, it is objectively difficult to replace Huawei's base stations.
On the other hand, Huawei's products are well-known in the industry for their high cost performance. Against the backdrop of weak growth among existing global operators, operator customers are subjectively unwilling to give up Huawei equipment. A classic example is Vodafone. Vodafone has selected Huawei's base station and core network equipment in its global network. However, in the context of trade uncertainty, Vodafone had to give up Huawei's core network equipment, but retained its qualifications as a base station equipment supplier.
Comparing the business structures of the four major wireless manufacturers' operator segments in each region, the operator businesses of Huawei, ZTE and Nokia are not limited to base stations, but also include optical network equipment, IP network equipment and other products. If we only compare the base station business, since Ericsson's main products are base station products, the proportion of overseas manufacturers should be slightly higher.
China region: The market size is 31 globally.
Huawei accounted for 65% in 2018, and the market is stable.
5G progress: China will start 5G construction in 2020. According to the latest feedback from operators, the goal of officially launching 5G commercialization in 2020 has not changed. The Ministry of Industry and Information Technology stated that China’s 5G commercial license is expected to be implemented in the near future. With the issuance of 5G licenses within the year, my country's network construction will enter a new stage. China Mobile will build 5G networks in 40 cities in 2019. Therefore, my country's 5G license issuance has not been affected by the Huawei incident.
? Share: Huawei and ZTE, as local suppliers, gained more than 80% of the operator market share in 2018. In the second quarter of 2018, ZTE was issued a Denial Order by the United States. However, the shares of Ericsson and Nokia did not increase significantly. Chinese operators have maintained close cooperation with Huawei and ZTE in research and development, and their share in the 5G field is expected to further increase. The recent issuance of my country's 5G licenses will further benefit technology leading manufacturers such as Huawei and ZTE. Therefore, if the construction speed is accelerated after the issuance of the licenses, the share of domestic manufacturers may further increase.
Asia-Pacific (excluding China) region: The market size is 17% of the world, Huawei accounted for 45% in 2018, and there is competition in the market.
? 5G progress: Different countries have different 5G progress. Leaders such as Japan and South Korea are currently building 5G, and most countries are building and promoting 4G networks. 5G construction requires waiting time. Some countries may consider starting 5G construction after the Huawei incident comes to light. This incident had an invisible impact on 5G construction.
? Share: Perhaps due to the impact of trade uncertainty, Japan’s SoftBank has not chosen Huawei and ZTE to cooperate in 5G networks in the near future. Therefore, Japan does not cooperate with Chinese manufacturers. In South Korea, only LGU has chosen some Huawei equipment. Other operators SK and KT have not cooperated with domestic manufacturers. However, Korean manufacturers have not excluded Huawei equipment. The main suppliers of base stations in the two countries are Ericsson, Nokia and Samsung. Among other countries, Ericsson and Nokia have higher shares in Australia, Singapore, Vietnam and other countries; while Huawei and ZTE have higher shares in Cambodia, Thailand, Myanmar, Bangladesh and other countries. Currently, none of these countries has been significantly affected by the Huawei incident. There is currently no demand for 5G in these countries, and 4G selection was driven in part by the superior performance and affordability of Huawei and ZTE equipment. In the long-term development, the 5G networks in these countries are also expected to use Huawei and ZTE equipment.
Other regions: The market size is 52% globally, and Huawei accounted for 39% in 2018. There is fierce competition in the market.
? 5G progress: The United States is the pioneer in 5G construction; 5G construction in Europe is similar to that of some Asian countries. There is a short-term wait-and-see situation due to trade uncertainty, which will have an impact on the 5G progress of some countries. . Some countries, such as the United Kingdom, Germany, the Netherlands and other European countries, still have not made a final decision. Recently, British operator EE used Huawei 5G equipment to conduct wireless live broadcasts and achieved good results.
? Share: Huawei’s revenue in the European, Middle East and African markets in 2018 was 204.5 billion yuan; revenue in the American market was 47.9 billion yuan. The above revenue includes consumer business and government and corporate business. The Huawei incident may lead some operators to choose non-Huawei equipment in 5G construction. However, due to Huawei's application in existing networks, it is difficult for some countries to switch instantly.
Note: The companies marked * are covered by CICC and use CICC forecast data; the rest use market consensus expected closing price information updated on June 4, 2019, Beijing time
Semiconductors: 5G promotes the development of radio frequency front-end and baseband chips
Semiconductors are the core components of base stations and the largest component of base station value.
The 5G macro base station is mainly presented in the AAU DU CU mode. The AAU is composed of the original radio frequency part RRU superimposed with active antennas. At the same time, the baseband part BBU is separated into a CU central unit and a DU distributed processing unit.
Among them, AAU's main semiconductor chips belong to the analog category, such as radio frequency chips (filters, power amplifiers, radio frequency switches, etc.), while DU/CU mainly uses digital chips as the core (such as baseband processing chips, etc.) The specific form is ASIC or FPGA). DU/CU/AAU are equipped with power management chips to ensure continuous and stable power supply. Optical and electrical interface chips are also essential for optical fiber transmission in base stations.
As the construction intensity of 5G base stations increases, the semiconductor market for base stations will also usher in a period of rapid growth. According to STMicro's predictions, in a single base station in 2021, the value of RF-related/digital-related semiconductors will account for 32% of the total semiconductor elements, while the value of high-performance analog, optoelectronics/power and sensors will account for 26/10 respectively.
Current status of localization of base station-related semiconductors: At present, domestic manufacturers have achieved some "independent control" in base station-related semiconductor devices.
Looking at the digital part, 1) Huawei and ZTE, the major domestic communication equipment vendors, have many years of experience in the field of base stations. They already have the ability to design ASICs in-house and can produce them through OEM partners such as TSMC.
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2) For FPGA chips used for baseband processing/interfaces, we currently mainly rely on overseas manufacturers to supply them, but the equipment manufacturer Huawei has also accumulated a large amount of inventory previously. my country's Unisoc, Anlu Information, and Gowin Semiconductor have launched commercial products, but there is still a huge gap in product performance and shipment scale with leading manufacturers such as Xilinx, Altera, and Lattice; although some domestic manufacturers have deployed power amplifier business , such as Suzhou Nengxun (unlisted) and Sanan Optoelectronics (600703.SH), but there is still a large gap between China and overseas in the field of base station suppliers purchasing core components;
In terms of filters, Fenghua Hi-Tech ( 000636.SZ) and Wuhan Fangu (002194.SZ) ceramic dielectric filters can be used in 5G base stations;
In terms of digital-to-analog conversion/power management chips, with the continuous improvement of technical strength, Shengbang Co., Ltd. (300661.SZ) is expected to further enter the base station market in the future.
In terms of optical components, currently low-speed (below 100G) chips have been replaced by domestic ones. The main manufacturers include Guangxun Technology (002281.SZ), O-Net Optical Communications (0877.HK), etc., but high-speed chips are still vacancy.
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