Don't let US-China worries cloud tech opportunities

Tensions between the US and China continue to simmer. Last week, the US Department of Commerce put more pressure on Chinese telecoms equipment maker Huawei by expanding its product rules targeting the firm. The regulations now ban sales to Huawei including any third-party semiconductor chips that have been “produced domestically and abroad from US technology and software.” Since both US software and technology are pervasive in the global tech sector, this poses a greater threat to Huawei’s ability to buy modern third-party chips without a US license.

For investors, worsening US-China tech tensions may suggest a cautious stance is warranted. Indeed, markets have moved to price in both winners and losers from the latest measures on Huawei. But we believe this shift towards distinct technology ecosystems led by the US and China may actually benefit a number of 5G-linked companies, both among those enabling the technology and the platforms built upon it:

5G enablers

• We believe the structural leaders across the 5G value chain—those that manufacture, install and maintain the required network equipment—stand to benefit from the multi-year pick-up in spending, with annual 5G capex set to jump 20x from last year’s levels to USD 150bn by 2025 on our estimates. And unlike the 4G rollout, where much of the upside was realized within just a few years, we believe 5G presents an opportunity for many years given its more complex technological nature and higher implementation costs. Likely winners include semiconductor equipment producers, chip makers, telecom and network equipment suppliers, tower operators and select telecoms.

Platforms

• Perhaps even more substantial upside may come from firms that can improve their offering or create new services built around the advantages of 5G networks. This includes smart mobility services, cloud, gaming, media & entertainment, and end-product manufacturers. About USD 13.2tr worth of economic value could be generated from 5G applications by 2035, according to an IHS Markit study, helping to generate some 22 million jobs in the network supply chain alone. Autonomous vehicles and the Internet of Things are two more use cases that may unlock significant economic value for category leaders.

China’s new economy.

• While US-China tensions are putting Chinese telecoms group in the spotlight, China’s new economy companies still offer plenty of investment opportunities. The COVID-19 pandemic has allowed the leading online players to grab more market share and new users have stuck with the mega apps even as lockdown restrictions were lifted. The Chinese government has also indirectly accelerated the digital market’s consolidation by imposing stricter consumer protection regulations. Without the need to compete fiercely, consolidation supports e-commerce leaders’ revenue prospects and their margin expansion potential.
• With 5G technology acting as the key enabler, we think these leaders will deliver above-market average earnings growth, yet they are currently trading at reasonable valuations. Focusing only on e-commerce would miss out on China’s other online industry segments that are poised to come of age. These include food delivery apps, travel agencies, search engines, cloud operators, data centers, fintech services and online entertainment platforms.

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