5G Infrastructure

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What IS 5G?

5G is the 5th generation of mobile network

  • 1G: mobile voice calls
  • 2G: mobile voice calls and SMS
  • 3G: mobile web browsing
  • 4G: mobile video consumption and high speed data
  • 5G: technology to serve consumers and digitalization of industries
    • Faster data speed: 100 times faster
    • Ultra-low latency: reduced response time
    • Network slicing: allow more connected items



5G

WILL CHANGE YOUR LIFE

Why 5G Infrastructure?

Traditional (“old”) infrastructure:
e.g. toll road, ports, airports

Digital (“new”) infrastructure:
e.g. base stations, 5G network, data centers

“Old” vs “New” Infrastructure

Traditional ("old") infrastructure Digital ("new") infrastructure
Business model Project return boosted by leveraging Self sustained model capturing additional revenue
Company balance sheet High gearing; longer build-up phase Low gearing or cash rich; shorter build-up phase
Asset growth Limited by capacity & utilization affected by disruptive technology Faster speed generates new consumer/commercial demand

    Business model

  • Traditional ("old") infrastructure

    Project return boosted by leveraging

  • Digital ("new") infrastructure

    Self sustained model capturing additional revenue

    Company balance sheet

  • Traditional ("old") infrastructure

    High gearing; longer build-up phase

  • Digital ("new") infrastructure

    Low gearing or cash rich; shorter build-up phase

    Asset growth

  • Traditional ("old") infrastructure

    Limited by capacity & utilization affected by disruptive technology

  • Digital ("new") infrastructure

    Faster speed generates new consumer / commercial demand

Characteristics of “New” Infrastructure

Recession proof:

supportive government policies

Good earnings visibility:

shorter construction cycle + simple business model with good and secured order book, providing strong cash flow

Promising industry growth:

next few years will be building phase for 5G infrastructure

Generating both income and growth:

companies related to telecom infrastructure provide both income and growth perspective, offer better risk adjusted return in current volatile investment environment

Infrastructure Investment Shifts To EM

Race to 5G:

Asia is ahead of others

China and South Korea are ahead of others in testing 5G services

Huawei became the first to complete a network trial for 5G

5G
will go beyond 2025

Best to capture the opportunity

BY Whom, How, When?

High demand but few providers

5g-high-demand

Source: Nomura Research Institute: Japan’s Asset Management Business, Japanese retail, 2017/2018

Best to capture - by whom

Deep understanding in China:

5G development in world will likely be China centric, by US Department of Defense Innovation Board “China has taken lead in 5G development through a series of aggressive investment and spectrum-allocation initiatives”

Strong fundamental research background:

this is a new theme and requires strong analytical skill focusing on free cash flow, earnings momentum and balance sheet strength

Ability to identify new trend:

only investors with experience through various business cycles (e.g. dot-com bubbles) can surf through coming 5G cycle

Based in Asia:

close to hot spot but with international exposure

Best to capture - How

Three-stage process of portfolio construction

Theme Setting

Focus on 5G infrastructure companies across Asia ex Japan region. This is the sector that benefits from supportive government policies and is recession-proof

Bottom Up Analysis

Proprietary fundamental analysis with emphasis on free cash flow, earnings momentum and balance sheet strength

Construction

Selective combination of a basket of value and growth stocks to achieve a target dividend yield of 5% p.a.

The above represents how the portfolio management team generally applies their investment process under normal market conditions

Best to capture – How (2)

Three-stage process of portfolio monitoring

Awareness of risk/return trade-off:

Daily P&L monitoring of market, sectors and stocks

Volatility control

Company visits to reduce risk of negative earnings shock

Liquidity control

Monitored in monthly quantitative report of portfolio characteristics

The above represents how the portfolio management team generally applies their investment process under normal market conditions

Best to capture – now!

  • There is no fund currently on the market that invests purely in 5G infrastructure
    • There are few listed infrastructure-related funds. Most of them are related to traditional “old” infrastructure with global exposure
  • 5G investment cycle is just starting
  • Investment horizon of 5 years – Asian countries are at different stages of development in their 5G network which makes unique investment opportunity to go beyond 2025

Conclusion

Challenges

  • Low yield
  • Low growth
  • Global trade down cycle
  • High debt level
  • Niche sectors to benefit

Opportunity

  • 5G infrastructure-related equities
  • “Old” vs “new”
  • Recession proof
  • Good earnings visibility
  • Promising industry growth
  • Generate income & growth
  • China led, Asia ahead

Best to capture

  • High demand, few (no) providers
  • By investors with deep China understanding
  • By proven portfolio construction and monitoring process
  • 5G investment cycle is just starting NOW!
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