Government to help subsidize 5G roll-out?    We met with a number of telecom experts over the last week to discuss theprogress of 5G development in China. Our conversations continue to point tolimited viable 5G use scenarios and hence it is understandable the generalreluctance by the telecom operators to splurge on 5G. However it appears theChinese government is supportive of the 5G development and building out thenetwork may be a national duty to be borne by the operators. To help ease thefinancial burden, one expert suggested that the government may subsidize theoperators in the 5G build-out, similar to the practice for the rural fiber roll-out,which we believe could be a reasonable solution to bridge the gap.    Equipment vendor highlights    The experts we met suggested generally limited difference in technicalcapabilities between ZTE and the other equipment vendors. While ZTE hasdone well in CM's recent NB-IoT auction, one expert suggested that this maybe due to a lack of preparation on the part of the other vendors. Overall, thereappears to be some consensus on an increased deployment of small cellsunder 5G given the smaller coverage area (e.g. on lamp posts) while fiberdemand is likely to continue to see a steady increase for backhaul upgrades.    Some concerns around NFV and SDN by the wireless equipment vendors    There was some concern expressed around the long term impacts from NFVand SDN adoption which could reduce barriers to entry and dilute margins.That said, it appears that the level of adoption remains low and for the RANunit, the significance of the processing power required means most vanillaCPU's remain inadequate for such purposes for the time being.    5G spectrum allocation: 5GHz for CM, 3.5GHz for CT and CU?    The MIIT issued a notice on 15Nov outlining its 5G spectrum allocation plansto assist the equipment vendors with the R&D efforts. 200MHz will beallocated at the 5GHz and 300MHz at the 3.5GHz bands (of which 100MHz isto be used for indoor coverage). We suspect CT and CU will each receive100MHz at the 3.5GHz band while CM will receive 200MHz at the 5GHz band.We note that given CM already uses a higher frequency band for 4G coverage(2.6GHz) and hence the step-up in capex for CM is likely to be similar to peers.    Spectrum allocation broadly supports view on telco capex    We expect total 5G capex to be double that of 4G which we believe continuesto be a reasonable assumption in light of the recent spectrum allocationresults. Annual capex spend is more manageable due to a longer investmentperiod under 5G, rising to ~RMB400bn p.a. in 2020and 2021(vs a peak ofaround RMB420bn in 2015) but declining in 2022as the lack of applicationscenarios results in a pullback by the operators. Some may see the recent rallyin ZTE’s share price indicative of a significantly higher capex intensity for theChinese operators and while we do not believe this will ultimately be the case(as the government appears keen to limit overinvestment), it is likely tocontinue to pressure Chinese telco share prices in the meanwhile.

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