HONG KONG -- China this year was expected to be in the middle of its three-year peak investment period for the country's strategically important 5G mobile network.
But despite the excitement generated by the central government and the related industries that hope to benefit from the hype, the latest investment figures disclosed by China's three state-owned telecommunication carriers reveal another story.
China Mobile, the largest of the three Hong Kong-listed carriers as measured by subscribers, is moving to lower investment costs for its 5G network infrastructure. Its unlisted parent, China Mobile Communications Group, recently agreed with China Broadcasting Network Corp. to a "co-build, co-share" arrangement, in which the two companies will jointly construct, supervise and use each other's 5G infrastructure.
State-owned China Broadcasting Network Corp. is the controlling shareholder of its similarly named unit, China Broadcasting Network. The unit was established last October as the country's fourth 5G carrier in a bid to invigorate the market, but cost-effectiveness became an issue and it ended up joining hands with the largest player.
The ability to keep 5G investment under control is what investors repeatedly have been asking the telecom carriers' management in recent years, against the backdrop of bullish comments and high expectations coming from authorities in Beijing and related industries.
Splashing around infrastructure investment means additional business opportunities for equipment and handset manufacturers and app developers on the 5G platform.
But that is not the case for the carriers, which face the burden of a new round of heavy cash outflows without clear returns and are under pressure by the government to cut mobile fees. Chinese telecom companies, like many of their global peers, have kept their word so far in keeping 5G budgets at a reasonable level while maintaining dividend payments at current or higher amounts from last year.
"We will comprehensively push forward the co-build, co-share arrangement in 5G with CBN," Yang Jie, who doubles as chairman of both Hong Kong-listed China Mobile and its unlisted parent, told reporters during an online news conference last week.
Yang also said that cooperation with the broadcasting and media unit will "help us expedite the network coverage in a highly efficient and money-saving fashion." He revealed part of their plan to jointly construct more than 400,000 base stations on a 700-MHz spectrum by the end of 2022.
Yang has stressed over the past couple of years that the company would control its spending in 5G, despite investment entering its peak years -- a period that he and the rest of the industry describe as being from 2020 to 2022. China Mobile on Thursday issued a capital expenditure forecast for this year -- mainly from 5G -- of 183.6 billion yuan ($28.1 billion), a mere 1.7% increase from last year.
"The company will stringently manage its investment size," said Yang, suggesting that there will not be a spike in 5G investment spending in 2022 -- the final year of the peak investment period.
China Mobile's two smaller state-owned telecom rivals -- China Telecom and China Unicom -- are ahead of the curve in terms of 5G investment savings. They agreed in 2019 on a co-build, co-share arrangement and are showing solid results.
"Both companies have saved more than 60 billion yuan in investment over the past year," Ke Ruiwen, chairman of China Telecom, said in an online news conference earlier this month. The savings go beyond infrastructure building, as the two companies are cutting back on various operating expenses, too, including electric bills, tower leases and other maintenance fees.
Wang Xiaochu, chairman of China Unicom, echoed Ke in a separate online news conference this month. "Due to the co-build, co-share arrangement, our accumulated savings in investments have exceeded 76 billion yuan," he said.
The push for cost-cutting is going deeper into their existing 4G network, too. "The scope of our cooperation is expanding, as we are pushing for more in 4G as well, where we are able to make up for network weaknesses swiftly and with lower costs," Wang said.
Ke also confirmed that China Telecom "will proactively promote co-share in the 4G network as well."
Expected combined capital expenditures for this year add up to 340.6 billion yuan, an increase of just 2.3% from 2020 and 5.5% lower than the telecom analysts' consensus compiled by Bloomberg.
While governments in China and elsewhere have been touting the importance of 5G, analysts have said that its advantages over 4G are not as striking as the technological jump from 2G to 3G more than a decade ago, and 3G to 4G several years back.
"We now have greater visibility," wrote Neale Anderson, head of Asia-Pacific telecom research at HSBC, following China Mobile's latest guidance for its investment and dividend. With the company's arrangement with CBN, "the increase in capex in 2021 has been only modest," he said. "The tone of the management commentary suggested that the investment in new business remains a factor in 2021, but that the dividend is highly unlikely to decline."
Michelle Fang, analyst at Citigroup, also referred to "earnings visibility" in a report, noting that the controlled investment forecast by the market leader "could provide share-price downside support." She reiterated a buy rating for China Mobile with a target price of HK$76, a whopping 50% higher than Friday's close of HK$50.75.
However, stringent controls on expenditures by telecom companies is a real blow for those counting on that.
Comba Telecom Systems Holdings, a Hong Kong-listed mainland mobile-equipment provider, last week reported that its revenue for 2020 declined 13% from a year earlier to 5.05 billion Hong Kong dollars ($650 million), while it slid to a net loss of HK$194 million from a net profit of HK$151 million. The main reason: a 37% drop in orders from the three Chinese telecom carriers, which account for about 40% of its revenue.
Following the second co-build, co-share 5G cost-saving arrangement, the focus in the industry is shifting to the possible creation of a single 5G network in rural areas.
Although the managements of the top three telecom companies have not made any clear comments about that possibility, talks are ongoing to further cut back on 5G expenditures. Some analysts, including Edison Lee at Jefferies Hong Kong, believe that issue is next on the agenda.
"We still expect the single rural 5G network deal would be struck in 2H21, further cutting industry capex," he wrote in his latest note to investors.