Some telecommunications stocks did not do as well as they could have last year, and J.P. Morgan thinks it knows why.
The bank said in an April note that some investors grew concerned in 2017 about returns — or the lack of them — on so-called 5G mobile network technology, which is designed to deliver faster data speeds.
J.P. Morgan analysts said they found “depressed valuation” for Chinese, Japanese, South Korea and Australian telecommunications stocks. Those markets are likely to be the first in the region to roll out 5G, according to the bank.
All told, companies in the Asian telecom sector underperformed the MSCI Asia Index by 18 percent in the 12 months to April 2018, the analysts said.
But the bank dismissed 5G concerns as coming “too early” and said many telecom stocks could be showing a disconnect between their current price and their actual value.
James Sullivan, head of Asia ex-Japan equity research at J.P. Morgan, told CNBC that the media attention being paid to 5G is significantly outpacing the technology’s impact in the real world. Many of its uses are still theoretical because complementary technologies don’t really exist yet.
“It’s not really about faster download speeds,” he said. “It’s about internet of things, autonomous vehicles and things of that nature for which no one understands a monetization case for networks yet.”
What is 5G?
The fifth generation of mobile networks, or 5G, is designed to serve up faster data speeds that cater to ever-growing web traffic.
Previous generations of mobile networks were geared mainly for consumer use, initially with voice and short messaging services and then web browsing and data streaming. 5G is expected to cater to those needs plus the needs of industries.
That’s seen as crucial for new technologies such as artificial intelligence and autonomous driving — they will depend on a network’s ability to process huge amounts of data quickly and with minimal interruptions.
For the technology to realize its potential, a lot of capital will be needed to build networks.
In December, the organization that creates the rules governing wireless connectivity completed the first specification for a kind of 5G, which was considered an important step toward commercializing the technology.
Why different types of 5G matter
The J.P. Morgan analysts said that investors were not only worried too soon about 5G expenses, but that they also needed to differentiate between two versions of the technology in development.
“The potential impact is significantly different,” they said.
The first version, known as non-standalone 5G, refers to instances where the technology is built into existing networks, with necessary upgrades. That is similar to how firms run current 4G services alongside their older networks.
“Mass market adoption for the major identifiable use case for 5G is still [more than] 10 years away.”
In other words, companies could offer non-standalone 5G service without having to invest heavily, since much of the infrastructure already exists.
Standalone 5G, on the other hand, is the idea of a fifth generation network that is built from scratch and does not piggyback on existing infrastructure, according to Sullivan. That sort of network would require higher capital investments.
“Non-standalone 5G cannot handle the technical requirements that are devoted to 5G,” Sullivan said.
There is no clearly defined business case for standalone 5G yet, he explained. The main advantage of that approach is that it could allow multiple machines to communicate with one another with minimal interruptions — in some cases, such as autonomous driving, uninterrupted communication between computers is crucial.
“The major envisioned use cases are still many years away, such as autonomous cars and industrial applications,” Sullivan added. “Mass market adoption for the major identifiable use case for 5G is still [more than] 10 years away.”
Risks and benefits
The investment bank said its analysis shows that within Asia, Japanese and Chinese telcos stand to benefit the most from non-standalone 5G networks. That’s because they would be able to offer 5G services to users by tapping into existing infrastructure, thereby reducing costs.
“We expect incremental equipment costs to be minimal, as much of the cost would be incurred in 4G network upgrades anyway,” Sullivan said.
The bank’s analysis said telcom stocks in those two markets were trading below what they’re worth, suggesting that risks associated with 5G investments were priced in.
The analysts said they were more cautious on the sector in Hong Kong, Singapore and Taiwan because their analysis showed that risks were not yet fully priced in.
Sullivan told CNBC that building standalone 5G network requires more spending, so the risks associated with them are greater than the risks associated with non-standalone networks.
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