The newest iteration of wireless technology is set to be the next big thing; 5G. It's supposed to offer download speeds that are 100 times faster than 4G. Telecommunication firms are expected to spend hundreds of billions of dollars building 5G infrastructure over the next decade and many analysts think it could be as transformative as the Internet of Things (IoT), augmented reality, virtual reality, and artificial intelligence.
Due to the trade tensions between the US and China, many believe China's 5G rollout might be delayed due to the US putting China's Huawei on the "entity list" which prevented American companies from selling technology to it without prior government approval. Huawei is regarded as the current leader in 5G technology and infrastructure.
After the recent trade war developments during the G20 meeting, however, it looks like US companies can expect a reprieve on the Huawei ban and the 5G rollout might be back on track. A faster 5G rollout is great news for many 5G stocks, particularly those listed in Hong Kong. Here are three China stocks that could benefit from 5G and that also pay a dividend.
China Tower Corp Ltd (SEHK: 788) currently has an effective monopoly on cellular tower operations in the world's second-largest economy, and many analysts believe it will be one of the chief beneficiaries of China's 5G rollout. To offer 5G services, China's leading telcos will need to build out 5G infrastructure and the associated towers and that won't come cheap. According to some estimates, the telcos could spend as much as RMB2.8 trillion (US$411 billion) from 2020 to 2030 on 5G mobile network infrastructure.
Once those towers are built, China Tower will operate many of them. According to Citi Research, the company charges a near-10% markup over its costs, giving it ample cash flow for any dividend payouts. Although it is only listed in December 2018, the stock is regularly touted as a solid dividend growth company due to the expected 5G cash flows it's expected to generate.
Chinese telcos are also expected to benefit from 5G. According to some estimates, China Mobile Ltd (NASDAQOTH: CHLKF), China Unicom, and China Telecom are expected to generate a cumulative RMB 7.9 trillion yuan in related 5G sales from 2020-2030. Of that total, China Mobile will likely benefit the most, simply because it currently has the most customers.
As of the end of 2018, China Mobile had 925 million mobile customers, while China Unicom had 315 million, and China Telecom was not far behind at 303 million mobile customers. China Mobile has increased its normal dividend since 2015, raising the payment from HK$2.72 per share in 2015 to HK$3.22 in 2018. It currently boasts a dividend yield of around 4.5%.
Given how 5G is expected to increase revenue due to increasing data usage, the telco will likely be able to continue to increase its dividend as long as it maintains its mobile customer base and management executes on its growth plans.
Finally, there's China Telecommunications Corporation (NASDAQOTH: CHJHF), also known as China Telecom. Its dividend yield of around 3% (as at the time of writing) will also be safer as it rolls out its 5G technology. Although China Telecom is the smallest of the three big telecoms, it's also the fastest-growing.
In terms of subscriber numbers, China Telecom's mobile subscribers rose from 215 million in 2016 to 250 million in 2017 and then 303 million last year – giving it a compound annual growth rate (CAGR) of 18.7% in terms of subscriber numbers over the period.
Over the past five years, China Telecom has had a history of increasing its dividend payment, raising its dividend per share (DPS) from HK$0.0958 in 2014 to HK$0.125 in 2018. Given its growing subscriber base and the likelihood of increased cash flows due to 5G adoption, China Telecom has a good chance of further hiking its dividend in the future too.
One point investors should keep in mind is that these three 5G stocks are all Chinese state-owned enterprises (SOEs), which might lead to conflicts of interest. Because they are state-owned, they might sometimes do what is in the government's best interest, and not necessarily shareholders' best interest. This could jeopardise potential upside.
Nevertheless, their exposure to 5G and their dominance in mobile makes them worthy of a closer look for investors interested in reliable dividends and future growth.
A version of article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.