(Bloomberg) -- Stock speculators are catching on to China’s 5G firms.
The latest trigger was China Mobile Ltd.’s huge order for fiber-optic cable, lifting shares of likely bidders in Hong Kong and onshore. The optimism spread wide across the telecom sector, boosting ZTE Corp. and Xiaomi Corp. which don’t even make cables. That followed news earlier in the week that China plans to expand the usage of e-payments in rural areas -- a policy that will require greater Internet coverage and more smartphones.
The thesis is that firms tied to next-generation wireless technology are about to get a windfall as China Mobile and other carriers spend big to upgrade their infrastructure. Low valuations, short-covering, improving sentiment and expectations of supportive policies have combined to accelerate the buying. Analysts now warn that growing enthusiasm for anything with a link to 5G risks spiraling out of control.
“The trade is looking a bit overheated now,” said Edison Lee, head of telecom research at Jefferies Hong Kong Ltd. “Investors may be pricing in too much optimism as operators will only develop 5G networks on a large scale when the whole supply chain and applications can keep up.”
Some stocks are only recovering from an awful 2018, when a smartphone slowdown and multiple disputes with the U.S. rattled China’s communications and equipment sector. But many firms are rallying far beyond that this year. Comba Telecom Systems Holdings Ltd.’s 79 percent surge has taken its price to the highest since 2014, while China Tower Corp. is up 42 percent since its listing. China Communications Services Corp. has climbed 28 percent this year.
Fiber-optic suppliers Yangtze Optical Fibre and Cable Joint Stock Ltd. and O-Net Technologies Group Ltd. have jumped about 12 percent this week alone. Widespread commercial rollout of 5G is only expected in 2020.
Jefferies’ Lee raised his price target on ZTE after a rally partly driven by “A share investors’ excitement about 5G,” predicting the stock will gain another 14 percent from Thursday’s close.
It’s not just 5G: concern is emerging that new measures to support the economy and allow investors to take on more risk have encouraged speculative behavior. Momentum is building in some of the riskiest parts of China’s equity market, with small caps surging almost 11 percent over five trading days, the most since 2016.
“Liquidity has been a lot looser and speculators need an excuse to put their money somewhere,” said Zhang Yankun, a partner at Beijing Hone Investment Management Co. While he owns shares of China Mobile, he’s staying clear of other 5G-linked companies.
Speculation that China’s government will prioritize investment in its network infrastructure has added more fuel to the 5G rally. Annual gatherings of the nation’s top legislators and advisers -- the National People’s Congress and the Chinese People’s Political Consultative Conference -- are scheduled for early March. The government may issue temporary licenses in some cities as early as this year.
The danger is that this trade gets crowded before anything actually happens.
“The market is trading on speculation a stream of policies will come out of the two sessions, and 5G is the first theme that comes to mind right now,” said Yang Yong, founder of Shenzhen Qianhai Yunxi Fund Management Co. “It’s the most obvious trade."
(Updates with Thursday’s closing prices throughout.)
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