(Bloomberg) -- It may be time for equity investors to reassess their 5G investments in Asia as they look to win big from one of the market’s hottest themes.
The coronavirus-driven stock sell-off presents an opportunity to shift into names that may have been overlooked in the recent run-up by technology stocks, said Kevin Chen, an analyst at China Merchants Securities Hong Kong Co.
“It’s the time to buy telecom services in China,” as the epidemic forces people to stay indoors and drives up mobile usage, Chen said. His top picks include China Tower Corp. and China Telecom Corp.
China Telecom and China Mobile Ltd. fell more than 10% each in 2019 amid huge expenses for building their 5G networks and government mandates to keep a lid on the rates they charge. Meanwhile, Taiwan Semiconductor Manufacturing Co. climbed 47% and Japanese chip equipment maker Advantest Corp. jumped 175% on hopes for a U.S.-China trade deal as well as for recoveries in the global chip and smartphone cycles.
For months, 5G stocks were touted as one of the biggest themes in Asian equities by money managers including UBS Global Wealth Management.Market jitters over the rising death toll from the so-called 2019-nCoV virus and the consequent shutdown of businesses across China have shone a spotlight on some highly valued stocks. Chen advises caution on smartphone vendors and their suppliers over the next few months.
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“The lesson here is that investors may look to more defensive names,” Chen said. “The 5G smartphone expectation was high from end-2019, and could be at risk” from supply-chain disruptions and a negative impact on demand due to the virus.
Tech hardware companies have been affected by shutdowns and employee quarantines in Chinese provinces as the country attempts to quell the spread of the deadly virus.
Companies that have had work at China-based factories interrupted include iPhone assembler Hon Hai Precision Industry Co., ZTE Corp., Fujitsu Ltd. and NEC Corp. Hardware firms -- which employ thousands to manufacture products -- are more labor-intensive than telecom carriers and will face a tougher time getting workers to come back, Chen said.
Don Yew, an analyst at Morningstar Investment Services LLC, said the outbreak’s spread to major production hubs such as Guangdong, Zhejiang and Jiangsu could have a more “material impact” on smartphone industry suppliers.
Companies including Pegatron Corp., Catcher Technology Co., Sunny Optical Technology Group Co. and AAC Technologies Holdings Inc. have plants in these provinces, according to Morningstar. Shares of all four companies are lower since trading resumed after the Lunar New Year holidays.
While China Merchants sees these tech hardware supply hiccups as a reason to buy China telecoms, not everyone is convinced. One big concern is that the carriers will have to spend billions to roll-out their 5G networks and services. Joanna Kwok, a portfolio manager at JPMorgan Asset Management who has invested in chip and smartphone makers as well as factory automation and cloud migration plays, said telcos are “too upstream”.
Such concerns are already reflected in the stock prices of the telecom providers, and they should start to see revenue contributions from the latest generation of communications technology this year, according to Chen.
“The 5G telco stories remain intact,” he said. “There are just a lot of concerns for hardware sectors this year.”
--With assistance from Ian Sayson, Edwin Chan and Dave McCombs.
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