Financial Knowledge Popularization Month丨Communication Industry, Open a New Era of Internet of Everything (Part 2)

Editor's note:

To understand a listed company, you must be familiar with the industry environment in which the company operates. In order to help investors master the basic skills of financial analysis in different industries and improve their investment decision-making ability, the Investment Education Center of Shenzhen Stock Exchange, together with KPMG, Haitong Securities, Changjiang Securities, and Industrial Securities, jointly launched a series of investment education articles on “Industry from a Financial Perspective”. This article is the second article, which will take you to know the financial characteristics and main financial indicators of the communications industry. Let's take a look.

Communication industry, opening a new era of Internet of Everything (Part 2)

In the last article, we introduced the development history, overall situation and industry characteristics of the communication industry. In this article, we will talk about the basic characteristics and main financial indicators of the financial performance of the communication industry.

The communication industry has high barriers to entry, rapid iterative development, obvious cyclicality, and prominent industry characteristics. The financial performance of the communication industry can focus on upstream capital expenditure, growth indicators, core technical capabilities, and goodwill impairment.

1. Analyze the development stage of the industry from the perspective of upstream capital expenditure and changes

The communication industry is relatively cyclical. Generally speaking, the capital expenditure of upstream operators determines the current development stage of the communication industry.

In the 3G cycle, the total capital expenditure of the three major domestic operators showed an upward trend in the first three years, and then declined steadily after reaching the peak in the third year. From 2007 to 2011, according to the promotion materials and annual reports of the three major operators, capital expenditures were 197.4 billion yuan, 255.2 billion yuan, 279.9 billion yuan, 237.5 billion yuan, and 254.7 billion yuan respectively. In the 4G cycle, capital expenditures show the same pattern. From 2013 to 2018, capital expenditures were 338.4 billion yuan, 376.9 billion yuan, 438.6 billion yuan, 356.2 billion yuan, 308.3 billion yuan, and 286.9 billion yuan respectively. In the 5G cycle, 2019 will be the first year of 5G. From 2019 to 2020, the capital expenditure will be 299.9 billion yuan and 333 billion yuan respectively. The capital expenditure of the three major operators is increasing year by year. It is estimated that the capital expenditure in 2021 will be 340.6 billion yuan, or will reach 5G investment peak. Therefore, investors can judge the development of the industry based on the capital expenditures and changing trends of upstream operators.

2. Understand the transmission effect of upstream capital expenditure on the industry from the growth rate of revenue and net profit attributable to the parent

Among the growth indicators, we can focus on the growth rate of revenue and the growth rate of net profit attributable to the parent. These two indicators can reflect the transmission effect of upstream capital expenditure on the industry, and can also analyze the company's performance growth.

In the 4G cycle, the total capital expenditure of upstream operators has increased year by year since 2013, and declined in 2016. Taking a company's annual report data as an example to analyze the industry transmission effect, the operator's business revenue growth rate was 16% in 2014, 21% in 2015, 24% in 2016, and 3% in 2017. Annual growth fell to -1%. In the 5G cycle, the capital expenditure of upstream operators began to rise in 2019. The company's operator business revenue growth rate increased to 4% in 2019 and 0.2% in 2020 (decreased due to the impact of the epidemic). The company's growth and capital Spending growth has been matched.

3. From the R&D investment, understand the company's core technical capabilities

Profitability indicators mainly include gross profit margin, net profit margin, research and development expenses, etc. A company's moat, business model, competitiveness, etc. are mainly reflected in these indicators, and these indicators also reflect the company's core technical capabilities.

The communication industry has high barriers to entry, rapid iterative development, and obvious periodicity. Only by continuously investing in R&D can enterprises maintain the competitiveness of the industry. Taking the annual report data of a company as an example, its R&D expenses have increased year by year since 2009. In 2014, it invested 40.8 billion yuan, in 2018, it invested 101.5 billion yuan, and in 2020, it invested 141.9 billion yuan, exceeding the total R&D investment of BATJ in 2020. Continued R&D investment has brought the company a number of 5G core patents and a high market share. According to the latest 5G patent list released by IPlytics, a patent data company cited by 199it in February 2020, the company has 3,147 SEPs (standard essential patents), ranking first on the list. From the perspective of the global market share of telecom equipment manufacturers, according to Dell'Oro data cited by Tencent and the Prospective Industry Research Institute, the company's market share has increased year by year from 20% in 2014 to 31% in 2020 with continuous R&D investment.

4. Pay attention to goodwill and enhance risk awareness

The communication industry is a cyclical industry, and the company's business often enters a downward period after a mature period. In order to smooth development fluctuations, some companies will acquire companies outside the communication industry, and thus generate goodwill.

In 2020 , the overall goodwill of the communications industry is 21.561 billion yuan, accounting for 1.72% of total assets and 3.36% of net assets. If the acquired company accrues impairment of goodwill, it will directly affect the company's financial profits. Investors should establish the concept of rational investment and value investment, and improve their awareness of risk prevention and professional analysis capabilities.

4G changes life, 5G changes society. As the key infrastructure for the digital transformation of the economy and society, the 5G era has once again made the communications industry the focus of market attention and public opinion. One year after the commercial use of 5G, China's 5G industry has developed rapidly, the network construction is progressing steadily, and the industrial ecology is constantly maturing. It is expected that 5G will give full play to the new engine power, promote the realization of the interconnection of all things between people and things, and things and things, and open a new era in which technology creates a better life.

(This article is contributed by Zhu Jinsong and Zhang Zhengqing of Haitong Securities Research Institute)

(Disclaimer: This article is published for investor education purposes only and does not constitute investment advice. Investors operate on this basis at their own risk. Shenzhen Stock Exchange strives to ensure that the information contained in this article is accurate and reliable, but does not guarantee its accuracy or completeness. does not make any guarantees on the timeliness and timeliness, and is not responsible for the loss caused by the use of this article.)