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20 June 2017 Asia Pacific/Hong Kong
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CONNECTIONS SERIES
Is biggest always best?
Figure 1: Returns versus valuation—FY20 snapshot EV/IC vs ROIC
Source: Company data, Credit Suisse estimates
■ Assessing monetisation and market share differentials. A raft of new
entrants in Asia, which prompted our sector downgrade to UNDERWEIGHT
in August 2016, raises the question of which incumbents and #2 players
have sustainable scale advantages, and which new entrants (if any) have
prospects of generating reasonable returns. We then assess if scale
advantages are overvalued or undervalued by the stock market.
■ Which operators can generate positive returns? Our analysis leads us
to group Asian telecom stocks into four categories: (1) 'undervalued
incumbents', including AIS/Intouch, SingTel, Globe and PT Telkom; (2)
'second players with reasonable prospects of acceptable return,' including
China Telecom, Indosat and SmarTone; (3) 'overvalued challengers,'
including Unicom A share, True Corp and PLDT; and (4) 'overvalued
incumbents in problem markets,' including Bharti.
■ Stock calls. Our top regional picks include three 'second players' in benign
markets, namely Indosat, China Telecom, as well as SmarTone, and Intouch
(as a proxy for AIS) as an 'undervalued incumbent'. Our top
UNDERPERFORM calls include three 'overvalued challengers', in True Corp,
M1 and PLDT, as well as Bharti and Maxis as 'overvalued incumbents'; we
believe that investors in India are underestimating the competitive impact of
Rjio across the coming years, and overestimating the potential positive
impact of consolidation among the smaller players. We downgrade both
DTAC and XL to a NEUTRAL. These 'borderline' challengers look unlikely to
generate adequate returns, and look expensive after sharp YTD rallies.
20 June 2017
Asia Telecoms Sector 2
Focus tables
Figure 2: Scoring Asian cellular markets on competition, regulation and therefore likely monetisation
Indonesia 5 No None 14.7% Tiered 3.0 3.5 3.6
China 3 No Some 56.8% Tiered 3.0 2.0 2.6
Thailand 3 No Some 31.3% Tiered 2.5 2.5 2.6
Philippines 2 No Some 9.0% Tiered 1.5 2.5 2.6
Taiwan 5 Yes Extensive 73.3% Unlimited 3.0 2.0 2.4
Hong Kong 4 No Extensive 93.4% Tiered 2.5 2.5 2.2
Korea 3 No Extensive 90.8% Tiered 1.5 3.5 2.2
Malaysia 5 Yes Some 24.2% Tiered 1.5 2.5 2.2
Australia 3 Yes Extensive 80.2% Tiered 2.5 2.5 2.2
India 6-8 Yes None (yet!) 7.0% Tiered 1.0 1.0 1.8
Singapore 3 Yes Extensive 88.0% Tiered 1.5 1.5 1.4
*5 being most attractive, calculated as ((competition score + regulatory score + growth/2)/2.5). Source: Company data, Credit Suisse estimates
Figure 3: Assessment of strength and sustainability of incumbent scale advantages
Cellular market Incumbent Spectrum
advantage
BTS
advantage
Capex
advantage
Regulatory
advantage
Incumbent
advantage score*
Indonesia Telkomsel 1.0 3.0 3.0 3.0 2.5
China China Mobile 1.0 3.0 2.5 1.0 1.9
Australia Telstra 2.0 2.0 2.0 1.0 1.8
India Bharti 1.5 2.0 1.5 1.0 1.5
Hong Kong HKT Trust 2.0 1.0 1.5 1.0 1.4
Thailand AIS 1.0 1.0 2.0 1.0 1.3
Malaysia Maxis 1.0 1.5 1.5 1.0 1.3
Korea SKT 1.0 1.0 1.0 1.0 1.0
Philippines Globe 1.0 1.0 1.5 1.0 1.1
Singapore SingTel 1.0 1.0 1.0 1.0 1.0
Taiwan CHT 1.0 1.0 1.0 1.0 1.0
* Scoring system: 1.0 for negligible advantage, 2.0 for a small advantage, 3.0 for a material advantage; Source: Company data, Credit Suisse estimates
Figure 4: Top OUTPERFORM and UNDERPERFORM calls
Close Target Potential P/E (x) EV/EBITDA (x) FCF yield (%) Div. yield (%)
price price upside 17E 18E 17E 18E 17E 18E 17E 18E
Top OUTPERFORM calls
Indosat 6,200.0 8,800.0 41.9% 14.9 12.5 3.8 3.4 13.3% 12.5% 3.3% 4.8%
China Telecom 3.8 5.3 40.6% 12.6 10.7 3.5 3.2 1.0% 7.1% 3.3% 4.2%
Intouch 55.8 75.3 35.1% 14.5 13.7 14.4 13.6 6.9% 7.3% 5.5% 5.1%
SmarTone 10.2 13.5 31.8% 15.0 15.4 5.0 5.0 10.0% 8.3% 6.2% 6.1%
Top UNDERPERFORM calls
True Corp 6.2 2.7 -56.3% 1,315.2 273.4 9.9 10.4 -0.6% 4.5% 0.0% 0.0%
M1 2.2 1.5 -33.5% 15.5 20.5 8.1 9.0 5.5% 5.3% 5.2% 3.9%
PLDT 1,900.0 1,500.0 -21.1% 19.9 20.3 8.7 8.5 1.5% 2.6% 3.0% 3.0%
Bharti 364.9 300.0 -17.8% 44.4 35.3 7.3 6.6 4.2% 4.3% 0.2% 0.3%
NJA- Integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
NJA - Mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
Note: Pricing as of 16th June 2017 throughout this report.
Source: Company data, Credit Suisse estimates
20 June 2017
Asia Telecoms Sector 3
Is biggest always best? A raft of new entrants in Asia, which prompted our sector downgrade to UNDERWEIGHT
in August 2016, raises the question of which incumbents and #2 players have sustainable
scale advantages, and which new entrants (if any) have prospects of generating
reasonable returns. We then assess if scale is overvalued or undervalued by the market.
Which markets are monetising data growth?
We have developed a framework to help assess likely degrees of success in monetising
data across cellular markets, by analysing: (1) competitive dynamics; and (2) regulatory
interference. Indonesia, China, and Thailand rank well and are expected to deliver
revenue growth, given stable-to-consolidating market structures. Malaysia, India, Australia,
and Singapore face new entrant threats, which we expect to materially affect data
monetisation. We reflect this in our market revenue growth forecasts across FY16-20.
Market share differentials and drivers
In order to attract subscribers and partake in industry revenue growth, cellular players
must be able to demonstrate broad, seamless coverage to customers. Given that this
overall coverage capex requirement (and associated operating costs) is common to all
cellular operators, we show that relative scale and revenue market share are the primary
determinants of returns on invested capital and profitability within cellular markets.
Assessing spectrum, network resources, balance sheet capacity and regulations leads us
to highlight that Telkomsel, China Mobile and Telstra enjoy meaningful and broadly
sustainable scale advantages.
Which operators can generate positive returns?
As at 2016, of the 31 stocks under our coverage with cellular exposure, only 19 generated
a ROIC of greater that 8% (while 17 generated a double-digit ROIC). Not surprisingly,
given the aforementioned benefits of scale, the majority of 'incumbent' operators fall into
this category. Only Bharti, in hypercompetitive India, and SKT, which has extensive non-
telecoms investments, generate returns below this threshold. By FY20, just two additional
stocks are expected to pass this threshold (China Telecom and Indosat).
Stock picks: What's in the price?
When we overlay valuation we can group Asian telecoms stocks into four categories: (1)
'undervalued incumbents’, including AIS/Intouch, SingTel, Globe and PT Telkom; (2)
'second players with reasonable prospects of acceptable return’, including China Telecom,
Indosat and SmarTone; (3) 'overvalued challengers’, including Unicom A share, True Corp
and PLDT; and (4) 'overvalued incumbents in problem markets,' including Bharti and
Maxis. Our top regional picks include three 'second players' in benign markets, namely
Indosat, China Telecom and SmarTone, as well as Intouch (as a proxy for AIS) as an
'undervalued incumbent'. Our top UNDERPERFORM calls include three 'overvalued
challengers,' in True Corp, M1 and PLDT, as well as Bharti as an 'overvalued incumbent';
we believe that investors in India are underestimating the competitive impact of Rjio
across the coming years, and overestimating the potential positive impact of consolidation
among the smaller players. Our analysis also prompts us to downgrade the ratings of two
'borderline' challengers, DTAC and XL, to NEUTRAL. Improving competitive dynamics in
Thailand and Indonesia have resulted in sharp YTD share price outperformance by DTAC
and XL, yet neither operator is actually expected to generate attractive returns by FY20.
New entrants are causing problems for
sector profitability
We assess data monetisation by
market…
…and the sustainability of scale advantages
19 out of 31 cellular stocks generate
ROIC >8.0%
We like Indosat, China Telecom, SmarTone,
and Intouch
20 June 2017
Asia Telecoms Sector 4
Sector valuation
Figure 5: Non-Japan Asia telco sector comps
Close Target Mkt cap Normalised P/E (x) EV/EBITDA (x) FCF yield (%) Div yield (%)
Ticker Ccy price Rating price (US$ bn) 17E 18E 17E 18E 17E 18E 17E 18E
Integrated operators
China Telecom 728 HK HK$ 3.77 O 5.30 39.1 12.6 10.7 3.5 3.2 1.0% 7.1% 3.3% 4.2%
China Unicom 762 HK HK$ 11.3 O 14.10 34.7 74.7 26.3 5.1 4.5 15.1% 13.4% 0.3% 1.9%
Chunghwa 2412 TT NT$ 107.5 N 105.00 27.5 21.2 21.2 10.0 9.9 5.1% 5.7% 4.7% 4.7%
HTHK 215 HK HK$ 2.68 N 2.60 1.7 19.7 18.5 7.2 6.9 7.7% 8.0% 3.8% 4.1%
KT 030200 KS W 31600 O 38,000.00 7.3 8.7 7.4 2.6 2.3 12.6% 13.9% 3.5% 4.1%
PCCW 8 HK HK$ 4.35 N 5.20 4.3 19.1 18.4 9.4 8.9 4.5% 6.1% 6.8% 7.0%
HKT Trust 6823 HK HK$ 10.2 O 11.85 9.9 15.3 14.7 11.1 10.9 7.0% 6.9% 6.3% 6.5%
PLDT TEL PM P 1900 U 1,500.00 8.2 19.9 20.3 8.7 8.5 1.5% 2.6% 3.0% 3.0%
SingTel ST SP S$ 3.8 O 4.50 44.9 15.8 15.2 7.1 6.8 2.3% 2.4% 4.7% 4.9%
SPK SPK NZ NZ$ 3.815 U 2.99 5.1 17.7 17.2 8.0 7.9 6.0% 6.2% 6.6% 6.6%
CNU CNU NZ NZ$ 4.72 N 4.24 1.4 14.4 16.6 5.5 5.7 -9.7% -7.7% 4.4% 4.7%
TM T MK RM 6.65 O 7.20 5.8 28.7 26.7 7.7 7.1 0.1% 1.4% 3.1% 3.4%
Telstra TLS AU A$ 4.38 U 4.00 40.7 13.3 12.6 6.3 6.1 6.8% 6.8% 7.1% 5.7%
Jasmine JAS TB Bt 8.45 U 7.25 1.6 23.0 22.6 6.8 5.9 3.7% 6.4% 2.6% 2.6%
True Corp TRUE TB Bt 6.15 U 2.69 7.2 1315.2 273.4 9.9 10.4 -0.6% 4.5% 0.0% 0.0%
HKBN 1310 HK HK$ 8.31 O 10.55 1.1 30.3 23.7 11.4 10.0 6.8% 7.7% 5.3% 5.7%
NJA - integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
Close Target Mkt cap Normalised PE EV/EBITDA FCF yield Div yield
Ticker Ccy price Rating price (US$ bn) 17E 18E 17E 18E 17E 18E 17E 18E
Mobile operators
AIS ADVANC TB Bt 173.5 O 218.00 15.2 16.6 15.6 8.6 8.2 2.9% 4.9% 4.2% 4.5%
AXIATA AXIATA MK RM 4.99 N 4.80 10.5 29.0 25.9 6.4 6.0 4.7% 6.0% 1.7% 1.9%
Bharti BHARTI IN Rs 364.85 U 300.00 22.6 44.4 35.3 7.3 6.6 4.2% 4.3% 0.2% 0.3%
China Mobile 941 HK HK$ 84.15 O 110.00 221.0 12.8 12.1 3.7 3.3 5.3% 7.2% 3.6% 4.1%
DiGi DIGI MK RM 4.95 N 5.00 9.0 23.0 23.1 13.8 14.1 3.9% 4.0% 4.3% 4.3%
XL EXCL IJ Rp 3160 N 3,600 2.5 60.5 36.1 5.4 4.9 2.7% 6.4% 0.5% 2.2%
FarEasTone 4904 TT NT$ 76.6 O 87.00 8.2 21.9 21.8 9.6 9.4 6.3% 6.4% 5.0% 5.1%
Globe GLO PM P 2,156 O 2,350 5.7 21.3 19.6 7.7 7.6 0.9% 1.8% 4.2% 4.3%
IDEA IDEA IN INR 77.75 U 74.00 4.3 n.m. n.m. 12.0 13.1 2.2% 3.3% 0.0% 0.0%
Indosat ISAT IJ Rp 6200 O 8,800 2.5 14.9 12.5 3.8 3.4 13.3% 12.5% 3.3% 4.8%
LG Uplus 032640 KS W 16,600 O 20,000 6.4 12.9 11.1 4.0 3.7 11.4% 12.0% 2.4% 2.8%
M1 M1 SP S$ 2.18 U 1.45 1.5 15.5 20.5 8.1 9.0 5.5% 5.3% 5.2% 3.9%
PT Telkom TLKM IJ Rp 4370 O 5,100.00 32.4 17.8 16.2 9.3 8.4 3.9% 5.4% 3.9% 4.3%
Reliance RCOM IN INR 19.05 U 30.00 0.7 7.7 5.4 6.2 5.4 45.6% 52.3% 0.7% 0.9%
SKT 017670 KS W 242,000 N 280,000 17.2 7.7 6.9 5.3 5.0 4.0% 3.8% 4.1% 4.1%
SmarTone 315 HK HK$ 10.24 O 13.50 1.4 15.0 15.4 5.0 5.0 10.0% 8.3% 6.2% 6.1%
StarHub STH SP S$ 2.72 U 2.20 3.4 16.9 20.4 8.7 9.5 5.8% 5.3% 5.9% 5.9%
TAC DTAC TB Bt 51.25 N 54.00 3.6 82.2 23.6 5.1 6.0 5.4% 1.2% 0.6% 2.1%
Taiwan Mobile 3045 TT NT$ 113 O 128.00 12.8 20.3 20.0 10.8 10.6 6.1% 6.3% 5.0% 5.0%
NJA - mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
NJA - telecoms 20.0 15.8 6.0 5.7 5.2% 6.7% 3.8% 4.1%
Note: Priced as of 16 June 2016. O = Outperform, N = Neutral, U = Underperform. Source: Bloomberg, company data, Credit Suisse estimates
20 June 2017
Asia Telecoms Sector 5
Table of contents
Is biggest always best? 3
Which markets are monetising data growth? ........................................................... 3
Market share differentials and drivers ...................................................................... 3
Which operators can generate positive returns? ...................................................... 3
Stock picks: What's in the price? .............................................................................. 3
Sector valuation 4
Which markets are monetising data growth? 8
Structural drivers explain trends and prospects ....................................................... 9
Market share differentials and drivers 11
Which operators can generate positive returns? 12
Stock picks: What's in the price? 14
Top regional picks ranked by upside to DCF ......................................................... 16
Top regional underperform calls ranked by downside ........................................... 16
China 17
Summary ................................................................................................................ 17
Growth rates recovering as policy effects roll off ................................................... 17
Mid-single-digit growth looks achievable ................................................................ 18
Growth differential to narrow with Unicom 4G roll-out............................................ 20
Does Unicom have a viable business? .................................................................. 23
What is in the price? ............................................................................................... 25
Indonesia 27
Summary ................................................................................................................ 27
High cellular revenue growth, but lopsided ............................................................ 27
Still plenty of room for revenue to grow .................................................................. 28
We expect a more even share of revenue growth ................................................. 29
Do smaller players have a viable business? .......................................................... 32
What's in the price? ................................................................................................ 34
Korea 36
Summary ................................................................................................................ 36
4G-driven cellular revenue growth ......................................................................... 36
Limited upside for cellular revenue......................................................................... 37
We expect LGU to continue to gain market share ................................................. 38
Superior ROIC for LGU .......................................................................................... 42
What's in the price? ................................................................................................ 42
20 June 2017
Asia Telecoms Sector 6
India 44
Summary ................................................................................................................ 44
Three dominant players gaining share—before Jio's entry .................................... 44
Market structure changing rapidly since Jio’s entry ............................................... 45
Good growth potential, but ability to monetise is key ............................................. 46
Rapid consolidation of market shares into three operator groups ......................... 49
ROIC has stayed below cost for many years—likely to stay so ............................. 51
See downside to Bharti/Idea .................................................................................. 52
Country sections: Malaysia 54
Summary ................................................................................................................ 54
Data demand up but data pricing down ................................................................. 54
Revenue outlook remains challenging ................................................................... 55
Big 3 to cede more market share to others ............................................................ 56
Do smaller players have a viable business? .......................................................... 59
What's in the price? ................................................................................................ 60
Country sections: Philippines 62
Summary ................................................................................................................ 62
Cellular revenue growth impacted by higher legacy contribution ........................... 62
Revenue growth to remain under pressure ............................................................ 64
Globe's outperformance to continue ...................................................................... 65
Do smaller players have a viable business? .......................................................... 67
What's in the price? ................................................................................................ 68
Country sections: Hong Kong 69
Summary ................................................................................................................ 69
Fundamentals improved post consolidation but competition in the low end is
increasing ............................................................................................................... 69
Competitive low end segment to hamper growth ................................................... 70
HTHKH to lose cellular market share ..................................................................... 71
Do smaller players have a viable business? .......................................................... 74
What's in the price? ................................................................................................ 74
Country sections: Singapore 76
Summary ................................................................................................................ 76
Cellular revenue impacted by ineffective data monetisation .................................. 76
Service revenue outlook continues to be hazy ....................................................... 78
TPG to capture ~2% market share by FY20 .......................................................... 80
ROIC analysis......................................................................................................... 82
What is in the price? ............................................................................................... 83
20 June 2017
Asia Telecoms Sector 7
Country sections: Taiwan 86
Summary ................................................................................................................ 86
Recent sector growth hampered by increase in competition… .............................. 86
…however, we expect pricing to improve in coming months with focus on
profitability .............................................................................................................. 88
Market share to remain largely stable .................................................................... 88
Do smaller players have a viable business? .......................................................... 91
What's in the price? ................................................................................................ 91
Country sections: Thailand 93
Summary ................................................................................................................ 93
True Corp gained market share across FY13-FY16 .............................................. 93
Scope for mid-single-digit market growth ............................................................... 94
AIS and DTAC still to lose share, but more slowly ................................................. 95
Do DTAC and True Corp have viable businesses? ............................................... 98
What's in the price? .............................................................................................. 100
Country sections: Australia 103
Summary .............................................................................................................. 103
20 June 2017
Asia Telecoms Sector 8
Which markets are monetising data growth? The starting point for the analysis of the potential for future revenue growth in cellular
markets in Asia ex-Japan remains smartphone and 4G penetration levels. The snapshot of
penetration by the market as at December 2016, set out below, suggests that there is still
room for growth in the 'emerging' Asian markets of Thailand, Malaysia, China, Indonesia,
the Philippines and India, where 4G penetration ranges from just 7.0% (India) to 56.8%
(China).
Figure 6: Smartphone and 4G penetration Figure 7: 4G penetration vs GDP per capita
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
With data use per 4G subscriber now reaching circa 4.0GB/month in markets such as
Thailand and Indonesia, versus circa 1.0GB/month on 3G smartphones, rising 4G
penetration is driving rapid growth in data volumes; Indonesia witnessed 154.1% growth in
data traffic YoY in 1Q17.
The key question for investors, in our view, is which markets (and which telecom stocks)
are best set to convert this volume growth into revenue, EBITDA, and cash flow. We have
developed a framework to help assess likely monetisation, by analysing (1) competitive
dynamics and (2) regulatory interference.
Competitive intensity is partly driven by the number of players in each market, with a larger
number of players contributing to heightened competition, the potential for unlimited data
plans and handset subsidies, and therefore inferior monetisation prospects. However, in
our experience, an even more important driver of competitive dynamics is a change in the
number of players. In particular, the introduction of a well-capitalised new entrant is, in our
view, the single most damaging structural change that can happen in a cellular market,
given that it triggers: (1) higher spectrum costs, (2) higher capex (as a new entrant is
forced to build nationwide coverage), (3) tariff competition and (4) increased marketing
expenditure. The tariff competition (for example, the introduction of unlimited data plans)
and increased marketing expenditure are the natural result of the new entrant attempting
to fill its empty network and attract revenue over its fixed cost base.
A key pre-requisite to launching services is a licence, and so risks of new entry tend to
spike when the regulator is issuing or auctioning spectrum. Several markets in Asia have
recently undergone such an event, including Malaysia, India, Australia, and Singapore. We
therefore assign a low competition score to these markets—particularly India, where (as
we shall see) the quantum of spectrum purchased by the new entrant, Rjio, together with
the amount of capacity constructed, constitutes a major supply shock to the industry.
The most attractive markets on competition are Indonesia, where we shall show that the
market is consolidating down towards a three-player market, and China, which is already a
stable three-player market. In Taiwan, the new entrants have entered into cooperation
100% 98% 98% 98%
89%86%
69% 68%
60%55%
28%
88%
80%
91% 93%
73%
31%
24%
57%
15%9% 7%
Singapore Australia Korea Hong Kong Taiwan Thailand Malaysia China Indonesia Philippines India
Smartphone penetration 4G penetration
SingaporeHong Kong
Malaysia
Indonesia
Korea
China
Thailand
PhilippinesIndia
Taiwan
Australia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
4G p
enet
ratio
nGDP per capita (US$)
Still room for growth in 'emerging' Asian
cellular
We analyse competitive intensity market-by-
market…
20 June 2017
Asia Telecoms Sector 9
deals with the incumbents and have constructed only limited infrastructure. Thus, while
new entrants exist, the competitive impact has been minimal.
Figure 8: Scoring Asian cellular markets on competition, regulation, and therefore likely monetisation
Country Number of
players
New
entrants?
Handset
subsidies
FY16 4G
penetration
Data pricing Competition
score
Regulatory
score
Monetisation
score*
Indonesia 5 No None 14.7% Tiered 3.0 3.5 3.6
China 3 No Some 56.8% Tiered 3.0 2.0 2.6
Thailand 3 No Some 31.3% Tiered 2.5 2.5 2.6
Philippines 2 No Some 9.0% Tiered 1.5 2.5 2.6
Taiwan 5 Yes Extensive 73.3% Unlimited 3.0 2.0 2.4
Hong Kong 4 No Extensive 93.4% Tiered 2.5 2.5 2.2
Korea 3 No Extensive 90.8% Tiered 1.5 3.5 2.2
Malaysia 5 Yes Some 24.2% Tiered 1.5 2.5 2.2
Australia 3 Yes Extensive 80.2% Tiered 2.5 2.5 2.2
India 6-8 Yes None (yet!) 7.0% Tiered 1.0 1.0 1.8
Singapore 3 Yes Extensive 88.0% Tiered 1.5 1.5 1.4
* 5 being most attractive, calculated as ((competition score + regulatory score + growth/2)/2.5). Source: Company data, Credit Suisse estimates
It is also necessary to overlay regulatory pressure. As mentioned, probably the greatest
negative influence a regulator can have on a cellular market is the facilitation of a new
entrant, for example through setting aside attractively priced spectrum resources
specifically for new players. This was recently done in Singapore and we score Singapore
1.5 out of 5.0 on this measure. The Indian regulator has also facilitated large numbers of
players in the market (including Rjio), and has kept incumbents spectrum-constrained in
order to maximise spectrum auction receipts. We score the Indian cellular market 1.0 out
of 5.0 on regulator factors.
Among the more aggressive regulatory backdrops regarding tariffs we would highlight
Taiwan, where price increases are not deemed politically acceptable, and formulaic tariff
reductions are in place. We score Taiwan 2.0 out of 5.0 on regulatory factors as a result.
Regulatory attention is also the key actual and perceived risk to monetisation in China.
The government has directly set market structure and technology choices, and in addition
a 'triple dip' in revenue generation was triggered by imposition of VAT (June 2014), data
rollover (October 2015), and abolition of long distance tariffs (July 2016). There have also
been 'higher speed lower price' policies in place since May 2015. We therefore score
China 2.0 out of 5.0 on regulatory attractiveness.
In contrast, Indonesia scores well on regulatory factors, at 3.5 out of 5.0. Since the
aggressive 2007-8 price war, the regulator has been more concerned about network
quality than tariffs. Thus, industry consolidation has been encouraged, interconnect rate
cuts have been minimal, and there has been no downward pressure on tariffs; indeed,
price increases by the 'big 3' operators have been tolerated.
Structural drivers explain trends and prospects
These structural drivers, and in particular the presence or otherwise of new entrants,
largely explain the recent trends in monetisation and revenue growth across Asia. In 1Q17
cellular revenue was under pressure in all of the 'problem markets', namely: India, where
intense competition from new entrant Rjio resulted in a 12.6% YoY decline in revenue;
Singapore, where price competition is pre-empting an imminent new entrant threat;
Malaysia, where there are two new entrants; and the Philippines, which is suffering from
intense competition and cannibalisation of still-high legacy voice SMS revenues by OTT
(Over the Top) services.
…and we factor in regulatory pressure
Indonesia scores well, while Singapore and
India score poorly
20 June 2017
Asia Telecoms Sector 10
Figure 9: YoY cellular revenue growth trends—Indian growth collapsed in 1Q17
Source: Company data, Credit Suisse estimates
In direct contrast, monetisation continues to be relatively good in markets with stable or
improving competitive dynamics and minimal regulatory interference. Indonesia, with the
most attractive industry and regulatory structure, was the fastest-growing market for the
eighth consecutive quarter in 1Q17, at 7.0% YoY, with market leader Telkomsel again
achieving double-digit growth YoY.
Data monetisation in China was also more evident, with YoY growth recovering to 5.8% in
1Q17, versus 4.9% in 4Q16 and just 0.4% in 3Q16 (when China Mobile had 'voluntarily'
given up domestic roaming revenues in expectation of further regulatory pressure). Growth
was also achieved in Thailand and Korea, given stable three-player market structures.
Figure 10: 1Q17 revenue trends, and FY16-20 revenue CAGRs
Cellular market 1Q17 revenue growth FY16-FY20 revenue CAGR
Indonesia 7.0% 6.9%
Thailand 6.3% 4.5%
China 5.8% 4.5%
Korea 0.5% 1.7%
Hong Kong 0.0% 0.0%
Singapore -1.6% -2.5%
Taiwan -2.3% 1.0%
Malaysia -2.8% 1.5%
Philippines -7.0% -0.2%
India -12.6% 4.0%
Australia -13.8% -1.4%
Source: Company data, Credit Suisse estimates
Looking forward on a longer time horizon (four-year CAGRs across FY16-20), we expect
these structural drivers to remain intact. We project the highest growth to be achieved in
Indonesia (6.9%) followed by Thailand and China (both at 4.5%). While India is expected
to remain under pressure in the near term due to Rjio, the very low penetration rates, and
recently announced round of industry consolidation, lead us to project 4.0% compound
growth though FY20. However, with new entrant TPG having not yet actually launched
services in Singapore or Australia, we are forecasting revenue declines in both markets
across the FY16-FY20 period.
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Malaysia India Singapore Philippines Taiwan
China Indonesia Thailand Korea
The Indonesian cellular market grew fastest in
1Q17
The Thai and Chinese cellular markets are
also expected to grow
20 June 2017
Asia Telecoms Sector 11
Market share differentials and drivers In order to attract subscribers and partake in industry revenue, cellular players must be
able to demonstrate broad, seamless coverage to customers, using the latest technology
offered by competitors. Given that this overall coverage capex requirement, together with
associated operating costs, is common to all cellular operators, the relative scale or
revenue market share is the primary determinant of returns on invested capital and
profitability within markets.
This is clearly demonstrated in the figures below. We note that widest disparity in returns
is in large geographies such as China, Australia, Indonesia and Thailand, where the very
high 'fixed' cost of rolling out a cellular network leads to starkly differing returns on capital.
Figure 11: Market share and ROIC differentials
Cellular market Number of players Incumbent Incumbent market
share 1Q17
Incumbent FY16
ROIC
Challenger Challenger market
share 1Q17
Challenger FY16
ROIC
Australia 4 Telstra 55.6% 15.4% Vodafone 16.8% NA
China 3 China Mobile 67.2% 17.3% Unicom 16.4% 0.6%
Hong Kong 4 HKT Trust 40.6% 7.9% HTHKH 20.8% 5.5%
India 8 Bharti 29.0% 6.5% Jio 0.0% NA
Indonesia 5 Telkomsel 62.7% 43.9% XL 13.8% 0.1%
Korea 3 SKT 48.0% 5.5% LGU 23.0% 7.0%
Malaysia 5 36.6% 17.7% Digi 27.0% 86.3%
Philippines 2 Globe 52.2% 13.7% PLDT 47.8% 10.0%
Singapore 4 SingTel 53.4% 11.1% M1 18.9% 20.1%
Taiwan 5 CHT 35.5% 11.9% FET 28.5% 13.2%
Thailand 3 AIS 48.6% 26.6% True Corp 25.8% (0.3%)
Source: Company data, Credit Suisse estimates
In addition to geography, the length of time that an incumbent has had to build up its
coverage advantages and brand equity, due to either delays in licensing or limitations in
spectrum allocations to challengers, or constraints in their supply of capital, can have an
impact on market share and therefore ROIC differentials. Conversely, differentials in both
market share and ROIC are far less pronounced in smaller 'city state' markets where
upfront capex burdens are lower and benefits of scale are commensurately lower.
We have explored these issues in detail in the country-by-country sections of this report,
and we summarise the current 'relative strengths' of the incumbent operators by market
below. Again, the largest, and therefore in our view most sustainable competitive
advantages, tend to be in larger geographies.
Figure 12: Assessment of strength and sustainability of incumbent scale advantages
Cellular market Incumbent spectrum advantage BTS advantage capex advantage regulatory advantage Incumbent
advantage score*
Indonesia Telkomsel 1.0 3.0 3.0 3.0 2.5
China China Mobile 1.0 3.0 2.5 1.0 1.9
Australia Telstra 2.0 2.0 2.0 1.0 1.8
India Bharti 1.5 2.0 1.5 1.0 1.5
Hong Kong HKT Trust 2.0 1.0 1.5 1.0 1.4
Thailand AIS 1.0 1.0 2.0 1.0 1.3
Malaysia 1.0 1.5 1.5 1.0 1.3
Korea SKT 1.0 1.0 1.0 1.0 1.0
Philippines Globe 1.0 1.0 1.5 1.0 1.1
Singapore SingTel 1.0 1.0 1.0 1.0 1.0
Taiwan CHT 1.0 1.0 1.0 1.0 1.0
* Scoring system: 1.0 for negligible advantage, 2.0 for a small advantage, 3.0 for a material advantage. Source: Company data, Credit Suisse estimates
Scale drives returns within markets…
…particularly in large geographies
20 June 2017
Asia Telecoms Sector 12
Which operators can generate positive returns? Competitive intensity, data pricing (tiered or unlimited), handset subsidies, capex and
spectrum requirements, as well as scale advantages/disadvantages, therefore combine to
drive returns on capital.
As at 2016, of the 31 stocks under our coverage with cellular exposure, only 19 generated
an ROIC of greater than 8.0% (while 17 generated a double-digit ROIC). Not surprisingly,
given the aforementioned benefits of scale, the majority of 'incumbent' operators (coloured
blue in the chart below) fall into this category. Only Bharti, in hypercompetitive India and
SKT, which has extensive non-telecoms investments, are incumbents which generated
returns below this threshold.
Figure 13: FY16 ROIC analysis by operator (market share leaders are highlighted in blue)
Source: Company data, Credit Suisse estimates
We also factor in the growth prospects of each market, together with the expected
improvement or deterioration in competitive intensity over the FY17-FY20 period, by
considering the FY20 ROIC. We make the following observations:
■ Market growth, and an increase in market share by smaller players, results in our
forecast that 21 operators in Asia will have surpassed the 8.0% threshold by FY20, up
from 19 in FY16.
■ In most markets, the ROIC gaps between the market leader and challengers are
expected to close somewhat by FY20, as a result of narrower differentials in spectrum
resources and capital expenditure.
■ But ROIC differentials are set to widen in Singapore (where incumbent SingTel has
exposure to more attractive overseas markets while challengers StarHub and M1 do
not), and Malaysia, where the incumbent is expected to suffer lower degradation in
returns than smaller peers.
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
19 cellular stocks generated ROIC > 8.0%
in FY16…
…this rises to 21 stocks by FY20
20 June 2017
Asia Telecoms Sector 13
■ We do not forecast any circumstances under which the returns of the market leader fall
below the 'challengers'; thus scale advantages are being maintained at least to some
extent.
Figure 14: FY20 ROIC analysis by operator (market share leaders are highlighted in blue)
Source: Company data, Credit Suisse estimates
While the ROIC of China Telecom and Unicom are projected to be 7.2% and 6.4%,
respectively, and therefore falling short of what we consider to be the appropriate cost of
capital (9.7% and 10.1%, respectively), we note that both the operators' returns are
suppressed by cash payments made to the China Tower Company spin-off (in which
China Telecom and Unicom own 27.9% and 28.1% stakes). Adjusting for the impact of the
China Tower Company, we estimate that China Telecom's FY20 ROIC would be 10.1%,
above cost of capital, while Unicom's would reach 9.4%.
XL in Indonesia and DTAC in Thailand are expected to generate ROIC of 6.5% and 6.0%,
respectively, and show improvement versus FY17, but below cost of capital.
Challengers Rjio, True Corp and TPG also look unlikely to generate returns close to cost
of capital. SKT is also expected to generate poor returns by FY20, at 4.4%.
-10%
0%
10%
20%
30%
40%
50%
20 June 2017
Asia Telecoms Sector 14
Stock picks: What's in the price? We use our understanding of the competitive dynamics and regulatory backdrop to build
our forecasts for overall market revenue growth, the likely trajectory of operating costs
(marketing and handset subsidies) and likely capex intensity.
The relative strengths of the incumbent operators versus challengers then drive our
estimates for the likely shares of incremental revenue by operator, together with stock-by-
stock projections or capital intensity, spectrum payments and likely operating costs. We
then discount the resulting cash flows at the appropriate WACC to set our target prices;
discounted cash flow (DCF) is the only way to fully capture the multi-year nature of cellular
investment and payback (particularly given what we have explained to be heavy upfront
capex to establish nationwide coverage and launch credible cellular services).
While not all-encompassing of multiple years of cash flows, EV/IC versus ROIC is a helpful
snapshot of returns versus valuation—the figure below shows the relevant FY20 figures by
stock and therefore builds in our expectations across the next four years.
Figure 15: Returns versus valuation—FY20 snapshot of EV/IC versus ROIC
Source: Company data, Credit Suisse estimates
We see four broad groupings emerging:
Group 1: Undervalued incumbents
When we overlay valuation we find that in Thailand incumbent AIS's relatively attractive
returns on capital, and resulting cash flows, are not being fully reflected in the current
share price. An even more attractive way to gain exposure to AIS's cash flows is through
an investment in parent company Intouch, which trades at a 17.5% discount to the market
value of its listed holdings.
Singapore incumbent SingTel, with exposure to the relatively attractive markets of
Indonesia and Thailand, also looks to be relatively undervalued by investors, as does its
associate in the Philippines, and market leader, Globe.
PT Telkom in Indonesia also stands out as attractive in a regional context; its high
growth/high return cellular business, and improving fixed line business, look relatively
undervalued.
China Mobile
Unicom
China Telecom
Unicom-A
HKT Trust
SmarTone
HTHKHBharti
IDEA
PT Telkom
IndosatXL
SKT
KT
LGU
Digi
Axiata
Globe
PLDT
SingTelStarHub
M1
CHT
TWM
FET AIS
DTAC
True Corp
Telstra
TPG
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
FY
20 E
V/IC
FY20 ROIC
Unattractive
Attractive
Competitive dynamics and regulatory
backdrop drive our forecasts
We then discount the resulting cash flows
AIS (Intouch), SingTel, Globe and PT Telkom
are 'undervalued incumbents'
20 June 2017
Asia Telecoms Sector 15
Group 2: Second players with reasonable prospects of acceptable return
In markets with relatively benign competitive dynamics and reasonable growth prospects,
there are some 'second players' which we expect to achieve sufficient scale by FY20 to
generate acceptable returns on capital. Some of these stocks look undervalued,
suggesting either that investors are not confident of competitive intensity, or the relative
strength of the operators' networks, spectrum resources and marketing budgets.
In this category we include China Telecom, which in 1Q17 became the second-largest
player in the China market. After adjusting for the diversion of cash flows to the China
Tower Company, we estimate that the overall data market in China, together with
consistent market share gains, can result in China Telecom achieving an adjusted ROIC of
10.1% by FY20, above WACC. This prospect does not seem to have been factored into
market valuations.
Indosat overtook XL to become the second-largest cellular operator in Indonesia in 3Q15.
Given Indonesia's benign competitive dynamics, low 4G penetration, rapid data volume
growth and absence of unlimited data plans and handset subsidies, we expect Indosat's
ROIC to improve from 7.6% in FY16 to 16.9% by FY20. Indosat's cautious and efficient 3G
roll-out on the 850MHz band is the other key driver behind its relatively low capital base
(and rising asset turn as revenues expand). Again, this does not seem factored into the
stock price at current levels.
In Hong Kong, the second-largest player, SmarTone, has sufficient scale within the city
state to generate attractive returns. Given our view that competition fears are overplayed
(we believe that MVNO-based competition is less damaging than infrastructure-based new
entrants), SmarTone currently looks undervalued versus the cash flows it generates.
Group 3: Overvalued challengers
There are also some 'challengers' which we do not expect to gain sufficient scale to
generate adequate returns. Yet when we overlay valuation, it appears that the market is
too optimistic about the prospects of these operators.
In this category we include Unicom A-share, which is currently trading at 1.9x FY20
EV/IC, despite our expectation that the company will fail to generate a ROIC greater than
WACC. True Corp in Thailand also falls into this category, trading at 1.5x FY20 EV/IC, in
spite of our forecast ROIC of just 2.6% by FY20 (given over-investment in cellular
spectrum, and a rapidly deteriorating competitive advantage). PLDT also looks
unattractive, trading at 2.0x FY20 EV/IC despite a projected FY20 ROIC of just 9.1%.
Our analysis also prompts us to downgrade the ratings of two 'borderline' challengers.
Improving competitive dynamics in Thailand and Indonesia have resulted in sharp YTD
share price outperformance by DTAC and XL, respectively. However, we expect DTAC's
ROIC to recover to just 6.0% by FY20 (due to spectrum fees), and expect XL's ROIC to
recover to just 6.5%. Given that the stocks now trade at 1.8x and 1.9x FY20 EV/IC,
respectively, we downgrade both DTAC and XL to NEUTRAL.
Group 4: Overvalued incumbents in problem markets
Thanks to the crystallisation of new entrant risks, we continue to have a negative view on
the Indian and Malaysian markets. This is reflected in our forecast of just 4.0% compound
revenue growth in India across FY16-20, and 1.5% compound revenue growth in
Malaysia. We expect the incumbent operators in these markets to suffer from margin and
capex pressure, and this in turn will lead to suppressed returns on capital. Although we
expect the returns of the incumbents to exceed those of the new entrants, when we
overlay valuation we find that the market is over-paying for the incumbent cash flows;
Bharti trades at 1.3x.
China Telecom, Indosat and SmarTone are
second players with reasonable prospects
Unicom A, True Corp and PLDT are
'overvalued challengers'
Bharti is an overvalued incumbent in problem
markets
20 June 2017
Asia Telecoms Sector 16
Top regional picks ranked by upside to DCF
Our resulting top regional picks include three 'second players' in benign competitive
markets, namely: Indosat in Indonesia, China Telecom in China and SmarTone in Hong
Kong with 41.9% and 40.6% and 31.8% potential upside to our DCF-based target prices,
respectively (our target price for China Telecom continues to include valuation upside from
its holding in the China Tower Company). We also include Intouch (as a cheap proxy for
AIS) as an 'undervalued incumbent'.
Figure 16: Top OUTPERFORM calls
Close Target Upside P/E (x) EV/EBITDA (x) FCF yield (%) Div yield (%)
price price 17E 18E 17E 18E 17E 18E 17E 18E
Indosat 6,200.0 8,800.0 41.9% 14.9 12.5 3.8 3.4 13.3% 12.5% 3.3% 4.8%
China Telecom 3.8 5.3 40.6% 12.6 10.7 3.5 3.2 1.0% 7.1% 3.3% 4.2%
Intouch 55.8 75.3 35.1% 14.5 13.7 14.4 13.6 6.9% 7.3% 5.5% 5.1%
SmarTone 10.2 13.5 31.8% 15.0 15.4 5.0 5.0 10.0% 8.3% 6.2% 6.1%
NJA- Integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
NJA - Mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
Source: Company data, Credit Suisse estimates
Top regional underperform calls ranked by downside
Our top UNDERPERFORM calls include three 'overvalued challengers', in True Corp, M1
and PLDT. We also include Bharti as an 'overvalued incumbent'; we believe that investors
in India are under-estimating the competitive impact of Rjio across the coming years, and
over-estimating the potential positive impact of consolidation among the smaller players.
Figure 17: Top UNDERPERFORM calls
Close Target Upside P/E (x) EV/EBITDA (x) FCF yield (%) Div yield (%)
price price 17E 18E 17E 18E 17E 18E 17E 18E
True Corp 6.2 2.7 -56.3% 1315.2 273.4 9.9 10.4 -0.6% 4.5% 0.0% 0.0%
M1 2.2 1.5 -33.5% 15.5 20.5 8.1 9.0 5.5% 5.3% 5.2% 3.9%
PLDT 1900.0 1500.0 -21.1% 19.9 20.3 8.7 8.5 1.5% 2.6% 3.0% 3.0%
Bharti 364.9 300.0 -17.8% 44.4 35.3 7.3 6.6 4.2% 4.3% 0.2% 0.3%
NJA - Integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
NJA - Mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
Source: Company data, Credit Suisse estimates
20 June 2017
Asia Telecoms Sector 17
China
Summary
■ In terms of industry structure, the China market looks relatively attractive, with no new
entrants and no fully unlimited data plans.
■ We expect the China market to grow service revenue at a CAGR of 4.5% across FY16-
FY20.
■ China Mobile is dominant with 67.2% revenue market share as at 1Q17 and an FY16
ROIC of 17.3%. However, this looks to be partly in the price.
■ China Telecom looks to be a #2 player with reasonable prospects of acceptable
returns. Given this, it is currently undervalued and we highlight it as a top pick. Unicom
A share, on the other hand, looks to be an overvalued challenger.
Growth rates recovering as policy effects roll off
The recovery in China's cellular service revenue growth rate continued in 1Q17, with
revenue expanding 5.8% YoY, up from 4.9% in 4Q16 and just 0.4% in 3Q16—when China
Mobile had 'voluntarily' given up domestic roaming and long distance revenues in
anticipation of regulatory requirements to abolish roaming and long distance fees.
In fact, the revenue trajectory of China’s market has experienced a 'triple dip' over the last
three years, entirely due to government policies. Firstly, the YoY growth rates of Chinese
telcos from 2Q14 through 2Q15 were affected by the imposition of VAT on the sector in
June 2014, the government's requirement that VAT should not be passed on to
consumers, and the presentation of revenue net of VAT in the financial statements. After a
recovery in 3Q15—when data growth flowed through to higher revenue unhindered—a
second dip was caused by the introduction of data rollover. This policy, which was again
accounted for very conservatively, effectively resulted in one month of data revenue
'disappearing' from the P&L account in 4Q15, and therefore dragged industry revenue
growth back into negative territory.
As the impact of this policy rolled off reported revenue, growth recovered in 1Q16 and
2Q16, before the third dip caused by the aforementioned abolition of roaming and long
distance fees.
Figure 18: YoY cellular service revenue growth (%)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
China Mobile -0.3% 1.3% 5.7% -5.3% 1.4% 7.6% -1.3% 1.3% 5.0%
China Unicom -10.0% -9.4% -4.5% -8.0% -1.2% 0.1% 1.5% 6.9% 2.8%
China Telecom -2.0% 3.1% 11.4% 1.9% 10.0% 6.7% 7.3% 18.8% 12.6%
Total -2.4% -0.3% 4.6% -4.7% 2.2% 6.2% 0.4% 4.9% 5.8%
Source: Company data, Credit Suisse
We note that this third dip was less severe than the others, in large part because Unicom
and China Telecom have less exposure to legacy roaming and long distance exposure,
and therefore have suffered less from the abolition of those charges. This also had the
impact of lowering China Mobile's revenue market share to its lowest-ever level of 65.8%
in 4Q16.
Prior to this latest, imbalanced, policy impact, two clear market share trends had been
visible through the 'noise' in the stated revenue numbers. The first phase, between 4Q08
(when China Mobile had boasted 83.6% market share) and 1Q14 (when China Mobile's
market share had declined to 66.9%), was the 3G phase. During this period China Mobile
consistently lost market share as its home-grown TD-SCDMA technology failed to offer
Policy and technology drove down China
Mobile's market share from 4Q08 to 1Q14…
20 June 2017
Asia Telecoms Sector 18
comparable services versus Unicom's W-CDMA network and China Telecom's EVDO
network. Unicom and China Telecom, therefore, consistently gained market share versus
China Mobile.
This situation changed in 2Q14 after China Mobile launched 4G services using TD-LTE
technology, which, crucially, worked. China Mobile broadly maintained its revenue market
share during this second phase, helped by the fact that Unicom and China Telecom's 4G
licences were granted on a delayed and piecemeal basis, with full nationwide licences only
issued on 27 February 2015. China Telecom and Unicom initially received trial FDD-LTE
licences for 16 cities on 27 June 2014, and then this was subsequently expanded to 40
cities on 28 August 2014, to 41 cities on 17 November, and to 56 cities (comprising in total
some 430 mn in population) on 17 December 2014.
Figure 19: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
China Mobile 68.3% 69.3% 68.7% 68.1% 67.8% 70.2% 67.5% 65.8% 67.2%
China Unicom 17.4% 16.4% 16.4% 16.8% 16.8% 15.4% 16.6% 17.2% 16.4%
China Telecom 14.3% 14.3% 14.8% 15.1% 15.4% 14.4% 15.9% 17.1% 16.4%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse research
Technology—allocated on the basis of policy—therefore tilted the playing field against
China Mobile in the 4Q08 to 1Q14 period, before a more level playing field emerged in the
second phase. But the second key trend that emerges is that China Telecom's market
share has continued to grind higher throughout the 4G, VAT and data rollover policy
changes, while Unicom lost market share from 1Q14 (18.9% share) to a low of 15.4% in
2Q16. In fact, China Telecom overtook Unicom to become the second-largest cellular
player by revenue in 1Q17.
The driver in this case is also technology related, though management decisions were also
important. Having built a relatively low-cost EVDO 3G network on 850MHz during the
2008-13 period, China Telecom was prepared financially, and operationally, for rapid
deployment of 4G as soon as the licences were issued province-by-province, and to his
credit Chairman Wang Xiaochu, then Chairman of China Telecom, recognised this
opportunity and executed well. This resulted in a relatively short gap in marketing, and
service speed, versus the re-invigorated and 4G-equipped China Mobile. In contrast,
Unicom, which had invested heavily in an expensive 3G network at 2100MHz, wanted to
continue to sweat the recently constructed assets. Thus, Unicom did not aggressively build
4G coverage until 2H15 (not coincidentally on the arrival of the same Chairman Wang
Xioachu, transferred over from China Telecom to Unicom in August 2015). Prior to 2H15,
Unicom's provincial marketing teams found it very hard to market 3G services in an
increasingly 4G-centric market and ecosystem, and so Unicom lost momentum.
Recovering that momentum has, as we shall see later, been difficult and expensive.
Mid-single-digit growth looks achievable
In large part due to China Mobile's haste to move on from 3G (where it was at a material
technological disadvantage) to 4G, and the resulting impact on both the competitive
environment and the equipment ecosystem, 4G penetration in China is much higher than
in other emerging markets in Asia, having reached 56.8% as at December 2016. This
leaves less potential for future growth than in markets such as Indonesia or the
Philippines.
…and then allowed stabilisation until 3Q16
Management and technology drove gains
for China Telecom, losses for Unicom
4G penetration can still double from current
levels…
20 June 2017
Asia Telecoms Sector 19
Figure 20: Smartphone and 4G penetration Figure 21: 4G penetration vs GDP per capita
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
On the other hand, 4G subscriber numbers can still double from current levels.
Furthermore, data volumes per 4G subscriber remain surprisingly low, at circa
1.0GB/month on average among China Mobile and China Telecom 4G subscribers in
2H16, and 1.5GB/month for Unicom 4G subscribers. The relatively low usage could be
related to relatively high home broadband penetration levels in China, with 65.6% of
households already enjoying broadband access. As customer behaviour shifts more
towards mobile, and as 4G penetration rises, we would still expect considerable growth in
total data volumes.
Of course the key question is whether this volume growth will drive through into revenue
growth. Given that there are no truly unlimited data plans in China, rising data volumes
should lead to some growth in data revenue. We would highlight that Unicom's recently
launched "ice-cream" packages, which were branded as 'unlimited' consist of a
Rmb198/month (US$28.7/month) plan, comprising 1500 minutes of voice and 15GB of 4G
data, and a Rmb398/month (US$57.7) plan, comprising 40GB of 4G data and unlimited
voice minutes; the packages have extremely high volumes, extremely high ARPU levels,
and actually have a set limit on usage.
The standard plans across the three operators for lower volumes are set out below, and
there is a clear ARPU uplift versus the 1Q17 average ARPU level.
Figure 22: Published data packages as a multiple of 1Q17 ARPU
Standard user definition Low Low-medium Medium Medium-high High volume
Assumed data per month 250 MB 700 MB 1000 MB 2500 MB 4000 MB
Assumed "outgoing" voice per month 200 200 200 200 200
China Mobile
Implied ARPU post VAT 68.0 88.0 98.0 148.0 178.0
1Q17A blended ARPU post VAT 59.8 59.8 59.8 59.8 59.8
Uplift multiple 13.7% 47.2% 63.9% 147.5% 197.7%
China Unicom
Implied ARPU post VAT 56.0 56.0 86.0 160.0 190.0
1Q17A blended ARPU post VAT 46.8 46.8 46.8 46.8 46.8
Uplift multiple 19.7% 19.7% 83.8% 242.0% 306.1%
China Telecom
Implied ARPU post VAT 55.5 71.1 89.1 173.0 206.1
1Q17A blended ARPU post VAT 56.9 56.9 56.9 56.9 56.9
Uplift multiple -2.5% 24.9% 56.5% 203.9% 262.0%
Source: Company data, Credit Suisse estimates
There is ongoing pressure from the 'higher speed lower tariff' policies of the Chinese
government, but so far the impact on standard price points has been minimal. Taking the
SingaporeHong Kong
Malaysia
Indonesia
Korea
China
Thailand
PhilippinesIndia
Taiwan
Australia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
4G p
enet
ratio
n
GDP per capita (US$)
…and usage per customer is still
relatively low
20 June 2017
Asia Telecoms Sector 20
standard price points and showing them graphically (and in USD) in the figure below, it is
clear that while customers must pay more as they use more, the chart does not slope
upwards at 45 degrees. Thus, customers enjoy volume discounts (lower price per MB as
they consume more data). As customers have moved up the volume curve, the data yield
per MB as reported by the operators has come down at a rate which has satisfied the
Chinese government, and the operators have not been forced to cut price points along the
volume curve.
Figure 23: Monthly fee in USD per month Figure 24: Actual data yield per MB (Rmb)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Given this, the ARPU uplift caused by customers shifting onto 4G has been enough to
drive revenue growth in the industry (now that the 'cosmetic' impact of VAT and data
rollover have rolled off). With 4G penetration continuing to rise, we project mid-single digit
revenue growth in China in FY17 and FY18, with growth tailing off towards FY20.
Figure 25: Cellular revenue growth (Rmb mn) and revenue growth rates (%)
Rmb mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
China Mobile (8,994) (15,533) 31,520 31,263 27,021 11,769 7,414
China Unicom 4,499 (13,012) 2,398 12,408 13,277 12,216 9,125
China Telecom 6,517 4,235 13,108 14,777 15,412 9,091 5,307
Total 2,022 (24,310) 47,026 58,447 55,711 33,077 21,845
Growth (% YoY)
China Mobile -1.5% -2.7% 5.6% 5.2% 4.3% 1.8% 1.1%
China Unicom 3.0% -8.4% 1.7% 8.6% 8.4% 7.2% 5.0%
China Telecom 5.7% 3.5% 10.5% 10.7% 10.1% 5.4% 3.0%
Total 0.2% -2.8% 5.6% 6.6% 5.9% 3.3% 2.1%
Source: Company data, Credit Suisse estimates
Growth differential to narrow with Unicom 4G roll-out
One key difference in FY17 versus the preceding three years is that we anticipate that
Unicom will resume growing faster than China Mobile, as had last been the case in FY14
(before China Mobile's 4G network reached nationwide coverage).
9.9
12.8
14.2
21.4
25.8
8.1 8.1
12.5
23.2
27.5
8.0
10.3
12.9
25.1
29.9
0
5
10
15
20
25
30
35
250 MB 700 MB 1000 MB 2500 MB 4000 MB
China Mobile Apr-17 China Unicom Apr-17 China Telecom Apr-17
0.030 0.028
0.024
0.017
0.013
0.009 0.009
0.006
0.025
0.020
0.016 0.016
0.013
0.009 0.007
0.004
0.043
0.034 0.033
0.029
0.022 0.020
0.013
0.009
-
0.005
0.010
0.015
0.020
0.025
0.030
0.035
0.040
0.045
0.050
1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16
China Mobile China Unicom China Telecom
20 June 2017
Asia Telecoms Sector 21
Figure 26: Cellular revenue (Rmb mn) and revenue market share (%)
Rmb mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
China Mobile 581,817 566,284 597,804 629,067 656,088 667,857 675,271
China Unicom 155,632 142,620 145,018 157,426 170,703 182,919 192,044
China Telecom 120,268 124,503 137,611 152,388 167,800 176,891 182,198
Total 857,717 833,407 880,433 938,880 994,591 1,027,668 1,049,513
Market share (%)
China Mobile 67.8% 67.9% 67.9% 67.0% 66.0% 65.0% 64.3%
China Unicom 18.1% 17.1% 16.5% 16.8% 17.2% 17.8% 18.3%
China Telecom 14.0% 14.9% 15.6% 16.2% 16.9% 17.2% 17.4%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
This expectation is based on our analysis of the following key factors:
Spectrum allocations by operator
China is increasingly unusual in a regional and global context, in that the operators are
given allocations by the regulator, the Ministry of Industry and Information Technology
(MIIT), and do not have to bid for it at auction or pay hefty upfront fees. Of course the fact
that the China government is the majority shareholder in all three operators means that to
some extent spectrum fees would be a 'left pocket to right pocket' exercise, except for the
impact on minority shareholders.
On the other hand, there is a different 'price' to pay for spectrum in that the government
allocates specific technology requirements along with the spectrum! As we have seen, the
allocation of TD-SCDMA technology to China Mobile for 3G caused China Mobile to lose
market share from 4Q08 to 1Q14. Furthermore, when this problem was effectively
resolved with the allocation of TD-LTE technology and spectrum to China Mobile in 2013
(4G technology which worked well), the allocated spectrum was in the 2.3GHz and
2.6GHz band, requiring a dense and extremely expensive roll-out.
Figure 27: Spectrum allocations by operator
MHz 800MHz 900MHz 1.8GHz 1.9GHz 2.0GHz 2.1GHz 2.3GHz 2.5GHz 2.6GHz
China Mobile 20*2 25*2 35*1 15*1 50*1 60*1
China Telecom 10*2 15*2 20*2 20*1
China Unicom 6*2 30*2 25*2 20*1 20*1
Source: Company data, Credit Suisse estimates
All three operators are now rolling out 4G technology in China. While, as mentioned, China
Mobile is using TD-LTE technology, and both Unicom and China Telecom are using FDD-
LTE technology, both technologies come from the same 'embryo' and are capable of
offering similar speeds. The spectrum allocations to all three players are relatively
generous in the regional context, with China Mobile having been compensated for the
unpaired nature of TD-LTE technology through receipt of large blocks of spectrum. Other
than required capital intensity, we see spectrum and technology allocations in China for
the current 4G phase as having created a relatively level playing field (for the first time in a
decade).
BTS by operator
China Mobile's extremely rapid 4G roll-out, starting in 2013, resulted in the construction of
1.5 mn 4G BTS, covering 95% of the population, by December 2016. China Telecom
followed quickly, aided by the formation of the imposition of mandatory sharing of towers in
April 2015 and the subsequent creation of the China Tower Company in October 2015. By
December 2016, China Telecom had 890,000 4G BTS in place, also covering 95% of the
population (given roll-out at the 1800MHz band). Coming from behind, Unicom's
accelerated roll-out programme took total 4G BTS to 736,000 by December 2016, taking
population coverage to 80.0%.
20 June 2017
Asia Telecoms Sector 22
Figure 28: BTS by operator
2G BTS 3G BTS 4G BTS Total BTS Proportion
China Mobile 900,000 500,000 1,510,000 2,910,000 48.4%
China Unicom 424,000 472,000 736,000 1,632,000 27.1%
China Telecom 290,000 290,000 890,000 1,470,000 24.5%
Total BTS 1,614,000 1,262,000 3,136,000 6,012,000 100.0%
Source: Company data, Credit Suisse estimates
Given that 4G penetration reached only 56.8% as at December 2016, we now consider
Unicom's 4G coverage and network quality to be competitive with that of China Mobile and
China Telecom, at least within the areas relevant for 4G subscriber growth at present.
With Unicom having caught up, we see no reason for market share losses to continue (as
long as pricing and promotional efforts remain competitive).
Capital intensity
During the most intense phase of its 4G roll-out, in FY14, China Mobile spent more than
China Telecom and Unicom combined. The gap narrowed in FY15 and FY16, as Unicom
and China Telecom ramped up 4G coverage, and as China Mobile's capital intensity
declined after meeting its population coverage targets.
Figure 29: Capex by operator (Rmb mn) Figure 30: Capex-to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
The absolute figures are somewhat skewed, given that China Mobile rolled out 4G
primarily on the 2600MHz band using TD-LTE technology. China Telecom has estimated
that to cover the same geographical area, its 1800MHz FDD-LTE roll-out cost only half of
China Mobile's 2600MHz TD-LTE roll-out, on a like-for-like basis.
Of course, given China Mobile's larger revenue base, it was well placed to cope with this
additional burden, though in FY14 it faced the highest capex-to-sales ratio in the sector, at
36.7%. Unicom's relatively late start on 4G can be seen in the FY15 figures, with
committed capex surging to Rmb133.9 bn, though capex declined sharply into FY16, and
is guided to decline again into 2017 given the completion of core 4G coverage. All three
operators are now experiencing declining capex, as all three have similar coverage levels
and relatively low 4G network utilisation. Therefore, we no longer see capex levels as a
key differentiator in the expected growth trajectory.
Balance sheet strength and capex sustainability
As state-owned enterprises, the three China telcos can borrow easily, and so we do not
view capital constraints as a differentiating factor for future growth rates. China Mobile sits
on a large net cash position, China Telecom's net debt to EBITDA is set to reach 0.9x as
at 2017 and, even after including vendor payables, Unicom's net debt to EBITDA is set to
reach 2.7x in 2017—a little high, but manageable, particularly if the company sells
additional shares as part of its mixed ownership reform programme, therefore bringing the
ratio down further. So we do not view Unicom's gearing, built up during the 3G and 4G
-
50,000
100,000
150,000
200,000
250,000
FY14 FY15 FY16 FY17 FY18 FY19 FY20
China Mobile China Unicom China Telecom
0%
10%
20%
30%
40%
50%
60%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
China Mobile China Unicom China Telecom
20 June 2017
Asia Telecoms Sector 23
investment phases, as a constraint on the company's remaining 4G roll-out. All three
operators are generating positive free cash flow yields in FY17 (and can therefore finance
the capex requirements from EBITDA generated), and sale of stakes in a jointly owned
associate company could raise further cash for the three players.
Regulation
We have shown that regulation has had a material impact on historic market share trends.
Currently, with all three operators offering LTE-based services, the differentials are
minimal. Though the recent abolition of internal roaming and domestic long distance
charges took a particularly heavy toll on China Mobile, the government's ongoing 'higher
speed lower tariff' policies affect all three players. We suspect that it is only in the case
whereby China Mobile continues to grow market share (and Unicom continues to lose
share) that further regulatory measures, most probably designed to constrain China Mobile
and help Unicom, might be introduced. Examples might include further changes in
interconnect rates in Unicom's favour, number portability or possibly even 'one way'
number portability. Implementation of these policies is not our base case, however, given
our expectation that Unicom's market share is set to gradually rise from current levels
'naturally'.
Does Unicom have a viable business?
Unicom's loss of traction in 2014 and 2015 re-emphasises that in order to attract
subscribers, cellular players must be able to demonstrate broad, seamless coverage with
the latest technology offered by competitors. Given that this overall coverage capex
requirement, together with associated operating costs, is common to all cellular operators,
the relative scale or revenue market share is the primary determinant of returns on
invested capital and profitability. The large disparity in revenue market share in China,
together with the very high 'fixed' cost of rolling out a cellular network across China's huge
geography, leads to starkly differing returns on capital.
Thus, in FY16, only one cellular player—China Mobile—was able to generate a return
greater than cost of capital. China Mobile's FY16 revenue market share of 67.9% was able
to drive a ROIC of 17.3%, given its 42.2% EBITDA margin asset turn of 1.2x. While
comfortably above WACC of 10.2%, the returns generated by China Mobile are actually
very low for an incumbent operator with a scale advantage of this magnitude. This in turn
is due to China Mobile's extremely inefficient 3G and 4G roll-outs, together with its
ongoing, value-destructive, investment in fixed broadband services. China Mobile's huge
capex burden has led ROIC to fall from a peak of 45.4% in FY08 (just prior to the shift to a
three-player market and the launch of 3G). NOPLAT is still at 2007-08 levels (thanks partly
to VAT, data rollover and other policies) but the invested capital base has doubled.
Given the lack of scale in the cellular market (16.4% share as at 1Q17), the second-largest
player, China Telecom, does not currently make a return greater than WACC. However,
China Telecom's efficient cellular roll-out, together with higher broadband tariffs from its
fixed line division, allows China Telecom to generate a consolidated ROIC of 5.7%. This is
closer to China Mobile's 17.3% ROIC than the relevant revenue market shares/scale
advantages would normally suggest.
China Unicom's problem is more pronounced. Given its highly inefficient 3G roll-out, loss
of top-line momentum due to a late 4G roll-out (as well as government policies such as
VAT and data rollover), and high marketing costs in order to re-ignite growth, Unicom's
FY16 EBIT margin was just 1.1% and its asset turn was 0.7x. This resulted in ROIC of just
0.6% in FY16.
Only China Mobile generates a ROIC
greater than WACC…
Unicom's FY16 ROIC is very low at 0.3%
20 June 2017
Asia Telecoms Sector 24
Figure 31: ROIC analysis
FY16 FY20 4-year CAGR
Rmb mn China Mobile Unicom Telecom China Mobile Unicom Telecom China Mobile Unicom Telecom
Subscribers (000s) 848,898 263,822 215,000 874,898 305,846 255,000
Service revenue 623,422 240,982 317,673 723,434 293,788 371,916 3.8% 5.1% 4.0%
EBITDA 263,394 79,498 95,139 304,305 101,269 114,498 3.7% 6.2% 4.7%
EBITDA margin 42.2% 33.0% 29.9% 42.1% 34.5% 30.8%
Depreciation to sales (%) 23.3% 31.9% 21.4% 22.7% 25.7% 19.7%
EBIT 118,088 2,693 27,201 139,997 25,828 41,089 4.3% 76.0% 10.9%
EBIT margin 18.9% 1.1% 8.6% 19.4% 8.8% 11.0%
Tax rate (%) 24.4% 19.6% 24.8% 24.4% 25.0% 24.7%
NOPLAT 89,268 2,164 20,442 105,830 19,371 30,932 4.3% 73.0% 10.9%
Average invested capital 516,171 367,725 393,954 573,940 304,671 429,623
Asset turn 1.2 0.7 0.8 1.3 1.0 0.9
ROIC 17.3% 0.6% 5.2% 18.4% 6.4% 7.2%
Net profit 108,741 625 18,004 131,545 19,831 30,466 4.9% 137.3% 14.1%
Net margin 17.4% 0.3% 5.7% 18.2% 6.8% 8.2%
Source: Company data, Credit Suisse estimates
On the other hand, the 4G BTS figures, and commensurate nationwide coverage, suggest
that all three China telcos are now set to emerge from the 4G investment 'j-curve'. The
1Q17 results showed that for all three operators' revenue was up YoY, EBITDA was up
YoY, and net profit was up YoY. As mentioned, all three operators have also guided for
capex to decline YoY into FY17, and together with rising EBITDA, this is set to drive higher
cash flow.
Looking forward to FY20, we expect China Mobile's ROIC to increase to 18.4%. In our
view this figure could be much higher if China Mobile controlled capex more aggressively
than we have forecast (and in particular invested less in rolling out fibre to the home for
fixed broadband services which at current price points are deeply value-destructive).
With rising revenue, China Telecom's ROIC is projected to climb to 7.2% by FY20. Again,
this projection is dampened by China Mobile's aggression in the fixed broadband space—
a core business of China Telecom. While we forecast total service revenue to grow at a
CAGR of 4.0%, we forecast that China Telecom's cellular revenue will grow at 7.3%,
achieving improved scale, while fixed line service revenue is only expected to grow at a
CAGR of 1.3% given China Mobile's disruption of the broadband market. Nevertheless,
China Telecom's ROIC is expected to be relatively close to WACC of 9.7% by FY20 and
we would certainly view it as a sustainable business. Indeed, if we adjust for cash flows
diverted to China Telecom's associate, China Tower Corporation, FY20 ROIC would be
10.1%, exceeding WACC.
FY16 can be viewed as a trough for Unicom's ROIC, given its aggressive capex and also
promotional costs, in its attempt to kick-start top-line growth. We forecast that rising
revenue will drive higher margins, and a recovery in ROIC to 6.4%. This still represents an
inferior return versus China Telecom, and a meaningful gap versus WACC of 10.1% is still
expected to exist. Thus, Unicom is expected to remain value destroying. However, it is
forecast to have sufficient scale to be comfortably cash flow positive and therefore
sustainable, albeit with low returns on capital invested.
There is, however, one very important caveat to this analysis, and that is with respect to
5G. The history of the China telcos shows that there is always the risk of aggressive capex
on the 'bleeding edge of technology' as the state-owned China telcos attempt to support
top-down government investment-led GDP targets (and the equipment lobby), without
sufficient regard to the potential for appropriate monetisation of the services. China
Mobile's extremely aggressive 4G investment phase at 2600MHz is one example of this,
and its current value-destructive roll-out of fibre to the home is another. While China
Returns are now beginning to rise…
…and even Unicom is likely to reach
sustainable size…
…though 5G represents a material
longer-term risk
20 June 2017
Asia Telecoms Sector 25
Mobile's dominant revenue share allows it to shoulder this burden (making lower returns
than would otherwise be the case, but at least overall making returns above WACC),
China Telecom and Unicom do not have this benefit, and this increases their risk profile.
With standardisation of 5G not yet completed, mass-market roll-out could easily be a post-
2020 event, and the frequencies which will be used, network density and therefore capital
intensity are not clear as yet. The earlier a 5G roll-out is required, and the more capital
intensive it is, the worse the news will be for China Telecom and Unicom. Indeed, in our
view, a very early and very intense 5G roll-out requirement could trigger industry
restructuring, even to the point of a merger of the two smaller players. (Arguably, creation
of the tower company, which represents consolidation of three sets of tower infrastructure
into one has been critical in supporting the sustainability of Unicom and China Telecom in
the 4G era.)
What is in the price?
We continue to rely primarily on discounted cash flow (DCF) to set our target prices, since
it is the only way to fully capture the multi-year nature of cellular investment and payback
(particularly given what we have explained to be heavy upfront capex to establish
nationwide coverage and launch credible cellular services).
At present, we believe that the market is only marginally overpaying for quality and scale
advantages, given that we have 30.7% potential upside for China Mobile, but 40.6%
potential upside for China Telecom. However, the upside is partly skewed by the
HK$1.69/share value uplift we ascribe to China Telecom for its 27.9% stake in the China
Tower Corporation, versus a much smaller (in proportional terms) HK$3.23/share for
China Mobile. Reference to the P/E ratios suggests that both stocks look attractive versus
the region, and China Mobile's higher scale and higher ROIC look quite fairly represented
in the relative EV/IC multiples; it trades at more than 2.0x the EV/IC multiple but generates
circa three times the return on capital in FY16, declining to 1.8x by FY20 on our forecasts
as China Telecom builds scale and China Mobile continues its value destructive fixed
broadband roll-out.
Figure 32: Chinese cellular sector—comparative multiples
Close Target Upside Normalised P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
China Telecom 3.77 5.3 40.6% 12.6 10.7 3.5 3.2 0.9 0.9 1.0% 7.1% 3.3% 4.2%
China Unicom 11.3 14.1 24.8% 74.7 26.3 5.1 4.5 1.3 1.3 15.1% 13.4% 0.3% 1.9%
China Mobile 84.15 110 30.7% 12.8 12.1 3.7 3.3 2.0 1.9 5.3% 7.2% 3.6% 4.1%
Unicom A* 7.47 4.7 -37.1% 130.7 50.5 7.8 6.9 1.9 1.9 7.5% 6.7% 0.2% 1.0%
NJA- Integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
NJA - Mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
* We have used the last quoted price for Unicom A – the stock is currently suspended. Source: Company data, Credit Suisse estimates
`
In direct contrast, the valuation of Unicom A-share makes no sense to us, trading at 1.9x
EV/IC despite Unicom's ROIC of 0.6% in FY16 and 6.4% in FY20. Indeed, given that the
Hong Kong-Shanghai Connect exists, investors who want exposure to Unicom's
operations are far better off buying Unicom H-share (0762.HK), the red chip listed in Hong
Kong; while the shareholding structure is different, the underlying operating assets in
which Unicom (A) owns a stake are identical to those of Unicom (H), and Unicom (A) does
not own any other additional assets or businesses. At present, Unicom (A) trades at a
premium of over 100% versus Unicom (H).
Both China Mobile and China Telecom look
attractive…
…while Unicom A share looks very
unattractive
20 June 2017
Asia Telecoms Sector 26
Figure 33: Share price performance—Unicom (H) has underperformed as it lost scale, the A-share has not
Source: Company data, Credit Suisse
40
60
80
100
120
140
160
180
200
220
240
260
280
300
320
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
China Mobile Unicom China Telecom Unicom-A
20 June 2017
Asia Telecoms Sector 27
Indonesia
Summary
■ In terms of industry structure, the Indonesia market looks the most attractive in Asia,
with the best monetisation of data, no new entrants and no fully unlimited data plans.
■ We expect the Indonesia market to grow service revenue at a CAGR of 6.9% across
FY16-FY20.
■ PT Telkom's cellular unit, Telkomsel, is dominant with 62.7% revenue market share as
at 1Q17 and an FY16 ROIC of 43.9%. However the market looks to be slightly
'overpaying' for PT Telkom's scale and liquidity relative to the Indonesian #2 player.
■ Indosat looks to be a #2 player underappreciated for its increasing returns on capital.
Given this, it is currently undervalued and we highlight it as a top pick. XL now looks
close to fully valued following a sharp share price rally.
High cellular revenue growth, but lopsided
Following an aggressive price war in 2007-08, triggered by a shift from a three-player
market to a ten-player market (and leading to new and re-capitalised competitors
attempted to build scale), the Indonesian cellular market in recent years has enjoyed much
more attractive competitive dynamics. This in turn has been supported by (1) what we
would call de facto consolidation, such as the loss of subscriber traction and termination of
investment in the Bakrie Telecom and Telkomflexi fixed wireless CDMA offerings and (2)
actual consolidation through the acquisition of Axis (Not listed) by XL and the merger of
Mobile 8 with Smart to create SmartFren.
As a result of sensible voice and data pricing moves, together with what is still a relatively
low 4G penetration rate (14.7% as at December 2016), the Indonesian cellular market has
delivered the highest cellular revenue growth rate in Asia for seven consecutive quarters.
Figure 34: Cellular service revenue growth
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Telkomsel 12.1% 13.8% 18.5% 14.5% 17.8% 14.5% 11.5% 13.0% 10.4%
Indosat 5.4% 12.9% 17.1% 13.8% 15.8% 11.2% 9.2% 5.1% 6.6%
XL 2.5% -5.4% -1.1% 0.8% 0.8% -7.1% -10.4% -11.1% -6.9%
Others 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 12.0% 12.0%
Total 8.5% 9.7% 14.3% 11.8% 14.2% 10.1% 7.5% 7.5% 7.0%
Source: Company data, Credit Suisse research
However, we observe that growth has been tilted heavily towards market leader
Telkomsel. Thus, at first glance perhaps counterintuitively, the largest player in the market
has been getting larger, reaching 62.7% market share by revenue as at 1Q17.
Figure 35: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Telkomsel 58.2% 59.0% 60.3% 60.1% 60.7% 61.9% 62.8% 63.4% 62.7%
Indosat 16.7% 17.2% 17.2% 17.4% 17.1% 17.5% 17.5% 17.0% 17.0%
XL 17.7% 17.2% 16.5% 16.4% 15.8% 14.6% 13.8% 13.6% 13.8%
Others 7.4% 6.6% 6.1% 6.1% 6.4% 6.0% 5.9% 6.0% 6.5%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse research
Indonesia has delivered the fastest revenue
growth in Asia in recent years…
20 June 2017
Asia Telecoms Sector 28
Several factors have been behind this lopsided industry growth.
■ Strong execution at Telkomsel: Telkomsel has successfully taken advantage of
stabilising competition (and the aforementioned, XL-Axis consolidation) to gradually
raise voice and SMS price points where possible. This has been pursued on a regional
basis; Telkomsel is now run through 206 pricing 'clusters' in order to maximise
opportunities from regional differentials in competitive intensity. Indeed, Telkomsel has
led tariffs upwards on voice, SMS and recently data (by reducing 4G data bonuses).
■ Poor execution at XL: While Indosat has almost kept up with Telkomsel, and has
broadly maintained its market share, XL has been the key market share 'donor' and in
revenue terms has significantly underperformed both of its larger peers. This has in
large part been caused by XL's February 2015 decision to no longer chase after what
were termed 'value-destroying customers', and a resulting loss in overall subscriber
growth and traction in traditional distribution channels.
■ Balance sheet strength: While both Indosat and XL are ultimately controlled by large,
well-capitalised groups, and while management has insisted that the companies were
not constrained on capex, heavy USD-denominated debt exposure prior to a recent
deleveraging process dragged earnings (in FY15 in particular) and contributed to slow
ex-Java roll-out plans in recent years.
■ Regulation: Indonesia's regulator, the BRTI, proposed an interconnect rates cut from
Rp250/min to Rp185/min effective 1 September 2016, and this might have (marginally)
reduced the value proposition to Telkomsel's 'on-net customer communities'
particularly outside of Java. However, this change, together with other draft legislation
on network sharing which would have been negative to Telkomsel, still has not been
implemented. In Indonesia's case, therefore, regulatory intransigence has favoured the
incumbent.
Still plenty of room for revenue to grow
We continue to see a significant opportunity for data volume growth in Indonesia, given
that smartphone penetration only reached 60.2% of the population as at December 2016,
while 4G penetration had only reached 14.7% of the population. Data volumes per
customer are roughly tripling to circa 1GB per month after customers acquire a
smartphone, then quadrupling again to circa 4GB per month on average as they upgrade
to 4G. Rising penetration therefore drove Telkomsel's total data traffic up by 115.5% YoY
into 1Q17.
Figure 36: Smartphone and 4G penetration Figure 37: 4G penetration vs GDP per capita
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Of course the key question is whether this volume growth will drive through into revenue
growth. Having successfully raised voice prices (as shown below), Telkomsel is now
SingaporeHong Kong
Malaysia
Indonesia
Korea
China
Thailand
PhilippinesIndia
Taiwan
Australia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
4G p
enet
ratio
n
GDP per capita (US$)
…but the largest player has grown fastest
Low 4G penetration rates…
…and sensible data pricing….
20 June 2017
Asia Telecoms Sector 29
turning its attention to data pricing. The 115.5% traffic growth in 1Q17 led to 21.3% data
revenue growth (a ratio of 0.2x revenue growth to volume growth) as the price per MB
declined to Rp21/month, and Telkomsel’s management is keen to drive that ratio to 0.3x or
above, so that double digit overall revenue growth can be maintained even if voice
revenue growth slows further.
Figure 38: Voice price per minute (Rp) Figure 39: Data price per MB (Rp)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Benign competitive dynamics, and Telkomsel's strong track record on voice and 3G
pricing, lead us to believe that this is likely to be achieved. We note that Telkomsel
reduced 4G bonus allocations in December 2016 and has also begun limiting usage of
bonus allocations to certain categories of content (video). On the standard '2GB' plan,
priced at Rp95,000 in Jakarta, the 4G bonus is now 3GB plus 5GB of content, rather than
10GB, and the 3GB bonus has a validity of only 15 days, rather than 30 days.
We therefore forecast that in FY17 Telkomsel will again deliver double-digit revenue
growth, for the seventh consecutive year. We also expect the market as a whole to
achieve double digit revenue growth in FY17.
Figure 40: YoY cellular revenue growth (Rp bn) and revenue growth rates (%)
Rp bn FY14 FY15 FY16 FY17 FY18 FY19 FY20
Telkomsel 6,221 9,803 10,670 9,779 7,673 4,627 4,428
Indosat 106 2,415 2,200 2,143 1,231 1,115 1,103
XL 2,179 (546) (1,644) 1,950 1,452 1,281 1,281
Others (2,701) 303 316 1,012 1,134 1,270 1,422
Total 5,804 11,975 11,542 14,885 11,489 8,293 8,235
Growth (% YoY)
Telkomsel 10.4% 14.8% 14.0% 11.3% 8.0% 4.4% 4.1%
Indosat 0.5% 12.4% 10.0% 8.9% 4.7% 4.1% 3.9%
XL 10.6% -2.4% -7.4% 9.5% 6.4% 5.3% 5.1%
Others -25.7% 3.9% 3.9% 12.0% 12.0% 12.0% 12.0%
Total 5.3% 10.3% 9.0% 10.6% 7.4% 5.0% 4.7%
Source: Company data, Credit Suisse estimates
We expect a more even share of revenue growth
One key difference in FY17 versus the preceding three years is that we anticipate that
industry growth will be far more evenly shared. In particular, we forecast that XL will
resume growing far more closely with the industry.
-
50
100
150
200
250
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Telkomsel Indosat XL
-
20
40
60
80
100
120
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Telkomsel Indosat XL
…lead us to expect double digit revenue
growth
We expect all of the 'big 3' to grow broadly
in line with the market…
20 June 2017
Asia Telecoms Sector 30
Figure 41: Cellular revenue (Rp bn) and revenue market share (%)
Rp bn FY14 FY15 FY16 FY17 FY18 FY19 FY20
Telkomsel 66,252 76,055 86,725 96,504 104,177 108,804 113,231
Indosat 19,480 21,896 24,095 26,238 27,470 28,585 29,688
XL 22,764 22,218 20,575 22,524 23,976 25,257 26,539
Others 7,817 8,120 8,436 9,449 10,582 11,852 13,275
Total 116,314 128,289 139,831 154,716 166,205 174,498 182,733
Market share (%)
Telkomsel 57.0% 59.3% 62.0% 62.4% 62.7% 62.4% 62.0%
Indosat 16.7% 17.1% 17.2% 17.0% 16.5% 16.4% 16.2%
XL 19.6% 17.3% 14.7% 14.6% 14.4% 14.5% 14.5%
Others 6.7% 6.3% 6.0% 6.1% 6.4% 6.8% 7.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
This expectation is based on our analysis of the following key factors:
Spectrum allocations by operator
XL purchased an additional 2x10MHz of 1800MHz spectrum through its (albeit very
expensive) acquisition of Axis for US$865 mn. This has created a relatively level playing
field, at least across the 'big 3' operators (Telkomsel, Indosat, and XL) in the core
900MHz, 2100MHz and 1800MHz bands supporting 2G, 3G and 4G services. All three
operators are also using the same technologies (GSM, W-CDMA, and FDD LTE) and are
therefore being supported by the same handset and equipment ecosystem.
Figure 42: Spectrum allocations by operator
MHz 850 MHz 900MHz 1.8GHz 2.1GHz 2.3GHz
Telkomsel 5*2 7.5*2 22.5*2 15*2
Indosat 2.5*2 10*2 20*2 10*2
XL 7.5*2 22.5*2 15*2
Hutch Indonesia 10*2 10*2
SmartFren 10*2 30*1
Source: Company data, Credit Suisse research
This in itself is a reason for all three players to take part in industry growth (other things
being equal). Indeed, given Telkomsel's much larger subscriber base, XL and Indosat are
currently carrying far fewer customers per MHz of spectrum, conferring something of a
capacity advantage, though as we shall see Telkomsel's subscriber base is spread over a
much wider geographical coverage, limiting the impact on customers in key cities in Java.
In contrast, smaller players such as Hutch Indonesia look strategically vulnerable in this
context. Hutch's (limited) 1800MHz spectrum is currently used to support voice services
for existing 2G subscriber base, and this constrains Hutch's ability to aggressively role out
4G at 1800MHz. SmartFren has ample 4G spectrum, with 30MHz of 2300MHz spectrum,
but is the only operator offering TD LTE services, given the unpaired nature of the
spectrum allocation it was awarded.
The proposed auctions for two blocks of 2x5MHz of 2100MHz spectrum, and one block of
15MHz of unpaired 2300MHz spectrum, are unlikely to change this 'balance of power' in
our view. We would expect Telkomsel to win 1x5MHz of 2100MHz spectrum to ease
capacity constraints, and if it is also allowed to bid for 2300MHz spectrum we expect it to
do so. Given that no 1800MHz spectrum is available, we do not expect a 'game-changing'
outcome for either Hutch or SmartFren (and we see little prospect of the auction triggering
value destruction on anywhere near the scale witnessed in Thailand in late 2015).
…after analysing spectrum allocations,
network and capital intensity
20 June 2017
Asia Telecoms Sector 31
BTS by operator
Telkomsel's 62.7% revenue market share is underpinned by its broad geographical
coverage, in the shape of 50,344 2G base transceiver systems (BTS) and 72,327 3G BTS.
With over 100% SIM card penetration of the population, the growth driver is the upgrade
from 2G to 3G and increasingly from 3G to 4G. In this regard the fact that all of the 'big 3'
commenced 4G at the same time after a nationwide re-farming of 1800MHz spectrum in
November 2015 is supportive of our expectation for a more even share of revenue growth
going forward; at present the 4G coverage across all of the 'big 3' is fairly even. On the
other hand, we would not expect XL and Indosat to grow faster than Telkomsel unless and
until significant inroads are made on Telkomsel's geographical dominance; opening up
2G, 3G, and 4G revenue opportunities to the challengers.
Figure 43: BTS by operator
2G BTS 3G BTS 4G BTS Total BTS Proportion
Telkomsel 50,344 72,327 6,362 129,033 39.7%
Indosat 24,042 27,724 4,717 56,483 17.4%
XL 37,549 38,731 8,204 84,484 26.0%
Hutch Indonesia 17,000 17,000 6,000 40,000 12.3%
SmartFren 2,000 12,850 14,850 4.6%
Total BTS 130,935 155,782 38,133 324,850 100.0%
Source: Company data, Credit Suisse research
Again, Hutch Indonesia and SmartFren look vulnerable. While SmartFren has received a
very generous allocation of unpaired spectrum at 2.3GHz, it lacks coverage. To catch up
on coverage will take a long time and, as we shall see, requires a level of capex
investment which would preclude a reasonable return on capital. Similarly, even 12 years
after Cyber Access (Not listed) was acquired to form Hutch Indonesia, given the size of the
network resources deployed and the aforementioned limitations on 1800MHz (4G)
spectrum resources, we would estimate that the company remains deeply cash flow
negative—just as Axis was before its acquisition by XL.
Capital intensity
Telkomsel's geographical coverage advantage over Indosat and XL looks unlikely to be
overhauled when we consider both recent and projected capex trends. Telkomsel has
been outspending both Indosat and XL by ratios of more than 2:1, and we expect this to
continue. In fact these figures understate the magnitude of Telkomsel's capex advantage,
given that we have compared the capex of Telkomsel alone with the consolidated (fixed
plus cellular) capex of Indosat. Were we to include an allocation of fibre investment from
PT Telkom's fixed line division in support of Telkomsel, the gap would be even wider. On
the other hand, when we consider Telkomsel's much larger subscriber base, Telkomsel is
of course enjoying the benefits of scale (a lower capex to sales ratio), but in our view is
probably maintaining, rather than actually widening its coverage and quality gap over XL
and Indosat based on the current capex trajectories.
20 June 2017
Asia Telecoms Sector 32
Figure 44: Capex by operator (Rp bn) Figure 45: Capex-to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Balance sheet strength and capex sustainability
We note that both XL and Indosat are now well positioned to maintain the aforementioned
capital intensity; on the basis of our current projections both operators are free cash flow
positive. Furthermore, after an aggressive de-leveraging process, XL's FY16 net debt to
EBITDA was lowered to 1.9x and Indosat's was lowered to 1.7x (PT Telkom's net debt to
EBITDA as at FY16 was just 0.0x). Importantly, XL has also cut its USD-denominated debt
exposure to just US$350 mn (fully hedged) from a peak of over US$1.5 bn, while Indosat
has cut its USD-denominated debt exposure to just US$180 mn, from a peak of US$1.2
bn. Neither operator now looks capital constrained therefore, but, as previously mentioned,
balance sheet pressure during FY14-15 in our view clearly contributed to decisions made
by both management teams to minimise capex commitments outside Java, thereby
perpetuating Telkomsel's very strong geographical coverage advantages.
Regulation
Regulation can be a trigger for a step-change in market share dynamics, but we are not
expecting any material changes in Indonesia. High voice interconnect rates favour the
largest player with the largest 'network' of subscribers, since they tend to enjoy a net inflow
of traffic. Indonesia's very high interconnect rates have also increased the 'value
proposition' of Telkomsel offering cheap 'on-network' calls between its subscribers, and
making it difficult for smaller players to break in to Telkomsel-dominated areas (particularly
outside Java where, on average, smartphone penetration is lower and voice usage
higher). As mentioned, Indonesia's regulator, the BRTI, recently drew back from a cut in
interconnect rates cut from Rp250/min to Rp185/min.
Similarly, more radical plans, aired in mid-2015, to make network sharing mandatory (and
therefore potentially to completely remove network coverage advantages), were not
supported by the government and have been abandoned. The ongoing status quo in
regulation can be viewed as positive for Telkomsel, and, together with spectrum, network
and capex considerations, lead us to expect only an improvement in the relative growth
rates of XL and Indosat, rather than material market share gains from the two challengers.
Do smaller players have a viable business?
We note that cellular operators do not really have the luxury of 'cherry picking' coverage
areas. In order to attract subscribers, cellular players must be able to demonstrate broad,
seamless coverage. Given that this overall coverage capex requirement, together with
associated operating costs, is common to all cellular operators, the relative scale or
revenue market share is the primary determinant of returns on invested capital and
profitability. The large disparity in revenue market share in Indonesia, together with the
very high 'fixed' cost of rolling out a cellular network across its wide geography, leads to
starkly differing returns on capital.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY14 FY15 FY16 FY17 FY18 FY19 FY20
Telkomsel Indosat XL
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
Telkomsel Indosat XL
Only Telkomsel currently generates a ROIC above WACC…
20 June 2017
Asia Telecoms Sector 33
Indeed, in FY16, only one cellular player—Telkomsel—was able to generate a return
greater than cost of capital. Its FY16 revenue market share of 62.0% was able to drive a
very attractive ROIC of 43.9%, given high EBITDA margin (57.4%) (thanks to the absence
of handset subsidies) and asset turn of 1.4x.
Neither Indosat nor XL is currently generating adequate returns on capital. With FY16
revenue share of 17.2%, Indosat generated an ROIC of 7.6%, lower than our assumed
WACC of 11.2%. XL's returns are even lower, at just 0.1%, versus a WACC of 11.2%.
The crux of the problem is that, due to the aforementioned coverage capex requirements,
Indosat and XL's invested capital, at Rp36.6 tn and Rp37.8 tn represent 57.7% and
59.6%, respectively, of Telkomsel's invested capital. Yet at Rp29.2 tn and Rp21.4 tn,
respectively, Indosat and XL's service revenues represent only 33.7% and 24.7% of
Telkomsel's FY16 service revenue of Rp86.7 tn. Given network operating costs, Indosat
and XL's consolidated EBITDA margins are also much lower than Telkomsel's, at 44.1%
and 37.6%, respectively. On each measure XL is worst-placed than Indosat, in part due to
a relatively aggressive (and in hindsight inefficient) roll-out of 2100MHz 3G equipment, in
part due to the expense of the Axis acquisition, and in part due to the loss of revenue
share following the 1H15 change in strategy.
While we have not explicitly shown an ROIC analysis for Hutch Indonesia and SmartFren
given a lack of consistent published financial information, our market revenue model
suggests that Hutch Indonesia commands a revenue share of around 6%, while
SmartFren's revenue is still negligible as it transitions its business to 4G cellular from 2G
CDMA. At 6% revenue share Hutch Indonesia's revenue would only be one-tenth of
Telkomsel's and less than half of XL's revenue base. Heavy fixed cost would make
negative returns on capital highly likely.
Figure 46: ROIC analysis
FY16 FY20 4 -year CAGR
Rp bn Telkomsel Indosat XL Telkomsel Indosat XL Telkomsel Indosat XL
Subscribers (000s) 173,920 85,600 46,433 177,920 92,000 62,537
Service revenue 86,725 29,185 21,412 113,231 35,200 27,346 6.9% 4.8% 6.3%
EBITDA 49,781 12,864 8,056 63,183 15,151 10,575 6.1% 4.2% 7.0%
EBITDA margin 57.4% 44.1% 37.6% 55.8% 43.0% 38.7%
Depreciation to sales (%) 14.8% 30.7% 37.6% 14.7% 24.2% 29.6%
EBIT 36,974 3,891 12 46,488 6,618 2,476 5.9% 14.2% 279.0%
EBIT margin 42.6% 13.3% 0.1% 41.1% 18.8% 9.1%
Tax rate (%) 24.7% 28.9% -102.5% 25.0% 25.0% 25.0%
NOPLAT 27,830 2,765 24 34,866 4,964 1,857 5.8% 15.8% 195.7%
Average invested capital 63,443 36,581 37,801 75,663 29,360 29,144
Asset turn 1.4 0.8 0.6 1.5 1.2 0.9
ROIC 43.9% 7.6% 0.1% 46.1% 16.9% 6.4%
Net profit 28,194 1,105 375 35,062 3,526 1,712 5.6% 33.7% 46.1%
Net margin 32.5% 3.8% 1.8% 31.0% 10.0% 6.3%
Source: Company data, Credit Suisse estimates
The most obvious way for the smaller players to drive up their returns is to generate more
revenue (while keeping operating costs under control). We believe that in the case of
Indosat and XL, with 17.2% and 14.7% FY16 service revenue market share respectively,
and with the benefit of competitive spectrum allocations, geographical coverage and
capital intensity, this expectation is reasonable.
Indeed, by 2020 we expect Indosat's ROIC to reach double digits, even growing slightly
slower than the overall cellular industry. The high operational leverage conferred by
Indosat's heavy fixed network, spectrum and staff costs lead us to project 33.7%
compound growth in earnings.
..but Indosat is set to achieve double-digit
ROIC by 2020
20 June 2017
Asia Telecoms Sector 34
XL's ROIC and earnings growth are expected to follow a similar trajectory, but XL's smaller
scale and commensurately heavier fixed costs result in a lower starting point on earnings
and ROIC, and even higher growth. Thus, ROIC is expected to more than triple by FY20,
and earnings are expected to grow at 46.1% compound. We do expect XL to achieve
double digit ROIC and therefore a 'viable' business, but this is expected to occur two years
later, in 2022.
On the other hand, our analysis suggests that without structural change—such as
consolidation, or a material regulatory change such as the introduction of mandatory
roaming—players which are smaller than XL in revenue terms are not likely to generate
returns anywhere close to cost of capital even in the medium term.
What's in the price?
We continue to rely primarily on discounted cash flow (DCF) to set our target prices, since
it is the only way to fully capture the multi-year nature of cellular investment and payback
(particularly given what we have explained to be heavy upfront capex to establish
nationwide coverage and launch credible cellular services).
At present, we believe that the market is overpaying slightly for quality and scale
advantages, given that we have only 16.7% potential upside for PT Telkom, but 41.9% for
Indosat. This might reflect PT Telkom's far superior liquidity (average trading volume
US$24 mn per day over the last six months, versus US$1.8 mn for XL and US$0.2 mn for
Indosat). It might also reflect the higher risk attached to Indosat, given that it does not yet
generate adequate returns. However, we would argue that this risk is potentially being
'double-counted', since our DCF already by definition discounts future cash flows more
heavily by applying a time value of money.
While multiples related to any particular year are less helpful (since they only represent a
'slice' of the overall investment project) standard comps for FY17 and FY18 suggest a
similar conclusion. Indosat currently trades at a meaningful discount to PT Telkom on
EV/EBITDA and EV/IC, more than reflecting the lower return on invested capital that is
currently being generated.
While Indosat looks more attractive than PT Telkom, following a sharp share price rally XL
now looks close to fully valued, in our view, particularly in the context of its poor returns on
capital. We downgrade the stock to NEUTRAL.
Figure 47: Indonesian cellular sector—comparative valuation
Close Target Upside Normalised P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
XL 3,160 3,600 13.9% 60.5 36.1 5.4 4.9 1.3 1.3 2.7% 6.4% 0.5% 2.2%
Indosat 6,200 8,800 41.9% 14.9 12.5 3.8 3.4 1.6 1.5 13.3% 12.5% 3.3% 4.8%
PT Telkom 4,370 5,100 16.7% 17.8 16.2 9.3 8.4 3.8 3.7 3.9% 5.4% 3.9% 4.3%
NJA - integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
NJA - Mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
Source: Company data, Credit Suisse estimates
Indonesia remains, in our view, the most attractive cellular market in Asia, with no new
entrants (in fact, consolidation), no handset subsidies, and limited risk on spectrum fees.
While PT Telkom is (1) a 'consensus buy', (2) is slightly expensive versus regional peers
and (3) has outperformed the regional telco sector over the last 12 months, it remains the
only liquid (large cap) way to invest in the successful monetisation of Indonesia's data
boom.
But for investors who can invest in stocks with lower daily trading volumes, Indosat offers
more potential upside than PT Telkom from current share price levels. This makes intuitive
sense; in a growing market with a benign competitive environment the high operational
gearing of the smaller operators can work in their favour. Crucially, we believe that both
XL has what we might call 'the minimum'
scale to be sustainable
The market is 'overpaying' for PT Telkom's scale and
liquidity
We see more upside in XL and Indosat than in
PT Telkom at present
20 June 2017
Asia Telecoms Sector 35
companies are already large enough to reach appropriate scale and produce returns on
capital above cost of capital in within the next 3-5 years, primarily due to overall market
growth.
Figure 48: Share price performance (rebased); XL could recover as revenue grows and ROIC improves
Source: the BLOOMBERG PROFESSIONAL™ service
In contrast, our numbers show that players with revenue market share of less than 14.7%
in FY16 have little chance of reaching sufficient scale and are therefore not in a position to
generate adequate returns, even in the medium term. We conclude that these businesses
are not sustainable, unless subject to material structural change.
30
60
90
120
150
180
210
240
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
PT Telkom XL Axiata Indosat
20 June 2017
Asia Telecoms Sector 36
Korea
Summary
■ In terms of industry structure, the Korean market looks relatively unattractive, with high
4G penetration and extensive handset subsidies.
■ We expect the Korea market to grow service revenue at a CAGR of 1.7% across FY16-
FY20; in positive territory.
■ SKT is dominant with 48.0% revenue market share as at 1Q17 and an FY16 ROIC of
5.5%. However this looks to be partly in the price.
■ #2 player KT and challenger LGU look to be undervalued relative to their strong cash
flow generating ability, with no major capex needs in the years before 5G.
4G-driven cellular revenue growth
Korea telcos rolled out 4G from 2H11, triggering intense competition among the three
operators based on handset subsidy, in pursuit of high ARPU subscribers. All three
operators saw a sharp rise in marketing expenses which also increased regulatory
pressure from the government. Nevertheless, 4G had a positive impact on the revenue
side. Net adds remained limited due to high cellular penetration but Korea telcos were able
to turn around cellular ARPU which had been on a multi-year declining trajectory due to
limited up-selling effect from 3G and government tariff cut pressures. Consumers reacted
positively to enhanced data speed and were willing to pay a premium and the operators
also devised sensible tariff schemes based on data consumption demand, in our view
Driven by rapid 4G take-up rate (30% by end of 2012, 52% by end of 2013, and 63% by
end of 2014), the Korea telcos enjoyed relatively decent top-line growth during 2012-14 in
a market that already was well into maturity growth stage. With 4G penetration now well
over 70%, 4G take-up driven ARPU growth has largely subsided but rather is being
pressured by (1) 'selective tariff discount programme' in which subscribers opt for c.20%
tariff discount over one-off handset subsidy, and (2) rise in MVNO second device subs.
Figure 49: Cellular service revenue growth
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
SKT -1.2% -2.4% -2.8% -3.1% -1.0% -1.0% -1.5% -0.4% -0.7%
KT 5.6% 5.6% 2.3% -0.6% 2.8% 2.2% 1.7% 0.2% -1.5%
LGU 4.5% 6.1% 3.7% 0.0% 3.6% 2.8% 3.5% 3.2% 3.8%
Total 1.9% 1.6% 0.0% -1.7% 1.1% 0.8% 0.5% 0.6% 0.0%
Source: Company data, Credit Suisse estimates
During the 4G era, growth has been skewed to the third operator LGU, which previously
had only competed based on price. LGU’s network strategy heavily depended on 4G (i.e.,
pre-emptive investments, aggressive spectrum acquisition) and it paid off due to
consumers' fast take-up of 4G. As a result, LGU became the biggest mover during the 4G
era on cellular service revenue market share, gaining 7.7 pp share during 2011 and 2016,
while the number one player SKT lost 7.3 pp and number two KT lost 0.4% pp.
Korea enjoyed decent revenue growth during 2012-14 driven by rapid
increase in 4G penetration…
20 June 2017
Asia Telecoms Sector 37
Figure 50: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
SKT 50% 49% 49% 49% 49% 48% 48% 48% 48%
KT 29% 29% 29% 29% 30% 30% 30% 29% 29%
LGU 21% 22% 22% 22% 22% 22% 22% 23% 23%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
Source: Company data, Credit Suisse estimates
Several factors have been behind this lopsided industry growth.
■ Ambitious focus on 4G and strong execution: LGU had a key focus on 4G, pre-
emptively investing in 4G and focused on complete overhaul on branding, which
previously was mostly known for cheaper tariffs but poor network quality. Despite its
smaller scale, LGU aggressively rolled out 4G acquiring 2.6GHz spectrum with 40MHz
bandwidth in 2013 which further helped solidify it as a leading 4G operator. LGU also
was aggressive on the marketing front, consistently outspending its competitors. This
aggressive capex and opex drove FCF into negative during 2011-14 but the focus
appears to have paid off as superior net adds and high growth of ARPU have put FCF
back in black from 2015.
■ Weak execution from SKT/KT: In comparison, SKT initially was less motivated and
proactive on 4G, in our view, due to its previous heavy investments in 3G. KT's 4G roll-
out was c.6 months late due to legal issues regarding 2G network termination.
Relatively relaxed entrances into 4G from SKT/KT have partially helped LGU re-brand
itself in the 4G era, in our view.
Limited upside for cellular revenue
With smartphone penetration close to 98% and LTE penetration at 91%, we see limited
upside for Korea operators' cellular revenue. Data consumption growth is still strong,
growing by 31% YoY (March 2017 average data consumption per 4G subscriber was
6.1GB); however, we believe this may be mainly driven by data consumption from
subscribers with unlimited data plans. Data consumption from subscribers without
unlimited data plans are rising more steadily as they should be more disciplined to stay
within the data capacity of their tariff bracket.
Figure 51: Smartphone and 4G penetration Figure 52: 4G penetration vs GDP per capita
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We believe the key revenue drivers are, unlimited data plan take-up rate and increase in
data consumption for non-unlimited data plan subscribers, which should result in migration
to higher data bucket plans.
On the other hand, Korean telcos are seeing pressure from selective tariff discount plans,
initiated by the government. Consumers have a choice to opt for selective tariff discount
SingaporeHong Kong
Malaysia
Indonesia
Korea
China
Thailand
PhilippinesIndia
Taiwan
Australia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
4G p
enet
ratio
n
GDP per capita (US$)
…LGU has been the great turnaround story
during 4G era
Limited upside on 4G penetration rates…
Uptake in unlimited data plans and
selective tariff discount plans cancel each
other out…
20 June 2017
Asia Telecoms Sector 38
plans at the expense of subsidy (i.e., cumulative monthly tariff discount should largely
match the upfront subsidy on a handset).
Heading into the latter part of the 4G era, we do not see much change in trend for the
three Korean operators, although there may be some changes in FY20, triggered by the
roll-out of 5G during late FY19. Even for 5G, our current base-case scenario is that, there
may not be too many implications on the B2C side, as currently 4G offers satisfactory
speed for most consumers, in our view, and all three telcos have heavily invested in 4G.
Unless there is an emergence of a killer service which requires 5G on the consumer side,
we believe 5G impact will be more subtle vs 4G.
Figure 53: YoY cellular revenue growth (W bn) and revenue growth rates (%)
W bn FY14 FY15 FY16 FY17 FY18 FY19 FY20
SKT 70 (265) (105) (19) (39) (53) (37)
KT 374 198 112 32 177 70 1
LGU 465 165 159 193 168 129 107
Total 94 98 166 206 307 146 70
Growth (% YoY)
SKT 0.6% -2.4% -1.0% -0.2% -0.4% -0.5% -0.3%
KT 6.3% 3.1% 1.7% 0.5% 2.7% 1.0% 0.0%
LGU 11.0% 3.5% 3.3% 3.9% 3.2% 2.4% 1.9%
Total 4.3% 0.4% 0.7% 0.9% 1.4% 0.6% 0.3%
Source: Company data, Credit Suisse estimates
We expect LGU to continue to gain market share
With similar network quality from the three operators and slightly more aggressive
marketing expense from LGU and arguably the strongest brand in regards to 4G, we think
LGU will continue to get the upper hand on handset-based MNO net adds which will also
lead to a resilient cellular ARPU trend going forward. Thus, we expect LGU to continue to
outgrow its competitors.
Figure 54: Cellular revenue (W bn) and revenue market share (%)
W bn FY14 FY15 FY16 FY17 FY18 FY19 FY20
SKT 11,180 10,915 10,810 10,791 10,752 10,699 10,662
KT 6,313 6,511 6,623 6,655 6,833 6,903 6,904
LGU 4,678 4,843 5,002 5,195 5,363 5,491 5,598
Total 22,171 22,269 22,435 22,641 22,947 23,093 23,164
Market share (%)
SKT 50.4% 49.0% 48.2% 47.7% 46.9% 46.3% 46.0%
KT 28.5% 29.2% 29.5% 29.4% 29.8% 29.9% 29.8%
LGU 21.1% 21.7% 22.3% 22.9% 23.4% 23.8% 24.2%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Spectrum allocations and BTS by operator
■ KT is the only operator that discloses the number of base transceiver systems (BTS) in
its 20F filing. However, it is our understanding that the three telcos are largely at par in
terms of number of BTS, based on our discussions with Korea telcos. Moreover, with
the data-centric nature of 4G and beyond, we consider bandwidth capacity more of a
driver for network quality compared to the number of BTS.
■ LGU made a surprise move back in 2013, acquiring 40 MHz bandwidth in 2.6 GHz
frequency, securing ample bandwidth for its 4G-centric network strategy. This move
was quite aggressive as LGU did not have a presence in this frequency previously
which meant that the network build-up has to be ground-up. This led to sharp capex
…unless there is an emergence of a killer service in regards to 5G, revenue growth
trend should not see meaningful derail from
the previous trend
LGU should continue to see superior net adds on MNO which in turn
will result in more resilient ARPU trend
20 June 2017
Asia Telecoms Sector 39
increase for LGU in 2014 on top of high ramp-up of capex during 2011-12 driven by the
initial roll-out of 4G.
■ Currently, SKT/KT/LGU each has 135/95/100 MHz bandwidth for 4G. If we compare
the 4G bandwidth capacity per million 4G subscribers, LGU has the biggest capacity of
9.1MHz per mn subs, followed by KT with 7.0MHz/mn, and SKT with the smallest
capacity at 6.4MHz/mn.
■ It is largely expected that MSIP (Ministry of Science, ICT and Future Planning) will
provide specific plans for allocating 3.5GHz and (or) 28GHz spectrum for 5G services
during 2H18 and host spectrum auction during 2019 for 2020 commercialisation. We
also note that there has also been news flow (Digital Times, 9 May) that the schedule
may be expedited depending on the readiness of the operators.
Figure 55: Spectrum by operator
(MHz) 800MHz 900MHZ 1.8GHz 2.1GHz 2.6GHz
SKT
15*2 10*2 20*2 20*2
17.5*2 10*2 10*2
20*2
KT
5*2 10*2 10*2 20*2
7.5*2 20*2
10*2
LG Uplus 10*2 10*2 10*2 20*2
10*2
Source: Company data
20 June 2017
Asia Telecoms Sector 40
Figure 56: Detailed spectrum status per network generation
Source: Company data, Credit Suisse estimates
Figure 57: 4G spectrum capacity per 4G subscribers
Source: Company data, Credit Suisse estimates
Capex intensity
There is not much differentiation with regards to geographical coverage among Korea
telcos as all three are well covered. The three telcos had a 4G-driven capex upcycle
during 2011 and 2014 with initial roll-out, followed by additional increase in data
throughput. As can be seen in 2014, LGU was the most aggressive in further data capacity
ramp-up. It is somewhat surprising that after initially enjoying incremental capex
advantage during 2012 and 2013, SKT does not appear to enjoy superior advantage
despite a much larger cellular user base. We do note that our analysis includes fixed
service revenue and capex which may dilute some advantage for SKT and possibly
smaller 4G bandwidth per user may result in higher maintenance capex on the cellular
side. We think a 5G-driven capex upcycle will take place from 2019. Our base-case
scenario is that the capex intensity will reach a similar level to the initial 4G roll-out phase.
In actuality, 5G nationwide roll-out should entail higher capex than 4G as the spectrum
SKT
(MHz) Total Uplink Downlink
Total (4G) 165 (135) 80 (65) 85 (70)
800 - 4G 20 10 10
800 - 2G 10 5 5
1800 - 4G 35 15 20
2100 - 3G 20 10 10
2100 - 4G 20 10 10
2600 - 4G 60 30 30
KT
(MHz) Total Uplink Downlink
Total (4G) 125 (95) 60 (45) 65 (50)
800 - 3G 10 5 5
900 - 4G 20 10 10
1800 - 4G 55 25 30
2100 - 3G 20 10 10
2100 - 4G 20 10 10
LGU
(MHz) Total Uplink Downlink
Total (4G) 120 (100) 60 (50) 60 (50)
800 - 4G 20 10 10
1800 - EV-DO Rev.A 20 10 10
2100 - 4G 40 20 20
2600 - 4G 40 20 20
4G subs (mn) 4G bandwidth (MHz) 4G bandwidth per mn 4G subs
SKT 21.3 135 6.4
KT 13.6 95 7.0
LGU 10.9 100 9.1
20 June 2017
Asia Telecoms Sector 41
used for 5G requires higher number of BTS (e.g., for 28 GHz, we understand the reach is
one-fifth of 1.8 GHz or 2.1 GHz) but we think the pace of roll-out will be slower than that of
4G. Admittedly, this is very much a shot in the dark as the size of incremental capex is not
easily quantifiable at this juncture due to several factors as illustrated below.
■ Nationwide or hotspot concentrated? With rapid penetration of 4G, the operators
quickly ramped up 4G network nationwide. However, it is not clear at the moment
whether there will be meaningful demand for 5G for B2C, thus meaningful upselling
across subscribers may be limited, at least initially. Thus, we are inclined to think the
pace of roll-out may be slower and concentrated on hot-spots but competitive factors or
emergence of meaningful B2C/B2B business opportunity regarding 5G may trigger
faster ramp-up, in our view.
■ 3.5 GHz or 28 GHz? Our understanding is the global standards are leaning towards
28GHz for 5G; however, 3.5GHz is also being considered by MSIP. For cost
considerations, 3.5GHz would be beneficial as we understand there is higher
compatibility with existing network equipment and lower frequency would also entail
less need for small cell which should require less BTS.
Figure 58: Capex by operator Figure 59: Capex-to-sales ratio
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Regulations
■ Of late, the presidential candidates had been making various pledges with regards to
telecom tariffs, which is a norm looking at past elections, in our view.
■ But the leading five candidates did not have tariff-related pledges in their key ten
pledges list. The emphasis appears to be largely more on enhancing competitiveness
amid the so-called fourth industrial revolution, including by President Moon.
■ We believe the characteristics of 5G (high data throughput, high capacity of
connections and low latency) have strong reliance on the Fourth Industry Revolution.
We believe the government will not be too aggressive in curbing investment capacity
ahead of 5G investments via interventions regarding tariff cuts.
■ The existing pledges from President Moon appear overly negative to be feasible, and
some contradict each other, in our view.
■ As we see from the past, the actual implementation of the tariff cut initiatives did not
yield as much damage since the industry is constantly evolving, and the regulations
often were made irrelevant.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E
(W bn)
SKT KT LGU
0%
5%
10%
15%
20%
25%
30%
35%
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E
SKT KT LGU
20 June 2017
Asia Telecoms Sector 42
Balance sheet strength and capex sustainability
All three Korea telcos are displaying solid balance sheet strength to drive up capital
intensity ahead of 5G investments. All three telcos are showing elevated FCF level with
margin improvement from cost efficiency and a declining (or stabilised) capex trend. SKT
has continued to maintain ~1.0-1.2 x net debt to EBITDA but KT and LGU have recently
have gone through a de-leveraging process lowering net debt to EBITDA level to ~1.1-
1.5x. None of the three Korea telcos appear capital constrained assuming 5G capex
intensity remains similar to 4G level (i.e., higher capex requirements but a slower roll-out
agenda)
Superior ROIC for LGU
We find none of the Korea telcos currently generate adequate returns on capital. The three
telcos’ WACC ranges from 7.3% to 7.5% while SKT/KT/LGU’s ROIC in 2016 was
5.5%/5.6%/7.0% respectively.
However, we think KT and LGU’s ROIC will move above cost of capital in FY20E and
FY17E, respectively. On our estimates, we do not think SKT will make a meaningful
improvement in ROIC and will continue to generate returns below cost of capital. Based on
our ROIC analysis, SKT does enjoy superior margins likely based on dominant cellular
share (albeit declining trend); however, its asset turnover is the lowest compared to its
competitors, likely due to non-parent segment.
Figure 60: ROIC analysis
ROIC analysis FY16 FY20 4-year CAGR
(W bn) SKT KT LGU SKT KT LGU SKT KT LGU
Subscribers (000s) 29,595 18,457 12,235 31,387 21,369 13,856
Service revenue 14,638 19,528 8,607 15,012 20,822 9,886 0.6% 1.6% 3.5%
EBITDA 4,603 4,785 2,400 4,746 5,159 2,825 0.8% 1.9% 4.2%
EBITDA margin 31.4% 24.5% 27.9% 31.6% 24.8% 28.6%
Depreciation to sales (%) 21.0% 17.1% 19.2% 22.0% 16.6% 17.9%
EBIT 1,536 1,440 747 1,440 1,705 1,059 -1.6% 4.3% 9.1%
EBIT margin 10.5% 7.4% 8.7% 9.6% 8.2% 10.7%
Tax rate (%) 20.8% 29.2% 23.3% 24% 24% 24.0%
NOPLAT 1,216 1,019 572 1,094 1,296 805 -2.6% 6.2% 8.9%
Average invested capital 22,266 18,182 8,201 25,117 18,504 8,457
Asset turn 0.6 0.8 1.0 0.5 0.7 0.9
ROIC 5.5% 5.6% 7.0% 4.4% 9.2% 9.5%
Net profit 1,660 798 562 2,384 1,409 740 9.5% 15.3% 7.1%
Net margin 11.3% 4.1% 6.5% 15.9% 6.8% 7.5%
Source: Company data, Credit Suisse estimates
What's in the price?
To fully capture the multi-year nature of cellular investments and payback, we have
recently shifted our valuation methodology for KT and LGU to discounted cash flow (DCF).
We have been using DCF to value SKT's parent operations in SOTP valuation.
Based on our DCF valuations, we see the biggest upside for LGU (21% upside), while we
see the least upside (16% upside) for SKT. KT also offers a decent upside of 20%.
On relative valuation, KT appears attractive on most metrics. Especially on EV/EBITDA
multiple, the company appears especially cheap. SKT appears cheap on P/E basis due to
large inflow of equity method gain but on EV/EBITDA metrics, it does not look cheap in
comparison to its competitors. LGU is seemingly more expensive; however, we think its
superior returns justify the premium.
20 June 2017
Asia Telecoms Sector 43
We continue to remain positive on Korea telcos industry position, as for the next 2.5 years,
the operators are set to enjoy latter monetization stage of 4G. We see limited growth for
cellular however benign competition will result in solid earnings trend in our view. Capex
should also remain calm until 5G driven upcycle possibly kicking in from 2H19. On the
regulatory side, we are seeing more noises than previously as Korea now has a new
president. Nevertheless, we think actual implementations will be softer (vs the pledges)
since key agenda for the new government includes supporting ICT industry amid so called
Fourth Industrial Revolution. We see LGU having the biggest upside as the company has
levelled up substantially during the early part of 4G era, making it large enough to scale up
and produce higher returns over cost of capital.
Figure 61: Korea cellular sector—comparative valuation
Close Target Upside Normalised P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
SKT 242,000 280,000 15.7% 7.7 6.9 5.3 5.0 1.1 1.0 4.0% 3.8% 4.1% 4.1%
KT 31,600 38,000 20.3% 8.7 7.4 2.6 2.3 0.7 0.6 12.6% 13.9% 3.5% 4.1%
LGU 16,600 20,000 20.5% 12.9 11.1 4.0 3.7 1.3 1.2 11.4% 12.0% 2.4% 2.8%
Source: Company data, Credit Suisse estimates
Figure 62: Share price performance (rebased) LGU could continue to
outperform on superior ROIC
Note: Rebased as of 1 January 2014. Source: Quantiwise
70
80
90
100
110
120
130
140
150
160
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
SKT KT LGU
20 June 2017
Asia Telecoms Sector 44
India
Summary
■ In terms of industry structure, the Indian market looks unattractive, with Rjio as an
aggressive new entrant posing heavy competitive pressure on industry returns.
■ We expect the Indian market to grow service revenue at a CAGR of 4.0% across
FY16-FY20.
■ Bharti is dominant with 29.0% revenue market share as at 1Q17 and an FY16 ROIC of
6.5%. However, we expect Bharti to suffer margin and capex pressure and suppressed
returns on capital from competition. We highlight it as a top regional sell.
■ IDEA looks to be a #2 player with expectation of the promised merge synergies more
than priced in. Jio's returns look set to be unattractive.
Three dominant players gaining share—before Jio's
entry
Historically, India has been quite competitive with the No.1 player never crossing 34%+
revenue market share due to the presence of 10-12 players at all times. The earlier
regulatory policy of low entry cost (Rs16.5 bn/US$250 mn for nationwide spectrum)
ensured high competition. Prior to the policy of auctioning spectrum which started since
2010, spectrum was allocated administratively with operators required to pay spectrum
usage charges and licence fees (~12% of adjusted gross revenues).
Figure 63: Revenue market share of Bharti, the market leader, peaked out 33.8%
in 2009
Source: Company data, Credit Suisse estimates
However, over the years, there have been a few regulatory changes that have led to
market shares consolidating with the top three operators: Bharti, Vodafone, and Idea.
■ Movement to auction-based spectrum allocation. Post the irregularities in 2G
spectrum allocation, the government has moved on to the policy of auctioning
spectrum with the key intent being highest revenue for the state exchequer. This has
resulted in bigger players bidding aggressively, in effect crowding out the smaller
players.
0%
20%
40%
60%
80%
100%
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Bharti Vodafone Idea RCOM BSNL/MTNL
TTSL Aircel BPL HFCL S Tel
Uninor Videocon Etisalat Sistema Shyam Jio
20 June 2017
Asia Telecoms Sector 45
■ Forced cancellation of licences in 2012. In 2012, the Supreme Court cancelled all
licences issued by the government from 2008 onwards and directed its re-allocation
through the auction process. This put the business continuity of operators in question.
As a result of these, the top three operators have been gaining market share over the last
8-9 years. However, as seen below, Idea, and to a smaller extent Vodafone, have been
the bigger market share gainers while Bharti has been largely stagnant.
Figure 64: Idea, and to a smaller extent Vodafone, gained market shares;
Bharti’s share has been largely stagnant
Source: TRAI, Company data, Credit Suisse estimates
Market structure changing rapidly since Jio’s entry
Reliance Jio started commercial services in September 2016 with the launch of free
services for three months which was later extended for another four months. During this
period, incumbent operators witnessed a sharp contraction in all financial and operating
parameters with ARPU compressing 19-22%, data and voice pricing compressing by 45-
46% and 25-27%, respectively, from the June 2016 quarter levels. This resulted in
significant loss of revenues for the industry. Indeed, Bharti’s India mobile revenues
declined by 6% YoY in 2H FY17, while in the case of Idea it was 9%.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16
Bharti Vodafone Idea
20 June 2017
Asia Telecoms Sector 46
Figure 65: Revenues for the industry declined by 5% in 2H of CY16 vs 1H CY16
Source: Company data, Credit Suisse estimates
Even after Jio has announced the start of paid services from April 2017, the price points
are significantly lower than that of the incumbents putting further pressure on them. This
intense competition has resulted in rapid consolidation in the sector with even the number
two and three operator (Vodafone-Idea) announcing their decision to merge.
Figure 66: Jio’s entry has accentuated consolidation among the operators
Deal Expected time line
Bharti - Telenor deal Expected to be completed over next few quarters. (12M)
Bharti - Tikona deal Expected to be completed over next few quarters. (12M)
Idea-Vodafone merger Management expects the deal to be completed in CY2018. A longer time line would be viewed
negatively for both the entities, given that individually both of them stand on a weaker footing to
compete with Airtel and Jio.
RCOM-Aircel merger Companies have received Competition Commission of India, Securities and Exchange Board of India
and stock exchange approvals. Shareholders of both the companies have approved the merger. We
expect the transaction to take some more time.
Source: Company data, Credit Suisse estimates
Good growth potential, but ability to monetise is key
From a top-down perspective, the Indian cellular market does offer good growth potential
given that smartphone and 4G penetration are the lowest amongst other Asian countries.
Smartphone penetration has reached 28% while 4G penetration is expected to have
reached 7%. Further, as we can see in the figure below, countries with higher per capita
GDP tend to have higher 4G penetration. With India having much headroom to grow its
GDP per capita, prospects for increasing 4G penetration seem encouraging.
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
Jun-10 Sep-11 Dec-12 Mar-14 Jun-15 Sep-16
Telecom Indutry revenuesRs mn
Launch of free services by Jio
20 June 2017
Asia Telecoms Sector 47
Figure 67: Smartphone and 4G penetration Figure 68: 4G penetration vs GDP per capita
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
With Jio’s entry offering free services for seven months, volumes have increased
significantly especially with data volumes for Bharti and Idea increasing 42%/36% from the
June 2016 quarter. However, one of the key questions to answer is whether this volume
growth will drive revenue growth even in the longer term. We have seen operators
struggling to take up data and voice tariffs, even before Jio's entry. In particular, Idea was
seen as using pricing aggression to gain share.
Figure 69: Industry struggled to take up pricing even before Jio’s launch—Idea
was focusing on market share gain keeping pricing in check
Source: Company data, Credit Suisse estimates
Even after Jio started its ‘paid’ services beginning April 2017, its price points are
significantly below the current pricing levels seen from incumbent operators. Over the
course of the last nine months, Jio has managed to bring down the data pricing levels by
45-46% for incumbents. Also, Jio’s bundled plans—offering voice bundled with data—are
increasingly causing incumbents to also offer bundled plans.
SingaporeHong Kong
Malaysia
Indonesia
Korea
China
Thailand
PhilippinesIndia
Taiwan
Australia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
4G p
enet
ratio
n
GDP per capita (US$)
20.0
25.0
30.0
35.0
40.0
45.0
Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16
Idea voice RPM Bharti voice RPM
20 June 2017
Asia Telecoms Sector 48
Figure 70: Jio has managed to bring down data price tables
Source: Company data, Credit Suisse estimates
Increasingly, there have been reports of Jio coming out with 4G feature phones to cater to
the lower end of the market, which is primarily voice-centric. To give some perspective,
Bharti (India mobile) and Idea receive 73-75% of their revenues from voice. Even on its 4Q
FY17 earnings call, Bharti Airtel’s CEO alluded to potential disruption from 4G feature
phones if Jio were to come up with one at a subsidised cost.
We now build low revenue growth for FY18 and FY19 for the industry (which coupled with
Jio's growth means flat/decline in top line for others). While we build in a strong recovery
period with ~9% revenue growth for the following 2-3 years, we eventually normalise
growth rates to a ~6% CAGR upto FY25. We believe this will be in line with the telecom
spend/GDP trajectory in India and other countries—and reflect the 'undisturbed' growth
rates for the industry 18 months prior to Jio's entry. We believe risks, if any, to these
expectations are to the downside.
Figure 71: YoY cellular revenue growth and revenue growth rates
Rs mn FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Bharti 36,127 52,801 41,182 4,693 9,626 28,765 95,115 65,848 73,052 51,683 46,547 44,908
Vodafone + Idea 85,689 79,868 53,178 13,511 (63,567) (6,241) 46,458 62,007 64,162 53,925 48,567 46,857
Jio - - - - 277,628 180,464 101,483 115,214 154,367 51,142 46,061 44,439
Others 31,794 45,843 7,713 16,267 (208,788) (103,808) (59,806) (45,822) (79,618) 8,225 7,408 7,147
Total 153,610 178,513 102,074 34,471 14,899 99,180 183,251 197,247 211,963 164,975 148,583 143,351
Growth (% YoY)
Bharti 8.4% 11.3% 7.9% 0.8% 1.7% 5.0% 15.8% 9.4% 9.6% 6.2% 5.2% 4.8%
Vodafone + Idea 15.9% 12.8% 7.5% 1.8% -8.2% -0.9% 6.6% 8.3% 7.9% 6.2% 5.2% 4.8%
Jio 0.0% 0.0% 0.0% 0.0% nm 65.0% 22.2% 20.6% 22.9% 6.2% 5.2% 4.8%
Others 6.0% 8.2% 1.3% 2.6% -33.1% -24.6% -18.8% -17.7% -37.4% 6.2% 5.2% 4.8%
Total 10.2% 10.8% 5.6% 1.8% 0.8% 5.0% 8.8% 8.7% 8.6% 6.2% 5.2% 4.8%
Source: Company data, Credit Suisse estimates
-
50
100
150
200
250
300
350
Jun-14 Jun-15 Sep-15 Jun-16 Dec-16 Mar-17 Apr-17
Indicative pricing for 1GB by incumbentsRs
Launch of Jio's free services
20 June 2017
Asia Telecoms Sector 49
Figure 72: Cellular revenue and revenue market share
Rs mn FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Bharti 466,835 519,636 560,818 565,511 575,137 603,901 699,017 764,864 837,916 889,599 936,146 981,055
Vodafone + Idea 624,899 704,767 757,946 771,457 707,890 701,650 748,107 810,114 874,276 928,201 976,768 1,023,625
Jio - - - - 277,628 458,092 559,575 674,789 829,156 880,298 926,359 970,798
Others 561,367 607,210 614,923 631,190 422,402 318,594 258,788 212,966 133,348 141,573 148,981 156,128
Total 1,653,101 1,831,614 1,933,687 1,968,158 1,983,057 2,082,237 2,265,487 2,462,734 2,674,697 2,839,672 2,988,254 3,131,606
Market share (%)
Bharti 28.2% 28.4% 29.0% 28.7% 29.0% 29.0% 30.9% 31.1% 31.3% 31.3% 31.3% 31.3%
Vodafone + Idea 37.8% 38.5% 39.2% 39.2% 35.7% 33.7% 33.0% 32.9% 32.7% 32.7% 32.7% 32.7%
Jio 0.0% 0.0% 0.0% 0.0% 14.0% 22.0% 24.7% 27.4% 31.0% 31.0% 31.0% 31.0%
Others 34.0% 33.2% 31.8% 32.1% 21.3% 15.3% 11.4% 8.6% 5.0% 5.0% 5.0% 5.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Rapid consolidation of market shares into three
operator groups
We expect rapid consolidation of current fractured market shares where we expect smaller
operators (outside the top three) to go from 30%+ current revenue market share to ~5% in
the long term.
Spectrum allocation by operators
The Indian telecom market has 22 circles with each circle requiring separate spectrum.
Thus having a pan-India spectrum footprint is essential to be able to retain/gain market
share. As can be seen in the table below, only the top three operator groups (i.e., Bharti,
Idea+Vodafone and Jio) along with state-run BSNL/MTNL have the essential spectrum
holdings to be able to compete on a national scale. While BSNL/MTNL has the fourth-
largest spectrum holding, its ability to utilise the spectrum has not been enthusiastic. To
put things in context, it still lacks 4G offerings at a time when the market is rapidly adopting
4G.
Figure 73: Spectrum allocations by operator
Revenue wtd
avg spectrum
800Mhz 900Mhz 1800Mhz 2100Mhz 2300Mhz 2500Mhz Total (paired
equivalent)
Bharti* 5.3*2 12.4*2 6.1*2 26.0 36.75
Vodafone 4.2*2 7.0*2 5.7*2 9.7 21.76
Idea 3.4*2 9.1*2 3.7*2 1.8 6.8 20.45
Jio 7.4*2 6.2*2 27.8 27.47
RCOM 0.3*2 4.0*2 2.5*2 6.70
Aircel 0.8*2 5.2*2 2.7*2 8.73
Tata 1.0*2 5.0*2 2.3*2 8.27
MTNL/BSNL 2.6*2 6.2*2 3.7*2 5.0*2 9.1 21.96
MTS 1.8*2 1.84
* Note: Includes spectrum from Telenor and Tikona deal Source: DOT, company data, Credit Suisse estimates
BTS by operator
Capacity being a function of spectrum, sites and technology, having higher number of sites
becomes important in a geographically vast country such as India to provide ubiquitous
coverage. As can be seen in the table below, Bharti, Idea and Vodafone lead in terms of
number of BTS. Having said that, Jio’s 100k sites need to be seen from the context of
them being purely 4G sites (technologically efficient) giving them higher capacity per site.
Besides, recently Jio has publicly commented on doubling the count of sites to 200k within
few months.
20 June 2017
Asia Telecoms Sector 50
Figure 74: BTS by operator
BTS by operator 2G Broadband (3G+4G) Total
Bharti 162,046 190,860 352,906
Vodafone 141,000 107,000 248,000
Idea 131,486 110,054 241,540
Jio - 100,000 100,000
RCOM 62,250 12,750 75,000
Aircel 46,878 10,500 57,378
Tata 61,234 10,500 71,734
MTNL/BSNL 116,250 10,000 126,250
MTS 12,497 - 12,497
Source: Company data, Credit Suisse research
Balance sheet strength
Indian telcos continue to remain one the most leveraged telcos regionally with net
debt/EBITDA for Idea and Vodafone at 4.9x and 4.3x, respectively. Even at 2.7x, leverage
remains higher for Bharti given its credit rating of BBB- from S&P with the rating agency
sounding caution on its high level of leverage.
Figure 75: Leverage levels at operators
Source: Company data, Credit Suisse estimates
With operators now moving increasingly to bundled service offerings (voice + data),
operators without any data offerings will find it increasingly hard to sustain.
With nearly 90% of revenues converging among the top three operators (Bharti, the soon-
to-be merged Vodafone-Idea, Jio), we assume it to be shared largely evenly by the top
three (31-33% share each). But this means largely flat market share for Bharti, fall in share
for Vodafone-Idea, and others and Jio gaining market share. We expect the bulk of the
market share gain for Jio (and loss for the others) to happen over FY18 and FY19.
4.9
4.3
2.7
-
1.0
2.0
3.0
4.0
5.0
6.0
Idea Vodafone Bharti
Trailing Net debt/EBITDA (x)
20 June 2017
Asia Telecoms Sector 51
Figure 76: We expect market shares of top three to converge over the longer
term; smaller operators should shrink to ~5%
Source: Company data, Credit Suisse estimates
Final market share structure to depend on Jio's ability and willingness to invest
Jio is promoted by RIL, which has already made an investment of US$29.4 bn in its
telecom venture with commitment to further invest US$9 bn over the next three years. To
gauge Jio’s ability to invest, one would have to look at the FCF that its parent generates.
With US$5.5 bn of annual FCF generation, it is easy to conclude that ‘ability’ to invest is
not the question. The right question to ask would be its ‘willingness’ to invest.
Figure 77: Post the end of capex cycle in its core businesses (ex-telecom) in
FY17, RIL will be generating close to US$5.5 bn of FCF p.a. (ex-telecom) by FY20
Note: This fully excludes working capital impact and the telecom business investments. Source: Company data, Credit Suisse estimates
ROIC has stayed below cost for many years—likely
to stay so
Telecom operators need to continuously invest (at times ahead of possible monetisation
opportunities) to be able to offer seamless connectivity and coverage. However, the
peculiar nature of the Indian market—high spectrum prices, high tax burden (by way of
revenue sharing with the government) and heightened competitive pressures—has
0%
20%
40%
60%
80%
100%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Others
Jio
Vodafone + Idea
Bharti
(8,000)
(6,000)
(4,000)
(2,000)
-
2,000
4,000
6,000
8,000
FY16 FY17 FY18 FY19 FY20
RIL FCF (ex telecom business)
20 June 2017
Asia Telecoms Sector 52
ensured that returns have been below cost for almost all the operators including for market
leader Bharti.
Figure 78: Returns have stayed below cost
Source: Company data, Credit Suisse estimates
We expect the coming couple of years of low industry revenue growth, high capex and
heighted competitive pressures (in a bid to gain higher market share) will lead to further
ROIC decline for the incumbents.
Figure 79: ROIC analysis
FY17 FY20 3 -year CAGR
Rs mn Bharti
(consol)
Idea
(Standalone)
Bharti
(consol)
Idea
(Standalone)
Jio Bharti
(consol)
Idea
(Standalone)
Subscribers (000s) – India
mobile 273,648 189,500 291,740 194,835 250,593
Service revenue 954,683 355,756 1,115,440 352,061 559,575 5.3% -0.3%
EBITDA 354,505 102,763 418,012 76,591 155,413 5.6% -9.3%
EBITDA margin 37.1% 28.9% 37.5% 21.8% 27.8%
Depreciation to sales (%) 20.7% 22.0% 19.3% 29.6% 23.2%
EBIT 156,775 24,490 202,456 (27,570) 25,651 8.9% Nm
EBIT margin 16.4% 6.9% 18.2% -7.8% 4.6%
Tax rate (%) 34.0% 34.0% 34.0% 34.0% 34.0%
NOPLAT 103,471 16,163 133,621 (18,196) 16,930 8.9% Nm
Average invested capital 1,582,628 694,389 1,629,307 691,355 2,084,248
Asset turn 0.6 0.5 0.7 0.5 0.3
ROIC 6.5% 2.3% 8.2% -2.6% 0.8%
Net profit 37,997 (3,996) 74,590 (35,243) (23,072) 25.2% Nm
Net margin 4.0% (1.1%) 6.7% (10.0%) (4.1%)
Source: Company data, Credit Suisse estimates
See downside to Bharti/Idea
We still maintain our cautious stance on telecom operators, as we see an extended period
of high competition and low profitability that is not adequately captured in stock prices.
Our Rs300 target price for Bharti is based on DCF, with 10.6% WACC, flat EBITDA from
FY17 to FY19, followed by a 12% EBITDA CAGR until FY25, and 3% terminal growth.
This implies a 6.2x FY19E EV/EBITDA for its India mobile business and 9.4x FY19E
EBITDA for tower investments (before applying holding company discounts).
For Idea, our value for the standalone business pre-merger comes to Rs9/share, with
implied EV/EBITDA valuations given below.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
FY13 FY14 FY15 FY16 FY17
ROCE %
Bharti Consol Idea
20 June 2017
Asia Telecoms Sector 53
The bulk of the value for the stock now comes from the promised merger synergies. The
total NPV of synergies works out to ~Rs93 per Idea share. With full synergies, the fair
value for the stock would come to Rs102. Given the complexities involved in the merger of
this scale, we assign a 70% probability—leading to a target price of Rs74 per share.
We retain our UNDERPERFORM rating on these two stocks.
Figure 80: India cellular sector—comparative valuation
Close Target Upside/ Normalised P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price downside (%) FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E
Bharti 365 300 -17.8% 44.4 35.3 7.3 6.6 1.47 1.44 4.2% 4.3% 0.2% 0.3%
IDEA 78 74 -4.8% n.m. n.m. 12.0 13.1 1.08 1.13 2.2% 3.7% 0.0% 0.0%
Source: Company data, Credit Suisse estimates
Figure 81: Idea—pre-synergy equity value @ Rs9/share
Implied EV/EBITDA
Fair value (Rs/share) FY18 FY19
SOTP for Idea 9 7.1 (Indus @10.4x) 7.8 (Indus @ 9.5x)
Source: Company data, Credit Suisse estimates
Figure 82: Much of the Idea stock's fair value currently hinges on achieving
synergies from the proposed merger
NPV of synergies guided Rs bn 670
No shares mn 7,201
NPV of synergies Rs / share 93
% achievement factored % 70%
Addition to idea SOTP Rs / share 65
Final TP Rs / share 74
Source: Company data, Credit Suisse estimates
20 June 2017
Asia Telecoms Sector 54
Country sections: Malaysia
Summary
■ In terms of industry structure, the Malaysia market looks relatively unattractive, with
new entrants and ineffective monetisation.
■ We expect the Malaysia market to grow service revenue at a CAGR of 1.5% across
FY16-FY20.
■ Celcom (Axiata) looks to be a #2 player that is fairly valued for its turnaround potential.
Digi, on the other hand, looks to be an overvalued challenger in a competitive
environment.
Data demand up but data pricing down
Following an aggressive price war in 2015-16, triggered by UMobile/Celcom in the
postpaid segment and Maxis/Digi in the prepaid segment, price points, especially for data,
in the Malaysian cellular market in recent years have suffered. To recap, while data
consumption and 4G penetration are growing substantially, mobile operators have been
unable to convert this ‘opportunity’ into revenue as subscribers have been receiving
significantly higher data allowances at the same/lower price. As a result, the Malaysian
cellular market remains unattractive relative to the other markets within Asia as the
sector’s service revenue has been on a downtrend for at least five quarters since 4Q15.
Figure 83: Cellular service revenue growth
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Maxis 3.4% 1.3% 4.7% 2.8% -0.7% -2.5% -3.1% -0.9%
Digi 2.2% 1.3% 0.0% -2.5% -1.8% -2.0% -1.9% -2.0%
Celcom (Axiata) -4.4% -8.6% -5.1% -9.3% -12.4% -11.4% -11.1% -7.5%
Others 13.3% 13.3% 13.3% 13.3% 10.0% 10.0% 10.0% 10.0%
Total 1.4% -0.8% 1.2% -1.5% -3.5% -3.9% -4.0% -2.1%
Source: Company data, Credit Suisse estimates
We also observe that other players, especially UMobile, continue to gain revenue market
share. However, it was acquired at a hefty cost to its shareholders - based on latest
publicly available information, UMobile’s net loss almost doubled from RM190 mn in 2014
to RM370mn in 2015.
Figure 84: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Maxis 34.5% 34.5% 35.1% 35.4% 35.5% 34.9% 35.4% 35.8%
Digi 27.1% 27.6% 27.2% 27.4% 27.6% 28.1% 27.8% 27.5%
Celcom (Axiata) 29.6% 29.1% 29.0% 28.4% 26.9% 26.8% 26.8% 26.9%
Others 8.7% 8.8% 8.7% 8.8% 9.9% 10.1% 10.0% 9.9%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Two key factors have been behind this negative industry growth.
■ Competition. While data usage per subscriber per month has more than doubled YoY
from 1-2GB in 1Q16 to 4-6GB in 1Q17, subscribers have been getting an average of
1.5x-10.0x additional data for the same price, resulting in an average decline in price
per GB by ~60%. The ramifications of these generous data allowances were: (1) down-
trading became an issue as consumers began subscribing to cheaper plan, which
offered significant data allowances; and (2) revenue upside potential was eliminated as
consumers no longer had to purchase add-on bundles for data.
Competition has eroded Malaysia’s
opportunity to monetize data
effectively
Revenue outlook remains muted
20 June 2017
Asia Telecoms Sector 55
■ Poor execution at Celcom. While both Digi and Maxis managed to keep their revenue
market share, Celcom has been the key market share ‘donor’ and in revenue terms
has significantly underperformed both of its larger peers. This has in large part been
caused by three things: (1) severe cannibalization within its subscriber base due to
down-trading (while its subscriber base is up 6% YoY in FY16, ARPU was -8% down
YoY); (2) loss of VAS revenue in 1Q16 onwards; and (3) severe decline in dealership
confidence (management is still trying to repair this).
Revenue outlook remains challenging
We believe that there is still an opportunity for data volume growth in Malaysia, given that
smartphone penetration has only reached between 64% and 73% among the big 3, as at
end 2016, while 4G penetration among big 3’s subscriber base has only reached between
26-44%. Also, data use per subscriber per month has almost tripled in the last 2 years to
circa 4GB per month, mainly due to the higher traffic on the 4G network.
Figure 85: While smartphone penetration is high,
there is still scope for 4G penetration to increase
Figure 86: Data use per subscriber per month has
almost tripled over the last 2 years
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Of course the key question is whether this volume growth will drive through into revenue
growth. Unfortunately for the Malaysian market, data monetization has been hampered by
the generous data allowances given by operators (data boost ranges from 1.5-10.0x YoY).
To make matters worse, price points (estimate price per 1GB of data per subscriber per
month) have declined by as much as 75%. As such, while data revenue has been growing
by circa 3-8% YoY over the last 4-6 quarters, it is not significant enough to offset the
double-digit decline in voice revenue. As a result, the outlook for revenue growth remains
challenging, in our view.
73%68%
64%
44%41%
26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Maxis Digi Celcom (Axiata)
Smartphone penetration
4G penetration
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
FY14 FY15 FY16
Maxis Digi Celcom (Axiata)
The opportunity is there...
…but it cannot be monetised as price
points declined
20 June 2017
Asia Telecoms Sector 56
Figure 87: Data prices has been trending downwards
ARPU (RM) Data allowance (GB) Data boost Estimated price reduction
Apr-16 Apr-17 Apr-16 Apr-17 per GB (%)
Maxis
98 98 5 20 4.0x -75%
128 128 10 30 3.0x -67%
158 158 15 40 2.7x -63%
188 188 20 50 2.5x -60%
Digi
48 50 1 10 10.0x -89%
48 50 3 10 3.3x -68%
80 80 10 20 2.0x -50%
Celcom
45 45 4 4 - 0%
80 80 10 20 2.0x -50%
150 150 18 60 3.3x -70%
UMobile
28 28 3 6 2.0x -50%
50 48 5 10 2.0x -54%
70 70 15 22 1.5x -32%
Source: Company data, Credit Suisse estimates
We note that UMobile has recently introduced a sim-only postpaid plan that offers
unlimited data (up to 5Mbps), free roaming and free mobile hotspot for RM78/month.
Theoretically speaking, the big 3’s existing postpaid plan at RM80/month is literally offering
‘unlimited’ data since the monthly data allowance is already significantly higher than
existing usage patterns. As such, it is disruptive, but not game-changing. We therefore
forecast that in FY17, the other operators will continue to grow their cellular revenue by
between 8-9%, while Maxis and Digi’s cellular revenue will be flattish. On the other hand,
Celcom’s cellular revenue will grow at a low single digit level if management successfully
plays catch up on its network coverage and rebuilds its sales channels. Overall, we expect
the market as a whole to achieve 1.2-1.8% growth p.a. between FY17-20. The caveat here
is that we assume the big 3 will avoid underpricing each other once again by lowering
ARPU or introducing cheaper unlimited data plans.
Figure 88: YoY cellular revenue growth (RM mn) and revenue growth rates (%)
RM mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
Maxis (345) 238 (147) (100) 14 11 9
Digi 202 15 (122) (3) 15 15 28
Celcom (Axiata) (102) (494) (717) 263 124 179 18
Others 183 101 59 163 179 196 216
Total (62) (141) (927) 322 331 401 271
Growth (% YoY)
Maxis -4.2% 3.0% -1.8% -1.3% 0.2% 0.1% 0.1%
Digi 3.3% 0.2% -1.9% -0.1% 0.2% 0.2% 0.4%
Celcom (Axiata) -1.4% -6.8% -10.6% 4.4% 2.0% 2.8% 0.3%
Others 11.7% 5.8% 3.2% 8.6% 8.7% 8.8% 8.9%
Total 0.3% -0.6% -4.0% 1.5% 1.5% 1.8% 1.2%
Source: Company data, Credit Suisse estimates
Big 3 to cede more market share to others
We believe that over the next few years, the big 3 should continue to retain their cellular
service revenue base at where it is today, but expect them to cede 1-2% overall market
share to the other operators, mainly UMobile. Within the big 3, we give Celcom the benefit
of the doubt and assume that it can wrestle 0.7% market share in 2017 once it repair its
internal issues. The caveat here is that we assume the big 3 will avoid rolling out unlimited
data plans at cheaper prices as they can still run a profitable business as long as price
points remain relatively high.
We expect big 3 to lose 1-2% market share to
other operators..
20 June 2017
Asia Telecoms Sector 57
Figure 89: Cellular revenue (RM mn) and revenue market share (%)
RM mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
Maxis 7,858 8,096 7,949 7,849 7,862 7,874 7,883
Digi 6,333 6,348 6,226 6,223 6,238 6,252 6,280
Celcom (Axiata) 7,237 6,743 6,026 6,289 6,413 6,592 6,610
Others 1,740 1,841 1,899 2,062 2,240 2,437 2,653
Total 23,168 23,027 22,100 22,423 22,754 23,155 23,426
Market share (%)
Maxis 33.9% 35.2% 36.0% 35.0% 34.6% 34.0% 33.6%
Digi 27.3% 27.6% 28.2% 27.8% 27.4% 27.0% 26.8%
Celcom (Axiata) 31.2% 29.3% 27.3% 28.0% 28.2% 28.5% 28.2%
Others 7.5% 8.0% 8.6% 9.2% 9.8% 10.5% 11.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
This expectation is based on our analysis of the following key factors:
Spectrum allocations by operator
In the recent spectrum reallocation exercise, UMobile emerged as the biggest beneficiary
as it received 2x5MHz of 900MHz and 2x15MHz of 1800MHz spectrums. Digi, to a certain
extent, also benefitted as it received 2x5MHz of 900MHz spectrum (it had merely 2x2MHz
previously), though it did lose 2x5MHz in the 1800MHz band (so did Maxis and Celcom).
The new allocation for the 900MHz band will certainly help both UMobile and Digi address
the relatively weak indoor coverage from June-2017, creating a relatively level playing
field across all four operators (Maxis, Celcom, Digi and UMobile).
Figure 90: Spectrum allocations by operator
900MHz 1.8GHz 2.1GHz 2.3GHz 2.6GHz
Maxis 10*2 20*2 2*15 / 5 10*2
Celcom (Axiata) 10*2 20*2 2*15 / 5 10*2
Digi 5*2 20*2 2*15 / 5 10*2
UMobile 5*2 15*2 2*15 / 5 10*2
Asiaspace 30 (PM)
P1 30 20
Puncak Semangat 20*2
Redtone 30 (EM) 10*2
YTL 30 20
Source: Company data, MCMC.
The reallocation for the 2100MHz, 2300MHz and 2600MHz will take place sometime this
year, and we believe the exercise will probably not shift the balance of power i.e. big 3 to
retain their leadership, but UMobile will not be left out. More importantly, we see little
prospect of an auction triggering value destruction since the government holds sizeable
stakes in these mobile operators. We would expect all four operators to retain their
ownership in the 2100MHz band. However, we believe the regulator will likely reallocate
the ownership in the 2600MHz band by removing inefficient owners from the list. Given
that the 2300MHz band is gazetted for WiMax and is not a ‘game-changing’ band, big 3
and UMobile will probably not negotiate for an allocation here.
While the 700MHz band is not highlighted in our diagram, it should not be ignored since it
will also be re-allocated very soon (likely in 2018/19). We believe it will be priced at a slight
premium to the upper band in the 900MHz/1800MHz reallocation exercise, since it is a
prized asset. To recap, the four operators had to pay RM218-500 mn for 2x5MHz during
the 900MHz/1800MHz reallocation exercise.
In conclusion, we believe the outcome of the recent reallocation implies that the regulator
intends to promote competition in the industry, but in a relatively healthy manner i.e. there
…after analysing spectrum allocations,
network and capital intensity
20 June 2017
Asia Telecoms Sector 58
is scope for the market to have up to four major operators. As such, we do not discount
the possibility for M&A to materialise (Celcom and TM to merge or TM to acquire UMobile)
since there is only room for four, not five.
BTS by operator
Maxis’ 36.0% revenue market share in FY16 was underpinned by its widest network
coverage for 4G. We estimate that it has the highest number of 4G BTS at 8,000 vis-à-vis
Digi and Celcom which have 7,500 and 6,900 respectively. With SIM card penetration at
circa 140%, the upgrade from 2G to 3G and from 3G to 4G were meant to boost data
revenue significantly, but as highlighted earlier, the generous data allowances capped this
opportunity. Maxis will likely retain its leading population coverage, although we do expect
Celcom and Digi to narrow the gap in FY17/18.
However, it is worth nothing that there were significant cost advantages in FY16 as more
users migrated to the 4G network. As a result, big 3’s EBITDA margins remain as one of
the highest in the region (FY16 EBITDA/cellular revenue – Maxis: 53.8%, Digi: 47.5%,
Celcom: 38.2%).
Figure 91: Likely BTS by operator among big 3
2G BTS 3G BTS 4G BTS Total BTS Proportion
Maxis 9,500 9,500 8,000 27,000 35.8%
Digi 8,000 8,000 7,500 23,500 31.2%
Celcom (Axiata) 9,000 9,000 6,900 24,900 33.0%
Total BTS (big 3) 26,500 26,500 22,400 75,400 100.0%
Note: this does not represent the total number of towers in Malaysia as each tower will likely carry 2G/3G/4G BTS' and each operator may also consider rented BTS as part of their total BTS so there may be overlaps. Source: Company data, Credit Suisse estimates,
As UMobile is not a public company, we were unable to verify its actual number of BTS
and population coverage on 2G/3G/4G. However, we do know that its 2G/3G coverage is
not too far off from its competitors and management intends to spend at least RM1 bn in
the near term to increase its 4G population coverage, following the recent spectrum
reallocation exercise. We believe the amount is reasonable, but it may be tough for
UMobile to overtake the big 3 since big 3, so it will probably deploy the capital in strategic
areas in key cities such as Kuala Lumpur, Penang and Johor Bahru. Therefore, this will
put more pressure on the big 3, who focus on these cities.
Capital intensity
We expect Maxis’ coverage advantage over Digi and Celcom to narrow when we consider
both recent and projected capex trends. Maxis was outspending both Digi and Celcom by
20-50% in 2014-15; but we expect Maxis’ competitors, including UMobile to play ‘catch
up’. It is worth noting, however, that the network advantage Maxis had over its competitors
was crucial as it has allowed Maxis to retain Malaysia’s premium consumers who value
quality over price.
20 June 2017
Asia Telecoms Sector 59
Figure 92: Capex by operator (RM mn) Figure 93: Capex- to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Balance sheet strength and capex sustainability
We note that both Celcom and Digi can maintain the aforementioned capital intensity,
while Maxis’ capital intensity will decline over time since it has a stretched balance sheet.
Should Maxis decide to ramp up capex again, it might impact free cash flows negatively
(dividends will then be affected), unless they recapitalize. As such, we argue that Maxis
looks capital constrained, although management guided that banks are comfortable to let
them borrow up to 4x net debt to EBITDA (it was at 2x as at end 1Q17). While Axiata’s
balance sheet is more leveraged than Maxis currently, there are various options on the
table to de-leverage (sell towers, sell stake in op-cos etc.) so we are not overly concerned.
More importantly, its Indonesian subsidiary, XL Axiata, has also cut its USD-denominated
debt exposure to just US$350mn (fully hedged) from a peak of over US$1.5bn.
Regulation
Regulation can be a trigger for a step-change in market share dynamics, but we are not
expecting any material changes in Malaysia. Based on the outcome of the recent
spectrum re-allocation exercise, we conclude that the regulator has delivered two key
messages: (1) there is space for a fourth operator in the market, therefore, M&A has to
happen as it is unlikely that both TM and UMobile will co-exist; and (2) the government will
not be extreme when pricing spectrum since it holds sizeable stakes in these listed mobile
operators. As such, we believe UMobile will continue to gain revenue market share, but at
a slower pace, if price points remain where they are today.
Do smaller players have a viable business?
In FY16, the big 3 were still able to generate returns greater than the cost of capital. This
is, of course, largely driven by the fact that they have minimal retained earnings since
almost all of their profits are paid out as dividends and the high EBITDA margins as well.
In FY16, Digi had the highest ROIC at 86.3%, followed by Celcom and then Maxis at
21.5% and 17.7% respectively. We do expect these returns to decline over the next few
years due to competition (in Digi’s case, the higher borrowings it will incur is also a factor).
While we have not explicitly shown an ROIC analysis for UMobile given a lack of
consistent published information, we understand that the company is still generating
negative ROICs with 6.8% revenue share. It is a puzzling scenario as the company’s
losses almost doubled in 2015 (PAT for FY16: -RM368 mn vs FY15: -RM192 mn), but yet
the company continues to keep the ‘profit switch’ turned off to build subscriber and
revenue market share.
0
200
400
600
800
1,000
1,200
1,400
1,600
FY14A FY15A FY16A FY17E FY18E FY19E FY20E
Maxis Digi Celcom (Axiata)
0%
5%
10%
15%
20%
25%
FY14A FY15A FY16A FY17E FY18E FY19E FY20E
Maxis Digi Celcom
Big 3 still generates ROIC above WACC
20 June 2017
Asia Telecoms Sector 60
Figure 94: ROIC analysis
FY16 FY20 4 -year CAGR
RM mn Maxis Digi Celcom Maxis Digi Celcom Maxis Digi Celcom
Subscribers (000s) 11,926 12,299 10,556 12,326 12,299 13,800
Service revenue 8,455 6,226 6,026 8,528 6,280 6,610 0.2% 0.2% 2.3%
EBITDA 4,551 2,955 2,527 4,541 3,074 2,655 -0.1% 1.0% 1.2%
EBITDA margin 53.8% 47.5% 38.2% 53.2% 48.9% 40.2%
Depreciation to sales (%) 16.2% 9.9% 13.8% 18.1% 10.7% 18.1%
EBIT 3,152 2,304 1,616 2,966 2,354 1,350 -1.5% 0.5% -4.4%
EBIT margin 37.3% 37.0% 26.8% 34.8% 37.5% 20.4%
Tax rate (%) 25.0% 25.0% 25.0% 25% 25% 25.0%
NOPLAT 2,364 1,728 1,212 2,225 1,765 1,013 -1.5% 0.5% -4.4%
Average invested capital 13,379 2,002 5,641 14,862 4,859 5,787
Asset turn 0.6 3.1 1.1 0.6 1.3 1.1
ROIC 17.7% 86.3% 21.5% 15.0% 36.3% 17.5%
Net profit 2,013 1,633 1,229 1,869 1,663 804 -1.8% 0.5% -10.1%
Net margin 23.8% 26.2% 20.4% 21.9% 26.5% 12.2%
Source: Company data, Credit Suisse estimates
The most obvious way for UMobile to drive up its returns is to generate more revenue
while keeping operating costs under control. Therefore, it has to consider reducing its
exorbitant data allowances and other ‘revenue generating’ features such as free roaming
and free mobile hot spot. We do not see this happening in the near term until it secures at
least 10% revenue market share.
What's in the price?
We continue to rely primarily on discounted cash flow (DCF) to set our target prices, since
it is the only way to fully capture the multi-year nature of cellular investment and payback
(particularly given what we have explained to be heavy upfront capex to establish
nationwide coverage and launch credible cellular services).
At present, it would seem that the market is overpaying for both Maxis and Axiata, given
that there is 1.4% potential downside for Maxis and 3.8% potential downside for Axiata.
We believe the market could be rewarding Maxis for its relatively more resilient operational
highlights, but we would argue that there is downside risk due to competition and spectrum
woes. For Axiata, we have not fully baked in the potential recovery of its business although
we do see scope for an eventual upgrade. In short, the recovery hinges on the delivery of
its promises to the market (note that the milestones for recovery have been postponed
multiple times over the last two years).
From a multiple standpoint, both Maxis and Digi would look relatively more expensive
relative to Axiata from an EV/EBITDA and EV/IC perspective (mainly due to the domestic
liquidity factor and also, investors need not worry about the other markets Axiata is
present at); we do not think this is justifiable since FCF yields are similar among all three
players, though arguably, the market could be applying a discount factor on Axiata since it
cut its dividend payout temporarily from 85% of normalised PATAMI to 50%.
Figure 95: Malaysian cellular sector—comparative valuation
Close Target Upside Normalised PE (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (5)
Price Price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
Maxis 5.88 5.80 -1.4% 23.8 23.9 12.0 11.8 3.8 3.7 4.9% 5.2% 3.4% 3.4%
Digi 4.95 5.00 1.0% 23.0 23.1 13.8 14.1 11.5 8.7 3.9% 4.0% 4.3% 4.3%
Axiata 4.99 4.80 -3.8% 29.0 25.9 6.4 6.0 1.4 1.4 4.7% 6.0% 1.7% 1.9%
Source: Company data, Credit Suisse estimates
The market is 'overpaying' for Maxis
and Axiata
20 June 2017
Asia Telecoms Sector 61
In conclusion, Malaysia remains in our view a relatively unattractive market in Asia, unless
operators decide to pull back their generous data allowances to monetise data effectively.
While M&A could potentially materialise, the market is still changing structurally as the
saturated market will now have four key players compared to just three. Also, there is still
risk on spectrum fees in the near term. Last but not the least valuations, especially for
Maxis and Digi, remain stretched when compared to companies form other markets within
this region. For bulls who insist on having exposure in Malaysia, we would recommend
Axiata as its eventual recovery should, in theory, result in a further re-rating. Longer-term
investors could consider investing in the stock if it dips below RM5.00 (a level close
enough to our target price).
Figure 96: Share price performance (rebased); Axiata could recover as there is scope for further upgrades if
Celcom and XL Axiata recover
Source: the BLOOMBERG PROFESSIONAL™ service
50
60
70
80
90
100
110
120
130
140
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Maxis Digi Axiata
20 June 2017
Asia Telecoms Sector 62
Country sections: Philippines
Summary
■ In terms of industry structure, the Philippines market looks relatively unattractive
suffering from cannibalisation of legacy SMS and voice, despite low 4G penetration.
■ We expect service revenue in the Philippines to decline at a CAGR of 0.2% across
FY16-FY20.
■ Globe is dominant with 52.2% revenue market share as at 1Q17 and an FY16 ROIC of
13.7%. At present, we believe the market is not fully appreciating Globe's cellular
market improved returns.
■ PLDT is now a challenger, and we believe that too much hope for recovery is priced in
given that it is trading at 2.0x FY20 EV/IC despite a projected return of just 9.1%. We
highlight it as a top regional sell.
Cellular revenue growth impacted by higher legacy
contribution
Being a developing nation, the Philippines generates expectations of a high growth
market. However, the Philippine cellular sector over the past few years has behaved quite
the contrary. The sector's service revenue has declined at a three-year (2014 to 2016)
CAGR of 1.4%, which is a dismal performance when compared to its developing Asian
peers. The Indian and Indonesian cellular sectors are registering revenue CAGR of 3.7%
and 9.6%, respectively, over the last three years. We note that India’s growth rate has
faltered in recent months due to a heightened competitive environment.
Structural changes (changing revenue mix) and increasing competitive dynamics have
affected the Philippine cellular sector’s revenue performance.
Figure 97: Cellular service revenue growth
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Globe -1.5% 5.5% 1.0% 2.9% -2.8% -1.7% -0.7% 4.9% 0.8%
PLDT -6.4% -0.5% -0.1% -0.5% -2.9% -2.3% -7.3% -2.8% -4.6%
Total -4.3% 2.1% 0.4% 1.1% -2.9% -2.0% -4.2% 0.9% -1.9%
Source: Company data, Credit Suisse estimates
However, we note that despite the cellular sector headwinds, Globe Telecom has been
able to outperform PLDT and capture ~12% cellular revenue market share over the past
five years (till 2016). In fact during 4Q16, PLDT lost market leadership to Globe Telecom
as its market share fell to 49% from 51% in 3Q16. Globe further gained 1.4% revenue
market share in 1Q17 from PLDT.
Figure 98: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Globe 44.4% 45.9% 46.2% 47.0% 47.0% 47.2% 48.9% 50.8% 52.2%
PLDT 55.6% 54.1% 53.8% 53.0% 53.0% 52.8% 51.1% 49.2% 47.8%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Several factors contributed to the dismal industry growth and Globe’s outperformance:
■ Higher contribution of legacy services. Philippines used to be colloquially referred to as
the “SMS capital” of the world with text messaging contributing ~40% of service revenues
in 2012. Besides SMS, international voice termination was also big for the Philippine
cellular sector, given the significant presence of overseas foreign workers. They together
Cellular service revenue declined at a
three-year CAGR of 1.4%
SMS and international voice accounted for
~55% of cellular service revenue in 2012
20 June 2017
Asia Telecoms Sector 63
accounted for ~55% of cellular service in 2012, making the Philippines market ripe for
disruption with the coming of data services. The launch of data network and increasing
penetration of smart devices resulted in cannibalisation of legacy services by data
revenue. As a result, Philippines cellular sector’s service revenue grew moderately by
2.7% and 0.7%, respectively, in 2014 and 2015, while in 2016 service revenue fell by
4.6% as the smartphone subscriber base gained sizeable mass.
Figure 99: Contribution of legacy services to cellular service revenue
Source: Company data, Credit Suisse estimates
■ Superior execution by Globe. Despite structural headwinds, Globe has been able to
outgrow PLDT mainly due to its superior execution (aided by the presence of SingTel).
The company invested heavily on the data network over 2012-15 to position itself as
the data network of Philippines. Globe’s average capex spent was ~36% of wireless
service revenue from 2012-15 vs ~20% by PLDT during the period. The increased data
investment was complemented with sound marketing promotions, which helped Globe
emerge as the preferred data brand in the Philippines. The company introduced free
Facebook promotion in 2013 and 2014 to get customer hooked on to cellular data. The
increased traction in the data market also helped Globe gain market share in the voice
segment since it started replacing PLDT as the primary SIM.
41% 39%35% 32% 29%
17%15%
13%
10%9%
0%
10%
20%
30%
40%
50%
60%
70%
FY12 FY13 FY14 FY15 FY16
SMS International voice
54%
47%
43%
38%
58%
Globe has been able to outgrow PLDT mainly
due to its superior execution
20 June 2017
Asia Telecoms Sector 64
Figure 100: Globe invested early into the data
network…
Figure 101: …helping it to grow faster than PLDT
and gain ~12% market share in the last five years
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
■ Poor execution by PLDT. While Globe’s execution was world class, PLDT’s execution
during the period was at the other extreme. PLDT’s network was historically designed
as SMS-centric and the company did not make necessary investments until 2015 when
market share loss started exacerbating. PLDT was slow to realise the potential of data
services as the company believed that the decline in SMS revenue will be more
gradual. However, Globe’s proactive data investment caught the company unprepared.
■ Increase in competition. With PLDT losing market share, the competitive dynamics
also increased in 2015 and 2016, resulting in ineffective data monetisation during the
period. One of the heavily promoted plans was the P50 plan, wherein the data
allowance was increased to 1GB data for three days from 350MB previously.
Additionally, PLDT provided prepaid handset subsidies in late 2015 and early 2016 in
order to arrest market share loss. However, the company stopped them in 2H16 as it
impacted its profitability without meaningful change in market share.
Revenue growth to remain under pressure
Though the competitive dynamics have largely been stable over the last six months with
PLDT withdrawing handset subsidies and no major price reduction, we expect cellular
sector’s service revenue growth to remain muted over the next three years as legacy
services (SMS and international voice) still account for ~36% of the total service revenue.
Also, increasing smartphone penetration is likely to create further headwinds for legacy
services. Domestic voice revenue has also been on a declining trajectory over the last 12
months due to cannibalisation from data services.
Additionally, we believe consumer behaviour needs to be changed towards regular
charging so that customers are connected online more frequently. Currently, many
customers still look for free WiFi connections to go online, hampering data monetisation.
10%
15%
20%
25%
30%
35%
40%
45%
50%
2011 2012 2013 2014 2015 2016
Globe's wireless capex as % of service revenue
PLDT's wireless capex as % of service revenue
55
65
75
85
95
105
115
125
2012 2013 2014 2015 2016
PDLT Globe
PLDT 5 year CAGR of c. -3%
Globe 5 year CAGR of c. 8%
(P bn)
Revenue growth to be muted till 2019E as
legacy services still account for ~36% of
revenue
20 June 2017
Asia Telecoms Sector 65
Figure 102: YoY cellular revenue growth (P mn) and revenue growth rates (%)
FY14 FY15 FY16 FY17 FY18 FY19 FY20
Globe 6,821 8,682 633 1,448 2,283 3,702 4,169
PLDT (1,642) (7,361) (9,866) (13,146) (2,056) 442 1,927
Total 5,179 1,321 (9,233) (11,698) 226 4,144 6,096
Growth (% YoY)
Globe 9.0% 10.5% 0.7% 1.6% 2.4% 3.9% 4.2%
PLDT -1.4% -6.4% -9.2% -13.4% -2.4% 0.5% 2.3%
Total 2.7% 0.7% -4.6% -6.2% 0.1% 2.3% 3.3%
Source: Company data, Credit Suisse estimates
Globe's outperformance to continue
We forecast PLDT to continue to lose market share over the next four years as the
contribution of legacy services to cellular revenue is high for PLDT (at ~40%) compared to
Globe (which is at ~33%). However, we expect market share loss to subside beyond 2017
as we believe PLDT’s data investment to yield some benefits in later years.
Figure 103: Cellular revenue (P mn) and revenue market share (%)
(P mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20
Globe 82,561 91,243 91,876 93,324 95,607 99,309 103,477
PLDT 115,037 107,676 97,810 84,664 82,608 83,050 84,977
Total 197,598 198,919 189,686 177,988 178,214 182,359 188,454
Market share (%)
Globe 41.8% 45.9% 48.4% 52.4% 53.6% 54.5% 54.9%
PLDT 58.2% 54.1% 51.6% 47.6% 46.4% 45.5% 45.1%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Our market share expectation is based on our analysis of the following key factors:
Spectrum allocation by operator
As highlighted in the figure below, PLDT has more spectrum than Globe. However, post
the joint acquisition of SMC’s telecom assets (Vega Telecom), we believe Globe is
comfortably placed with respect to its spectrum holding. Vega Telecom has provided
Globe with 700MHz, 900MHz, 1800MHz, 2300MHz and 2500MHz spectrum bands, easing
company’s capacity constraints. That said, Globe would like increasing migrating
customers to 4G network as its spectrum footing on 4G is more even than on 3G. Globe
has 2x10MHz of 2100MHz spectrum compared to 2x25MHz of 2100MHz spectrum with
PLDT. With such vast spectrum holdings (compared to its regional peers), Philippines
cellular operators do not face any spectrum constraints, in our view. Additionally, there is
no spectrum renewal risk as it is linked to the company’s franchise licence, which
generally gets renewed for 25 years.
Figure 104: Spectrum allocations by operator
700MHz 850MHz 900MHz 1800MHz 2100MHz 2300MHz 2400MHz 2500MHz/26
00MHz
3500MHz 5000MHz
PLDT 2x17.5MHz 2x10MHz 2x12.5MHz 2x45MHz 2x25MHz 60MHz 73MHz 75MHz - 10MHz
Globe 2x17.5MHz - 2x22.5MHz 2x30MHz 2x10MHz 30MHz - 90MHz - 10MHz
Government 2x10MHz 10MHz - 2x10MHz - 15MHz 40MHz -
Source: Company data, Credit Suisse estimates
BTS by operator
While the Philippine cellular operators do not disclose the cell sites data, our
understanding is that PLDT has more cell sites than Globe largely due to legacy reasons.
Philippines cellular operators do not face
any spectrum constraints
20 June 2017
Asia Telecoms Sector 66
Globe has been looking to close the gap by adding more cell sites over the past few years.
The recent changes in regulatory regime are also helping in faster roll-out of sites as the
number of approvals needed for installing a site have been streamlined. However, we do
not believe cell site count will lead to any significant disadvantage for Globe as the
company has good coverage in all major population areas and the recent SMC deal has
eased the company’s capacity constraints.
Capital intensity
Both Globe and PLDT have been investing heavily on the data network over the past few
years. Going forward, the priorities of the two operators (apart from improving the 4G
network) are a bit different with PLDT primarily focused on the modernisation of its legacy
network, while Globe is more concentrated on expanding its footprint to improve its
coverage and network capacity. Hence, we do not see any significant easing in capital
intensity over the next 2-3 years.
Figure 105: Capex by operator (P mn) Figure 106: Capex-to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Balance sheet strength and capex sustainability
The recent Vega Telecom acquisition has increased the leverage of both PLDT and
Globe. PLDT’s net debt to EBITDA rose to 2.5x by Dec-2016 (from 1.8x in Dec-2015)
while that of Globe’s rose to 1.9x (from 1.3x). However, we see both the telcos as well-
positioned to maintain the aforementioned capital intensity. We forecast Globe and PLDT
will continue to generate free cash flow, though the quantum has come down compared to
history, which should aid the capex spending.
PLDT has already cut its dividend payout ratio to 60% in 2016 (from ~90% in 2014) due to
headwinds in the core cellular business and the investment needed on the cellular side.
We do not expect any increase in the payout ratio over the next three years. While for
Globe, we believe the company can manage some increase in its dividends over the next
three years, given the growth in operating profit led by cellular market share gain.
Regulation
The key regulatory issues affecting the sector are: (1) the Philippines Competition
Commission's (PCC) review of joint acquisition of SMC’s telecoms assets by Globe and
PLDT and (2) the introduction of a third cellular operator.
On the first, we see low probability of the SMC deal getting cancelled, given: (1) SMC was
not operating a full-fledged cellular network, (2) the deal enables the use of the precious
spectrum resources, which were lying idle, and (3) the regulator has granted the
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY14 FY15 FY16 FY17 FY18 FY19 FY20
Globe PLDT
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
Globe PLDT
We do not see any significant easing in
capital intensity over the next 2-3 years
We see a low chance of: (1) the SMC deal
getting cancelled and (2) a competitive third
cellular operator
20 June 2017
Asia Telecoms Sector 67
necessary approvals for the co-use of SMC's spectrum. Additionally, we see a lack of
alternatives in case the deal is cancelled. Furthermore, we believe the more (and longer)
investments telcos make in SMC's spectrum assets, the harder it will get to undo the deal
as consumers will start utilising and realising the benefits of the 700MHz network.
We see a low probability of a competitive third cellular operator in the Philippines over the
next 3-5 years, given the availability of limited spectrum and also the significant investment
needed. We believe SMC’s struggle in being the third cellular operator after having an
attractive spectrum portfolio shows how difficult a market the Philippines is for a new player.
Do smaller players have a viable business?
Philippines telecom operators have seen a contrasting trend in their return profile over the
past few years. While Globe’s ROIC has, expectedly, increased from 2010 levels, given
that it has been gaining cellular market share, PLDT’s ROIC has been on a declining
trajectory. As of 2016, PLDT had an ROIC of 10.0%, slightly more than our assumed
WACC of 8.5%, while Globe generated an ROIC of 13.7% (~5% above our WACC
assumptions).
Going forward, we expect Globe’s ROIC to decline to ~11% by 2017 due to the joint
acquisition of SMC’s telecom assets. However, after 2017 we expect gradual improvement
in the company’s ROIC as it leverages newly acquired spectrum (from SMC deal) to gain
market share. That said, decline in legacy service revenues will continue to be a headwind
on ROIC. By 2020, we expect the company’s ROIC to reach ~12%. For PLDT, we forecast
ROIC to continue to decline gradually and reach ~9% by 2020. We believe cellular
headwinds are likely to be somewhat compensated by the strong performance in the fixed
line segment. Our estimates suggest that PLDT will barely manage to earn above its
WACC for the next four years.
Given structural issues, the lack of good quantum of spectrum, and the quantum of initial
investment needed, we see no business case for the smaller players in the Philippines.
PLDT’s recent ROIC figures reflect the challenging environment the Philippine telecom
operators currently face despite it being a duopoly.
Figure 107: ROIC analysis
FY16 FY20 4 -year CAGR
Globe PLDT Globe PLDT Globe PLDT
Subscribers (000s) 62,799 62,763 58,553 66,509
Service revenue 119,990 157,210 142,036 169,908 4.3% 2.0%
EBITDA 49,978 61,161 58,507 69,510 4.0% 3.3%
EBITDA margin 41.7% 38.9% 41.2% 40.9%
Depreciation to sales (%) 19.9% 22.5% 17.5% 21.0%
EBIT 26,129 25,777 33,718 33,878 6.6% 7.1%
EBIT margin 21.8% 16.4% 23.7% 19.9%
Tax rate (%) 27.6% 6.9% 30.0% 26.0%
NOPLAT 18,925 23,993 23,603 25,069 5.7% 1.1%
Average invested capital 137,942 239,508 191,928 276,965
Asset turn 0.9 0.7 0.7 0.6
ROIC 13.7% 10.0% 12.3% 9.1%
Net profit 15,888 25,521 20,396 22,335 6.4% -3.3%
Net margin 13.2% 16.2% 14.4% 13.1%
Note: There is a change in definition of pre-paid subs for Globe from 1Q17 and hence there is a substantial decline in FY20 figure from FY16 level; Source: Company data, Credit Suisse estimates
PLDT will barely manage to earn above its WACC for the next
four years, in our view
20 June 2017
Asia Telecoms Sector 68
What's in the price?
We use discounted cash flow methodology to value Philippines telecom stocks. We
believe it fully captures the investment nature of the cellular business and its payback
potential.
At present, we believe the market is not fully appreciating Globe's cellular market share
gain potential. On the other hand, we believe PLDT's stock price is building in a recovery
in the cellular business ahead of our expectations as there is 21.1% downside potential on
our PLDT target price.
Even on a relative valuation basis, PLDT's stock looks more expensive (in terms of 2017E
and 2018E EV/EBITDA) than Globe, which in our view is unjustifiable, given that Globe is
gaining market share and its profitability and dividends are growing. Additionally, Globe is
offering higher dividend yield than PLDT.
Figure 108: Philippines cellular sector—comparative valuation
Close Target Upside Normalised P/E 9x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
Globe 2,156.00 2,350.00 9.0% 21.3 19.6 7.7 7.6 2.4 2.2 0.9% 1.8% 4.2% 4.4%
PLDT 1,900.00 1,500.00 -21.1% 19.9 20.3 8.7 8.5 2.1 2.1 1.5% 2.6% 3.0% 3.0%
Source: Company data, Credit Suisse estimates
Figure 109: Share price performance (rebased). Globe's outperformance is likely to continue
Source: Company data, Credit Suisse estimates
40
60
80
100
120
140
160
180
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Globe PLDT
We believe the market is not fully appreciating Globe's cellular market
share gain potential
20 June 2017
Asia Telecoms Sector 69
Country sections: Hong Kong
Summary
■ In terms of industry structure, the Hong Kong market looks relatively unattractive with
high 4G penetration and extensive handset subsidies.
■ We expect the Hong Kong market to deliver flat service revenue (a CAGR of 0.0%)
across FY16-FY20.
■ HKT Trust is dominant with 40.6% revenue market share as at 1Q17 and an FY16
ROIC of 7.9%. It appears somewhat undervalued as the market is overly punishing the
stock for the rise in MVNO competition.
■ SmarTone looks to be an undervalued #2 player with sufficient scale to generate
attractive returns and appealing cash flow profile. We highlight it as a top pick. HTHKH,
on the other hand, looks to be fairly valued.
Fundamentals improved post consolidation but
competition in the low end is increasing
Hong Kong (HK) has historically been a very competitive market with five cellular
operators vying for market share till 2013. However, 2014 saw in-market consolidation
wherein HKT, the No. 4 operator then, acquired CSLNW, the No. 1 operator. As a result,
the pricing in the sector improved, leading to the sector’s net service revenue (adjusted for
customer acquisition cost) growing by ~1% in 2014. Revenue growth has faltered since
then due to rising competition.
Figure 110: Cellular service revenue growth (% YoY)
1H15 2H15 1H16 2H16
HKT Trust n.a. -3.0% 0.0% 0.1%
SmarTone 10.2% 3.0% -2.7% -0.7%
HTHKH -10.9% -12.4% -5.7% -2.0%
China Mobile and others 4.9% 4.9% 4.3% 4.3%
Total n.a. -2.8% -1.4% 0.0%
Source: OFCA, Company data, Credit Suisse estimates
In terms of market share, Hutch Tel HK (HTHKH) has lost market share to HKT Trust
(HKT), SmarTone, and others (including China Mobile HK) due to poor execution.
Figure 111: Cellular service revenue market share (%)
1H15 2H15 1H16 2H16
HKT Trust 39.4% 40.5% 40.0% 40.6%
SmarTone 26.0% 25.6% 25.6% 25.4%
HTHKH 22.3% 21.2% 21.4% 20.8%
China Mobile and others 12.3% 12.6% 13.0% 13.2%
Total 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Below we discuss in detail the reasons for the recent decline of HK’s cellular revenue:
■ Competition: Post the in-market consolidation of May-2014, the fundamentals of the
Hong Kong cellular market improved with the easing in competitive intensity. The
pricing in the sector saw a positive uptick with operators increasing the tariffs both at
the lower and higher end of the plans. For example, the price of SIM-only plans were
increased by 5-20% in Sep-2014, while the pricing of 3G speed capped was increased
from HK$68/month to HK$88/month by July-2015. However, post the initial burst of
20 June 2017
Asia Telecoms Sector 70
positive price actions, the progress on cellular pricing has been disappointing as prices
in the higher-end segment have remained largely flat over the past 24 months, while
the low segment has evolved with the launch of various speed capped plans, limiting
the sector’s growth potential.
The sector has seen the launch of various 4G lite plans at attractive price points of
HK$108-208/month (vs mainstream 4G plans), which offer 1GB to 5GB monthly data
with a maximum speed of 21-42Mbps. We do not believe these plans can be masked
as speed capped plans, as 21-42Mbps is a very good speed for data usage (unlike the
384Kbps plan, which is truly a speed capped plan). HTHKH, HKT (through Sun Mobile)
and China Mobile HK have been more active in this segment, while SmarTone has
presence mainly in the 3G speed capped segment (HK$88). However, the launch of
HKBN cellular services has addressed some of the gaps for SmarTone in the low-end
segment of the market as it is using HKBN as a platform to target that segment.
■ Cannibalisation by OTT services. Besides competition in the low end segment, HK
cellular sector growth has also been impacted by the popularity of OTT services as
they have cannibalised roaming and IDD revenues. The impact of declining roaming
revenue was more pronounced for HTHKH over the last 12-18 months as the company
ended the wholesale roaming arrangement with one of the Japanese operators. For
HTHKH, the contribution of the roaming revenue (to cellular revenue) declined to ~18%
by 2016 from ~20% in 2015 and 25% in 2014. The roaming revenue contribution for
SmarTone is ~14% and for HKT it is 16-18%. In the pre-paid segment, SmarTone has
been impacted the most as it has the highest exposure to the domestic foreign worker
segment, which has been impacted by the cannibalisation of IDD revenue by OTT
services. The company’s pre-paid revenue declined by ~34% YoY over the last 12
months vs ~21% declined registered by HKT and ~4% registered by HTHKH.
■ Poor execution by HTHKH. Hutch Telecom HK (HTHKH) has been facing challenging
times as the company has been unable to revive cellular service revenue growth over
the last three years. HTHKH’s cellular service revenue declined at a two-year CAGR
(2014-16) of ~8%. The revenue was impacted by the decline in roaming revenues and
the company's conscious decision not to offer the 3G speed capped plans, which led to
contraction in the subscriber base. However, the company restarted offering the 3G
speed capped plan in 2H CY15 when the price of the plan was raised to HK$88/month.
Competitive low end segment to hamper growth
The past 3-4 months have seen competitive dynamics worsening further, on the low-end
segment, with first HKBN launching its new bundled plan offering 3GB cellular data (5GB
for port in customers) at a capped speed of 21Mbps (on China Mobile’s network), access
to TVB’s app, and fixed voice services for a monthly fees of HK$90. The HKBN’s launch
was followed by HKT’s response which launched a new cellular plan offering 3GB data
(5GB for port in customers) at a capped speed of 21Mbps for a monthly fee of HK$78.
HKT is offering the new plan under the Sun Mobile brand and it is applicable to “The Club”
members (i.e., customers availing at least one HKT service). Few weeks later, HKBN
matched HKT’s HK$78 plan by launching the similar plan on SmarTone’s network.
The sector has seen launch of various 4G
lite plans in the low-end segment, increasing
down-trading risk
Growth has been affected by OTT
services cannibalising roaming and IDD
revenues
HKBN's entry as a MVNO has worsened
the competitive dynamics further
20 June 2017
Asia Telecoms Sector 71
Figure 112: HK cellular sector—SIM-only plans
Source: Company data, Credit Suisse estimates
We view these plans as aggressive as they are likely to promote down-trading risk. We
note that the mainstream 4G plan offers 2.5GB data for a monthly fee of HK$238 while the
new plan offers 3GB data (5GB for port in customers) for just HK$78/month (down from
HK$108 previously). Additionally, we believe the sector has moved one step backwards
with HKT launching the HK$78 plan as the pricing is lower than the current price of 3G
speed capped plan, which offers unlimited data at 384Kbps speed for HK$88/month. We
expect HK cellular sector’s service revenue to remain under pressure in the near term. We
are forecasting service revenue to decline at a two-year CAGR (2016-18E) of ~1%.
However, we expect HK cellular pricing (led by the increase in prices of the low end plans)
to improve in the medium to long term as the current pricing in the low end segment is not
sustainable.
Figure 113: YoY cellular revenue growth (HK$ mn) and revenue growth rates (%)
FY14 FY15 FY16 FY17 FY18 FY19 FY20
HKT Trust 201 248 2 (21) (9) 66 95
SmarTone 69 296 (82) (22) 14 39 57
HTHKH (492) (540) (160) (60) (71) (39) (28)
China Mobile and others 19 110 101 (30) (22) 12 29
Total (204) 114 (139) (133) (88) 77 153
Growth (%)
HKT Trust 2.8% 3.4% 0.0% -0.3% -0.1% 0.9% 1.3%
SmarTone 1.5% 6.5% -1.7% -0.5% 0.3% 0.8% 1.2%
HTHKH -9.6% -11.6% -3.9% -1.5% -1.8% -1.0% -0.7%
China Mobile and others 0.8% 4.9% 4.3% -1.2% -0.9% 0.5% 1.2%
Total -1.1% 0.6% -0.7% -0.7% -0.5% 0.4% 0.8%
Source: Company data, Credit Suisse estimates
HTHKH to lose cellular market share
We believe HTHKH is likely to be impacted the most from the increasing competitive
dynamics in the low-end segment as it has a substantial share of low-end customers. HTHKH
has lost ~4% cellular revenue market share over the past two years and we expect the
company to lose further ~1% market share to SmarTone and HKT Trust over the next four
years. The market share of China Mobile HK and other MVNOs is expected to remain stable
at ~13%, in our view. Below are our reasons for the market share expectations.
78 88 90
108 128
148
178
208 198
238
298
438
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200
250
300
350
400
450
3GB Unli 3GB 3GB 1GB 2GB 3GB 5GB 1GB 2.5GB 6GB 10GB
21Mb/s 384Kb/s 21Mb/s 21Mb/s 42Mb/s 42Mb/s 42Mb/s 42Mb/s 4G 4G 4G 4G
Low-end speed capped plansMainstream SIM only plans
Low end segment has evolved over the last 15-18 months with the launch of these plans (ex 384Kb/s).
(HK$/mth)
These new plans have been launched by HKT and HKBN in Feb-Mar'17
We believe HTHKH is likely to be impacted
the most from the increasing competitive
dynamics
20 June 2017
Asia Telecoms Sector 72
Figure 114: Cellular revenue (HK$ mn) and revenue market share (%)
FY14 FY15 FY16 FY17 FY18 FY19 FY20
HKT Trust 7,292 7,541 7,543 7,522 7,513 7,579 7,674
SmarTone 4,564 4,860 4,778 4,757 4,771 4,809 4,867
HTHKH 4,646 4,106 3,946 3,886 3,815 3,776 3,747
China Mobile and others 2,240 2,350 2,451 2,421 2,399 2,411 2,440
Total 18,743 18,857 18,718 18,586 18,498 18,575 18,728
Market share (%)
HKT Trust 38.9% 40.0% 40.3% 40.5% 40.6% 40.8% 41.0%
SmarTone 24.4% 25.8% 25.5% 25.6% 25.8% 25.9% 26.0%
HTHKH 24.8% 21.8% 21.1% 20.9% 20.6% 20.3% 20.0%
China Mobile and others 12.0% 12.5% 13.1% 13.0% 13.0% 13.0% 13.0%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Spectrum
The leading HK operators (HKT, SmarTone, and HTHKH) have a good mix of low band
and high band spectrums to offer quality 4G services in HK. From a total spectrum
quantum perspective, HKT has an advantage over its peers largely due to its substantial
holding of the 1800MHz spectrum band (arising from its CSL acquisition). The large
spectrum bank enables HKT to have more capacity and higher network speed. However,
we do not believe that the spectrum advantage can translate into significant market share
gain for HKT as spectrum holdings of SmarTone and HTHKH are good enough to offer
competitive 4G services. Additionally, technological changes are enhancing network
capacities while using existing network resources. For example, SmarTone plans to move
to quad band carrier aggregation (the latest technology) with the re-farming of 2100MHz
spectrum to LTE in 2017. Also, the company is looking to upgrade to 4x4 MIMO (from 2x2
MIMO) and data modulation to 256QAM on downlink, enabling it to offer higher download
speed and, hence, enhancing network capacity.
Post the acquisition of the 2100MHz spectrum in the 2014 spectrum auction, China Mobile
HK’s competitive position has improved as it can offer 3G service on its own network.
Earlier, the company was offering 3G services in a roaming arrangement with the
incumbents. That said, the company does not have access to low band spectrum in HK,
which can be an impediment on its network quality.
Figure 115: Spectrum allocations by operator
850/900MHz 900MHz 1800MHz 2100MHz 2300MHz 2600MHz
HKT 2 x 7.5MHz 2 x 8.3MHz 2 x 36.4MHz 2 x 14.8MHz 2 x 20MHz
HTHKH 2 x 5MHz 2 x 8.3MHz 2 x 11.6MHz 2 x 14.8MHz 30MHz
CMHK - 2 x 13.2MHz 2 x 9.8MHz 30MHz 2 x 20MHz
SMT 2 x 5MHz 2 x 8.3MHz 2 x 13.2MHz 2 x 19.8MHz 2 x 10MHz
GBL1 - 2 x 20MHz
Note 1: GBL is a joint venture between HKT and HTHKH Source: Company data, Credit Suisse estimates
Capital intensity
Like their peers in Taiwan and Singapore, HK telcos are also past their peak 4G capex cycle
as the 4G roll-out is complete. As a result, we saw cellular capex decline in 2015 and 2016,
and the capex guidance for 2017 is for stable capex. HKT's cellular capex increased in 2015
mainly due to the network integration cost related to the CSL merger. The next big capex
cycle for the telcos is likely to emerge from the roll-out of the 5G network. However, we
believe 5G is unlikely to happen before 2020, given 5G standards are not finalised yet.
Hence, we expect cellular capex for HK telcos to remain largely flat over the next four years.
HK telcos are also past their peak 4G capex
cycle as the 4G roll-out is complete
20 June 2017
Asia Telecoms Sector 73
Figure 116: Capex by operator (HK$ mn) Figure 117: Capex-to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Balance sheet strength and capex sustainability
We believe HK telcos are well capitalised to fund their capital expenditure plans.
SmarTone has very little debt (net debt to EBITDA of 0.4x) as of Dec-2016, while the net
debt to EBITDA of HTHKH and HKT are 1.8x and 2.8x, respectively, which in our view are
manageable. Given our expectations of stable capex and operating profits, HK telcos’
future cash flow generation should remain strong to maintain the capital intensity and
dividend pay-outs. China Mobile HK, on the other hand, has a strong parent company,
which should be able to support the company’s capex layout in HK.
Regulation
Currently, the major outstanding regulatory issue in HK is the renewal of 900MHz and
1800MHz spectrum bands. The 900MHz spectrum assignment will expire in November
2020 while 1800MHz in September 2021. OFCA, the HK telecom regulator, has proposed
the hybrid approach wherein: (1) first right of refusal will be given to incumbents for 2x
10MHz of 1800MHz, and (2) the remaining spectrum will be put on auction.
The fees for the reserved spectrum are likely to be HK$38-67 mn per MHz with the
inclination towards the higher end of the range. The fees will be subject to upward revision
depending on the outcome of the auction with a cap of 30-40% higher than the reserved
price. For the spectrum put up for auction, the reserve price is likely to be HK$19-54 mn
per MHz with the inclination towards the higher end of the range.
HKT is likely to be the most impacted with the spectrum renewal exercise as it can lose
some of the 1800MHz spectrum where it currently has a disproportionate share. The other
major concern regarding the spectrum auction is the potential emergence of a new
operator from the auction. We see a low probability of a new entrant in the sector as the
market is very mature and the returns in the sector are not conducive for a new operator’s
business case (as discussed below). The below table shows our expectations from the
upcoming spectrum auctions.
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200
400
600
800
1,000
1,200
1,400
1,600
FY14 FY15 FY16 FY17 FY18 FY19 FY20
HKT SmarTone HTHKH
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
SmarTone HKT HTHKH
HK telcos are well capitalised to fund their
capital expenditure plans
HKT is likely to be the most impacted with the
spectrum renewal exercise
20 June 2017
Asia Telecoms Sector 74
Figure 118: CS expectations of upcoming 900/1800MHz spectrum auction
Spectrum coming up for renewal CS expectations of outcome Price (HK$ mn/MHz) Payment (HK$ mn)
900MHz 1800MHz 900MHz 1800MHz 900MHz 1800MHz 900MHz 1800MHz Total
CMHK 2 x 13.2MHz 2 x 18.2MHz HK$100m HK$55m 2,002 2,002
HKT 2 x 8.3MHz 2 x 36.4MHz 2 x 8.3MHz 2 x 21.4MHz HK$100m HK$55m 1,660 2,354 4,014
Hutch Tel 2 x 8.3MHz 2 x 11.6MHz 2 x 8.3MHz 2 x 16.6MHz HK$100m HK$55m 1,660 1,826 3,486
SmarTone 2 x 8.3MHz 2 x 13.2MHz 2 x 8.3MHz 2 x 18.2MHz HK$100m HK$55m 1,660 2,002 3,662
Source: Company data, Credit Suisse estimates
Do smaller players have a viable business?
Being a pure cellular operator, SmarTone has the highest ROIC in the HK telecoms
sector. The company generated an ROIC of 21% in 2016, much higher than our assumed
WACC of 7.0%. However, the two integrated telcos (with cellular and fixed line
businesses) had a ROIC of low single digit in 2016. While HKT with a ROIC of 8% in 2016
was able to generate return above its assumed WACC of 6.0%, HTHKH with a ROIC of
5% failed to earn higher than its WACC of 6.8%.
Going forward, the cellular business' ROIC is likely to remain under pressure due to
increasing competition in the low end segment and rising cost of providing cellular services
(especially related to spectrum). We expect SmarTone's ROIC to decline to 18% by 2020
while that of HKT and HTHKH should remain largely stable due to the fixed line business.
For smaller players, we believe the business case is challenging, given the high
competitive dynamics as reflected by the ROIC profile of the sector.
Figure 119: ROIC analysis
FY16 FY20 4 -year CAGR
SmarTone HKT HTHKH SmarTone HKT HTHKH SmarTone HKT HTHKH
Subscribers (000s) 2,000 4,469 3,222 2,169 4,477 3,405
Service revenue 4,779 27,944 7,640 4,867 29,314 7,935 0.5% 1.2% 1.0%
EBITDA 1,943 10,206 2,465 1,877 10,831 2,553 -0.9% 1.5% 0.9%
EBITDA margin 41% 37% 32% 39% 37% 32%
Depreciation to sales (%) 19% 12% 19% 19% 10% 18%
EBIT 1,045 6,876 1,044 943 7,920 1,085 -2.5% 3.6% 1.0%
EBIT margin 22% 25% 14% 19% 27% 14%
Tax rate (%) 19% 14% 17% 20% 18% 19%
NOPLAT 844 5,946 870 753 6,495 876 -2.8% 2.2% 0.2%
Average invested capital 3,959 75,701 15,850 4,163 78,201 15,420
Asset turn 121% 37% 48% 117% 37% 51%
ROIC 21% 8% 5% 18% 8% 6%
Net profit 787 4,889 701 710 5,491 743 -2.5% 2.9% 1.5%
Net margin 16% 17% 9% 15% 19% 9%
Source: Company data, Credit Suisse estimates
What's in the price?
We use DCF methodology to value HK telecom stocks as we believe it rightly captures the
multi-year nature of the cellular investment and payback while factoring in the competitive
dynamics.
Based on our DCF valuation, SmarTone currently looks undervalued as there is ~32%
upside to our valuation. We believe the market is overly punishing the stock for the rise in
competition in the cellular segment. Similarly, HKT also appears undervalued, given ~16%
upside to our DCF-based valuation while HTHKH looks fairly valued currently.
On a relative valuation, SmarTone's valuation looks attractive with the company's stock
trading at 2018E EV/EBITDA of 5.0x and dividend yield of 6.1%. HKT's valuation is also
SmarTone looks undervalued as there is
~32% upside to our DCF-based valuation
20 June 2017
Asia Telecoms Sector 75
compelling as the stock is offering one of the highest dividend yield spreads in our telco
coverage universe.
Figure 120: Hong Kong cellular sector—comparative valuation
Close Target Upside Normalised P/E EV/EBITDA EV/IC (x) FCF yield Div yield
Price Price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
SmarTone 10.24 13.50 31.8% 15.0 15.4 5.0 5.0 2.4 2.0 10.0% 8.3% 6.2% 6.1%
HTHKH 2.68 2.60 -3.0% 19.7 18.5 7.2 6.9 0.9 0.9 7.7% 8.0% 3.8% 4.1%
HKT Trust 10.20 11.85 16.2% 15.3 14.7 11.1 10.9 1.5 1.5 7.0% 6.9% 6.3% 6.5%
Source: Company data, Credit Suisse estimates
Figure 121: HK telcos' share price performance (rebased)
Source: Company data, Credit Suisse estimates
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120
140
160
180
200
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
SmarTone HTHK HKT Trust
20 June 2017
Asia Telecoms Sector 76
Country sections: Singapore
Summary
■ In terms of industry structure, the Singapore market looks most unattractive, with new
entrants, extensive handset subsidies and high 4G penetration.
■ We expect the Singapore market to experience declining service revenue at a CAGR
of 2.5% across FY16-FY20.
■ SingTel is dominant with 53.4% revenue market share as at 1Q17 and an FY16 ROIC
of 11.1%. We believe the stock is being overly penalised for domestic competition
without due regard to its growing enterprise business and international associates.
■ On the other hand, the competitive pressure does not seem to be properly priced in for
#2 player StarHub and challenger M1. We highlight M1 as a top regional
Underperform.
Cellular revenue impacted by ineffective data
monetisation
Following IMDA’s decision (on July 2015) to facilitate a fourth cellular operator, the
Singapore cellular market has seen competitive dynamics worsening with operators
launching aggressive plans (such as data add on) in order to pre-empt the entry of the
new operator. This, in turn, has put pressure on sector revenue as operators have not
been able to monetise the data effectively. Singapore cellular sector revenue has been on
a decline (YoY) over the past five quarters as the decline in legacy services (SMS,
international long distance, roaming, and voice) has not been compensated by growth in
data revenue.
Figure 122: Cellular service revenue growth (YoY)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
SingTel 1.7% 1.2% 0.8% -0.7% -0.8% -2.9% -2.3% -3.7% -2.3%
StarHub -0.2% 0.2% -0.1% -2.3% -2.4% -1.8% -3.6% -0.4% -0.6%
M1 -1.5% -2.0% -0.8% -0.8% -2.6% -0.9% -4.6% -4.7% -1.1%
Total 0.6% 0.3% 0.2% -1.1% -1.6% -2.2% -3.1% -3.0% -1.6%
Source: Company data, Credit Suisse estimates
The market shares of the three Singaporean telcos (SingTel, StarHub and M1 Ltd) have
remained largely stable (though there may be some quarterly variations) over the last two
years as the operators have witnessed similar service revenue decline during the period.
Figure 123: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
SingTel 53.4% 53.6% 53.5% 53.4% 53.8% 53.2% 53.9% 53.0% 53.4%
StarHub 27.7% 27.7% 27.8% 27.8% 27.4% 27.8% 27.6% 28.5% 27.7%
M1 19.0% 18.7% 18.8% 18.8% 18.8% 19.0% 18.5% 18.5% 18.9%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
The introduction of 4G services in 2012 saw Singapore telecom companies moving away
from unlimited data plans to tiered data pricing. Hence, the sector witnessed decent
growth from 2012-14, though at a slower pace than the previous years as smartphone
penetration peaked. However, the sector growth has started to falter post 2014 due to
factors as detailed below.
Cellular competition has worsened with
incumbents looking to pre-empt the entry of a
new operator
20 June 2017
Asia Telecoms Sector 77
■ Cannibalisation from OTT services: The emergence of faster networks (fixed and
cellular) and powerful handsets (smartphones) has catalysed the development of OTT
services, which in turn have cannibalised telcos’ core revenue stream (voice, SMS,
roaming, etc.) over the past 3-4 years. Singapore, being a developed nation with very
good cellular and fixed broadband infrastructure, is one of the most adversely impacted
markets. Additionally, the rising competitive dynamics over the past 18-24 months have
made data monetisation ineffective.
■ Regulator’s keenness to introduce competition: Encouraged with the results
yielded by the introduction of competition in the broadband segment, IDA had been
keen to introduce competition in the Singapore cellular market for some time. The
regulator tried to introduce a fourth cellular operator in the 2013 spectrum auction by
reserving 2x20MHz of 2600MHz for new operators (at S$40 mn). However, no new
operator showed any interest in the Singapore cellular market then.
But the 2016 new operator spectrum auction saw three companies—airYotta Pte Ltd,
My Republic and TPG Telecom—submitting expression of interest in being the fourth
cellular operator in Singapore with TPG Telecom finally winning the auction. We
believe the availability of the low band and high band spectrum at attractive terms
(2x10MHz in 900MHz and 40MHz in 2.3GHz for S$35 mn) was one of the main factors
for the active participation in the 2016 new operator spectrum auction.
■ Launch of new aggressive data plans: With IMDA looking to introduce competition,
the Singapore telcos launched new price plans (such as launch of SIM-only plans, data
add-on plans, etc.) in order to deter the entry of the fourth cellular operator. The key
among them was the launch of data X3 plan by SingTel in September 2016 wherein
the data allowance was increased to three times for an additional fee of S$9.90/month.
M1 and StarHub, uncharacteristic of their past behaviour, did not respond immediately
to SingTel’s new plan. M1 finally responded to SingTel’s data X3 plan in Nov-2016 by
launching its own ‘Upsized data plus’ plans while StarHub introduced ‘Data Jump plan’
in May-2017. We view these plans as disruptive as they can lead to significant down-
trading (click here) and believe this is one of the reasons why M1 and StarHub did not
respond immediately.
The figure below shows the changes in data prices (SIM-only plans) over the past 18
months. As can be seen, prices in Singapore have declined during the period, led by the
recent launch of data X3 plans.
The rising competition has led to ineffective data monetisation in
the last two years
The new data X3 plans are disruptive, in our
view
20 June 2017
Asia Telecoms Sector 78
Figure 124: M1's SIM-only pricing trend
Note: Added caller ID charges of S$5.35/month to the basic plan Source: Company data, Credit Suisse estimates
Service revenue outlook continues to be hazy
Service revenue outlook continues to be hazy as we expect further reduction in data prices
with the potential launch of services by TPG Telecom in 2H18. Though the Singapore
cellular sector has seen some price actions over the past 12-18 months, we believe price
competition is likely to intensity further over the next three years with TPG looking to gain
market share. Also, our recent analyses suggest that there is more downside to Singapore
pricing over the next two to three years. In the first of our analysis ('Four is a (bigger)
crowd' dated 2 March 2017), we had looked at TPG Telecom’s cost structure (operating
and capex) to determine the downside potential in Singapore cellular sector ARPU. Based
on inputs from various industry participants, we forecasted TPG’s steady state operating
expenses to reach S$185 mn by 2022E, representing ~51% of M1’s 2016 operating cost.
We believe our assumptions are reasonable given that M1 has a lot of legacy costs and TPG
can also drive significant cost savings from its Australia business. Our sensitivity analysis
suggests that TPG would turn EBITDA breakeven at a discount of ~17% to the current
service ARPU of S$33 with cellular subs share of 6% and fixed broadband (BB) subs share of
6%. Below, we have reproduced the sensitivity analysis published in that report.
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31 37
47
68
0
20
40
60
80
100
120
140
5GB/6GB 7GB/8GB 12GB 20GB
Sep-15 Mar-17(S$ per month)
Service revenue outlook continues to be
hazy as we expect further reduction in
data prices
20 June 2017
Asia Telecoms Sector 79
Figure 125: TPG can be EBITDA breakeven at ~17% discount to current sector
ARPU with 6% cellular and fixed broadband subs share
Source: Credit Suisse estimates
In our second analysis (click here), we did global peer comparison to ascertain downside
in Singapore cellular pricing. Our global cellular price comparison suggests limited
downside potential in Singapore's cellular pricing as it is already in the low to mid end of
the price range of the markets that we studied. That said, Asian peer (HK and Taiwan)
price comparison reflects otherwise, as pricing in Taiwan is the lowest in the region while
HK has a much more competitive low-end segment than Singapore. However, we believe
ROIC is a much better metric to gauge the pricing pressure as it factors in the costs as
well. From an ROIC perspective, pricing in Singapore can decline substantially as the
returns in Singapore remain significantly higher than its global peers even though they
have declined over the past two years (M1’s ROIC has reduced from 28% in 2014 to 20%
in 2016).
We are currently building in Singapore cellular sector service ARPU to decline by 15-20%
(from 2016 level) over the next three years (until 2019E). The ARPU decline will be led by
customers down-trading their plans with the increasing adoption of the aggressive data
add-on plans and the launch of cellular services by TPG Telecom in 2H18. As a result, we
expect cellular service revenue to decline at a three-year CAGR of ~4% till 2019E vs
service revenue decline of c.3% witnessed in 2016.
Figure 126: YoY cellular revenue growth (S$ mn) and revenue growth rates (%)
(S$ mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20
SingTel 44 18 (58) (53) (97) (73) (26)
StarHub 12 (8) (25) (23) (69) (40) (18)
M1 (19) (11) (27) (21) (44) (33) (20)
TPG - - - - 11 34 50
Total 37 (0) (111) (96) (199) (112) (14)
Growth (% YoY)
SingTel 1.9% 0.8% -2.4% -2.2% -4.2% -3.4% -1.2%
StarHub 1.0% -0.6% -2.0% -1.9% -5.8% -3.6% -1.6%
M1 -2.2% -1.3% -3.2% -2.6% -5.5% -4.3% -2.8%
TPG - - - - - 321.9% 111.5%
Total 0.8% 0.0% -2.5% -2.2% -4.7% -2.8% -0.3%
Source: Company data, Credit Suisse estimates
3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0%
-45.0% (115) (86) (57) (29) 0 29 58
-37.5% (107) (74) (42) (9) 24 57 89
-30.0% (99) (63) (26) 11 47 84 121
-22.5% (91) (51) (10) 30 71 112 152
-15.0% (84) (39) 6 50 95 139 184
-7.5% (76) (27) 21 70 118 167 215
0.0% (68) (15) 37 89 142 194 247
% d
isco
un
t to
cu
rre
nt
se
rvic
e A
RP
U (
S$33)
Subscriber m arket share (%)
We forecast cellular ARPU to decline by 15-20% in the next
three years
20 June 2017
Asia Telecoms Sector 80
TPG to capture ~2% market share by FY20
We expect TPG to launch cellular service in 2H18 and to capture ~2% revenue market
share by 2020E. We believe pricing is likely to be the main lever to gain market share. The
market share gain is likely to come from all the three telcos with M1 losing little more
market share than StarHub and SingTel as it does not have any strong Pay TV
proposition. Although we believe pay TV will lose its bundling attractiveness in the long
term (five years or more), we believe in the initial years it may help StarHub and SingTel to
retain high-end subscribers. Below are the key factors for our expectations.
Figure 127: Cellular revenue (S$ mn) and revenue market share (%)
(S$ mn) FY14 FY15 FY16 FY17 FY18 FY19 FY20
SingTel 2,374 2,392 2,334 2,281 2,185 2,112 2,086
StarHub 1,248 1,240 1,215 1,192 1,123 1,082 1,065
M1 853 842 815 794 751 718 698
TPG - - - - 11 45 95
Total 4,475 4,474 4,364 4,268 4,069 3,957 3,943
Market share (%)
SingTel 53.1% 53.5% 53.5% 53.5% 53.7% 53.4% 52.9%
StarHub 27.9% 27.7% 27.8% 27.9% 27.6% 27.4% 27.0%
M1 19.1% 18.8% 18.7% 18.6% 18.4% 18.1% 17.7%
TPG 0.0% 0.0% 0.0% 0.0% 0.3% 1.1% 2.4%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Go-to-market strategy
TPG in Australia is known to be a disruptor as the company provides the lowest price
plans in the broadband market. TPG has consistently had the lowest price points in the
market, offering a basic unlimited broadband service with limited add-on services. TPG
has an extremely efficient operating model and lean cost structure, which has enabled it to
offer the lowest prices, while reporting some of the highest margins of its peers
(broadband EBITDA margins of ~40% for the core TPG brand). We believe the company
is likely to carry a similar approach in Singapore to gain market share.
Singapore cellular operators continue to draw revenue from voice coverage (as there are
no unlimited voice plans) and caller id services. We believe, as part of its go-to-market
strategy, TPG may only charge for data services while offering free voice and other
services. Additionally, unlike Hong Kong, Singapore does not have a vibrant low-end
segment, which TPG can target as well, increasing down-trading potential.
Spectrum
The recently concluded general spectrum auction reflected the first major headwind
emerging from the entry of a new cellular operator in the sector. The final auction clearing
price was at a significant premium to the reserve price (3 to 6 times). While the high final
spectrum price for 900MHz is reflective of the scarcity value (as only one lot of 900MHz
was available for auction), the large premium on 700MHz shows M1’s and STH’s quest for
low band spectrum as they currently do not have the low band spectrum for 4G coverage.
SingTel has secured the highest amount of low band spectrum 2x20MHz of 700MHz and
2x5MHz of 900MHz, while StarHub got 2x15MHz of 700MHz and M1 won 2x10MHz of
700MHz. Clearly, SingTel has the best spectrum portfolio in Singapore followed by
StarHub, M1 and TPG Telecom.
Though from the total spectrum quantum perspective, incumbents are at an advantage,
we believe TPG has a good mix of low band (2x10MHz of 900MHz) and high band
(40MHz of 2300MHz and 10MHz of 2500MHz) spectrum to offer high-quality 4G services
in Singapore. Our analysis suggests that TPG can offer theoretical download speed of up
We expect TPG to launch cellular service in 2H18 and to capture
~2% revenue market share by 2020E
We believe TPG will only charge for data
services while offering free voice and other
services
20 June 2017
Asia Telecoms Sector 81
to 450Mbps using two carrier aggregation (CA), 64 QAM modulation, and 4x4 MIMO
technology. The above download speed can increase further by deploying higher
technologies such as 8x8 MIMO or 256 QAM modulation, etc. We note that category 9,
which is the standard that most premium handsets are currently deploying, can support a
maximum download speed of 450Mbps while the future categories (11 and 12) can
support maximum download speeds of 600Mbps. Also, having two carriers (2x5MHz each)
of 900MHz provide TPG with a marginal advantage to M1 and StarHub in providing better
macro coverage till M1 and StarHub get access to the 700MHz spectrum band (which is
unlikely till 2019).
Additionally, our analysis suggests that TPG’s current spectrum portfolio should be able to
support market share of ~28% (at theoretical speed of 450Mbps), assuming average data
usage per subs of 7GB, which is almost twice of current data usage (click here).
Figure 128: Spectrum allocations by operator
900MHz 1800MHz 2100MHz 2300MHz 2500MHz 2600MHz
SingTel 2x10MHz 2x30MHz 2x20MHz - 15MHz 2x20MHz
StarHub 2x5MHz 2x25MHz 2x20MHz - 20MHz 2x20MHz
M1 2x5MHz 2x20MHz 2x20MHz - - 2x20MHz
TPG 2x10MHz - - 40MHz 10MHz -
Source: Company data, Credit Suisse estimates
Capital intensity
Being a small city state (with an area of 719 sq km) having mostly a low lying area with a
small range of hills (at the centre), Singapore is not difficult to cover from a macro
coverage perspective. Incumbents, having made cellular investments over the last 10-15
years, have good cellular network with not much difference in the network quality. That
said, SingTel may have a slight edge to M1 and StarHub as it has access to higher
quantum of low band spectrum. We believe cellular capex for incumbents is likely to
decline marginally over the next three years, given telcos are past their peak 4G
investments. For TPG, we expect it to start cellular services in 2H18 with 775 macro sites
and then to gradually ramp-up to ~1,000 sites by 2021E. On in-building coverage, we
expect TPG to have coverage of 575 buildings at the beginning, which is likely to expand
to 930 buildings by 2021E. We expect the total capex to be ~S$500 mn by 2021E (out of
which ~S$300 mn will be spent by 2018E).
Figure 129: Capex by operator (S$ mn) Figure 130: Capex-to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
-
100
200
300
400
500
600
700
800
900
1,000
FY14 FY15 FY16 FY17 FY18 FY19 FY20
SingTel StarHub M1 TPG
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
SingTel StarHub M1
We believe cellular capex for incumbents
is likely to decline over the next three years
20 June 2017
Asia Telecoms Sector 82
Balance sheet strength and sustainability
Singapore telcos are well capitalised to make necessary investments in the telecom
network. Based on our forecasts, they will continue to generate free cash flows over the
next three years. Though the quantum will reduce (especially for M1 and StarHub) due to
competition, impacting their ability to pay dividends. We are building in a declining
dividend profile for M1, while for StarHub, we estimate the company’s leverage to increase
to support annual dividends of S$0.20/share.
Regulation
We believe the sector is currently past most of the regulatory headwinds with the
conclusion of recent spectrum auctions (new operator spectrum auction and general
spectrum auction). We believe regulatory intervention may be needed in case TPG
complains to the regulator of any incumbents’ actions that may impede its network roll-out
in Singapore.
ROIC analysis
We believe Singapore is a perfect market showcasing excess cellular returns. Hence, it
presents an opportunity for the new operator to strive for a business case. The figure
below shows the cellular ROIC comparison of the developed global peers that we studied
(click here). As can be seen, Singapore stands out amongst its peers with M1 having one
of the highest ROICs in 2016, highlighting the pricing power in the Singapore cellular
sector compared to its global peers. Only SmarTone with an ROIC of 22% had more ROIC
than M1 in 2016. However, we would highlight that M1’s ROIC declined by 6% in 2016 due
to increase in competition as incumbents looked to pre-empt the entry of the new entrant.
A comparison of ROIC profile prior to 2016 reveals that M1, with an ROIC range of 26-
28%, had the highest returns amongst the global peers we studied.
Additionally, the fact that M1’s cellular market share is one of the lowest among the
operators (we studied) serves as a reminder of the excess return in the Singapore cellular
market. For example, Far EasTone’s and SmarTone’s three-year average (2014-16) ROIC
is less than that of M1’s despite having higher cellular market share. Far EasTone has
~29% cellular revenue market share in Taiwan, while SmarTone has ~25% market share
compared to ~19% market share of M1. Outside of Asia, the return profile appears to be
much weaker. T Mobile, the number three cellular operator in the US, had an ROIC of 5%
in 2016, while in EU, we expect the average ROIC to be in single digits.
We believe the sector is currently past most of
the regulatory headwinds
Singapore is a perfect market showcasing
excess cellular returns
20 June 2017
Asia Telecoms Sector 83
Figure 131: Singapore has one of the highest ROIC
amongst its global peers…
Figure 132: …suggesting more downside potential
in Singapore's cellular pricing and ROIC
Note 1: 2016 ROCE comparison; Note 2: For RoCE calculation, we have taken M1 Ltd. in Singapore, SmarTone in HK, FET in Taiwan, Optus in Australia, T Mobile in US, and EU is CS estimate for the region; Source: Bloomberg, Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
However, the sector is likely to witness a diminishing return profile, given the pricing
headwinds along with the increasing cost (resulting from spectrum auction, handset
subsidies, etc.). We forecast M1’s ROIC to decline to ~10% by 2019E which, in our view,
is still decent when seen in the context of global peers. StarHub will also witness a decline
in its consolidated ROIC due to cellular competition while the impact on SingTel is likely to
be limited. For TPG, our sensitivity analysis suggests that it would turn ROIC breakeven at
a discount of 9% to the current service ARPU with cellular subscriber market share of
7.5% and 6% market share in the broadband segment.
Figure 133: ROIC analysis
FY16 FY20 4 -year CAGR
SingTel StarHub M1 SingTel StarHub M1 SingTel StarHub M1
Subscribers (000s) 4,137 2,307 2,019 4,151 2,235 1,982
Service revenue 31,314 2,209 811 36,176 2,065 739 3.7% -1.7% -2.3%
EBITDA 11,201 690 312 12,936 563 247 3.7% -4.9% -5.6%
EBITDA margin 36% 31.2% 38.5% 36% 27.3% 33.5%
Depreciation to sales (%) 18% 12% 15.6% 17% 14% 20.6%
EBIT 5,700 425 185 6,883 272 95 4.8% -10.6% -15.5%
EBIT margin 18% 19% 22.9% 19% 13% 12.8%
Tax rate (%) 28.8% 17% 16.2% 29.6% 17% 18.0%
NOPLAT 4,060 354 155 4,845 226 78 4.5% -10.6% -15.9%
Average invested capital 36,733 2,263 775 42,514 2,688 962
Asset turn 0.9 1.0 1.0 0.9 0.8 0.8
ROIC 11.1% 15.6% 20.1% 11.4% 8.4% 8.1%
Net profit 3,915 341 150 4,660 198 69 4.4% -12.8% -17.5%
Net margin 12.5% 15.5% 18.5% 12.9% 9.6% 9.4%
Source: Company data, Credit Suisse estimates
What is in the price?
We use discounted free cash flow (DCF) valuation methodology to value Singapore
telecom companies. And based on our valuation, there is ~34% and ~19% downside to
M1's and StarHub's stock prices, suggesting that they are not building in increasing
competitive dynamics in the Singapore cellular sector. M1 will be impacted the most by the
entry of TPG Telecom in Singapore as it has the highest exposure to Singapore’s cellular
22%
20%
13%12%
8%7%
6%5%
0%
5%
10%
15%
20%
25%
SMT M1 KDDI FET Optus LGU Avg TMobile
HK SG JP TW AU KR EU US
28%28%
26%
20%
17%
13%
10%
5%
10%
15%
20%
25%
30%
2013 2014 2015 2016 2017E 2018E 2019E
M1's RoCE
The sector is likely to witness a diminishing
return profile, given pricing headwinds
20 June 2017
Asia Telecoms Sector 84
sector followed by StarHub. SingTel has the least exposure to the Singapore cellular
sector as it accounts for only ~5% to our SoTP based target price for SingTel.
We note that M1 has recently announced that its majority shareholders are currently doing
a strategic review of their respective shareholding and have appointed Morgan Stanley as
their financial advisor. M1's stock price has moved up ~11% since the announcement. Our
DCF-based target price of S$1.45 for M1 is based on our fundamental analysis of the
company's business, which is facing headwinds. We believe the key investment thesis for
any potential investment in M1 will be the eventual merger with StarHub as that is where
the real upside resides (from synergies). However, we believe the investment horizon has
to be longer term (five years and beyond) as IDA is unlikely to approve the same in the
medium term. We believe the current stock price is already baking any potential premium
from the general offer.
On SingTel, we believe the market is over-penalising the stock on the threat of increased
competition in the Singapore and Australia markets. As highlighted above, we believe the
impact of TPG's entry to Singapore’s cellular sector is limited on SingTel. In Australia also,
we do not expect TPG to have a significant impact on Optus's longer-term cellular
earnings as TPG will only realistically address relatively niche low end market segments
(e.g., prepaid handheld and consumer wireless broadband).
On a relative valuation basis as well, SingTel appears inexpensive compared to M1 and
StarHub as it is trading at 2018E EV/EBITDA of ~7x compared to multiple of ~9x for
StarHub and M1. Additionally, SingTel's 2018E dividend yield of 4.9% appears attractive.
SingTel is our preferred pick in the Singapore telecoms sector as we have a positive view
on the company's enterprise business and international associates (except for Bharti
Airtel). Additionally, the expectations of special dividends from the Netlink Trust IPO, over
the next 12 months, should limit the downside potential in the stock, in our view
Figure 134: Singapore cellular sector-comparative valuation
Close Target Upside Normalised P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
SingTel 3.80 4.50 18.4% 15.8 15.2 7.1 6.8 1.6 1.6 2.3% 2.4% 4.7% 4.9%
StarHub 2.72 2.20 -19.1% 16.9 20.4 8.7 9.5 2.2 2.2 5.8% 5.3% 5.9% 5.9%
M1 2.18 1.45 -33.5% 15.5 20.5 8.1 9.0 3.1 3.0 5.5% 5.3% 5.2% 3.9%
Source: Company data, Credit Suisse estimates
We believe the current M1 stock price is
already baking any potential premium from
the general offer
Market is over penalising SingTel's
stock on threat of increased competition
20 June 2017
Asia Telecoms Sector 85
Figure 135: Share price performance (rebased); M1's and StarHub's underperformance likely to continue
Source: Company data, Credit Suisse estimates
50
60
70
80
90
100
110
120
130
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
M1 SingTel Starhub
20 June 2017
Asia Telecoms Sector 86
Country sections: Taiwan
Summary
■ In terms of industry structure, the Taiwan market looks relatively unattractive with new
entrants, high 4G penetration and extensive handset subsidies.
■ We expect the Taiwan market to grow service revenue at a CAGR of 1.0% across
FY16-FY20.
■ Chunghwa is dominant with 35.5% revenue market share as at 1Q17 and an FY16
ROIC of 11.9%. However this looks to be fairly in the price.
■ TWM and FET are #2 and #3 players are more leveraged to improving cellular
fundamentals.
Recent sector growth hampered by increase in
competition…
Taiwan’s cellular sector has seen spurts of competition with the introduction of new
technologies. For example, 3G licensing saw the emergence of two new players VIBO
Telecom and APT in 2002, while the 4G spectrum auction in 2013 saw the entry of Taiwan
Star (TSTAR) and Ambit. Post the 4G auction, Taiwan Star acquired VIBO Telecom to
mark its presence in Taiwan's cellular sector while Ambit acquired APT and rebranded
itself as APT. However, the market continues to be dominated by the incumbent
operators—Chunghwa Telecom (CHT), Taiwan Mobile (TWM) and Far EasTone (FET)—
given their network reach and spectrum holding. The incumbents have consolidated their
market position further post the launch of 4G services. Together they owned ~94% cellular
service revenue market share in 2016, up from ~87% in 2013. However, the market share
of new 4G entrants has remained largely stable over the last two years. Taiwan cellular
sector registered some growth in 2014 and 2015 post the introduction of 4G services as
operators pushed customers to higher tiered plans under 4G. However, growth faltered in
2016 and is likely to follow a similar trajectory in 2017 due to the factors detailed below.
Figure 136: Cellular service revenue growth (%, YoY)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
CHT 4.6% 5.7% 4.7% 2.6% 1.0% -2.6% -4.1% -4.5% -4.4%
TWM 0.2% 1.6% 1.3% 1.4% 1.7% 1.2% 1.1% 0.9% -2.0%
FET 3.9% 3.3% 1.4% -0.7% -0.6% -1.3% -1.4% -1.5% -1.7%
Others -9.2% -11.3% -11.1% -8.6% -11.4% -5.6% 1.4% 4.6% 5.3%
Total 2.1% 2.6% 1.7% 0.6% -0.1% -1.3% -1.5% -1.5% -2.3%
Source: Company data, Credit Suisse estimates
Figure 137: Cellular service revenue market share (%)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
CHT 35.9% 36.3% 36.6% 36.3% 36.2% 35.8% 35.6% 35.2% 35.5%
TWM 29.2% 29.3% 29.3% 29.5% 29.7% 30.0% 30.1% 30.2% 29.8%
FET 28.5% 28.3% 28.3% 28.5% 28.3% 28.3% 28.3% 28.5% 28.5%
Others 6.5% 6.1% 5.8% 5.7% 5.7% 5.9% 6.0% 6.1% 6.2%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
■ Consolidation of multi-SIM. Taiwan is one of the few developed telecom markets that
was late to introduce 4G services. The market saw launch of 4G services in 1H14 after
the completion of 4G auctions in 2013. However, once introduced, 4G services have
gained momentum with 4G penetration reaching ~60% by Dec-2016 (vs ~57% in
Taiwan cellular sector registered some growth
in 2014 and 2015 post the introduction of 4G
Number of cellular subs declined at a two-
year CAGR of 2.6% to 28.91 mn by 2016
20 June 2017
Asia Telecoms Sector 87
Singapore and ~51% in HK). In the 3G era, voice and data were priced separately
resulting in some of the customers having more than one SIM, depending on the best
offers, for each of these services. Also, trade channels heavily promoted the multi-SIM
phenomenon due to the high commissions they earned. However, the coming of 4G
services saw the emergence of bundled plans wherein both voice and data were priced
together. Hence, the industry saw consolidation of SIMs as separate SIM for voice and
data became redundant. Additionally, the emergence of powerful smartphone devices
have also resulted in customers consolidating various handheld devices (such as
tablets, feature phones, etc.). As a result, the number of cellular subscribers in Taiwan
declined at a two-year CAGR of 2.6% to 28.91 mn by 2016. The cellular penetration
reduced to ~123% in 2016 from ~128% in 2014.
■ Cannibalisation by OTT services. The emergence of faster networks (fixed and
cellular) and powerful handsets (smartphones) have catalysed the development of OTT
services, which in turn have cannibalised telco’s core revenue stream (voice, SMS,
roaming, etc.) over the last three years. As highlighted above, Taiwan had separate
voice plans in the 3G era and the introduction of 4G services saw the launch of
bundled services. Hence, the sector was highly susceptible to the cannibalisation of
domestic voice revenues by OTT services, given voice revenue contribution was high
(voice revenue contribution was ~70% in 2012 for FET). The cannibalisation of voice
revenue is also reflected (to a large extent) in the declining minutes of usage (MoU) for
the sector. FET’s MoU declined from 263 minutes in 2012 to 126 minutes by 2016.
■ Reduction in interconnect cost. Taiwan regulator, NCC, has historically been
mandating reduction in cellular interconnect fees. The last round (four-year cycle) of
rate cut ended on 31-Mar-2017, wherein the interconnect fees were gradually reduced
from NT$2.15/min to NT$1.15/min in four years. The reduction in interconnect fees
impacted service revenue performance during the period. However, the impact on
profitability is minimal as there is also corresponding reduction in interconnect cost.
■ Competition in the low-end segment. Pricing in the sector is mainly determined by
CHT, while TWM and FET follow the market leader. The launch of 4G services saw the
sector transitioning from unlimited data plans to tiered data plans. However, that
transition was shortlived as CHT (immediately followed by TWM and FET) launched an
aggressive NT$999/month unlimited plan in 1Q15 in order to promote 4G adoption.
With 4G penetration reaching ~46% by Mar-2016, the threshold of unlimited plan was
raised to NT$1,399/month from NT$999/month in Apr-2016. However, that increase
failed to lift the sector’s service revenue as competition in the low end segment
intensified. A new NT$699 plan was launched in Aug-2016, which offered unlimited
data for 24 months, impacting the sector’s service revenue performance. Additionally,
the lack of popular high end phone models (especially iPhone) during the last two
years has also resulted in customers downgrading to lower tiered plans. However, the
handset subsidies were lowered in 2016, which aided operators EBITDA.
FET’s MoU declined from 263 mins in 2012
to 126 mins by 2016
20 June 2017
Asia Telecoms Sector 88
Figure 138: Progress of 4G plans in Taiwan
Dec'16 — SIM only
introduced
Aug'16—NT$699
introduced
May'16—Unlimited
threshold raised
Dec'15—NT$499
introduced
Apr'15—NT$998
introduced
Sept'14—Unlimited
introduced
May'14—Initial 4G
plans
Price Data Price Data Price Data Price Data Price Data Price Data Price Data
399 3GB4 399 3GB4 399 3GB4 499 5GB3
599 6GB1,5 599 6GB1,5 599 6GB1,5 599 3GB1 599 1.5GB1 599 1.5GB1 599 1.5GB
5997 Unlimited - - - - - - - - - - - -
6996 Unlimited 6996 Unlimited - - - - - - - - - -
799 9GB1,5 799 9GB1,5 799 9GB1,5 799 7GB1 799 3GB1 799 3GB1 799 3GB
999 16GB2,5 999 16GB2,5 999 16GB2,5 999 Unlimited 999 Unlimited 999 4.5GB1 999 4.5GB
1,199 26GB2,5 1,199 26GB2,5 1,199 26GB2,5 1,199 Unlimited 1,199 9GB - - - -
- - - - - - - - 1,299 10GB 1,299 10GB 1,299 7.5GB
1,399 Unlimited 1,399 Unlimited 1,399 Unlimited 1,399 Unlimited 1,399 Unlimited 1,399 Unlimited
1,599 Unlimited 1,599 Unlimited 1,599 Unlimited 1,599 Unlimited 1,599 Unlimited 1,599 Unlimited 1,599 13.5GB
1,899 Unlimited 1,899 Unlimited 1,899 Unlimited 1,899 Unlimited 1,899 Unlimited 1,899 Unlimited 1,899 18GB
2,599 Unlimited 2,599 Unlimited 2,599 Unlimited 2,599 Unlimited 2,599 Unlimited 2,599 Unlimited 2,599 30GB
Note 1: Unlimited data for the first 6 months in a 24 months contract; Note 2: Unlimited data for the first 12 months in a 24 months contract; Note 3: Unlimited data for the first 12 months in a 30 months contract; Note 4: Unlimited data for the first 3 months in a 30 months contract; Note 5: In case of TWM, the unlimited period extends by 6 months for NT$599-NT$799 plans and by 3 months for NT$999-NT$1,199 plans in a 30 months contract; Note 6: Introduced as a promotional plan limited to students, senior citizens and mobile number portability customers. The plan bundles only low end phones; Note 7: This is a 12 month SIM only plan and is only available online. Source: Company data, Credit Suisse research
…however, we expect pricing to improve in coming
months with focus on profitability
We note that the competitive dynamics in the low end segment have improved over the
last 2-3 months as operators are focusing on monetising their 4G investments. During the
1Q17 earnings call, all three Taiwanese operators highlighted that they are deemphasising
the focus on low end plans (especially the NT$699 plan) and are targeting high end plans.
Additionally, we believe the launch of iPhone 8 (in 2H17) is likely to help telcos migrate
customers to higher tier plans, given the upfront payment for handset is low. Hence, we
expect Taiwan cellular sector growth to resume from 2018 and grow at a three-year CAGR
of 1.8% after declining by 1.6% in 2017.
Figure 139: YoY cellular revenue growth (NT$ mn) and revenue growth rates (%)
FY14 FY15 FY16 FY17 FY18 FY19 FY20
CHT 760 3,397 (2,082) (2,099) 687 1,398 1,309
TWM 1,026 714 776 (951) 1,317 1,759 1,691
FET 1,870 1,194 (750) (685) 975 1,326 979
Others (TSTAR + APT) (2,079) (359) (1,554) 260 128 259 189
Total 1,576 4,946 (3,610) (3,476) 3,107 4,742 4,169
Growth (%)
CHT 1.0% 4.4% -2.6% -2.7% 0.9% 1.8% 1.7%
TWM 1.6% 1.1% 1.2% -1.4% 2.0% 2.6% 2.5%
FET 3.1% 1.9% -1.2% -1.1% 1.6% 2.1% 1.5%
Others (TSTAR + APT) -12.2% -2.4% -10.6% 2.0% 1.0% 1.9% 1.4%
Total 0.7% 2.3% -1.6% -1.6% 1.4% 2.2% 1.9%
Source: Company data, Credit Suisse estimates
Market share to remain largely stable
We expect market share for all operators to remain fairly stable over the next four years.
We do not believe new operators (APT and TSTAR) can make a dent on incumbents
market share given their spectrum bank and network reach. APT and TSTAR together
have ~6% as of 2016 and we expect their market share to remain at that level. Of the two,
we think APT is a more able player due to ownership of Foxconn Technology. However,
Competition in the low end segment has
improved over the last 2-3 months
We expect market share for all operators to remain fairly stable
over the next four years
20 June 2017
Asia Telecoms Sector 89
the company has been rational towards its approach to the cellular business. APT initially
sold part of its 700MHz spectrum to TWM and entered into a roaming arrangement with
the company for its 4G services. We expect the rational behaviour from APT to continue.
On the other hand, TSTAR has been competing aggressively by offering significant
discounts to incumbents. But the company is facing financial constraints after burning cash
on operating losses and the acquisition of 2.6GHz spectrum. We believe the company will
need fresh capital injection to sustain in the medium term.
Figure 140: Cellular revenue (NT$ mn) and revenue market share (%)
NT$ mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
CHT 77,468 80,865 78,783 76,684 77,371 78,769 80,078
TWM 64,691 65,405 66,181 65,230 66,547 68,306 69,997
FET 62,194 63,388 62,638 61,953 62,928 64,255 65,234
Others (TSTAR + APT) 14,998 14,639 13,085 13,345 13,473 13,732 13,921
Total 219,352 224,297 220,687 217,211 220,319 225,061 229,230
Market share (%)
CHT 35.3% 36.1% 35.7% 35.3% 35.1% 35.0% 34.9%
TWM 29.5% 29.2% 30.0% 30.0% 30.2% 30.3% 30.5%
FET 28.4% 28.3% 28.4% 28.5% 28.6% 28.5% 28.5%
Others (TSTAR + APT) 6.8% 6.5% 5.9% 6.1% 6.1% 6.1% 6.1%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
Spectrum allocations by operator
In terms of total quantum of spectrum, CHT and FET have more spectrum that TWM, mainly
due to TWM’s decision to withdraw from the 2.6GHz spectrum auction in Dec-2015. However,
TWM’s low quantum of spectrum is compensated by the quality of spectrum. TWM has
2x20MHz of precious 700MHz spectrum, while FET has 2x10MHz of 700MHz and CHT has
2x10MHz of 900MHz, providing TWM an edge in offering quality 4G services economically.
Also, we believe the incumbents are unlikely to face capacity constraints in the medium term,
given their vast spectrum holding and constant improvement in technology (resulting in higher
spectral efficiency). Hence, we believe spectrum in Taiwan does not offer competitive
advantage to any of the incumbents in driving market share gain.
Among the two new players, APT has a much better spectrum portfolio than TSTAR.
However as mentioned earlier, we do not believe APT has made any significant network
investments to compete with incumbents. Rather, the telco has sold a part of its 700MHz
spectrum to TWM and also entered into a 4G roaming agreement with it, effectively
consolidating the market. TSTAR got a little breather on the capacity side after it acquired
2x20MHz of 2.6GHz spectrum in the Dec-2015 auction. However, we do not see Taiwan
Star gaining meaningful market share in the medium term, as its financial situation is likely
to keep a tab on market share ambition.
Figure 141: Spectrum allocations by operator
700MHz 850MHz* 900MHz 1800MHz 2100MHz 2600MHz (FDD) 2600MHz (TDD)
CHT 2x10MHz 2x25MHz 2x15MHz 2x30MHz
TWM 2x20MHz 2x15MHz 2x15MHz
FET 2x10MHz 2x20MHz 2x15MHz 2x20MHz 20MHz
APT 2x15MHz 2x20MHz 2x10MHz 20MHz
TSTAR 2x10MHz 2x10MHz 2x20MHz
* APT uses 850MHz band to provide CDMA2000/EVDO (3G) services. Source: Company data, Credit Suisse estimates
Capital intensity
Taiwan operators' capex intensity increased in 2013-15 with the roll-out of 4G services.
However, the telcos are now past their peak 4G capex cycle as the 4G roll-out is
complete. We have already seen cellular capex declining in 2016 and the 2017 guidance
Incumbents are unlikely to face
capacity constraints in the medium term
20 June 2017
Asia Telecoms Sector 90
for FET and TWM highlight further decline in cellular capex. The next big capex cycle for
the telcos is likely to emerge from the roll-out of the 5G network. However, we believe 5G
is unlikely to happen before 2020, given that 5G standards are not finalised yet. We are
building in some pick-up in FET’s and TWM’s capex in 2018 and beyond, as we believe
the telcos may need to invest more on augmenting capacity and building IoT capabilities.
The two new operators are far behind the incumbent operators in terms of network
coverage and would need to invest more to be competitive. While APT is investing on the
4G network in order to its regulatory obligation, TSTAR is constrained by its balance sheet
to further expand its network.
Figure 142: Capex by operators (NT$ bn) Figure 143: Capex-to-sales ratio (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Balance sheet strength and capex sustainability
We note that CHT has a net cash balance sheet while the leverage (net debt to EBITDA)
of FET (0.9x as of Dec-2016) and TWM (1.2x) is low. Hence, the incumbents have well
capitalised balance sheets currently. And given the expected improvement in EBITDA
(coming from potential pricing improvement and lower subsidies) and stable capex, the
FCF profile of the telcos should remain healthy. As highlighted earlier, between the two
new operators, TSTAR has a stretched balance sheet and we believe the company would
need a capital injection to sustain in the medium term. We believe TSTAR can be an
acquisition candidate (due to the spectrum asset) but pricing may be a key hurdle for the
incumbents.
Regulation
We believe the regulatory approach in Taiwan’s telecom sector is heavy handed as the
regulator, National Communications Commission (NCC), has historically mandated retail
voice pricing. There are currently no mandatory retail tariff reductions in the cellular sector.
NCC is currently reviewing the voice interconnect regime and there is a high probability of
another round of voice termination rate cuts in the coming months. Most of the price
regulation pertains to the fixed-line segment. Given the history of voice price regulation,
concerns remain among investors that the regulator can manage data pricing in the future
as well. We see a low risk of regulatory intervention on data pricing, as unlike voice pricing
(during the period of regulatory invention) data prices in Taiwan are competitive versus
other regional peers (click here).
In terms of spectrum auction, the regulator has already auctioned most of the
commercially available cellular spectrum (700MHz, 900MHz, 1800MHz, 2600MHz) over
the past two years. The only spectrum due for renewal is 2100MHz, which expires in 2018.
Also, our discussions with sector participants suggest that the regulator may auction the
-
2
4
6
8
10
12
FY14 FY15 FY16 FY17 FY18 FY19 FY20
CHT TWM FET
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
CHT TWM FET
We believe TSTAR can be an acquisition
candidate
We see a low risk of regulatory intervention
on data pricing
20 June 2017
Asia Telecoms Sector 91
additional 1800MHz spectrum along with 2100MHz spectrum renewal. We expect
2100MHz spectrum auction to happen in 2H17 and believe that the final auction price will
be rational as all major telcos (including Taiwan Star) have 2100MHz spectrum coming up
for renewal. For the 2100MHz spectrum renewal payment, we currently assume NT$22 bn
in our cash flow for CHT, TWM and FET each.
Do smaller players have a viable business?
Though the return profile of the sector has diminished post the 4G investments, the three
incumbent operators continue to generate healthy returns (ROIC) at 12-15% above their
WACC of 6-6.5%. We note that TWM has the highest ROIC of 15% in 2016 followed by
FET at 13% and CHT at 12%. CHT’s ROIC is the lowest due to headwinds from the legacy
fixed line businesses. Given our expectations of no significant change in market share, we
expect the ROIC profile of Taiwanese operators to remain stable over the next four years.
The new operators continue to be loss making even after three years of launching services. In
order to improve ROIC, the key thing for new operators is to gain revenue market share,
which in turn requires investments. With APT’s cautious decision to limit investment in order
to contain losses and TSTAR’s balance sheet constraints, we do believe new operators are
likely to generate returns from their cellular investments in Taiwan.
Figure 144: ROIC analysis
FY16 FY20 4 -year CAGR
CHT TWM FET CHT TWM FET CHT TWM FET
Subscribers (000s) 10,785 7,439 7,346 11,111 7,788 7,688
Service revenue 197,972 67,950 71,598 197,964 72,995 73,689 0.0% 1.8% 0.7%
EBITDA 81,087 33,872 27,842 82,260 36,407 30,168 0.4% 1.8% 2.0%
EBITDA margin 41% 50% 39% 42% 50% 41%
Depreciation to sales (%) 16% 20% 18% 17% 19% 19%
EBIT 48,602 20,020 15,024 48,856 22,500 16,120 0.1% 3.0% 1.8%
EBIT margin 25% 29% 21% 25% 31% 22%
Tax rate (%) 17% 17% 17% 17% 17% 17%
NOPLAT 40,578 16,616 12,433 40,404 18,675 13,380 -0.1% 3.0% 1.9%
Average invested capital 341,703 107,349 94,418 338,357 118,031 99,350
Asset turn 0.6 0.6 0.8 0.6 0.6 0.7
ROIC 12% 15% 13% 12% 16% 13%
Net profit 40,067 15,320 11,391 40,225 16,883 12,509 0.1% 2.5% 2.4%
Net margin 20% 23% 16% 20% 23% 17%
Source: Company data, Credit Suisse estimates
What's in the price?
We have a positive view on the Taiwan cellular sector as we expect cellular pricing to
improve over the next 12-18 months and the sector to gradually transition to tiered pricing
in the medium term (3-5 years). We like TWM and FET as they are more leveraged to
improving cellular fundamentals.
We use discounted cash flow methodology to value Taiwan telecom stocks. At present, we
do not believe that the market is fully factoring in the potential cellular price improvement
for Far EasTone and Taiwan Mobile as there is ~14% and ~13%, respectively, upside to
our DCF-based target prices for the two companies, while ChungHwa Telecom's stock
price appears fairly valued.
On relative valuation as well, FET and TWM are offering higher dividend yield spread than
CHT. FET is trading at 2018E dividend yield of 5.1%, while TWM is offering a 5.0% yield
and the yield of CHT is 4.7%.
We expect ROIC profile of Taiwanese operators
to remain stable over the next four years
We have a positive view on the cellular sector as we expect
pricing to improve
20 June 2017
Asia Telecoms Sector 92
Figure 145: Taiwan cellular sector—comparative valuation
Close Target Upside Normalised P/E EV/EBITDA EV/IC (x) FCF yield Div yield
Price Price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
TWM 113.00 128.00 13.3% 20.3 20.0 10.8 10.6 3.3 3.1 6.1% 6.3% 5.0% 5.0%
FET 76.50 87.00 13.7% 21.9 21.8 9.6 9.4 3.0 2.8 6.3% 6.4% 5.0% 5.1%
CHT 108.00 105.00 -2.8% 21.2 21.2 10.0 9.9 2.4 2.3 5.1% 5.7% 4.7% 4.7%
Source: Company data, Credit Suisse estimates
Figure 146: Taiwan telcos share price performance (rebased)
Source: Company data, Credit Suisse estimates
80.0
90.0
100.0
110.0
120.0
130.0
140.0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
TWM FET CHT
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Asia Telecoms Sector 93
Country sections: Thailand
Summary
■ In terms of industry structure, the Thailand market looks relatively attractive, with no
new entrants, declining subsidies and some remaining growth potential.
■ Indeed, we expect the Thai market to grow service revenue at a CAGR of 4.5% across
FY16-FY20.
■ AIS is dominant with 48.6% revenue market share as at 1Q17 and an FY16 ROIC of
26.6%. However its relatively attractive returns on capital and resulting cash flows are
not being fairly valued. AIS's parent company Intouch is even more attractive trading at
17.5% discount to the market value of its listed holdings.
■ DTAC looks to be a #2 player with reasonable prospects of acceptable returns.
However, this looks priced in after a sharp share price rally. True Corp, on the other
hand, looks to be an overvalued challenger with forecast ROIC of just 2.6% by FY20,
given over-investment in cellular spectrum and deteriorating competitive advantages.
True Corp gained market share across FY13-FY16
Wireless data demand in Thailand is proving to be very strong, and the cellular revenue
growth rate recovered to 6.9% YoY in 4Q16 and 6.3% in 1Q17—the second highest
revenue growth rates in our coverage universe.
Figure 147: YoY cellular service revenue growth
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
AIS 4.6% 2.9% 2.0% -0.5% -0.9% -1.5% 1.5% 4.5% 2.6%
DTAC -3.6% -5.3% -1.5% -1.6% -2.0% -2.4% -1.2% -3.7% -1.3%
True Mobile Group 14.5% 18.7% 15.7% 20.2% 23.7% 31.2% 31.5% 27.1% 24.3%
Total 3.7% 3.0% 3.3% 2.9% 3.3% 4.4% 6.6% 6.9% 6.3%
Source: Company data, Credit Suisse estimates
However, growth has been extremely lopsided, with True Corp enjoying 24.3% YoY
growth in 1Q17, versus AIS's 2.6% YoY growth and a DTAC's 1.3% YoY revenue decline.
In fact, True Corp has been consistently gaining market share since 3Q13, with market
share having risen by 10.2 pp from 15.6% as at 2Q13 to 25.8% in 1Q17—True Corp has
just overtaken DTAC to become the second-largest operator by revenue in Thailand's
three-player market.
Figure 148: Cellular service revenue market share
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
AIS 52.5% 52.7% 52.0% 50.9% 50.4% 49.8% 49.5% 49.7% 48.6%
DTAC 29.1% 28.4% 28.4% 28.3% 27.6% 26.6% 26.4% 25.5% 25.6%
True Mobile Group 18.4% 18.8% 19.6% 20.8% 22.0% 23.7% 24.2% 24.8% 25.8%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
The origin of this dramatic market share expansion can be explained as resulting from
several inter-related factors:
■ Regulation: Prior to the formation of the National Broadcasting and
Telecommunications Commission (NBTC) Thai cellular operators gained access to
spectrum through Build Transfer Operate (BTO) concessions. These concessions
granted the right to use spectrum for a certain period, in return for the transfer of the
assets and a revenue share. Different concessions ended on different dates; True
Corp's 1800MHz concession ended in September 2013. Due to a regulatory vacuum
20 June 2017
Asia Telecoms Sector 94
over the next steps for the use of this spectrum, True Corp's revenue share dropped
from 30% of revenue (under concession) overnight to zero (under True Corp's
interpretation of the so-called a 'remedy period' that ensued). Competitors AIS and
DTAC continued to be locked into their expensive and restrictive concession
arrangements. Following a military coup in 2014, a proposed auction in September
2014 was delayed until November 2015, elongating True Corp's 'remedy period' and
window of opportunity.
■ Deal-making: In addition to 'free' use of 1800MHz spectrum from September 2013,
True Corp also had the use of a 2x15MHz block of spectrum following the acquisition
of Hutch Thailand (Not listed) in December 2010. The contracts were amended such
that the spectrum could be used for W-CDMA services, rather than CDMA services.
The contract was based on cost-plus economics, rather than a revenue share,
incentivising high utilisation.
■ Marketing expenses. Armed with concession-free (and revenue-share-free) 1800MHz
and 850MHz spectrum revenue, together with 2100MHz spectrum won transparently at
auction in 2012, True Corp re-invested its revenue share windfall in an aggressive
marketing budget to gain scale, and introduced handset subsidies into the Thai market
in 3Q13. With sufficient spectrum resources, True Corp was able to launch 4G services
more than two years prior to incumbent AIS, which was still locked in concession
arrangements. This made the marketing message simple and the handset subsidy
strategy effective.
■ Capital injections. The shift in cost allocation from revenue share payments to
marketing costs and handset subsidies meant that EBITDA was nowhere near
sufficient to fund True Corp's enlarged capex caused by 3G and 4G roll-out. True Corp
sold its tower assets in 2013, then raised equity in both 2014 (with China Mobile taking
an 18% stake in the form of new shares, in addition to a rights issue) and again in
2016. Shareholders therefore financed True Corp's capex, marketing spend and, as we
shall see, auction payments.
Scope for mid-single-digit market growth
Looking forward, we continue to see scope for mid-single digit revenue growth in the Thai
market into the medium term. Smartphone penetration in Thailand has reached 85.9% as
at December 2016 (in part due to the aggression with which the operators shifted their
customers from 2G concession structures to the 2100MHz 3G spectrum won at auction in
2012), but 4G penetration only reached 31.3% of the population as at December 2016.
Figure 149: Smartphone and 4G penetration Figure 150: 4G penetration vs GDP per capita
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
With AIS's launch of 4G, the average data use per subscriber rose sharply from 2GB per
month in 4Q15 to 4GB as at 1Q17. At present, the conversion of the resulting volume
SingaporeHong Kong
Malaysia
Indonesia
Korea
China
Thailand
PhilippinesIndia
Taiwan
Australia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
4G p
enet
ratio
n
GDP per capita (US$)
20 June 2017
Asia Telecoms Sector 95
growth into revenue growth is sub-optimal. In part, this is due to the fact that when AIS
finally officially launched 4G services, in January 2016, Jasmine had bid for, and won, an
allocation of 900MHz spectrum, and looked to be entering the market as a fourth player.
This expectation led AIS to sharply lower the price points per MB, as shown in the figure
below; subscribers are able to consume 4GB of data for Bt399/month, rather than
Bt599/month under the previous packages. While this still represents a meaningful ARPU
uplift versus AIS's blended average ARPU of Bt256/month, and while AIS's data revenue
grew by 20.0% YoY into 1Q17, the ARPU uplift, and the resulting revenue trajectory, is far
lower than would have been the case if previous price points had been maintained.
Figure 151: Change in implied ARPU from published data packages
Assumed data per month ~250MB ~700MB ~1GB ~2.5GB ~4GB
AIS 3G (Nov 2015)
Implied ARPU 399 399 399 399 599
AIS 3G/4G (Jan 2016)
Implied ARPU 343 343 343 399 399
Source: Company data, Credit Suisse estimates
The re-introduction of an 'unlimited' package (albeit with some usage constraints and a
high price point of Bt899/month) is also sub-optimal for data monetisation, and is another
reason to expect lower market revenue growth in Thailand than in some other emerging
Asian markets (such as Indonesia).
Figure 152: YoY cellular revenue growth (Bt mn) and revenue growth rates (%)
Bt mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
AIS 5,461 2,511 1,201 3,189 3,227 2,826 966
DTAC (1,830) (2,054) (1,527) 1,522 1,701 1,716 1,335
True Corp 3,195 6,646 12,804 12,392 6,933 5,302 5,755
Total 6,826 7,103 12,478 17,103 11,861 9,843 8,056
Growth (% YoY)
AIS 4.9% 2.1% 1.0% 2.6% 2.6% 2.2% 0.7%
DTAC (2.6%) (3.0%) (2.3%) 2.4% 2.6% 2.5% 1.9%
True Corp 9.1% 17.3% 28.4% 21.4% 9.9% 6.9% 7.0%
Total 3.1% 3.2% 5.4% 7.0% 4.5% 3.6% 2.8%
Source: Company data, Credit Suisse estimates
AIS and DTAC still to lose share, but more slowly
Our forecasts for revenue growth also project a slowdown in market share gains for True
Corp, commencing in FY17; we project that True Corp will gain 3.2 pp of market share in
FY17, down from the 4.3 pp of market share gained in FY16. We then expect True Corp to
gain just 1.4 pp of market share in FY18. We note that our forecasts imply that True Corp
will achieve 28.3% market share by FY18, circa 4.0 pp below the company's stated target
of 32.0% revenue market share by that point.
20 June 2017
Asia Telecoms Sector 96
Figure 153: Cellular revenue (Bt mn) and revenue market share (%)
Bt mn FY14 FY15 FY16 FY17 FY18 FY19 FY20
AIS 117,989 120,500 121,701 124,890 128,117 130,943 131,910
DTAC 68,275 66,221 64,694 66,216 67,917 69,633 70,967
True Corp 38,406 45,052 57,856 70,248 77,181 82,483 88,237
Total 224,670 231,773 244,251 261,354 273,215 283,058 291,114
*ex IC
Market share (%)
AIS 52.5% 52.0% 49.8% 47.8% 46.9% 46.3% 45.3%
DTAC 30.4% 28.6% 26.5% 25.3% 24.9% 24.6% 24.4%
True Corp 17.1% 19.4% 23.7% 26.9% 28.2% 29.1% 30.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
These market share expectations are based on our analysis of the following key factors:
Regulation
True Corp's advantages in the 4Q13 through 2Q16 period were primarily driven by
regulation, and in particular to a chaotic and unprecedented shift from the concession
structure to a licenced structure. Crucially, market leader AIS fully emerged from the
concession structure into a licence and deal-based structure in May 2016 (albeit almost two
years after the initial expectations of a September 2014 auction of 1800MHz spectrum). This
puts AIS on a level regulatory playing field with True Corp and has ended True Corp's
'window of opportunity'. In fact the pace of market share loss from AIS to True Corp slowed
immediately to 0.3 pp QoQ in 3Q16, from 0.6 pp in 2Q16. DTAC is still at something of a
regulatory disadvantage, on the other hand, as it continues to operate under a concession
regime until 2018, at which point an auction should facilitate a shift onto the licenced regime.
This is a key reason behind our expectation that DTAC will continue to lose market share in
FY17 (before softening in FY18, thanks to the end of the concession period and a recently
agreed deal with TOT Corp outside of the concession structure).
Spectrum allocations by operator
Following the November 2015 1800MHz auction and 900MHz re-auction in May 2016, a
relatively level playing field in spectrum resources was established. As shown in the table
below, AIS has 2x55MHz of spectrum, DTAC has 2x50MHz (and recently-announced 1x
60MHz of 2300MHz spectrum) and True Corp has 2x55MHz of spectrum, all in low and
medium bands suitable for 2G, 3G and 4G services.
Figure 154: Spectrum allocations by operator
MHz 850 MHz 900MHz 1.8GHz 2.1GHz 2.3GHz
AIS 10*2 15*2 30*2
DTAC 10*2 25*2 15*2 60*1
True Corp 15*2 10*2 15*2 15*2
Source: Company data, Credit Suisse estimates
There are still some nuances; in particular the fact that DTAC's 850MHz spectrum and
1800MHz spectrum resources are both still under concession structure, conferring a
different fee structure and a higher revenue share, as well as limiting DTAC's confidence
in investing in those frequencies (since assets under the BTO concession structure are
transferred and the right to operate them will cease in 2018). This is why DTAC's recently
announced deal to access TOT Corp's 60MHz of unpaired spectrum in the 2300MHz band
is of such importance; on the assumption that the deal is approved by year-end, DTAC will
be free to invest in 2300MHz equipment with full rights and rewards of ownership.
Furthermore, the very expensive auctions for 1800MHz and 900MHz spectrum, won by
AIS and True Corp, reduce the near-term cost disadvantage faced by DTAC under the
concession structure. Thus, the key disadvantage in our view, and the key reason for the
20 June 2017
Asia Telecoms Sector 97
expectation of sharp ongoing market share losses in FY17, is the relative 'inefficiency' of
DTAC investing in 850MHz and 1800MHz equipment under concession—a situation that
should improve somewhat in FY18 with DTAC's 2300MHz roll-out and potentially slow
True Corp's growth rate relative to DTAC.
BTS by operator
As mentioned, AIS's improving growth rate, and moderating market share losses in FY17,
have been facilitated by the victory in the November 2015 1800MHz auction, allowing the
construction of a 4G network and launch of 4G services. AIS's 4G roll-out was extremely
quick, with 45,200 4G base transceiver systems (BTS) rolled out within just 12 months to
achieve 98% population coverage by December 2016, and the improving revenue
trajectory coincided with the 4G network quality became competitive, in key cities at least,
in mid-2016.
Figure 155: BTS by operator
2G BTS 3G BTS 4G BTS Total BTS Proportion
AIS 13,500 46,800 45,200 105,500 41.4%
DTAC 10,827 28,435 21,820 61,082 24.0%
True Corp 25,000 28,000 35,000 88,000 34.6%
Total 49,327 103,235 102,020 254,582 100.0%
Source: Company data, Credit Suisse estimates
True Corp has the second largest network and had enjoyed the competitive advantage of
4G service launch ahead of incumbent AIS. True Corp also invested heavily in building up
2G coverage in the 900MHz band in 1H16, after winning 900MHz spectrum in the initial
auction in December 2015, and AIS's initial auction loss. With Jasmine reneging on its
successful bid, AIS was able to secure 900MHz spectrum in the re-auction in May, and so
True Corp was not in the monopoly position it expected on 900MHz by mid-year. Some of
the 900MHz network resources may therefore suffer relatively low utilisation.
Given that it remains under the BTO concession structure on 850MHz and 1800MHz,
DTAC's network roll-out has been more constrained than AIS and True Corp's roll-outs.
Capital intensity
The impact of the highly disruptive shift from concession structure to licence structure can
also be clearly seen in the historic capex expenditure, and capex budgets, of the three
operators. We have shown consolidated capex budgets for simplicity (though True Corp
also has a fixed line division, and AIS has recently commenced fixed broadband
investment).
True Corp invested heavily in FY14 and FY15 as it pressed home the advantage conferred
by the relatively early end of its concession (and its deal with CAT Corp). AIS was also
investing at this point, primarily in 3G services on its 2100MHz network after winning
2100MHz spectrum under licence in late 2012, but in relative terms True Corp was
investing more.
AIS further ramped up investment in absolute terms in FY16 following its 4G auction
victory, and we forecast that AIS's capex will remain elevated at the Bt40-50 bn level in
FY17 and FY18, before dropping back in FY19 after the completion of a geographically
broad but dense 4G network. This further supports our expectation of slower revenue
market share losses by AIS.
20 June 2017
Asia Telecoms Sector 98
Figure 156: Capex by operators (Bt mn) Figure 157: Capex-to-sales ratios (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
With one eye on the end of its concession DTAC was clearly under-investing in relative
terms in 2013 and 2014. After suffering sharp market share losses in 2014, DTAC
attempted to address this problem in 2015, increasing its capex to Bt20.0 bn. Management
acknowledged that part of this expenditure was extremely inefficient, given that DTAC
would only get use of the assets constructed in the 850MHz and 1800MHz bands until
2018 under concession; much shorter than useful life. We forecast that capex will rise to
Bt25 bn level in FY18 as DTAC builds equipment under the 2300MHz deal with TOT Corp,
and we expect capex to remain elevated in FY19 as DTAC re-invests in new equipment
under a clean licence structure post-auction (and enjoys full legal ownership of the assets
across all of its spectrum holding). DTAC's higher-than-industry capex to sales ratio in
FY18 and FY19 supports our expectation of much slower market share losses.
Balance sheet strength and capex sustainability
AIS and DTAC are both generating positive free cash flow in FY17. With both operators
having cut their dividend payout ratios (DTAC: 50%, AIS: 70%), the peak gearing ratio for AIS
is expected to reach 1.96x net debt to EBITDA in 2020, while DTAC is expected to hit 2.9x in
2020 based on our current EBITDA forecasts and the capex forecasts set out above.
In spite of seven capital raisings in the last 13 years (an average of one every two years),
True Corp's gearing looks high, at 2.7x as end-FY16, and likely to peak at 3.4x in FY18
under our current assumptions. Participation in the FY18 auctions—which are not yet
factored into our True Corp model—could therefore trigger yet another capital rising.
However, historical track record leads us to fully expect CP Group (Not listed) and China
Mobile to subscribe to any capital raising, and so we view True Corp's participation in the
Thai cellular industry as 'sustainable' (even though, as we explore further below, common
application of financial theory might question this assertion). As an alternative, True Corp
could look to sell additional assets to the Digital Infra Fund, though this would effectively
involve swapping an upfront cash receipt for ongoing lease fees at the EBITDA line.
Do DTAC and True Corp have viable businesses?
AIS and DTAC enjoyed a significant improvement in ROIC following the receipt of
2100MHz spectrum in 2012. The spectrum was inexpensive (Bt13.5-14.6 bn) and allowed
an initial shift of some customers from the high-revenue-share concession structure to a
5.25% revenue share under licence. AIS's ROIC peaked at 68.4% in FY12. DTAC's ROIC
in FY12 was 27.7%.
The difference was largely due to scale. Thailand's concession structure adds a significant
amount of complexity to the trajectory of margins and returns, but Thailand's relatively
large geography, and the requirement from consumers for nationwide coverage, creates
high fixed costs and means that revenue market share is a key driver of returns. In 2012,
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
FY14 FY15 FY16 FY17 FY18 FY19 FY20
AIS DTAC True Corp
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
FY14 FY15 FY16 FY17 FY18 FY19 FY20
AIS DTAC True Corp
20 June 2017
Asia Telecoms Sector 99
AIS had enjoyed 53.5% revenue market share, while DTAC had enjoyed 31.2%, and True
Corp had just 15.3%. True Corp's consolidated ROIC in 2012 was just 1.1%.
True Corp's introduction of aggressive handset subsidies in September 2013 triggered
market share loss, higher capex, and less EBITDA margin expansion than would
otherwise have been the enjoyed. This contributed to AIS's ROIC declining to 26.6% in
2016—still healthy, thanks to its scale advantage (FY16: 49.8% revenue share) but down
significantly from the 2012 peak.
With the loss of scale, higher capex, defensive handset subsidies and also very high
deprecation charges in FY16 (thanks to a policy of depreciating over an ever-shortening
concession life), DTAC's ROIC fell to just 5.3% in FY16, below what we estimate to be its
cost of capital (WACC: 9.5%).
Perhaps more surprisingly, despite increasing its cellular market share to 23.7%, True
Corp's ROIC had declined to -0.3% by 2016, due to its heavy capex roll-out and
aggressive handset subsidy and promotion costs. True Corp had not captured enough
scale to support its enlarged cost structure.
Figure 158: ROIC analysis
FY16 FY20 4 -year CAGR
Bt mn AIS DTAC True Corp AIS DTAC True Corp AIS DTAC True Corp
Subscribers (000s) 41,031 24,480 24,526 43,031 27,330 33,610
Revenue 146,770 77,919 119,409 168,933 84,192 166,361 3.6% 2.0% 8.6%
EBITDA 60,900 27,336 25,072 85,851 33,588 39,156 9.0% 5.3% 11.8%
EBITDA margin 41.5% 35.1% 21.0% 50.8% 39.9% 23.5%
Depreciation to sales (%) 14.8% 30.1% 21.4% 22.6% 29.6% 19.3%
EBIT 39,233 3,904 (492) 47,741 8,677 6,967 5.0% 22.1% n.m.
EBIT margin 26.7% 5.0% -0.4% 28.3% 10.3% 4.2%
Tax rate (%) 14.4% 20.0% -21.1% 20.0% 20.0% 17.6%
NOPLAT 33,572 3,123 (595) 38,193 6,942 5,741 3.3% 22.1% n.m.
Average invested capital 126,321 59,060 181,163 230,299 116,397 223,789
Asset turn 1.2 1.3 0.7 0.7 0.7 0.7
ROIC 26.6% 5.3% -0.3% 16.6% 6.0% 2.6%
Net profit 30,667 2,086 (2,814) 33,305 3,956 3,395 2.1% 17.4% n.m.
Net margin 20.9% 2.7% (2.4%) 19.7% 4.7% 2.0%
Source: Company data, Credit Suisse estimates
Is this divergence in returns likely to change going forward? Not much.
On the basis of current competitive dynamics and data pricing, we expect cellular industry
revenue to grow at a compounded annual rate of 4.5%. We also expect EBITDA margins
to rise, in part due to regulatory savings (particularly for DTAC as it shifts from a 30.0%
concession revenue share to a licence with a 3.75% revenue share), and in part due to
declining handset subsidies now that a level playing field on competition is in place.
However, in what we consider to be a major 'collective mistake' by True Corp, Jasmine
and AIS, the fees paid in the recent auctions are set to cause a material drag on industry
returns on capital. Due to the inclusion of Jasmine in the 1800MHz bid in November 2015
auction, AIS and True Corp paid Bt41.0 bn and Bt39.8 bn, respectively, for 2x15MHz
allocation of 1800MHz spectrum. DTAC stopped bidding at Bt17.5 bn, and so if Jasmine
had not continued to the bid, the clearing price for this spectrum would have been Bt18.0
bn.
Jasmine also took part in the December 2015 auction for 900MHz spectrum, as did True
Corp (surprisingly, since True Corp had low-band spectrum through its 850MHz deal with
CAT Corp). Jasmine and True Corp won 2x10MHz allocations for Bt75.6 bn and Bt76.0
bn, respectively, after AIS stopped bidding. Jasmine then reneged and, in a re-auction in
May 2016, AIS was the sole bidder at the Bt75.6 bn 'reserve price', as the company paid
20 June 2017
Asia Telecoms Sector 100
more than it thought the spectrum was actually worth in order to protect its legacy 2G
business. The ramifications of this unfortunate series of events are material, namely:
■ As a result of Bt117.0 bn in payments for 1800MHz and 900MHz spectrum, plus our
estimate of a further Bt60.0 bn in upfront spectrum payments in 2018, we expect AIS's
ROIC to decline to 16.6% by FY20—still comfortably above its WACC of 9.3%, but
clearly sub-optimal.
■ For True Corp, the Bt116.1 bn in payments for 1800MHz and 900MHz spectrum
completely offset the benefits of higher scale built over recent years and the
expectation of improving competitive dynamics going forward. We forecast ROIC of
just 2.6% in FY20, well below the cost of capital.
■ DTAC bid rationally in the 1800MHz auction and did not take part in the 900MHz 're-
auction', so it does not face any drag on returns from the 2015/16 auctions. However,
our key concern is the prospect of Thai politicians taking the clearing prices of those
auctions as the 'fair value' of spectrum and pressuring the NBTC to use those price
points as a reference for the reserve prices in the 2018 auction round. We therefore
assume that DTAC will need to pay Bt90.0 bn in total for 2x15MHz of 1800MHz
spectrum and 2x10MHz of 850MHz spectrum in the 2018 auction. This leads us to
expect an ROIC of just 6.0%, though we expect this to grind higher to reach 6.6% in
2023 as the spectrum is more fully utilised.
We conclude that AIS's business is, and will continue to be, value accretive. In DTAC's
case, what was a good business has been badly damaged, and due to our expectation of
high spectrum fees DTAC is set to be 'borderline' in generating adequate returns versus
its 9.5% WACC. Returns are probably just good enough to warrant ongoing support from
shareholders (including Telenor Group).
True Corp does not appear to have a viable business. It has not generated returns close to
cost of capital in the 20 years the stock has been listed. Scale benefits from recent strong
cellular revenue share gains were re-invested into spectrum payments in an attempt to
create an ongoing competitive advantage which has failed. While True Corp is not
sustainable on a stand-alone basis, CP Group and China Mobile may continue to support
it using the excess returns generated from their food business and (dominant) China
cellular business, respectively.
What's in the price?
We again rely primarily on discounted cash flow (DCF) to set our target prices, since it is
the only way to fully capture the multi-year nature of cellular investment and payback, as
well as spectrum fees and differing revenue share payments in Thailand's complex
regulatory environment.
We believe that there are very significant valuation anomalies in Thailand, which create
opportunities for investors. AIS still looks attractive in absolute terms, with 25.6% potential
upside to our DCF-based target price; the company generates returns above cost of
capital even factoring in the expensive auction fees. However, investors can gain
exposure to the same set of cash flows through AIS's parent company, Intouch, which
offers 35.1% potential upside. Intouch, therefore, looks far more attractive than AIS on a
risk-reward basis at present.
While DTAC's lack of scale means that it generates inferior returns to AIS, this looks fairly
reflected in the valuation. Our DCF-based target price of Bt54.0 offers just 5.4% potential
upside. Reference to multiples suggests a similar conclusion; AIS is trading at 8.6x FY17
EV/EBITDA, while DTAC is trading at 5.1x. AIS trades at 3.7x EV/IC, DTAC trades at 2.6x,
but AIS generates higher returns, given its scale advantage.
AIS's scale and low risk profile drive a higher
valuation
DTAC looks fairly valued versus its return
profile…
20 June 2017
Asia Telecoms Sector 101
Indeed, given limited remaining upside to our DCF-based target price following a very
sharp share price rally, we downgrade DTAC from Outperform to NEUTRAL. The discount
at which DTAC trading is trading is in our view warranted by its lower returns on capital.
DTAC also suffers a high P/E ratio, though this is in large part due to DTAC's accounting
policy of depreciating over concession life, which leads to under-depreciation in the early
years of the concession, and very heavy (non-cash) depreciation charges as the end of
the concession approaches in 2018.
Figure 159: Thai telecoms—comparative multiples
Close Target Upside Normalised P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
AIS 173.5 218 25.6% 16.6 15.6 8.6 8.2 3.7 3.0 2.9% 4.9% 4.2% 4.5%
Intouch 55.75 75.3 35.1% 14.5 13.7 14.4 13.6 6.9% 7.3% 5.5% 5.1%
TAC 51.25 54.0 5.4% 82.2 23.6 5.1 6.0 2.6 2.6 5.4% 1.2% 0.6% 2.1%
True Corp 6.15 2.69 -56.3% 1315.2 273.4 9.9 10.4 1.6 1.4 -0.6% 4.5% 0.0% 0.0%
NJA- Integrated 24.5 16.6 6.5 6.2 6.4% 7.5% 4.3% 4.5%
NJA - Mobile 17.3 15.3 5.7 5.4 4.5% 6.2% 3.4% 3.8%
Source: Company data, Credit Suisse estimates
Given True Corp's ongoing destruction of capital, our DCF valuation, using a WACC of 9.2%,
gives a value of Bt2.69. This implies 56.3% downside from current levels. On comparative
multiples, True Corp looks similarly unattractive, at 9.9x EV/EBITDA (a premium to AIS),
1315x P/E, with a zero dividend and a small negative free cash flow yield.
While the asset base is very large, the market is currently paying 1.6x EV/IC, in spite of
the fact that the assets generated a negative return in FY16. We might conclude that the
market is expecting a dramatic improvement in returns on capital and profitability in the
medium term, driven by rising market share, and therefore improving economies of scale.
However, we have shown that, given the return of a level playing field on spectrum,
regulation, BTS and capital intensity market share gains from here on will likely be more
difficult for True Corp. This is already the case versus AIS, and is likely to become more
evident versus DTAC following 2300MHz roll-out.
Furthermore, the benefits of True Corp's increase in scale so far have been offset by higher
marketing and network costs, and future declines in marketing costs going forward are set to
be largely offset by the payment of extremely high spectrum fees bid in the recent auctions.
Thus our forecasts do not suggest that True Corp will be able to achieve reasonable returns
on capital even in the medium term—in contrast to the market's implied view.
But the market is pricing in returns from
True Corp which we do not expect to
materialise
20 June 2017
Asia Telecoms Sector 102
Figure 160: Relative share price performance
Source: Company data, Credit Suisse estimates
20
40
60
80
100
120
140
160
180
200
220
240
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
AIS DTAC TRUE
20 June 2017
Asia Telecoms Sector 103
Country sections: Australia
Summary
■ In terms of industry structure, the Australia market looks relatively unattractive, with
new a new entrant, extensive handset subsidies, and high 4G penetration.
■ We expect the Australia market to experience a decline in service revenue at a CAGR
of 1.4% across FY16-FY20.
■ Telstra is dominant with 55.6% revenue market share as at 1Q17 and an FY16 ROIC
of 15.4%. However the margin impact of the NBN in fixed line and increasing
competition in mobile are yet to be fully priced in.
■ TPG looks to be a challenger with high level of earnings and funding risk not yet
reflected in its (expensive) valuation.
Mobile revenue declines low single digits in 2016
Total Australian mobile service revenue fell 13.5% in 2016. Revenue was significantly
impacted by the reduction in mobile termination rates (MTR) from 1 January 2016, which
had a large impact on revenue, but minimal impact on industry EBITDA. We estimate that
on an underlying basis, the industry service revenue was down low single digit in 2016.
Figure 161: Australian mobile service revenue growth
YE June; A$ mn 1H14 2H14 1H15 2H15 1H16 2H16 1H17
Telstra 7.3% 5.0% 7.4% 7.0% 0.5% -9.7% -9.8%
Optus 1.3% 4.7% 2.9% 6.1% 2.2% -18.3% -20.6%
Vodafone -10.0% -8.9% -8.7% -1.1% 3.0% -14.1% -14.1%
Total 1.8% 2.2% 3.0% 5.3% 1.4% -13.0% -13.8%
Source: Company data, Credit Suisse estimates
The underlying decline in service revenue reflects a general step-up in the level of
competitive intensity across the industry. Optus and Vodafone have both spent the last
few years re-investing in their networks and have been more aggressive and innovative
with plan structures and pricing.
Vodafone has returned to subscriber growth and has stabilised its subscriber market
share. Optus has been winning subscriber share, though revenue market share is down
due to the impact of device repayment credits and MTR on service revenue. Telstra's
subscriber share has slipped slightly, though revenue share is actually up as the lower
MTR has a bigger relative impact on its competitors.
Figure 162: Australian mobile service revenue market share
YE June; A$ mn 1H14 2H14 1H15 2H15 1H16 2H16 1H17
Telstra 51.4% 52.7% 53.6% 53.6% 53.1% 55.6% 55.6%
Optus 29.8% 29.7% 29.7% 29.9% 30.0% 28.1% 27.6%
Vodafone 18.8% 17.6% 16.6% 16.5% 16.9% 16.3% 16.8%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Source: Company data, Credit Suisse estimates
TPG to enter market as fourth operator
There will be a big shift in mobile market dynamics over the next 3-4 years as TPG enters
as a fourth network operator. TPG is the No.2 broadband service provider with 25%
subscriber share.
20 June 2017
Asia Telecoms Sector 104
TPG paid A$1.26 bn to acquire 2x10MHz of 700 MHz spectrum. It plans to spend A$600
mn over the next 2-3 years to build a national network to cover 80% of the population.
TPG intends to leverage its existing fibre backhaul network and telco infrastructure as it
rolls out its network. TPG is targeting EBITDA breakeven with 2% subscriber share (c500k
subscribers) and EBIT breakeven with 6-7% share.
We expect TPG's network to be of significantly lower quality than its competitors, given the
limited amount that it intends to spend on capex and opex (see report TPG.AX: TPG
takes the high risk road). We expect that TPG will have a strong offering in the prepaid
and consumer wireless broadband market (c25% of the total market), but that it will find
the core postpaid market much harder to address.
We expect TPG to achieve its 500k EBITDA breakeven subscriber target fairly quickly, but
that the 6-7% EBIT breakeven target will be much harder to achieve. We forecast TPG to
achieve 4.5% subscriber market share by FY25F.
Figure 163: FY17F capex by operator (A$ mn) Figure 164: Macro cell sites by operator
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
TPG's entry to drag down overall market growth
We do not expect TPG's entry to have a huge impact on the existing operators in terms of
taking market share as we expect its network to be lower quality than competitors.
However, we do expect TPG to drag down pricing, particularly in the prepaid and
consumer wireless broadband segments.
As a result, we forecast total market growth of only 0-1% over the next 3-4 years as TPG
launches service.
Figure 165: YoY mobile service revenue growth (A$ mn) and revenue growth rates (%)
YE June; A$ mn FY14 FY15 FY16 FY17F FY18F FY19F FY20F
Telstra 8,178 8,765 8,362 7,893 7,974 8,055 8,067
Optus 4,669 4,878 4,482 3,764 3,801 3,839 3,839
Vodafone* 2,854 2,709 2,559 n.a n.a n.a n.a
TPG - - - - 1 9 43
Total market 15,701 16,352 15,403 14,200 14,371 14,523 14,543
Growth (% YoY) Telstra 6.1% 7.2% -4.6% -5.6% 1.0% 1.0% 0.1%
Optus -2.8% 4.5% -8.1% -16.0% 1.0% 1.0% 0.0%
Vodafone -9.4% -5.1% -5.5% n.a n.a n.a n.a
TPG - - - - - nm nm
Total market 0.3% 4.1% -5.8% -7.8% 1.2% 1.1% 0.1%
* CS does not cover HTAL. Source: Company data, Credit Suisse estimates
4,700
1,800
900
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Telstra Optus Vodafone
8600
6230
5000
2000-2500
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Telstra Optus Vodafone TPG
20 June 2017
Asia Telecoms Sector 105
Spectrum: 5G spectrum auction likely in 2019/20
The table below shows spectrum holdings following the recent 700MHz auction. ACMA is
undertaking a review into whether it may conduct an auction for the 900MHz spectrum,
which is currently held under an apparatus licence.
All operators will require additional spectrum for 5G, most likely in the 3.4-3.6GHz band
range which is emerging as the global standard to 5G. Optus already has a sizeable
holding in this band due to its acquisition of Unwired a number of years ago. We expect an
auction for 3.5GHz spectrum in the 2019/20 timeframe.
Figure 166: Spectrum allocations by operator
Source: Company data, Credit Suisse estimates
Regulation: Domestic roaming won't be declared
The ACCC has been undertaking a review into domestic mobile roaming and recently
issued a draft decision not to declare domestic roaming. This was in line with our
expectations and positive for Telstra as it will not have to open up its regional network to
its competitors.
Balance sheet strength and capex sustainability
Capex has stepped up across the sector in the last 1-2 years, driven by increased
competition.
Telstra has said that its capex will increase to 18% of sales over the next three years as it
invests to maintain its network advantage. Optus spent A$1.7 bn on capex in FY16 and
will spend A$1.8 bn in FY17F. Vodafone expects its capex to be in the 'high teens' as a
percentage of sales. We expect capex to remain high as operators start to spend on 5G.
Telstra, Optus and Vodafone are all well-funded with robust balance sheets (Vodafone's
balance sheet is supported by its offshore parents).
TPG's balance sheet will become increasingly stretched as it rolls out mobile networks
across both Australia and Singapore. We forecast TPG’s net debt to peak at A$2.25 bn in
FY20F, equivalent to 3.0x EBITDA (close to debt covenant limit of 3.25x). We see a high
risk that TPG will need to raise additional equity to invest in 5G spectrum and capex.
20 June 2017
Asia Telecoms Sector 106
Figure 167: Summary financials table
YE June FY16 FY20F
A$ mn Telstra Optus TPG Telstra Optus TPG
Mobile subscribers (000s) 17,233 9,337 - 19,373 9,876 320
Group revenue 27,050 7,533 2,388 28,325 6,799 3,105
EBITDA 10,711 2,462 775 9,674 2,333 759
EBITDA margin 39.6% 32.7% 32.5% 34.2% 34.3% 24.5%
NPAT 4,009 931 361 2,981 734 171
Capex 4,194 1,668 281 4,681 1,390 750
ROIC 15.4% - 13.5% 11.4% - 5.0%
Source: Company data, Credit Suisse estimates
Investment views and valuations
The Australian telcoms sector is a tough investment proposition at the current time, due to
the margin impact of the NBN in fixed line and increasing competition in mobile.
We have an UNDERPERFORM rating on Telstra with a A$4.00 target price (see TLS.AX:
Dividend cut to 25cps from FY18F).
We have an UNDERPERFORM rating on TPG with a A$5.25 target price to reflect the high
level of earnings and funding risk as it rolls out mobile across Australia and Singapore.
Figure 168: Australia telecoms sector—comparative valuation
Close Target Upside P/E (x) EV/EBITDA (x) EV/IC (x) FCF yield (%) Div yield (%)
price price (%) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
Telstra 4.38 4.00 -8.7% 13.3 12.6 6.1 5.9 2.2 2.2 7.0% 7.9% 7.1% 5.7%
TPG 5.59 5.25 -6.1% 12.2 15.4 7.9 7.9 2.0 1.5 -10.4% -3.3% 2.8% 2.4%
Source: Company data, Credit Suisse estimates
20 June 2017
Asia Telecoms Sector 107
Companies Mentioned (Price as of 19-Jun-2017) Advanced Info Service PCL (ADVANC.BK, Bt175.5) Axiata Group Berhad (AXIA.KL, RM5.07) Bharti Airtel Ltd (BRTI.BO, Rs367.05) China Mobile Limited (0941.HK, HK$84.05) China Telecom (0728.HK, HK$3.78) China Unicom Hong Kong Ltd (0762.HK, HK$11.32) China United Network Communications Ltd (600050.SS, Rmb7.47) Chorus (CNU.NZ, NZ$4.72) Chorus (CNU.AX, A$4.53) ChungHwa Telecom (2412.TW, NT$108.0) DiGi.Com (DSOM.KL, RM5.0) Far EasTone Telecom (4904.TW, NT$77.0) Globe Telecom (GLO.PS, P2144.0) HKBN (1310.HK, HK$8.3) HKT Trust (6823.HK, HK$10.22) Hutchison Telecommunications HK Holdings Ltd. (0215.HK, HK$2.72) Idea Cellular Ltd (IDEA.BO, Rs79.8) Intouch Limited (INTUCH.BK, Bt56.0) Jasmine International (JAS.BK, Bt8.3) KT Corp (030200.KS, W31,700) LG Uplus (032640.KS, W16,500) M1 Limited (MONE.SI, S$2.22) Maxis Berhad (MXSC.KL, RM5.88) Optus (Unlisted) PCCW (0008.HK, HK$4.38) PT Indosat Tbk (ISAT.JK, Rp6,250) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp4,400) Philippine Long Distance Telephone Company (TEL.PS, P1890.0) Reliance Communication Ltd (RLCM.BO, Rs19.05) SK Telecom (017670.KS, W247,500) Singapore Telecom (STEL.SI, S$3.8) SmarTone Telecom (0315.HK, HK$10.18) Spark NZ (SPK.NZ, NZ$3.82) Spark NZ (SPK.AX, A$3.64) StarHub Ltd (STAR.SI, S$2.74) TPG Telecom (TPM.AX, A$5.5) Taiwan Mobile (3045.TW, NT$113.5) Telekom Malaysia (TLMM.KL, RM6.62) Telenor (TEL.OL, Nkr138.1) Telstra Corporation (TLS.AX, A$4.41) Total Access Communication PCL (DTAC.BK, Bt52.0) True Corp PCL (TRUE.BK, Bt6.25) Vodafone Group (VOD.L, 222.8p) XL Axiata Tbk (EXCL.JK, Rp3,230)
Disclosure Appendix
Analyst Certification Colin McCallum, CA, Sunil Tirumalai, Fraser McLeish, Eric Cha, Varun Ahuja, CFA and Danny Chan each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for KT Corp (030200.KS)
030200.KS Closing Price Target Price
Date (W) (W) Rating
08-Jul-14 30,700 36,000 N
13-Feb-15 29,200 36,000 O
04-May-15 32,250 40,000
07-May-15 31,100 37,000
30-Oct-15 29,550 37,000 *
07-Mar-16 28,500 36,000 *
30-Jun-16 29,650 37,000
01-Aug-16 32,600 38,000
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
20 June 2017
Asia Telecoms Sector 108
3-Year Price and Rating History for LG Uplus (032640.KS)
032640.KS Closing Price Target Price
Date (W) (W) Rating
05-Aug-14 9,850 13,000 O
22-Sep-14 12,250 15,000
26-Jan-15 12,500 16,000
07-May-15 9,850 12,000
28-Oct-15 11,350 13,000 *
07-Mar-16 10,300 12,800 *
01-Aug-16 11,400 13,000
31-Oct-16 11,800 13,800
02-Feb-17 11,550 15,000
30-May-17 15,550 20,000
* Asterisk signifies initiation or assumption of coverage.
O UT PERFO RM
3-Year Price and Rating History for SK Telecom (017670.KS)
017670.KS Closing Price Target Price
Date (W) (W) Rating
25-Jun-14 240,500 300,000 O
21-Sep-14 292,500 350,000
29-Oct-14 269,500 330,000
29-Jan-15 284,000 345,000
07-May-15 262,500 325,000
03-Nov-15 230,000 R
22-Aug-16 221,000 NR
29-Sep-16 226,000 260,000 O *
06-Feb-17 222,000 280,000
30-May-17 249,000 280,000 N
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
N O T RA T ED
N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Pri or to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
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Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): SPK.NZ, TLMM.KL, 0215.HK, CNU.NZ, TLS.AX, STEL.SI, TEL.PS, 1310.HK, TRUE.BK, 030200.KS, SPK.AX, CNU.AX, BRTI.BO, ISAT.JK, RLCM.BO, 017670.KS, AXIA.KL, TLKM.JK, STAR.SI, GLO.PS, ADVANC.BK, 0315.HK, DSOM.KL, VOD.L, TPM.AX, TEL.OL, EXCL.JK Credit Suisse provided investment banking services to the subject company (STEL.SI, TEL.PS, 1310.HK, 017670.KS, AXIA.KL, TLKM.JK, GLO.PS, ADVANC.BK, DSOM.KL, TEL.OL, EXCL.JK) within the past 12 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: 032640.KS, STEL.SI, 0728.HK, TEL.PS, 0762.HK, TRUE.BK, RLCM.BO, 017670.KS, 0941.HK, STAR.SI, MONE.SI, IDEA.BO, 600050.SS, TEL.OL Credit Suisse has managed or co-managed a public offering of securities for the subject company (STEL.SI, TLKM.JK, GLO.PS, ADVANC.BK, DSOM.KL, TEL.OL) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): STEL.SI, TEL.PS, 1310.HK, 017670.KS, AXIA.KL, TLKM.JK, GLO.PS, ADVANC.BK, DSOM.KL, TEL.OL, EXCL.JK Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (6823.HK, JAS.BK, SPK.NZ, TLMM.KL, 0215.HK, 2412.TW, 032640.KS, CNU.NZ, TLS.AX, STEL.SI, 0728.HK, TEL.PS, 0008.HK, 1310.HK, 0762.HK, TRUE.BK, 030200.KS, SPK.AX, CNU.AX, BRTI.BO, ISAT.JK, RLCM.BO, 017670.KS, AXIA.KL, TLKM.JK, STAR.SI, MONE.SI, GLO.PS, ADVANC.BK, 3045.TW, 0315.HK, IDEA.BO, DSOM.KL, VOD.L, TPM.AX, INTUCH.BK, TEL.OL, DTAC.BK, EXCL.JK) within the next 3 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): 032640.KS, STEL.SI, 0728.HK, TEL.PS, 0762.HK, TRUE.BK, RLCM.BO, 017670.KS, 0941.HK, STAR.SI, MONE.SI, IDEA.BO, 600050.SS, TEL.OL As of the date of this report, Credit Suisse makes a market in the following subject companies (0728.HK, 0008.HK, 0762.HK, 0941.HK). A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (SPK.NZ, 2412.TW, 032640.KS, CNU.NZ, TLS.AX, STEL.SI, 0728.HK, 0008.HK, 1310.HK, TRUE.BK, 030200.KS, SPK.AX, CNU.AX, BRTI.BO, ISAT.JK, 017670.KS, AXIA.KL, TLKM.JK, STAR.SI, 4904.TW, GLO.PS, ADVANC.BK, 3045.TW, 0315.HK, IDEA.BO, DSOM.KL, 600050.SS, VOD.L, INTUCH.BK, TEL.OL, EXCL.JK, MXSC.KL) within the past 12 months. Credit Suisse may have interest in (ISAT.JK, TLKM.JK, EXCL.JK) Credit Suisse may have interest in (TLMM.KL, AXIA.KL, DSOM.KL, MXSC.KL) Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (BRTI.BO, RLCM.BO, IDEA.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (TRUE.BK, 4904.TW). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (032640.KS, TRUE.BK, 030200.KS, 017670.KS).
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For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (TLMM.KL, VOD.L, TEL.OL). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (STEL.SI, RLCM.BO, TLKM.JK, GLO.PS, ADVANC.BK, DSOM.KL, TEL.OL) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2016 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Jasmine International () , True Corp PCL (Very Good) , Advanced Info Service PCL (Very Good) , Intouch Limited (Excellent) , Total Access Communication PCL (Excellent) Taiwanese Disclosures: This research report is for reference only. Recipients should carefully consider their own investment risk and note they may be subject to the applicable rules and regulations in Taiwan, including the requirements under the Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers ("Taiwan Recommendation Rules") on conflicts of interest. Investment results are the responsibility of the individual investor. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Recommendation Rules. Reports may not be reproduced without the permission of Credit Suisse. Credit Suisse has entered into a strategic partnership with First NZ Capital ("FNZC"). Pursuant to this agreement, (SPK.NZ, CNU.NZ, SPK.AX, CNU.AX) is jointly covered by Credit Suisse and First NZ Capital. This research report is authored by: Credit Suisse (Hong Kong) Limited ........................................................................................................................................... Colin McCallum, CA Credit Suisse Securities (Europe) Limited, Seoul Branch .................................................................................................. Eric Cha ; Sohyun Lee Credit Suisse Securities (India) Private Limited ............................................................................................................Sunil Tirumalai ; Viral Shah Credit Suisse AG, Singapore Branch ........................................................................................................................................... Varun Ahuja, CFA Credit Suisse Securities (Malaysia) Sdn Bhd. ...................................................................................................................................... Danny Chan Credit Suisse Equities (Australia) Limited .................................................................................................................. 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Eric Cha ; Sohyun Lee Credit Suisse Securities (India) Private Limited ............................................................................................................Sunil Tirumalai ; Viral Shah Credit Suisse AG, Singapore Branch ........................................................................................................................................... Varun Ahuja, CFA Credit Suisse Securities (Malaysia) Sdn Bhd. ...................................................................................................................................... Danny Chan Credit Suisse Equities (Australia) Limited .................................................................................................................. Fraser McLeish ; Tom Cutler
Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse ’s disclosure website at https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.
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