DBS Group Research 2015-07-27: Telecom Sector - 2 Options.

Two options 

  • Data usage is flattening while legacy business is declining; Korea's experience suggests flat data usage once 4G penetration reaches 65%-70% as in Singapore now. 
  • Two ways to go for telcos- witness ARPU decline due to flattish data usage; or launch bigger or unlimited data plans as in Korea to defend ARPU. 
  • Downgrade M1 and StarHub to Fully Valued as we cut FY15F/16F earnings significantly. 

4G penetration has reached ~70% in Singapore. 

  • Average revenue per user (ARPU) stagnated in Korea as 4G penetration reached 65% due to flat data usage over 3Q13- 1Q14. 
  • Average data usage stood at 2.2GB versus data allowance of 2.5GB on most popular plans in Korea. Subsequently, Korean telcos introduced unlimited data plans at 10-20% premium to the most popular plans to boost ARPU. 
  • They also benefitted from cuts in handset subsidies and marketing expenses due to the regulatory pressure, resulting in healthier earnings. 

Expect declining ARPU due to flattening data usage or stable ARPU with higher capex in Singapore. 

  • By June 2015, average data usage per customer at M1 stood at 3.2GB, flat q-o-q. 
  • Most popular plans in Singapore offer data allowance of 3- 4GB per month. 
  • In our view, Singapore telcos need to launch unlimited data plans to defend ARPU, in our view. However, there are two important differences from Korea: 
    1. Unlike Korea, voice & SMS revenue make up a big portion of mobile revenue in Singapore (over 50%) with roaming accounting for ~24% of this legacy business. Unlimited data plans will cause capex to rise but ARPU may not rise much due to declining legacy business; and 
    2. Handset subsidies and marketing expenses are unlikely to drop in Singapore as telcos may want to lock in customers before the 4th telco's entry. 

Our thoughts on the 4th telco 

Potential 4th telco to face multiple operating challenges. 

  • The biggest challenge would be getting the sites for rooftop towers. As we understand, building owners are required to provide free access for in-building coverage but not for towers. Most of the sites are already occupied by existing telcos. 
  • We believe network capex for the 4th telco could well exceed US$500m versus US$250m-300m capex intended by MyRepublic. 
  • Besides, a 60% lower reserve price may not be realised due to competition between MyRepublic and OMGTel if both decide to bid for the spectrum despite these challenges. 

Much depends on results of HetNet trials. 

  • HetNet technologies allow consumers to connect to different networks such as Wi-Fi, 4G and 3G networks seamlessly. 
  • Currently, there is a need for authentication via a password for each network, which does not allow a seamless handover. HetNet technology may allow telcos to invest 30-40% capex investment compared to traditional technology for similar coverage. 
  • SingTel, StarHub, M1 and MyRepublic are involved in HetNet trails in Jurong Lake district. The results of HetNet trials are expected towards the end of 2015. 
  • However, if the HetNet trials are not successful, we doubt MyRepublic will have a business case to bid for the 4th telco spectrum.

Vendor financing will be the key to the funding. 

  • We have learnt that equipment vendors like Huawei and Ericsson go to the extent of funding 80-100% of the network construction by extending credit. 
  • Unlike banks, these vendors are not afraid to take technology risks on unproven technologies like HetNet. This implies that new entrants have to get the funding mainly for the spectrum auction only which is likely to be less than S$100m even if there is an aggressive bidding between the two possible contenders. 

M1 & StarHub could lose up to 10% & 4% of their revenues by 2022 respectively if 4th telco is successful. 

  • In Malaysia, the 4th mobile player - U Mobile - has captured only 6-7% revenue share after six years. Singapore is a postpaid dominated (unlike Malaysia) market with handset subsidies, multi-product bundling and 2-year contracts. 
  • We model a 7% revenue share for the new telco by 2022. 
  • We have factored in a 10% adverse impact on M1’s revenue in 2022 versus 4% adverse impact on StarHub’s revenue.

Stock Recommendations 

  • Downgrade both M1 and StarHub to Fully Valued with revised TPs of S$2.94 and S$3.70 respectively. 

(Sachin MITTAL)

Source: http://www.dbsvickers.com/