UOB Kay Hian Research 2015-07-08 (Telco): Spectrum Set Aside To Facilitate Entry Of A Fourth Mobile Operator. SingTel Remains Top Pick, M1 Downgraded.

SECTOR UPDATE Telecommunications – Singapore 60MHz Of Spectrum Set Aside To Facilitate Entry Of A Fourth Mobile Operator 


  • The IDA has proposed to conduct an auction to allocate 225MHz of spectrum, of which 60MHz has been set aside for one new entrant. The reserve price is S$40m for the entire 60MHz block, which is 60% lower than the general auction open for the three incumbents. 
  • More spectrum made available and the attractive reserve price may entice more interested parties to step forward. 
  • SingTel remains our top pick. 
  • Maintain MARKET WEIGHT on the sector. 

WHAT’S NEW 

  • The Infocomm Development Authority (IDA) has reviewed the responses submitted for the first industry consultation issued on 22 Apr 14 and has followed up by issuing a second industry consultation. 

Facilitating entry of a fourth mobile operator. 

  • IDA has proposed to conduct an auction to allocate 225MHz of spectrum, of which 60MHz will be set aside for one new entrant. The potential new entrant has to bid for 2x10MHz of 700MHz, 2x10MHz of 900MHz and 20MHz of 2300MHz of spectrum as a block. IDA has offered both high and low frequencies to provide the new entrant with wide coverage and high capacity. 
  • The reserve price is S$40m for the entire 60MHz block, which is 60% lower than the general auction open for the three incumbents. IDA envisages that the new mobile operator will need to invest S$300m-700m during the initial years to roll out its network. The lower reserve price serves to reduce the barrier to entry. 
  • IDA highlighted several benefits of introducing a fourth mobile operator, including: 
    1. New entrants have brought about competitive prices and innovative services in countries such as Taiwan, France, Spain, the UK and the US. 
    2. IDA cited examples, such as France and Canada, where the incumbents had increased capex due to competition from a new mobile operator. 

Light-touch regulations to facilitate MVNOs.

  • Mobile network operators (MNOs) and mobile virtual network operators (MVNOs) are required to negotiate in good faith on wholesale access to MNOs’ network infrastructure. 
  • IDA will set principles to facilitate wholesale negotiations. For example, wholesale prices cannot be higher than equivalent retail prices charged by host MNOs. MNOs also cannot impose terms that prevent MVNOs from switching to another MNO. 

Timeline for implementation. 

  • IDA's proposal is subject to feedback during the second round of industry consultation. 
  • IDA targets to finalise the auction framework by end-15 and the auction should be conducted in early-16. 
  • It expects the new entrant to achieve nationwide deployment by Sep 18 and will phase in the implementation of quality of service and resilience requirements. 

ACTION 


Incumbents caught by surprise. 

  • IDA’s hawkish pro-choice and pro-consumer stance was a negative surprise. The amount of spectrum set aside for the potential fourth mobile player is more than we had expected and the reserve price is also lower than expected. 
  • We previously anticipated 2×20MHz of spectrum to be set aside for potential new entrant with reserve price at S$50m-60m. 
  • With the regulatory framework clarified, key contenders ConsisTel and MyRepublic have to raise the requisite funds to bid for spectrum and to roll out their network. 
  • Maintain MARKET WEIGHT. 
  • SingTel remains our top pick. 

M1 (Downgrade to SELL/S$3.22/Target: S$3.20) 

  • M1 is susceptible to regulatory risks in Singapore with mobile accounting for 81.5% of its service revenue in 1Q15. 
  • We downgrade M1 to SELL. 
  • M1 would be hurt most badly by competition from a fourth mobile operator. Thus, we have used a higher beta of 1.1x (previous: 1.0x) and a higher discount rate of 7.7% (previous: 7.2%), which translates to a lower target price of S$3.20 (previous: S$3.60). 

StarHub (SELL/S$3.98/Target: S$3.50) 

  • StarHub is susceptible to regulatory risks in Singapore with mobile accounting for 56.5% of its service revenue in 1Q15. 
  • StarHub suffers from competitive pricing for residential broadband services and a saturated market for pay-TV services. 

SingTel (BUY/S$4.32/Target: S$4.80) 

  • SingTel benefitted from growth of its regional mobile associates Telkomsel, Bharti Airtel, Advanced Info Service and Globe Telecom. 
  • SingTel provides a hedge against regulatory uncertainties in Singapore due to its diversified exposure to overseas markets. 


SECTOR CATALYSTS 

  • The US Federal Reserve is expected to normalise interest rates in 2H15. The start of an upcycle for interest rates could increase risk aversion towards investing in yield plays, such as telcos. 

ASSUMPTION CHANGES 

  • We have tweaked the method by which we value M1. 

RISKS 

  • The US Federal Reserve delays the normalisation in interest rates, which leads to positive sentiments for yield plays.

PEER COMPARISON 



(Jonathan Koh, CFA)

Source: http://research.uobkayhian.com/




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