Telecommunications - RHB Invest 2016-01-18: Netflix Not a Game Changer

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SINGTEL Z74.SI  M1 LIMITED B2F.SI  STARHUB LTD CC3.SI 

Telecommunications - Netflix Not a Game Changer 

• Although Netflix would be officially made available via Singtel and StarHub, we do not view the online media streaming service as a game changer in the short to medium term given: 
  1. the lack of local and live content including sports, 
  2. access to other downloadable media from the internet, and 
  3. it has been available via VPN for years. 
• Maintain NEUTRAL sector weighting, with M1 as our preferred pick. 

 On official channels from April. 

• Both Singtel and StarHub have respectively announced tie-ups with the US’ largest on-demand internet streaming media provider, Netflix Inc (Netflix). Netflix had earlier this month announced its expansion into 130 new countries. 
• The telcos had last year highlighted ongoing discussions with Netflix – hence the partnerships should not come as a surprise to the market. Singtel’s earlier revelation of its ‘exclusive’ partnership with Netflix may have initially led some to believe that StarHub had gotten a ‘raw deal’. 
• While both telcos are likely to make Netflix available on their pay-TV set-top boxes from April, Singtel’s ‘exclusivity’ allows it to offer up to nine months of free subscription for new and re-contracting subscribers that sign up from 22 Jan-22 July. However, this means it would absorb the cost of Netflix subscriptions until 2017. 
• The operators are part of Netflix’s Open Connect programme, which allows for a smoother streaming experience. 

 Netflix is already accessible to many Singaporeans. 

• We believe Netflix ought not to be a game changer as it is already available to many tech-savvy Singaporeans via an internet protocol (IP) masking service. 
• Viewers also have access to a raft of online content via peer-to-peer (P2P) file sharing sites, including pirated content. That said, Netflix may compete with Singtel’s own over-the-top (OTT) video-on demand app, HOOQ and potentially similar OTT applications. 
• Netflix said it plans to crack down on virtual private network (VPN) users, which, if executed, would be positive for pay-TV providers that have direct collaborations. 

 Local content remains relevant and still a strong proposition. 

• While there are concerns that Netflix would cannibalise existing pay-TV services of the operators, we expect this to be mitigated by the lack of local, iconic and live content on Netflix including sports. 
• StarHub’s focus in recent years on local production has also contributed to the largely steady share of the pay-TV market despite competition from OTT content. 
• Netflix’s plans to have more ‘localised’ content in the future and the growing demand for online streaming content are longer-term negatives for the industry. 

 Maintain NEUTRAL sector weighting. 

• The sector lacks meaningful rerating catalysts on the back of pedestrian earnings growth and concerns over the potential entry of a fourth operator. That said, with the sharp share price de-ratings in 2015, we think the overhang from stronger competitive risks have been priced in to a large extent. 
• Our preferred pick remains M1 (M1 SP, BUY, TP: SGD3.72) as it stands to gain the most when the overhang from greater competition is lifted.

Singapore Research Team RHB Research | http://www.rhbinvest.com.sg/ 2016-01-18

RHB Research SGX Stock NEUTRAL Maintain NEUTRAL 3.90 Same 3.90

BUY Maintain BUY 3.72 Same 3.72

NEUTRAL Maintain NEUTRAL 4.00 Same 4.00