Telecommunications Sector - UOB Kay Hian 2016-05-10: MyRepublic – Vying To Be The Fourth Telco

SGinvestors.io

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

Telecommunications Singapore:  MyRepublic – Vying To Be The Fourth Telco

• MyRepublic leverages on extensive coverage provided by the 900MHz frequency band, new SDN and NFV technologies and an all-IP mobile network on 4.5G LTE Advance to minimise capex to S$250m. 
• It has an efficient cost structure through its lean operator model and expects to break even with just a market share of 4-5%. 
• Our recommendation for the sector is Under Review as we monitor the progress of fund raising at MyRepublic and ConsisTel/OMGtel.

WHAT’S NEW

• We visited MyRepublic and toured their operating facilities for fibre broadband at 33 Ubi Avenue 3.
• Building a new type of telco. MyRepublic plans to establish a fourth mobile operator that is radically different from the traditional incumbents:
  1. Utilising NGNBN for backhaul transmission.
     • MyRepublic plans to build its mobile network by riding on the infrastructure provided by Next Gen Nationwide Broadband Network (NGNBN), just like its existing fibre broadband business. It will utilise Active Ethernet and Gigabit Passive Optical Network (GPON) connections available on NGNBN for backhaul transmission. New XGPON connections could provide transmission speed of 2-10Gbps.
     • A competing telco offers S$1,088/month for 2Gbps and S$1,688/month for 4Gbps XGPON connections for enterprise customers. MyRepublic is able to significantly reduce its cost for backhaul transmission as it has set up its own Operating Company (OpCo) for NGNBN, and is no longer reliant on StarHub’s subsidiary Nucleus Connect. According to management, its cost of backhaul transmission could be reduced to S$185/month per connection by procuring fibre capacity directly from NetLink Trust.
  2. Applying cloud computing to mobile network.
     • MyRepublic leverages on Software Defined Network (SDN) and Network Function Virtualisation (NFV) technologies. SDN decouples network control (software) from data forwarding (network hardware). Network intelligence and configuration is centrally controlled. In the past, network administrators have to set up and configure each individual network device manually. With SDN, algorithmic control of network devices, such as switches and routers, are programmed dynamically on the fly, adapting to changing network conditions. NFV implements network functions, such as firewall, intrusion detection, load balancer and caching, through software.
     • The new technologies reduce purchase of purpose-built network hardware and support a scalable pay-as-you-grow business model. MyRepublic plans to set up its core network at two separately located data centres. It does not need to incur capex for 2G and 3G networks that are based on legacy circuit switching technology.
• This is the right timing to launch a fourth mobile operator as the industry moves to an all- Internet Protocol (IP) network based fully on packet switching technology with 4.5G Long Term Evolution (LTE) Advance.

Leveraging on thin operator model. 

• MyRepublic’s thin operator model reduces costs to acquire and serve customers. It has developed its own cloud-based Business Support System (BSS) that manages accounts and payments, customer support and service modification. 
• Business processes are streamlined and automated. 50% of its customers signed up online and the balance were done through its two retail outlets and its dealers. 
• Management plans to add headcount of only 100 staff for its new mobile business.

New entrant has advantageous mix of spectrum. 

• iDA has offered 2x10MHz of the 900MHz band and 40MHz of the 2300MHz band, a generous combined 60MHz block of spectrum. The 900MHz frequency band has better propagation characteristics with longer range and better in-building coverage, which minimises capex. The 2300MHz frequency band provides capacity for high data throughput. 
• MyRepublic is able to achieve data download speed of up to 600Mbps using 3-component carrier aggregation and 4T4R Multiple Input Multiple Output (MIMO) technologies.

Lower breakeven from a lean cost structure. 

• MyRepublic targets to garner 250,000 subscribers in its first year of commercial operation (market share: 3%). It targets to secure 700,000 subscribers within five years (market share: 9%). MyRepublic aims to break even with market share of just 4-5% within three years by leveraging on its thin operator model. Management aims to achieve EBITDA margin of 40% within five years.
• MyRepublic’s estimated capex at S$250m to build its mobile network is below iDA’s expectations of S$300m-700m.

MyRepublic focuses on data-only plans. 

• MyRepublic has unveiled its mobile service plans for pre-registration and feedback. It intends to offer two data-only packages:
  1. 2GB data-only plan at a monthly subscription of S$8 (existing fibre broadband customers: S$6) and excess data charges also at S$8/GB.
  2. Unlimited data-only plan at monthly subscription of S$80 (existing fibre broadband customers: S$60).
• MyRepublic has promised to allow data sharing across family members and carrying forward of unused data in its submission to iDA dated 19 Jun 14. Feedback received indicates that its unlimited data-only plan is more popular and would be well received.

Completed trial for HetNet. 

• MyRepublic participated in iDA’s trial for Heterogeneous Network (HetNet) at Jurong Lake District, including Jurong East bus interchange and MRT station, in 4Q15. HetNet facilitates pervasive and seamless high-speed Internet access from indoors to outdoors, and between 4G and WiFi.
• MyRepublic has provided 1,000 SIM cards and free Xiaomi 4G smartphones for the trial. Participants have access to unlimited data during the 2-month trial period. MyRepublic devoted capex of S$5m to install two macro base stations and 15 small cells for the trial, which serves as a “proof-of-concept” for its proposed mobile network.

Making good progress in fund raising. 

• MyRepublic has hired DBS and Goldman Sachs to raise S$250m, comprising equity of S$150m and debt of S$100m. It is said to have secured two-thirds of the equity portion. Its financial backers include Sinar Mas, who previously invested S$24m in MyRepublic.

ACTION

• Assessing the risk-reward trade-off. The deadline for key contenders MyRepublic and ConsisTel to provide expression of interest by mid-16 is fast approaching. Stage A of the auction (New Entrant Spectrum Auction) should be conducted in 3Q16 and stage B (General Spectrum Auction) in 4Q16.
• We have re-examined our best- and worst-case scenarios for telcos:
  1. Best-case scenario – No new entrant. No potential new entrants step forward to bid for spectrum during the upcoming auction.
  2. Worst-case scenario – Fourth mobile operator disrupts status quo. A new entrant raises sufficient funding, meets iDA’s qualifying criteria, secures 60MHz of spectrum during the New Entrant Spectrum Auction, rolls out its mobile network and commences commercial operations on schedule in Apr 17.
• We have assigned a probability of 50% for both scenarios.

M1 (UNDER REVIEW/S$2.41/Target: S$3.02)

• M1 is most reliant on the mobile business in Singapore, which accounted for 80.3% of service revenue in 1Q16.
• Our probability-weighted target price is S$3.02 (best case: S$3.89, worst case: S$2.14). The risk-reward trade-off is favourable with potential upside of 61.4% vs potential downside of 11.2%.

StarHub (SELL/S$3.38/Target: S$3.03)

• StarHub is susceptible to regulatory risks in Singapore, with mobile accounting for 55% of its service revenue in 1Q16.
• Our probability-weighted target price is S$3.03 (best case: S$3.75, worst case: S$2.30). The risk-reward trade-off is unfavourable with potential upside of 10.9% vs potential downside of 32%.

Singtel (BUY/S$3.89/Target: S$4.41)

• Mobile business in Singapore accounts for 13% of group revenue (7% if we include the proportionate share of associates’ revenue).
• Our probability-weighted target price is S$4.41 (best case: S$4.46, worst case: S$4.35). The potential upside of ranges from 11.8% to 14.7%.

SECTOR CATALYSTS

• Investors buying into Singtel as a defensive shelter.
• Progress in fund raising at ConsisTel/OMGtel and MyRepublic.

ASSUMPTION CHANGES

• We maintain our existing earnings forecast and target prices.

RISKS

• Entry of a fourth mobile operator that uses low pricing to win market share.

PEER COMPARISON 

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-10

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.02 Same 3.02

BUY Maintain BUY 4.41 Same 4.41

SELL Maintain SELL 3.03 Same 3.03