Telecommunications Sector - UOB Kay Hian 2016-05-12: Liberty Wireless/Circles.Life – New MVNO On The Block

Telecommunications Sector - UOB Kay Hian 2016-05-12: Liberty Wireless/Circles.Life – New MVNO On The Block Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications Sector: Liberty Wireless/Circles.Life – New MVNO On The Block

  • The entry of Liberty Wireless/Circles.Life as an MVNO highlights increasing competition and the potential shift towards SIM-only plans. 
  • We had reported the progress of ConsisTel/OMGtel and MyRepublic in our updates dated 13 Apr 16 and 10 May 16. M1’s and StarHub’s profitability would be affected if one of the two key contenders secures 60MHz of spectrum during the New Entrant Spectrum Auction in 3Q16 and commences operations as the fourth mobile operator. 
  • Downgrade to UNDERWEIGHT.



WHAT’S NEW


Circles.Life offers differentiation and flexibility. 

  • Liberty Wireless, a mobile virtual network operator (MNVO), has launched its mobile services under the Circles.Life brand on 5 May, last Thursday. The local start-up aims to offer the most innovative mobile service plans and unparalleled customer experience. Unlike other MVNOs, Circles.Life focuses on post-paid mobile customers.
  • Circles.Life’s base plan with talk time of 100mins (incoming and outgoing) and data of 3GB is priced at S$28/month. This is a SIM-only post-paid plan without handsets. Consumers can sign up online at the Circles.Life website. Customers have to pay a registration fee of S$4 but delivery of SIM cards, number portability and caller ID are free.

Circles.Life offers a few differentiating factors:

  1. Free Whatsapp. Circles.Life provides unlimited messaging, voice calls and sending of videos on Whatsapp. Data consumed when using Whatsapp is free and does not get deducted from customers’ data allowance.
  2. Rewarding loyalty with bonus data. Circles.Life provides bonus data of 500MB- 4GB every month. Customers are rewarded for their loyalty, depending on how long they have stayed on as a customer. Customers could also get a boost to their bonus data by referring friends to sign up as customers. There is an early bird promotion with bonus data of 2GB.
  3. Flexibility to modify service plan. Customers can change their service plans any time using mobile app CirclesCare. An additional 100mins of voice calls is priced at S$4. An additional 100 SMSes are also collectively priced at S$4. Additional data is priced at S$1 for 100MB, S$2 for 250MB, S$3.50 for 500MB and S$6 for 1GB. Any changes made to customers’ personalised dashboard will be reflected in the next billing cycle.
  4. No worries from excess charges. Customers are freed from having to pay excess charges for data. Customers are notified to boost data when their data allowance is running low. If customers do not respond, data allowance would be automatically boosted by the minimum amount of 100MB for S$1.
  • According to management, Liberty Wireless/Circles.Life would break even with a high single-digit market share.

Trend of increasing competition. 

  • The entry of Liberty Wireless/Circles.Life as an MVNO emphasises the trend of increasing competition for incumbent mobile operators Singtel, StarHub and M1.
  • Potential shift towards SIM-only plans. Singaporeans like their branded and subsidised smartphones but get locked into two-year contracts. The trend could change with more consumers opting for SIM-only plans as competition erodes pricing for SIM- only plans. Consumers could also change their smartphones less frequently to reduce discretionary spending.

Tough being a challenger. 

  • Liberty Wireless/Circles.Life faces challenges from incumbent mobile operators:
    1. There is limited publicity for the launch of Liberty Wireless/Circles.Life. There was no advertising campaign through TV or newspapers. Consumers could only obtain information mainly through its website and Facebook page. Liberty Wireless was scheduled to commence commercial operations by end-15 but the much-awaited launch only took place in May 16.
    2. Circles.Life’s pricing is not necessarily cheaper compared with similar SIM-only plans from incumbent mobile operators. Both Singtel and Circles.Life allow customers to custom-build their SIM-only plans. For a basic SIM-only plan with 200min of voice calls and 3GB of data, Singtel charges S$25.35 compared with S$32 by Circles.Life. Circles.Life is more expensive when topping up for additional voice minutes, SMSes and data. However, it is provides more flexibility as the size of top-ups is more granular.
    3. Incumbent mobile operators offer affordable pre-paid service plans with attractive rates for iDD calls. For example, Singtel charges S$0.22/min for calls to Indonesia (Telkomsel number). For Philippines, Singtel charges S$0.34 for the first minute and S$0.16/min thereafter (Globe number). Comparatively, Circles.Life charges S$0.62/min for Indonesia and S$0.17/min for Philippines.



ACTION

  • The entry of Liberty Wireless/Circles.Life as an MVNO highlights the trend of increasing competition and the potential shift towards SIM-only plans.
  • Progress at ConsisTel/OMGtel and MyRepublic. We had reported on the progress of ConsisTel/OMGtel and MyRepublic in our previous updates dated 13 Apr 16 and 10 May 16. ConsisTel/OMGtel has hired heavyweight William "Bill" Amelio to helm OMGtel. MyRepublic leverages on new Software Defined Network (SDN) and Network Function Virtualisation (NFV) technologies and an all-IP mobile network on 4.5G LTE Advance to minimise capex and has an efficient cost structure through its lean operator model.
  • The deadline for key contenders ConsisTel/OMGtel and MyRepublic 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.
  • One of the two key contenders could raise sufficient funding, meet iDA’s qualifying criteria, secure 60MHz of spectrum during the New Entrant Spectrum Auction and commence operations as the fourth mobile operator. We fear that our worst case scenario would be realised.

M1 (Downgrade to SELL/S$2.39/Target: S$2.14)

  • Hosting Liberty Wireless. M1 has entered into an agreement to provide voice, SMS and data services on a wholesale basis to Liberty Wireless in Jul 15. Including Liberty Wireless, M1 would be hosting a total of two MVNOs.
  • Liberty Wireless’ customers would be added to M1’s subscriber base. The MVNO would contribute wholesale revenue to M1 but we do not expect the contribution to be significant at this juncture.
  • Downgrade to SELL. Mobile business in Singapore accounted for 80.3% of M1’s service revenue in 1Q16. We expect M1’s 2019 earnings to be reduced by 32.6% in the event that a fourth mobile operator commences commercial operations on schedule in Apr 17.

StarHub (SELL/S$3.34/Target: S$2.30)

  • Maintain SELL. Mobile business in Singapore accounted for 55% of StarHub’s service revenue in 1Q16. We expect StarHub’s 2019 earnings to be reduced by 20% in the event that a fourth mobile operator commences commercial operations on schedule in Apr 17.

Singtel (BUY/S$3.83/Target: S$4.35)

  • Maintain BUY. Singtel is our top BUY call as its mobile business in Singapore accounts for 13% of group revenue (only 7% if we include the proportionate share of associates’ revenue).


SECTOR CATALYSTS

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


ASSUMPTION CHANGES

  • We downgrade M1 to SELL and the telco sector to UNDERWEIGHT. 


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/ 2016-05-12
UOB Kay Hian SGX Stock Analyst Report SELL Downgrade BUY 2.14 Down 3.02
BUY Maintain BUY 4.35 Down 4.41
SELL Maintain SELL 2.30 Down 3.03

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