Telecommunications Sector - UOB Kay Hian 2016-08-22: MyRepublic And OMGtel Benefit From China's "Go Global" Strategy

Telecommunications Sector - UOB Kay Hian 2016-08-22: MyRepublic And OMGtel Benefit From China's 'Go Global' Strategy Telecommunications Sector M1 LIMITED B2F.SI  SINGTEL Z74.SI  STARHUB LTD CC3.SI 

Telecommunications – Singapore - MyRepublic And OMGtel Benefit From China’s “Go Global” Strategy

  • We understand that MyRepublic has completed its fund-raising exercise.
  • Unfortunately, OMGtel could be affected by the censure from IDA
  • We believe MyRepublic and OMGtel would purchase the bulk of their network equipment from Huawei and ZTE, thus benefitting from the bank financing covered by buyer’s credit insurance provided by Sinosure
  • Maintain UNDERWEIGHT.



WHAT’S NEW

  • We met MyRepublic and ConsisTel’s subsidiary OMGtel to re-assess their readiness to participate in the upcoming spectrum auction.

MyRepublic: Ready to roll. 

  • MyRepublic is ready to submit expression of interest by 1 Sep 16 and to participate in the upcoming spectrum auction scheduled in early-October.
  • It has completed fund-raising for the equity portion of S$150m. Existing strategic investors, such as Sinar Mas, Xavier Niel and DST Communications, have re-invested.
  • There were also undisclosed new investors. The debt portion of S$100m was oversubscribed and MyRepublic needs to narrow down its list of bankers.
  • MyRepublic’s fund-raising exercise for mobile and fixed broadband businesses in Singapore is closed. The company welcomes new investors who are keen to participate in their regional expansion, such as fixed broadband in Australia.
  • MyRepublic will carry a range of popular smartphones. Consumers will have the option to choose between smartphone bundled packages with 2-year contracts or SIM-only packages. The billing will be transparent and indicate clearly the amount charged for mobile services and device repayment.

OMGtel: Setback from ConsisTel’s infringement. 

  • The IDA has fined ConsisTel S$300,000 for: a) providing misleading information in its application to transfer network assets at Sports Hub to a JV between ConsisTel and Asia Networks (affiliated to Equis Funds), and b) signing an agreement to transfer before getting full approval from the IDA.
  • The IDA says ConsisTel's breach of licence obligation is a "grave misconduct". The IDA has also lodged a police report against ConsisTel for providing misleading information.
  • Management felt that the infringement was due to "technicality". ConsisTel owns less than one-third of OMGtel. As such, the infringement by parent ConsisTel should not affect the chances of OMGtel becoming the fourth telco in Singapore.
  • OMGtel’s new CEO Michael DeNoma was previously the CEO of Global Consumer Bank at Standard Chartered (1999-2009). He has experience in telecommunications as he was previously the COO at Hutchison Whampao (1991-93).
  • We believe OMGtel has raised more than the minimum requirement of S$60m (reserve price for 60MHz of spectrum: S$35m + performance bond: S$25m). Management did not deny rumours that they have already raised S$300m.

Financing covered by export credit insurance. 

  • We expect the eventual fourth telco to procure the bulk of its network infrastructure from Chinese equipment vendors Huawei and ZTE. Banks are more than willing to finance MyRepublic and OMGtel for the purchase of network equipment due to export credit insurance provided by Sinosure.
  • Sinosure is a state-owned enterprise (SOE) in China. It provides buyer’s credit insurance that underwrites payment default by a bank’s borrowers or an exporter’s counter-party so as to promote China’s export of high-tech mechanical and electronic products. This is done to improve the competitiveness of Chinese exporters, which is part and parcel of the Chinese government’s “Go Global” strategy.
  • We believe both MyRepublic and OMGtel have already secured financing from a panel of banks for the purchase of network equipment from Huawei and ZTE. Sinosure provides buyer’s credit insurance to these banks, ensuring that the banks would not suffer losses should MyRepublic/OMGtel default on repayment.


ACTION


A culture of disbelief. 

  • Many investors have started to punt on the possibility of status quo with no new entrant by buying M1 and StarHub. They believe that: 
    1. MyRepublic and OMGtel are having a lot of difficulties raising funds.
    2. The entry of a fourth telco would not affect the profitability of incumbent mobile operators because competition would remain rational.

Risk of intensified competition to secure more spectrum. 

  • StarHub has amassed a war chest after raising S$300m through a medium-term note programme in May 16. This could signify a change to the previous cosy oligopoly. Competition could intensify during the general spectrum auction (stage B) in Oct 16.

Maintain our cautious stance. 

  • Maintain BUY for Singtel (BUY/S$4.19/Target: S$4.70) and SELL for M1 (SELL/S$2.72/Target: S$2.39) and StarHub (SELL/S$3.85/Target: S$3.07).


SECTOR CATALYSTS

  • Investors buying into Singtel as a defensive shelter.
  • Submission of expression of interest by MyRepublic and OMGtel by 1 Sep 16.


ASSUMPTION CHANGES

  • We maintain our existing earnings forecasts and target prices.


RISKS

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



PEER COMPARISON 


Singapore Telcos Peer Comparison by UOB Kay Hian 2016-08-22




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-22
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 2.39 Same 2.39
BUY Maintain BUY 4.70 Same 4.70
SELL Maintain SELL 3.07 Same 3.07


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