Telecom Sector - OCBC Investment 2016-11-17: No longer a comfortable oligopolistic market

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

Telecom Sector - No longer a comfortable oligopolistic market

• IMDA pre-qualified two companies.
• Downgrade to NEUTRAL.
• Singtel is our sector top pick.

Competition in Singapore’s mobile market set to intensify

• Infocomm Media Development Authority of Singapore (IMDA) yesterday announced that out of the three applicants that submitted the Expression of Interest (EOI) documents for the New Entrant Spectrum Auction (NESA), two of them, MyRepublic Ltd (MyRepublic) and TPG Telecom Pte Ltd (TPG), have received pre- qualifications to be registered to participate in the NESA. 
• Recall that IMDA has set aside two 900 MHz spectrum lots and eight 2.3 GHz spectrum lots for the new entrant (i.e. 4th telco). Had there only been one applicant that pre- qualifies for NESA, then these set aside spectrum lots will be allocated to the new entrant at S$35m. 
• However, now that there are two applicants that pre-qualify for NESA, the spectrum lots will be awarded based on a multiple-round auction format, which will likely result in a price higher than S$35m. 
• In addition, the winner of the NESA will also be allowed to participate in the General Spectrum Auction, which will be open to the existing players in 1QCY17. 

4th Telco likely to compete on pricing 

• According to IMDA, the 4th Telco has, after commencement of the spectrum rights set aside for it (1 Apr 17), up to: 
  1. 18 months to achieve nationwide outdoor service coverage, 
  2. 30 months to achieve road tunnels and in-building service coverage, and 
  3. 54 months to achieve underground MRT stations/lines service coverage. 

• In our view, given the time needed by the 4th Telco to build up its infrastructure and achieve network coverage to match that of the incumbents, the most likely way it will try to gain market share is to compete on pricing. 
• Furthermore, the lacks of its ability to offer bundling options (i.e. PayTV for both and Broadband for TPG) makes a pricing strategy even more compelling. That said, we do not expect mass switching of customers from incumbents to 4th Telco due to possibly unstable network coverage during the first few years. 
• We project the 4th Telco to capture ~5% mobile revenue share by CY20, and at the same time exerting downward pressures on mobile ARPUs.

Downgrade to NEUTRAL with 4th Telco entry 

• Hence, we are downgrading the Telecom sector to NEUTRAL with the incumbents’ earnings likely to be eroded as they lose market share over time, especially in Singapore’s market where mobile telecom business has reached low growth stage (at ~150% mobile penetration rate). 
• In our view, among the incumbents, Singtel [BUY; FV: S$4.40] remains our sector top pick, as we expect it to be the least impacted given its limited Singapore exposure, strong enterprise segment and exposure to regional associates. 
• We expect M1 [HOLD; FV: S$2.25] to be the most impacted given its 100% Singapore exposure and with ~90% of its 9M16 revenue derived from Singapore’s mobile telecom segment. 
• For Starhub [HOLD; FV: S$3.30], given its 100% Singapore exposure as well, we expect the impact to be larger than Singtel but smaller than M1 due to its enterprise segment and Pay TV bundling option used to retain customers.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-11-17

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