Telco Overall - CIMB Research 2016-12-14: TPG is Singapore’s fourth mobile player

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

Telco Overall - TPG is Singapore’s fourth mobile player

TPG wins auction with S$105m bid to become Singapore’s fourth mobile player.
IMDA will hold GSA likely in Feb 2017. Risk of exorbitant final prices is manageable.
Maintain Hold on M1 and StarHub as their valuations are merely fair. SingTel remains our only Add and preferred Singapore telco pick.

TPG Telecom won the bid to become Singapore's fourth mobile operator in the New Entrant Spectrum Auction (NESA) that was concluded today. Given its stronger balance sheet, it was not a total surprise that it managed to outbid MyRepublic.
Its winning bid of S$105m was 3x the preferential reserve price of S$35m, or about 64% higher than the reserve price in a general auction. We believe this will not curtail TPG’s ability to spend capex to meet the Infocomm Media Development Authority’s (IMDA) roll out obligations.
TPG will be allocated 2 x 10MHz in the 900MHz and 40MHz in the 2.3GHz spectrum bands, with the new spectrum rights to commence from 1 Apr 2017. We believe TPG may possibly launch its mobile service in mid-2018, as it will require time to roll out its network and ensure that the initial customer experience is reasonable.

IMDA will next proceed to hold the General Spectrum Auction (GSA), most likely in Feb 2017, in our view. This will be open to existing players, as well as TPG.
TPG has said it will join the GSA to bid for an additional 15MHz spectrum. Given IMDA’s spectrum caps, TPG will only be able to bid for either i) 2 x 5MHz of 700MHz and 5MHz of 2300MHz, or ii) 15MHz of 2300MHz.
We think incumbents may try to deny TPG access to the valuable 700MHz spectrum by bidding for 2 x 15MHz each. If TPG pursues the 700MHz, this may see the final spectrum price ending up higher than the reserve price.
However, we believe the risk of prices reaching exorbitant levels is mitigated by the fact that incumbents will likely remain rational bidders and that it only requires one of them to pare down its spectrum lot demand to 2 x 10MHz (thereby making way for TPG) to eliminate any excess demand and complete the auction.

Incumbents have already introduced many new offerings (sim-only, data upsize) in 2016 to cover the needs of various customer segments, in preparation for the entry of the fourth mobile player. As such, we do not expect too many new launches or major price cuts in 2017. However, incumbents may incur high subs acquisition and retention cost (SARC) to lock in customers for the next two years, especially coinciding with the launch of the iPhone 8 in Sep 2017.
When TPG launches its service in mid-2018, we believe that its services will initially appeal more to the price-sensitive subs as its network quality/coverage will likely be inferior vs. incumbents. M1 and, to a lesser extent, StarHub, would have a bigger exposure to this segment of subs (as % of total base). For SingTel, 37% of its mobile service revenues come from Enterprise customers, which are less likely to switch.

Although M1’s and StarHub’s share prices have fallen in the past 24 months, we believe that their current valuations are just about fair. We also see a big overhang on their share prices at least until TPG’s service launch in mid-2018, when the market gets better visibility of its impact.
We maintain Hold on StarHub and M1, as we believe their 6-7% FY16-18F yields are merely sufficient to compensate investors for future earnings risk. SingTel is our only Add and preferred Singapore telco pick. We maintain Neutral on the sector.

HOLD, TP S$2.10, S$2.02 close
We expect M1 to be the hardest hit by new competition, given its focus on Singapore and mobile, its relatively higher prepaid revenue mix, and inability to bundle pay TV services in a quad-play offering.

ADD, TP S$4.50, S$3.77 close
SingTel is the least at risk among its local peers of being negatively affected by the entry of a fourth mobile operator in Singapore due to its diversified operations. We forecast core net profit to be flat in FY17F, then grow by a decent 8.4%/10.1% in FY18F/19F.

HOLD, TP S$3.20, S$2.97 close
StarHub should be less at risk than M1 from new competition, as the mobile business accounts for a relatively smaller 71% of its EBITDA and given its ability to bundle quadplay services. Nevertheless, we expect flat EBITDA and a 2.3% drop in core EPS in FY16F.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-12-14

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