Telecommunications - UOB Kay Hian 2017-01-18: To Share Or Not To Share?

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

Telecommunications - To Share Or Not To Share?

• M1 and StarHub will be commencing studies on the sharing of network infrastructure, such as base stations and backhaul transmission. 
• We believe the likelihood of the two companies collaborating is high, given that they share common equipment vendors, namely Huawei and Nokia. 
• We have upgraded M1 (Target: S$2.50) and StarHub (Target: S$3.55) to BUYs, assuming network sharing reduces mobile-related capex and 5G-related opex by 25%. 
• Upgrade to OVERWEIGHT.

WHAT’S NEW

Agreed to talk. 

• M1 and StarHub have signed a MOU to study mobile infrastructure sharing focused on radio access network and backhaul transmission. Both companies will benefit from the expanded coverage and capacity of the shared infrastructure.
• However, they will retain independent management of network traffic (runs their separate core networks and billing systems). 
• We understand that the potential deal does not involve the sharing of spectrum and does not require regulatory approval from the Info-communications Media Development Authority of Singapore (IMDA).

Plotting the technology roadmap for migration to 5G. 

• The benefit of sharing 4.5G is marginal as there are significant overlaps in network infrastructure. However, IMDA has mandated more stringent quality of service requirements for outdoor coverage from 95% to 99% for 2H17. Thus, the two companies could generate some small savings in capex at locations where either/both companies’ coverage are below par.

5G is crucial. 

• The economics of network sharing become more compelling when sharing to build a new 5G network, which could be rolled out in 2019. According to Ericsson, network sharing could reduce site requirements by 30-40%. 
• For network sharing that encompasses new coverage, additional capacity and network modernisation, the combined savings in capex could be as high as 20-30%. 
• Network sharing also reduces network-related opex by 25-30% due to savings from backhaul transmission, site rentals, utilities and maintenance.

ACTION

Early days. 

• The MOU to study network sharing was inked only last Thursday, 12 Jan 17.
• We understand that chief technology officers (CTO) of M1 and StarHub have yet to commence their studies. The study could take up to six months before the managements of both companies could decide on whether to proceed with network sharing.

Both companies use the same equipment vendors. 

• Coincidentally, both M1 and StarHub use the same equipment vendors, namely Huawei and Nokia. This would facilitate integration and sharing, assuming both companies could iron out the implementation details. 
• M1 would be the bigger beneficiary of network sharing as mobile accounted for 78.7% of service revenue in 3Q16 compared with 54.8% for StarHub.

Preliminary assessments. 

• We have assumed that: 
  1. Mobile related capex will be reduced by 25% starting 2019, 
  2. 5G related opex will be reduced by 25% starting 2019 (no change for 3G and 4G), 
  3. Capex intensity will not increase with the roll-out of 5G.
  4. The fourth mobile operator, TPG, commences commercial operation in Jan 18.

M1 (Upgrade to BUY/S$2.09/Target: S$2.50)

• We raise our target price for M1 from S$1.76 to S$2.50 based on DCF (COE: 7.5% (beta = 1.0), terminal growth: 1.5%).

StarHub (Upgrade to BUY/S$3.08/Target: S$3.55)

• We raise our target price for StarHub from S$2.40 to S$3.55 based on DCF (COE: 6.6% (beta = 0.82), terminal growth: 1.5%). 
• We have utilised a lower beta of 0.82 (previous: 1.0) to recognise StarHub’s defensive qualities from bundling multiple services.

Singtel (BUY/S$3.82/Target: S$4.53)

• Sharing between M1 and StarHub could trigger strategic responses from Singtel and TPG. Singtel and TPG could explore the feasibility of network sharing. However, the execution impediments are greater here as Singtel’s wholly-owned subsidiary Optus and TPG are competitors in the fixed line market in Australia.
• The overall impact on Singtel is likely to be marginal as the mobile business in Singapore accounted for only 7% of its revenue if we include the proportionate share of revenue from its regional mobile associates.

SECTOR CATALYSTS

• Relief rally for M1 and StarHub.
• Investors buying into Singtel as a defensive shelter.

ASSUMPTION CHANGES

• As mentioned above.

RISKS

• Execution risks related to achieving the desired cost savings from network sharing.
• Volatilities from quarterly results.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-18

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