Telecom Sector - DBS Research 2020-01-03: Will 5G Alter Market Structure?

Telecom Sector - DBS Research | SGinvestors.io NETLINK NBN TRUST (SGX:CJLU) SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3)

Telecom Sector - Will 5G Alter Market Structure?

  • Share prices are likely to perform well in 1Q2020 on the back of bids for Nationwide 5G licences.
  • 2020 street projections adequately capture the risk of earnings erosion.
  • NetLink Trust is our top pick followed by SingTel and StarHub.

Share prices of telecom players might perform well in 1Q20

Joint bid for Nationwide 5G licence in Jan 2020.

  • In our view, StarHub-M1 may bid jointly for a Nationwide 5G licence in Jan 2020 and SingTel might go solo. Each 5G network may take S$1bn plus in investments over the next 5-6 years almost double of an estimated S$600m spent on 4G network by StarHub. Without a Nationwide 5G licence, there may be increased pressure on TPG to exit from Singapore as there will be 5G coverage across at least half of Singapore by the end of 2022.
  • While TPG is likely to bid for one of the two Localised 5G licences, 26/28GHz spectrum available for Localised 5G will be inadequate for Nationwide 5G rollout and will cater to certain enterprise use case only. Nationwide 5G licences will come with both 3.5GHz spectrum and 26/28GHz spectrum. 3.5GHz spectrum is essential for Nationwide coverage.
  • Licenses are expected to be granted by mid-2020 although the 3.5GHz licences required for the launch of the Nationwide networks are likely to be allocated only in 2021.

Two Localised 5G networks to create a faster enterprise centric roll-out.

  • We believe that the smaller localised 5G networks will ensure that operators start providing 5G services to enterprises for use cases like Smart Factories from mid-2020 onwards as the roll-out of the Nationwide 5G network is likely to take till 2021.

TPG’s business case is too weak for the company to survive.

  • TPG claims to have 300K free subscribers already (~5% subscriber share) but we believe many of these subscribers might churn out once TPG starts charging for the service in 1H20. Our base-case scenario assumes 200k subscribers paying S$15 per month, implying S$36m revenue (~1% revenue share) by 1H21. In our estimation, TPG needs S$120m-150m revenue (5-6% revenue share) to cover its costs.
  • As of July 2019, TPG had spent A$147m (S$139m) in cumulative capex on its Singapore roll-out, or c. 46-70% of its planned S$200-300 of capex. To put this into perspective, StarHub typically spends c. S$200m plus annually to expand and upgrade its network. Hence, we do not expect TPG to be a disruptive force at the commercial launch of its services.

2020 street projections adequately capture the risk of earnings erosion in Singapore.

  • As more people adopt cheaper SIM only plans (vs. 20-25% of postpaid users now), postpaid average revenue per user (ARPU) is likely to decline further over the next 1-2 years. For example, SingTel offers 20GB for S$20 SIM-only plans, well below SingTel’s postpaid ARPU of S$38.

TPG paid incumbent telcos a significant fee for access to in-tunnel equipment in 3Q19.

  • TPG paid ~S$9m to StarHub (S$27m in total to all three telcos possibly) for the use of in-tunnel equipment. TPG is required to make payments for the use of in-tunnel radio equipment laid out by the incumbent operators in order to meet the 99% road tunnel coverage requirement by 1 January 2020, as set out by the regulator. The fee may decline gradually in 4Q19F and 2020F, as TPG puts its own equipment incrementally in these tunnels with limited hours being available to install new equipment.
  • However, to put things into context, with just S$36m annual revenue potential over the next 12 months, the cost of accessing in-tunnel equipment seems prohibitively high to us.

Zero Mobile – the second oldest Mobile virtual network operator (MVNO) – discontinued operations in Dec 2019.

  • Zero Mobile Virtual mobile telco Zero Mobile (also known as ZeroSG), which is headquartered in Australia, was rolled out in Singapore back in December 2017. It leases mobile network from SingTel and is the second virtual mobile telco to launch here after Circles.Life. Fast forward two years later, Zero Mobile has stopped offering mobile services in Singapore. Last month, it emailed its users to inform them that it will discontinue its Zero Xs and Zero X plans, which offered unlimited data at S$49.95 and S$59.95 per month respectively. According to the company, several individuals abused the service by using more than 600GB in a single month before defaulting on their account.
  • There are ten players in the market including six MVNOs out of which only Circles.Life seems to be doing well. We think that a couple of MVNOs could face funding shortfalls in 2020 due to their unsustainable business model.

Netlink NBN Trust (NLT) is our top pick followed by SingTel and StarHub in the order of preference

NetLink Trust offers much superior yield and growth with much lower risks.

SingTel is likely to benefit from rise in associates market value and reduction in holding company discount below 10%.

We also like StarHub for its ~6% dividend yield and catalyst in place.

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Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-01-03
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