Jun 06, 2016 15:49:36
Regional Telecommunications: Come Forth, Next Generation…

This report documents 4G developments across the ASEAN-4 telcos and complements RHB’s coverage initiation on the world’s largest mobile telecommunications group, CM. 4G has gained considerable traction across developing markets due to rapid network expansion and the use of optimal spectrum bands. Falling prices of 4G handsets are also driving a raft of upgrades to the spectrally-efficient technology. We expect 4G to be near ubiquitous across the ASEAN-4 by 2018/2019, helped by data-centric applications and the progressive adoption of the 700MHz band.

¨ 4G is increasingly mainstream. 494 LTE networks have been launched in 162 countries as at April, with over half of live deployments in developing markets, according to Global Mobile Suppliers Association (GSA) data. Across the ASEAN-4, 4G was first commercialised in Singapore (2012), followed by Malaysia/Thailand (2013) and Indonesia (2014). The rapid 4G footprint expansion in the Asia-Pacific region has helped drive strong subscriber (sub) conversion from 3G, with the decline in price-points of handsets further easing barriers to switching. We expect 4G penetration in the ASEAN-4/China markets to respectively reach 60-70%/83% by 2018 from 15%/33% currently.

¨ China’s 4G coverage is already above 90%. China Mobile’s (CM) (HK:0941) pervasive 4G coverage in China puts it in an enviable position to drive stronger data uptake and ARPU uplifts going forward, in our view. Its 4G sub penetration surged to 37.8% in 2015 (2014: 11.2%) post aggressive 2014/2015 4G capex. We project its data traffic to grow by a FY15-18 CAGR of 54.1% while blended ARPU is set to rise to CNY66.00 in FY18 (FY15: CNY57.70). While average data consumption in China still lags the ASEAN-4, the gap should narrow quickly, given the proliferation of over-the-top (OTT) applications and the Chinese penchant for online services and social media.

¨ Improved data economics from overstated regulatory risks. Unlike few ASEAN-4 markets where spectrum is typically auctioned off or awarded via a beauty contest, Chinese telcos are beneficiaries of near free spectrum allocated by the Ministry of Industry and Information Technology (MIIT). This eliminates the risk of hefty amortisation charges from prohibitive spectrum costs, which may dis-incentivise network investments. Regulatory risks, in our view, are overstated in China, as some polices do offer long-term mutual benefits.

¨ We add China telecoms to our ASEAN-4 coverage. Indonesia remains our sole OVERWEIGHT among the ASEAN-4 telcos. We like the Indo telcos given their superior growth prospects among ASEAN-4 telcos, steady competition in the market and the sector’s attractive 4.5x FY16F EV/EBITDA valuations. We are NEUTRAL on Malaysia and Singapore telcos on concerns over rising competitive risks from potential new entrants, while our UNDERWEIGHT stance on the Thai telcos is premised on stiff 4G competition, regulatory related risks and prohibitive spectrum payouts. Our preferred ASEAN-4 telco picks are Telkom Indonesia, Axiata Group, XL Axiata (XL), Advanced Info Service (AIS) and M1. (Jeffrey Tan, Wong Cheng Horng, CFA, Ken Chui)

$TLKM $EXCL $ISAT HK:0941 HK:0728 SG:B2F