Jul 10, 2018 07:48:46

Indonesia Telco: Pricing is not up in 2Q18, but healthier trends observed vs. 1Q18

We conducted an on-the-ground review of telco tariffs across: 1) traditional channels, and 2) distributors. Our key takeaways are: a) data yields remained down in June vs. May but this is likely due to telco channel stuffing, with June Lebaran actual demand strong especially in rural areas, b) Strong demand is prompting telcos and distributors to raise their ASPs in July, c) starter packs are incrementally deemphasized (vs. reloads) at Telkomsel. Our thesis of a better recovery in 2H18 is starting to take shape; hence, we see 2Q18 as another “wash-out” quarter due to a ‘lost’, subscriber base (see our report “Indo Telco – The State of Play: 1Q18 Wrap up” , 16 May 2018).

All in all, this suggests 2 key findings: a) 2Q18 revenue probably has yet to recover owing to continued data-yield pressure, while subscriber overhang remains due to SIM card deregistration, b) however, the overall trend is definitely getting healthier, especially with market leader Telkomsel since late June deemphasizing high-churn starter packs. This suggests its focus has turned towards lower-churn customers, which is positive for the longer-term tariff trend (ie, it is easier to maintain tariffs in an ecosystem of recharges vs. one of starter packs), and paves the way for trend improvements in 2H18.

Data yield down from average of IDR8k/GB to average of IDR6k/GB in June; but demand was strong during Lebaran. Our research across traditional shops in Jakarta, Jogja, Bandung and Makassar (700+ data points in 3 months) suggests data yields continue to trend lower across different absolute price ranges. Our market research looked at 3 price points i) below IDR25k, ii) IDR25-70k, and iii) above IDR70k. Our key findings are as follows:

1) Data yield overall declined for Telkomsel, EXCL and Fren, while for ISAT, Axis and Tri it is stabilizing-to-rising. In 1Q18 we observe data yields falling sharply to IDR8-10/MB (4Q17: IDR9-14/MB); in 2Q18 our market research suggests a further decline potentially to IDR6-8/MB on a blended basis. A data yield decline is, in our view, natural and we also understand demand (consumption) during Lebaran was especially strong for telco packages, which offsets data the yield decline. Our official view is that tariffs will continue to decline, but at a less rapid pace, which bodes well vs. the 2H17-1H18 rapid-declining tariff season.

2) SmartFren data yield gap significant vs. others. Fren data yield ranges from IDR4k-5.5k/GB or a good 10-20% gap vs. others. Smartfren is the only player we see turning more aggressive in July; we think this is a logical move given Fren’s sparse network and see this is one factor limiting tariff upside continuously. Our meeting with Smartfren suggests they have a peak utilization below 50% (lowest in the sector); indeed the recent OpenSignal June Indonesia report ranks Smartfren’s 4G availability and overall download speed to be the fastest, even above Telkomsel’s. We believe Smartfren’s network does put a cap on overall tariff increases (see next section for more thoughts on Smartfren).

3) Telkomsel likely exited low-priced packages (below IDR25k) in July. This tallies with our market research and we understand it is management’s strategy to shift towards reloads and less churn. We believe this is healthy for the industry, and with the exception of Smartfren, we are indeed seeing less competition in this segment.