Deutsche Bank Markets Research

Asia Industry Date 10 September 2015 Telecommunications Industry Update sector

Peter Milliken, CFA Research Analyst A house of cards? (+852) 2203 6190 [email protected]

Netflix launch an incremental negative for HKT James Wang Netflix has announced its intention to launch in HK next year, while LeTV is Research Analyst reported by the South China Morning Post on Sept 7th, to be bidding (+852) 2203 6145 US$400m for English Premier League broadcast rights. We see content [email protected] competition increasing in the HK market, with the potential to take AFFO down by double digit percentages in a moderate competition scenario. With overall Focus stocks competition level in HK remaining stable, we retain our HOLD rating on HKT. HK Telecom Trust (6823.HK),HKD9.07 Hold Price Netflix plans to launch in HK and Taiwan Target HKD10.00 Source: Deutsche Bank The Standard today reported that Netflix plans to launch in Hong Kong early next year as well as in Taiwan, Singapore and South Korea, as part of a move to wrap up global coverage by the end of 2016. Netflix has a total of 41.1m paid US subscribers and 19.3m international paid subscribers as at 2Q15. Its growth in the US has been strong with the company estimating that its share of peak download internet traffic has reached 36% in 2015 from 21% in 2010. Impact on HK Telecom – Two significant risks  Content competition/carriage revenue sustainability: NOW TV, owned by parent, PCCW, is facing more competition from these new platforms, and, as seen with the Barclays Premier League (BPL) bidding, may see content prices bid up. This may eventually force it to ask why it is paying for carriage, whilst local broadband competitors do not need to. Whether Netflix should pay broadband providers or not for quality of service has been a point of in the US.

 Bundling economies for peers: Those wanting pay TV in HK have increasing options, from Apple, Amazon, LeTV, and grey-area services. However, we believe Netflix is seen as a more relevant alternative by users, particularly given NOW TV’s focus on international content. Should it lose the BPL, we would expect its stickiness to decline, and HKBN and Hutchison, would be able to offer a competitive one-stop shop bundle.

Implications for HKT negative but likely to be limited at this stage Currently ~15% of HKT’s revenue comes from broadband services and the commission from signing up NowTV subscribers is ~HKD550m. Each 1% reduction in broadband market share and 1% reduction in broadband EBITDA margin (to account for competition leading to lower prices) would by our estimates impact AFFO by 4.1%. The estimated sensitivity is disturbingly high. While broadband pricing is generally moving in a positive direction, we believe the approximately, 45%/35%/10%/10% broadband home market share break- down is not at equilibrium, and so potentially unstable. On the positive side, Netflix is but one of many OTT services, many of which HKT and others may profit from as they emerge.

______Deutsche Bank AG/Hong Kong The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Deutsche Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr; MCI (P) 124/04/2015.