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Hong Kong Telecom Sector China / Hong Kong Industry Focus Hong Kong Telecom Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 27 November 2015 Winning through effective pricing HSI : 22,068 strategy ANALYST Mobile operators remain disciplined in mobile data Tsz Wang TAM CFA, +852 2971 1772 [email protected] pricing, positive to ARPU and service revenue Chris KO growth [email protected] Downside risk from handset sales due to weak iPhone 6S demand in HK, triggering downward earnings revisions Recommendation & valuation Company Price Target Rec Mkt FY15F HKBN gained market share as revealed by its better- than-expected FY8/15 results; expect more Price Cap PE aggressive pricing going forward HK$ HK$ US$m x Prefer HKBN and SmarTone, who are smaller players Hong Kong Telecom operators and gaining market share with strong capability in HKBN 10.2 11.0 Buy 1,324 98.4 strategy execution (1310 HK) HKT Trust Mobile service revenue growth offset by handset sales 9.72 9.1 Hold 9,496 22.8 (6823 HK) decline. Hong Kong mobile operators remain disciplined in Hutchison Telecom mobile data pricing, which is positive to mobile ARPU and 2.78 2.7 Hold 1,729 14.8 service revenue growth. Operators have recently been (215 HK) focusing more on raising tariffs for lower-tier plans as well Smartone Telecom 11.74 15.0 Buy 1,606 13.2 (315 HK) as launching various top-up plans to monetise more data usage. But we saw limited tariff hike for the higher-tier plans in the past few months. On the other hand, the Source: Thomson Reuters, DBS Vickers demand for iPhone 6S is weaker than iPhone 6 in Hong Kong. This suggests a possible downside risk in handset sales and therefore downward earnings revisions. HKBN successfully gained market share; expect more aggressive pricing to follow. The competition in the residential broadband market started to heat up early this year, and we believe it was initiated by HKBN (1310 HK, BUY). It successfully gained market share with 62k net-adds in FY8/15 with 5% ARPU increase. While we notice that HKT (6823 HK, HOLD) and other smaller players also responded by lowering their prices, HKBN appears to be the winner through tactical pricing strategies. We expect more aggressive pricing from HKBN going forward. We like HKBN and SMT. HKBN and SmarTone (SMT, 315 HK, BUY) are smaller players with strong execution ability in their residential broadband and mobile markets respectively. They have been able to gain market shares. We believe that HKBN is on track to achieve its target of 300k sub net-adds in FY8/15-FY8/19F, which will support 20%+ p.a. dividend growth in the coming few years. Maintain BUY on HKBN with a TP of HK$11.0. SMT, being a smaller player focusing on high-end subs, started to penetrate into specific lower- tier segment a few years back. It has successfully added a new revenue stream. Maintain BUY on SMT with a TP of HK$15.0. www.dbsvickers.com ed-TH / sa- PY Industry Focus Hong Kong Telecom Sector HOLD) raised tariffs of its 4G SIM-only plans by HK$20-30 per Mobile market month to narrow the pricing discounts to its major competitors - HKT and SMT. Expect ARPU improvement through the tariff hike on lower-tier plans and launch of top-up plans Mobile operators also launched various top-up plans to improve mobile ARPU. HT launched a new “Top Up Data Pack” Hong Kong mobile operators remain disciplined in mobile data at an additional HK$40 per month for 1Gb or HK$70 per pricing, recently focusing more on raising the tariffs for lower- month for 2.5Gb. HKT started offering a top-up plan of tier plans to narrow the price gap between lower-tier and high- HK$150 for an additional 10Gb for its 10Gb plan subs. SMT tier plans to minimise the risk of trade downs. Accordingly we also increased the price of its unlimited data top-up plan from did not see much tariff hike for the high-tier plans, during the HK$128 to HK$148, which was launched last year. launch of iPhone 6S. They also launched various top-up plans to monetise more data usage. On the other hand, mobile On a negative note, roaming revenue decline will continue to roaming revenue continues to weigh on service revenue. drag down mobile service revenue. In terms of contribution to mobile service revenue, SMT’s FY6/15 and HT’s FY14 roaming SMT took the lead to further raise the price for the 3G speed- revenues accounted for 15% and 25% of the mobile service capped plan from HK$78 to HK$88 per month in Jun 2015, revenue respectively. We expect roaming contribution to and this was followed by China Mobile Hong Kong (CMHK) continue to decline in the coming years. and HKT. On the other hand, Hutchison Telecom (HT, 215 HK, Top-up plans of Hong Kong mobile operators Data plan user (per month) SMT 3 HK CMHK csl. 1010 1Gb User HK$50/Gb HK$38 /200MB HK$30 /0.5Gb HK$28 /200MB HK$28 /200MB **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb 2.5Gb User HK$50/Gb HK$38 /200MB HK$30 /0.5Gb HK$28 /200MB HK$28 /200MB **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb **HK$70 /2.5Gb 6Gb User HK$50/Gb HK$38 /200MB HK$30 /1Gb HK$28 /200MB HK$28 /200MB **HK$148 for unlimited **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb data (subjected to Fair **HK$70 /2.5Gb Usage Policy) **HK$150 /6Gb 10 Gb User HK$50/Gb HK$38 /200MB HK$30 /1Gb HK$28 /200MB HK$28 /200MB **HK$148 for unlimited **HK$40 /1Gb HK$50 /1Gb HK$50 /1Gb data (subjected to Fair **HK$70 /2.5Gb **HK$150 /10Gb **HK$150 /10Gb Usage Policy) **HK$200 /10Gb **HK$150 /6Gb ** Required to sign contracts Source: HKT, HT, SMT, CMHK, DBS Vickers Page 2 Industry Focus Hong Kong Telecom Sector Downside risk from handset business Hong Kong mobile market share (2014) The demand for iPhone 6S (launched in Sep 2015) in Hong Kong is much lower than that for iPhone 6 (launched in Sep 2014) due to relatively less newly added features and less Others trading demand from China. We expect downside risk for 12% handset sales volume and margins, which should result in HKT downward earnings revisions. 33% CMHK iPhone 6S was launched in Hong Kong and China on 25 Sep 18% 2015. iPhone 6S is less popular than iPhone 6 because it has relatively less newly added features and the pent-up demand for a big screen was largely digested by the previous model. SMT China also launched the product at the same time as Hong 14% Kong and this eliminated the trading demand. We expect both HT 23% the handset sales volume and margins to drop substantially. We estimate that handset business contributed 29% and 24% Source: HKT, HT, SMT, DBS Vickers to SMT’s 2H6/15 and HT’s 1H15 pre-tax profits respectively. We believe that SMT and HT will face downside risk from handset business. We accordingly revised down our earnings estimates for SMT by 1% in FY6/16F and for HT by 9% in FY15F. Mobile sub movement analysis… SMT has been gaining sub market share in the past few years, thanks to the launch of speed-capped plan which is a product targeting lower-spending customers. The company positioned the products clearly and well; and we do not see much cannibalisation or downgrade in its high-end market positioning. It becomes an additional revenue stream to SMT. On the other hand, HT decided to give up lower-end subs to focus on mid-high-end customers. It has lost c.574k subs from 3,771k in FY13 to 3,197k in FY14 and further lost c.328k subs in 1H15 to 2,869k. HKT/CSL started integrating the two mobile networks after the merger in May 2014. While this will bring cost synergy in the long term, it may result in short-term network instability. Re- branding exercise may also lead to some sub churn. We reckon that HKT lost mobile subs from 3,183k in 1H14 to 3,147k in 1H15. Page 3 Industry Focus Hong Kong Telecom Sector o-y from HK$180m in 1H14 to HK$174m in 1H15 due to Broadband market broadband competition. HKBN gaining market share amid heating up competition Hong Kong residential broadband market share (1H15) Competition in the Hong Kong residential broadband market started to heat up earlier this year, and we believe it was i-Cable initiated by HKBN. The company gained market share with 62k 7% sub net-adds for FY8/15 (and 32k in 2HFY8/15) with 5% ARPU HT 9% increase in the period. HKT’s sub base remained stable and it managed to increase the broadband revenue by 5% y-o-y in 1H15 through customer upgrades. The residential broadband HKBN HKT revenues of HT and i-Cable, the two smaller players in 29% 55% residential broadband market, fell by 1% and 4% y-o-y respectively in 1H15 due to competition. The market is concerned about an ongoing price war. HKBN earlier offered PCCW’s home telephone customers a special rate of “existing bill amount + HK$99”, for “VoIP voice service +100Mbps broadband service”. This offer was applicable Source: HKT, HKBN, HT, i-Cable, DBS Vickers exclusively to existing HKT customers who switched over their telephone numbers to HKBN.
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