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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 3 Dec 2018 2019 outlook: ARPU recovery HSI: 26,507 • More rational competition after management changes of major listed telecom operators • Expect further rounds of industry-wide tariff ANALYST Chris KO CFA, +852 3668 4172 [email protected] hikes in the mobile market Tsz-Wang TAM, CFA +852 3668 4195 [email protected] • Increasing spending per sub through upselling and cross-selling in residential broadband market Recommendation & valuation • HKBN (1310 HK, BUY) remains our top pick in the sector due to its attractive dividend yield and Company Price T arget Rec Mk t Cap F Y19F strong growth potential Price Yield HK$ HK$ US$m % More rational competition after various management changes. HKBN 12.18 15.60 BUY 1,566 5.6 In September 2018, HKT (6823 HK, BUY), the largest telecom (1310 HK) operator in Hong Kong, started its tariff hike for mobile service Smartone Telecom 9.74 11.80 BUY 1,395 4.5 plans to end the price war. Going forward, we expect further (315 HK) rounds of industry-wide tariff hikes in the mobile market HKT Trust 11.32 14.90 BUY 10,956 6.4 supported by (1) more rational competition after management (6823 HK) changes in major listed telecom operators, (2) increasing data Hutchison Telecom 2.94 3.30 HOLD 1,811 1.9 usage, and (3) cost pressure from higher spectrum utilisation (215 HK) fee (SUF) for 900/1800MHz spectrum reassignment. Source: Thomson Reuters, DBS Bank (Hong Kong) Limited (“DBS HK”), Bloomberg Finance L.P. Increasing spending per sub in residential broadband market. In the residential broadband business, dominant operators (HKT and HKBN) are increasing spending per user by upselling bandwidth and cross-selling more services. Smaller operators (HGC and i-Cable [1097 HK, NR]) continue to offer residential broadband services at low prices to gain market share, but the impact has been limited. We anticipate that HKT, the largest residential broadband operator, will raise prices in the residential broadband market after leading the price increase in the mobile market. Pecking order: HKBN>SMT>HKT>HT. HKBN, with an attractive dividend yield of c.6% and a strong dividend per share CAGR of 20% from FY8/18-FY8/21, remains our top pick in the sector. SmarTone (SMT, 315 HK, BUY) will be the biggest beneficiary from the industry-wide tariff hikes in the mobile market. HKT is an ideal defensive play with an attractive dividend yield, steady growth and decent market capitalisation. For Hutchison Telecom (HT, 215 HK, HOLD), the market now focuses more on how the company utilises its cash proceeds from its asset disposal last year, which account for two-thirds of its market value. ed-TH / sa-CS / AH Industry Focus Hong Kong Telecom Sector Table of Content Mobile market outlook 3 Fixed-line market outlook 6 Interest rate hike sensitivity 7 Valuations and recommendations 8 Stock Profile HKBN 12 SmarTone 19 HKT Trust 25 Hutchison Telecom 31 Page 2 Industry Focus Hong Kong Telecom Sector Mobile market outlook HKT raised mobile service tariff to end the price war HKT adjusted the pricing for its mobile data service plans Overview effective from 21 September 2018. The pricing for 5GB mobile In September 2018, HKT, the largest telecom operator in Hong data service plan with speed capped at 21Mbps increased from Kong, started its tariff hike for mobile service plans to end the HK$96 to HK$116 per month. Unlimited mobile 4G data price war. Going forward, we expect further rounds of service plan increased from HK$316 to HK$366 per month. industry-wide tariff hikes in the mobile market supported by (1) Some mobile service promotion plans at low prices have also more rational competition after recent management changes been discontinued. SMT and HT have followed suit to raise at major listed telecom operators, (2) increasing data usage, their prices. and (3) cost pressure from higher spectrum utilisation fee (SUF) for 900/1800MHz spectrum reassignment. Mobile postpaid 4.5G SIM-only service plan pricing# for port-in subs HK$ per month Nov 2018 HK$ per month Sep 2018 (before 21 Sep 2018) SMT T hree csl. CMHK HKBN SMT T hree csl. CMHK HKBN 1GB na na na na na 1GB 216 na 216 na na 2.5GB na na na na na 2.5GB 256 na 256 na na 3GB na na na na na 3GB na na na 108 na 5GB 176 166 176 na na 5GB na na 118 na na 6GB na na na 156 166 6GB 316 156 316 138 166 8GB 246 216 216 na na 8GB na na na 158 na 10GB na na na na na 10GB na 216 456 na na 12GB 316 306 316 138 236 12GB na na na 118 236 15GB na na na na na 15GB na 246 na na na 18GB na na na na na 18GB 256 na na na na 20GB 456 446 456 168 na 20GB na na na 148 na 50GB na na na 238 na 50GB na na na na na Unlimited~ 374 356 366 168 346 Unlimited~ 316 306 316 168 316 Mobile postpaid SIM only speed-capped service plan pricing# for port-in subs HK$ per month Nov 2018 HK$ per month Sep 2018 (before 21 Sep 2018) SUN SUN SMT T hree Mobile CMHK HKBN SMT T hree Mobile CMHK HKBN 384kbps - unlimited 106 na na na na 384kbps - unlimited 96 na na na na 384kbps - 2GB na na 106** na na 384kbps - 2GB na na 106** na na 2Mbps - unlimited 106 na na na na 2Mbps - unlimited 106 na na na na 3.6Mbps - 15GB na na 106* na na 3.6Mbps - 15GB na na na na na 21Mbps - 5GB na 126 116* 88* 86 21Mbps - 5GB 136 96 96* 78* 86 21Mbps - 5GB na na 138 na na 21Mbps - 5GB na na na na na 21Mbps - 10GB na na 158* na na 21Mbps - 10GB na na na na na 21Mbps - Unlimited na na na na na 21Mbps - Unlimited na 136 164* na na 42Mbps - 1GB 166* na na na na 42Mbps - 1GB 166* na na na na 42Mbps - 2GB na na 146 na na 42Mbps - 2GB na na 146 na na 42Mbps - 3GB na na 106** na na 42Mbps - 3GB na na 106** na na 42Mbps - 4GB na na 196 na na 42Mbps - 4GB na na 196 na na 42Mbps - 7GB na na 256 na na 42Mbps - 7GB na na 256 na na Source: Companies, DBS HK Note: #: includes some mobile service promotion plans * thereafter unlimited data at 128kbps ** thereafter unlimited data at 384kbps ~Subject to fair usage policy Page 3 Industry Focus Hong Kong Telecom Sector More rational competition after management change Increasing data usage The competition in the mobile market has become more In Hong Kong, thanks to the proliferation of multi-media rational after management changes at HKT, HT and HKBN. content and mobile applications, data usage per capita has Both the new CEOs of HKT and HKBN have financial increased by 73% from 3,171Mbytes in 2016 to 5,474Mbytes background, hence will likely be more sensitive to the in April 2018. We believe this will support data usage upgrade profitability and financial performance of the companies, in our for the industry and ARPU improvement in the next few years. view. We believe the price war in the mobile market was triggered by the entry of HKBN in 2H16. We estimate that the Data usage per capita in Hong Kong mobile service pricing has decreased by c.10-30% while the market share gained by HKBN was only 3%. HKT, HT and SMT MBytes also only gained 1-3% market share. Going forward, we 6,000 expect telecom operators to maximise revenue and profitability 5,000 rather than sub market share. This will be favourable to industry pricing. 4,000 3,000 Management changes of Hong Kong telecom operators 2,000 Prev ious Background of Effectiv e 1,000 Company New CEO CEO new CEO date HKBN NiQ Lai William COO and previously 1-Sep-18 0 Yeung CFO of the 2008 2009 2010 2011 2013 2014 2015 2016 2017 company 2012 Apr-18 HKT Susanna Hui Alexander CFO of the 31-Aug-18 Mobile data usage per capita Arena company Huctchison Sing Fai Koo Cliff Woo Chief Commercial 1-Aug-18 Telecom Officer of the Source: OFCA, DBS HK company SmarTone Anna Yip Douglas Li Head of HK/Macau 16-Jun-16 Stable market share MasterCard Going forward, we expect the mobile market share to remain Asia/Pacific relatively stable amid industry-wide tariff hikes. Though CMHK and HKBN have not followed suit on the tariff hike, the Source: Companies, DBS HK potential market share shift should be slow as CMHK mainly focuses on the lower-end market where the pricing differences Mobile postpaid sub market share (Jun 2016-Jun 2018) of mobile service plans are small. HKBN offers discounts mainly through bundling plans. 45% 40% Mobile market share in Hong Kong (Jun 2018) 35% 30% 25% 20% 15% CMHK and HKT 10% other 27% 5% MVNOs 0% 35% Jun-17 Jun-18 Jun-16 Oct-16 Feb-17 Oct-17 Feb-18 Apr-17 Apr-18 Dec-16 Dec-17 Aug-16 Aug-17 HKT HT SMT (include HKBN) CMHK and Others HT SMT 22% 16% Source: OFCA, Companies, DBS HK Source: OFCA, Companies, DBS HK Page 4 Industry Focus Hong Kong Telecom Sector Higher costs for 900/1800MHz spectrum Expect 5G capex to be prolonged and gradual We expect the reassignment of the spectrum in 900MHz and 5G Spectrum bands to be assigned by the regulators will be 1800MHz bands (2G spectrum) to take place by the end of 3.5Ghz, 4.9GHz, 26/28GHz and 3.3GHz.
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