2 March 2017 Asia Pacific/Singapore Equity Research Telecommunication Services
Singapore Telecoms Sector Research Analysts THEME Varun Ahuja, CFA 65 6212 3017 [email protected] Four is a (bigger) crowd
Figure 1: TPG can be EBITDA breakeven at ~17% discount to current sector ARPU with 6% mobile and fixed broadband subs share
Subscriber market share (%) 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% -45.0% (115) (86) (57) (29) 0 29 58 -37.5% (107) (74) (42) (9) 24 57 89 -30.0% (99) (63) (26) 11 47 84 121 -22.5% (91) (51) (10) 30 71 112 152
-15.0% (84) (39) 6 50 95 139 184 serviceARPU (S$33)
% discount % to current -7.5% (76) (27) 21 70 118 167 215
0.0% (68) (15) 37 89 142 194 247 Source: Credit Suisse estimates ■ Addressing key investor queries. With TPG telecom (TPG) emerging as the fourth mobile operator in Singapore, the key questions in investors’ mind are: (1) How much will it cost to build the mobile network?, (2) What are the likely operating costs?, (3) At what ARPU levels TPG can break even?, and (4) Is there more downside to StarHub’s and M1’s stock prices from current levels? In this report, we aim to address these queries. Based on inputs from various industry participants, we have developed a proprietary new operator model to look at the new operator's economics. ■ TPG likely to spend ~S$500 mn on capex by 2021E. We expect TPG to start mobile services in 2H 2018 with 775 macro sites and then to gradually ramp-up to ~1,000 sites by 2021E. On in-building coverage, we expect TPG to have coverage of 575 buildings at the beginning which is likely to expand to 930 buildings by 2021E. We expect the total capex to be ~S$500 mn by 2021E (out of which ~S$300 mn will be spent by 2018E). ■ Pricing likely to fall by 15-25% over the next three years. We forecast TPG’s steady state operating expenses to reach S$185 mn by 2022E, representing ~51% of M1’s 2016 operating cost. Our sensitivity analysis suggests that TPG would turn EBITDA breakeven at a discount of ~17% to the current service ARPU of S$33 with mobile subs share of 6% and fixed broadband subs share of 6%. The ~17% discount can come down further to ~25% if TPG can operate at 45% of M1's cost structure. ■ Remain underweight on M1 and StarHub. We think current stock prices of M1 and StarHub are not fully factoring the increasing competitive dynamics. We see downside risk to consensus 2018/19 EPS estimates for M1 and StarHub. SingTel is our top pick as it has the least exposure to Singapore mobile sector. We have cut our 2017-19E EPS for M1 and StarHub by 0-4% as we bake in higher subsidies. As a result, our target prices for M1 and StarHub reduce by ~3% to S$1.50 and ~4% to S$2.25, respectively.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
2 March 2017
Focus charts and table Figure 2: TPG's capex and opex forecasts Figure 3: RoCE sensitivity analysis (S$ / mn) 2017E 2018E 2019E 2020E 2021E 2022E Subscriber market share (%) Capital expenditure Total macro capex 35 33 7 6 5 2 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% Total IBS capex 72 135 63 36 29 14 -45.0% -14.7% -12.3% -9.9% -7.5% -5.1% -2.7% -0.3% Other capex 5 15 15 18 20 19 -37.5% -14.0% -11.3% -8.6% -5.8% -3.1% -0.4% 2.3% Total capex 112 183 85 60 54 36 Operating expenses -30.0% -13.4% -10.3% -7.3% -4.2% -1.2% 1.9% 4.9% Network expenses 5 34 51 57 61 65 -22.5% -12.7% -9.3% -6.0% -2.6% 0.8% 4.2% 7.5% Transmission expenses 0 18 26 35 44 51 -15.0% -12.0% -8.3% -4.7% -1.0% 2.7% 6.4% 10.1%
Sales and marketing 0 19 30 33 32 29 service ARPU (S$33) G&A expenses 10 20 28 34 38 41 discount% to current -7.5% -11.4% -7.4% -3.3% 0.7% 4.7% 8.7% 12.7% Total operating expenses 15 91 135 159 175 185 0.0% -10.7% -6.4% -2.0% 2.3% 6.7% 11.0% 15.4% Source: Credit Suisse estimates Source: Credit Suisse estimates Figure 4: M1's current SIM only plans and EBITDA Figure 5: TPG's current spectrum portfolio should breakeven levels for TPG be able support subs market share of till ~28% 50 250 (Mbps) (S$/month) 47 Current sector service ARPU (S$33/mth) Actual network capacity @ 35% of the theoretical speed of 600Mbps 45 43 EBITDA breakeven ARPU @ 6% subs share 200
40 EBITDA breakeven ARPU @ 7.5% subs share 37 Actual network capacity @ 35% of the theoretical speed of 450Mbps 150 35
31 30 100
25 25 Peak hour network traffic (Mbps) 50 20 (Subs market share, %) 0 15 0% 5% 10% 15% 20% 25% 30% 35% 40% Data - 4GB Data - 6GB Data - 8GB Data - 10GB Data - 12GB Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates Figure 6: Downside likely to consensus 2018E EPS Figure 7: Asian telcos dividend yield spread comps 105 6.0% +/- 1 SD Hist average Current 100 5.5%
95 5.0% SingTel - Current CSe 4.5% 90 4.0% 85 3.5% 80 3.0% 75 M1 Consensus 2.5% 70 STH Consensus StarHub - Current CSe 2.0%
65 STEL Consensus 1.5%
60 1.0%
M1 - Current CSe
M1
FET
CHT HKT
55 TWM
HTHK
HKBN
PCCW SingTel Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 StarHub SmarTone Source: IBES, Credit Suisse estimates Note: Data as on 28 Feb 2017; Source: Company data, Credit Suisse estimates
Figure 8: Singapore telecoms valuation comparison Rating CP TP % Up/ Mkt cap P/E (x) EV/EBITDA (x) FCF yield (%) Div. yield (%) (S$) (S$) (down) (US$ m) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E SingTel O 3.94 4.60 16.8% 45,861 16.0x 15.4x 7.2x 6.9x 5.2% 5.4% 4.6% 4.8% StarHub U 2.88 2.25 -21.9% 3,551 18.0x 21.6x 9.0x 9.8x 5.5% 5.1% 5.6% 5.6% M1 Ltd U 2.08 1.50 -27.9% 1,389 14.8x 19.6x 7.8x 8.7x 4.9% 5.7% 5.4% 4.1% Note: Prices as of 28 Feb 2017; O = OUTPERFORM, U = UNDERPERFORM; Source: Company data, Credit Suisse estimates
Singapore Telecoms Sector 2 2 March 2017
Four is a (bigger) crowd TPG likely to spend ~S$500 mn on capex by 2021E We expect TPG to start We believe TPG has a good mix of low band and high band spectrum which should aid in mobile services in 2H18 a cost efficient roll out of the 4G network. Also, our analysis suggests that TPG’s current with 775 macro sites spectrum portfolio should be able to support subscriber market share of ~28%. We expect and 575 IBS with a TPG to start the mobile services in 2H 2018 with 775 macro sites and then to gradually likely capex spend of ramp-up to ~1,000 sites by 2021E. We estimate the total capex for rolling out 1,000 macro ~S$300mn by 2018E. sites will be ~S$85 mn. Besides macro coverage, in-building coverage presents one of the key challenges for the new entrant given significant amount of data usage happens indoor. Though having a sizeable quantum of low band spectrum aids in providing good in- building coverage, TPG would need to have basic building coverage to provide quality service. Based on our checks, currently incumbents have in-building solutions (IBS) in around 1,000 buildings. We expect TPG to start mobile services with coverage of 575 buildings which is likely to expand to 930 buildings by 2021E. We expect the total cost of installation for IBS to be ~S$335 mn by 2021E. Pricing likely to fall by 15-25% over the next 3 years At a steady state Based on inputs from various industry participants, we forecast TPG’s steady state (2022E), TPG's opex operating expenses to reach S$185 mn by 2022E, representing ~51% of M1’s 2016 likely to be at ~51% of operating cost. Assuming a 10% variation in the operating costs, we believe the range of M1’s 2016 opex… operating expenses can be 45-55% of M1’s current operating cost. That said, we see more downside risk to our operating costs base case assumptions as we have kept some buffer in many cost items given our negative view on the sector. We think our assumptions are reasonable given that M1 has lot of legacy costs and TPG can also drive significant cost savings from its Australia business. Our sensitivity analysis suggests that TPG would …implying EBITDA turn EBITDA breakeven at a discount of ~17% to the current service ARPU of S$33 with breakeven at ~17% mobile subs share of 6% and fixed broadband (BB) subs share of 6%. The ~17% discount discount to current can come down further to ~25% if TPG can operate at 45% of M1's cost structure. We ARPU with 6% mobile would highlight that TPG has guided to turning to EBITDA breakeven with 5-6% subs and BB subs share market share. Our forecasts appear to be in line with the guidance. While for RoCE, TPG would turn RoCE breakeven at a discount of 9% to the current service ARPU with mobile subscriber market share of 7.5% and 6% market share in the broadband segment. Competition to intensify in mobile and BB segments We expect TPG to Though the mobile sector has seen some price competition over the last 12-18 months, capture ~6% mobile we think pricing is likely to deteriorate further over the next three years as TPG is known to and ~5% BB subs disrupt the market. Also, our EBITDA breakeven analysis corroborates the same. We share by 2021E believe, as part of its go-to-market strategy, TPG may only charge for data services while offering free voice and other services. We expect TPG to capture ~6% mobile subscriber market share by 2021E and pricing is likely to be the main lever to gain market share. We expect TPG to launch broadband services in Singapore in 1H 2018 as it would help the company to compete more effectively in the mobile market. Hence, we expect competition in the broadband sector to resume with the potential entry of TPG and forecast TPG to capture ~5% broadband subscriber market share by 2021E. Remain underperform on M1 and StarHub We see downside risk Singapore mobile revenue declined by ~3% in 2016, impacted by poor data monetisation to consensus 2018/19 with operators launching aggressive data add-on plans during the year. We expect sector earnings estimates for revenue to decline at a three-CAGR of ~4% till 2019E due to price competition. Further, M1 and StarHub we think handset subsidies are likely to increase over the next 12-18 months as operators look to lock in customers. We maintain UNDERPERFORM on M1 and StarHub as we believe current stock prices are not fully baking in the increasing competitive dynamics. We see downside risk to consensus 2018/19 EPS estimates for M1 and StarHub. SingTel is our preferred pick as it has the least exposure to Singapore mobile sector. We have cut our 2017-19E EPS estimates for Singapore telcos by 0-4% as bake in higher subsidies. As a result, our TPs for M1 and StarHub reduce by ~3% to S$1.50 and ~4% to S$2.25 resp.
Singapore Telecoms Sector 3 2 March 2017
Regional valuation comparison
Figure 9: Asia regional valuation comparison Close Target Mkt cap Normalised PE EV/EBITDA FCF yield Div yield Absolute Performance Relative Performance Ticker Ccy price Rating price (US$ bn) 17E 18E 17E 18E 17E 18E 17E 18E 1m 6m YTD 1m 6m YTD Asia Integrated operators China Telecom 728 HK HK$ 3.65 O 5.50 38.1 11.0 9.6 3.4 3.1 6.2% 7.8% 3.6% 4.7% -0.5% -2.9% -3.4% 0.4% -6.5% -21.1% China Unicom 762 HK HK$ 9.44 O 12.85 29.1 29.6 14.2 4.6 4.1 6.4% 9.9% 1.4% 3.5% 1.5% -4.0% 6.7% 2.5% -7.5% -12.8% Chunghwa 2412 TT NT$ 102.00 N 105.00 25.8 19.1 18.4 8.9 8.6 6.2% 6.4% 5.4% 5.6% 0.5% -4.2% -3.3% 0.8% -10.0% -16.6% HTHK 215 HK HK$ 2.43 O 2.95 1.5 17.1 15.4 6.5 6.1 8.7% 9.2% 4.4% 4.9% -0.8% -6.5% -11.6% 0.1% -9.9% -27.8% KT 030200 KS W 30,450.00 O 38,000.00 7.0 8.1 6.9 2.4 2.0 27.1% 28.8% 3.9% 4.9% 0.7% 2.0% 5.4% 1.2% -3.3% -3.5% PCCW 8 HK HK$ 4.73 N 5.25 4.7 20.2 19.1 9.9 9.3 4.2% 5.7% 6.3% 6.5% 1.3% 3.7% -3.5% 2.2% 0.0% -21.1% HKT Trust 6823 HK HK$ 10.36 O 11.95 10.1 15.3 14.5 11.0 10.5 6.9% 6.8% 6.2% 6.4% 0.8% 1.8% -5.6% 1.7% -1.9% -22.9% PLDT TEL PM P 1,460.00 U 1,300.00 6.3 17.4 18.6 7.6 7.6 2.2% 2.3% 3.5% 3.2% 2.1% 12.3% -16.8% 3.1% 6.9% -22.4% SingTel ST SP S$ 3.94 O 4.60 45.8 16.0 15.4 7.2 6.9 5.6% 6.5% 4.6% 4.8% -0.8% 3.4% 6.2% -0.8% -2.2% -8.0% SPK SPK NZ NZ$ 3.57 U 3.00 4.7 16.6 16.1 7.5 7.5 6.4% 6.7% 7.0% 7.0% 2.3% 1.4% 2.2% 1.2% -1.4% -7.2% TM T MK RM 6.16 O 7.20 5.2 26.6 24.8 7.2 6.6 0.1% 1.5% 3.4% 3.6% -0.2% 0.2% -6.8% 0.6% -3.8% -8.1% Telstra TLS AU A$ 4.64 U 4.60 43.3 14.2 13.4 6.5 6.3 6.4% 6.4% 6.7% 6.7% -4.4% -7.3% -7.3% -2.4% -10.0% -19.2% Jasmine JAS TB Bt 8.80 U 7.25 2.7 25.9 23.2 12.3 10.1 0.3% 1.6% 2.3% 2.6% 1.1% 15.8% 216.5% 1.5% 12.3% 173.4% True Corp TRUE TB Bt 6.25 U 2.69 7.1 1023.1 925.7 10.0 11.0 0.0% 4.6% 0.0% 0.0% 1.6% -13.2% -14.6% 1.9% -15.8% -26.2% Link Net LINK IJ Rp 4,860.00 O 8,300.00 1.1 12.9 10.4 6.4 5.1 6.8% 8.6% 2.3% 3.9% -2.8% 0.6% 30.8% -3.6% -2.9% 16.1% HKBN 1310 HK HK$ 9.05 O 11.00 1.2 25.1 19.3 11.0 9.8 6.2% 7.0% 4.8% 5.6% 0.0% 3.9% -13.1% 0.0% 0.1% -29.0% Asia average - integrated 14.9 13.6 5.9 5.7 10.8% 11.4% 3.0% 3.3% -1.0% 3.4% 9.6% 0.1% -0.4% -7.1% NJA - integrated 17.2 14.4 6.5 6.1 6.4% 7.5% 4.5% 5.1% 0.0% -1.8% 1.0% -0.6% -5.9% -13.5%
Close Target Mkt cap Normalised PE EV/EBITDA FCF yield Div yield Absolute Performance Relative Performance Ticker Ccy price Rating price (US$ bn) 17E 18E 17E 18E 17E 18E 17E 18E 1m 6m YTD 1m 6m YTD Asia Mobile operators AIS ADVANC TB Bt 167.00 O 218.00 14.2 15.9 15.1 8.3 8.0 3.0% 5.1% 4.4% 4.6% -0.6% 16.8% -2.9% -0.3% 13.3% -16.1% AXIATA AXIATA MK RM 4.43 N 4.80 9.0 25.7 23.0 5.8 5.4 5.2% 6.8% 1.9% 2.2% -8.7% 4.5% -25.9% -8.0% 0.3% -26.9% Bharti BHARTI IN INR 365.15 U 295.00 21.9 32.8 27.3 7.0 6.5 3.8% 3.4% 0.9% 1.1% -2.7% 14.8% 13.9% -3.0% 6.0% -5.8% China Mobile 941 HK HK$ 85.60 O 115.00 225.6 12.5 11.8 3.8 3.4 5.8% 7.3% 4.0% 5.1% -1.6% -0.4% 2.3% -0.6% -4.0% -16.3% DiGi DiGi MK RM 5.04 N 5.00 8.8 23.5 23.5 14.1 14.3 3.9% 3.9% 4.2% 4.2% -1.0% 1.8% 2.2% -0.2% -2.2% 0.8% XL EXCL IJ Rp 2,990.00 O 3,950.00 2.4 54.2 32.4 5.2 4.6 2.9% 6.9% 0.6% 2.5% -2.6% 34.7% -22.3% -3.4% 30.0% -31.0% FarEasTone 4904 TT NT$ 74.00 O 87.00 7.9 20.1 20.2 9.4 9.9 6.9% 6.9% 5.2% 5.3% 0.5% 0.5% 6.8% 0.8% -5.6% -7.9% Globe GLO PM P 1,828.00 O 2,200.00 4.8 18.1 16.8 7.2 7.1 1.4% 2.3% 5.0% 5.2% 2.1% 30.3% 8.6% 3.1% 24.0% 1.3% IDEA IDEA IN INR 115.85 U 91.00 6.3 137.8 n.m. 8.1 8.6 -26.9% 3.0% 0.1% 0.0% 6.8% 59.1% 9.9% 6.5% 47.0% -9.1% Indosat ISAT IJ Rp 7,100.00 O 7,250.00 2.9 18.7 16.4 4.3 4.0 8.0% 9.1% 2.7% 3.7% 4.4% 13.1% 35.2% 3.5% 9.2% 20.0% LG Uplus 032640 KS W 12,800.00 O 15,000.00 4.9 9.6 9.1 3.3 3.3 17.2% 18.4% 3.2% 3.4% 1.2% 8.9% 20.2% 1.7% 3.3% 10.1% Maxis MAXIS MK RM 6.31 U 5.60 10.7 26.2 26.4 12.9 12.8 4.5% 4.8% 3.2% 3.2% -2.2% 6.9% 1.8% -1.4% 2.7% 0.4% M1 M1 SP S$ 2.08 U 1.50 1.4 14.8 19.4 7.9 8.8 4.9% 5.2% 5.4% 4.1% 3.0% 4.5% -18.4% 2.9% -1.1% -29.3% NTT DoCoMo 9437 JP ¥ 2,667.00 O 3,000.00 88.8 15.2 15.2 6.2 6.2 6.9% 0.0% 3.7% 3.7% -1.2% 1.3% 1.1% 0.1% -2.0% -15.0% PT Telkom TLKM IJ Rp 3,850.00 O 4,750.00 28.9 16.6 15.4 8.5 7.8 4.5% 5.8% 3.6% 3.9% -0.8% -0.3% 17.4% -1.6% -3.7% 4.2% Reliance RCOM IN INR 38.90 U 30.00 1.5 15.6 11.1 6.8 6.1 22.3% 25.6% 0.3% 0.5% 12.3% 8.8% -27.7% 11.9% 0.5% -40.2% SmarTone 315 HK HK$ 10.54 O 15.50 1.5 14.8 14.3 5.9 5.7 9.6% 9.6% 5.7% 5.8% -0.6% -2.6% -17.8% 0.4% -6.1% -32.8% StarHub STH SP S$ 2.88 U 2.25 3.5 17.8 21.2 9.0 9.9 5.6% 5.2% 5.6% 5.6% 2.1% -0.3% -14.5% 2.0% -5.8% -26.0% TAC DTAC TB Bt 43.50 O 66.00 2.9 34.9 12.5 4.5 4.9 6.0% 7.3% 1.4% 4.0% 0.0% 30.8% 37.0% 0.3% 26.9% 18.3% Taiwan Mobile 3045 TT NT$ 108.00 O 128.00 12.0 19.5 19.1 9.9 9.6 5.5% 5.2% 5.3% 5.3% 0.5% 2.4% 4.3% 0.8% -3.8% -10.0% Asia average - mobile 17.1 14.4 5.4 5.4 6.6% 6.7% 3.7% 4.3% -1.1% 3.3% 3.1% -0.4% -0.9% -12.6% NJA - mobile 17.8 14.3 5.6 5.3 6.5% 8.2% 3.7% 4.4% 0.0% 3.8% 3.6% -0.5% -0.6% -12.1%
Asia average - telecoms 16.0 14.0 5.7 5.6 8.7% 9.0% 3.4% 3.8% -1.1% 3.3% 6.4% -0.2% 6.4% -9.9% NJA - telecoms 17.5 14.3 5.9 5.6 6.5% 7.9% 4.0% 4.7% 0.0% 1.7% 2.7% -0.5% 2.7% -12.6%
Notes: 1) Rating: O = Outperform; N = Neutral; U = Underperform; R = Restricted 2) The averages are based on market capitalisation. 3) The PE for non-Asian stocks are based on Credit Suisse adjusted EPS. 4) The financial years of Softbank, KDDI, NTT, NTT DoCoMo, Bharti, Reliance and SingTel are ended in March. For the sake of comparison, FY14 of these companies in this matrix represents FY3/15 of their financial years and etc. 5) PCCW's earnings excludes contribution from Cyber Port. 6) FCF yield = (EBITDA - interest exp. - tax - capex) / mkt cap Note: Data as on 28-Feb-17; Source: Thomson Reuters, Bloomberg, Company data, Credit Suisse estimates
Singapore Telecoms Sector 4 2 March 2017
TPG likely to spend ~S$500 mn on capex by 2021E Being a small city state, Building a mobile network requires interactions amongst various network parameters such Singapore is not hard as coverage area, topography of an area, spectrum availability and technology to be to cover from macro deployed. Being a small city state, Singapore (with an area of 719 sq. Km) being a mostly coverage perspective low lying area with small range of hill (at the center) is not difficult to cover from a macro coverage perspective. Additionally, TPG is looking to build a 4G network with a good mix of low band and high band of spectrum, aiding a cost efficient roll out of the network. Below we discuss network investments in detail. TPG has good mix of low band and high band spectrum Though from the total spectrum quantum perspective incumbents are at an advantage (to the new entrant), we believe TPG has a good mix of low band (2 x 10MHz of 900MHz) and high band (40MHz of 2300MHz) spectrum to offer high quality 4G services in Singapore. Figure 10: Spectrum holdings of Singapore telcos 900MHz1 1800MHz 2100MHz 2300MHz 2600MHz M1 2 x 5MHz 2 x 20MHz 2 x 19.8MHz - 2 x 20MHz StarHub 2 x 5MHz 2 x 25MHz 2 x 19.6MHz - 2 x 20MHz SingTel 2 x 10MHz 2 x 30MHz 2 x 20MHz - 2 x 20MHz TPG 2 x 10MHz - - 2 x 40MHz - Note 1: 900MHz spectrum holding is based on our expectation of general spectrum auction; Source: IMDA, Company data, Credit Suisse estimates TPG can offer peak Given the superior physical characteristics of 900MHz spectrum, TPG is likely to deploy download speed of up the same for macro coverage and 2300MHz for providing capacity. Having two carriers (2 to 450Mbps using two x 5MHz each) of 900MHz provide TPG with a marginal advantage to M1 and StarHub in carrier aggregation providing better macro coverage till M1 and StarHub get access to the 700MHz spectrum band. We expect SingTel to win the additional one carrier (2 x 5MHz) of 900MHz in the upcoming spectrum auction. Our analysis suggests that TPG can offer theoretical download speed of up to 450Mbps using two carrier aggregation (CA), 64 QAM modulation, and 4x4 MIMO technology. The above download speed can increase further by deploying higher technologies such as 8x8 MIMO or 256 QAM modulation etc. We note that category 9, which is the standard most premium handsets are currently deploying, can support maximum download speed of 450Mbps while the future categories (11 and 12) can support maximum download speeds of 600Mbps. Figure 11: Theoretical peak download speed for TPG (Mbps) Without carrier aggregation Scenario 1: CC 2300 (20MHz) Assuming 64QAM and 2 x 2 MIMO 112 Mbps Assuming 64QAM and 4 x 4 MIMO 224 Mbps Scenario 2: CC 900 (2 x 10MHz) Assuming 64QAM and 2 x 2 MIMO 73 Mbps Assuming 64QAM and 4 x 4 MIMO 147 Mbps With carrier aggregation Scenario 3: CA_40C (40MHz of 2300MHz) Assuming 64QAM and 2 x 2 MIMO 224 Mbps Assuming 64QAM and 4 x 4 MIMO 448 Mbps Scenario 4: CA_8A-40A (2 x 10MHz of 900MHz and 20MHz of 2300MHz) supported under Release - 12 Assuming 64QAM and 2 x 2 MIMO 185 Mbps Assuming 64QAM and 4 x 4 MIMO 371 Mbps Scenario 5: CA_8A-40C (2 x 10MHz of 900MHz and 40MHz of 2300MHz) not supported yet but can be in future releases Assuming 64QAM and 2 x 2 MIMO 297 Mbps Assuming 64QAM and 4 x 4 MIMO 595 Mbps Source: 3GPP.org, Credit Suisse estimates
Singapore Telecoms Sector 5 2 March 2017
Additionally, our analysis suggests that TPG’s current spectrum portfolio should be able to support market share of ~28% (at theoretical speed of 450Mbps) assuming average data usage per subs of 7GB which is almost twice of current data usage.
Figure 12: TPG's current spectrum portfolio should be able support subs market share of over 25%
250 (Mbps)
Actual network capacity @ 35% of the theoretical speed of 600Mbps 200
Actual network capacity @ 35% of the theoretical speed of 450Mbps 150
100
Peak hour network traffic (Mbps) 50
(Subs market share, %) 0 0% 3% 5% 8% 10% 13% 15% 18% 20% 23% 25% 28% 30% 33% 35% 38% 40%
Source: Credit Suisse estimates TPG would need 700-900 macro sites on 900MHz for good outdoor coverage We estimate TPG to As highlighted above, we expect TPG to deploy 900MHz spectrum band for macro spend ~S$85 mn on coverage given the superior coverage characteristics. The below table shows the macro coverage coverage radius and area for various spectrum bands.
Figure 13: Uplink coverage comparison 700MHz 800MHz 1800MHz 2100MHz 2300MHz 2600MHz Uplink cell range (Km) Dense urban 0.70 0.63 0.38 0.36 0.30 0.27 Urban 1.21 1.09 0.64 0.61 0.51 0.45 Semi urban 3.37 3.04 1.67 1.58 1.31 1.16 Rural 8.48 7.65 4.40 4.17 3.44 3.04 Coverage area (Km square) Dense urban 0.95 0.78 0.27 0.25 0.17 0.14 Urban 2.84 2.33 0.80 0.72 0.50 0.40 Semi urban 22.16 18.06 5.42 4.87 3.35 2.63 Rural 140.37 114.22 37.71 33.84 23.08 18.06 Source: ZTE White paper, June 2013; GSMA
Assuming Singapore to be densely urban area, for the entire city state (which in our view is a stringent condition), we get a coverage range of 0.6km (implying coverage area of 0.8 sq. Km) for the 900MHz spectrum band. Given Singapore's area is 719 sq. Km, 900 macro sites are sufficient for coverage of Singapore using this stringent coverage condition. Our checks with various industry participants suggest that 700-800 sites are good enough to start services in Singapore. In our model, we expect TPG to start the mobile services in 2H 2018 with 775 macro sites and then to gradually ramp-up to ~1,000 sites by 2021E.. Assuming the cost per site of US$60,000 (including equipment, software licenses, installation etc.), we estimate total capex for rolling out 1,000 macro sites to be S$85 mn (out of which S$74 mn will be spent over the next three, till 2019E).
Singapore Telecoms Sector 6 2 March 2017
Figure 14: Coverage timelines Coverage requirements Timeline Nationwide outdoor service coverage By 30 Sep 2018 (18 months after the commencement of spectrum rights) Road tunnels and in-building service coverage By 30 Sep 2019 (30 months after the commencement of spectrum rights) Underground MRT stations/ lines service coverage By 30 Sep 2021 (54 months after the commencement of spectrum rights) Source: IMDA IBS capex is likely to be S$350 mn by 2021E We expect TPG to start Besides macro coverage, in-building coverage presents one of the key challenges for the mobile services with new entrant given significant amount of data usage happens indoor. Though having a coverage of 575 IBS sizeable quantum of low band spectrum (900MHz) aids in providing good in building coverage (due to better penetration), TPG would need to have basic building coverage to provide quality service. Based on our checks, currently incumbents have in-building solutions (IBS) in around 1,000 buildings. We expect TPG to start mobile services in 2H 2018 with coverage of 575 buildings which is likely to expand to 930 buildings by 2021E. We expect TPG to use 2300MHz spectrum for providing in-building coverage given the capacity it can generate. The cost of in-building coverage varies significantly with the size of the building. For example, the cost of doing in-building coverage for a very large building (such as an airport) can be as high as S$15-25 mn while the same for a small building can be S$50,000. That said, there are very few large buildings requiring that quantum of investment. For our analysis, we have assumed 20% of the total IBS installed are in the large buildings with average cost of installation being S$700,000 while the remaining 80% are in the small and medium buildings with average cost of installation S$275,000. Therefore, we expect the total cost of installation for 930 IBS by 2021E to be S$335 mn. Total capex spent likely to be ~S$500mn by 2021E Besides macro and in building coverage, TPG would need to invest on building core network, billing solutions, IT systems, technology upgrade and other maintenance capex. We expect cumulative investment in other capex to be S$73 mn by 2021E. Therefore, we estimate TPG to invest ~S$500 mn on capex over the next five years (till 2021E). We note that TPG has guided for capex of S$200-300 mn by September 2018. Our capex forecast till 2018E is S$295 mn, at the higher end of the management guidance. Below figure provides more detailed break-up of capex over the next 5 years.
Figure 15: Total capex break-up (S$ mn) 2017E 2018E 2019E 2020E 2021E Total macro capex 35 33 7 6 5 Total IBS capex 72 135 63 36 29 Other capex 5 15 15 18 20 Total capex 112 183 85 60 54 Source: Credit Suisse estimates
Singapore Telecoms Sector 7 2 March 2017
Pricing likely to fall by 15-25% over the next three years TPG can operate at ~50% of M1's 2016 operating cost at a steady state… Based on inputs from Telecom is largely a fixed cost business requiring upfront investments in the form of capital industry participants, expenditure and operating expenses. In the previous section, we looked at the various we list operating capital expenditures and in this section we detail various operating expenses. We met with expenses in to… various industry participants (telecom operators, equipment vendors, and consultants) and based on their inputs we have classified operating expenses in to followings heads – − Network expenses, − Transmission/traffic expenses, − Sales and marketing expenses, and − General and administrative expenses. Below, we detail these operating expenses
… 1) network expenses ■ Network expenses: These expenses relate to running of mobile network and include – relating to running of lease rentals, utility costs, network operating costs, repair and maintenance etc. mobile network… − Rental and utility expenses: The rental cost primarily relates to leasing of space to place macro sites on buildings. Rentals per site vary with the location of the buildings. For example, rentals in central business district (CBD) can average around S$4,500 per month while in remote areas it can be less than S$1,000 per month. We have assumed an average lease rental of S$2,000 per month. We expect TPG to start services with 775 macro sites in 2018 and to ramp up the same to around 1,000 over the next five years. For utility and other expenses, we have assumed an average monthly cost of S$750 per site for the macro and in building solutions. We have also factored in average annual inflation of 1.5% in our assumptions, leading to total rental and utility cost of S$43 mn by 2022E. Here, we would like to highlight the importance of COPIF 2013, a regulation by IMDA to facilitate the deployment of mobile equipment in buildings. Under COPIF, the building owners/developers are required to provide a minimum set of mobile deployment space (MDS) at their own cost. The COPIF standard was recently revised to increase the MDS and IMDA had also proposed that the MDS requirements would be applicable to both new and existing developments. Hence, there is a strong possibility of rentals cost coming down significantly over the next five years. Taking a conservative approach, we have not factored the same in our forecasts. If the average lease rental cost declines by 50% (to S$1,000 per month), then our 2022E total rental and utility cost can reduce by S$11 mn. … we expect it to reach − Network operating costs: Network operating costs pertains to management and S$65 mn by 2022E operation of the access and core network. In order to estimate network operating cost, we have assumed (1) initial employee strength to be 50 which gradually ramps up to 75 by 2022, and (2) an average employee cost of S$8,500/month with annual cost inflation of 2%. Additionally, we have factored in network administrative cost at 25% of the staff cost. Total network operating cost is estimated to reach S$22 mn by 2022E. We note that TPG can also leverage its Australian office to save some of these costs.
Singapore Telecoms Sector 8 2 March 2017
…2) Traffic expenses – ■ Transmission or traffic expenses: These expenses relate to carrying of mobile traffic relates to carrying of on an operator’s network. mobile traffic… − Backhaul: This cost pertains to connecting all the sites (macro and in building solutions) to one of the operator’s exchanges with fibre. However, the amount of bandwidth needed on each site depends on the traffic on each site. We had assumed initially that 25% of the sites are in high traffic areas and would need dedicated lease line to carry traffic while the remaining sites can be connected on a shared basis. We expect percentage of dedicated sites to increase to 35% by 2022. We estimate the cost of dedicated site to be S$2,300 per month and that of a shared site to be S$185 (reflecting the cost of NBAP from Netlink trust). We have also factored in inflation of 1.5% in our costs. − Core connectivity: In a mobile network topology, the cell sites are usually connected to small exchanges which in turn are connected to the main network centers. Also, the redundancies are created in the connectivity so that network performance is stable in case of disruptions in one of the connecting fibre. We estimate the core connectivity cost to reach S$11 mn by 2022E. … we expect it to reach − International bandwidth: International bandwidth can be a bottleneck in providing ~S$50 mn by 2022E good internet experience in case of insufficient bandwidth. We have estimated international bandwidth requirement using the peak hour calculation factoring in average monthly data usage of 5.5GB in 2018E (reaching 7GB by 2022E). We have also assumed the current cost of 1Gbps international bandwidth to be US$2,500 which is expected to decline at an annual rate of 2% over the next five years. − Other traffic expenses: We have assumed other traffic expenses relating to interconnect cost etc. to reach to S$2 mn by 2022E.
…3) sales & marketing ■ Sales and marketing expenses: These expenses relate to go-to-market strategy and – relates to go-to- include physical store cost, commissions and advertising expenses. market strategy… − Sales channel costs: This includes costs related to the running of physical stores. We expect TPG to start services in 2018 with four physical stores each having 12 employees and estimate the number of stores to increase to eight by 2022. We forecast the sales channel cost to reach S$8 mn by 2022E. We would highlight that the sales channel cost can reduce substantially if the company decides to use online sales as the go-to-market strategy with very little physical presence. − Commissions: We have assumed monthly churn rate in the initial years to be 1.5- 2.0% for the postpaid customers higher than the current churn rate of 1.0%. We expect the churn rate to settle down at 1.3% in the longer term. We forecast postpaid commissions to start at S$40/sub in 2018 and to decline to S$32/sub by 2022E. … we expect it to reach − Advertising expenses: M1 spent S$22 mn in advertising costs in 2016. We expect ~S$30 mn by 2022E TPG’s advertising spend to be S$20 mn in the initial years which is likely to decline to S$18 mn by 2022E.
■ General and administrative expenses: This section includes costs related to corporate office, license fees, managed services etc. …3) G&A – relates to − Employee cost: We expect TPG to have 150 employees (excluding employees in corporate office and network management and sales channel) by 2022E with average monthly salary of other admin costs… ~S$9,400. We would again highlight that the company can leverage its Australia office to reduce this cost item. − Managed services: This cost item relates to call center, IT services and other managed services (excluding network services). We estimate managed services to reach S$15 mn by 2022E.
Singapore Telecoms Sector 9 2 March 2017
… we expect it to reach − Other costs: This line item factors in costs pertaining to license fees, provision for ~S$40 mn by 2022E bad debt, corporate office expense etc. We estimate other G&A cost to reach ~S$10 mn by 2022E.
Figure 16: TPG operating expenses forecasts (S$ mn) 2017E 2018E 2019E 2020E 2021E 2022E Network expenses 5 34 51 57 61 65 Transmission expenses 0 18 26 35 44 51 Sales and marketing 0 19 30 33 32 29 General and administrative 10 20 28 34 38 41 Total operating expenses 15 91 135 159 175 185 Source: Credit Suisse estimates
Our base case cost As detailed above, at a steady state the operating expenses for TPG at our base case is assumptions likely to be around S$185 mn in 2022E, five years after the first commercial launch of represents ~51% of services in 2018. Assuming a 10% variation in the operating costs, we believe that the M1’s 2016 operating total operating costs can vary by ~S$20 mn on the higher or lower side. However, as costs by 2022E… highlighted above, we see more downside risks to our base operating costs assumptions as we have kept some buffer in many cost items such as network rental expenses, international bandwidth, sales and marketing, etc given our negative view on the sector. Hence, TPG's operating costs can be closer to S$165 mn in 2022E at our lower cost assumptions. On the higher side, the operating cost can be around S$205 mn. …and we see more We can also look at M1’s operating costs to sanity check our assumptions. M1 had an downside risks to our operating cost (excluding handset and residential broadband business) of S$365 mn in cost assumptions 2016. Our base assumptions suggest that TPG’s operating cost in 2022E is likely to be S$185 mn, representing ~51% of M1’s current operating cost while at the lower cost structure the percentage can be ~45% and on the higher side it can be 55%. The main difference in M1's and TPG's operating cost structure comes from the employee cost. M1 had an employee cost of S$115 mn in 2016 while we estimate in our base case TPG's employee cost to be ~S$30 mn. The other key differences come from network costs and traffic expenses. We think our assumptions are reasonable given that M1 has lot of legacy costs, its operating costs also include investment in to enterprise fixed network and TPG can also drive significant cost savings from its Australia business (especially in the employee cost). Hence, we believe the range of TPG's operating expenses can be 45- 55% of M1's current operating cost. …implying EBITDA breakeven at ~17% discount to current service ARPU with 6.0% subs share At what ARPU levels With TPG emerging as the fourth mobile operator in Singapore, one of the key questions TPG can break even?... in investors’ mind is – At what ARPU levels TPG can break even? We have done sensitivity analysis using the 2022E operating cost structure to find solution to the question. We have looked at two scenarios – mobile only services and mobile and fixed broadband services – to arrive at the answer. …EBITDA at ~17% Our sensitivity analysis suggests that TPG would turn EBITDA breakeven at a discount of discount to current ~11% to the current service ARPU of S$33 with a mobile subscriber market share of 6.0%. service ARPU with 6% However, the same would increase to ~17% (at 6.0% mobile market share) if the company mobile and BB subs also gets 6% market share in the fixed broadband market. The 17% discount can come share… down further to 25% if TPG can operate at 45% of M1's cost structure. We would highlight that TPG has guided to turn EBITDA breakeven with 5-6% subs market share. Our forecasts appear to be in line with management guidance.
Singapore Telecoms Sector 10 2 March 2017
Figure 17: EBITDA sensitivity analysis with mobile Figure 18: EBITDA sensitivity analysis with mobile only services and fixed broadband services
Subscriber market share (%) Subscriber market share (%) 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% -45.0% (128) (99) (70) (41) (12) 17 45 -45.0% (115) (86) (57) (29) 0 29 58 -37.5% (120) (87) (54) (21) 11 44 77 -37.5% (107) (74) (42) (9) 24 57 89 -30.0% (112) (75) (38) (2) 35 72 108 -30.0% (99) (63) (26) 11 47 84 121 -22.5% (104) (63) (23) 18 58 99 140 -22.5% (91) (51) (10) 30 71 112 152
-15.0% (96) (52) (7) 38 82 127 171 ARPU (S$33) -15.0% (84) (39) 6 50 95 139 184 service ARPU (S$33)
% discount% to current -7.5% (88) (40) 9 57 106 154 203 -7.5% (76) (27) 21 70 118 167 215
0.0% (80) (28) 24 77 129 182 234 discount% to current service 0.0% (68) (15) 37 89 142 194 247 Source: Credit Suisse estimates Source: Credit Suisse estimates
…RoCE at ~9% disc. to While for return on capital employed (RoCE), TPG would turn RoCE breakeven at a current service ARPU discount of 5% to the current service ARPU with a mobile subscriber market share of 7.5% with 7.5% mobile and and the same would increase to 9% with the 6% market share in the fixed broadband 6% BB subs share… segment as well. We note that for our RoCE assumptions we have assumed a total investment of S$1.0 bn, out of which S$500 mn will be the capital expenditure, S$105 mn spectrum cost and the remaining investments will be to fund the operating losses.
Figure 19: RoCE sensitivity analysis with mobile Figure 20: RoCE sensitivity analysis with mobile only services and fixed broadband services
Subscriber market share (%) Subscriber market share (%) 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% -45.0% -15.7% -13.3% -10.9% -8.5% -6.1% -3.7% -1.3% -45.0% -14.7% -12.3% -9.9% -7.5% -5.1% -2.7% -0.3% -37.5% -15.0% -12.3% -9.6% -6.9% -4.2% -1.5% 1.3% -37.5% -14.0% -11.3% -8.6% -5.8% -3.1% -0.4% 2.3% -30.0% -14.4% -11.3% -8.3% -5.3% -2.2% 0.8% 3.9% -30.0% -13.4% -10.3% -7.3% -4.2% -1.2% 1.9% 4.9% -22.5% -13.7% -10.4% -7.0% -3.6% -0.3% 3.1% 6.5% -22.5% -12.7% -9.3% -6.0% -2.6% 0.8% 4.2% 7.5%
-15.0% -13.1% -9.4% -5.7% -2.0% 1.7% 5.4% 9.1% -15.0% -12.0% -8.3% -4.7% -1.0% 2.7% 6.4% 10.1%
service ARPU (S$33) service ARPU (S$33) % discount% to current % discount% to current -7.5% -12.4% -8.4% -4.4% -0.4% 3.7% 7.7% 11.7% -7.5% -11.4% -7.4% -3.3% 0.7% 4.7% 8.7% 12.7%
0.0% -11.8% -7.4% -3.1% 1.3% 5.6% 10.0% 14.3% 0.0% -10.7% -6.4% -2.0% 2.3% 6.7% 11.0% 15.4% Source: Credit Suisse estimates Source: Credit Suisse estimates What about handset bundled plans? In our operating costs, we have not factored in handset costs as our focus is on standalone plans (SIM only plans) given they are a better reflection of the operating costs and service revenues. Bundled plan comparison gets complicated due to variation in the accounting treatment of handset component of the revenue. We also think that operators usually finance the handset purchase rather than subsidise the same is reflected in the substantial difference in the pricing of bundled plans and SIM only plans. In order to compare with the prevalent sector ARPU, we can assume the handset component in the service ARPU to be S$18 per postpaid subscriber. Below table provides sensitivity analysis factoring in the handset bundled plans and TPG's presence in both the mobile and fixed broadband markets (having 6% share in fixed broadband segment).
Singapore Telecoms Sector 11 2 March 2017
Figure 21: EBITDA sensitivity analysis with handset Figure 22: RoCE sensitivity analysis with handset bundled plans bundled plans
Subscriber market share (%) Subscriber market share (%)
3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0% 3.0% 4.5% 6.0% 7.5% 9.0% 10.5% 12.0%
-45.0% (134) (114) (95) (75) (55) (36) (16) -45.0% -16.2% -14.6% -13.0% -11.3% -9.7% -8.1% -6.5%
-37.5% (124) (99) (75) (50) (25) (1) 24 -37.5% -15.4% -13.3% -11.3% -9.3% -7.2% -5.2% -3.1%
-30.0% (114) (84) (55) (25) 5 34 64 -30.0% -14.5% -12.1% -9.6% -7.2% -4.7% -2.3% 0.2%
-22.5% (104) (69) (34) 0 35 69 104 -22.5% -13.7% -10.8% -8.0% -5.1% -2.2% 0.6% 3.5%
-15.0% (94) (54) (14) 25 65 104 144 -15.0% -12.9% -9.6% -6.3% -3.0% 0.3% 3.5% 6.8%
ARPU (S$42) ARPU (S$42)
-7.5% (84) (39) 6 50 95 139 184 -7.5% -12.0% -8.3% -4.7% -1.0% 2.7% 6.4% 10.1% % discount% to current 0.0% (74) (24) 26 75 125 174 224 discount% to current 0.0% -11.2% -7.1% -3.0% 1.1% 5.2% 9.3% 13.5% Source: Credit Suisse estimates Source: Credit Suisse estimates
Singapore Telecoms Sector 12 2 March 2017
Competition to intensify in mobile and broadband markets We expect TPG to The size of the Singapore telecom market was S$9.8 bn as of 2016; the mobile sector target mobile and fixed accounted for S$4.4 bn of revenues, enterprise sector for S$4.3bn, fixed broadband sector broadband market in for S$0.7b n and fixed voice for S$0.4 bn. We expect TPG to target mobile and fixed the initial years broadband market in the initial years as the enterprise segment will be hard to break into given the investment needed in building the network and developing capabilities. Additionally, SingTel has c.90% market share of the enterprise market and it will be difficult for TPG, initially, to get a foothold in the market.
Figure 23: Break-up of Singapore telecom sector revenues (S$9.8bn as of 2016) Fixed voice Fixed BB 4% 8%
Enterprise 44%
Mobile 44%
Source: Company data, Credit Suisse estimates Mobile: TPG likely to get ~6% subs share by 2021E from incumbents Large portion of market The growth potential in the Singapore mobile market appears limited with the mobile share gain for TPG is penetration at ~150% as of 2016. We expect mobile penetration to largely remain at that likely to come from level over the next five years. Hence, a large portion of market share gain for TPG is likely incumbents to come from incumbent operators. Go-to-market strategy: TPG may only charge for data while offering other services for free TPG in Australia is known to be a disruptor as the company provides the lowest price plans in the broadband market. TPG has consistently had the lowest price points in the market, offering a basic unlimited broadband service with limited add on services. TPG has an extremely efficient operating model and lean cost structure, which has enabled it to offer the lowest prices, whilst reporting some of the highest margins of its peers (broadband EBITDA margins of ~40% for the core TPG brand). We believe the company is likely to carry the similar approach in Singapore to gain market share. Though the Singapore mobile has seen some price actions (the launch of SIM only plans and data add on plans) over the last 12-18 months, we think price competition is likely to intensity further over the next three years with TPG looking to gain market share. Further, Singapore mobile operators continue to draw revenue from voice overage (as there are no unlimited voice plans) and caller id services. We believe, as part of its go-to-market strategy, TPG may only charge for data services while offering free voice and other services. Additionally, unlike Hong Kong, Singapore does not have a vibrant low-end
Singapore Telecoms Sector 13 2 March 2017
segment which TPG can target as well, increasing downgrading potential. We expect TPG to capture ~6% subscriber market share over the next five years and pricing is likely to be main lever to gain market share. We expect mobile Singapore mobile sector’s service revenue declined by c.3% in 2016 as the sector has sector service revenue been impacted by the decline in roaming, IDD and excess data revenues. We expect the to decline at a three decline in mobile service revenue to continue over the next three-years (at a CAGR of year CAGR of ~4% ~4% till 2019E) due to (1) ineffective data monetisation resulting from the launch of aggressive data add on plans in 2017, (2) further price cuts in 2018 with the imminent launch of mobile services by TPG, and (3) continued cannibalisation of roaming and voice revenues by OTT services.
Figure 24: Singapore mobile market share forecasts 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E Cellular subs ('000) SingTel 4,102 4,088 4,102 4,094 4,087 4,083 4,083 4,089 StarHub 2,187 2,307 2,336 2,316 2,291 2,267 2,245 2,228 M1 1,928 2,019 2,044 2,018 1,981 1,944 1,912 1,885 TPG - - - 70 205 350 495 620 Total cellular subs 8,217 8,414 8,482 8,498 8,564 8,644 8,735 8,822 Mobile penetration (%) 147.6% 148.8% 148.9% 147.9% 148.0% 148.2% 148.7% 149.1% Cellular subs market share (%) SingTel 49.9% 48.6% 48.4% 48.2% 47.7% 47.2% 46.7% 46.4% StarHub 26.6% 27.4% 27.5% 27.3% 26.8% 26.2% 25.7% 25.3% M1 23.5% 24.0% 24.1% 23.7% 23.1% 22.5% 21.9% 21.4% TPG - - - 0.8% 2.4% 4.0% 5.7% 7.0% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cellular revenue (S$ m) SingTel 2,392 2,334 2,227 2,123 2,069 2,057 2,067 2,089 StarHub 1,240 1,215 1,192 1,120 1,077 1,057 1,051 1,053 M1 842 815 790 743 711 690 682 680 TPG - - - 11 45 95 150 210 Total cellular revenue 4,474 4,364 4,209 3,997 3,901 3,900 3,950 4,033 - % change YoY 0.0% -2.5% -3.5% -5.0% -2.4% 0.0% 1.3% 2.1% Cellular revenue market share (%) SingTel 53.5% 53.5% 52.9% 53.1% 53.0% 52.8% 52.3% 51.8% StarHub 27.7% 27.8% 28.3% 28.0% 27.6% 27.1% 26.6% 26.1% M1 18.8% 18.7% 18.8% 18.6% 18.2% 17.7% 17.3% 16.9% TPG - - - 0.3% 1.1% 2.4% 3.8% 5.2% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: IMDA, Company data, Credit Suisse estimates Fixed broadband: Competition in the segment to also revive with the potential entry of TPG We expect TPG to launch broadband services in Singapore as it would help the company to bundle mobile and broadband services and hence, compete more effectively in the mobile market. Given TPG does not need to build infrastructure for residential broadband (as it owned by NGBN), the company can launch broadband services earlier than mobile services in order to establish a brand in the market. However, with fixed broadband penetration at c.104% as of 2016E, we see limited growth potential in the fixed broadband segment. We expect fixed broadband penetration to improve marginally to c.105% over the next five years (until 2021E). Hence, we forecast fixed broadband subs to witness a five-year CAGR of 2% until 2021E, largely mirroring the growth in Singapore residential households.
Singapore Telecoms Sector 14 2 March 2017
We expect TPG to Residential broadband market is dominated by SingTel (46%) and StarHub (36%) with launch fixed broadband ~83% combined subscriber share as of 2016E. The new entrants (M1, MyRepublic, etc.) services in 1H 2018 and together have captured ~17% of overall Singapore fixed broadband subscriber market capture ~5% market share by 2016E, at the expense of both STH and SingTel. We expect TPG to launch fixed share by 2021E broadband services in 1H 2018 and capture ~5% market share by 2021E. After witnessing heightened competition from 2011-13, the competitive dynamics in the fixed broadband sector largely stabilised during 2015 and 2016 with no major changes in prices. However, we expect the competition in the broadband sector to resume with the potential entry of TPG in the sector. We expect sector’s ARPU to decline at a CAGR of 1.5% over the next three years. In terms of revenue market share, we expect SingTel and StarHub to lose ~7% revenue market share to new players (including M1) over the next five years.
Figure 25: Singapore fixed broadband market share forecasts 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E Fixed broadband subs ('000) SingTel 597 605 605 603 600 599 601 603 StarHub 476 473 470 465 461 459 458 458 M1 128 160 188 212 231 247 259 269 TPG - - - 6 23 44 68 89 Others 49 66 74 79 80 76 72 72 Total fixed broadband subs 1,250 1,304 1,337 1,365 1,394 1,424 1,457 1,491 - Fixed broadband penetration (%) 102.0% 104.1% 104.6% 104.6% 104.9% 105.3% 105.9% 106.8% Fixed broadband subs market share (%) SingTel 47.7% 46.4% 45.3% 44.2% 43.0% 42.1% 41.2% 40.5% StarHub 38.1% 36.3% 35.2% 34.1% 33.1% 32.2% 31.4% 30.7% M1 10.2% 12.3% 14.1% 15.5% 16.6% 17.3% 17.8% 18.0% TPG 0.0% 0.0% 0.0% 0.5% 1.7% 3.1% 4.7% 6.0% Others 3.9% 5.0% 5.5% 5.8% 5.7% 5.3% 4.9% 4.8% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Fixed broadband revenue (S$ m) SingTel 410 422 422 413 407 402 398 395 StarHub 200 217 220 218 217 215 213 213 M1 65 78 90 99 105 111 116 121 TPG - - - 1 6 14 24 33 Others 22 30 34 36 36 34 32 31 Total fixed BB revenue 696 746 765 767 770 776 783 794 - % change YoY 5.1% 7.2% 2.5% 0.2% 0.4% 0.7% 1.0% 1.3% Fixed broadband revenue market share (%) SingTel 58.8% 56.5% 55.1% 53.9% 52.8% 51.8% 50.8% 49.8% StarHub 28.8% 29.0% 28.7% 28.5% 28.1% 27.7% 27.2% 26.8% M1 9.3% 10.4% 11.7% 12.9% 13.6% 14.3% 14.8% 15.2% TPG 0.0% 0.0% 0.0% 0.2% 0.8% 1.8% 3.0% 4.2% Others 3.1% 4.0% 4.5% 4.6% 4.6% 4.4% 4.1% 3.9% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: IMDA, Company data, Credit Suisse estimates
Singapore Telecoms Sector 15 2 March 2017
Remain underweight on M1 and StarHub M1's and StarHub's stock prices not baking in increasing competitive dynamics Given mobile is a scale business, the first objective of TPG would be to gain subscriber market share in order to turn EBITDA breakeven before looking at return ratios. And pricing is one of the key levers (in any market) to gain subscribers, in our view. The above strategy has played out in many markets with India being the most recent one. That said, we do not expect pricing in Singapore to be as irrational as in India given the different market dynamics. We expect the competitive intensity to worsen further in the Singapore mobile sector with the imminent launch of mobile services by TPG in 2018. We think handset Additionally, we think handset subsidies will also be the other key tool deployed by telcos subsidies are likely to to gain or defend market share. We think handset subsidies are likely to increase in the increase over the next sector over the next 12-18 months as operators look to lock in customers before TPG 12-18 months launches services. StarHub’s 2017E EBITDA margin guidance of 26-28% (vs 31% margins in 2016) partially bakes in higher handset subsidies, in our view. Besides the mobile market, we expect competitive dynamics to worsen in the broadband market over the next 12-18 with the likely entry of TPG. What about M&A? possible but sector needs to witness the pain first While we expect Singapore mobile sector to be a three-player market in the long term (three years and beyond), we do not think that the sector is likely to witness consolidation in the next 3-5 years as the regulator would like to see TPG launch its own network. Hence, the sector needs to pass through a heightened competitive phase before we can witness consolidation. However, despite M1's and StarHub's share prices correcting by ~22% and ~21% respectively since the announcement (1 Sep'16) of new entrant in Singapore mobile sector, we believe that the current stock prices are not fully baking in the increasing competitive dynamics. Hence, we reiterate our UNDERPERFORM stance on M1 and StarHub. SingTel is our preferred pick as it has the least exposure to Singapore mobile sector. We have trimmed our While we have been factoring in 15-20% decline in service ARPU over the next three 2017-19E EPS years (by 2019E), we have further trimmed our 2017-19 EPS estimates for M1 and estimates for M1 and StarHub by 0-4% as we factor in higher subsidies. As a result, our target prices for M1 and Singapore as we factor StarHub reduces by 3.2% to S$1.50 (from S$1.55) and 4.3% to S$2.25 (from S$2.35) in higher subsidies respectively. The impact on SingTel's earnings and target price is negligible.
Figure 26: Singapore Telcos changes in estimates Rating Target Price % Year % change in revenue % change in EBITDA % change in earnings % change in dividends New Previous New Previous chng T T+1 T+2 T+3 T+1 T+2 T+3 T+1 T+2 T+3 T+1 T+2 T+3 SingTel O O 4.60 4.60 0.0% 03/16 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.7% 0.0% 0.0% 0.0% 0.0% 0.0% StarHub U U 2.25 2.35 -4.3% 12/16 -0.4% -0.3% -0.2% -0.4% -0.8% -1.7% -0.7% -1.7% -3.6% 0.0% 0.0% 0.0% M1 Ltd U U 1.50 1.55 -3.2% 12/16 -0.1% -0.2% -1.2% -0.2% -0.7% -2.2% -0.4% -1.2% -3.6% -0.4% -1.2% -3.6% Source: Credit Suisse estimates We see downside to consensus estimates We see significant downside risk to consensus 2018 and 2019 earnings estimates for M1 and StarHub as we do not think consensus is fully building in competitive dynamics for the Singapore mobile sector.
Singapore Telecoms Sector 16 2 March 2017
We see significant Figure 27: M1 – CS vs consensus estimates downside risk to consensus 2018 and (S$ mn, Y/E December) 2017E 2018E 2019E 2019 EPS estimates for Revenue - CS 1,081 1,067 1,050 M1 and StarHub Revenue - Consensus 1,048 1,010 994 - % difference 3.1% 5.6% 5.6%
EBITDA - CS 300 270 258 EBITDA - Consensus 312 298 280 - % difference -4.0% -9.2% -7.8%
PAT - CS 130 99 84 PAT - Consensus 142 131 112 - % difference -8.2% -24.9% -25.0%
Dividend - CS 11.22 8.48 7.25 Dividend - Consensus 12.30 10.90 9.10 - % difference -8.8% -22.2% -20.3% Source: IBES, Credit Suisse estimates
Figure 28: StarHub – CS vs consensus estimates (S$ mn, Y/E December) 2017E 2018E 2019E Revenue - CS 2,391 2,325 2,286 Revenue - Consensus 2,395 2,366 2,354 - % difference -0.2% -1.7% -2.9%
EBITDA - CS 630 579 558 EBITDA - Consensus 635 628 629 - % difference -0.8% -7.8% -11.2%
PAT - CS 277 230 211 PAT - Consensus 284 276 264 - % difference -2.3% -16.6% -20.3%
Dividend - CS 16.00 16.00 16.00 Dividend - Consensus 16.10 16.00 15.80 - % difference -0.6% 0.0% 1.3% Source: IBES, Credit Suisse estimates
Figure 29: SingTel – CS vs consensus estimates (S$ mn, Y/E March) FY17E FY18E FY18E Revenue - CS 16,463 16,935 17,346 Revenue - Consensus 16,572 17,009 17,357 - % difference -0.7% -0.4% -0.1%
EBITDA - CS 4,958 5,075 5,141 EBITDA - Consensus 5,467 5,623 5,704 - % difference -9.3% -9.7% -9.9%
Net profit - CS 3,766 4,014 4,176 Net profit - Consensus 3,919 4,185 4,375 - % difference -3.9% -4.1% -4.6%
Dividend - CS 17.8 18.2 18.9 Dividend - Consensus 17.7 18.5 19.6 - % difference 0.5% -1.7% -3.5% Source: IBES, Credit Suisse estimates
Singapore Telecoms Sector 17 2 March 2017
Singapore telcos valuation not compelling from regional perspective M1 and StarHub are Additionally, the M1's and StarHub's valuations are not attractive as they are offering one offering one of the of the lowest dividend yield spread compared to regional peers and also historically. lowest dividend yield spread compared to Figure 30: Asian telecoms dividend yield spread regional peers 6.0% +/- 1 SD Hist average Current 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5%
1.0%
M1
FET
CHT
HKT
TWM
HTHK
HKBN
PCCW
SingTel
StarHub SmarTone
Note 1: Yield spread calculated as 12M forward dividend yield minus respective 10-year gov't bond yield; Note 2: Historical mean excludes the Global Financial crisis period. Note 3: Prices as of 28 Feb 2017; Source: Bloomberg, Reuters, Company data, Credit Suisse estimates Stock views
■ M1 (UNDERPERFORM, TP S$1.50): M1 remains the most vulnerable to the entry of the fourth mobile operator in Singapore, given 90% of its service revenue comes from the mobile segment. M1’s 2016 result performance reflects the same as the competitive intensity rose in 2016 with incumbents looking to pre-empt the entry of new operator. We expect pricing in the mobile sector to decline further over the next 2-3 years as TPG launches services in 2H 2018. As a result, we expect M1 earnings and dividend to decline over the next three years. Our new target price of S$1.50 (from S$1.55) is DCF-based wherein we have assumed a WACC of 7.2% and terminal growth of 0%. Our target price implies a 2017E/18E of EV/EBITDA of 6.0x/6.7x and dividend yield of 7.4%/5.6%.
■ StarHub (UNDERPERFORM, TP S$2.25): StarHub is also impacted by the rising competition in the mobile sector as ~55% of its service revenue comes from the mobile market. However, compared to M1, StarHub is better placed given its better bundling proposition and its much stronger footing in fixed-network services. That said, we think StarHub’s bundling proposition is likely to lose sheen in the medium to longer term with the emergence of IP TV boxes and OTT services. StarHub has cut its 2017 dividend guidance to S¢16/sh (from S¢20/sh), reflecting the challenging medium-term outlook. Our target price of S$2.25 (from S$2.35) is based on SOTP. In our SOTP valuation, we value the cellular, fixed line, and pay TV/broadband businesses separately using DCF methodology. We have assumed a WACC of 7.2% and terminal growth of 0% for our DCF. Our target price implies a 2017E/18E of EV/EBITDA of 7.3x/7.9x and dividend yield of 7.1%/7.1%.
Singapore Telecoms Sector 18 2 March 2017
■ SingTel (OUTPERFORM, TP S$4.60): SingTel is our preferred pick in the Singapore telecom sector as we have a positive view on most of the company's businesses except for Bharti Airtel (India business). We believe the stock offers a unique combination of yield and growth (coming from international associates). Further, the company is least exposed to the potentially rising competitive scenario in the Singapore cellular market as ~5% of our target price comes from the cellular market. Additionally, the expectations of special dividends from the Netlink Trust IPO, over the next 12-15 months, will limit the downside potential in the stock, in our view. We value Singapore and Australia businesses using DCF methodology and the international associates at their respective CS target prices. Singapore accounts for ~19% of our target price while Optus contributes ~22%, Telkomsel ~27%, Airtel ~12%, AIS ~8%, Globe ~5%, Intouch ~3%, and others account for the remaining ~4%.
Figure 31: SingTel SoTP based valuation (S$ mn) Equity value SingTel's stake Equity value Equity value % contribution /share (S$) Singapore 13,993 100.0% 13,993 0.86 18.6% Australia 16,339 100.0% 16,339 1.00 21.8% Total Core 30,332 30,332 1.86 40.4% Telkomsel - Indonesia 57,473 35.0% 20,116 1.23 26.8% Bharti - India 25,328 36.3% 9,189 0.56 12.2% AIS - Thailand 26,501 23.3% 6,175 0.38 8.2% Globe - Philippines 8,612 47.2% 4,065 0.25 5.4% Intouch - Thailand 10,141 21.0% 2,130 0.13 2.8% Others 3,079 0.19 4.1% Total Associates 44,753 2.74 59.6% Total SingTel Group 75,085 4.60 100.0% CS TP (Rounded) 4.60 Source: Credit Suisse estimates
Singapore Telecoms Sector 19 2 March 2017
Companies Mentioned (Price as of 28-Feb-2017) Advanced Info Service PCL (ADVANC.BK, Bt167.0) Axiata Group Berhad (AXIA.KL, RM4.43) Bharti Airtel Ltd (BRTI.BO, Rs365.15) China Mobile Limited (0941.HK, HK$85.6) China Telecom (0728.HK, HK$3.65) China Unicom Hong Kong Ltd (0762.HK, HK$9.44) ChungHwa Telecom (2412.TW, NT$102.0) DiGi.Com (DSOM.KL, RM5.04) Far EasTone Telecom (4904.TW, NT$74.0) Globe Telecom (GLO.PS, P1828.0) HKBN (1310.HK, HK$9.05) HKT Trust (6823.HK, HK$10.36) Hutchison Telecommunications HK Holdings Ltd. (0215.HK, HK$2.43) Idea Cellular Ltd (IDEA.BO, Rs115.45) Jasmine International (JAS.BK, Bt8.8) KT Corp (030200.KS, W30,450) LG Uplus (032640.KS, W12,800) M1 Limited (MONE.SI, S$2.08, UNDERPERFORM, TP S$1.5) Maxis Berhad (MXSC.KL, RM6.31) PCCW (0008.HK, HK$4.73) PT Indosat Tbk (ISAT.JK, Rp7,100) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp3,850) Philippine Long Distance Telephone Company (TEL.PS, P1460.0) Pt Link Net Tbk (LINK.JK, Rp4,860) Reliance Communication Ltd (RLCM.BO, Rs38.9) Singapore Telecom (STEL.SI, S$3.94, OUTPERFORM, TP S$4.6) SmarTone Telecom (0315.HK, HK$10.54) Spark NZ (SPK.NZ, NZ$3.59) StarHub Ltd (STAR.SI, S$2.88, UNDERPERFORM, TP S$2.25) Taiwan Mobile (3045.TW, NT$108.0) Telekom Malaysia (TLMM.KL, RM6.16) Telstra Corporation (TLS.AX, A$4.82) Total Access Communication PCL (DTAC.BK, Bt43.5) True Corp PCL (TRUE.BK, Bt6.25) XL Axiata Tbk (EXCL.JK, Rp2,990)
Disclosure Appendix Analyst Certification I, Varun Ahuja, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for KT Corp (030200.KS)
030200.KS Closing Price Target Price Date (W) (W) Rating 10-Mar-14 28,800 35,000 N 08-Apr-14 31,250 37,000 08-Jul-14 30,700 36,000 13-Feb-15 29,200 36,000 O 04-May-15 32,250 40,000 07-May-15 31,100 37,000 30-Oct-15 29,550 37,000 * 07-Mar-16 28,500 36,000 * 30-Jun-16 29,650 37,000 01-Aug-16 32,600 38,000 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.
Singapore Telecoms Sector 20 2 March 2017
3-Year Price and Rating History for LG Uplus (032640.KS)
032640.KS Closing Price Target Price Date (W) (W) Rating 28-Apr-14 10,150 13,000 O 22-Sep-14 12,250 15,000 26-Jan-15 12,500 16,000 07-May-15 9,850 12,000 28-Oct-15 11,350 13,000 * 07-Mar-16 10,300 12,800 * 01-Aug-16 11,400 13,000 31-Oct-16 11,800 13,800 02-Feb-17 11,550 15,000
OUTPERFORM * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for M1 Limited (MONE.SI)
MONE.SI Closing Price Target Price Date (S$) (S$) Rating 15-Jul-14 3.59 3.73 N 19-Jan-15 3.62 3.85 07-Oct-15 2.92 2.35 U * 19-Jan-16 2.50 2.15 13-Apr-16 2.48 2.05 02-Sep-16 2.51 2.00 19-Sep-16 2.43 1.75 18-Oct-16 2.33 1.65 24-Jan-17 2.17 1.55 * Asterisk signifies initiation or assumption of coverage. NEUTRAL UNDERPERFORM
3-Year Price and Rating History for Singapore Telecom (STEL.SI)
STEL.SI Closing Price Target Price Date (S$) (S$) Rating 03-Apr-14 3.67 3.90 N 05-Jun-14 3.86 3.84 15-Aug-14 3.91 4.00 12-Feb-15 4.18 4.15 08-Oct-15 3.77 4.25 O * 13-Nov-15 3.86 4.40 14-Jan-16 3.50 4.20 12-Apr-16 3.69 4.35 12-May-16 3.89 4.40 20-Jun-16 3.85 4.45 NEUTRAL OUTPERFORM 11-Aug-16 4.27 4.75 05-Sep-16 3.95 4.65 19-Sep-16 3.97 4.55 10-Nov-16 3.84 4.50 09-Feb-17 3.88 4.60 * Asterisk signifies initiation or assumption of coverage.
Singapore Telecoms Sector 21 2 March 2017
3-Year Price and Rating History for StarHub Ltd (STAR.SI)
STAR.SI Closing Price Target Price Date (S$) (S$) Rating 15-Jul-14 4.14 3.95 U 08-Oct-15 3.58 3.10 * 21-Jan-16 3.33 3.05 17-Feb-16 3.56 3.00 19-Sep-16 3.46 2.65 06-Feb-17 2.80 2.35 * Asterisk signifies initiation or assumption of coverage.
UNDERPERFORM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 39% (60% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with
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Target Price and Rating Valuation Methodology and Risks: (12 months) for M1 Limited (MONE.SI) Method: Our 12-month target price of S$1.50 for M1 Ltd is based on discounted cash flow valuation based on a 7.2% weighted average cost of capital (WACC) and a 0.0% terminal growth rate. Our 7.2% WACC is based on a 8.0% cost of equity and a 3.7% cost of debt (post tax shield). At our target price, M1 would be trading at an FY17E/18E EV/EBITDA of 6.0x/6.7x below its historical range as we expect entry of fourth cellular operator in Singapore market leading to pressure on earnings and hence dividend and accordingly we maintain our UNDERPERFORM rating. Risk: Risks to our 12-month target price of S$1.50 and UNDERPERFORM rating for M1 Ltd include: (1) absence of fourth cellular operator from Singapore Telecoms sector, (2) more severe than expected competition among the telcos in Singapore, (3) slower than expected growth in key business segments in Singapore and (4) changes in regulatory environment. Target Price and Rating Valuation Methodology and Risks: (12 months) for Singapore Telecom (STEL.SI) Method: Our target price of S$4.60 for Singapore Telecom is based on a sum-of-the parts calculation. The core Singapore and Australia operations within the sum-of-the-parts, which contribute S$1.86 of the total, are valued using discounted cash flow (DCF) analysis. For Singapore, we use an estimated 6.8% weighted average cost of capital (WACC) and we use a terminal growth rate of 0.0% for mobile and 0.0% for fixed line, For Australia, we use an estimated 7.5% WACC and we use 0.5% terminal growth. The associates, which contribute S$2.74 within our sum-of-the-parts, are also valued using DCF. For Singtel's 35% stake in Telkomsel, we value at S$1.23. For Singtel's 36% stake in Bharti Airtel, we value at S$0.56. For Singtel's 23% stake in AIS, we value at S$0.38. For SingTel's 21% stake in Intouch, we value at S$0.13. For Singtel's 47% stake in Globe, we value at S$0.25. We also value Singtel's 26% stake in SingPost at S$0.04 and 100% stake in NetLink Trust at S$0.14. We have an OUTPERFORM rating on SingTel primarily due to its international exposure. Risk: The key risks to our S$4.60 target price and OUTPERFORM rating for Singtel include: (1) Foreign currency fluctuations, (2) more severe than expected competition among the telcos in Singapore and Australia, as well as key regional markets, (3) slower than expected growth in key business segments in key regional markets, (4) changes in regulatory environment, and (5) acquisition risk. Target Price and Rating Valuation Methodology and Risks: (12 months) for StarHub Ltd (STAR.SI) Method: Our target price of S$2.25 for Starhub is derived from discounted cash flow (DCF) based on weighted average cost of capital (WACC) of 7.2%, 0.0% terminal growth rate for mobile, 0.0% for cable & broadband, and 0.0% for Fixed network services respectively. Our 7.2% WACC is based on a 8.0% cost of equity and a 3.7% cost of debt (post tax shield). At our target price, StarHub would be trading at an 2017E/18E EV/EBITDA of 7.3x/7.9x below its historical range as we expect entry of fourth cellular operator in Singapore market leading to pressure on earnings and accordingly maintain our UNDERPERFORM rating. Risk: Key risks to achievement of our S$2.25 target price and UNDERPERFORM rating for StarHub include: (1) less severe than expected competition among the telcos in Singapore, (2) higher than expected growth in key business segments in Singapore and (3) lower than expected capital expenditure and higher than expected savings from infrastructure sharing arragement with M1.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (STEL.SI, STAR.SI, 6823.HK, SPK.NZ, ISAT.JK, TLS.AX, EXCL.JK, 1310.HK, GLO.PS, TRUE.BK, DSOM.KL, LINK.JK, TLMM.KL, RLCM.BO, 0215.HK, AXIA.KL, TLKM.JK, TEL.PS, 0008.HK, ADVANC.BK, 030200.KS, 0315.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (STEL.SI, EXCL.JK, 1310.HK, GLO.PS, DSOM.KL, AXIA.KL, TLKM.JK, TEL.PS, ADVANC.BK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (STEL.SI, DSOM.KL, TLKM.JK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (STEL.SI, EXCL.JK, 1310.HK, GLO.PS, DSOM.KL, AXIA.KL, TLKM.JK, TEL.PS, ADVANC.BK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (STEL.SI, MONE.SI, STAR.SI, 6823.HK, BRTI.BO, SPK.NZ, ISAT.JK, DTAC.BK, TLS.AX, EXCL.JK, 1310.HK, 0762.HK, GLO.PS, TRUE.BK, 3045.TW, IDEA.BO,
Singapore Telecoms Sector 23 2 March 2017
DSOM.KL, LINK.JK, TLMM.KL, RLCM.BO, 0215.HK, AXIA.KL, TLKM.JK, 2412.TW, 032640.KS, 0728.HK, TEL.PS, 0008.HK, ADVANC.BK, 030200.KS, 0315.HK) within the next 3 months. Credit Suisse may have interest in (DSOM.KL, TLMM.KL, AXIA.KL, MXSC.KL) Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (BRTI.BO, IDEA.BO, RLCM.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0762.HK, 2412.TW, 0728.HK, 4904.TW). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (TRUE.BK, 032640.KS, 030200.KS). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. 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For Thai listed companies mentioned in this report, the independent 2014 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Jasmine International () , Total Access Communication PCL (Excellent) , True Corp PCL (Very Good) , Advanced Info Service PCL (Excellent) Taiwanese Disclosures: This research report is for reference only. Recipients should carefully consider their own investment risk and note they may be subject to the applicable rules and regulations in Taiwan, including the requirements under the Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers ("Taiwan Recommendation Rules") on conflicts of interest. Investment results are the responsibility of the individual investor. 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Singapore Telecoms Sector 24 2 March 2017
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Singapore Telecoms Sector 25