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Singapore Telecoms Sector Research Analysts THEME Varun Ahuja, CFA 65 6212 3017 [email protected] Four Is a (Bigger) Crowd

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Singapore Telecoms Sector Research Analysts THEME Varun Ahuja, CFA 65 6212 3017 Varun.Ahuja@Credit-Suisse.Com Four Is a (Bigger) Crowd 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.
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