Capax Infiniti STARHUB
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Capax Infiniti CFA Institute Research Challenge STARHUB LTD| SELL CHENG Jun Song, S9205433J Kenny TAY, S9213421J LIM You Jie, S9206224D Sarah Chantalle LEONG Wen Yi, S9326342A Singapore | Telecom Sylvester YEO Kai Ren, S9214214J 20 October 2015 Starhub Ltd Wishing upon a falling star Rating SELL We issue a SELL recommendation on Starhub with a target price of $3.25 using the Target Price SGD 3.25 Discounted Cash Flow Model. This offers a 10.5% downside from its closing price of Starts At S$3.63 on October 20, 2015. Increasing regulatory pressures and Starhub’s heavy reliance on weakening prepaid and pay TV segments make it more vulnerable to Closing Price increasing competition in the industry. IDA’s support for the 4th MNO in Singapore SGD 3.63 would be the key indicator to look out for. 20 Oct 2015 Intrinsic weakness with mobile segment. Starhub’s high exposure to the prepaid Downside -10.5% segment and higher ARPUs suggest that it is relatively more exposed to a downturn in tightening immigration policies and severe price competition. Coupled with new competition introduced by the 4th telco, Starhub’s margins and subscriber base are At A Glance expected to suffer going forward. Ticker SGX:CC3 Broadband and free Wi-Fi cannibalizing data usage. With the rollout of the Mkt. Cap (S$bn) 6.28 NGNBN network and the Wireless@SG, this has increased the public’s access to free broadband on the go. The number of hotspots around Singapore has doubled to Major Shareholders 10,000 in 2015 and this has boosted wireless connectivity for consumers at shopping malls and train stations. Consumers are able to access free public Wi-Fi and this will Asia Mobile (%) 55.89 in turn reduce the number of subscribers who exceed their data caps. NTT Docomo (%) 9.91 Pay TV losing its luster. Since the introduction of Cable TV, the exclusive content BlackRock (%) 1.45 and innovative services have always been a key differentiator for Starhub services and pay TV is the crown jewel in Starhub’s hubbing strategy. However, competition Avg. Daily Vol. (‘000) 1,906,490 from illegal set-top boxes and network streaming services reduce the stranglehold Starhub once holds over premium content. Beyond a fall in pay TV revenues, we see P/E (ttm) 17.20 the lost in lustre of this key segment will reduce the effectiveness of Starhub’s EPS (ttm) 0.21 hubbing strategy. Key Financials (in SGD millions unless otherwise stated) 2012 2013 2014 2015F 2016F 2017F 2018F 2019F Revenue 2,422 2,370 2,387 2,474 2,491 2,495 2,488 2,487 % Growth -2.1% 0.7% 3.6% 0.7% 0.2% -0.3% -0.1% Gross Profit 1,411 1,428 1,438 1,509 1,519 1,521 1,517 1,516 % Margin 58% 60% 60% 61% 61% 61% 61% 61% EBITDA 720 743 748 770 777 774 766 761 % Margin 30% 31% 31% 31% 31% 31% 31% 31% EBIT 447 474 477 434 408 369 326 286 % Margin 18% 20% 20% 18% 16% 15% 13% 12% Net Profit 359 380 371 341 319 283 246 210 % Margin 15% 16% 16% 14% 13% 11% 10% 8% Page 1 | Capax Infiniti Capax Infiniti CFA Institute Research Challenge Company Overview Established in 1998, Starhub was awarded the licence to provide mobile and fixed network Figure 1: Starhub’s Revenue (in mm) services when the government announced that telecommunications sector in Singapore would be completely liberalised by 2002. Despite being a latecomer to the industry, Starhub managed to establish itself as the second largest telecom player in the industry ahead of M1. 167 378 Key Segments: It has business operations in four main segments, mobile, broadband, payTV and fixed network services. In the mobile segment, it focuses on the provision of voice, data and internet services to its subscribers. In the broadband segment, it provides 202 1250 fixed line broadband services, including ultra fast fibre network services, to households. StarHub’s traditional area of strength has been in the payTV segment. It merged with 390 Singapore’ s sole cable television operator, Singapore Cable Vision (SCV) in 2002. As a result of the merger, Starhub acquired SCV’s cable television and broadband operations. Mobile PayTV Apart from offering exclusive channels such as Cantonese dramas and American movies Broadband Fixed Network over a set-top box, StarHub has started to offer these programs through mobile and online platforms. Lastly, the fixed network services segment refers to StarHub’s business solutions unit. The list of enterprise services include mobile, internet & IP solutions, data centre and cloud computing. Hubbing the cornerstone of Starhub’s strategy: Starhub’s main marketing strategy is to Figure 2: Number of multi-play households with bundle all of its different services together in one package, otherwise known as Hubbing. Starhub Consumers receive discounts and benefits when they purchase several services and Single Double Hubbing provides consumers with a one-stop solution for all their mobile, internet and entertainment needs. 400 Triple % with TV 71% 350 Hubbing confers Starhub 3 main advantages: 300 70% 1. Cross-selling. Hubbing allows Starhub to bundle services that are less desirable 250 with other services that customers want by offering discounts through hubbing. 200 69% Although other telcos may offer services at lower prices, households will still 150 subscribe to Starhub for its other differentiating products such as pay TV. Hubbing 100 68% also allows Starhub to advertise multiple services on one medium which lowers 50 No. Householdsof / '000 marketing costs. 0 67% 2. Reduces churn rate. Churn rate measures the annual percentage rate at which 2010 2011 2012 2013 2014 customers stop subscribing to Starhub’s services. By signing users to multiple services under Starhub, this raises switching costs, as consumers must repurchase all the services originally provided by Starhub. 3. Increase ARPU. ARPU increases when users subscribe to more services from Starhub. Hubbing has been a key strategy for Starhub, as single and double-service households Figure 3: Shareholder Structure of Starhub (households that only subscribe to one or two services) have been decreasing, while [VALUE]% triple-service households have increased from 200,000 in 2010 to 242,000 in 2014 (Refer to Fig. 2). Pay TV has been the key element behind the effectiveness of Starhub’s hubbing strategy, as 70% of Starhub’s households subscribe to Starhub for its pay TV content. Due [VALUE]% to the exclusive deals held by Starhub with content providers such as HBO and CNN, the percentage of households with subscription to Starhub’s pay TV content have remained [VALUE]% constant between 68% to 70%. [VALUE]% Shareholder Structure: Starhub’s main shareholder is Asia Mobile Holdings Pte. Ltd, a mobile telecoms investment company jointly held by ST Telemedia and Ooredoo. ST Telemedia is 100% owned by Temasek and Ooredoo is a telecommunications company Institutions Asia Mobile Holdings who operates in the Middle East. The second largest shareholder is NTT Docomo NTT Docomo Ventures Public Ventures at 9.91%, the venture capital arm of NTT Docomo Inc. The rest of the shareholders are highly diluted and held by public investors (24.99%) and institutional investors (7.82%). Page 2 | Capax Infiniti Capax Infiniti CFA Institute Research Challenge Industry Overview and Competitive Positioning Telecom industry characterised by high barriers to entry and strong bargaining power over its consumers: High barriers to entry in the telecom industry Figure 4: Porter’s Five Forces is evidenced by the high capital expenditure and time taken by existing mobile network Bargaining operators (MNOs) to lay down network infrastructure. Such a commitment has deterred Power of entry of new MNOs despite efforts by the Infocomm Development Authority of Singapore Buyers (IDA)’s to encourage competition. In addition, another barrier to entry is the huge subscriber base that the incumbent MNOs possess. With most of Singapore’s population already subscribed to a mobile plan, the incumbents have an advantage of an existing Bargaining customer base and economies of scale it can utilise in any price competition. Hence, a Substitutes Power of new MNO will have to offer prices and services that are significantly superior to Sellers incumbents for it to obtain market share, which is highly improbable without government support. Entrant of a 4th Mobile Operator: Despite high barriers to entry and strong bargaining Competitive Barriers to powers over consumers, we believe these key competitive advantages may be eroded Rivalry Entry with the introduction of a new MNO. The IDA has noted the fall in service standards from telecom operators. Although Singapore’s average mobile speeds are faster than that of Before MNO After MNO neighbouring countries, Singapore also has one of the highest ARPUs in the region. The oligopolistic structure has cultivated a comfortable scenario for the telecom operators, leading to a fall in service standards. Therefore, the IDA seeks to increase competition by Figure 5 Distribution of Speeds (size of bubble reserving a key spectrum in the upcoming auction for a new MNO. IDA has set aside 60 equates to smartphone penetration) MHz out of 225 MHz of spectrum at a lower indicative reserve price of S$40 million, in an auction open only to potential new entrants. Furthermore, the new MNO, likely to be 60 MyRepublic, already has a sizeable customer base with its broadband services, with 10% 55 market share. The introduction of a new operator will lead to intensified price competition, Singapo 50 re resulting in lower ARPUs for all telecom operators, and a decrease in market share for the incumbent MNOs. StarHub, as a telecom operator with operations only in Singapore, will 45 be especially affected by the increased competition.