Highlights

• It was reported that The Nepal Telecommunications Authority (NTA) has backtracked on its decision to grant Ncell a 4G license (which was awarded earlier this month) in response to a directive from the parliamentary Public Accounts Committee (PAC).

• PAC directed the regulator to prevent Ncell from launching 4G services until an ongoing dispute over capital gains tax is settled and NTA has announced it will abide by this decision.

• The NTA said the directive has been issued in the spirit of Nepal’s technology neutral spectrum policy, as well as in response to a finding from Nepal’s Development Committee that withholding a license would negatively affect consumers and state funds.

• The tax despite revolves around the sale of TeliaSonera’s indirect majority stake in Ncell to Axiata in 2015.

• Nepal government has been split on whether the tax should be paid by the buyer or the seller and may require Ncell to pay on behalf of the international companies.

• There is also disagreement over whether Nepalese tax law even applies to the transaction as it involved the sale of a holding company listed in a tax haven.

Financial Impact

• Recall that in May 2016, Ncell has made a deposit of 15 of the 25% capital gain tax (Rs9.9bn or RM411m) on behalf of TeliaSonera arising from the sale of share.

• Ncell may require to fork out another RM274m if TeliaSonera refuse to settle the remaining 10%.

Comments

• A negative development although we opine that this is truly unfair to Axiata as capital gain tax should be borne by Telia as the vendor.

• Recall that its closest rival, Nepal Telecom was granted a 4G license back in Oct 2016 and had a good head start to offer LTE services with first mover advantage. Even the smaller player, Smart Telecom obtained its 4G license last week.

• Without a 4G license, Ncell’s leadership position in Nepal will be greatly threatened.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and in-country consolidations.

Risks

• Regulatory risks, price wars and high gearing level.

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM4.65 ↔

• Regional exposure with focus on emerging countries with great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a long term catalyst.

Valuation

• Maintain HOLD rating with unchanged SOP-derived TP of RM4.65 (see Figure #2).

Source: Hong Leong Investment Bank Research - 1 Jun 2017