THE BUZZ
Several media reports said the Myanmar government is inviting bids for two telecommunication permits which it plans to issue in June. The licences, which will be valid for a period of 10 to 20 years, are renewable thereafter. Successful bidders will have to meet strict rollout requirements, including covering the country's large rural population, as well as offer cheap subscription fees. Prospective bidders have until 25 Jan to officially register interest.
OUR TAKE
Certainly no lack of interest. We gather from sources that apart from Axiata, up to a dozen telcos are vying for licences. They include big names like Telenor, SingTel, Vodafone, China Mobile, Vimpelcom, Digicel and NTT. Myanmar's spectrum resource is one of the most lucrative as it represents the final bastion of mobile growth in the region. Given the very limited M&A opportunities in Indochina and there being only two initial licences up for grabs, we expect the bidding to be intense and highly-charged. This leads us to believe that some operators may forge partnerships and bid as part of a consortium to improve their chances of winning. We understand that the Myanmar government is keen to see foreign investors form JVs with two state-owned enterprises - MPT & Yatanarpon Teleport - which will be awarded separate licences.
Axiata unlikely to wade in at any cost. While Myanmar's mobile market makes for a compelling investment case, we expect Axiata to maintain its strict and rigorous investment evaluation process and adopt a disciplined approach. We think the group is unlikely to venture into a greenfield market at any cost, which may force it to compromise on its capital management headroom. Management had previously indicated a preference for in-country consolidation to strengthen its footprint in existing markets. Axiata had earlier proposed to merge Hello, its wholly owned subsidiary in Cambodia with Smart Telecom - the second largest mobile operator, which will boost its market share to 25% from 13% currently.
High growth but low spending propensity. Myanmar's sub-10% mobile penetration against a population of 60m provides strong growth potential. This compares with the over 100% and 70% in neighboring Thailand and Cambodia, while Laos' mobile penetration stands at 88%. Nonetheless, Myanmar continues to be one of the poorest nations in the world and within the Indochina region, with a GDP per capita of USD1300, well below Cambodia's USD2300 and Laos' USD2800. Despite having a relatively similar population base, Myanmar's GDP per capita is some 80% below Thailand's, largely reflecting the relatively low urbanization rate following decades of military rule. The government is targeting to raise the mobile penetration to 80% by end-2015.
Regulatory risks run high. As with most telecom markets at the early stages of liberalization, regulatory risk remains the key risk facing operators. We think that investors' main concerns and uncertainties revolve around policy pronouncements and government transparency in awarding licences. The government intends to pass a draft law on telecoms later this year and also set up an official telecoms regulatory body.
Capex could potentially be onerous. We believe the successful operator(s) would have to cough out hefty capex to roll out a greenfield mobile network capable of catering to a broad segment of the population. Myanmar's poor infrastructure and the pretty much rural demography would also contribute to the high cost of rollout as well as a prolonged gestation period.
NEUTRAL. Although we are positive on Axiata's potential move into the Myanmar market given the strong growth potential, our concerns are largely related to regulatory and capex risks. We are keeping our neutral recommendation based on a FV of RM7.02. This aside, we think the stock's current record-high foreign shareholding of 29% carries the most downside risk in the event of a shift in Malaysia's risk profile as well as the highly-anticipated selldown by investors after the country holds its general election. Meanwhile, the potential share price re-rating catalysts are: (i) stronger than expected earnings, and (ii) special dividends.