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.

Source: OSK