The recently concluded results season saw the universe of telco stocks we cover faring  mostly in line with expectations.  Our NEUTRAL call on the regional sector is maintained as with our sole OVERWEIGHT stance on  the  Indo  telco  sector.  The  Thai  telco  sector  has  nonetheless  been downgraded  to  NEUTRAL  (from  Overweight.)  Our  top  regional  buy ideas  remain  Telkom  Indonesia  (Telkom),  Digi,  M1,  Sarana  Menara Nusantara and Total Access Communications. 

Steady  as  she  goes.  Of  the  16   telco  and  tower  infrastructure companies  (towercos)  we  cover  across the Asean-4 markets, only  one(StarHub)  missed  expectations  during  the  recently  concluded  reporting season. The  key  operational  highlights gleaned  from the    results were: i)  most  cellcos  continued  to  exercise  good  cost  discipline,  ii)  revenue momentum  remains  weak  in  Malaysia  and  Thailand  and  iii)  subscriber acquisition  cost  (SAC)  appears  to  be  leveling  off  in  Singapore  and Malaysia. 

MY & SG  telcos.  The  acute  SMS  revenue pressure  remains a concern for Malaysian telcos on top of the extended voice decline. Industry SMS revenue  fell  27%  y-o-y  (-  7%  q-o-q)  while  voice  revenue  fell  4%  y-o-y (-0.8%  q-o-q).  Most  notably,  Celcom‟s  revenue  momentum  was unexpectedly hit by issues  with its IT upgrade.  The higher percentage of subscribers  on  tiered  plans  in  Singapore  provided  some  support  to industry  revenue  albeit  the  cellcos‟  prepaid  revenue  was  further dampened by the SIM card ownership restrictions imposed from 1 April.   

Indo  telcos  on  a  roll.  The  Indo  telcos  posted  the  strongest  revenue growth  across  the  Asean-4  in  1H14.  We  see  the  strong  momentum flowing into the 2H, supported by the on-going price repair in the marketand rising data uptake from increasing smartphone penetration. We also see  the  towercos  benefitting from the  continued  3G network expansion by the telcos and potential M&As involving tower assets.  

Thai telcos.  After a  pathetic showing in 1H, the Thai telcos are guiding for  „flat‟  to  „low  single  digit‟  growth  in  2H14  service  revenue  from  the anticipated  rebound  in  economic  sentiment.  We  foresee  a  sluggish recovery  in  industry  revenue  with  telcos pursuing  zero  margin handset strategies to compel more upgrades from 2G to 3G.

MALAYSIA 

The  Malaysian  telcos  posted  2QCY14  results  that  were  generally  in  line.Overall, margins have remained relatively stable. Interim dividends paid out by the telcos were also within expectations.  Following the  results, we  have  kept our  valuations  and  earnings  forecasts  unchanged.  Our  TP  for  Time  is maintained  at  MYR5.20,  but  downgraded  to  NEUTRAL  (from  Buy)  as  we believe most of the recent positives  have been priced in.  Digi (DIGI MK, BUY,FV: MYR6.50) remains our top pick for the sector. 

DiGi a clear winner. Digi continued to outperform with a 21.3% y-o-y core earnings growth in 1H14. Overall, we believe the relatively muted results at Maxis (MAXIS, SELL, FV: MYR6.00) and Celcom were more of a reflection of  the  respective  companies‟  internal  issues,  and  not  a  sign  that  the industry is on a decline. Maxis is now only beginning to find a firm footing in recovering data revenue lost following the elimination of pay-per-use data pricing early this year.

Short  term  headwinds  for  Celcom.  We  learn  that  Celcom  has  been underperforming (1H14 revenue declined 3% y-o-y) due to issues  with  its internal  IT  upgrades, which management expects to resolve by year-end. Some of these upgrade issues  caused network  problems  in certain areas, preventing  Celcom  from  launching  new  products,  according  to management.  Nonetheless,  management  hinted  that  it  expects  to  regain the ability to introduce new products in the market sometime in 3Q14.

Quiet 1H for OCK but expect a brisk  2H.  OCK Group‟s (OCK MK, BUY, FV: MYR1.65) 1H14 earnings made up only 30% of our full-year estimates, but we expect a much stronger 2H, driven by i) new projects, ii) the maiden revenue from  its  Indonesian acquisition  and iii)  potential  award  of  the  1stphase of the Universal Service Provisioning (USP) Timeline 3 contract  by the government. The company should begin consolidating revenue from its earlier acquisition of PT Putra Mulia Telecommunication (PMT), a telco site maintenance company in Indonesia this month.   

TM’s  simmering  wireless  ambitions.  We  note  the  introduction  of  TM‟s wireless broadband product,  TMgo last month,  which is marketed as a 4G service utilizing the group‟s existing 850Mhz spectrum,  could be an early sign of  the  group‟s  ambitions  to  re-enter  the  mobile  space.  Nonetheless, the  lack of coverage implies that competition will remain relatively muted. 

The 4G service has been officially launched in the less populated states of Kedah and Melaka, but we think this may serve as a test bed for TM before making a more aggressive foray into the key urban centres such as Klang Valley, Penang and Johor Bahru. TM‟s pricing appears fairly attractive,  at about  MYR10-20/GB  depending  on  validity  period  vs.  the  incumbent‟s mobile data postpaid pricing of MYR15-30/GB for additional data quota.

SINGAPORE 

SAC for Singapore telcos are on a declining trend 
Save for StarHub which missed both our and consensus estimates, the results of the telcos were generally in line.  The key highlights for the quarter were:  i) the seasonal uptick in mobile revenue, ii) the decline in SAC and iii)  improved tiered data adoption. Post  results,  we  lowered  StarHub‟s  FY14/15  earnings  forecast  by  4-6%  but keep  our  projections  on  SingTel  and  M1.  Our  TP  for  SingTel  (ST  SP, NEUTRAL) has been raised slightly to SGD3.82 (from SGD3.80) while that of StarHub (STH SP, NEUTRAL)  lowered  to SGD4.20 (from SGD4.60).  Our top pick remains M1 (BUY) with TP upgraded to SGD4.30 (from SGD3.70)

The red camp cements its leadership. SingTel maintained its leadership in  mobile  and  broadband  services  during  the  quarter,  supported  by  theaggressive  initiatives  to  bundle  its  Home  service.  It  maintained  mobile revenue share at 52% in 2Q14 and strengthened its  subscriber  share of the fiber market to 65% from 60% in the preceding quarter. For pay-TV, its revenue share expanded 4%-pts q-o-q to 39% at the expense of StarHub whose share fell further  to 61%, thanks to the  FIFA World Cup acquisition campaign which boosted pay-TV ARPU by 17% q-o-q (normalized growth of 6% q-o-q). 

Lower SAC. The decline in smartphone volume sales and a higher  mix of lower priced Android handsets contributed to the 19 -25% y-o-y fall in SAC (-13  to  -20%  q-o-q). We  expect  SAC  to  rise in  2H14  from  new  handsetlaunches such as the Samsung Galaxy Note 4 and the iPhone 6.

Prepaid business still sluggish. Prepaid mobile revenue for the industry continued to contract due to i) the fall in  foreign  workers permit issuance and ii)  the  restriction  imposed on  the  ownership of  SIM cards  which took effect  this quarter.  StarHub appeared  to  be  the  most impacted  given  its bigger  share  of  mobile  revenue  derived  from  the  prepaid  segment  (est. 17-18%). Its prepaid ARPU slipped 12% q-o-q compared to the 11% q-o-qfall  at  M1.  SingTel‟s  prepaid  ARPU  bucked  the  trend,  rising  6%  q-o-q which the telco attributed to stronger reload promotions.  

Tiered  data.  The  number  of  postpaid  customers  on  tiered  data  plans expanded  to 56%  in 2Q14  from 50% in 1Q14 with 19% exceeding their data  allowances  vs 16% in the preceding quarter, allowing the telcos to better  monetise  data.  Despite  the  higher  proportion  of  subscribers exceeding their data caps, the telcos‟ postpaid ARPU  still  fell 4-6% y-o-y from lower outbound roaming revenue and  more postpaid subscribers on shared data plans. M1‟s postpaid ARPU was relatively steady y-o-y as it benefitted  from  the  earlier  re-pricing  of  its  data  plans.  We  believe SingTel‟s  recent  introduction  of  the  Combo  Wi-Fi  4G  plans  should  lift ARPU  by  5-8%  in  the  longer-term  as  it  is  charging  SGD3/mth  more  in monthly  commitment  on  average  and  data  traffic  is  poised  to  increase further from higher 4G handset penetration.  

Cable/DSL  broadband  market  bottoming  out.  While  competition  from smaller operators has significantly eroded  the  industry‟s  cable broadband ARPU,  we  think  prices  may  have  bottomed-out.  StarHub‟s  cable broadband ARPU fell 18% y-o-y in 2Q14 to SGD37, the steepest in over two quarters.  

Fourth  operator.  The  press  reports  of  the  potential  entry  of  a  fourth mobile operator drew  mixed responses from telcos.  StarHub  believes the most  probable  route  for  the  new  operator  would  be  for  the  regulator  to allocate fresh spectrum  with certain concessions  as opposed to a Mobile Virtual Network Operator (MVNO) model. SingTel‟s management is of the view  that  its  good  experience  dealing  with  new  entrants  in  hyper competitive markets  should position its domestic business well to fend off additional competition.

INDONESIA 

Indonesia’s industry mobile revenue growth on an uptrend due to improving RPM and strong data uptake 

The  results  of the  Indonesian  telcos  were  broadly  in  line.  The  key  highlights were: i) the robust  industry mobile revenue growth  in 1H14, ii) improving voice average revenue per minute (RPM) and iii) stabilizing data yields. We maintain our core  earnings forecast for  Telkom (TLKM IJ, BUY: IDR3200)  but  lowered XL (EXCL IJ, BUY, TP: IDR6280)‟s FY14  earnings  forecast after modeling in higher  depreciation  and  interest  charges.  Our  forecast  for  Indosat  (ISAT  IJ, BUY, TP: IDR4800) is under review pending the results call with management. Our preferred telco exposure remains Telkom and for the tower infrastructure sector, Sarana Menara Nusantara (TOWR IJ, BUY, TP: IDR4800).

Strong mobile revenue. The industry revenue  rebounded  strongly by 6% q-o-q in 2Q14 after falling 4% in the 1Q14, driven by the combined effects of the  Lebaran, general elections and the  FIFA World Cup which boosted usage. This brought 1H14 industry revenue growth to 8%, in line with our expectations and  on track to meet the  7-8% guided by the telcos for the full  year.  While  Telkomsel  maintained  its  double  digit  revenue  growth trajectory  in  2Q14,  the  full  quarter  contribution  from  Axis  provided  an added fillip to XL‟s mobile revenue, which expanded 16% y-o-y in 2Q14 vs 8.4% in 1Q14.  The decline in  ISAT‟s mobile revenue  extended into 2Q14 (-2.2%  y-o-y) as the growth in  its  Java revenue was not able to offset the decline in its revenue fom outside of Java.  In addition to  the  strong data uptake, improving voice and SMS revenues also contributed to the better showing by the telcos for the quarter. We expect revenue growth to remain strong  in  2H14,  underpinned  by  the  price  repair  in  the  market,  steady competition and initiatives to better monetise data. 

Data yields seen stabilizing. We believe data tariffs in Indonesia is close to  bottoming  out  as  the  operators  are  collectively  looking  to  better monetise the surge in data traffic on their 3G networks. We believe current data  tariffs  in  the  market  (one  of  the  lowest  in  the  region)  are  not sustainable  and  data  yields  should  rise  to  reflect  the  inherent  cost  of delivering an optimal data experience  with  the majority of 3G sites in the exceeded  50%. XL has started to re-price its data products in 3Q14 after slowing down the decline in data prices in 2Q14. Anecdotal observations and our channel checks indicate that Telkomsel has  also been selectively 
raising data prices.  We think ISAT would look to also re-price data ahead of the completion of its network modernization exercise by year-end. 

Smartphone  adoption  should  accelerate  with  declining  ASPs.  The greater  access  to  lower-priced  smartphones  has  spurred  more Indonesians to upgrade to a 3G handset. According to  GfK Research, the strongest demand  are for 3G handsets  priced under IDR500k (<USD50), which are mostly dominated by brands such as Samsung, Nokia, Mito and Evercross. We expect smartphone penetration to double over the next two years  (currently  25%)  with  average  selling  prices  (ASPs)  of  regular branded  3G  handsets  falling  below  USD70  from  over  USD150-200 currently.

Demand  for  towers  to  remain  strong.  There  was  a  strong  pickup  in 2Q14  tower  growth  following  a  somewhat  lacklustre  1Q14,  mainly underpinned by aggressive orders from Telkomsel. We expect demand for towers to remain strong  while also  noticing potential M&A opportunities in the sector from the possible disposal of towers by XL and Indosat   (ISAT IJ,  BUY,  TP:  IDR4800).  In  this  respect,  we  think  Sarana  Menara Nusantara  is  in  a  strong  position  to  expand  inorganically  due  to  the group‟s  healthy  gearing  position  as  at  2Q14  (annualised  gross debt/EBITDA of 2.5x).

Source: RHB