Industry Outlook Telecommunications (Thailand)

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1 Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 13 September 2016 Overall Outlook Steady revenue growth but bottom line impacted due to network expansion We expect Thailand mobile revenues to grow at mid- to single-digit levels annually over the next two to three years due to an expanding subscriber base and increasing data usage Top line growth will be tempered by the cannibalisation of legacy revenues Sector earnings before interest, taxes, depreciation and amortisation are likely to see an improvement in the near-term due to lower handset subsidies and regulatory cost savings However, overall profitability could see a decline, in our view, due to higher depreciation and amortisation costs, higher interest costs and the rise in network operating costs relating to network investments Higher capital expenditure (capex) and spectrum payments are also likely to impact the dividend pay-out levels of Advanced Info Service (AIS), in our view Capital expenditure-heavy 2016/17 fiscal year expected as telcos rush to improve 3G/4G coverage Thai telcos are accelerating their capex plans in 2016 to increase coverage of 3G and 4G services AIS plans to spend 40 billion Thai baht on network expansion over the next 2-3 years, on top of the 8 billion baht paid as the initial payment to acquire 900 MHz spectrum rights in May AIS network capex of 40 billion baht is over 30% of its 2015 fiscal year revenues and is a 25% increase from 2015 fiscal year network capex True Corporation also plans to increase its capex on its network as it intends to capture one third of market share by 2018 The company successfully raised 60 billion baht through a rights issue in the second quarter to fund network expansions and spectrum payments Total Access Communication (DTAC) plans to spend around 20 billion baht in capex on the 3G/4G network in 2016 as it aims for 3G coverage of over 95% of the population and nationwide 4G coverage by the third quarter Thailand has one of the cheapest data pricing in the region, which is a key reason why Thai operators may need to incur more capex on network capacity unless data pricing is revised upwards Capital expenditure as a percentage of service revenues (ex-interconnection) 1 Rising trend of capex in Thailand with expanding 3G and 4G network coverage Page 1

2 Competitive landscape remains heated despite AIS 900 MHz spectrum win After AIS won the 900 MHz spectrum auction in May 2016, the scramble by telcos to sign up AIS 2G clientele has died down However, telcos have aggressively looked to add higher-end 4G subscribers through handset subsidies, along with the higher network capex on data True is positive on its ability to reach its target of 33% market share by 2018, while DTAC has increased its handset subsidies to protect its market share erosion due to network inferiority Spectrum allocations in Thailand Under licence (MHz) Under concession (MHz) Total (MHz) 900MHz 18GHz 21GHz 850MHz 18GHz AIS *** 400 DTAC TRUE ** Network building efforts of True are backed by a strong portfolio of spectrum rights ** Wholesale deal with CAT *** Wholesale deal with TOT Key Industry Trends Revenue market share is evolving in True Corporation s favour We believe True Corporation will continue to gain revenue share in the cellular market its revenue share stood at 246% in the 2016 second quarter, up from 171% in the 2014 second quarter Much of these gains were made at the expense of DTAC, which lost close to 5% market share over the same period True remains the aggressor in the market, as it aims for 33% market share in the nearterm True Corporation is likely to maintain this trend with its expressed commitment to expand coverage of 3G and 4G networks and its ownership of a strong portfolio of spectrum assets DTAC, which has lagged behind its competitors in terms of capex and network quality, is most at risk of losing market share However, DTAC has recently made an effort to address customer losses by introducing a Super 4G service, which allows new subscribers to enjoy YouTube streaming during off-peak hours as well as music streaming without data charges We are likely to see the effectiveness of these services in the subsequent quarters Revenue market share in Thailand 1 True is only slightly behind DTAC to claim second place 2 AIS has lost some market share in the most recent quarters due to its 2G sub churn Page 2

3 Regulatory costs to decline with the increasing use of licenses With the acquisition of 10 MHz on the 900 MHz spectrum, all of AIS bandwidth is now under a licensing scheme which could push down regulatory costs to little over 70% in 2016 from 117% in 2015 AIS witnessed a sudden jump in its regulatory costs in the first quarter due to a one-time charge of 22 billion baht DTAC is also expected to enjoy some cost savings, from 20% to 18% of service income in 2016 Regulatory cost as a percentage of service revenues 1 Regulatory costs have been declining, thanks to the auction of 21 GHz and 900 MHz licences 2 Regulatory costs will continue their declining trend with the shift from a concessionbased to a licensebased system Handset wars shift to 3G/4G With the 900 MHz spectrum win by AIS, the subsidy battleground between AIS and True has shifted from 2G customers to high-end post-paid subscribers AIS has started offering Lava handsets worth 4,000 baht for free if a user migrates from a prepaid to post-paid package with a minimum commitment of 688 baht per month In response to True s and AIS offerings, DTAC started offering handset subsidies to its customers in May so that they can upgrade their handsets to 3G/4G devices DTAC s subscribers can obtain the devices for free when they fill 200 baht in their prepaid accounts, while the cost per device for DTAC, including commission fees and logistics costs, is around 1,000 baht We expect aggressive handset subsidies to continue, with True looking to build market share and operators migrating customers to 3G/4G networks However, we are likely to see handset subsidies decrease in absolute terms due to lower volumes as the target market shifts to 3G and 4G from 2G Disruption from over-the-top (OTT) services will continue Thailand is likely to see a continued negative impact from the ongoing OTT uptake and resultant cannibalisation of legacy revenues The contribution of data to service revenues has been increasing from 38% in the 2015 second quarter to 47% in the 2016 second quarter and is likely to continue doing so over the near-term Making matters worse, Thailand telcos are one of the worst in the region in monetising data according to our estimates The combined effect of data substituting legacy services with poor data monetisation is likely to drive down the revenue growth potential of the industry over the medium-term Page 3

4 Composition of revenues in Thailand 1 Contribution from data to revenue increased to 47% by the 2016 second quarter from just 38% in the 2015 second quarter 2 The contribution could easily breach 50% within 12 months as telcos invest heavily in 3G and 4G infrastructure Cost per gigabyte is low in Thailand 1 Thailand s data prices are some of the lowest in the region 2 In markets like Singapore, telcos have been able to sustain revenue growth despite disruption by OTT services through high data pricing 3 Telcos in Thailand may struggle to maintain revenue growth amid disruption by OTT services and low data prices Page 4

5 Risks and Regulations Unclear spectrum roadmap Thailand s National Broadcasting and Telecommunications Commission (NBTC) has yet to outline a clear roadmap on spectrum allocations for the future A major obstacle is that the NBTC has to negotiate with state-owned enterprises on compensation to get the spectra back to the regulator DTAC stands to lose the most with the unclear spectrum roadmap since the company will be left with only 15 MHz of the 21 GHz spectrum when all of its concessions expire in August 2018, down from the 50 MHz it currently owns The government has yet to announce its plans for the expiring spectrum or provide a timeline for upcoming spectrum auctions, leaving operators in the dark Development of a spectrum roadmap may be further delayed with the introduction of a new frequency act, which, according to news reports, places the NBTC under a new Digital Economy Commission, weakening its authority The NBTC also disclosed plans in June to allocate up to 10 MHz of spectrum in the 800 Hz band This is presently used by DTAC under concession from CAT and will expire in September 2018 However, according to news reports, the NBTC and the Transport Ministry have signed a memorandum of understanding allocating the bandwidth for wireless railway communication Telecom operators have petitioned this proposal citing the efficiency of lower band spectrum in providing coverage to rural areas A decision about the auction has yet to be finalised Tower disputes could soon come to an end True Corporation and DTAC have had lingering tower disputes with CAT as a legacy of the concessionary build-transfer-operate scheme AIS has also had similar disputes with TOT, resulting in a combined 32,700 telecommunication towers being disputed between private operators and state enterprises CAT's management recently approved the state agency s plan to set up two joint ventures with DTAC: Tower Joint Venture Company and Fibre Joint Venture Company, but the plan is pending approval from both the Ministry of Information and Communication Technology and the cabinet According to news reports, this deal could resolve disputes over the ownership of over 9,000 towers and could generate annual rental revenues of around 1 billion baht for CAT, in addition to 16 billion baht in dispute settlements that CAT expects to recover AIS agreed to hand over more than 13,000 disputed towers to TOT in January, and is in talks with TOT on leasing towers for a 15-year period for its network deployments In addition, AIS and TOT officially announced a partnership on TOT s 21 GHz network (15 MHz) The terms have been agreed by both parties, and the contract is being reviewed by the Office of the Attorney General The deal could boost TOT s annual revenues by 10 billion baht, as per our estimates Page 5

6 Companies We Cover Advanced Info Service Digital Telecommunications Infrastructure Fund Jasmine Broadband Internet Infrastructure Fund Total Access Communication Our In-House Expert Wasu Mattanapotchanart Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS interest in the companies mentioned in the respective reports Page 6

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