Thailand Industry Focus Telecommunications Refer to important disclosures at the end of this report DBS Group Research. Equity 14 Mar 2016 Share repurchase could imply JAS s non-entry BUY on ADVANC (Bt193 TP), HOLD on DTAC (Bt40 TP) ADVANC to roam on DTAC s network this week DIF (Bt14.80) and ADVANC (Bt193 TP) are our favourites Share repurchase could imply JAS s non-entry. On 1 Feb 16, we released a sector report, predicting that JAS would not be able to find financial support to enter the mobile market. JAS s announcement of a share buyback (Bt6bn budget) on 7 Mar reinforced our view since the company will be left with even less cash for the necessary collateral when applying for mobile-business-related loans and letters of guarantee from banks. The deadline for the first instalment of 900MHz licence is 21 Mar 16. Maintain BUY on ADVANC, downgrade DTAC to HOLD. There have been constant news flows that may have pointed to JAS s non-entry. As a result, the share prices of ADVANC and DTAC have risen by 4% and 28%, respectively, since we upgraded their ratings to BUY over a month ago. DTAC (Bt40 TP) is downgraded to a HOLD due to i) fierce competition and strong spectrum portfolio at both TRUE (55MHz bandwidth) and ADVANC (45MHz, including TOT s 2.1GHz spectrum), and ii) lack of share price upside. We maintain BUY on ADVANC with a new TP of Bt193, up from Bt185, as we cut our FY18/19/20F capex by 9%/7%/1%, believing that capex would peak in FY16-17F at Bt40bn p.a. when 3G capacity is at its full potential and 4G population coverage is above 90% in the respective years. ADVANC to roam on DTAC s network this week. TRUE has paid its first instalment (Bt8bn) for the 900MHz licence last Friday (11 Mar), implying that ADVANC will start using DTAC s 1.8GHz network for its remaining 2G clients (around 8m) sometime this week. DIF and ADVANC are our favourite stocks. With this turbulent environment in the telco industry, DIF (BUY, Bt14.80 TP) is our top pick for its high FY yield (7%), healthy earnings growth (12%) and highly secured revenue streams. ADVANC is an attractive long-term investment for its i) healthy FY dividend yield of 6%, ii) declining capex from FY18F onwards, iii) earnings rebound in FY17F (+11%). The major driver for FY17F earnings is the lack of handset giveaways to 2G subscribers. SET : 1,393.41 Analyst Sachin Mittal +65 6682 3699 sachinmittal@dbs.com Wasu MATTANAPOTCHANART +66 2657 7826 wasum@th.dbsvickers.com STOCKS Source: Company, DBS Bank Advanced Info Service : ADVANC is the largest cellular operator in Thailand with a 44% market share. Total Access Communication : DTAC is the second largest cellular operator in Thailand with a subscriber base market share of 30%. Digital Telecommunications Infrastructure Fund : DIF is a closed-ended fund that owns towers and other related passive telecommunications infrastructure. It also owns core fiber optic cable grid. Relative performance 120% 100% 80% 60% 40% Price Bt Mkt Cap Target Price Performance (%) US$m Bt 3 mth 12 mth Rating Advanced Info Service 177 15,014 193 (8.1) (24.0) BUY Total Access Communication 41.50 2,804 40.00 (8.3) (50.0) HOLD Digital Telecommunications Infrastructure Fund 13.50 2,237 14.80 9.8 12.5 BUY 20% Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 ADVANC TB DTAC TB JAS TB TRUE TB Source: SET, DBS Bank ed-ck / sa- CS
JAS s share repurchase could imply Jas Mobile s non-entry Jasmine International (JAS) has announced on 7 Mar 16 that it plans to buy back 1,200 1,426m shares or 16.8-20.0% of its paid-up shares with the allocated budget of Bt6bn. The company will schedule another board meeting to consider fixing the price of treasury stocks on 12 April 2016. The final price will be either Bt2.96 per share, the average price during the 30-day period ending 7 Mar 16 (the day the board announced the share buyback); or Bt5.01, the average share price from 6 Mar 15 to 4 Mar 16. It is worth nothing that Thai companies rarely use the 1-year average price for share buybacks. In our view, the share repurchase could imply that JAS no longer wants to enter the mobile market as the company will be left with less cash for the necessary collateral when applying for mobile-business-related loans and letters of guarantee for the 900MHz licence from banks. JAS s potential non-entry has sent the share prices of mobile operators higher across the abroad last week. Potential speculators and investors of JAS shares should be cautious because there are two major uncertainties: i) the repurchase price is yet to be finalised; the first price (30-day) is 20% below the market price while the second price (1-year average) is 35% above the market price, and ii) the share repurchase will be in the form of a General Offer, not a typical buyback in the stock market. If more shares are offered to JAS than the amount that the company is willing to buy given the Bt6bn budget, JAS shareholders would be able to sell only part of their holdings on a pro-rata basis. Signals of JAS s non-entry Even before the share repurchase plan was announced, there has been newsflows that may have implied JAS s hesitation to enter the mobile market since we predicted JAS s non-entry in our report on 1 Feb. Major struggles include i) its attempts and failure to secure a mobile partner from Malaysia, Singapore, Korea and Japan, and ii) its loan application being rejected by Bangkok Bank twice. Bangkok Bank has declined to comment on the matter. JAS: Share repurchase and deadline for the 900MHz licence Source of all data: Company, DBS Bank Page 2
ADVANC expected to roam on DTAC s network this week TRUE paid its first instalment (Bt8bn) for the 900MHz licence today (11 Mar), and the licence should be given to the company sometime this week. ADVANC will then start using DTAC s 1.8GHz network to accommodate its remaining 2G clients (around 8m). We currently expect ADVANC to pay Bt5.5bn for 3G/4G handset giveaways and Bt2bn for 2G roaming with DTAC (5MHz of bandwidth under 1800MHz spectrum, 88% population) in FY. As of 24 Feb, the company has already migrated 4m 2G clients to using 3G/4G devices. Of the total 4m, 1.7m came to exchange their devices with ADVANC, 1.3m were on the waiting list for new devices and another 1m bought new devices by themselves and thus did not utilise ADVANC s subsidy offerings. Although ARPU of the migrated clients is unknown, AIS has been focusing on high ARPU group, consisting of 3m users (out of the total 12m) with ARPU above Bt300 per month (vs Bt150 ARPU for the overall 2G users), because this group contributed over half of the 2G clients revenue last year. Maintain BUY on ADVANC with a new TP of Bt193 Our new TP is slightly higher than the old TP of Bt185, as we reduce our CAPEX projections from FY18F onwards. Capex is expected to peak in FY on the back of i) expansion of 2.1GHz network to accommodate the migrated 2G clients and lack of coverage in some areas that had been covered by concessionary 900MHz network, ii) expansion of 4G population coverage to 50% by the end of the year, and iii) Bt7bn investment for fixed-broadband business. Capex is then expected to decline significantly in FY18 after ADVANC s 3G/4G coverage and capacity are close to their full potential by the end of FY17F. Hence, we reduce our FY18/19/20F capex by 9%/7%/1%, resulting in the new DCF-based TP of Bt193. We now project capex to be Bt35bn p.a. from FY18F to FY20F, down from Bt40bn p.a. in FY16-17F. We still like ADVANC for its i) healthy dividend yield of 6%, ii) earnings rebound in FY17F (+11%), and iii) declining capex from FY18F onwards. ADVANC: Handset subsidies (2G to 3G/4G upgrade) Note: the required top up can be used by clients for calls and data Source: DBS Bank Page 3
DIF (Buy, Bt14.80 TP) is another favourite in the sector With this turbulent environment in the telco industry, DIF (BUY, Bt14.80 TP) is another favourite for its high FY yield (7%), healthy earnings growth (12%) and highly secured revenue streams. Our FY/17F revenues are already 99%/94% secured by TRUE. In the short to medium term, a small upside surprise could be from additional leases from DTAC, In the long run, there are potential upsides from further asset injections from TRUE, including i) 7.5k towers (2G 1800MHz), ii) 2-3k towers from TRUE s FY16 capex, and iii) fibre network. The 2G towers are complete, but they are subject to legal dispute between TRUE and CAT Telecom. The towers were under built-transfer-operation (BTO) concession between TRUE, the concessionaire, and CAT, a former telecom regulator. While TRUE is not willing to transfer the ownership of towers to CAT, CAT considers the towers, along with the base stations and equipment that TRUE already transferred to CAT, to be part of the concessionary assets. This led CAT to file a lawsuit against TRUE. If TRUE wins the tower ownership, the company plans to inject the 7.5k towers into DIF. DIF may end up paying around Bt20bn-24bn for the towers (Bt2.7m-3.3m per tower), depending on the required yield (6.5-8%). Under FY16 CAPEX plan,, TRUE plans to build 2-3k 2 new towers to support the expansion of 2G/4G 900MHz network. These towers and linking fibre network may be sold to DIF next year. TRUE also plans to build more fibre optic cable on top of existing copper wire for its fixed broadband to strengthen and defend its status as the market leader. The Bt10.9bn capex budget for TrueOnline should raise its homepass coverage to 10m (half of Thailand s household) by the end of the year. The total fibre-to-the-home (FTTX) network at TRUE is estimated to be worth around Bt20bn by the end of 2016. DIF: Asset overview Source: DBS Bank Peer Comparison Market PE P/BV EV/EBITDA Div Yield ROE Cap (x) (x) (x) (%) (%) BB Ticker Name US$m 17F 17F 17F Rcmd ADVANC TB Advanced Info Service 15,014 15.9 14.3 11.5 11.1 9.5 8.4 6.3 70.7 BUY DIF TB Digital Telecommunications Infrastructure Fund 2,237 13.8 12.7 1.1 1.1 10.3 13.3 7.2 7.9 BUY DTAC TB Total Access Communications 2,804 18.6 16.4 3.4 3.1 4.9 4.4 4.0 18.5 HOLD JAS TB * JASMINE INTL PUBLIC CO LTD 735 nm nm 1.5 1.5 5.8 4.8 2.4 (2.7) NR TRUE TB* TRUE CORP PCL 5,636 nm nm 2.7 2.8 11.3 9.6 0.2 (3.8) NR Average (simple) 16.1 14.5 4.1 3.9 8.3 8.1 4.0 18.1 Source Company, DBS Vickers, Bloomberg Finance L.P *Consensus Page 4
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