Singapore Telcos : Downgrade M1 and STH to UW - Assessing the impact of a potential fourth operator

We recently met with the management of Liberty Wireless (Circles Asia), who are looking to participate as an MVNO in the Singapore wireless market. Liberty, a private company, is of the view that the wireless market lacks breadth of offers and there is scope for a new player to drive more service-based innovation in the market. Management believes the regulator (IDA) can consider multiple approaches for setting wholesale pricing for MVNO network access, but there is a need to take interests of all stakeholders into account. Liberty believes that it is taking a more balanced view on regulatory intervention required for the successful entry of a new player v/s potential MNO hopefuls (see link to our note with meeting with a private company MyRepublic below).

The IDA is expected to announce a regulatory framework for potential entry of a new player this month. To us, a business case for an MVNO seems more viable compared to an MNO, but we do not rule out any outcome. While the extent on impact on incumbents would depend on the regulatory outcome (earnings sensitivity and case studies in this note), we see overhang on valuations for Singapore telecom stocks continuing. We downgrade M1 and STH to Underweight, maintain Neutral on ST.

ARPU/pricing premium provide a basis to the regulator for a fourth operator. Singapore postpaid wireless ARPU is running at USD52, 40%-50% higher than markets like UK and Hong Kong. Wireless spends in Singapore as % of GDP is running at 2.8% v/s 1%-2% for other markets.

The case for an MNO v/s MVNO. We are of the view that for a potential new MNO, economics are likely to be challenging, unless significant concessions like mandated roaming are granted by the regulator. Network wholesale arrangements might be easier to implement and will be possibly more acceptable to incumbents, making a more favorable economic case for potential MVNOs.

ARPUs for incumbents will likely come under pressure. We have looked at the impact of new entrants in other markets - we see a best case scenario similar to Malaysia, where MVNOs have taken market share through aggressive pricing, not matched by incumbents that have seen negative revenue impact. A worst case scenario could be akin to France, where entry of a fourth operator led to 28-32% decline in ARPU for incumbents.

Risk reward looks unfavorable. Over the past 2 months, stock prices for Singapore telcos are down between 5%-16%. We see further downside. M1 is most exposed, with Singapore wireless service accounting for ~71% of its revenues, v/s ~52% for STH and ~15% for ST (cushioned by international exposure). In the worst case (4th MNO disrupting pricing) our DCF analysis suggests a potential c55%/ 30%/ 8% downside to M1/ STH/ ST share prices. A more benign scenario (MNVO with less disruption) suggests a potential c23%/ 15%/ 5% downside to M1/ STH/ ST share prices. (Read Report)

Read Related Report
Singapore Telcos - How likely is the entry of a fourth wireless operator? Notes from MyRepublic management meeting
Tuesday, 15 July 2014
- JP Morgan Asia Pacific Equity Research

Source : JP Morgan Asia Pacific Equity Research

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