Singapore Telecoms Sector - Postcards from Hong Kong: Increasing OTT threat


The HK pay TV market has seen the entry of a new OTT player, Letv. The company has won EPL rights for HK for the next three seasons. We believe the emergence of Letv has long-term ramifications for the regional pay TV market as it marks the entry of a major OTT player.

Pay TV in Singapore has acted as a strong bundling proposition. We believe increasing popularity of OTT services can reduce bundling attractiveness. We think OTT presents a long-term challenge for the current pay TV model in Singapore given a lack of strong local content.

With IDA exploring the possibility of the fourth cellular operator in Singapore, we believe the emergence of OTT services can enhance competitiveness of the fourth cellular operator in the medium to long term as appeal of pay TV services reduces with time.

We remain UNDERWEIGHT on the Singapore telecoms sector as we see a high probability of a fourth cellular operator. We see further downside in stock prices of M1 and StarHub as they are not baking in the complete financial impact from the potential entry of a fourth operator. SingTel is our top pick. Click here.

Emergence of a major OTT player in HK
The HK pay TV market has seen the entry of a new player—Le Corporation Ltd (Letv). Letv is one of the leading online entertainment portals in China and recently entered the HK market to expand its overseas business. To achieve its ambition, Letv has won the HK rights of the English Premier League (EPL) for the next three seasons (2016-17–2018-19). The company has also entered into a partnership with HKBN to expand its footprint in the HK pay TV market. We believe the emergence of Letv in HK has long-term implications for the Singapore pay TV market as it marks the entry of a major over the top (OTT) player in the region.

Singapore: Pay TV acts as a strong bundling proposition
Though the contribution of pay TV to Singapore telcos' profitability is low, the product acts as a strong bundling proposition. Historically, SingTel and StarHub have gained traction in the Singapore cellular market by employing pay TV as an effective bundling tool. StarHub entered the Singapore cellular market in 2000 as the number three operator and became the number two operator by 2005 due to its ability to bundle pay TV with broadband and cellular services. SingTel's entry in to the pay TV market in 2007 helped it to increase its dominance in the cellular market as its bundling proposition became attractive with the filling of missing link, pay TV. We believe the increasing popularity of OTT services has the potential to reduce bundling attractiveness. Additionally, a lack of strong local content complicates the matter further for the Singapore pay TV market, in our view. We think OTT presents a long-term challenge for the current pay TV model in Singapore and operators need to realign their business strategies to account for the changing landscape.

OTT increases competitiveness of potential fourth operator
With IDA exploring the possibility of a fourth cellular operator in Singapore, we believe the emergence of OTT services can enhance competitiveness of the fourth cellular operator in the medium to long term as the appeal of pay TV services reduces with time. Already, new fibre broadband resellers such as My Republic and ViewQuest are promoting their broadband services by offering OTT services such as Netflix, Hulu etc., with their VPN and broadband services. With Netflix also looking to launch services in HK and Singapore in 2016, we believe pay TV dynamics can change in Singapore in the medium to long term.

Remain UNDERWEIGHT on the sector; SingTel our top pick
We remain UNDERWEIGHT on the Singapore telecoms sector as we see a high probability of a fourth cellular operator. We expect pricing headwinds emerging in the Singapore cellular sector over the next 2-3 years. M1 and StarHub are likely to be impacted the most from increasing competition in the cellular market given their substantial exposure to the sector. Even after the recent stock price correction, we see further downside in both the names as we think consensus financials are not yet baking in the complete financial impact from the potential entry of fourth operator. We like SingTel as it offers unique combination of dividends and growth. Further, it is least impacted by potential rising competition in the cellular sector (accounts c5% to our SoTP). Key upside risk to our forecasts/valuations arises from the absence of a fourth cellular operator in Singapore. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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