TELCO – CIMB

City Telecom pulls out of NGNBN NetCo Bid

A blow to Infinity

City Telecom (CTI) has ceased to be a member of the Infinity NGNBN Netco consortium, whom StarHub and MobileOne are also members. With CTI’s withdrawal, StarHub will be taking over the role of consortium leader. M1 will continue to play an active role and Qatar Investment Authority (QIA) has been tapped to replace City Telecom in the consortium. No reason was provided as to why CTI dropped out although we believe the direction and strategy of the bid could have prompted such a move. This comes soon before the winner of the bid is announced.

Who is City Telecom? Established in 1992, City Telecom (HK) is a provider of residential and corporate fixed network and international telecommunication services. It started off as an alternative IDD service provider in 1992, before obtaining a fixed line licence in 2000. In that same year, it set up its wholly own subsidiary, Hong Kong Broadband Networks (HKBN) which is a major fixed network service operator, providing the world’s fastest residential access, with speeds hitting up to 1Gbps.

Who is QIA? QIA was established on June 23, 2005 as the investment arm of the state of Qatar. The principal aim is the investment of surplus financial resources in regional and international markets, blue chip companies and projects.

Reduces Infinity’s chances

Key loss. CTI’s pullout caught us by surprise. With CTI’s pullout, we see less odds of Infinity winning the bid for NetCo as we find approximately 30% of the criteria of the NetCo RFP (25% from quality of network infrastructure and 5% of bidder’s track record and management expertise. See Figure 1 below.) being at risk with the loss of such a key partner as CTI. QIA, is in our view, more of a financial investor given limited experience in the telco space.

Prior to this announcement, we had already regarded the SingTel led OpenNet consortium as having the better odds of winning for three key reasons:

• proposition of rolling out 2 years before iN2015 vision would be welcomed,
• significantly lower cost of rollout from having a more extensive fibre network,
• likelihood of lower civil works disruption.

Extensive experience in rolling out broadband. CTI has extensive experience in rolling out broadband as it built up its network up from scratch to compete against the bigger boys of PCCW. Today, it standard product, offers much greater speed of 100 Mbps uplink and downlink versus the incumbent’s offering of 8 Mbps downlink and 1 Mbps uplink. More crucially, CTI’s experience in building the NBN in densely populated areas by using existing infrastructure such as bridges and drains while causing minimum disruption would have proven handy and would have been a key attraction of the Infinity-led consortium.

NetCo is mildly positive to SingTel. The much improved odds of securing the NetCo bid would be slightly positive for SingTel, in our view. This would negate them building an alternative network to rival the winning competitors on top of securing them the $750m grant to upgrade their existing network. Returns from the network should offset potential loss of revenue from lower revenue of leasing backhaul capacity to StarHub and M1.

Win or lose, NetCo is mildly positive for StarHub and M1. Win or lose, we believe StarHub stands to gain. If it wins, it gains three advantages, a) part ownership of the network, saving on rental costs for backhaul, b) grant of $750m, covers approximately 50% of entire capex and c) layering of income if multiple OpCos enter the frame. If Infinity loses, both M1 and StarHub would still benefit from lower leasing costs, access to commercial and residential homes and lower interconnect charges.

Valuation and recommendation

Maintain Neutral on the sector, and Neutral for all the telcos. The dogged determination of SingTel in pursuing market share gains overshadows the consumption growth and dividend stories and trains the spotlight on margin compression. SingTel’s diversified earnings base offers better downside protection with Singapore contributing about 30% of SingTel’s earnings vs. 100% of StarHub and M1. Between StarHub and M1, we prefer StarHub for its more diversified earnings base.

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