TELCO – Phillip

NGNBN OpCo Winner

StarHub is the winner. The Infocomm Development Authority of Singapore (IDA) announced that it had selected StarHub as the Next Generation National Broadband Network Operating Company (NGNBN OpCo). StarHub will establish Nucleus Connect to install equipment for the active infrastructure. It will invest about S$100m and receive S$250m grant from the government for the network. Nucleus Connect will work with OpenNet, which will lay the cables for the network. OpenNet comprises Canada-based Axia and three local companies, SingTel, Singapore Press Holdings and SP Telecommunications.

Commercial services start from 2010. Nucleus Connect is expected to start commercial operations in 1Q 2010. Moreover, by June 2012, 95% of homes and offices can expect to have access to high-speed broadband Internet access.

Nucleus Connect will offer a wholesale price of S$21 per month for a 100 Mbps residential end-user connection and S$121 for a 1Gbps connection. For nonresidential purposes, it will offer a wholesale price of S$75 per month for a 100 Mbps connection.

Impact from NGNBN. Nucleus Connect will also be bringing more retail service providers in addition to the three existing players, SingTel, StarHub and M1. We expect greater competition in providing Internet services and the losers are likely to be the existing players. The benefits will be lower costs and faster access for consumers. In fact, we expect the retail price to range from S$25 to S$30 for a 100 Mbps residential end-user connection and S$140 to S$160 for a 1Gbps connection.

SingTel and StarHub are expected to see erosions in profit margins due to more competitors offering lower retail prices. For M1, which is currently the smallest player in the Internet business, we expect it to grow its Internet subscriber base as there is now greater clarity in the cost of wholesale Internet services. M1 does not have Pay TV and will have to grow its Internet business segment to maintain its revenue growth.

Stock recommendation. Currently, the Internet segment contributes 9.3% and 11.9% to the total revenue of SingTel and StarHub in FY2008 while M1 is a new player in the Internet market. We have reduced the revenue estimates for the Internet segment for SingTel and StarHub slightly from FY2010F onwards to reflect the lower retail prices. We have also increased the revenue estimate for the Internet segment for M1 from FY2010F onwards to reflect the likelihood of it gaining new subscribers. Nevertheless, as the revenue from Internet business constitutes only a small portion of the total revenue of the three telecommunications operators, there is no impact on our ratings and fair values for SingTel, StarHub and M1.

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