TELCO – AmFraser

Mobile broadband bumps numbers up

Investment Highlights

• IDA statistics show aggregate residential and corporate broadband subscribers grew a strong 9% QoQ in 3Q09 to 1.6 million. But fixed broadband (BB) subscribers – predominantly xDSL and cable modem subscribers – grew a slower 3% QoQ to 1.1 million. The fixed BB market share continued to fall from 77% at end 2008 to 66%.

• Mobile broadband provided boost, surging 26% QoQ to 560,000 subscribers. Voracious appetite for Internet access over mobile networks via smartphones and laptops, remain unabated. Via laptop access alone, M1 reported a 9% QoQ rise in mobile data users to 149,000. Including those accessing via smartphones, M1’s base is 35% higher at 201,000, after net adds of nearly 8,000/month in 3Q09. SingTel added a much stronger 27,000/month by this broader measure to 306,000 subscribers, attributed largely to its launch of the new iPhone 3G S. StarHub does not disclose its mobile data user base, but revealed a 36% QoQ surge in mobile data traffic to 2.2 million gigabytes in 3Q09.

• StarHub continues to take fixed broadband market share from SingTel. StarHub’s cable modem platform enjoyed net adds of 7,500/month in 3Q09, far exceeding net add of 1,100 for xDSL users on SingTel’s platform. That said, much of StarHub’s net adds were due to its free 1Mbps offering bundled with its HubStation service (a value-added cable TV set-top box). As StarHub reported 392,000 paying broadband subscribers, its free 1Mbps service accounted for net adds of 6,500/month. Overall, cable modem BB had a market share of 52%, with xDSL having 48%. StarHub’s paying cable modem base had a share of 36%.

• Legacy broadband approaching saturation. While IDA reports household broadband penetration at 129%, this figure is being bumped up by double counting from the inclusion of mobile broadband. We estimate household broadband penetration at closer to 80%, stripped of mobile BB. Even so, this represents a saturated market for broadband. On paid BB services, take-up has been hovering at an unexciting 1% QoQ growth in recent quarters. We project StarHub reporting 6% YoY growth in paying broadband subscribers to 397,000 for FY09, and SingTel to report 2% YoY growth to 510,000 for FY10 (YE March).

• Broadband ARPU to fall in run-up to NGNBN. After a 7% QoQ fall in 2Q09, StarHub continued to see a 2% QoQ fall in 3Q (to S$50/month) due to down-trading of broadband speeds. SingTel fared better at -1% QoQ fall in 3Q09 (to S$59.5/month) and flat for the previous quarter. In the run-up to the commercial launch of the Next Generation National Broadband Network (NGNBN) in 2Q10, we expect downward pressure on broadband ARPU to continue.

• Next growth phase from NGNBN from 2Q10. NBN’s network rollout by OpenNet (NetCo in which SingTel has 30%-stake) is scheduled for 60% completion by end 2009. After which, Nucleus Connect (StarHub’s 100%-owned OpCo) will start to wholesale fibre connectivity in 2Q10. As NBN provides broadband speeds starting from minimum 100Mbps, scalable up to 1 Gbps, Retail Service Providers (RSPs) will be tagging on advanced applications and services for a higher value proposition. M1, StarHub and SingTel will be participating as RSPs, among other entrants to broadband.

• New NBN opportunities have biggest impact on M1. We think incremental benefit will be felt most at M1, which is hitherto a mobile service provider while NBN opens up a new revenue stream. Whereas incremental benefit to StarHub and SingTel will be more marginal as they shift their legacy broadband base over to NBN.

• Reiterate BUY rating on M1 with fair value at S$2.20/share. Maintain HOLD ratings on StarHub and SingTel.

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