Telco – Macquarie

Singapore telecoms sector

Misplaced fears on 3G auction

Event

There appear to be fresh concerns over a possible increase in competition in the mobile market post the 3G auction date announced by IDA (Infocomm Development Authority). We believe the fears are misplaced and that the market should concentrate on the more important event of NGNBN. We reiterate our view that StarHub is the best proxy to NGNBN and any weakness in the share price over the 3G auction event should be seen as an entry opportunity.

Impact

What is up for grabs?

⇒ 3 lots of 2 X 5MHz 3G spectrum up for auction: Reserve price of S$20m/lot has been set with the auction date as 15 November.
⇒ These lots have been lying idle since 2001: Ever since the three telcos were awarded 3G spectrum in 2001, these three lots have been lying idle.

What are the possibilities?

⇒ A fourth mobile operator could jump in: Two lots of 2 X 5MHz should be sufficient for a new mobile operator to start operating in Singapore with a target base of 1m subscribers. The reserve price is also attractive.

⇒ One of the existing telcos could bid for the future: In the light of exponentially increasing data traffic, one or more of the existing telcos could bid for one or more slots. This could spike up the reserve price.

⇒ If no one bids, IDA could distribute the spectrum: The three telcos have been asking for this for a while. However, IDA has been resisting this proposal as it wants a transparent auction and a higher price for lots.

⇒ Spectrum remains idle: The existing telcos have upgraded to HSPA+ network and are trialling LTE technology, which should aid network capacity as greater traffic occurs. There is also room to re-farm the 2G spectrum. Thus, the three telcos could abstain from bidding for spectrum.

Outlook

Remote possibility of a fourth player: We expect the likely outcome to bein favour of existing telcos, as we do not see a new player entering the Singapore mobile market in a hurry. Our reasons are:

⇒ Singapore is 140% penetrated in mobile: We believe penetration is at its peak with annual growth in mobile expected to be in the low single- digits. We doubt new operators would want to enter such a market.

⇒ Requires huge capex to roll out services: In addition to spending at least S$40m for two lots of spectrum, the new operator will have to shell out at least S$200–300m in upfront investments.

⇒ Virgin Mobile entered in 2002 but lasted only a year: In the less competitive market of 2002, a fourth player lasted but a year.

⇒ Only an international player with capacity to absorb initial losses could enter: Given the high capex and long gestation period to recover costs, we believe the probability of local players entering such as LGA or SuperInternet is low. An international player could take a chance on the improving 3G market and play on differential pricing.

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