TELCOs – DBSV

Hostile non-mobile

Mobile sector could benefit from lower data-cap and adoption of Android phones.

Intense competition in broadband and structural changes in pay TV may outweigh the positives.

StarHub outperformed STI by 32% in 2011, downgrade to HOLD. Prefer SingTel on valuation grounds despite hiccups from weak Indian Rupee

Positive signs emerging in the mobile sector. Firstly, telcos are offering faster speeds (4G) and better quality of service (priority pass to premium customers), to encourage users to adopt lower data-cap. During 4G launch in Dec 2011, SingTel capped 4G data at 10GB versus 50GB on 3G and intends to lower 3G data cap with more 4G roll out in 2012 (see Table 1 on next page). Lower data-cap is likely to enhance data-revenue. Secondly, Android phones from Samsung & HTC support 4G and Near Field Communication (NFC), not available on iPhone yet. 4G support is crucial as telcos may start to offer 4G over smart phones by mid 2012. Besides NFC enabled phones will allow users to “tap” and pay at over 20K retail points and taxis from June 2012 onwards. Telcos stand to benefit from lower handset subsidies (than iPhone) and revenue sharing for certain Apps on Android platform.

StarHub faces uphill task in consumer broadband. StarHub offers broadband speeds of 50 & 100 Mbps on its Hybrid Co-axial Cable (HFC) network compared to SingTel offering up to 15 Mbps using ADSL technology. As National Broadband Network (NBN) reaches 95% of population in June 2012, many of the high-end customers could switch to lower-margin fibre plans. Meanwhile, in the corporate space, StarHub & M1 concede that NBN progress is quite slow due to the lack of control over service provisioning.

Structural changes for pay TV in the longer term. Under Next Generation Interactive Multimedia, Applications and Services (NIMS) project, regulators want to support contents from various providers accessible on a common set top box. The project is likely to be awarded to one of the three telcos in 1H12F and would be based on IPTV platform in our view. StarHub may need to support IPTV platform in addition to HFC platform.

StarHub is trading above +1SD valuations. We prefer SingTel for its (i) cheap valuation of 12x forward PE versus 16x for StarHub and 13x for M1. Downgrade StarHub to HOLD as we trim FY12F/13F earnings by 3%. Maintain HOLD on M1 as consensus FY12F earnings are 7% above ours. As mobile ARPU has not increased at all, fair value accounting for handsets may lead to disappointment in 2012F.

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