Press ‘Play’

What’s New

• M1 has made its long‐awaited foray into the world of Pay TV with the launch of 1box. While the initial service is fairly modest, we believe this is just the tip of the iceberg with a bigger splash coming by 1H11 when content cross‐carriage is implemented. We expect M1 to be a beneficiary of the immense potential of the blurring of lines between TV and the Internet, particularly in the area of interactive IPTV.

Our View

• M1’s 1box is currently available as a value‐added service only for its fixed broadband subscribers. The four types of content – education, movies, games and music – are priced at $1.07‐5.35 per month or per view, on top of the monthly set‐top box rental of $5 (for broadband plans below 50Mbps) or $12 (for broadband plans above 50Mbps).

• While the 1box offerings are still modest, we expect more significant benefits for M1 when content cross‐carriage kicks in, and particularly when the proposed common featured set‐top box is ready. This settop box, developed by the Infocomm Development Authority of Singapore (IDA) and the Media Development Authority (MDA) under Project NIMS (Next Generation Interactive Multimedia Applications and Services), will replace the current multi‐box system and make it easier for subscribers to switch between service providers.

• The cost of entry into Pay TV is expected to be low for M1, as it will have no heavyweight content and its content will only be distributed to users upon subscription and on‐demand. Also, there will be no additional capex as there is no need for network investment. This is consistent with M1’s content‐light, low‐cost strategy.

Action & Recommendation

We maintain our BUY rating and target price of $2.63 (15x FY10F EPS). Dividend forecasts remain intact as capex assumptions are unchanged.

A quad-play operator now

M1 launches pay-TV service

Maintain Outperform. M1’s new pay-TV service, while positive, is unlikely to be a game-changer for the company given the limited content on offer. Nevertheless, we are positive on the service as it would complete M1’s quad-play offering, provide some ARPU uplift and serve as a retention tool. The earnings impact is not expected to be big in the near term, and we retain our FY10-12 earnings forecasts along with our DCF-based target price of S$2.65 (WACC 8.5%). We continue to see catalysts from capital-management potential, upside from NGNBN and the news that it is now a quad-play operator. M1 remains our top pick in the sector.

The news

M1 will be launching its pay-TV service today where it will be offering niche content in education, music, movies and games etc. The service will only be available to existing M1 broadband customers on either the ADSL or fibre service as a value-added service and would be delivered over the Internet. The content will be offered on a monthly subscription basis except for movies which are payable per view. Customers would have to rent a set-top box for S$5/month or S$12/month depending on the broadband plans they are on. They would be able to receive the programmes by linking hardware to their TV and broadband connections, can use the set-top box to surf the Internet on TV, and play back videos and photos on the big screen as well. In addition to set-top box rental, they would be charged for the programmes on an à-lacarte basis.

Comments

Not a surprise but positive. We are not entirely surprised as M1 has long hinted at its intention to offer a niche IPTV service with the advent of NGNBN. We take a positive view as the service would: 1) enable M1 to become a quad-play telco; 2) increase stickiness among its subscribers; 3) lift M1’s broadband ARPU; and 4) attract customers as the programmes are offered on an à-la-carte basis similar to SingTel’s mio-TV.

Not groundbreaking. While we view the news positively, we do not see this development as groundbreaking. The success of a pay-TV business depends on the content offered, and M1’s content is rather niche and limited. SingTel’s IPTV service did not gain much traction even with video-on-demand, serials and some sports offerings but only took off in a meaningful way when it had secured more compelling

content such as the Barclays Premier League, though at a heavy price.

More niche strategy. Given M1’s smaller balance sheet and lower financial resources relative to the two incumbents, M1 is unlikely to bid for premier content. This could hamper its pay-TV aspirations. Nevertheless, we believe the cross-carriage ruling which mandates content-sharing by operators would favour M1 in the long run.

Valuation and recommendation

Maintain OUTPERFORM; still our top pick. While we are positive on this development, it is unlikely to be a game changer given the niche content on offer and the limited impact on M1’s earnings in the near term. We leave our FY10-12 numbers intact along with our DCF-based target price of S$2.65 (WACC 8.5%). M1 remains our top pick in the sector. We continue to see catalysts from capital-management

potential, upside from NGNBN and the news that it is now a quad-play operator.