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.

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.

Telco stocks slip on fears of keener competition

High mobile penetration makes it unlikely for new player to bid for final 3G spectrum

TELCO stocks fell yesterday on concerns that more competitors may join the market, after the government announced that it is seeking bids for its final third-generation (3G) mobile spectrum.

But market watchers felt that the selling was unwarranted, as the high mobile penetration in Singapore makes it unlikely for a new player to bid for the spectrum.

Singapore Telecommunications (SingTel) dipped as much as 2.3 per cent yesterday before closing 0.3 per cent lower at $3.10. StarHub ended 2.8 per cent down at $2.42, while M1, the smallest of the three operators, slipped 1.8 per cent to $2.22. The benchmark Straits Times Index was marginally up at 3,036.09 points yesterday.

Despite opposition from incumbent telco operators, the Infocomm Development Authority (IDA) of Singapore said that it will go ahead with plans to auction off three lots of radio frequencies within the 1,900 to 2,100 megahertz (MHz) range.

The auction documents were published on IDA’s website last Friday. IDA said it will accept minimum bids of $20 million for each radio frequency bandwidth at an auction set for Nov 15. Bidders will not be limited to the three existing telcos.

IDA had in 2001 issued four spectrums, of which three spectrums were snapped up by SingTel, StarHub and M1 for $100 million each, leaving one unclaimed band which IDA is now seeking to allot.

Responding to the news, DMG & Partners Securities reaffirmed its ‘neutral’ call on the telco sector yesterday on expectations that competition in the industry will intensify.

‘We question the rational of a fresh auction as the additional spectrum could otherwise be more equitably distributed among the existing operators to meet the rising 3G data uptake,’ the brokerage said in a note.

But independent telecoms consultant Soh Siow Meng noted that the prospect is slim for a fourth operator to enter the market given the high mobile penetration in Singapore.

There were seven million mobile subscriptions in Singapore as at June this year, translating to a penetration rate of 140.7 per cent, IDA data shows.

‘For a new player to invest in a new network and possibly get into a price war with the three existing mobile operators, I don’t think this is a feasible business for the new player,’ Mr Soh said.

James Sullivan, head of Asia Telecom Research at JPMorgan, also noted that Singapore’s high penetration and small market size make it more likely for the incumbents to use this as an opportunity to buy additional spectrum to shore up their wireless broadband capabilities.

In the meantime, rumours that SingTel is likely to bid for the UK’s Cable & Wireless Worldwide appeared to have been quashed after SingTel clarified in a meeting with analysts that it wants to focus on the Asia-Pacific region.

Citi analysts Arthur Pineda and Ravi Sarathy said that this indicated to them that ‘there is likely to be limited interest on the part of SingTel in acquiring C&W Worldwide, contrary to UK press reports’. The speculated move was, however, perceived positively by various research houses given C&W’s attractive growth and valuations.

CIMB maintained an ‘underperform’ call on SingTel yesterday with a target price of $3.09 in view of headwinds faced by its key units. DMG’s top pick for sector exposure is M1 with a ‘buy’ call, while it is keeping ‘neutral’ on SingTel and StarHub.

3G spectrum sale as bargaining chip?

• Three lots of 3G spectrum on sale with three potential bidders.

• Theoretically a fourth operator can participate in the auction, practically no one should be interested.

• This could be a bargaining chip in the hands of SingTel.

• Prefer SingTel and M1 to StarHub.

Three lots of 3G spectrum on sale. The telecom regulator, IDA would be auctioning three lots of additional 3G spectrum in 1900-2100 MHz band , with reserve price of S$20m for each lot. Applicants wishing to secure the spectrum must submit offers by 4 October, with the auction starting on 15 November.

Theoretically a fourth operator can participate, practically, no one should be interested. We like to remind investors that new entrants in the broadband space, LGA and SuperInternet are retail service providers (RSPs), who do not own any infrastructure. 3G spectrum, on the other hand, is part of mobile infrastructure, which needs high upfront investments. RSPs are equivalent to mobile virtual network operators (MVNOs) who do not need additional spectrum, if cellular operators lease mobile infrastructure to them.

Bid price may exceed the reserve price if SingTel decides to bid for 2 lots. Incumbents wanted IDA to simply allocate one lot of 2x 5MHz to each operator. However, IDA disagreed and aims to secure higher price by allowing each operator to bid for up to two lots instead of just one lot. In the 2001 auction, each lot of 2x 15 MHz spectrum was allocated (without auction) to the 3 operators at S$100 million each. Recently, India recently concluded its own 3G auction that generated S$20 bn for the local government. While India is not a right comparison for Singapore, we believe 3G spectrum is worth more as data traffic is growing exponentially requiring more spectrum and capex. An aggressive SingTel may be willing to secure 2 lots of spectrum, spiking up the price. This could be a bargaining chip in the hands of SingTel with StarHub and M1 encroaching into SingTel’s traditional stronghold of SME and corporate broadband. StarHub and M1 could be impacted if bid price is higher than S$20m, especially StarHub with higher dividend commitments..

Prefer SingTel and M1 to StarHub. We prefer SingTel for an improving Bharti (1Q11 was the bottom for Bharti) and attractive valuations of 12.1x FY11F PER at over 10% discount to its historical average of 13.4x. We like M1 for its sustainable 6.5% dividend yield and as key beneficiary of National Broadband Network. For StarHub, we estimate that its group equity may turn negative in 2012F, if it continues with 20 cents DPS.

Door swings open for fourth mobile operator

IDA to auction off final 3G spectrum in November despite opposition from incumbents

Local authorities will go ahead with plans to auction off Singapore’s final third-generation (3G) mobile spectrum this November despite opposition from incumbent operators.

In doing so, the government is also keeping the door open for a fourth player to break the country’s decade-long telecommunications trinity.

This 3G spectrum, which has been left unused for the last nine years, is set to go under the hammer on Nov 15.

Three lots within the 1,900 to 2,100 MHz (megahertz) frequency range will be up for grabs this time round and the reserve price for these have been set at $20 million each.

These additional details were disclosed by the Infocomm Development Authority of Singapore (IDA) in a set of auction documents published on its website last Friday.

The move is envisioned to provide existing operators – Singapore Telecommunications, StarHub, and M1 – with additional cellular bandwidth to cope with the explosive demand in mobile broadband services in recent years.

IDA statistics show that some 5.5 million wireless broadband users are now using smart phones and mobile broadband sticks to surf on the go, a trend which places a growing strain on a telco’s cellular network.

In addition, the IDA previously said the auction could also pave the way for a fourth mobile operator to join the scene.

All three incumbents protested the auction when the idea was first floated in March this year.

Instead, they collectively mooted a non-competitive, ‘administrative allocation’ approach where the remaining 3G spectrum is apportioned to them instead.

‘An auction will be a more efficient, objective, and transparent approach for allocating scarce resources because it relies on market forces to allocate them to those who value them most,’ the IDA said in its defence last Friday.

‘This takes into account the fact that radio-frequency spectrum is a scarce and finite resource and that a market-based allocation approach, such as an auction, is more effective in ensuring spectrum optimisation by operators,’ it added.

This was the same route it took in 2001 when the 3G spectrum first went on sale here.

Four lots were to be parcelled off then but the auction was scrapped as it only garnered three bids in the end.

SingTel, StarHub, and M1 eventually paid the reserve price of $100 million each for their 3G licences in 2001. The fourth unclaimed band is the one that IDA is now looking to allot.

Under IDA’s latest auction rules, the three incumbent operators can only bid for a maximum of two spectrum lots in the November auction.

Interested bidders must submit their initial offers by Oct 4 and they must be backed by bank guarantees, the regulator said.

Other companies outside Singapore’s telco fraternity are welcome to throw their hats into the ring but the spectrum will only be allotted to firms with an established local presence.

However, the IDA is giving interested foreign companies some leeway.

‘It is not necessary for such an entity to have been established in order for a bidder to participate in the auction,’ the regulator said.

This gives a new player a time buffer of at least two months between tabling their initial bids and setting up a local subsidiary.

However, market watchers believe the chances of having a fourth operator are slim as the incumbents have entrenched customer bases and they can be expected to defend their turfs aggressively.

Singapore did have a fourth operator once in 2002 in the form of Virgin Mobile, a joint venture between SingTel and Richard Branson’s Virgin Group.

However, it failed to make a dent in the market and the company pulled out within a year.