Likely muted World Cup demand

Likely muted World Cup demand. The month-long 2010 World Cup campaign kicked off in South Africa last Friday. As a recap, both SingTel and StarHub have managed to secure the broadcast rights for all 64 matches of the month-long 2010 World Cup event in South Africa; this was done via two separate non-exclusive contracts after their earlier joint bids were repeatedly rejected by FIFA. However, various media reports suggest that the take-up rate for the subscription packages could be muted. For example, a quick poll done by The StraitsTimes just a day before the kick off found that only 37 among the 625 HDB households (6% take-up rate) it surveyed had signed up for the package – the high pricing of the packages was given as one of the stumbling blocks.

Pricing may be the sticking point for home viewers. As mentioned previously in our May report, we believed that the higher pricing of S$88  before GST (nearly 4x more expensive than the 2006 World Cup) would be a sticking point for home viewers. According to data compiled by Bloomberg, the charges make Singapore one of the most expensive places to watch the World Cup. We noted that the packages were also  higher than our back-of-the-envelope calculation of around S$40.Conversely, a dip in the take-up from home viewers could see better response from the business segment, as F&B establishments use the "live" telecasts to attract viewers who are not subscribing for the  event. Assuming that the telcos paid a total of S$20m for the rights and that the average subscription price is S$70/subscriber, the telcos would probably need to sell 280k packages to break even (before advertising revenue).

WC costs felt in 2Q and 3Q. In any case, we expect to see higher content costs being booked in the second and third quarters, leading to  slightly depressed margins for both SingTel and StarHub. However, if the take-up rate comes in worst than expected, we note that there is a  risk of seeing further margin compression. On the other hand, we see M1 Ltd emerging as a better bet (at least in the near term) as it is not going to face this risk of a World Cup disappointment in the coming two quarters. That said, we continue to like the telcos for their defensive earnings and high dividend yields, especially in the increasingly volatile market. Maintain OVERWEIGHT.
 

1QCY10 Scorecard; Maintain Overweight

1QCY10 results show margin compression. All three telcos – MobileOne (M1), SingTel and StarHub – showed signs of margin compression in their 1QCY10 results recently, no doubt hit by higher handset subsidies for highly sought-after “smartphones” like the Apple iPhone 3GS. Still, the strongerthan-expected demand for these smartphones saw revenue coming in ahead of our estimates.

Review of operations. As a result of the higher handset subsidies, acquisition costs for all the three telcos have risen quite sharply, and they are expected to remain relatively high as smartphones remain hotly sought after. Meanwhile, consumer spending (ARPU) has dipped slightly in 1QCY10 but we note that this is mainly due to the shorter Feb month as well as the Chinese New Year festivities. On the broadband front, while both SingTel and StarHub have managed to increase their subscriber base, the ARPUs have declined. For Pay TV, StarHub continued to add new subscribers, as did SingTel, but StarHub’s ARPUs have come down and may continue to decline in 2HCY10.

Major Pay TV revamp. Still on Pay TV, the government initiated a major revamp in the industry by requiring Pay TV providers to cross-carry each other’s content that is acquired or renewed on an exclusive basis. In short, Pay TV customers will be able to watch all Pay TV content with their preferred operator and need not pay any extra fees for doing so. Given StarHub’s much larger installed base, we believe the latest development is slightly more positive for StarHub. We also think that the move may provide an opening for other players like M1 to enter the market without having to spend too much on building their own Pay TV infrastructure.

Stable outlook for 2010. Going forward, all three telcos expect their Singapore operations to remain stable or show slight growth, but most note that EBITDA margins are likely to decline slightly this year; StarHub for example, expects its EBITDA margin to hover around 28% vs. the historical average of 32-35%. Nevertheless, due to their strong cashflow-generating businesses, the telcos have largely kept their dividend payout guidance: M1 to pay at least 80% of underlying net profit; SingTel to pay 45-60% of underlying earnings; StarHub to pay S$0.20/share, or S$0.05/share per quarter.

Maintain Overweight. In light of the increased volatility in the market due to the ongoing uncertainties in Europe, we continue to like the telcos’ defensive earnings and relatively attractive dividend yields. Maintain OVERWEIGHT.

iPhone still leads in Singapore: AdMob

iPhone OS is also the leading OS in Australia and HK

THE iPhone still leads the pack of smartphones in Singapore, according to a recent report on the growth and usage of mobile Internet by AdMob, one of the world’s largest and fastest growing mobile advertising companies.

According to the report, handsets running the iPhone OS (operating system) have been some of the most sought after mobile devices in Singapore since October 2009, with an increase of almost 200 per cent in unique devices.

As at March 2010, the iPhone OS accounted for 89 per cent of smartphone traffic in Singapore, forming a significant proportion of marketshare.

The iPhone OS is also the leading OS in Australia (88 per cent) and Hong Kong (78 per cent), based on March 2010 traffic share.

Singapore also had the highest traffic from smartphone devices at 84 per cent of the first quarter of this year, rising 7 per cent from Q4 2009, despite traffic from smartphone devices in South-east Asia decreasing by 2 per cent to 38 per cent. Vietnam showed the weakest traffic from smartphone devices at 20 per cent, declining 2 per cent.

This quarterly South-east Asian mobile metrics report released by the company tracks the growth of mobile devices and usage, as well as manufacturer share trends, smartphone operating systems share and other devices in South-east Asia, Australia, and India in the first quarter of 2010. It then aggregates the data collected to provide insight on major trends in the mobile ecosystem.

For the first quarter this year, ‘there has been tremendous growth in the mobile Internet market regionally, with different reasons driving each market’, Jeff Merkel, AdMob’s vice-president and managing director of Asia-Pacific and Latin America, told BizIT. While smartphone devices, in particular iPhones, are strong drivers for the Singapore, Hong Kong and Australian markets, the Nokia platform remains dominant in India and Indonesia.

Commenting on Singapore’s outlook for the rest of the year, Mr Merkel said that ‘growth prospects are positive despite its limited population’, citing ‘improved data plans and rich and interesting mobile content’ as key drivers.

Mr Merkel also said that HP’s (Hewlett Packard) recent move to acquire Palm, a provider of smartphones powered by the Palm webOS mobile operating system, will prove ‘challenging in this competitive market.’

Nonetheless, he noted that Palm has an ‘interesting user interface, and it would be interesting to see how it can be made use of.’

According to the report, the Nokia N70 is the most popular smartphone device in countries such as the Philippines and India. It uses the Symbian OS, which is the most popular operating system in the region and accounted for 62 per cent of smartphone traffic in the first quarter this year, despite a traffic share drop of 4 per cent.

The iPhone OS came in second at 33 per cent of Q1 2010 smartphone traffic, up from 30 per cent in Q4. Jointly, Symbian and iPhone OS account for a 95 per cent share, down one per cent from the last quarter of 2009.

According to the report, manufacturers in South-east Asia, not including Nokia, Apple and SonyEricsson, accounted for 26 per cent of traffic, an increase from 21 per cent last quarter. LG and Motorola, both at one per cent each, gained significant traffic share.

Despite leading the manufacturer share, Nokia showed a loss of market share from 52 per cent to 47 per cent, while Apple had 15 per cent and SonyEricsson had 11 per cent of the traffic share based on Q1 2010 traffic. This data is extrapolated from AdMob’s mobile ad network and only looks at smartphone share.

No edge scored with World Cup

• Both StarHub and SingTel have secured broadcast rights to 2010 FIFA World Cop, almost at the last hour much to the relief of die-hard followers in Singapore. Both operators will be offering all 64 matches ‘live’ over their TV, internet and mobile platforms.

• This turn of events is unexpected. Previous joint-bid by the two operators was rejected by FIFA. And while the two now secured the rights as separate bids, this non-exclusive award appear little different as both operators will offer the same pricing to consumers.

• We therefore conclude that the combined value of the separate bids is higher than the rejected joint bid. While we cannot confirm whether the bids for both operators are similar, to be sure, the content cost impact will be more visible on StarHub’s bottomline.

• Both operators will charge common pricing for the World Cup package – at $66 for early birds signed up by 31 May 2010, and after at $88. This is significantly higher than the $10.50 to $26.75 packages StarHub charged for 2006 World Cup.

• The hike in pricing is a strong indication of the premium in the bids. We think this just about covers costs for StarHub at best, with the event meant more as a branding and marketing exercise.

• Both operators are at status quo in respect to their Pay TV subscriber base. As both have secured rights, World Cup offers no edge to either operator.

• As such we expect little impact on StarHub’s bottomline, biased on the downside. On announcement of its 1QFY10 results on 6 May, we had just cut FY10F EPS by 11% (also see Report 7 May). At the same time, we lowered FV based on DCF approach, by 4% to $1.88. We’re comfortable to keep these numbers.

• No change to our ratings – SELL StarHub (FV $1.88) and HOLD SingTel (FV $3.05).