END OF UNIVERSAL SET‐TOP BOX DREAM HURTS M1

The IDA (Infocomm Development Authority) and MDA (Media Development Authority) have decided to drop their search for a standardised box through which the country’s various entertainment providers could reach homes.

Dubbed Project Nims (next generation interactive multimedia applications and services), it was to have provided a nationwide platform for video and interactive digital services over the next‐gen nationwide broadband network (NBN).

Delivering video over the new fibre network would have made it easier for smaller players to jump on and provide pay TV services. Home viewers could have accessed content without having to deal with multiple box providers.

The IDA started conceptualisation in 2009, and in September 2010 launched a request‐for‐proposal to the industry, to select an operator for the Nims platform.

It received bids from the country’s three telcos, M1, SingTel and StarHub. Ten rounds of discussion with each provider, including technology demonstrations later, it appears the IDA and MDA have exhausted this avenue.

The agencies said: “None of the bids, as submitted, are likely to achieve the desired outcomes.”

BT understands that there were a number of issues preventing some of the proposals from scaling, including both technology and business constraints.

The box was originally slated to be launched commercially this year.

Each of the three bidders has its own pay TV service. Incumbent StarHub has the largest, at 544,000 cable subscribers. This is followed by SingTel’s IPTV mio service at 368,000, launched in 2007.

The newest entrant, M1, has its 1box service, launched end‐2010.

The service rides on M1’s broadband services carried to homes on cable and ADSL networks leased from StarHub and SingTel respectively, as well fibre connectivity on the newer NBN.

Nims no more

We are positively surprised by the regulators’ decision to drop plans for the development of a common set-top box (STB) for pay TV. This will be positive for the incumbents, especially StarHub, as it raises entry barriers. Newcomers will now have to provide a STB instead of using a common one.

We continue to advocate StarHub, for a potential increase in its dividends or capital repayment given its low net debt/EBITDA, providing re-rating catalysts.

What Happened

Singapore’s telecom and multimedia regulators have decided to drop their search for a standardised pay-TV set-top box, dubbed Project Nims (next generation interactive multimedia applications and services), as the bids would not have achieved the desired outcome. There were issues preventing some of the proposals from gaining traction, including technology and business constraints. It was supposed to be undertaken by NIMSCo to build, design and finance the project backed by grants from the government.

What We Think

This will be positive for the incumbents, we reckon, especially StarHub, since it would raise entry barriers for newcomers. Aspiring pay-TV operators would have to develop their STB rather than turn to a common one that would probably be supplied by OpenNet.

Nims initially was supposed to lower the barriers of entry and spur new players in the PayTV market while increasing content variety. With the cancellation of Nims, regulatory risk is now lower and the probability of higher dividends or capital management from StarHub has risen, in our view. The other risk cited by StarHub is global economic uncertainties.

What You Should Do

Stay invested in StarHub, our top telco pick. We like it for a potential increase in dividends or capital repayment, given its low net debt/EBITDA of 0.5x, the lowest among Singapore telcos and substantially below its target of 1.5-2x.

1QCY12 REVIEW – OVERWEIGHT

•Stable 2012 outlook,

•But margins pressure exists

•Defensive earnings, attractive yields

1QCY12 results were in line

All three telcos recently reported 1QCY12 results which were in line with our forecasts. M1 and SingTel earnings were either spot on or within 2% of our estimates. Although StarHub’s earnings were 13.2% above our forecast, we note that the boost came from higher NBN roll-out adoption grants and higher amortised income; but EBITDA margin of 32.2% was in line with our forecast.

Review of Singapore mobile operations

No change in status quo in the post-paid mobile market – SingTel dominated with a ~47% share, followed by StarHub ~28% and M1 ~26%. Overall, the post-paid subscriber base grew by 38k QoQ to 4067k, with the bulk coming from SingTel (+30k). However, the 0.9% growth was the slowest since Mar 09; and could continue to slow as users shift towards multi-SIM plans for their mobile devices from dongles. Data as a percentage of ARPU is hovering around 37-42%, up from around 35-40% in 1QCY11; this as non-voice communication continues to gain popularity among smartphone users.

Stable 2012 outlook

Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by the increasing mobile data usage and also the NBN roll-out which is nearing completion. However, EBITDA margin outlook continues to remain fairly muted; and any boost from LTE is not likely to materialize substantially in 2012. Nevertheless, thanks to their strong cashflow generative businesses, the telcos have kept their dividend payout guidance, thus keeping their yields attractive.

Maintain OVERWEIGHT

With the exception of StarHub (+11% YTD), the other two stocks have underperformed (M1 -1.6%, SingTel -0.6%) versus the STI’s 5.2% gain. But with markets likely to remain volatile, we believe that the telcos’ defensive earnings and attractive yields offer a safe harbour for the risk-adverse investors. Maintain OVERWEIGHT. Our pick in the sector is M1.