No 3G spectrum auction

The IDA has announced that it has received a total of three applications for the 3G spectrum rights auction. As there was only one offer for each of the three lots, the IDA will allocate each lot at the reserve price of S$20m. The news is not a major surprise as we had not expected any new bidders to emerge from this process and is in fact positive as the three telcos avoided a bidding warfare and obtained the spectrum at a fairly low cost. The additional spectrum will give the telcos more capacity for mobile broadband. The cost of the spectrum should not affect dividend payouts given the telcos’ fairly solid balance sheet. We retain our UNDERWEIGHT stance on the sector as we remain perturbed over the rising content costs, pressure on fixed broadband ARPUs and escalating subsidies. M1 (OUTPERFORM, TP: S$2.60) remains the top pick for its capital management potential, most upside from NGNBN and as it benefits from the soaring inbound visitors.

The news

The IDA has received three applications from each of the three telcos who were interested in participating in the 3G spectrum rights auction. As there was only one offer for each of the three lots of 2×5 MHz, the IDA will not be conducting an auction and the 3G spectrum will be allocated to each of the incumbents at the reserve price of S$20m.

Comments

Not a surprise. As mentioned in our previous note, we had not expected any new bidders to emerge given Singapore’s small and mature market with well-established incumbents. We had also not expected any of the incumbents to go after more than one lot as the incumbents would have a total of 2×20 MHz, following this round of auction, which is more than sufficient in our view.

No bidding warfare, increased capacity. The development is on the whole positive as the three telcos avoided a bidding warfare and was able to obtain the additional spectrum at a relatively low cost of S$20m. Moreover, the three incumbents would benefit from having more real estate, ie spectrum, that would help increase the capacity for the three operators and enable them to cater for current and future growth in the mobile data and wireless broadband business. It would also enable them to plan their networks more efficiently with the additional spectrum.

No impact to dividend payouts. At the assigned price of S$20m, the spectrum cost would boost SingTel, StarHub and M1’s 2010 capex by 1%, 6% and 19% respectively. The spectrum cost should not affect the dividend payouts of the telcos given their solid balance sheet, in our view. Of the three telcos, M1 would be the most affected in terms of capex outlay given its smaller balance sheet but we do not think that this would inhibit any capital management potential there.

Valuation and recommendation

Maintain UNDERWEIGHT on the sector as we are concerned over the rising content cost, escalating subsidies and pressure on broadband ARPUs. Our top pick within the sector is M1 (OUTPERFORM, TP: S$2.60) for its capital management potential, the most upside from NGNBN and as it benefits from soaring inbound visitors.

Talk of 4th telco dies in the air

Remaining 3G spectrum to be shared by SingTel, M1 and StarHub

The doors to a fourth local mobile operator have now closed and Singapore’s telco scene will remain a three-cornered fight among Singapore Telecommunications, M1 and StarHub.

The Infocomm Development Authority of Singapore (IDA) yesterday announced that it would allocate the country’s remaining third-generation (3G) cellular network spectrum to the three incumbent operators in the absence of other rivalling bids.

Three lots within the 1,900 to 2,100 MHz (megahertz) frequency range were supposed to go under the hammer but the regulator received only one offer each from SingTel, StarHub and M1 when the registration deadline passed on Monday.

‘No more than one initial offer was made in respect of each of the three 3G spectrum lots available for allocation. Therefore, the 3G spectrum rights (2010) auction will not take place,’ the IDA said on its website.

The latest development means that these lots will be allotted to SingTel, StarHub and M1 at the reserve price of $20 million apiece.

This is a repeat of the scenario in 2001 when the country’s 3G licences first went on sale.

Four spectrum lots were to be parcelled off then but the IDA’s auction plan was scrapped as it garnered only three bids in the end. SingTel, StarHub and M1 ended up paying the reserve price of $100 million each for their 3G licences at that time.

The fourth unclaimed spectrum is the one that IDA is now allocating to the three incumbents. The move is expected to boost their cellular bandwidth to cope with the explosive increase in mobile broadband consumption in recent years.

The smart phone boom, fuelled by handsets such as the iPhone, coupled with the growing use of token-like 3G modems, are placing a growing strain on an operator’s existing cellular network.

Besides giving current players more headroom, the government also wanted to see if a fourth player is willing to throw its hat into the ring.

While all three telcos welcomed the bandwidth boost, they protested against the IDA’s initial plan to conduct a second 3G auction.

Instead of bidding, they had lobbied for a non-competitive, ‘administrative allocation’ approach where the remaining 3G spectrum is distributed among the trio. Should there be interest beyond the current telco trinity, incumbents should be given first dibs at acquiring the spectrum, they said.

However, the IDA eventually stood its ground, arguing that an auction is a more objective and transparent way of allocating scarce national resources such as cellular network spectrums.

Last month, it also released more details of the auction. In particular, the IDA kept the door open for a fourth operator by giving foreign players a two-month buffer between tabling their initial bids and setting up a local office.

Despite the government’s best intentions, market watchers have repeatedly said that the chances of having another telco are slim as the local mobile scene is already mature and the incumbents have entrenched customer bases. 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.

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.