Sector Report 21 Dec 2015

Telco Sector Landscape has changed, pressuring telco stocks ► Telecom landscape has changed as a newcomer enters the market. ► Auction winners will face high license costs and related network expansion ► ► ►

capex hurting bottom lines despite ability to grab market share. We maintain Neutral rating for telecom sector from positive trend in ICT, but with negative outlook from higher competition and costs. We view ADVANC as the best choice. We maintain BUY recommendation for ADVANC but revised down target price to Bt245 from Bt266 Maintain BUY recommendation for DTAC and INTUCH with target prices of Bt47.00 and Bt99.00, respectively.

The landscape has changed The 900MHz spectrum auction took five days ending in the 198th. TRUE and JAS won the licenses with prices of Bt76.30bn and Bt75.67bn, respectively. This was the world’s second most expensive 900 MHz license cost per megahertz per population basis or Bt57/MHz/person while Hong Kong’s was Bt64/MHz/person. Nonetheless, after adjusting the purchasing power factor, Hong Kong’s was Bt51/MHz/person even though Hong Kong’s rate of return in the telecom market is higher than Thailand’s. Therefore, these 900-MHz licenses are the most expensive worldwide and represent a big burden to the winners. This should definitely pressure the overall telecom sector as JAS, a newcomer, has entered the sector with one 4G license and TRUE with two 4G licenses is likely to aggressively grab more market share for economy of scale. JAS expects to spend Bt20bn for 4G network expansion over the next three years and targets 2mn subscribers in the first year and 5mn subs within three years. In the past, when JAS entered the fixed broadband business, it aggressively dumped service package prices much lower than average prices before its debut. The company could repeat this strategy in mobile broadband business. If it does so, competition will be much more intense. Meanwhile, TRUE will have to spend significant capex for license payment and related network expansion (currently Bt55bn in 3 years) grabbing more subscribers (hoping to get 34% market share from 20%) and generating more revenues to cover its dramatically higher fixed costs. This would also result in higher competition. Winners’ curse

Thailand Research Department Mr. Narudon Rusme, CFA (No.029737) Tel: 02 680 5056

There should be considerable negative effect from the winners’ curse and losers should be negatively affected too. The successful bids by TRUE and JAS are likely to necessitate capital increases and further investments by both companies in order to fight current industry runner-up, DTAC. JAS’ shares should be negatively affected as it enters the intensified

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Sector Report 21 Dec 2015 market with an expensive license cost as it won the first lot of license which ranges in the spectrum very close to 850 MHz spectrum, there is probably some technical disturbance from 850 MHz spectrum, so JAS can actually use less than 10 MHz to provide data service. The NBTC estimated significant additional capex of around Bt3bn for the first lot winner to mitigate the disturbance. Since the 900 MHz license costs Bt75.67bn, there is a considerable negative effect on the firm’s cash flow, dividend, financial position and profitability. Although JAS insisted that there would be no capital increase, we doubt its ability to pay installments, especially the last one which would be approximately Bt60bn, since the company currently generates just Bt5bn in operating cash flow a year. The net cash flow may be even less because cash flow from 4G business may be negative. Although we think the market would speculate TRUE to be a 4G market leader providing partial positive sentiment to the counter winner’s curse in the short term, TRUE should face a big cost burden. We believe its bottom line would be dramatically affected at least in the medium term as it will incur plenty of fixed costs such as license amortization, network depreciation, financial costs, etc. TRUE should face even more negative effect than JAS since it got two licenses amounting to Bt116bn and may need a capital increase. ADVANC should be negatively affected as it lost the auction for the 900MHz and disappointed the market raising fears that it would lose its top position in the mobile market. However, we think it has the most potential for bottom-line growth among mobile operators. DTAC is more vulnerable than before, having failed to secure any bandwidth, which means it will now have to shoulder hefty revenue-sharing costs despite having a lot of spectrum bandwidth. Maintain Neutral for telco sector but with negative outlook Despite the significant negative effects mentioned above, we maintain a Neutral rating on the telecom sector thanks to the positive ICT trend such as double-digit data revenue growth and digital economy transformation. However, we added a negative outlook from possible higher competition from the new player and winners aggressively expanding their business to cover enormous costs. Higher costs across the whole industry has prompted speculation that each operator will seek partners to help capitalize on larger capabilities whilst also alleviating capital constraints. Nonetheless, on the whole the telecom sector remains a compelling investment target, due to the cash-generating nature of the business and the expansionary opportunity afforded by 4G technology. The situation is fluid however, and the next watershed moment will be marked by the operators’ push to find partners.

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Sector Report 21 Dec 2015 ADVANC, the best choice ADVANC should still reign as leader in mobile service and its potential will be unlocked as it got a 4G license and has started to offer fixed broadband services. It should not have much additional network expansion expense, as we believe most mobile operators installed high-cost equipment and infrastructure such as telecom towers and optical fiber network during the 3G expansion. The 4G upgrade would entail installing additional 4G base stations to the older towers and core fiber. ADVANC should reveal details regarding next year’s capex including 4G investment this week. We maintain a BUY recommendation for ADVANC but revised down our target price to Bt245, from Bt266, assuming more competition suppressing revenue growth and rapid handset subsidy to migrate 2G users (Bt700/subscriber and 11mn subscribers remain for migration). INTUCH is a good choice to have exposure in ADVANC. We maintain BUY recommendation, but revised down its target price to Bt99.00 to reflect the downward revision to ADVANC. We also revise down DTAC’s target price to Bt47.00 as market competition should be fiercer driving its revenue growth down. Other securities that would benefit is the digital infrastructure fund DIF since JAS will probably want to use DIF’s telecom towers as it would be the fastest way to expand network coverage.

Figure 1: Global 900 MHz license before adjusting purchasing power 70 60

64 57

50 37

40 30 20

12.5

10

9.9

9.5

9.4

Spain

Romania

Protugal

Germany

10 0 Hong Kong Thailand

Hungary

Greece

Source: Company data, AWS estimates

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Sector Report 21 Dec 2015 Figure 2: Comparison after 4G auctions Stock

4G license

Low

Upfront 4G

Related

Competitive

Effect on

Target price

regulatory

license cost

investment

ness

bottom line

(Bt)

cost ADVANC

expense

1 (15 MHz)

+

Bt40.99bn

Low

++

-

Bt245.00

DTAC

-

0

-

Low

-

--

Bt47.00

TRUE

2 (25 MHz)

+

Bt116.1bn

High

++

---

NR

JAS

1 (10 MHz)

+

Bt75.67bn

High

+

---

NR

Source: NBTC, Company data, AWS estimates

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Sector Report 21 Dec 2015

ADVANC AOT ASIMAR BAFS BANPU BAY BBL BCP BECL BKI BROOK

BTS CIMBT CK CPF CPN CSL DRT DTAC EASTW EGCO ERW

GRAMMY HANA HEMRAJ ICC INTUCH IRPC IVL KBANK KKP KTB LPN

MCOT MINT NKI NOBLE PAP PG PHOL PR PRANDA PS PSL

PTT PTTEP PTTGC QH RATCH ROBINS RS S&J SAMART SAMTEL SAT

SC SCB SCC SCSMG SE-ED SIM SIS SITHAI SNC SPALI SPI

SSI SSSC SVI SYMC TCAP THAI THCOM THRE TIP TISCO TKT

TMB TNITY TOP TRC TRUE TTW TVO UV VGI WACOAL

2S ACAP AF AHC AIT AKP AMANAH AMARIN AMATA AP APCO APCS ASIA ASK

ASP AYUD BEC BFIT BH BIGC BJC BLA BMCL BWG CCET CENTEL CFRESH CGS

CHOW CM CNT CPALL CSC DCC DELTA DTC ECL EE EIC ESSO FE FORTH

GBX GC GFPT GL GLOW GOLD GSTEL GUNKUL HMPRO HTC IFEC INET ITD JAS

JUBILE KBS KCE KGI KKC KSL KWC L&E LANNA LH LHBANK LHK LIVE LOXLEY

LRH LST MACO MAJOR MAKRO MBK MBKET MFC MFEC MODERN MTI NBC NCH NINE

NMG NSI NWR OCC OFM OGC OISHI PB PDI PE PF PJW PM PPM

PPP PREB PRG PT PYLON QTC RASA SABINA SAMCO SCCC SCG SEAFCO SFP SIAM

SINGER SIRI SKR SMT SNP SPCG SPPT SSF STANLY STEC SUC SUSCO SYNTEC TASCO

TCP TF TFD TFI THANA THANI THIP TICON TIPCO TK TLUXE TMILL TMT TNL

TOG TPC TPCORP TPIPL TRT TRU TSC TSTE TSTH TTA TTCL TUF TWFP TYM

UAC UMI UMS UP UPOIC UT VIBHA VIH VNG VNT YUASA ZMICO

A AAV AEC AEONTS AFC AGE AH AI AJ AKR ALUCON ANAN ARIP

ASIA BAT-3K BCH BEAUTY BGT BLAND BOL BROCK BSBM CHARAN CHUO CI CIG

CITY CMR CNS CPL CRANE CSP CSR CTW DEMCO DNA DRACO EA EARTH

EASON EMC EPCO F&D FNS FOCUS FPI FSS GENCO GFM GJS GLOBAL HFT

HTECH HYDRO IFS IHL ILING INOX IRC IRCP IT JMART JMT JTS JUTHA

KASET KC KCAR KDH KTC KWH LALIN LEE MATCH MATI MBAX MDX PRINC

MJD MK MOONG MPIC MSC NC NIPPON NNCL NTV OSK PAE PATO PICO

PL POST PRECHA PRIN Q-CON QLT RCI RCL ROJNA RPC SCBLIF SCP SENA

SF SGP SIMAT SLC SMIT SMK SOLAR SPC SPG SRICHA SSC STA SUPER

SVOA SWC SYNEX TBSP TCCC TEAM TGCI TIC TIES TIW TKS TMC TMD

TMI TNDT TNPC TOPP TPAC TPP TR TTI TVD TVI TWZ UBIS UEC

UOBKH UPF UWC VARO VTE WAVE WG WIN WORK

Score 90 - 100 80 - 89 70 - 79 60 - 69 50 - 59 Below 50

Range Number of Logo

No logo given

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Description Excellent Very Good Good Satisfactory Pass N/A

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Contact Branch

Head Office

Address

540 Floor 7,14,17 , Mercury Tower, Ploenchit Road, Lumphini,

Phone

Fax

02-680-5000

02-680-5111

02-630-3500

02-630-3530-1

02-261-1314-21

02-261-1328

02-884-7333

02-884-7357,

Pathumwan Bangkok 10330 Silom

191 Silom Complex Building,21st Floor Room 2,3-1 Silom Rd., Silom, Bangrak, Bangkok, 10500 Thailand

Asok

159 Sermmitr Tower, 17th FL. Room No.1703, Sukhumvit 21 Road, Klong Toey Nua, Wattana, Bangkok 10110 7/3 Central Plaza Pinklao Office Building Tower B, 16th Flr.,

Pinklao

Room No.1605-1606 Baromrajachonnanee Road, Arunamarin,

02-884-7367

Bangkoknoi, Bangkok 10700 Chaengwattana

99/99 Moo 2 Central Plaza Chaengwattana Office Tower, 22nd

02-119-2300

02-8353006

02-119-2388

02-119-2399

02-106-7345

02-105-2070

038-808200

038-807200

043-334-700

043-334-799

038-274-533

038-275-168

038-981-587

038-981-591

Flr., Room 2204 Chaengwattana Road, Bang Talad, Pakkred, Nonthaburi 11120 Chaengwattana 2

9/99 Moo 2 Central Plaza Chaengwattana Office Tower, 22nd Flr., Room 2203 Chaengwattana Road, Bang Talad, Pakkred, Nonthaburi 11120

Mega Bangna

39 Moo6 Megabangna, 1st Flr., Room 1632/7 Bangna-Trad Road, Bangkaew Bangplee, Samutprakarn 10540

Rayong

Khonkaen

356/18 Sukhumvit Road, Nuen-Phra Sub District, Muang District, Rayong Province 21000 26/9 Srijanmai Road, Tamboonnaimuang, Khon Khaen 40000

Chonburi

Chaseongsao

44 Vachiraprakarn Road, Bangplasoi, Muang Chonburi, Chonburi 20000 233-233/2 Moo2 1st Flr., Sukprayoon Road, Na Meung SubDistrict, Meung District, Chachoengsao 24000

This report has been prepared by Asia Wealth Securities Company Limited (“AWS”). The information herein has been obtained from sources believed to be reliable and accurate, but AWS makes no representation as to the accuracy and completeness of such information. AWS does not accept any liability for any loss or damage of any kind arising out of the use of such information or opinions in this report. Before making your own independent decision to invest or enter into transaction, investors should study this report carefully and should review information relating. All rights are reserved. This report may not be reproduced, distributed or published by any person in any manner for any purpose without permission of AWS. Investment in securities has risks. Investors are advised to consider carefully before making decisions.

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