SINGAPORE Company Update Results SINGAPORE Sector Update 19 May 2010

MITA No. 010/06/2009 MITA No. 016/06/2009

Telecom Sector

Overweight

1QCY10 Scorecard; Maintain Overweight

4000 3500 3000 2500 2000 1500 1000 Jan-08 StarHub MobileOne A pr-08 A pr-09

SingTel STI

3.7 3.2 2.7 2.2 1.7 1.2 0.7 0.2 A pr-10

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 3235%. 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.

Jan-09

Carey Wong (65) 6531 9808 e-mail: carey@ocbc-research.com

Please refer to the important disclosures at the back of this document.

Jan-10

Jul-08

O ct-08

Jul-09

O ct-09

Sector Update

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.

Exhibit 1: Summary of 1QCY10 Results Mar 10 Quarter (S$ m) Operating Revenue EBITDA Net Profit

SingTel 1640 579 341 43.30%

StarHub 557.2 118.4 42.7 22.50%

M1 249 77 39.3 42.40%

Service EBITDA Margin *Singapore Operations Only
Source: Companies, OIR

StarHub suffered the largest drop in service EBITDA margin, which eased from the typical 32-35% range to just 22.5%. According to management, it is because its practice is to fully expense the handset subsidy at the point of sale rather than amortize it over the contract period. It adds that the take-up of smartphones - especially the iPhone - was stronger than expected. Nevertheless, it remains confident of a recovery in margin in the subsequent quarter. Overall, the stronger-than-expected demand for these smartphones saw revenue for all the three telcos 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.

Exhibit 2: Acquisition Cost Trends

$387 $369 $327 $310 $304 $313 $306 $276 $231 $215 $242 $223 $193 $166 $146 $178 $152 $147 $159 $140 $148 $124 $95 $106 $89 $92 $91 $92 $97 $104 $86 $77 $79 $74 $106 $122 $196 $240 $253 $210 $290 $247 $304 $303 $355

$235

$89

$87

Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 StarHub M1 SingTel

Source: Telcos, OIR

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19 May 2010

Sector Update

Interestingly, we note that M1's acquisition cost has risen above SingTel's and is currently the highest of the three. But it was expected as we had earlier highlighted the need for M1 to sustain higher acquisition costs due to the lack of its bundling ability. However, we believe this should improve for M1 once the NBN (National Broadband Network) becomes fully operational end 2012.

Exhibit 3: Monthly Churn Rates

1.8%

1.8% 1.7% 1.6% 1.5% 1.5% 1.5% 1.4% 1.3% 1.3% 1.2% 1.2% 1.2% 1.1% 1.2% 1.2% 1.1% 1.1% 1.1% 0.9% 1.0% 0.9% 0.8% 0.8% 0.8% 0.7% 0.7% 0.8% 0.8% 0.8% 0.9% 0.9% 0.9% 0.9% 1.0% 1.0% 1.0% 1.2% 1.3% 1.2% 1.3% 1.7% 1.6%

1.1% 1.0% 0.9% 0.8%

1.1%

Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 StarHub M1 SingTel

Source: Telcos, OIR

On the other hand, thanks to the sharp increase in acquisition cost, M1 was able to bring its churn rate down to 1.4% from a high of 1.8% in 3Q08. As for the other two telcos, their monthly churn rate was relatively stable at 0.9% and 1.2% for SingTel and StarHub respectively.

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19 May 2010

Sector Update

Exhibit 4: Post-Paid ARPU Trends

$92 $90 $87 $87 $86 $90

$93 $88 $88 $86 $83 $84 $88 $85 $89 $86

$78 $74 $70 $71 $72 $71

$79

$79 $77 $74 $71 $69 $67 $69 $70 $69

$61 $59 $58

$61

$62

$62

$62

$62

$62 $59

$62 $60

$61

$60

$61

$60

Jun-06 Sep-06 Dec-06 M ar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 StarHub M1 SingTel

Source: Telcos, OIR

Meanwhile, consumer spending (ARPU) has dipped slightly in 1QCY10 but we note that this is mainly due to seasonality because of the shorter Feb month as well as the Chinese New Year festivities.

Exhibit 5: Market Share Dynamics

38.4% 38.5% 38.2% 38.0% 39.0% 40.3% 41.4% 42.4% 44.8% 44.7% 45.6% 45.9% 45.9% 46.2% 46.3%

46.0%

32.5% 33.2% 33.1%

33.1% 32.7% 31.8% 31.3% 30.4%

29.6%

28.1% 30.4% 27.8% 28.1% 28.3%

28.1%

28.4%

29.3% 28.4% 28.5% 28.9% 28.4% 28.3% 27.4% 27.4% 26.0% 26.1% 27.2% 26.8% 26.5% 26.0% 26.4% 26.5%

Jun06

Sep06

Dec- Mar06 07

Jun07

Sep07

Dec07 M1

Mar08

Jun08

Sep08 SingTel

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

StarHub

Source: Telcos, OIR

Since M1 and StarHub started to distribute the iPhone in mid-Dec 2009, both their post-paid market shares have improved slightly.

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19 May 2010

Sector Update

Exhibit 6: Broadband Growth and Market Penetration
('000) 600 500 140% 400 300 80% 200 100 20% 0 Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar04 04 05 05 05 05 06 06 06 06 07 07 SingTel 07 07 08 08 08 08 09 09 09 09 10 0% 60% 40% 120% 100% 157.9% 180% 160%

StarHub

Broadband Penetration

Source: Telcos, OIR

On the broadband front, the penetration rate has surged from 109.5% in 1Q09 to 157.9% in 1Q10, but we note that the growth came mainly from the wireless broadband segment. As such, both SingTel and StarHub only managed to increase their fixed line subscriber base marginally.

Exhibit 7: Broadband ARPU Trends
(S$) 65 59 60 62 61 61 62 60 59 59 58

55 55 50

57

57

57 55 51

50

49

45

48

40 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Source: Telcos, OIR

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19 May 2010

Sector Update

Despite the economic recovery, we note that broadband ARPUs have continued to slide further as subscribers continue to opt for the cheaper lower speed packages. However, we may start to see a potential reversal in 2011 and 2012 as subscribers may switch over to the higher speed packages offered by the NBN.

Exhibit 8: StarHub PayTV Trend
600 580 560 540 520 500 480 460 440 420 400 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 Subscribers ('000) Monthly ARPU (S$) 490 496 499 504 508 511 520 524 528 530 535 30.3 539 541 20.3 10.3 0.3 48 49 51 55 57 58 56 57 58 56 56 56 55 70.3 60.3 50.3 40.3

Source: Telcos, OIR

On the PayTV front, StarHub has managed to modestly grow its subscriber base to some 541,000 customers (penetration rate of 46.7% of all Singapore homes). While the monthly ARPU has remained fairly stable, we expect to see a slide in both APRU and subscribers in 2H10 following the loss of the 2010-2012 Barclays Premier League (BPL) and ESPN-Star Sports exclusive broadcast rights to SingTel. Separately, SingTel disclosed that its mio TV subscriber base has hit the 200k mark recently from 155k (as of end-2009). While SingTel did not provide any details about its Pay TV segment, we believe that the bulk of its new subscribers may be paying nothing until the actual broadcast of the BPL in Aug 2010. Major Pay TV revamp. Still on Pay TV, the government initiated a major revamp in the industry in Mar 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. As for SingTel, the latest ruling may mean that it would not be able to use its strong balance sheet to pay more for exclusive content to grow its fledging mio TV segment.

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19 May 2010

Sector Update

Nevertheless, we believe that there is still merit in being the original broadcaster of the content as all revenues will accrue to that party. As such, we may still see some fairly aggressive bidding for popular content. And because of the common carriage, 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. Minimal World Cup impact. Another major event happening in Jun 2010 is the World Cup in South Africa; both SingTel and StarHub have managed to secure the broadcast rights for all 64 matches. The two telcos did not reveal how much they paid for the rights, but we believe that it is probably several times higher than the US$5m that StarHub reportedly paid for the 2006 World Cup event. Looking at the current packages, which cost (preGST) a minimum of S$66 before 31 May and S$88 thereafter, we note these are around four times more expensive than the packages of S$15 and S$25 that StarHub charged in 2006.
Exhibit 9: World Cup Pricing Details

Category Consumers

Pricing Plans S$66 (before GST) for sign ups before 31 May S$88 (before GST) thereafter

Businesses Commercial Establishments

TV Screens Under 50 inches S$2888 for first TV set (screen under 50 inches) S$1888 for each subsequent set TV Screens Above 50 inches S$4888 for first TV set S$2888 for each subsequent set

Hotels and Hospitals
Source: Telcos, OIR

S$24 per TV screen/room

Media reports suggest that the pricing may be the sticking point for home viewers. Still, a dip in the take-up from home viewers could see, conversely, a better response from the business segment, as F&B establishments are likely to use the "live" telecasts to attract viewers who will not be subscribing for the event. As the pricing for businesses ranges from S$2888 (for the first TV set under 50 inches) to S$4888 (for the first TV set above 50 inches), a business customer is worth at least 44 to 55 home customers. 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 - we think that this is achievable.

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19 May 2010

Sector Update

Stable outlook for 2010. Going forward, all three telcos expect their Singapore operations to remain stable or show modest growth in operating revenues, aided by the ongoing economic recovery in Singapore and the higher expected tourist arrivals with the opening of the two integrated resorts.
Exhibit 10: Updated Guidance after 1QC10 Results

Company M1

SingTel

StarHub

Latest Guidance 2010 earnings to improve YoY Maintains EBITDA margin of 43-45% is sustainable Dividend payout of at least 80% of net profit SG operating revenue to see mid single digit growth Modest SG EBITDA growth; margin to ease to 35% from 36-38% Dividend payout of 45-60% of underlying net profit Service revenue to see low single digit growth Reduces service EBITDA margin to 28% from 32% Dividend target of S$0.20/share, or S$0.05 per quarter

Source: Telcos, OIR

But due to the growing acceptance of smartphones, most telcos also 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. Based on our review of the 1QCY10 results, we believe that the telcos have done reasonably well and their outlook for the rest of 2010 remains upbeat. Although most of the telcos are guiding for further declines in service EBITDA margins, we are not overly perturbed as we see this as a natural progression in a maturing market. On the other hand, the roll-out of the NBN from mid-2010 onwards (completion by 2012) is likely to provide different opportunities (and challenges) to all three telcos and these opportunities should allow them to offer new services to grow their margins. Last but not least, 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

Exhibit 11: Our Recommendations

M1 SingTel StarHub
Source: OIR

Price S$2.15 S$2.97 S$2.27

Our Recommendation BUY BUY BUY

Fair Value S$2.40 S$3.40 S$2.32

Div Yield 6.50% 5.40% 8.80%

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19 May 2010

Sector Update

SHAREHOLDING DECLARATION: The analyst who wrote this report holds shares in Spore Telecoms. RATINGS AND RECOMMENDATIONS: OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. - However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10% from the current price; Sell = More than 10% downside from the current price. - For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from the current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the current price. DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. Privileged/Confidential information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this message that do not relate to the official business of my company shall not be understood as neither given nor endorsed by it.

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Carmen Lee Head of Research 19 May 2010

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