Advanced Info Service

Advanced Info Service Plc (ADVANC)
3G investment despite low sales volume presses 3Q13 profit
ADVANC provided 3G service under 2.1 GHz license for the first full quarter in
3Q13, after opening 3G service in early-May 2013. There are 9 million new 3G
subscribers at end-3Q13, making 24% of total subscribers. However, the service
quality is still inferior to the rival, so 3Q13 service revenue would not grow as
blissfully as targeted. Voice revenue would fall qoq due to low purchasing power
and low season, predicted to press service revenue by 2.4%qoq. Also, mobile
phone sales revenue is likely to decrease by 10%qoq, as most 3Q13 sales are from
inexpensive smartphones due to no launching model from high-end mobile phone
brand, pressing total income by 3.9%qoq. Service cost and selling and
administrative expense are likely to drop by only 2.4%qoq. Though income sharing
has decreased due to migration of 9 million subscribers to 3G network, lowering
income sharing from 25% of revenue to 5.25% under the concession, it cannot
compensate for hurried expansion of 2.1 GHZ 3G network to provide the same
quality of service as the rival, as well as 75%qoq rise in marketing expense to
attract new 3G subscribers and bonuses for engineers who worked on 3G network
expansion. Thus, 3Q13 normalized profit would drop by 5.3%qoq to B9.2bn (rising
7.1%yoy)
- Blissful 4Q13 profit due to high season and more 3G subscribers. To grow next year
Benefits from high season and the first season of new iPhone sales are projected to
boost ADVANC's 4Q13 service revenue from 3Q13. Moreover, there would be more
2.1GHz 3G subscribers than predicted at 10-12 million units, benefiting ADVANC
with lower income sharing. That would compensate for increasing investment
budget and marketing expense. However, revenue from data service (after 3G) is
likely to be lower than expected, and marketing and employee expense would be
higher than projected. Thus, we will revise down ADVANC's FY2013-2014 net profit
forecast after 3Q13 earnings report. Preliminarily, net profit under new forecast
would grow by only 10% in 2013 and rise by 15% in 2014, after benefit from 3G
under new license is recognize for the full year.
- Short-term share price not to outperform. "BUY" for long-term investment
Though FY2013 net profit forecast is likely to be revised down, we maintain
ADVANC’s FY2013 fair value at B315. After 3Q13 earnings result is reported, we’ll
change to use 2014 fair value, which is close to B315 with 19% upside, while
dividend yield is expected at 4-5% per year. We recommend "BUY" when the share
price weakens.