Advance Info Services

Advance Info Services Plc (ADVANC) 

 

YoY growth momentum continues in 1Q15  

Higher non-voice revenue and lower regulatory cost will continue to propel YoY earnings growth in 1Q15. We expect strong earnings in 2015 of Bt41.7bn, up 16% YoY and maintain Buy with an unchanged target price of Bt300.  

Good meeting, confirming our stance. We attended a small group meeting held to provide an update on 1Q15 performance. Unusually, CFO K. Pong-Amorn joined the meeting. The conversation with him dealt primarily with recent issues. These included the auction of 1800MHz and 900MHz, the company’s backup plan if its 900MHz spectrum is not put up for auction before its concession on this spectrum ends in September, and its take on the addition of JAS into the bidding pot. We appreciated the responses, most of which were consistent with our view. The primary difference between the CFO’s view and us is the timing of the auction, which we do not expect until early 2016, not August 2015. We still Buy with unchanged DCF TP of Bt300. 

To win at least two licenses on 1800MHz and 900MHz. The CFO views that it makes more sense to auction 1800MHz and 900MHz than 2.3GHz and 2.6GHz, largely because these are already available and the National Broadcasting and Telecom Commission (NBTC) has done all the studies necessary for these spectra. The CFO believes the auction for 1800MHz will take place first and could be held in August as planned by the government, followed by the auction for 900MHz. ADVANC will participate in both and hopes to win at least two licenses, one on each spectrum. If it gets both, as hoped, it will use 1800MHz for 4G; it expects to be able to start service 3-4 months after obtaining the license. It plans to split 900MHz in half: 5MHz bandwidth for its 2G subs and 5MHz for 3G, especially in the provinces. 

Difficult for newcomers to get in. The CFO believes newcomers without a background in the cellular business would find it very difficult to run a cellular business, facing major hurdles in the form of a billing system, competition from incumbents (ADVANC, DTAC, TRUE), and difficulty in sourcing network suppliers, among others.  

1Q15 earnings to grow YoY. We expect 1Q15 core earnings of Bt9.46bn, down 2.2% QoQ but up 2% YoY. The key YoY earnings driver is lower regulatory costs due to greater smartphone penetration and strong growth in non-voice revenue. In the quarter we estimate a reduction in the ratio of regulatory cost to service revenue to 15% from 19.3% in 1Q14, accompanied by a 37% YoY growth in non-voice revenue. The QoQ slip in profit arises out of higher network opex: 1Q15 will be the first quarter reflecting the expiration of the maintenance grace period, which will raise network opex by about 4% QoQ (22% YoY).