Advanced Info Service

Investment thesis

We choose ADVANC as our ICT sector top pick due to its strong FY15 earnings momentum with the anticipated 2H15 consumption recovery, and the lower-tier data and handset market expansion. We also like it for its scope for upside from greater fixed broadband subscribers, digital life service revenue and the 4G bandwidth auctions in 2H15. 

Recap of results for 1Q15—core profit aligned with our model 

ADVANC posted a Bt9.89bn net profit for 1Q15, up 4% YoY and 8% QoQ. Stripping out extra items in 1Q15—Bt137m FX gain and a Bt227m write-off of obsolete equipment—core earnings would be Bt9.99bn, up 4% YoY and 1% QoQ. Net and core profits aligned with our models. Service revenue (excl. IC) rose 5% YoY and 1% QoQ, led by nonvoice income, up 34% YoY and 6% QoQ, which outweighed the effect of declining voice income (down 14% YoY and 4% QoQ). Service income (excl. IC) posted a YoY rise for four straight quarters and was above the 3-4% FY15 growth guidance (see page 4 for details). 

Fixed broadband subscribers targeted at 80k in the first year

The firm maintains the same FY15 operational targets—a 3-4% rise in service revenue (excluding IC), a 10% gain in handset sales with a zero GM for FY15, 70% 3G device penetration, a 100-200bps rise in EBITDA margin, Bt40bn CAPEX (excluding 4G investment) for 29k 3G base stations (including small cells), 12k access points for “AIS Super WiFi” with the speed of 650Mbps (higher than 4G) by YE15 and Bt1bn for fixed broadband (out of Bt4.6bn for the first phase). It aims to increase its fixed broadband (FBB) subscribers from currently 5.2k to 80k in the first year by offering the AIS Fibre FTTx FBB services, which were launched on April 27 in Bangkok and six major provinces. 

Penetration of lower-tier feature phone market 

We don’t expect a fast 4G network rollout in the first few years after it wins the 1800MHz or 900MHz licenses, unlike the 3G-2.1GHz network rollout. We understand that its handset strategy is to push both 3G feature phones (AIS Ola Pop: Bt799 model) and low-cost smartphones (LAVA 5.0: Bt3,290, and LAVA 5.0 PRO: Bt4,790) into the low-tier market and bundle them with the FBB and WiFi services.  

No easy task for govt’s TowerCo implementation 

The CFO believes that the govt’s TowerCo establishment—pooling all assets of state enterprises and private operators into a single company—is not easy to execute in practice due to some towers remaining subject to the arbitration process and negotiations for TowerCo’s stakeholding. NBTC has yet to release its guidance on how to deal with the remaining 2G subscribers following a 900MHz concession expiry in September 2015. He believes that the NBTC will grant the company a one-year grace period to allow it to continue using the 900MHz bandwidth for its 2G services.