Adavanced Info Service
Price drops due to bad news. Good entry point BUY
Advanced Info Service Plc (ADVANC)
- 3G device sales promotion weakens 3Q15 earnings
ADVANC's earnings are not likely to be strong in 3Q15 due to the strategy of selling mobile phones at lower prices than their cost to encourage subscribers to switch to new 3G devices from 2G devices that depend on 900 MHz 2G network concession expiring on September 30, 2015. B117m profit from mobile sales in 2Q15 is projected to reverse to B1bn loss in 3Q15. For the mobile operation business, operating expense (cost of service plus SG&A) is projected to stay unchanged from 2Q15 because regulatory cost is expected to drop 13.3%qoq since selling mobile phones at lower prices increases the number of 3G-compatible devices and lowers use of concession with 30% regulatory cost, thus compensating for increasing overall cost (mainly from 3G investment and SG&A). However, service revenue (IC excluded) is projected to slip 0.6%qoq but rise 2%yoy due to low season, weakening profit from service and sales. Overall, 3Q15 net profit is estimated at B8.4bn, falling 14.8%qoq and 6.3%yoy.
- 4G to promote growth in 2016
4Q15 profit is expected to rebound significantly as service revenue would rebound in high season, loss from mobile sales would decrease as new iPhone 6s will be launched for the first quarter, and B3bn/quarter amortization cost from 2G equipment concession would be no longer recognized. We maintain net profit forecast at B42bn in 2015, growing 15%. Although 2016 earnings forecast may be revised down due to expense from investment in 4G network (not included in our forecast), the company does not have to recognize 2G amortization cost for the first full year in 2016, so net profit is expected to grow by over 10% from 2015.
- Negative sentiment weakens share price. Good entry point
ADVANC's earnings are projected to be strong. It would benefit most from the 4G bid late this year because it is currently the only mobile operator without 4G network. The share price has dropped significantly because the government demands penalty for the change in concession in the past; the possibility for ADVANC to actually face charge is low. For the worst-case scenario that ADVANC faces full penalty, its fair value would be slashed by B25 to B260, which still shows an upside. We reiterate BUY.
