Advanced Info Service

Advanced Info Service Plc (ADVANC)

 

Investment thesis

With the sooner-than-expected heightened competition from JAS and TRUE, we decided to adopt more conservative assumptions on CAPEX, blended ARPU and cumulative subscribers and cut our FY16-28 earnings forecasts and target price. Despite another FY16 earnings cut, its dividend yield is attractive at 7.5%. Our BUY rating stands.

Price-led competition might come sooner than expected 

As JAS plans an aggressive launch of 4G promotions on 15 Jan (Bt590 monthly fee at the data speed of 8GB with 350 minutes of free calls), we expect that the price-led competition, which could be either indirect handset subsidies or future direct price-cutting, might come sooner than we had anticipated. Though we believe that JAS’ aggressive 4G subscriber targets of 2m by YE16 and 5m by YE19 look difficult to achieve due to its limited 4G network which is a major constraint during the first few years, it raises concerns over the more intense competition in 2016. Moreover, the extension of supplier credit and payment terms from Hua Wei (equipment supplier) will give JAS more financial flexibility for at least the first few years to push sales harder. 

FY16-28 earnings cuts to reflect more conservative assumptions 

In light of the sped up, intensified competition from JAS and TRUE, we are taking a more conservative stance on ADVANC’s revenue and earnings projections. First, we revised up CAPEX assumptions—by 34% for FY16 (to Bt45bn), 21% for FY17 (to Bt46bn) and 16% for FY18 (to Bt47bn)—to reflect the increased 4G capacity to keep 4G network quality intact. Secondly, we slashed blended ARPU assumptions by 6%, FY16-20, to Bt239-240/sub/month and by 7-16%, FY21-28, to Bt226-240/sub/month, to factor in the potential price-cutting strategy to retain existing subscribers. 

Thirdly, we further revised down cumulative subscriber (excluding 4G) assumptions—by 7% for YE16 (to 37.6m), by 12% for YE17 (to 36.3m) and by 19% for YE18 (to 34.4m)—due to the potentially greater subscriber loss to TRUE and JAS than previously assumed. Hence, we cut our earnings projections—by 11% for FY16 (to Bt29.8bn), by 20% for FY17 (to Bt30.8bn), by 29% for FY18 (to Bt28.9bn) and by 30-40% for FY19-28. Our YE16 DCF-based target price falls by 31% (to Bt170). 

Insights into 4Q15—a slight YoY core profit rise 

We estimate a Bt10.23bn net profit for 4Q15, up 12% YoY and 19% QoQ. Stripping out other extra items in 4Q14 and FX, core earnings would be Bt10.16bn, up 3% YoY and 16% QoQ. The marginal YoY core profit rise is due to the absence of 2G asset amortization from 900MHz concession expiry and a regulatory cost decline, which will outweigh the rises in marketing, general administrative and network OPEX, and a dip in service income (excluding IC). GM for sales will be -3% in 4Q15 (against -11% in 3Q15 and 2% in 4Q14). Service income (excl. IC) will surprisingly drop 0.8% YoY and 0.5% QoQ—led by falls in pre-paid and post-paid revenues and sustained weak consumption.