Advanced Info Service

Advanced Info Service Plc (ADVANC)

3Q12’s profit improves slightly from 2Q12 despite low season
Service revenue in 3Q12 recovered slightly from the prior quarter due to
benefits from the number of subscribers that increased by 1.5%qoq or
590,000 units from 2Q12, compensating ARPU that dropped slightly to B248.
However, as buyers are waiting for a launch of iPhone 5 in the end of the
year, income from mobile sales fell by 24%qoq, making sales and service
income in 3Q12 decrease 2.2%qoq. Fortunately, because of a contraction of
income from mobile sales that have substantially lower gross margin than
service income, overall gross margin decreased only slightly. Moreover, there
was also compensation from marketing and interest expense which declined
from the prior quarter. Consequently, norm profit in 3Q12 stood at B8,739m,
close to that of the previous quarter, while in 3Q12 there was also a FX gain
of B47m, making net profit increase to B8,787m, a little better than 2Q12.


Profit to peak in 4Q12 on high season, making FY forecast practical
With benefits from a high season and a sale of iPhone 5 in the end of the
year, ADVANC’s sales and service income is projected to peak in 4Q12 as well
as 4Q12’s profit that will be urged to a record high of the year. Meanwhile, as
net profit in 9M12 comprises 75.3% of our FY2012’s forecast, an actual profit
in FY2012 would be only 2-3% higher than our forecast. We, therefore,
maintain our forecast, projecting net profit in 2012 to grow by 58%yoy with a
continued growth of 12% in 2013 under an assumption that the company
would receive a new 3G license on 2.1 GHz spectrum within 18 January and
start providing service in mid-2013. After getting the new license, ADVANC
would be able to transfer 50% of its post-paid customers and 10% of its prepaid
customers under the current concession of 900 MHz spectrum to the
new license (migration), which will make income sharing (average license
auction fee included) stand at 10-12% of service income, decreasing from
the current income sharing of 25% under the current concession.


Share price already absorbs risk. Upgrade from Hold to Accumulate
In spite of the risk that the NBTC might give a new 3G-2.1GHz license to the
auction winners later than previously scheduled on 23 November (but still
earlier than the timeframe), according to legislation the NBTC has to deliver
the new license to the winners within 90 days after 18 October which is the
date of signing to acknowledge the auction result. Moreover, the NBTC will
negotiate for a decrease in service charge rate under the new license.
ADVANC’s management confirmed that the company would file a damage
claim against NBTC if the NBTC cannot deliver the license within the
timeframe or if the service charge rate required by the NBTC is irrational.
Consequently, we believe the NBTC will finally deliver the license to the
auction winners in time. We change to use 2013’s fair value which includes
the benefit from the new license at B250, implying 33% upside. In the worst
case scenario of not including the benefit from the new license, 2013’s fair
value will be B200, which is still higher than the current share price. We
therefore upgrade our recommendation from Hold to Accumulate.