Advanced Info Service

Advanced Info Service Plc (ADVANC)

2014F: high marketing expense to lift 3G devise usage. Marketing expenses are expected to continue high for at least the next 12 months in a push to entice customers to upgrade to smartphones, now at ~25%, as this will encourage migration from 2G concession to 3G license and lower roaming fees. This means continued promotions with attractive price plans bundled with smartphones.
2015: New era post concession. The 900 MHz concession will expire in Sep 2015. The NBTC is expected to conduct an auction for this spectrum, which ADVANC plans to bid for. It will then rent towers back from TOT to continue providing service to customers who are still on 2G. If the NBTC does not arrange a spectrum auction by Sep 2015, management expects a one-year temporary license, similar to True Move, whose concession already expired.
Faster rollout, faster budget expenditure. ADVANC originally budgeted Bt70bn CAPEX over 2013-2015F. By end-9M13 it had spent Bt19bn to bring its 3G-2.1 GHz network coverage to 70% of the country’s population, closing in on its target of 90% by mid-2014. With network rollout more rapid than planned, data demand is likely to explode and this plus the need to prepare for the expiration of its 2G concession in Sep 2015 means CAPEX spending is likely to be ahead of plan. Therefore, management says it is likely to bulk up its three-year CAPEX; it will give new guidance ~Feb 2014.
Cut 2013F by 2%, 2014F by 8%. Although there is no real price war yet, we do see some battles going on in terms of price competition and marketing games and this will pressure earnings. In response we are revising down 2013F by 2% and 2014F by 8%. Behind this is a 3% reduction in 2014F core service revenues to reflect the strong price competition and saturated voice revenue and a rise in SG&A of 5% in 2013F and 15% in 2014F.
Cut TP to Bt250, raise to Neutral. The downgrades lead us to trim our mid-2014 TP to Bt250 from Bt280. Although most of the negatives seem to be priced in, given the 30% share price contraction over the previous five months, we see no catalysts on the near horizon, but instead 3G cost pressure from start-up costs and high marketing expenses. This plus the anticipation of higher CAPEX guidance in ~Feb-2014 will dog the company and thus despite the upside, we raise it to only Neutral from Sell.