Advanced Info Service

Advanced Info Service Plc (ADVANC)

- Weak profit but low cost to keep 1Q14 profit unchanged qoq
We project ADVANC's 1Q14 normalized profit to stay unchanged qoq at
B9.2bn. Service revenue (excluding IC) is expected to slip by 1%qoq.
Income from voice service (61% of total service revenue) is likely to
drop by 2%qoq as people have replaced voice service with data service.
Income from non-voice service (32% of total service revenue) is likely to
grow by only 3.2%qoq (versus the eight-quarter average growth of
5.4%qoq) as a result of the promotion (selling new mobile phones with
free internet; encouraging subscribers to switch to 3G network), partially
compensating for decreasing income from voice service. However,
thanks to the promotion, the number of 3G network subscribers has
increased from 16.5 million in 4Q13 to 20 million (50% of total
subscribers), lowering overall revenue sharing cost by 6.4%qoq and
reducing revenue sharing cost/service revenue ratio from 19.6% in
4Q13 to 18.4% in 1Q14. As more subscribers have been migrated from
2G network (25% revenue sharing cost) to 3G network (5.25% revenue
sharing cost), the decrease in overall revenue sharing cost can
compensate for an increase in cost of service on 3G network investment.
Consequently, 1Q14 cost of service (excluding IC) is projected to stay
unchanged. Overall, despite a decline in income, profit would stay
unchanged because advertisement expense is likely to drop by over
26%qoq after the festival in 4Q13.

- 2Q14 profit to drop from low season
For the remainder of the year, ADVANC is projected to benefit from
decreasing revenue sharing cost/service revenue ratio as more
subscribers would be migrated to 3G network. However, 2Q14 net profit
is expected to fall qoq; 2Q14 service revenue would drop as a result of a
low season. After that, net profit is projected to rebound in 3Q14 and
make the year's high in 4Q14 thanks to strong service revenue in the
peak season. We maintain our earnings forecast; projecting ADVANC's
FY2014 net profit to grow by 10% to B39bn.

- Attractive valuation in ICT sector. Buy
Though ADVANC's profit grows at the slower rate than the sector's
average (10% for ADVANC versus the sector's average growth at 13%),
ADVANC's expected FY2014 P/E ratio is 16.6x, considerably lower than
the sector's average FY2014 expected P/E ratio of 20.6x. Thus,
ADVANC's price is likely to outperform the sector. As ADVANC's current
share price has 21% upside with over 6.0% dividend yield, we
recommend buying.