ADVANCE

Advance Info Service Plc (ADVANC) 

- 1Q14 profit up 7.5%qoq, down 4.4% yoy
ADVANC posted 1Q14 net profit at B9.4bn, growing 7.5%qoq but
dropping 4.4%yoy – in line with projection. Excluding an extraordinary
item i.e. a decrease in net expenditure from B538m in 4Q13 to B121m
in 1Q14, the normalized profit was B9.6bn - 3.8% better than expected,
rising 3%qoq but decreasing 2.7%yoy because of the slowing economy
and fierce competition. 1Q14 service revenue (excluding IC) slipped
1.8%yoy, while selling and administrative expense increased 31.2%yoy
from aggressive marketing campaigns to encourage subscribers to
migrate to a new 3G network before the 2G network expires in
September 2015. Although 3G investment since 2Q13 resulted in an
increasing expense, the cost of service decreased 10.1%yoy because the
regulatory cost to service revenue ratio dropped from 25.9% in 1Q13 to
19.3% in this quarter (after the migration of subscribers from 2G
network with regulatory cost (annual license fee) of 25% to new 3G
network with regulatory cost of 5.25%). Regulatory cost to service
revenue ratio in 1Q14 stayed flat from 4Q13; although the subscriber
migration increased from 9.8 million in 4Q13 to 26.2 million in this
quarter (62% of total subscribers), ADVANC had to undertake
retroactive adjustment of regulatory cost for a 2G network tower rental
income ADVANC received from its subsidiary AWN since 3Q13.
- Profit to weaken in 2Q14, yoy growth foreseen
Even though 2Q14 is a low season of the year, year-on-year profit
growth is still foreseen owing to a low profit base in 2Q13 which was the
first quarter that 3G investment expense was booked. Regulatory cost to
service revenue ratio (excluding IC) would also improve yoy due to
greater subscriber migration to 3G network and no retroactive
adjustment of regulatory cost. For 2H14, high year-on-year growth is
expected; service revenue would revive yoy after the new 3G network
can replace all 2G network in the middle of 2014, while regulatory cost
to service revenue ratio would decrease. Combined with a better
controlling of network expansion expense, FY2014 net profit would grow
10% to B39bn.
- More attractive valuation than peers. Positive sentiment waiting in 2H14
ADVANC’s valuation is cheaper than peers. The expected P/E ratio is
17.8x, versus 21.4x of the sector’s, while the current fair value provides
13% upside. Additionally, with its strong financial status, ADVANC would
be one of the winners in 1800 and 900 MHz license biddings held by the
NBTC in the second half of the year (for further data service
development to boost long-term growth), which is a positive sentiment
to increase the share price in the future. Reiterate BUY.