Advanced Info Service

Advanced Info Service Plc (ADVANC)

Investment thesis
Expectations for FY14 service income are now lower, due to weak the weak 1H14 consumption environment, but we recommend looking forward to an earnings recovery in late 3Q14 through 4Q14. The market has recently penalized ADVANC too severely over intensified price competition, the NBTC’s one-year moratorium on planned auctions of bandwidth and True Mobile’s better financial position with the entry of China Mobile as a strategic investor. As such, the share price now looks more attractive, offering a 6% dividend yield. Our BUY rating stands, premised on a 2H14 earnings recovery and a good yield.       
Insights into 2Q14—YoY and QoQ core profit drops
We estimate a Bt9.0bn net profit for 2Q14, down by 2% YoY and 5% QoQ. Stripping out an extra expense in 1Q14 and FX, we assume core profit slippage of 4% YoY and 7% QoQ. The expected core profit decline is due to a decline in service revenue (squeezed by weak consumption spending and intensified price competition) and heavier OPEX, which should have outweighed the effect of lower regulatory costs. We model that marketing expenses rose by 36% YoY and 6% QoQ, led by the “3G Best Network Nationwide” campaign. Bad debts are likely to post a jump of 59% YoY and 17% QoQ in tandem with post-paid revenue expansion.
The weak consumption climate dampened service income in 2Q14. Service revenue (excl. IC) dipped by 1% YoY and was flattish QoQ, we estimate, led by voice income slippage of 11% YoY and 1% QoQ, which would have outweighed effect of nonvoice income expansion of 25% YoY and 4% QoQ. Post-paid revenue was solid but pre-paid revenue weakened. GM for sales would have dropped to 1% in 2Q14 due to price-cutting for handset sales. Regulatory costs should have declined by 25% YoY and 5% QoQ. ADVANC installed 18,000 2.1GHz sites at end-June (16,800 sites by end-March).
FY14-15 service income forecast revised down
We expect management to cut its FY14 service income (excl. IC) growth guidance from 6-8% to 1-2%, given the estimated 1H14 service income (excl. IC) dip of 1.3% YoY. We assume that the service income (excl. IC) will grow by 3% YoY in 2H14.
We have cut our service income (excl. IC) growth projections from 6% (or Bt124bn) to 1.8% for FY14 (Bt119bn) to factor in weaker 1H14 numbers than earlier assumed and from 6.3% to 5.3% for FY15 to reflect a tougher price-led competition expectation. Our net profit projections decline by 7% to Bt37bn for FY14 and by 8% to Bt43bn for FY15. Factoring our forecast downgrades and lower assumptions for the risk-free rate (from 4.5% to 4.2%) and market rate of return (from 12.8% to 12.6%), we have trimmed our YE14 target price 4% to Bt250.