Advanced Info Service

Advanced Info Service Plc (ADVANC) 

Investment thesis

Following the conference call, we are fully confident that ADVANC’s service income will recover in 2H14, led by a consumption turnaround. Moreover, robust data revenue and greater regulatory cost saving underpinned by a targeted YE14 migration rate of 85% and a 3G-2.1GHz network rollout of more than 20,000 cell sites will facilitate stronger 2H14 earnings. There may be scope for upside from the business partnership with TOT during the NBTC’s one-year moratorium on the 4G spectrum auctions. Our BUY rating stands.

2Q14 results recap—core profit slightly below model

ADVANC reported a Bt8.47bn net profit for 2Q14, down by 8% YoY and 11% QoQ. Stripping out a Bt22m FX gain and a Bt321m write-off of obsolete equipment, core earnings would be Bt8.77bn, down by 6% YoY and 9% QoQ. Core profit was 3% below estimate, thanks to higher marketing and interest expenses than assumed. Service income (excl. IC) exceeded our model by 3% (details on page 4).

FY14 service revenue (excl. IC) growth guidance revised down

Given the flattish 1H14 service income (excl. IC), the firm has revised down its FY14 service revenue (excl. IC) growth guidance from 6-8% to 1-2%, which implies a 2H14 growth recovery to 2-4%. The new guidance is in line with our FY14 service income (excl. IC) growth assumption of 1.8%. The Bt40bn CAPEX budget stands even with the 4G auction delayed to 2015. The firm needs to add small cells to expand capacity in heavy call traffic areas and will add to its fiber-optic network for fixed broadband services.

ADVANC maintains FY14 service EBITDA margin guidance of a 300 bps rise—regulatory cost savings will offset the effect of higher marketing and other 3G-related expenses. And it has lifted its FY14 consolidated EBITDA margin by 100 bps (from flat), thanks to lower handset sales in 1H14. The firm’s 3G-2.1GHz subscribers are expected to reach 85% of total subs by YE14 (from 80% at end-June) as low-end rural users migrate. The 3G device penetration rate guidance has been revised down from 50% to 45%, due to softer handset sales in 1H14. Marketing expenses will remain high in 2H14.

Key points of conference call

The CFO said that True Mobile has been more rational in its pricing competition since China Mobile came in as a strategic partner. Due to a limited range of handset models, ADVANC will deploy 4G services on 1800MHz rather than on 900MHz bandwidth. It will clarify details with the NBTC regarding rental fees and the ownership of new assets for the one-year period using 1800MHz bandwidth. The CFO said that it would have a back-up plan if the 4G spectrum auctions were delayed beyond one year.