Advanced Info Service

Investment thesis

Following our recent visit, we remain fully confident that ADVANC will deliver a service income recovery in 2H14 of 3-4% YoY (following flattish income in 1H14), led by a broad recovery in domestic consumption, improved network quality and more generous low-end bundled packages. We recommend accumulating the stock ahead of 4G spectrum auctioning (expected in July 2015). Our BUY rating stands, premised on a 2H14-FY15 earnings recovery, a moderate dividend yield of 6.5% for FY15 and scope for long-term upside from the new fixed-line broadband business.

Insights into 3Q14—YoY and QoQ core profit rises

We estimate a Bt8.86bn net profit for 3Q14, up by 6% YoY and 5% QoQ. Stripping out FX and write-offs of obsolete equipment, core earnings would be Bt9.09bn, up by 8% YoY and 4% QoQ. The expected core profit rise is attributable to a modest service income recovery and substantially lower regulatory costs, which should have outweighed the effect of heavier network OPEX, depreciation and amortization and marketing costs. Due to improved 3G network quality in 3Q14 and greater low-end smart phone sales, service income improved further in 3Q14, despite seasonality.

Service income (excl. IC) in 3Q14 is assumed to have risen by 3% YoY and 1% QoQ—the second straight quarter of both YoY and QoQ growth. Nonvoice income expanded by 37% YoY and 7% QoQ, we understand, outweighing the effect of a 12% YoY and 2% QoQ fall in voice receipts. Surprisingly, the YoY rise in nonvoice income growth was higher than 2Q14 number (up by 32% YoY and 10% QoQ). GM for sales would have been negative (we assume -0.7%), due to handset subsidies.

Regulatory costs should have dropped by 20% YoY and 7% QoQ, as the roaming fees for 3G subscribers using 2G concession network declined because under the terms of the roaming contract ADVANC gets a deep discount for heavier volume. Marketing expenses are estimated to have jumped 28% YoY (led by new bundled packages) but declined 6% QoQ (ADVANC spent heavily during the FIFA World Cup). Bad debts are likely to post a 79% YoY surge (flattish QoQ) in tandem with post-paid revenue expansion. We assume that the firm installed 21k 2.1GHz sites by end-Sept (19,300 sites by end-June) and had 37m 3G subscribers—85% of its total sub base (up from 80% at end-June). 

Service income recovery expected in 2H14 

In light of ADVANC’s 9M14 service income (excl. IC) growth of 1.1% and targeted FY14 service income growth of 1-2%, we forecast that its service income in 4Q14 will rise by 3-4% YoY, led by a recovery in consumption spending and a heavier bundled marketing campaign.