Telecom

Migration to 3G is fast and reaching a high level. To enjoy the growing popularity of mobile internet usage and lower regulatory cost savings from 3G licenses compared to concessions, operators are working to build up their 3G networks as rapidly as possible. They have very been successful at migrating their 2G subs to the 3G network: migration rate to 3G for ADVANC is about 88%, slightly ahead of TRUE at 87%, with DTAC in last place with 71%. Despite these high migration rates, operators will not enjoy the full benefit of the boom in mobile internet and declining regulatory cost until smartphone penetration reaches 100%. Hence, we believe the next strategy will be to get as many subscribers as possible to put smartphones into their pockets.

Subsidizing handsets still a must. All operators need to engage in subsidizing handsets to further reduce regulatory costs and generate strong growth in non-voice revenue in 2015 and beyond. Though most premium subs, especially postpaid, have migrated to 3G and are using smartphones and penetration is steadily rising to reach 37-43% in 3Q14 from 30-35% in 2Q14, operators need even more subs to switch to smartphones. The remaining 57-63% will be more difficult to move, as these subscribers are in the lower end where smartphones are less affordable. So, in order to move them over, operators will need to give them a hand via subsidies. We expect the fierce competition in handset subsidies to continue, giving a zero margin from this area of business.      

Short-term earnings clouded by voice. For the past three quarters, voice revenue has been a burden on revenue growth and earnings for all operators. YTD, voice revenue has fallen by almost 20% YoY. We believe there are two major causes for the collapse: the economic slowdown and the cannibalization of voice by non-voice. With the economic outlook improving next year, we expect the biggest drag on voice revenue will be cannibalization. Revenue from this service will undoubtedly continue to decline but the magnitude of the decline should be less. Next year we expect a decline in voice revenue of 10% YoY compared to the 20% fall in 2014.

Top picks: ADVANC and TRUE. We maintain our preference for ADVANC with unchanged PT of Bt300, preferring it to DTAC. We expect ADVANC to continue to gain a greater market share at the expense of DTAC. We have witnessed this trend since 2Q14 after ADVANC completed its 3G network rollout. Non-voice revenue for ADVANC grew an average of 30-35% in 2Q-3Q14 while DTAC’s non-voice revenue rose at a much slower pace of 19-22%. We expect this trend to continue for at least the next six to nine months as ADVANC works to persuade its mid- to low-end subscribers to switch to smartphones. This will allow it to continue with strong growth in non-voice of 25-30% for at least the next six to nine months. We also like TRUE, but for a different story - it is at turnaround in 4Q14 and poised to become a growth stock with tremendous growth starting next year and for many years to come.