Telecom

Telecom 

Finally the auction!

The plunge in the share prices for ADVANC and TRUE over the past two days due to concerns about how high the license prices were going look overdone. Admittedly, the final prices are far above expectations, but at about Bt20bn above our initial estimate, ADVANC’s target price will be cut only by Bt7 and TRUE’s by Bt0.8. We maintain our BUY calls on both with a new TP for ADVANC of Bt262 and for TRUE of Bt16.2.   

 

News: The long, winding and pot-holed road toward an auction for 1800MHz licenses is finally ended and ADVANC and TRUE came out on top. ADVANC won one of the two licenses with a bid of Bt40.986bn and TRUE the second one for Bt39.792bn. The NBTC reports that Jasmine (JAS) hung in there to the last with its final bid of Bt38.996bn. DTAC was the first to pull out after a bid of Bt17.504bn.      

 

Implication: The final prices were far above expectations. We had initially thought ADVANC and TRUE would win the 1800MHz race with a bid of ~Bt20bn, but in the end, they bid pretty close to double that. This has led us to revise down our forecasts and target prices. 

 

Figure 1 shows the impact on ADVANC. In short, its target price is cut by Bt7/share to Bt262 (from Bt270), its earnings from 2016 on are cut 5% due to higher amortization and interest expenses (as we conservatively assume the license will be financed by debt) and net debt to EBITDA and net debt to equity ratios will rise to 1.02x (from 0.43x) and 1.88x (from 0.8x), respectively. 

 

Figure 2 shows the impact on TRUE. We have cut its target price by Bt0.8/share to Bt16.2 (from Bt17), reduced earnings from 2016 by 18% due to higher amortization and interest expenses (we conservatively assume the license will be financed by debt) and net debt to EBITDA and net debt to equity ratios will go up to 3.24x (from 1.65x) and 1.09x (from 0.56x), respectively. A net debt to EBITDA ratio of 3.24x looks rather high compared to ADVANC’s 1.02x, but remains in a manageable range. 

 

The win for ADVANC will allow it to again be competitive with its peers as it will now be able to offer 4G on 15MHz bandwidth on 1800MHz. For TRUE, the implication is also significant. Winning 15MHz on 1800MHz spectrum means TRUE will have 25MHz (including 10MHz on 2.1GHz) bandwidth on which to offer 4G, the most of the three leaders (ADVANC 15MHz on 1800MHz, DTAC 15MHz on 2.1GHz and 1800MHz). Higher bandwidth means TRUE can provide higher speed on 4G than ADVANC or DTAC, keeping it as market leader for 4G.  

 

After seeing the first auction, we can expect even more heat in the auction for 900MHz on December 15. JAS desperately needs to win this license in order to gain a toehold in the mobile business and to become a convergence play to compete with ADVANC and TRUE. However, we assume ADVANC and DTAC will win these licenses at a cost of Bt20bn each (or 55% above the starting price of Bt12.864). 

 

Action: We reiterate our Buy call on ADVANC with a lower TP of Bt262. In our view the recent sharp correction is overdone on fears of the sky-high price for the 1800MHz license. Our model suggests a price of ~Bt20bn over our initial assumption would cut ADVANC’s share price by only Bt7 – far less than the Bt20 collapse seen in the past two days. We maintain our Buy on TRUE with a new TP of 16.2 due to ongoing revenue market share gain theme.