Telecom

Telecom 

 

The fight for the 1800MHz license was long and intense and we expect no difference at the 900MHz auction on Dec 15. We double our license price assumption to Bt40bn, ~300% above the Bt12.864bn starting price and expect ADVANC and DTAC to win with TRUE as a wild card. We cut earnings for ADVANC from 2016 onward by 5% and DTAC by 28% and lower ADVANC TP to Bt255 (from Bt262) and DTAC to Bt56.5 (from Bt65). ADVANC remains on our buy list as we feel the market has pushed price down more than is warranted and continue to Buy TRUE as better network quality will continue to give it more of the market.  

 

Focus now on 900MHz. The next auction is on December 15 for licenses on 900MHz. Similarities to the 1800MHz auction are the number of licenses (two) and the qualified bidders (ADVANC, DTAC, TRUE and JAS). The differences are in the starting price for the license (Bt12.864bn vs. Bt15.912bn) and the license bandwidths (only 2x10MHz for 900MHz vs. 2x15MHz for 1800MHz). We assume the auction takes place and ADVANC and DTAC win at a price of Bt40bn (310% above the starting price).     

 

Why ADVANC and DTAC are expected to win: 

 

ADVANC must win a 900MHz license since its 2G subs are still on this spectrum, generating about Bt1.6-2bn per quarter (or about Bt7.5bn a year). Strongly grounded financially (balance sheet and cash flow) and in the interest of business continuity, ADVANC should get a license.  

 

DTAC has a stronger incentive to fight for this license than for the 1800MHz license, as its only lower spectrum (850MHz) expires in 2018 and optimal operations requires a combination of lower and higher bands. According to a statement by the NBTC, after DTAC’s concession ends, this spectrum might be used for security purposes rather than be re-farmed and auctioned.  

 

Raise final price to Bt40bn Given the brutal fight over 1800MHz, we believe our Bt20bn price for 900MHz is low and double it to Bt40bn from Bt20bn, equal to the 1800MHz license.  

 

Figure 1 shows the impact on ADVANC. In short, its target price is cut by Bt7/share to Bt255 (from Bt262), 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 1.59x (from 1.02x) and 2.93x (from 1.88x), respectively. 

 

Figure 2 shows the impact on DTAC. We have cut its target price by Bt8.45/share to Bt56.5 (from Bt65), reduced earnings from 2016 by 28% 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 2.14x (from 0.71x) and 2.15x (from 0.72x), respectively.  

TRUE is the dark horse. Everyone expects ADVANC and DTAC to win the 900MHz battle. The surprise will be if TRUE (not JAS) wins and forces DTAC to drop out. As users turn to more data consumption, bandwidth becomes crucial. Think of it like a highway – a broader highway (bandwidth) means more and faster traffic, i.e. faster uploads/downloads and better network quality. TRUE’s win of the 900MHz license would give it the largest bandwidth of all: 55MHz (on 850MHz, 900MHz, 1800MHz, and 2100MHz) and the best combination of lower and higher bands (see Figure 1). The acquisition of a 900MHz license would strengthen TRUE’s network quality and coverage especially in provincial areas. So – if TRUE does win, how would it impact earnings and financial status?  

 

Figure 3 shows the impact on TRUE if it wins a 900MHz license. In this scenario, TRUE’s TP will be cut by Bt1.63 to Bt14.57 (from Bt16.2) if it pays Bt40bn for the 900MHz license (equal to what we assume for ADVANC and DTAC). Our earnings from 2016 will also be chopped by 39-84% owing to higher amortization and interest expenses (conservatively assume debt financing). Net debt to EBITDA and net debt to equity ratios will go up to 4.85x (from 3.24x) and 1.64x (from 1.09x), respectively.  

 

After full payment of all bank loans at end-2014, TRUE no longer has to abide by a debt covenant. Its own internal target is for net debt to EBITDA ratio to stay below 2x. We would not be surprised if TRUE goes to the equity market to raise cash to finance the license.  

 

JAS will fight but difficult to get past DTAC and TRUE. JAS clearly is serious about getting one license (1800MHz or 900MHz) to get into the mobile market and this may be its last chance after having to leave the field in the battle for the 1800MHz licenses. This means it could bid the 900MHz price way up in its fight to get one. But because the value of 900MHz for existing operators (DTAC, TRUE or even ADAVANC) is far greater than that for JAS because of business continuity, they will also be fighting hard. We thus find it hard to see JAS winning.