Asian telcos on fire but with not enough fuel

There are now 2.2bn subscribers in Asia but total revenues were flat at 2% q-o-q.

According to Nomura, Asian telcos have been on fire of late where shareprices up 13% in the past three months, making it the second-best performing sector in the past three months and the fourth best sector YTD. But Nomura noted that this rally isn’t really supported by operating trends as highlighted in the recent June-quarter results, during which only 20% of the Asian telcos exceeded market expectations.

Here's from Nomura:

• Only 13 of the 35 Asian telecom stocks have seen positive consensus EPS revisions this year; thus leaving the sector trading at an expensive FY13F P/E of 16x. Therefore, we think dividend appeal again is the main justification for the recent rally in Asian telcos, which remains strong at 4.5% with a 5.5% FCF yield (median), on our numbers. The sector continues to be reasonably geared with an average net debt-to- EBITDA of 1.5x. Seven out of 35 telcos are in a net cash position.

– YTD, we have seen the largest consensus upgrades for mid-caps Softbank, FET and AIS (average 17%). The largest downgrades have been for Bharti, Unicom and ZTE (average 32%).

• Total 2.2bn subs in Asia now, with a solid 58mn in wireless net adds, vs. the recent quarterly average of 63mn.

• Total combined sector revenue in the June quarter was flat q-q and up 8% y-y (including handset sales).

– Total wireless service revenue growth was 3% q-q and 7% y-y and total (wireless, fixed and other) service revenue growth was 2% q-q and 10% y-y

• Total EBITDA was up 1% q-q and y-y with flattish margins of 34%, down 200bps y-y. The decline could have been worse if it wasn’t for the upcoming iPhone-5 launch, which we believe, caused subscribers to delay handset upgrades and hence reduced subsidies in the June-quarter.

• Adjusted NPAT grew 2%.

• 6 telcos have increased their capex guidance so far this year.

– Telstra by 1pp to15% of sales (for LTE and partially NBN);

– PT Telkom by IDR3bn or ~20% (data/ 3G network ramp up);

– KT Corp by KRW0.3bn or ~8% (LTE related);

– StarHub from <11% of operating revenue to ~11% of operating revenue (LTE
related); and

– Taiwan Mobile by TWD1bn or 9% (for its mobile business).

– LGU+ indicated incrementally more capex budget (vs. original guidance) due to strong pick-up of LTE subscribers during its 2Q12 conference call.

• More focus on data economics & competition and lesser on regulations.

– Telcos in Korea, Hong Kong, Australia and Singapore are making attempts to re-price data (mainly via reduced data allowances) and 4G upgrades/ launches is one potential catalyst/ event for re-pricing.

– The jury is still out on the potential impact of ‘data growth’ on margins and returns (as stand-alone ‘data costs’ are difficult to work out. However, at a consolidated level, we note that average ROIC has been declining for wireless operators (from 21.5% in FY11 to around 18.7% in FY12F, on our forecasts), while it is broadly stable for the integrated operators (at around 11%), which again highlights the importance and benefits of owning networks (fixed/ backhaul).

– Competition appears to be have picked up a notch and we remain cautious towards the end of the year, especially in markets like China (via higher subsidies), India (lower prices and higher marketing expenses), Korea (marketing spend), Australia (bundling), Philippines (marketing spend/subsidies) and Malaysia (pricing pressure/higher marketing expenses/content costs).