This week we published a series of notes looking forward to 2019 and the outlook for various markets across Asia.
In Japan (HERE), we remain fundamentally bullish. Although revenue pressure is intensifying, we do not think we are likely to witness a price war. Government pressure to reduce prices, which we think is linked to the October 2% sales tax increase will likely have eased by the end of the year. Opex and subsidy reductions should offset the revenue weakness we think with the result that earnings surprise to the upside, and in fact as we wrote (HERE & HERE) we think Apple is the major loser in the price changes happening in Japan, as the majority of the price cuts get recouped through lower subsidies. As a resuit, we do not think that an inflection in the top line will result in an inflection in returns. At the same time, payout ratios are set to gradually rise, as the domestic telcos follow Softbank KK’s lead and increase dividends. Despite the weak response to the IPO, SB KK is still trading at around 7.5x FY 18 EV/EBITDA, making the other domestic telcos (and especially KDDI) look cheap by comparison (LINK). For Softbank, we think market confidence in the Vision Fund strategy will likely rise through the year, as profitable exits/up-valuations of assets such as Uber are announced. We switch top picks, with KDDI our new top pick in Japan (previously NTT) followed in order by NTT.
For the Chinese telcos (HERE), we remain optimistic on the fundamentals of the industry, but the first half will be challenging for two key reasons. Firstly, there is likely to be a lot of uncertainty around the level of 5G spend for the industry. The operators are very clear that they do not intend to spend significantly given the demand case is not apparent. However, with the ongoing political uncertainty and the commentary from Apple around lower consumer spend in China, the government may be forced to step in to ensure demand is sustained by ‘coercing’ SOE’s to spend more. We expect to hear the first indication of 5G spend in March when the telcos report FY18 results. Secondly, y/y trends will remain weak in H1 given the cancellation of data roaming from July 18. We could see a marginal improvement in Q219 as the operators gradually reduced data roaming in Q218, but the full lapping will be in Q319. In contrast, the first half should be positive for China Tower for exactly the same reasons. The risk of higher 5G spend will be positive for towerco sentiment as accelerating growth should support a multiple re-rating. In addition, H119 will see the company lapping the price cuts in early 2018, so the underlying trends should see a clear inflection point. For this reason, and given the amount of growth now coming outside of the Master Services Agreement we highlight China Tower as our preferred play in China (LINK), and upgraded our price target to HK$ 2.20 from HK$ 1.60, following our recent upgrade to Buy (LINK). For the telcos, we would highlight Unicom as our preferred play (LINK) given its bigger exposure to China Tower and extremely cheap valuation with a potential catalyst in the possible joint 5G network rollout with China Telecom.
Predictions for Indian mobile in 2019 (LINK) in our view are as much about what probably won’t happen as what will; we do not expect Jio to lift prices and nor do we expect material relief from the government towards the private telcos. The environment likely therefore remains tough. As a result, by the end of 2019, as we wrote (HERE) we expect fears that Vodafone IDEA requires more capital will probably resurface. Bharti is closer to an inflection of returns and we are confident that unless prices fall again (which we don’t expect) revenues bottomed for Bharti in Q2 FY19. Bottom line: Bharti can live with current pricing; Vodafone IDEA in our view cannot. As a result, although the stock will likely remain volatile, we see some signs of easing pressure for Bharti, as market share transfers from Vodafone/IDEA. We remain at Reduce on Vodafone IDEA, with leverage and operational underperformance the key issues, despite the recently announced capital increase. If competitive intensity continues the viability of the business remains under threat. For Infratel we lift our price target to INR 220 on the back of higher FY 20 forecasts as the company has given some more granularity around pro forma figures post the Indus merger. We still think Q3 will be weak as profits rebase lower post the Vodafone IDEA merger, but then the outlook is more stable unless/until the market starts to question Vodafone IDEA’s viability more deeply (LINK).
In developed Asia, we would highlight Hong Kong as the safer bet as 2019 progresses. Although CMHK and HKBN have not followed in the industry price increases, we think mobile prices will hold. HKT is clearly more focussed on improving returns which are very low in a global context and will be a barrier to further price cuts and finally looks willing to lose some lower value subscribers to CMHK/HKBN. Although the price increases will not have a material impact on 2019 earnings, the risk of earnings disappointment is limited and shareholder returns will support the shares over the year. In Korea, we are seeing increased newsflow around M&A (LINK) which combined with weaker fundamentals makes the recent multiple re-rating difficult to be sustained in our view. Whilst the market could get excited about a new technology (5G), we see the increased capex combined with the weaker fundamentals impacting shareholder returns. In Singapore, a TPG launch remains a concern and whilst we think the impact may be mute, the sentiment is likely to remain weak. Taiwan continues to be an unappealing market in our view. Our recent visit confirmed our view that there looks to be little respite to the price aggression shown by all operators. We continue to expect Chunghwa to reduce its absolute dividend payment and retain our Reduce recommendation.
Finally we also wrote on the outlook in emerging Asean markets (Thailand, Malaysia, Indonesia, and Philippine) telco space in 2019 (HERE). Key themes: Trends are likely to worsen in Thailand and the Philippines, but improve in Indonesia and possibly Malaysia. Margin trends as always are likely to follow revenue, but Indonesia is also likely to see the added benefit of declining churn. Political risk is elevated with elections in both Thailand and Indonesia in H1. On a likely positive earnings trajectory, Telekom Indonesia is our top pick. Outside of the traditional MNOs, the best opportunities would seem to be Indonesian Towers for improving growth (especially Protelindo), the Thai Infrastructure funds for yield (especially JASIF) and defensiveness given the current market environment, and LinkNet (Indonesia) and Jasmine (Thailand) as M&A targets.
Overall therefore, we would highlight Japan and Indonesia as our preferred markets, and KDDI, China Tower, Telekom Indonesia, Bharti and China Unicom as our preferred stocks.
For the full weekly review and updated comp sheets, see HERE.