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Singapore Telcos When the facts don't fit the story Buy SingTel We initiate coverage of

Singapore Telcos

When the facts don't fit the story

Buy SingTel

We initiate coverage of the Singapore Telecom sector with an OW recommendation on SingTel (TP of S$3.60), and Neutral recommendations on both Starhub (TP S$2.70) and M1 (TP S$2.50). Many, including ourselves, have made much over the potential for Singapore’s National Broadband Network project to increase competition and drive opportunities for infrastructure-lite competition. The facts, however, do not support this case. We think the NBN will largely serve to cement SingTel’s dominance of the local market, potentially forcing Starhub into a Virgin Media (covered by JPM analyst Carl Murdock-Smith) type strategy, and lock M1 out of the mainstream market.

The NBN will ultimately curtail competition and cement SingTel dominance. On paper, the NBN looks like a great opportunity for M1. In reality, we estimate SingTel earns a much higher long term (2015) margin (47%) on NBN subscribers then others (STH at 21%, M1 at 14%), giving them a structural cost advantage over both Starhub and M1. This ironically means that the NBN serves to institutionalize SingTel’s dominance, in our view. The only potential to break this dynamic would be Starhub’s pursuance of a Virgin Media strategy where they aggressively leverage their own infrastructure and ignore the NBN…we see little sign of this as of yet.

Bundling/ Pay TV will now REALLY matter: A saturated market combined with still relatively high SAC implies that operators will need to bundle in order to reduce churn. MioTV will be competitive in the future as subscribers move from fiber and cross carriage regulations bite, in our view. This should trigger both better Pay TV monetization as well as market share gains in residential broadband for SingTel, at Starhub's expense.

Starhub to opt out of NBN? We do not see M1 as a credible long term alternative carrier in Singapore given its over reliance on NBN infrastructure at much lower margins then peers (we think it becomes the TalkTalk equivalent). It therefore remains a third mobile operator with little traction in overall bundled services, in our view. Starhub, however, has longer term potential to leverage their ubiquitous cable infrastructure (100% household coverage vs. Virgin Media in the UK at approximately 50%) to pursue an in-house alternative to the NBN infrastructure. This would position them as the only real domestic competition for SingTel, albeit with a large CAPEX bill attached.

Equity Ratings and Price Targets

Asia Pacific Equity Research

21 October 2011

Singapore Asian Telecommunications

James R. Sullivan, CFA AC

(65) 6882-2374 james.r.sullivan@jpmorgan.com

J.P. Morgan Securities Singapore Private Limited

Vishesh Gupta

(65) 6882 2367 vishesh.x.gupta@jpmorgan.com

J.P. Morgan Securities Singapore Private Limited

Laurent Horrut

(61-2) 9220-1593 laurent.j.horrut@jpmorgan.com

J.P. Morgan Securities Australia Limited

Christopher Gee, CFA

(65) 6882-2345 christopher.ka.gee@jpmorgan.com

J.P. Morgan Securities Singapore Private Limited

 

Mkt Cap

Rating

Price Target

Company

Symbol

(S$ mn)

Price (S$)

Cur

Prev

Cur

Prev

Singapore Telecom

STEL.SI

50,371.13

3.16

OW

n/c

3.60

n/c

StarHub

STAR.SI

4,835.47

2.82

N

n/c

2.70

n/c

M1

MONE.SI

2,278.72

2.51

N

n/c

2.50

n/c

Source: Company data, Bloomberg, J.P.Morgan estimates. n/c = no change. All prices as of 20 Oct 11.

See page 139 for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

www.morganmarkets.com

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Table of Contents

Pacific Equity Research 21 October 2011 Table of Contents Investment conclusions 3 Valuation Discussion 8

Investment conclusions

3

Valuation Discussion

8

Key risks to our view

13

Valuing Singapore

14

Comparing NBN and existing business EBITDA margin and

cash flows

33

What does MioTV actually mean?

36

Counting the Cash: Yield Sustainability

43

Appendices

Appendix I: NGNBN Structure in Singapore

48

Appendix II: NGNBN in Australia

59

Appendix III: Economics of Wireless Data: Singapore

66

Appendix IV: Fiber vs. Cable

69

Companies

Singapore Telecom

80

StarHub

105

M1

122

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Investment conclusions You’ve heard it before…from us,

Investment conclusions

You’ve heard it before…from us, as well as others. “M1 is a market share gainer in all product categories, and the big winner from the NBN”. When we began work on this report, that was the easy story to see. But, an interesting thing happened on the way to the report, so to speak…the facts do not fit this view of reality. SingTel is clearly (in our view) the structural winner, Starhub plays an important #2 role but could be ultimately forced into a heavy CAPEX round to replicate a Virgin Media strategy, while M1 will be structurally challenged by the changes wrought on the market place by the NBN.

The Facts

There are several important facts, as we now understand them:

1)

Operators face VERY different economics on an NBN subscriber. Per the chart below, we estimate SingTel’s margin on an NBN sub is almost twice that of Starhub and M1. This is due to a 75% revenue claw back of OpenNet’s revenues, which takes their OpenNet fee to S$3.8 vs. S$15 for all others. This implies either higher margins, or significantly greater pricing power relative to their competitors. There is evidence in other markets that high speed broadband pricing begins to move closer to unbundled pricing (BT (covered by JPM Analyst Hannes Wittig) Infinity pricing in the UK, for example, moving closer to the charge from OpenReach for Generic Ethernet Access (GEA). This type of development only favors the network owner, and while SingTel only owns 30% of OpenNet, they still control 75% of the revenues.

Table 1: Singapore NBN margin differential from NetCo and OpCo payments

 

SingTel

StarHub

M1

NBN ARPU NetCo monthly payment OpCo payment Other monthly OpEx

60.0

60.0

60.0

(3.8)

(15.0)

(15.0)

(6.0)

(6.0)

(6.0)

(25.0)

(25.0)

(25.0)

NBN monthly profit/user NBN margin

25.3

14.0

14.0

42.1%

23.3%

23.3%

Source: J.P. Morgan estimates

2)

A feedback loop exists between NBN and Pay TV, and therefore residential broadband: Rising NBN penetration combined with cross carriage regulations significantly increase the competitiveness of MioTV relative to Starhub's Pay TV offering. In the first instance, this should put pressure on industry Pay TV ARPU (we forecast this to go to S$40 from S$60 over the next five years). In the second instance, a more competitive Pay TV offering should enable SingTel to take residential broadband market share from Starhub (we forecast SingTel’s residential broadband market share to go to 51% from 42% over the next five years, vs. Starhub 32% from 34%). M1 suffers in this category given the lack of a credible Pay TV product to leverage to gain broadband market share.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com Asia Pacific Equity Research 21 October 2011
James R. Sullivan, CFA
(65) 6882-2374
james.r.sullivan@jpmorgan.com
Asia Pacific Equity Research
21 October 2011
Figure 1: Singapore Pay TV market share (LHS) vs. ARPU (RHS)
120.0%
70
60
100.0%
50
80.0%
40
60.0%
30
40.0%
20
20.0%
10
0.0%
0
SingTel ARPU
StarHub ARPU
SingTel sub share
StarHub sub share
2005A
2006A
2007A
2008A
1Q09A
2Q09A
3Q09A
4Q09A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

2015E Source: Company reports and J.P. Morgan estimates. Figure 2: Singapore residential broadband market share
Figure 2: Singapore residential broadband market share trends 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.
Figure 2: Singapore residential broadband market share trends
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0. 0%
SingTel-Total
St arHub-Total
M1-NBN
2005A
2006A
2007A
2008A
1Q09A
2Q09A
3Q09A
4Q09A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

3)

A feedback loop exists between NBN enabled bundles and mobile churn: Singapore is a heavily penetrated telecom market in almost every product category, with relatively high Subscriber Acquisition Costs (SAC). We therefore believe the NBN is most important in enabling churn reduction focused product bundles. We estimate that every 10bps of churn reduction is worth S$4-7mn yearly savings per the table below. This implies that a) operators like SingTel will measure the profitability of certain product investments (think Pay TV) in terms of both absolute product P&L as well as its value in churn reduction, b) operators with a weaker bundle will face structurally higher overall costs given more persistent SAC expenditures to manage churn (think M1).

Figure 3: Singapore household penetration of Pay TV, Residential broadband, and Fixed line services 2006-2015
Figure 3: Singapore household penetration of Pay TV, Residential
broadband, and Fixed line services 2006-2015
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
Fixed line household penetration
Broadband household penetration-fixed
Pay TV household penetration
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Figure 4: Yearly savings from 10bps of churn reduction (S$ mn)

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 SingTel StarHub M1
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
SingTel
StarHub
M1

Source: J.P. Morgan estimates.

Another way to think about this issue graphically is to chart the lifecycle profitability of a subscriber under the current scenario vs. an NBN scenario. Per the figures below, profitability is most impacted by a) SAC, b) ability of an operator to upsell incremental services, c) duration of customer life. We believe both SingTel and Starhub can successfully upsell services and reduce churn (therefore increasing customer life), while M1 may struggle.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Figure 5: Life cycle profitability of a bundled fixed line customer

5: Life cycle profitability of a bundled fixed line customer Source: J.P. Morgan. Figure 6: Life

Source: J.P. Morgan.

of a bundled fixed line customer Source: J.P. Morgan. Figure 6: Life cycle profitability of a

Figure 6: Life cycle profitability of a bundled fixed line customer NBN environment

of a bundled fixed line customer NBN environment Source: J.P. Morgan. Virgin Media has released enough

Source: J.P. Morgan.

Virgin Media has released enough data to allow our UK Telecom team to estimate the value of a customer based on the number of services taken. This analysis indicates that a quad play subscriber offers operators 24x the value of a single play subscriber.

Figure 7: Average customer lifetime revenue - Virgin Media

Figure 7: Average customer lifetime revenue - Virgin Media Source: J.P. Morgan estimates, Company Data. *

Source: J.P. Morgan estimates, Company Data. * as commented at 4Q10 results. JPMe estimate then applied for calculation. ^ as reported in 2Q11 results.

4)

The NBN should increase pricing pressure and decrease industry revenue growth, ST benefits from diversification. The chart below shows our forecast reduction in telecom industry revenue growth rates from the 5-10% seen in 2004-2010 to an average of 2% moving forward. SingTel drives 35% of its revenues from Singapore, vs. peers at 100%.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 8: Singapore Telecom Industry revenue growth Source:

Figure 8: Singapore Telecom Industry revenue growth

2011 Figure 8: Singapore Telecom Industry revenue growth Source: Company reports and J.P. Morgan estimates. Figure

Source: Company reports and J.P. Morgan estimates.

Figure 9: Operator revenue contribution from Singapore

120% 100% 80% 60% 40% 20% 0% SingTel StarHub M1
120%
100%
80%
60%
40%
20%
0%
SingTel
StarHub
M1

Source: Company reports and J.P. Morgan estimates.

5)

The Singapore telecom market could look increasingly like the UK over time. Carl Murdock-Smith argues in a recent report (UK Fixed-Line Telecom: Bundling, market maturity and superfast broadband driving price rationality, VMED and BT best positioned) that instead of explicit price competition, operators are increasingly finding their market niches, per the chart below. There are relatively clear parallels between the emerging status of the UK fixed line market and what we expect here in Singapore. Singtel plays a modified BT role, with ownership of the underlying common network (OpenNet for ST, OpenReach for BT), Starhub playing a combined Sky / potentially Virgin Media role with a history of content aggregation and management, and M1 playing the role of TalkTalk (covered by JPM Analyst Carl Murdock-Smith) on the value end. If valid, this implies that SingTel could enjoy the best economics moving forward; Starhub may eventually need to invest in a competing cable based infrastructure alternative; and M1, with a focus on value pricing, may struggle given lower structural margins. The M1/TalkTalk analogy becomes especially interesting when one considers M1’s historic lack of pricing power, as shown in Figure x below (M1’s ARPM relative to ST and STH shows a large and persistent gap…this implies that they need to charge a significantly lower price to gain usage / subscribers, which is difficult given their structurally lower margins).

Figure 10: M1 ARPM vs. ST and STH, 2006-2015 1.1 1 0.9 0.8 0.7 0.6
Figure 10: M1 ARPM vs. ST and STH, 2006-2015
1.1
1
0.9
0.8
0.7
0.6
0.5
M1/SingTel ARPM
M1/StarHub ARPM
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

6)

Impact of wireless data: We have previously published detailed analysis of the impact of wireless data on operators (The Economics of Wireless Data - Part One: The Importance of Population Density and Spectrum; The

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Economics of Wireless Data – India Edition ; The

Economics of Wireless Data – India Edition; The Economics of Wireless Data – Industry Dialogues), this analysis suggests that Singapore will move from the current honeymoon period (already built wireless networks allowing for revenue growth with little incremental CAPEX), to full networks and incremental linear economics (full networks and the lack of scaleability of data as a product leads to rising CAPEX and lower structural returns) until usage reaches 50% smartphone penetration at 3GB per user per month…as such this is an issue, but one years out. The more important short-term impact of wireless data is rising international link expenses, given that over 90% of internet data accessed from Singapore resides on servers outside the country. SingTel and Starhub both have memberships in subsea cable consortia that potentially limit some of this impact, but this should be a source of margin compression for M1, in our view.

Figure 11: Site numbers in Singapore with increased user demand

M1, in our view. Figure 11: Site numbers in Singapore with increased user demand Source: J.P.

Source: J.P. Morgan, ATiC Consulting

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Valuation Discussion We are assuming coverage of SingTel and

Valuation Discussion

We are assuming coverage of SingTel and initiating on StarHub and M1, with an Overweight rating on SingTel and Neutral rating on StarHub on M1, with a preference for M1 over StarHub.

Our target price implies 20% total return potential at SingTel vs. 1% at StarHub and 6% at M1. Dividends account for 5.3%, 7.0% and 6.0% respectively of our total returns for SingTel, StarHub and M1.

Table 2: Singapore Telcos: Valuation summary

Company

Stock

Rating

Price

PT

% to

EV/EBITDA (x)

PE (x)

Dividend Yield (%)

FCF Yield (%)

Total

code

(LC)

(LC)

Target

2011E

2012E

2011E

2012E

2011E

2012E

2011E

2012E

Return

SingTel

ST SP

OW

3.2

3.6

14.3%

10.6

10.8

12.7

11.2

5.3

6.1

5.4

4.8

19.6%

StarHub

STH SP

N

2.9

2.7

-5.9%

8.3

7.8

15.6

14.8

7.0

7.0

7.9

9.1

1.0%

M1

M1 SP

N

2.5

2.5

0.0%

8.1

8.0

13.3

13.2

6.0

6.0

9.4

9.3

6.0%

Source: Bloomberg and J.P. Morgan estimates. Priced as at 20 October

Best/worst case analysis: We analyze the impact on our price target for Singapore Telcos at peak and trough of their P/E valuation range. Such an analysis is increasingly important given current global macroeconomic developments and an environment of GDP downgrades. On our estimates, SingTel has the best upside to downside ratio of 1.0 while StarHub fares at the bottom with negative upside to target price on both ends of the valuation range.

Table 3: Singapore Telcos: Best and worst case analysis

Current price Current consensus P/E Peak P/E Trough P/E

JPM vs. consensus EPS

Best case price % upside

Worst case price

% upside

Up/Down

SingTel

3.15

11.9

13.0

10.0

6.4%

3.6

15.8%

2.7

-15.9%

1.00

StarHub

2.87

15.3

14.0

10.0

3.0%

2.7

-5.3%

1.9

-34.5%

(0.15)

M1

2.50

12.6

13.0

10.0

-5.1%

2.5

-1.6%

1.9

-25.5%

(0.06)

Source: Bloomberg, J.P. Morgan estimates. Priced as at 20 October

DCF analysis: We run full discounted cash flow analysis on all of our companies, but do not use this analysis to specifically set target prices. Our experience has been that the heavy retail participation in most South East Asian markets leaves P/E multiples, and the upside to street + upside to multiple approach described above a more effective way of forecasting future share price movements. We instead use DCF analysis as another gauge of market sentiment, by back calculating what discount rate is implied by the current share price. A high discount rate would be indicative of either a) a very risky business / market, or b) an excessively pessimistic sentiment applied by the market.

SingTel's share price currently implies a lower discount rate relative to Starhub and M1. This appears fair to us given both SingTel's greater revenue diversification outside of Singapore and the fact that it is likely a market share gainer due to the NBN, but also given its status as a large cap stock (S$50.2bn vs. STH at S$4.9, M1 at S$2.2bn) with a much larger index inclusion then STH or M1 (ST at 10.14% of STI vs. STH at 0.79% and M1 at 0%).

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Table 4: Singapore Telcos: DCF summary

21 October 2011 Table 4: Singapore Telcos: DCF summary Current price (LC) 2013E Terminal growth rate

Current price (LC)

2013E Terminal growth rate

2012E Terminal value as % of EV

Implied discount rate at current price

SingTel

3.15

4.0%

92.0%

7.9%

StarHub

2.87

4.0%

87.6%

10.4%

M1

2.50

4.0%

87.8%

10.1%

Source: Bloomberg, J.P. Morgan estimates. Priced as at 20 October

The discount rate equivalence between STH and M1 is interesting and arguably justifiable. On the one hand, Starhub faces a loss of its Pay TV monopoly and loss of residential broadband market share, on the other, M1 may be permanently locked out of broader participation in the market

Valuation Methodology / Setting Target Prices

Our investment philosophy has simplified over the years. It is our belief that ultimately share prices are driven by earnings estimates, an assumption holding true for all of our coverage companies around the region.

Our simple valuation methodology is that we believe only two things can mathematically move a share price: 1) changing earnings estimates, and 2) the multiple the market is willing to put on those earnings estimates. This structure allows us to focus our research on: 1) getting the numbers right; and 2) understanding what potential range of multiples the market might apply. A simple sum of the two leads to our target prices, i.e. if we have 10% upside to the Street’s EPS forecasts, and think there could be 15% multiple expansion, our total target return is 25%.

This method allows us to capitalize on (hopefully) good fundamental research, but also allows us to understand market sentiment. If a multiple has expanded to previously unseen levels, either the business has changed or a lot of expectations have already been built into the share price.

On our numbers we see largest upside to Street FY12 EPS estimates for SingTel at 6%, StarHub’s 2012 consensus EPS is largely in-line with our estimates while we think the Street needs to lower M1’s EPS by 4%.

Table 5: Singapore Telcos: JPM vs. Street estimates

 

FY11E

FY12E

SingTel Revenue EBITDA EBITDA margin-BP diff EPS

0.8%

-3.5%

NA

NA

NA

NA

1.7%

6.4%

StarHub Revenue EBITDA EBITDA margin-BP diff EPS

-1.0%

-3.0%

-0.1%

0.8%

0.3

1.2

3.3%

3.0%

M1

Revenue EBITDA EBITDA margin-BP diff EPS

-0.2%

-1.8%

-1.1%

-4.9%

(0.3)

(1.0)

-0.1%

-5.6%

Source: Bloomberg and J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Dividend Yields do not form a basis for our

Dividend Yields do not form a basis for our valuation approach, but can serve as both a catalyst as well as a gauge of investor sentiment and the perception of risk inherent in a stream of cash flows. Per the charts below, SingTel is trading at one of its largest spreads to local Government bonds over the past few years, indicating in our view that investors are assigning too much risk to SingTel’s cash flows relative to their Singapore peers. The large reduction in spreads for Starhub and M1, conversely appear to be underpricing the risks to cash flows, in our view.

Figure 12: SingTel dividend yield spread to govt bonds

view. Figure 12: SingTel dividend yield spread to govt bonds Source: Bloomberg. Figure 13: StarHub: Dividend

Source: Bloomberg.

Figure 13: StarHub: Dividend yield spread to government bonds

to govt bonds Source: Bloomberg. Figure 13: StarHub: Dividend yield spread to government bonds Source: Bloomberg.

Source: Bloomberg.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 14: M1: Dividend yield spread to government bonds

Figure 14: M1: Dividend yield spread to government bonds

Figure 14: M1: Dividend yield spread to government bonds Source: Bloomberg. Street View SingTel We believe

Source: Bloomberg.

Street View

SingTel We believe the Street is not factoring in potential market share gains in residential broadband and Pay TV over the next few years. There is the potential for short term earnings downside driven by deteriorating cross forex rates, but (in our view more importantly) we see 6% upside to Street estimates for FY2013 driven by better margins on NBN products.

Figure 15: SingTel: Street 1 year forward P/E

NBN products. Figure 15: SingTel: Street 1 year forward P/E Source: Bloomberg. Figure 2: SingTel: Street

Source: Bloomberg.

Figure 2: SingTel: Street 1 year forward EPS

Bloomberg. Figure 2: SingTel: Street 1 year forward EPS Source: Bloomberg Starhub The market appears to

Source: Bloomberg

Starhub The market appears to be mispricing the business risk associated with a more competitive pay TV and residential broadband market, as such we expect yield spreads to re widen, indicating downside risk for the stock.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Figure 16: StarHub: Street 1 year forward P/E

October 2011 Figure 16: StarHub: Street 1 year forward P/E Source: Bloomberg. Figure 2: StarHub: Street

Source: Bloomberg.

16: StarHub: Street 1 year forward P/E Source: Bloomberg. Figure 2: StarHub: Street 1 year forward

Figure 2: StarHub: Street 1 year forward EPS

Bloomberg. Figure 2: StarHub: Street 1 year forward EPS Source: Bloomberg M1 Street EPS estimates have

Source: Bloomberg

M1

Street EPS estimates have been largely flat for M1, recently, and we do not expect material upside from current levels. M1 is also trading close to peak valuations and hence we are Neutral on the name.

Figure 17: M1: Street 1 year forward P/E

on the name. Figure 17: M1: Street 1 year forward P/E Source: Bloomberg. Figure 2: M1:

Source: Bloomberg.

Figure 2: M1: Street 1 year forward EPS

Figure 17: M1: Street 1 year forward P/E Source: Bloomberg. Figure 2: M1: Street 1 year

Source: Bloomberg

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Key risks to our view  Pricing competition is

Key risks to our view

Pricing competition is worse then forecast: We do expect a degree of price compression which will reduce overall industry revenue growth rates moving forward, but are not forecasting an all out price war on a product by product basis. This is driven by the fact that a) bundles will increasingly drive this

saturated, mature market, in our view, which theoretically limits product specific price discovery for consumers; b) Starhub and to a lesser degree M1 will face structurally lower NBN economics, which limits their ability to aggressively cut

price without significantly impacting their own margins

price competition will not get out of control, but clearly a limiting factor.

not a guarantee that

Forecast competitive dynamics are upended as Starhub pursues an alternative infrastructure approach: We suspect that a Virgin Media type strategy may in fact be the best long term strategic option for the company, but as of yet see no signs that this will occur. Were this dynamic to change, we would expect a greater potential for a degree of price competition between Starhub and SingTel given Starhub's better economics. This could be somewhat restrained, however, by Starhub's desire to achieve a reasonable return on their CAPEX investment.

A foreign operator takes control of M1 and introduces cross market competitive dynamics into the Singapore environment. We would not be shocked to see an operator like Telstra (in order to have a counter balance to SingTel's Optus) or Axiata (already a 29.23% shareholder in M1, general offer is triggered at ) to eventually make a bid for the firm. This has the potential to introduce another layer of strategy into the Singapore market, which could be de- stabilizing.

NIMS project creates unbundles content: The Infocomm Development Authority of Singapore (IDA), the Telecom industry regulator, has been actively pushing a program called the NextGen Interactive Multimedia Applications and Services program (NIMS), which provides for a common platform Set Top Box (STB). This could theoretically be used to completely unbundle content and reduce the role of SingTel and Starhub as Pay TV content aggregators. This program is at a very early stage of development, but is something we are watching closely.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Valuing Singapore Wireless matters most but the change is

Valuing Singapore

Wireless matters most but the change is in fixed line

Wireless business is the single largest revenue contributor for StarHub and M1 while SingTel derives almost 30% of its revenues from wireless. Though wireless matters most we do not expect significant market share shifts in the business going ahead and believe the business has matured to a point of stability. What matters most in terms of value shifts are the fixed line and pay TV businesses in a NBN world. We expect fixed line business to see further mix shifts in fixed voice/broadband and fixed corporate segments. We thus first analyze the impact on fixed line and pay TV business from NBN with wireless business details to follow later

Figure 18: SingTel: Revenue distribution FY11A and FY16E

45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Mobile Fixed IT and engineering
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Mobile
Fixed
IT and engineering
Pay TV
Others
FY11A
FY16E

Source: Company reports and J.P. Morgan estimates.

Figure 19: StarHub: Revenue distribution FY10A and FY15E

60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Mobile Fixed line Pay TV 2010A 2015E
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Mobile
Fixed line
Pay TV
2010A
2015E

Source: Company reports and J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 20: M1: Revenue distribution FY10A and FY15E 90.0%

Figure 20: M1: Revenue distribution FY10A and FY15E

90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Mobile Fixed Others 2010A 2015E
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Mobile
Fixed
Others
2010A
2015E

Source: Company reports and J.P. Morgan estimates.

Fixed line and pay TV business in an NBN era

NBN is expected to change Singapore’s fixed line and pay TV business going ahead, providing market share gain opportunity to SingTel on broadband and pay TV, StarHub on corporate SME business and M1 on broadband. The sections below take a deeper dive into the impact of NBN to Singapore's fixed line and pay TV business.

Fixed line and broadband: Opportunity for SingTel, not meaningful for M1 We expect 12% of Singapore’s fixed line subs to migrate to NBN by 2012 and then gradually grow to 45% of the subscriber base by 2015. Key here is the government’s set limit on NBN weekly ports, which was recently increased to 2,400 from 2,050. We are of the view that the required weekly ports capacity has to go up for the NBN to have a sizeable impact in the country. Current limit at 2,400 weekly ports implies 520k additional subs from here on until 2015, giving NBN a low market share of 23% by 2015. We forecast weekly ports to increase to 5,000 from 3Q12 as we believe this is necessary to allow NBN to gain a substantial market share (falling short of meaningful subscriber share is not a politically acceptable outcome, in our view).

Table 6: JPM NBN model

 

2010E

1Q11E

2Q11E

3Q11E

4Q11E

2011E

1Q12E

2Q12E

3Q12E

4Q12E

2012E

2013E

2014E

2015E

Total Fixed subs

1,984

1,966

2,008

2,043

2,079

2,079

2,101

2,124

2,147

2,170

2,170

2,238

2,292

2,348

QoQ

 

-0.9%

2.1%

1.8%

1.7%

 

1.1%

1.1%

1.1%

1.1%

       

YoY

4.6%

2.1%

3.3%

3.9%

4.8%

4.8%

6.9%

5.8%

5.1%

4.4%

4.4%

3.1%

2.4%

2.4%

Household penetration (%)

102.9%

103.3%

105.8%

106.3%

106.8%

106.8%

107.3%

107.8%

108.3%

108.8%

108.8%

110.0%

111.0%

112.0%

BP change QoQ BP change YoY

 

0.42

2.48

0.50

0.50

 

0.50

0.50

0.50

0.50

       

5.90

4.22

7.92

4.00

3.90

3.90

3.98

2.00

2.00

2.00

2.00

1.20

1.00

1.00

NBN's share in total Fixed line

0.0%

0.8%

1.8%

3.0%

4.4%

4.4%

5.8%

7.1%

9.8%

12.5%

12.5%

23.7%

34.5%

44.8%

BP change QoQ BP change YoY

 

0.85

0.98

1.17

1.39

 

1.38

1.35

2.72

2.66

       

0.00

0.85

1.83

3.00

4.39

4.39

4.92

5.29

6.84

8.11

8.11

11.23

10.77

10.27

Total NBN subs (000) NBN Weekly Ports

0.0

16.7

36.7

61.2

91.2

91.2

121.2

151.2

211.2

271.2

271.2

531.0

790.8

1051.0

1.39

1.67

2.05

2.50

2.50

2.50

5.00

5.00

5.00

5.00

5.00

Source: J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 21: Existing network and NBN market share of
Figure 21: Existing network and NBN market share of total fixed line 120.0% 100.0% 80.0%
Figure 21: Existing network and NBN market share of total fixed line
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
Existing network's share in total Fixed line
NBN's share in total Fixed line
2010E
2011E
2012E
2013E
2014E
2015E

Source: J.P. Morgan estimates.

Fixed line: We forecast SingTel and StarHub to account for 60% and 30% of the NBN market while M1 to account for 10%. The mix is debatable and we thus analyze in further sections the sensitivity of valuation to market share. Within the existing network we expect market shares to remain largely stable.

Figure 22: Singapore fixed line subscriber market share 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%
Figure 22: Singapore fixed line subscriber market share
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2010A
2011E
2012E
2013E
2014E
2015E
SingTel-existing network
SingT el-NBN
SingTel-Total
StarHub-NBN
M1-NBN

Source: Company reports and J.P. Morgan estimates.

We believe SingTel’s existing network ARPU’s will remain under pressure due to additional capacity in the system through NBN networks. 1H11 showed signs of increasing pressure with fixed voice ARPU down 6% in 2Q11 and 7% in 1Q11 vs. 4% in 2010.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 23: SingTel' existing network fixed local voice
Figure 23: SingTel' existing network fixed local voice ARPU trend 25 20 15 10 5
Figure 23: SingTel' existing network fixed local voice ARPU trend
25
20
15
10
5
-
SingTel-voice local
2007A
2008A
2009A
1Q10A
2Q10A
3Q10A
4Q10A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: J.P. Morgan estimates and Company data.

Fixed broadband: Given that NBN will largely be a bundled product with a monthly charge for fixed voice and broadband this takes NBN share of total fixed broadband markets to parity with the existing network by 2015. So, simply put, we believe all NBN fixed line subs would subscribe to a bundle fixed and broadband package.

Figure 24: Fixed broadband market share split between NBN and existing networks 120.0% 100.0% 80.0%
Figure 24: Fixed broadband market share split between NBN and existing networks
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
Existing network's share in total Fixed broadband
NBN's share in total Fixed broadband
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

As with fixed line, we forecast SingTel and StarHub to retain their share in existing network broadband offerings. Thus the opportunity here lies for SingTel and M1 to gain share in the broadband market.

SingTel is a unique incumbent in that it is not the market leader in fixed broadband. We believe this was largely driven by StarHub’s superior bundling capabilities through a better pay TV product. SingTel has been gaining pay TV market share since its BPL win and aggressive push of the product. We believe superior bundling capabilities going ahead would be the key driver enabling SingTel to gain market share in fixed broadband and pay TV segments. The second chart below shows the

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 multi-product penetration of the subscriber base for SingTel

multi-product penetration of the subscriber base for SingTel and Starhub respectively.

Figure 25: Asian incumbent fixed broadband market shares

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Source: Company reports and J.P. Morgan estimates.

Figure 26: SingTel and StarHub bundling market share 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0%
Figure 26: SingTel and StarHub bundling market share
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
SingTel’s Mio TV launch
SingTel’s BPL rights win
10.0%
0.0%

3Q07A 4Q07A 2007A 1Q08A 2Q08A 3Q08A 4Q08A 2008A 1Q09A 2Q09A 3Q09A 4Q09A 2009A 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11A

SingTel

St arHub

Source: Company reports and J.P. Morgan estimates.

Note: Bundled subscribers include any user who subscribes to two or more products from the same operator.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 27: Singapore: Total fixed line broadband market
Figure 27: Singapore: Total fixed line broadband market share 60.0% 50.0% 40.0% 30.0% 20.0% 10.0%
Figure 27: Singapore: Total fixed line broadband market share
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
SingTel-xDSL
SingTel-NBN
SingTel-Total
StarHub-CATV
StarHub-NBN
StarHub-Total
M1-NBN
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Overall broadband ARPU’s would remain under pressure and we believe NBN bundled ARPU’s would need to come down to existing xDSL and Cable TV levels in order. A quick survey done amongst our Singapore office colleagues suggested that most were not inclined to increase their monthly broadband bill beyond S$50-60 levels, even on better quality fiber services.

Figure 28: Singapore: Fixed broadband ARPU trends 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0
Figure 28: Singapore: Fixed broadband ARPU trends
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
SingTel-xDSL
SingTel-NBN
StarHub-CATV
StarHub-NBN
M1-NBN
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Fixed corporate and others: This has been a monopoly segment for SingTel with ~82% market share historically. We believe the opportunity lies in here for StarHub to gain market share. We forecast StarHub's market share to increase to 24% by 2015 from 18% currently. The size of this market was ~S$1.5 bn in 2010 and we expect the space to become competitive with NBN infrastructure. 2Q11 showed signs of slowdown with only 0.7% growth in revenues and we expect the segment to decline by 2.5% every year from 2012 onwards to a size of S$1.36 bn in 2015.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011 Figure 29: Singapore fixed corporate and other market
Asia Pacific Equity Research
21 October 2011
Figure 29: Singapore fixed corporate and other market share and size trends
100.0%
1,600
90.0%
1,500
80.0%
70.0%
1,400
60.0%
50.0%
1,300
40.0%
1,200
30.0%
20.0%
1,100
10.0%
0.0%
1,000
SingTel mkt share
St arHub mkt share
Total corporate and ot hers revenue (S$ mn)
2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Pay TV: This has been a business dominated by StarHub until SingTel's aggressive moves post its BPL rights win in 2009. Standalone profitability of SingTel’s pay TV

business has been low but we believe pay TV would be a key asset for success on the bundling platform. SingTel has been continuously gaining pay TV market share and

we believe it would get to parity with StarHub by 2015.

does MioTV mean? later in this report for more detail on this issue.

Please see our section What

Figure 30: Singapore pay TV subscriber market share trends 120.0% 100.0% 80.0% 60.0% 40.0% 20.0%
Figure 30: Singapore pay TV subscriber market share trends
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
SingTel
StarHub
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Recent trends have shown significant improvement in SingTel’s pay TV ARPU (up 160% to S$25 in 2010 and at S$26 in 2Q11) and we expect the positive trend to continue driven by increasing take-up of SingTel’s sports package and improving content offering. The new content sharing law in Singapore calls for operators to share all new content acquired and any rational analysis would get someone to ARPU parity within the existing virtual duopoly.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 31: Singapore Pay TV ARPU trends 70 60
Figure 31: Singapore Pay TV ARPU trends 70 60 50 40 30 20 10 0
Figure 31: Singapore Pay TV ARPU trends
70
60
50
40
30
20
10
0
SingTel
StarHub
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Figure 32: Singapore: Pay TV revenue share and total market revenues 120% 100% 80% 60%
Figure 32: Singapore: Pay TV revenue share and total market revenues
120%
100%
80%
60%
40%
20%
0%
SingTel
StarHub
Total Pay TV revenues (S$ mn)
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

600

550

500

450

400

350

300

250

200

What is the overall impact on fixed and pay TV revenue profiles in an NBN era?

Fixed and broadband (ex. corporate): Fixed line and broadband is largely one product in Singapore with a monthly charge for the combined bundle. We expect the market to grow at a 2015-2010 CAGR of 1.6%. We expect SingTel to lose market share in this segment to StarHub and M1.

Figure 33: Singapore: Combined fixed line and broadband (ex. corporate) market share and total market
Figure 33: Singapore: Combined fixed line and broadband (ex. corporate) market share and total
market size
80.0%
1,080
70.0%
1,060
60.0%
1,040
50.0%
1,020
40.0%
1,000
30.0%
980
20.0%
10.0%
960
0.0%
940
2010A
2015E
SingTel
StarHub
M1
Total revenue

Source: Company reports and J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Fixed, broadband and pay TV (ex. corporate) : SingTel

Fixed, broadband and pay TV (ex. corporate): SingTel is expected to be the biggest beneficiary in the pay TV segment, we do not forecast M1 to capture pay TV market share. We expect the combined market to grow at a 2015-2010 CAGR of 2.7%. On a combined basis, SingTel and M1 are expected to be beneficiaries at the expense of StarHub.

Figure 34: Singapore: Combined fixed line, broadband and pay TV (ex. corporate) market share and
Figure 34: Singapore: Combined fixed line, broadband and pay TV (ex. corporate) market share
and total market size
70.0%
1,700
1,650
60.0%
1,600
50.0%
1,550
40.0%
1,500
30.0%
1,450
20.0%
1,400
10.0%
1,350
0.0%
1,300
2010A
2015E
SingTel
StarHub
M1
Total revenue

Source: Company reports and J.P. Morgan estimates.

Fixed, broadband and pay TV (including corporate): The equation now gets changed as with NBN assets in place, we think SingTel will feel pressure on its corporate fixed line segment while we forecast the total corporate fixed market to contract due to aggressive competition. We expect the combined market to grow at a 2015-2010 CAGR of 0.4%. Overall, SingTel and StarHub are expected to lose some market share to M1.

Figure 35: Singapore: Combined fixed line, broadband and pay TV (including corporate) market share and
Figure 35: Singapore: Combined fixed line, broadband and pay TV (including corporate) market
share and total market size
80.0%
3,020
3,010
70.0%
3,000
60.0%
2,990
50.0%
2,980
40.0%
2,970
2,960
30.0%
2,950
20.0%
2,940
10.0%
2,930
0.0%
2,920
2010A
2015E
SingTel
StarHub
M1
Total revenue

Source: Company reports and J.P. Morgan estimates.

NBN cost analysis

NBN being an asset light business model should structurally have lower EBITDA margins than tradition Telco businesses. We have simplified our NBN cost analysis for Singapore Telco operations by assuming two sets of expense items.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 1) Cost of services, fixed expense per subscriber added

1)

Cost of services, fixed expense per subscriber added: This is the monthly charge per subscriber paid to NetCo and OpCo at S$15 and S$6 respectively. We have assumed an additional S$4/subs monthly cost of sales expense on equipments, and connectivity network maintenance. This is in- line with the other cost of sales expense reported by M1 on its existing subscriber base. We thus forecast a monthly all in cost of services charge of S$25. This expense item is expected to remain largely stable going ahead.

2)

Marketing and others, variable expense per subscriber added: This is a variable monthly expense line which we estimate at monthly S$15/sub for SingTel and StarHub while S$10/sub for M1. SingTel and StarHub would be offering their fixed line, broadband and pay TV products together while M1 in only offering fixed and broadband and hence a lower assumption on this cost item. We forecast a gradual (1%) yearly increase in this monthly marketing and other cost per sub going ahead.

Overall NBN EBITDA margin differs greatly for the three Telcos given the difference in pricing and SingTel’s 75% revenue share from NetCo. We analyze the impact from both in greater detail below.

Effective cost of residential fiber adoption is S$3.75 for SingTel vs. S$15 for StarHub: Operators need to pay NetCo a monthly fee of S$15 for residential NBN subs. SingTel’s being a key owner of NetCo receives 75% of this compensation back and thus its effective cost of fiber adoption is only S$3.75 vs. S$15 for StarHub and M1. Analysis in the table below highlights that on similar NBN ARPU's there is a large difference in NBN margin between SingTel, StarHub and M1due to NetCo payment. SingTel thus has higher effective margins than StarHub and M1.

Figure 36: SingTel, NetLink and NetCo service and lease agreements

margins than StarHub and M1. Figure 36: SingTel, NetLink and NetCo service and lease agreements Source:

Source: SingTel.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Table 7: Singapore NBN margin differential from NetCo and

Table 7: Singapore NBN margin differential from NetCo and OpCo payments-sensitivity analysis

 

SingTel

StarHub

M1

NBN ARPU NetCo monthly payment OpCo payment Other monthly OpEx

60.0

60.0

60.0

(3.8)

(15.0)

(15.0)

(6.0)

(6.0)

(6.0)

(25.0)

(25.0)

(25.0)

NBN monthly profit/user NBN margin

25.3

14.0

14.0

42.1%

23.3%

23.3%

Source: J.P. Morgan estimates.

Taking guidance from the current monthly charge on NBN broadband bundles we estimate SingTel’s current NBN ARPU at S$70, StarHub at S$60 and M1 at S$42. We believe monthly packages need to come down over the long term in order to stimulate mass adoption of the product. A quick survey done amongst our Singapore colleagues indicated that majority preferred their absolute broadband monthly expense to stay below S$60 and would not be willing to spend higher even for a faster service. We forecast broadband monthly package to drop to S$50 levels for SingTel and StarHub by 2015 while S$38 for M1.

Figure 37: SingTel: fiber plans

S$50 levels for SingTel and StarHub by 2015 while S$38 for M1. Figure 37: SingTel: fiber

Source: Company website.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Figure 38: StarHub fiber plans

Research 21 October 2011 Figure 38: StarHub fiber plans Source: Company website. Figure 39: M1 current
Research 21 October 2011 Figure 38: StarHub fiber plans Source: Company website. Figure 39: M1 current

Source: Company website.

Figure 39: M1 current fiber plans

2011 Figure 38: StarHub fiber plans Source: Company website. Figure 39: M1 current fiber plans Source:

Source: Company website

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 40: Singapore: Fixed broadband ARPU trends 90.0
Figure 40: Singapore: Fixed broadband ARPU trends 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0
Figure 40: Singapore: Fixed broadband ARPU trends
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
SingTel-xDSL
SingTel-NBN
StarHub-CATV
StarHub-NBN
M1-NBN
2004A
2005A
2006A
2007A
2008A
2009A
2010A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Thus we expect NBN EBITDA margin to gradually decline going ahead as pricing goes down.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Table 8: Singapore Telcos: Detailed NBN margin build  

Table 8: Singapore Telcos: Detailed NBN margin build

 

2012E

2013E

2014E

2015E

SingTel NBN ARPU (S$) NBN revenue (S$ mn) Revenue share from NetCo (S$ mn) Total NBN revenue (S$ mn)

65

56

53

51

107

163

254

340

50

72

103

138

157

235

357

478

NBN marketing/sub (S$) NBN marketing (S$ mn) NBN cost of services/sub (S$) NBN cost of services (S$ mn) Total NBN OpEx (S$ mn)

(24)

(24)

(24)

(24)

(39)

(74)

(112)

(156)

(14)

(14)

(15)

(15)

(24)

(45)

(69)

(98)

(62)

(119)

(181)

(254)

NBN EBITDA margin

60%

49%

49%

47%

StarHub NBN ARPU (S$) NBN revenue (S$ mn) Revenue share from NetCo (S$ mn) Total NBN revenue (S$ mn)

52

50

48

47

34

72

114

156

0

0

0

0

34

72

114

156

NBN marketing/sub (S$) NBN marketing (S$ mn) NBN cost of services/sub (S$) NBN cost of services (S$ mn) Total NBN OpEx (S$ mn)

(14)

(14)

(14)

(14)

(9)

(20)

(34)

(47)

(23)

(23)

(23)

(23)

(15)

(33)

(55)

(76)

(24)

(53)

(88)

(123)

NBN EBITDA margin

29%

26%

23%

21%

M1

NBN ARPU (S$) NBN revenue (S$ mn) Revenue share from NetCo (S$ mn) Total NBN revenue (S$ mn)

39

38

38

38

8

18

30

41

0

0

0

0

8

18

30

41

NBN marketing/sub (S$) NBN marketing (S$ mn) NBN cost of services/sub (S$) NBN cost of services (S$ mn) Total NBN OpEx (S$ mn)

(9)

(9)

(9)

(10)

(2)

(5)

(7)

(11)

(23)

(23)

(23)

(23)

(5)

(11)

(18)

(25)

(7)

(16)

(26)

(36)

NBN EBITDA margin

17%

14%

14%

14%

Source: J.P. Morgan estimates.

Figure 41: NBN EBITDA margin, 2012-2015E

70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% SingTel StarHub M1 2012E 2015E
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
SingTel
StarHub
M1
2012E
2015E

Source: J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Valuation sensitivity to NBN market share Our best case

Valuation sensitivity to NBN market share

Our best case assumes that NBN would account for 45% of the total fixed line market in Singapore by 2015 and we assume a 60%, 30% and 10% market share split within NBN subs for SingTel, StarHub and M1. This is a long dated conversation with hard data points on subscribers still not released by any operator. We thus believe it becomes important to test the variability of valuation to our NBN market share assumptions. The conclusions after we ran the numbers were interesting:

Sensitivity to NBN’s share of total fixed line by 2015: Here we study the impact of varying NBN market share assumptions to our 2015 earnings for SingTel, StarHub and M1. We keep our estimates of their NBN market share unchanged at 60%, 30% and 10% respectively. The table below highlights that on our estimates SingTel remains the most levered to this assumption as it receives the highest share of NBN market (60%) and also gets a flow through in revenue share from OpenNet.

Table 9: Singapore Telcos: Earnings sensitivity to total NBN fixed line market share by 2015

SingTel NBN share of fixed line market by 2015 FY16 Singapore EBITDA (S$ mn) Upside to base case

 

Base case

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

1,998

2,054

2,107

2,162

2,216

2,269

2,321

2,371

2,426

2,476

2,528

2,580

2,632

2,683

-15.8%

-13.4%

-11.2%

-8.8%

-6.6%

-4.3%

-2.1%

0.0%

2.3%

4.4%

6.6%

8.8%

11.0%

13.1%

FY16 group net (S$ mn) Upside to base case

5,469

5,512

5,552

5,594

5,635

5,676

5,715

5,754

5,796

5,834

5,874

5,913

5,953

5,992

-5.0%

-4.2%

-3.5%

-2.8%

-2.1%

-1.4%

-0.7%

0.0%

0.7%

1.4%

2.1%

2.8%

3.5%

4.1%

StarHub 2015 net income (S$ mn) Upside to base case

355

357

358

360

361

363

364

365

366

367

368

369

370

371

-2.8%

-2.3%

-1.8%

-1.4%

-1.0%

-0.6%

-0.3%

0.0%

0.3%

0.6%

0.9%

1.1%

1.3%

1.5%

M1

2015 net income (S$ mn) Upside to base case

189

190

190

190

191

191

192

192

192

193

193

194

194

194

-1.5%

-1.3%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Source: J.P. Morgan estimates.

Sensitivity to market share within NBN: Here we keep NBN’s market share of total fixed line unchanged at 45% by 2015 and study the impact of varying our estimated NBN market share assumptions for SingTel, StarHub and M1. Our base case assumes 60%, 30% and 10% within NBN market share for SingTel, StarHub and M1 respectively. The table below highlights that M1 and StarHub are most levered to varying market share assumptions as SingTel has downside protection through payments from OpenNet.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Table 10: Singapore Telcos: Earnings sensitivity to market

Table 10: Singapore Telcos: Earnings sensitivity to market share within NBN subscribers

SingTel NBN market share FY16 Singapore EBITDA (S$ mn) Upside to base case

 

Base case

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

2,292

2,300

2,307

2,314

2,321

2,328

2,336

2,343

2,350

2,357

2,364

2,371

2,379

2,386

-3.3%

-3.0%

-2.7%

-2.4%

-2.1%

-1.8%

-1.5%

-1.2%

-0.9%

-0.6%

-0.3%

0.0%

0.3%

0.6%

FY16 group net (S$ mn) Upside to base case

5,694

5,700

5,705

5,711

5,716

5,721

5,727

5,732

5,738

5,743

5,748

5,754

5,759

5,765

-1.0%

-0.9%

-0.8%

-0.8%

-0.7%

-0.6%

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

StarHub NBN market share 2015 net income (S$ mn) Upside to base case

 

Base case

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

347

351

354

358

361

365

369

372

376

380

383

387

390

394

-4.9%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

4.9%

5.9%

6.9%

7.9%

M1

Base case

NBN market share 2015 net income (S$ mn) Upside to base case

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

190

192

194

196

198

200

202

204

206

208

210

212

214

216

-1.0%

0.0%

1.0%

2.0%

3.1%

4.1%

5.1%

6.1%

7.1%

8.2%

9.2%

10.2%

11.2%

12.2%

Source: J.P. Morgan estimates.

Wireless business

As we earlier noted, we do not expect big moves in this segment. Wireless in our view is a stable and saturated market in Singapore with additional subscriber growth driven by multi-SIM phenomenon and dongles.

SingTel lost significant market share to Starhub from 2001-2006 as the latter’s voice pricing was at a significant discount (35-50%) to SingTel. SingTel started to gain revenue and subscriber market share from StarHub since 2007 with more competitive pricing and better network quality, giving it a significant lead in data revenue growth. M1’s subscriber share has largely remained unchanged around 30% on the back of aggressive pricing. This has led a drop in its revenue share which is below 20% now.

Figure 42: Singapore: Wireless subscriber market share trends 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
Figure 42: Singapore: Wireless subscriber market share trends
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
SingTel
StarHub
M1
2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 43: Singapore wireless revenue share 60.0% 50.0%
Figure 43: Singapore wireless revenue share 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% SingTel StarHub
Figure 43: Singapore wireless revenue share
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
SingTel
StarHub
M1
2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Wireless MOU: StarHub’s relative historical premium on MOU’s has been converging and we expect the gap to continue to narrow.

Figure 44: Singapore: Wireless MOU trends 600.0 500.0 400.0 300.0 200.0 100.0 0.0 SingTel StarHub
Figure 44: Singapore: Wireless MOU trends
600.0
500.0
400.0
300.0
200.0
100.0
0.0
SingTel
StarHub
M1
2003A
2004A
2005A
2006A
2007A
2008A
2009A
1Q10A
2Q10A
3Q10A
4Q10A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Wireless ARPM: SingTel and StarHub have kept tariffs quite close while M1’s relative discount is partly due to reporting certain line items (international revenues, which is a low margin business) on a net basis. Both SingTel and StarHub have kept tariffs largely stable while the declining trends at M1 are partly a function of net reporting of international revenues and falling international revenue margins. Operators don’t intend to get aggressive on voice pricing and are fully cognizant of the overall negative impact on the industry from price wars.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 45: Singapore: Wireless ARPM trends (long history)
Figure 45: Singapore: Wireless ARPM trends (long history) 25.0 20.0 15.0 10.0 5.0 0.0 SingTel
Figure 45: Singapore: Wireless ARPM trends (long history)
25.0
20.0
15.0
10.0
5.0
0.0
SingTel
StarHub
M1
2003A
2004A
2005A
2006A
2007A
2008A
2009A
1Q10A
2Q10A
3Q10A
4Q10A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Figure 46: Singapore: Wireless ARPM trends (short history) 9.0 8.5 8.0 7.5 7.0 6.5 6.0
Figure 46: Singapore: Wireless ARPM trends (short history)
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
SingTel
StarHub
M1
2009A
1Q10A
2Q10A
3Q10A
4Q10A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Wireless data as % of total: Data has been a key growth driver and we expect data’s proportion in total revenues to rise to 40-46% by 2015 from 33-41% currently. SingTel leads the pack here with 41% contribution from data revenues at CY2Q11.

Figure 47: Singapore: Wireless data as % of total revenue trends 50.0% 45.0% 40.0% 35.0%
Figure 47: Singapore: Wireless data as % of total revenue trends
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
SingTel
StarHub
M1
2001A
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009A
1Q10A
2Q10A
3Q10A
4Q10A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Wireless ARPU’s: Given recent trends and maturity of the business, we believe wireless ARPU’s would remain largely stable 2012 onwards while rise by 3% for SingTel in 2011 and decline 4% and 5% for StarHub and M1.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Figure 48: Singapore: Wireless total ARPU trends 65 60
Figure 48: Singapore: Wireless total ARPU trends 65 60 55 50 45 40 35 30
Figure 48: Singapore: Wireless total ARPU trends
65
60
55
50
45
40
35
30
25
20
SingTel-total
StarHub-total
M1-total
2003A
2004A
2005A
2006A
2007A
2008A
2009A
1Q10A
2Q10A
3Q10A
4Q10A
2010A
1Q11A
2Q11A
2011E
2012E
2013E
2014E
2015E

Source: Company reports and J.P. Morgan estimates.

Wireless market share and total market size: We expect ~100 bps market share gains at SingTel largely at the expense of StarHub, in line with recent trends. M1’s market share is expected to remain largely stable. We expect the wireless market to grow at a 2015-2010 CAGR of 4%. Thus, our point that value shift largely lies in the pay TV and broadband segments.

Figure 49: Singapore: Wireless revenue share and total market size 60.0% 50.0% 40.0% 30.0% 20.0%
Figure 49: Singapore: Wireless revenue share and total market size
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2010A
2011E
2015E
SingTel
StarHub
M1
Total Revenue

Source: Company reports and J.P. Morgan estimates.

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

-

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Asia Pacific Equity Research 21 October 2011 Comparing NBN and existing business EBITDA margin and cash

Comparing NBN and existing business EBITDA margin and cash flows

In this section we analyze our revenue, EBITDA and EBITDA margin forecasts for Singapore Telcos on an NBN and ex. NBN basis. Ideal world scenario would have been to analyze wireless and fixed line businesses separately but operators do not release such data and even we are of the view that to a certain extent this would be a cost allocation discussion, given the increasing combined use of assets between wireless and fixed line.

What ultimately is important is the Cash flow margin profile of the two segments as a major difference between NBN and ex. NBN business is the asset light nature of the former.

11: SingTel: NBN and ex. NBN business comparison

NBN cash flow dynamics S$m

FY 2009A

FY 2010A

FY 2011A

FY 2012E

FY 2013E

FY 2014E

FY 2015E

FY 2016E

NBN

NBN revenue

63

157

235

357

478

NBN OpEx

(19)

(62)

(119)

(181)

(254)

NBN EBITDA

 

44

95

116

175

224

NBN EBITDA margin

70.5%

60.4%

49.5%

49.1%

46.9%

NBN Capex

0

0

0

0

0

NBN FCF (EBITDA-Capex)

 

44

95

116

175

224

NBN FCF margin

70.5%

60.4%

49.5%

49.1%

46.9%

Ex. NBN

Ex. NBN revenue Ex. NBN OpEx Ex. NBN EBITDA

5,547

5,995

6,399

6,438

6,417

6,436

6,429

6,436

3,437

3,772

4,219

4,426

4,492

4,569

4,667

4,797

2,111

2,223

2,181

2,049

2,049

2,104

2,126

2,147

Ex. NBN EBITDA margin

38.0%

37.1%

34.1%

31.8%

31.9%

32.7%

33.1%

33.4%

Ex. NBN Capex

736

652

726

902

847

793

772

787

Ex. NBN

FCF (EBITDA-Capex)

1,375

1,571

1,455

1,147

1,203

1,312

1,354

1,360

Ex. NBN FCF margin

24.8%

26.2%

22.7%

17.8%

18.7%

20.4%

21.1%

21.1%

Total

Total revenue

5,547

5,995

6,400

6,501

6,574

6,671

6,786

6,914

Total OpEx

3,437

3,772

4,219

4,407

4,430

4,450

4,485

4,543

Total EBITDA

2,111

2,223

2,182

2,094

2,144

2,221

2,301

2,371

Total EBITDA margin

38.0%

37.1%

34.1%

32.2%

32.6%

33.3%

33.9%

34.3%

Total Capex

736

652

726

902

847

793

772

787

Total FCF (EBITDA-Capex)

1,375

1,571

1,456

1,191

1,297

1,428

1,529

1,585

Total FCF margin

24.8%

26.2%

22.7%

18.3%

19.7%

21.4%

22.5%

22.9%

Source: Company reports and J.P. Morgan estimates.

James R. Sullivan, CFA (65) 6882-2374 james.r.sullivan@jpmorgan.com

Asia Pacific Equity Research 21 October 2011

Table 12: StarHub: NBN and ex. NBN business comparison

2011 Table 12: StarHub: NBN and ex. NBN business comparison NBN cash flow dynamics S$m 2008A

NBN cash flow dynamics S$m

2008A

2009A

2010A

2011E

2012E

2013E

2014E

2015E

NBN

NBN revenue

9

34

72

114

156

NBN OpEx

(6)

(24)

(53)

(88)

(123)

NBN EBITDA

3

10

18

26

33

NBN EBITDA margin

35.7%

29.3%

25.5%

22.9%

20.9%

NBN Capex

0

0

0

0

0

NBN FCF (EBITDA-Capex)

3

10

18

26

33

NBN FCF margin