Telcom sector

Risks from CTH still remote
UNDERWEIGHT - Maintained

Telcom sector - fixed line

We reiterate our positive stance on the fixed broadband operators after meeting an advisor of the Thai Cable TV Association and

learning about the local cable TV business. CTH would spend 1-2 years strengthening its position in TV before expanding into

broadband. CTH's key challenge and top priority would be to integrate and modernise over 300 local cable TV networks. Jasmine

and True would dominate the fixed broadband market in 2013-14. We are still bearish about mobile operators (AIS, DTAC and True)

and therefore reiterate our Underweight call. However, we are more positive on fixed broadband plays with Jasmine as our top pick.

What Happened

We met Mr Kasem Inkaew, an

advisor at the Thai Cable TV

Association (TCTA), last week to

understand the local cable TV

business and gain insights into

CTH's business model. TCTA has a

30percent stake in CTH.

In the early stages, CTH would have

to 1) strengthen its TV programme

line-up, 2) integrate over 300 local

cable TV networks, and 3) distribute

new set top boxes.

CTH won the broadcast rights to EPL

and unveiled an aggressive content

acquisition plan to feed up to 120

local cable TV channels in 1H13 from

16 currently. CTH has leased optical

fibre from TOT and SYMC to

integrate local cable TV networks

and will supply 2.5m set top boxes to

replace old boxes and for sale to new

customers.

What We Think

We do not see CTH as a threat to the

fixed broadband business for the

next 2-3 years. Although cable TV

operators are the natural

competitors of fixed broadband

operators, we believe that CTH

would be extremely busy monetising

EPL and other newly-acquired

content first. On top of that, the

integration of over 300 local cable

TV networks would be one of key

challenges given the incompatible

technology, fragmented ownership

and different financial capabilities.

What You Should Do

Stay invested in Jasmine (O, TP

THB6.16). CTH's ambitious plan is

likely to affect True's pay TV unit the

most whereas CTH's expansion into

broadband would depend on the

success of the pay TV business and it

would take a while to integrate and

modernise the fragmented networks.

Jasmine's recent share price

underperformance against both True

and SET offers a great buying

opportunity.

Jasmine remains our top pick

We still prefer fixed broadband operators to mobile operators given the ample

room for subscriber growth, more favourable competitive intensity and a capex

cycle that peaked in 2012. Jasmine, the only pure fixed broadband play in

Thailand, is our top pick, thanks to 1) decent brand awareness, 2) leadership in

the underpenetrated provincial market, 3) proven cost efficiency, 4) high

operating leverage, and 5) manageable debt levels.

The stock is an Outperform with likely re-rating catalysts including 1) an

earnings surprise in FY13-14, and 2) more aggressive capital management in

FY14. The stock is fairly underowned by institutional investors and is currently

trading at an appealing earnings multiple (12x vs. 20x country average FY13

P/E) and growth metric (57% vs. 13% average national EPS growth over three

years).

After the meeting with Mr Kasem, we understand the cable TV business and

CTH's strategy more clearly and no longer think of CTH as a near-term threat

to Jasmine's growth outlook, for now at least. Jasmine's recent share price

weakness due to concerns about CTH as a new entrant in the fixed broadband

space offers a great buying opportunity, in our opinion.

Concerns over new entrant in FBB market

Jasmine's share price fell 6% over the past two weeks due to concerns that a

fourth player, CTH, has emerged, armed with quite an aggressive fixed

broadband plan. CTH's CEO, Mr Krisanan Ngampatipong, unveiled his

ambition to transform CTH from a content aggregator into a triple-play (voice,

data and video) operator with a 7m subscriber target by 2015 (2.4m currently).

CTH would not be a threat to FBB players over the next 2-3

years

We do not think CTH will be a major threat to the three fixed broadband (FBB)

incumbents (TOT, True and Jasmine) over the next 2-3 years but could instead

intensify competition in the pay TV space (True, Grammy and RS) beginning

next year.

Surviving the local cable TV business the top priority: We believe that

CTH will spend the first 1-2 years improving the competitiveness of local cable

TV operators, whose businesses have deteriorated after losing viewership to the

free satellite TV platform and which could be further jeopardised by True's

aggressive cable TV coverage expansion from Bangkok to 30 provinces in 2013

(see Figure 7). To accomplish this, CTH would have to acquire more quality

content (both local and international) to strengthen its value-for-money

proposition. Fiercer competition for content acquisition would drive up content

costs whereas competition would limit pricing power, implying lower

profitability.

"Time to market" would be a big constraint: CTH's ambitious business

plan for a single cable TV platform with 7m subscribers in 2015 would require a

huge capex budget and involve the time-consuming process of integrating over

300 local cable TV networks into a single platform and expanding the network

capacity (homes passed) from 3.5m to over 7m in three years. It would not be

an easy mission to manage 300+ operators moving their businesses in the same

direction. Moreover, CTH's aggressive network expansion plan for the next 1-2

years may be made even more difficult as we expect a shortage of telecom

subcontractors due to hefty network rollouts by 3G/2.1GHz licensed operators

during 2013-15.

However, we have not ruled out the possibility that CTH may seek last-mile

partnership to short-cut the time-consuming network expansion process. Three

possibilities are 1) a business collaboration with True, 2) a partnership with

satellite TV platform operators (PSI, DTV, Grammy or RS), and 3) a

partnership with fixed broadband incumbents (TOT, True, Jasmine or TTT).

How large is the demand for triple-play service? Mr Krisanan said that

CTH's triple-play service (voice, data and video) package should not exceed

THB1,000 per month. Given the lack of economies of scale, CTH would be in an

inferior position to offer competitive pricing for fixed broadband services

compared to the incumbents. Our calculation suggests that CTH's preliminary

price would be 11-27% more expensive than the low-end bundled TV and

broadband packages from True and Jasmine (see Figure 8). Meanwhile, True

has about 0.2m-0.3m customers subscribing for both pay TV and broadband

(almost all in Bangkok) whereas Jasmine has less than 0.1m IPTV customers

(mostly upcountry).

Key takeaways from the meeting with Mr Kasem

Due to confusing newsflow in the market, we met up with Mr Kasem Inkaew,

an advisor at the Thai Cable TV Association (TCTA), to learn about the local

cable TV business and understand more about CTH's business strategy. Note

that TCTA is the major shareholder of CTH with a 30percent stake. Key takeaways

are as follows:

Local cable TV overview: There are about 300 local cable TV operators,

3.5m homes passed and 2.4m subscribers with ARPU of THB300. About 30%

of total subscribers are in Bangkok under 15 operators whereas the upcountry

market is considerably fragmented. Over 90% of the 300 cable operators are

using analogue transmission technology over coaxial cables, limiting the display

capability to 50-80 channels.

Hurt by free satellite TV: Multiple channels with localised and pirated

content are the main attraction drawing local viewers to local cable networks.

This proposition has lately been challenged by the free satellite TV platform.

Nielsen reported that local cable TV operators have lost their customers to the

free satellite TV platform, which offers a greater number of TV channels (+200

vs. 70-80 channels for cable) with no monthly fee requirement (advertising vs.

a subscription-based business model for cable). See Figure 11.

Regulated by the NBTC for the first time: The National Broadcasting and

Telecoms Commission (NBTC) will step in and regulate the entire local cable

TV industry for the first time ever. The NBTC will call for registration and then

issue operating licences to all local cable TV operators by 2012. This process

will legalise all local cable TV operators and imbue operators with higher

responsibility, i.e. intellectual property, content/service quality and regulatory

costs. This would definitely increase the burden (content, network and

regulatory costs) for local and small operators and we are quite skeptical about

how far would cable operators be able to pass on the higher content and

regulatory costs to consumers.

High hopes for CTH: By invitation of TCTA chairman Mr Surapol

Seeprasertkul, Mr Vichai Thongtang and Mr Vachara Vacharapol injected

THB0.5bn cash into CTH and have owned 50% of CTH since 30 Mar 2012. Mr

Vichai is a major shareholder of the Phayathai hospital group and Mr Vachara

is a member of the family that owns the largest newspaper group in Thailand.

According to local newspapers, Mr Vichai said that CTH has set aside more

than THB20bn in capex for the next three years, covering content acquisition,

set top box distribution, system upgrade and network integration. Key spending

milestones are as follows:

On 15 Nov, CTH won the bid for broadcast rights to the English Premier League

(EPL) for the next three seasons (Aug 2013-May 2016) at the price of US$300m.

On 16 Nov, CTH reached a core network lease agreement with TOT and SYMC.

On 22 Nov, CTH allowed consumers to pre-book set top boxes via its website

and will supply 2.5m set top boxes (about THB1,600 per box). On 23 Nov, CTH

entered into a system lease agreement with HP (Thailand). On 26 Nov, the

company introduced six new local TV channels on the cable TV platform (on

top of the existing 16 channels).

Mr Kasem believes that winning the broadcast rights to EPL would be the

major tool for CTH to unify the over 300 local cable TV operators on a single

platform. He added that CTH plans to acquire more content, both local and

international, and aims to offer a total 120 channels (about 50 exclusive

channels and 70 non-exclusive ones).

Besides providing a nice basket of content, CTH plans to lease core networks

and broadcast equipment from TOT, SYMC and HP. This would help CTH to

centralise the distribution centre (head-end), billing, call centres and CRM

systems of all cable TV networks. Mr Kasem believes that the network

integration would strengthen the competitive position of local cable TV

operators and open up opportunities in the broadband market.

Big challenges ahead: Mr Kasem admitted that CTH's ambitious target will

not be easy to execute owing to 1) the incompatibility of each network's

technology, 2) fragmented cable network ownership, and 3) each operator's

differing financial capabilities. On top of that, the retail price-setting and

revenue sharing arrangement between CTH and local operators would be a very

important and sensitive issue. Some consumers may expect better quality

content but baulk from paying higher monthly fees whereas some local cable

operators may be reluctant to absorb additional investments and pay high

content costs to CTH.

Latest stories in this category

• Telcom sector - fixed Line


• Risks from CTH still remote
  UNDERWEIGHT -..


• October vehicle sale up 233.2%


• Thanachart Capital

We Recommend

• Protesters injured, arrested in clashes with police


• Police Saturday morning fired teargases at..


• Bangkok on rally alert


• Police defend tear gas firings

Comments conditions

Users are solely responsible for their comments.We reserve the right to remove any comment and revoke posting rights for any reason withou prior notice.

Article source: http://www.thethailandlinks.com/2012/11/27/telcom-sector/