sMedia&TechnologyAsias
AsiaWirelesss
4Gfallout–thepathtoLTE
Keyvaluationmetrics
ChinaTelstraDoCoMoSoftBankessMobile
LGU+
RatingPreviousratingTickerCurrentprice,(LC)TargetPrice(TP)PreviousTP%changePotentialreturnFY12edividendyield
NN941HKHKD76.1580791%8.7%3.7%
NOWTLSAUAUD3.293.403.400.0%11.3%8.60%
OWOW9437JPJPY140,800160,000160,0000.0%17.6%3.9%
OWOW9984JPJPY2,1683,5003,5000.0%56.8%0.3%
N(V)OW(V)9427JPJPY17,22018,00031,000-41.9%
9.2%4.7%
UWUW032640KSKRW6,7905,0005,0000.0%26.4%1.7%
Source:Companydata,HSBCestimates.Pricesasof13January2012.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,plustheforecastdividendyield,exceptforSoftBankandLGU+,wheredividendyieldisnotincluded.
17January2012
NealeAnderson*
Analyst
TheHongkongandShanghaiBankingCorporationLimited
+85229966716
neale.anderson@.hk
TuckerGrinnan*
Analyst
TheHongkongandShanghaiBankingCorporationLimited
+85228224686
tuckergrinnan@.hk
VaibhavDusad*Associate,Bangalore
ViewHSBCGlobalResearchat:
*Employedbyanon-USaffiliateofHSBCSecurities(USA)Inc,andisnotregistered/qualifiedpursuanttoFINRAregulations
Issuerofreport:TheHongkongandShanghaiBankingCorporationLimited
Disclaimer&DisclosuresThisreportmustbereadwiththedisclosuresandtheanalystcertificationsintheDisclosureappendix,andwiththeDisclaimer,whichformspartofit
abc
GlobalResearch
4G(LTE)launchesaregatheringmomentuminAsia
ContinuetopreferJapanesewirelessoverChinaandKorea–OWNTTDoCoMoandSoftbank;UWLGU+
DowngradeTelstratoNfromOW(onvaluation)andesstoN(V)fromOW(V)(onpetition);retainNonChinaMobile
LTE(Long-TermEvolution)launchesareeleratinginAsia,resultingininvestmentopportunityinsomemarketsandpetitionandrisksinothers.
ForChinaMobile,weexpectTD-LTEservicelaunchin2H12,withlimitedearningsimpactuntil2014.Whilethe3G(TD-SCDMA)outlookismuchimproved,petitionislikelytoremainintense.
InSouthKorea,LGU+stockhasralliedonitsaggressiveapproachtoLTE.Webelievepetition,inadditiontotariffcontrols,willcontinuetounderminethestrongdemandforsmartphones.
InJapan,SoftBank’slaunchofaworkshouldthreateness–previouslytheleadingwirelessbroadbandproviderinJapan.Inthewirelesshandsetmarket,bothNTTDoCoMoandSoftBankremainwell-positionedtobenefitfromstrongdemand.
InAustralia,weexpectafocusonLTEdeploymentandspectrumacquisitionin2012,withTelstrafacingpetitionfromVodafone-Hutchison.
WedowngradeTelstratoNeutralfromOverweight,aswebelievethesuperiormobileoutlook,highyieldandlikelystockbuybackin2012arenowreflectedintheshareprice.InJapan,wedowngradeessfromOW(V)toN(V)ontherapidincreasepetitionforitseMobilewirelessbroadbandunitfromSoftBank.WeremainNeutralonChinaMobile:thekeyupsiderisktoourratingiselerationintheTD-LTElaunchtimelines,whilethekeydownsideriskisgreaterinvolvementinthewirelinemarket.picksinJapanremainNTTDoCoMoandSoftBank.
sMedia&TechnologyAsias17January2012
abc
Investmentsummary
DifferentlaunchtimelinesforLTEareresultinginpetitioninChinaandKorea
ContinuetopreferJapan:welikeDoCoMo(OW)andhighlightearningsupgradesandsharepricedeclinesatSoftBank(OW)
DowngradeTelstratoNfromOW(onvaluation)andesstoN(V)fromOW(V)onincreasedlevelspetition
Technologydivergence
Wehaveconsistentlyarguedthatoverallservicecapability(workquality,spectrum,abilitytooffloadtowirelineandhandsets)iskeyincopingwiththewirelessdata‘capacitycrunch’.
Theincreasingpaceof4G(LTE)servicelaunchinAsiaishighlightingdifferentlevelsofservicecapability:inthisreportweexplorehowthemigrationtoLTEaffectstheinvestmentoutlook.
Weexploredifferentscenariosof3Gand4GgrowthforChinaMobile,anddowngradeTelstrainAustralia(onvaluation)andessinJapan(duetopetitioninthewirelessbroadbandsegment).
Market/operatorpreferences
Ourpreferredapproachremainstostartatthemarketlevel,assessingregulatorypetitiveintensity.Here,wenotethatLTElaunchispetitiveintensityinKorea,andalsointhewirelessbroadbandsectorinJapan.WearecautiousontheKoreanwirelessoperatorsanddowngradeesstoNeutral(V)fromOverweight(V)asaresult.
Bycontrast,LTEisnotsignificantlyaffectingthelevelspetitionintheJapanesewirelesshandsetsector.WecontinuetolikebothNTTDoCoMoandSoftBank:bothbenefitfromstronglevelsofsmartphonedemand,andrelativelylowadoption-levels.
Similarly,weremainconfidentthatTelstra’smobilebusinesswillcontinuetooutperformitspeers.WehoweverdowngradeTelstraonvaluation,andleaveourforecastsandtargetpriceunchanged.
Chinarepresentstheplexofthefourmarkets,witheachoperatorusingadifferenttechnology.WhilewenoteanimprovedoutlookforChinaMobile’s3GTD-SCDMAtechnology,itshouldremainconstrainedinitsabilitytoprocurehandsetsfromglobalvendors.WeexpectittolaunchTD-LTEservicesin2H2012,butdonotexpectlower-costhandsetsinvolumeuntillate2013,andacorrespondingearningsrecoveryuntil2014e.
Potentialcatalysts
Technologymigrationcreatesgreateropportunitiesandthreatsfortelcos(andtelcoinvestors),asthepaceofchangeisexacerbated,
2 sMedia&TechnologyAsias17January2012 abc comparedtothe‘steady-state’phasewhenchangesinsubscriberandrevenuemarketsharehappenonlyslowly.Potentialnear-termstockcatalystsinclude,inourview: ChinaMobile.ThekeyupsiderisksarebetterthanexpectedavailabilityandadoptionofTD-SCDMAsmartphonesin2012,andanearlierthanexpectedlaunchofTD-LTE.Thekeydownsideriskisgreaterinvolvementinthewirelinesector(toprovidethepetitionthesectorcurrentlylacks–seeourJanuary2012report:PolicyPressures).WeadjustourforecastsslightlytoreflectOctoberandNovember2011monthlysubscribernumbersandraiseourTPfromHKD79toHKD80. Japan.Atthesectorlevel,welookforthetelcostoadjustdatapricesfromthecurrentflat-ratestructure.ForNTTDoCoMo,welookforanimprovingprofitandsmartphonesalesoutlookatthe9-monthresultsinlateJanuary,preparingthegroundforstrongerguidanceforFYMar-13inMay.WeexpecttheministrytoawardSoftBank15MHzof900MHzspectrumshortly,helpingtoworkcongestionwhen5MHzesavailableinJuly2012.Ourforecasts,targetprices,andratingsremainunchanged.WedowngradeesstoN(V)fromOW(V)onpetitioninbothwireline(fromNTT’snewlow-costfibreservice)and wireless(fromUQCommunicationsandSoftBank’swork.WehalveourtargetFY12ePEmultiplefrom8xto4xandcutourtargetpriceby42%fromJPY31,000toJPY18,000.Arisktoourviewistheawardofthe900MHzspectrumwhichweexpecttogotoSoftBank. Australia.WedowngradeTelstratoNeutralfromOverweightonvaluation.Wemakenochangestoourforecastsorvaluationmethodology.Keyingeventsforthestockarethe(expected)approvaloftheNBNdealbytheregulator(theACCC).Thiswouldclearthewayforpanytoannounceastockbuyback–perhapsassoonashalf-yearresultsinFebruary.Thekeydownsideriskremainspotentialregulatorychange:theOppositionLiberalDemocratpartyhaspledgedtocanceltheNBN,whichcouldreturnthewholetelcosectortoaperiodofprolongedregulatoryuncertainty. Korea.WeremainUnderweightLGU+,believingthatitwillstruggletoregainsubscriberslostin2H10and1H11whenitssmartphoneline-upwasweak.Conversely,weviewitsbigpushwithLTEasdestabilisingforthewholesector,poundingtheimpactofregulatorypricecontrols.Akeypotentialcatalystat4Q11results(andarisktoourview)isanaveragerevenueperuser(ARPU)growth. Keyvaluationmetrics ChinaMobile Telstra DoCoMo SoftBank ess LGU+ RatingPreviousratingTickerCurrentprice(localcurrency)TargetPrice(TP)PreviousTP%changeTarget/ImpliedFY12ePEPotentialreturnEV/EBITDA2012eFY12edividendyield,% NN941.HKHKD76.1580791%118.7%4.53.6% NOWTLS.AUAUD3.293.403.400.0% 1111.3% 4.98.50% OWOW9437.JPJPY140,800160,000160,0000.0% 1317.6% 3.13.9% OWOW9984.JPJPY2,1683,5003,5000.0% 956.8% 4.50.3% N(V)OW(V)9427.JPJPY17,22018,00031,000-41.9% 49.2% 3.64.7% UWUW032640.KSKRW6,7905,0005,0000.0%2226.4%2.81.50% Source:Companydata,HSBCestimates.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,plustheforecastdividendyield,exceptforSoftBankandLGU+,wheredividendyieldisnotincluded.Priceasofcloseofbusinesson13January2012.
3 sMedia&TechnologyAsias17January2012 abc LTE:subscriberimpacts Consumerscaremoreabouthandsetsandservicesthantheunderlyingtechnology PotentialupsideforChinaMobileifTD-SCDMAsmartphonevolumesandavailabilityimprovein2012,priortoTD-LTElaunch LimitedupsideforLGU+initsaggressivemarketingofearlyLTEhandsets Summary WeseeacleardivideinLTEmarketingpoliciesacrossAsia.KoreanoperatortacticsaresimilartotheUSinthatLGU+andSKTareusingtheirearlylaunchtopresshomeanadvantage.LTEservicesarebeingmarketedaggressivelyasaresult.Inothermarkets,LTEismorelow-key,beingpositionedasprimarilyasupply-sideinnovation. Thislatterapproachfitsourview.Weseetheprimaryinnovationinwirelesstelcoservicesoverthelastseveralyearsasthemigrationfromfeature-phonestosmartphones(andthe‘capacitycrunch’istheresultofthisshift).Wedonotseethemovefrom3G(offeringspeedsofupto42MbpswithHSPA+)toLTE(offeringspeedsofupto40-70Mbps,dependingonthesizeofthecarrier)asasimilarstep-change. Inmostmarkets,LTEwillbeintroducedgradually.ThekeypossibleexceptionisChina,whereChinaMobilehaseveryincentivetomigraterapidlytoTD-LTE,giventhebetterperformanceandesstoglobalhandsetsvendors. Handsetavailabilityiskey Contrastinggrowthrates LTEhasseenwildlydifferenttake-upratesinbothKoreaandJapan. JapanandKorea:LTEounts,monthafterservicelaunch 12001000800600400200 0123456789101112 NTTDoCoMoSKTLGU+ Source:Companydata,HSBCestimates Thisisprimarilyduetohandsetavailabilityandmarketing.WeexpectsimilaravailabilityissuesinChina. Koreanvendorsseektobuildamarketshareadvantage.HavingbeenslowtorespondtoApple’stouch-screeninnovationswiththeiPhone,KoreanvendorsareseekingtoregaintheinitiativewithLTE.AppleisnotexpectedtolaunchtheLTE-capable(probably)iPhone5
4 sMedia&TechnologyAsias17January2012 abc untillate2012,givingtheKoreantelcosc1yeartopresstheiradvantage. Japanesevendorsarefurtherbehind.InJapan,bycontrast,NTTDoCoMoonlylauncheditsfirstLTEhandset(theSamsungGalaxy)inDecember2011.Thefocusismoreonrelativesmartphoneportfolios,andlessontheinherentadvantagesofLTEtechnology.Japanesehandsetvendorshavegenerallybeenslowertomarketwithtouch-screensmartphonesthantheirKoreanpeers,andarethusfocusedfurtherbehindwithLTE. China:TD-SCDMAsmartphonesfinallyarrivinginvolume.ChinaMobilehasonlyrecentlybeguntoshipTD-SCDMAsmartphonesinvolume,andhaslostsignificantgroundtoitspeers.WhilewebelievetheoutlookforTD-SCDMAsmartphonesin2012ismuchimproved,ChinaMobileisunlikelytobenefitfromthe‘haloeffect’ofaniPhoneuntil2013. DifferentresponsestotheiPhone4S AnadditionalfactordrivingLTEadoptioninKoreaisatepidreceptiontotheiPhone4S.Webelievethisisbecause: Hardwareissues.Comparedtothelatestedition(LTE)phonesfromSamsungandLGE(amongothers),theiPhone4Sisseenashavinganinferiorscreen(resolutionandsize). Batterylifeissues.Koreanconsumershavebeenputoffbythewell-documentedbatteryissueswithiPhone. Sirivoice-recognitionservicenotavailableinKorea.ThekeysoftwareupgradetotheiPhonewastheSiriservice–unfortunatelythisisinitiallysupportedinjustafewlanguages. iPhone4Spre-ordersstartedinKoreaon11November2011.By23November,bined pre-ordersreachedc300k,butmanycustomershadregisteredformultipledevicesonworks,whilesomecancelledtheirorder–actualsalesvolumehasthereforebeenmuchlower. Revenuemarketshare ChinaMobileoutlookimproving AsweoutlinedinourNovember2011report‘Thesurge:datademandtotakeoffin2012’,ourbasecaseisforChinaMobiletoloserevenuemarketsharetoChinaandChinain2012.WhileweraiseourTD-SCDMAsmartphoneforecastsinthisreport,thisviewstillholds: Portfoliogapremains.WhileChinaMobilewillhaveamuchbroaderarrayofTDSCDMAsmartphonesin2012,thegapwithpeersstillremains–particularlyforhighvisibilitybrandssuchastheiPhone. Mindthe(speed)gap.Chinacurrentlyhastheeasiestmigrationpathinupgradingwork.ItisalreadydeployingHSPA+inmajorcities,whichcanreachpeakspeedsof42Mbps.Bycontrast,ChinaMobileandChinaareconstrainedwiththeir3Gtechnologytospeedsofc5-10Mbps.Weexpectthistoeincreasinglyapparenttousersthrough2012,tothebenefitofChina. OurestimatesassumethatChinaMobilesmartphonesalesgaingroundrapidly,reaching46%addsin2012,fromjust12%in2011.However,itslatestartmeansthatitwouldremainbehinditspeers.
5 sMedia&TechnologyAsias17January2012 abc China:wirelessmarketoutlook China:additionsmarketshare,% 60% 50% 40% 30% 20% 10% Mar-10May-10 Jul-10Sep-10Nov-10 Jan-11Mar-11May-11 Jul-11Sep-11Nov-11 ChinaMobile China China Source:Companydata ChinaMobile:subscriberbreakdownbytechnology,m 1,0009008007006005004003002001000 Dec-08 Dec-09 Dec-10Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 2G3G4G Source:Companydata,HSBCestimates China:Mobilerevenuemarketshare,% 70% 60% 50% 40% 30% 20% 10% 0% 2011 2012 2013 2014 2015 2016 ChinaMobileChinaChina Source:Companydata,HSBCestimates
6 sMedia&TechnologyAsias17January2012 abc Korea:LGU+fightsback InKorea,strongearlydemandforLTEhasbeendrivenbymassiveadvertising.WithbothSKandLGU+pushingLTE(liketheUSbutunlikemostothermarkets)andstrongvendormarketingfrombothSamsungandLGE(whichseesLTEasanopportunitytocatchuplostground),demandhasbeenstrongerthanmanyanticipated.WhiledatacardserviceswerelaunchedinJuly2011,handsetsweren’tlauncheduntilOctober.BothSKTandLGUplushaveofferedsimilarphonesthusfar:theLGEOptimusLTEphonewaslaunchedinOctober,andtheSamsungGalaxySIIHDinNovember. ThepositivefortelcosisfasterthanexpectedLTEadoptionbyconsumersmeansfastermigrationawayfromflat-ratetariffs.TheLTEdatabundlesarelarge(3GB)buttheprincipleoflinkingusagetorevenueisbeinggraduallyintroduced(again)inKorea. SubscribergrowthSKoriginallytargeted300ksubsbyend2011,6mby2013,and10mby2015.However,ithad300ksubscribersby24November,surpassingitsoriginaltargetwithease.SKTstatedthat35%ofnewcustomersaretakingLTE.Itnowexpectsc700kbyend2011and5mbyend2012.Bythe endof2012,itexpectsthathalfofitshandsetportfoliowillsupportLTE. LGUplushad550kLTEsubscribersbytheendofDec-11.BylateNovember,94%ofLTEusersweresubscribingtotariffsofavalueofKRW62korhigher,and87%hadoptedfora30-monthcontract.OnaKRW62ktariff,thisentitlesthemtoanadditionalKRW104,000revenuediscount(6x18,000monthlydiscount). China:sensitivityanalysis WeranasensitivityanalysisonourChinaMobileforecaststoassesstheimpactofchangesinourTD-SCDMAandsmartphonegrowthforecasts(tablebelow). CommontoourallscenariosistheexpectationthatTD-LTEountgrowthdrivesanearningsrecoveryin2014e.ThedifferencebetweenourbullishandbearishexpectationsistheextenttowhichTD-SCDMAountgrowthisstablein2012and2013. Inourbullcasescenario,better-than-expectedadoptionofTD-SCDMAsmartphones(33min2012asopposedto22minourbasecaseestimate)andlowersubsidycosts(drivenbyincreasedvolumes)woulddriveEPSgrowthof9%. China:3Gasa%adds100% 80% 60% 40% 20% 0%Mar-10 May-10 Jul-10 Sep-10Nov-10Jan-11 Mar-11May-11 Jul-11 Sep-11Nov-11 Source:Companydata CM CT CU
7 sMedia&TechnologyAsias17January2012 Conversely,ourbearcasescenarioproject20msmartphonesbyend2012–anountnumberachievedbypushingsubsidieshigher.TheresultingEPSgrowthwouldbejust3.2%in2012e. abc ChinaMobile:earningssensitivitytochangesinountgrowth Basecase 2011e TD-SCDMAounts,m 50 TD-LTEounts,m - Smartphoneounts,m
3 Sales,RMBmEBITDA,RMBmOP,RMBmNete,RMBmEPS,RMBEPSgrowth,% 516,505246,840150,004122,314 6.021.0% Bullcase 2011 TD-SCDMAounts,m 51 TD-LTEounts,m - Smartphoneounts,m
4 Sales,RMBmEBITDA,RMBmOP,RMBmNete,RMBmEPS,RMBEPSgrowth,% 516,550246,876150,040122,341 6.021.0% Bearcase 2011 TD-SCDMAounts,m 50 TD-LTEounts,m - Smartphoneounts,m
3 Sales,RMBmEBITDA,RMBmOP,RMBmNete,RMBmEPS,RMBEPSgrowth,% Source:Companydata,HSBCestimates 516,496246,833149,996122,308 6.021.0%
8 2012e 91322 556,470265,346160,545129,606 6.386.0% 2012100 333 561,336270,872166,068133,768 6.599.3% 201288320 555,086260,923156,122126,279 6.223.2% 2013e 12610868 575,122270,056160,672130,445 6.420.6% 201313510780 584,603280,468170,753138,023 6.803.2% 201312410867 572,783262,381153,083124,733 6.14-1.2% 2014e 160200152 614,117292,187180,297146,146 7.2012.0% 2014169198163 622,275302,635190,049153,513 7.5611.2% 2014158200150 612,180282,632170,917139,058 6.8511.5% sMedia&TechnologyAsias17January2012 abc Networkoutlook ChinaMobiletoseegreaterworkutilisation,asmixshiftsawayfromlow-usagefixed-wirelesscustomers MostoperatorstodeployLTEgradually,focusingonmetroareasChinaMobileandLGU+arepossibleexceptions:botharemore likelytorequirenationalcoverage LTEdeploymentpatterns LTEdeploymentisprogressingatvastlydifferentratesacrosstheregion,dependingontechnologyavailability,petition,andoperatordemand: China.ChinaMobilewouldliketofast-trackitsTD-LTEdeployment,duetoitsstatusasaglobaltechnology.However,itisconstrainedbypolicy.WedonotexpectTD-LTEvolumesuntil2H2013. Japan.LTEhasbeenrelativelylow-keythusfar,butweexpectoperatoractivityandconsumerinteresttopickupduetoaseriesofservicelaunchesin2012. Korea.TherehasbeenasignificantincreaseininterestinLTEservicesinlate2011,fuelledbyheavyadvertisingbyhandsetvendorsandLGUplus.Weseethisaspositive,asoperatorsareabletomigrateusersawayfromflat-rateplans,butunlikelytooffsettheimpactofheavytariffcontrols. ChinaMobile–TDoutlook AsweexplainedinourNovember2011reportThesurge:datademandtotakeoffin2012,webelievethatChinaMobileisdisadvantagedrelativetoitspeersbecauseofthelackofglobal scaleforTD-SCDMAtechnology.Theoutlookisnowimproving,enablingittosellabettermixofhandsetsthroughbothoperatorandopen-marketretailchannels.However,inourview,itwillcontinuetolacktheesstoglobalhandsetplayersandmodels(mostnotablytheiPhone)untilTD-LTEservicesarewidelyavailable.OurbasecaseisforbroaderavailabilityofTD-LTEservicesin2013,butonlysupportedinitiallybyhigh-endhandsets. Fixed-wirelessdependenceending Giventhattheessofthehome-grownTDSCDMAstandardisatechnologypolicyobjective,ChinaMobilehasbeenunderconsiderablepressuretoshowsubscribergrowth.Inourview,thishasledtotheregionalaffiliatespushingfixed-wirelessterminalsaggressively(particularlyin2010).However,TD-SCDMAchipsetmarketshareleaderSpreadtrumnotedthataslateasthefirstquarterof2011themajorityofTD-SCDMAshipmentswereforfixed-wirelessterminals.ChinaMobileprovidesneitherasplitof2Gvs3GARPU,ordifferenttypesof3Gsubscriber.Thissuggeststhat3GARPUhasbeenlowtodate,becausethemajorityofTDSCDMAcustomershavebeenusingfixed-wirelessterminals(providingrevenueofcRMB30permonth).Weestimatethatc30%(14.4m)ofChina
9 sMedia&TechnologyAsias17January2012 abc ChinaMobile:subscriberbreakdownbytype,m750 700 650 600 550 500Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source:Companydata,HSBCestimates 2GhandsetsSmartphonesDatacardsFixed-wireless Dec-12 Mobile’s48mTD-SCDMA3GountsatendNovember2011werefixed-wirelessmodems,whilec10%weredatacards.Theproportionoffixedwirelessmodemshasbeendecliningthrough2011ashandsetavailabilityimproves–weestimateitwasthemajorityofshipmentsin2010. TD-SCDMAoutlookimproving Through2011,theavailabilityofTD-SCDMAhandsetshasgraduallyimproved.Keymilestonesinclude: Featurephones.SpreadtrumnotedthatvolumeshipmentsofTD-SCDMAfeaturephonesbeganin1Q11,andwastheprimarydriverofitsexpectationoftotalTD-SCDMAshipmentsof50min2011,upsignificantlyfrom30min2010.Ofthis50m,itestimated6-7mfixedwirelessterminals,5-10msmartphones,withtheremainderfeature-phones. Distribution.Initially,TD-SCDMAproductswereonlyavailablethroughChinaMobilestores.In2011,ChinaMobilehasgraduallyopenedupitsretailchannelssomoreandmoreTD-SCDMAproductisavailableinopenmarketstores.Spreadtrumexpectstwothirdsofsalesin2012tobethroughopenmarketchannels. Smartphones.TD-SCDMAsmartphonesstartedtogathermomentumin3Q11,withthelaunchoftheSamsungGalaxySIIatthehighend,andterminalsusingMarvelchipsets.Crucially,ChinaMobileisnowseeingmoreproductsattheRMB1,000-1,500pricepoint–thisiswhereChinaandareseeingstronggrowth.monwithitspeers,ChinaMobileseemslessinterestedinpushingsmartphonesbelowtheUSD100level,assmartphonesbelowthisprice-pointareseenastoounder-powered. TD-SCDMAshipments/sales Therehasbeenconsiderableuncertaintyinthemarketovera)howtoreconcileChinaMobileTD-SCDMAdevicesaleswithshipmentestimatesfromchipsetmanufacturers,andb)theoutlookforTD-SCDMAsalesgrowthin2012. Totalmarket.Onits3Q11resultscall,SpreadtrumestimatedtotalTD-SCDMAshipmentsat50min2011,andashighasc90min2012. Smartphoneestimates.MarvelestimatesTDSCDMAshipmentsat10-12min2011,and20-30min2012. 10 sMedia&TechnologyAsias17January2012 abc Takingthetotalmarketshipmentsfirst,thediscrepancybetweenchipsetshipmentsofc50min2011andChinaMobile’saddsofc30mseemslarge,butwebelieveitcanbeexplainedasfollows: Inventory.ChipsetsareshippedtohandsetmanufacturersandthentoChinaMobileanditsdealers,resultingintwostagesofinventorybeforeadeviceissoldandregisteredasaddition. Upgrades.WeestimatethatupgradesforChinaMobilecouldbehigherascustomersupgradedfixed-wirelessmodemsasTDSCDMAhandsetsimprovedin2H2011.Thiswouldnotshowupasaaddition,butwouldboostshipmentnumbers. RegardingTD-SCDMAsmartphones,webelievetheMarvelestimateof10-12mfor2011representsalargenumberofdevices‘inthechannel’ratherthaninthehandsofendusers.However,weestimateasubstantialimprovementinsmartphonessalesbyChinaMobilein2012,to28m. China:TD-LTEoutlook Weexpectasoft-launchofTD-LTEtechnologybyChinaMobilein2H2012,withc2mountsbyyear-endgrowingsignificantlytoc43mbyend2013.ChinaMobilehasmadenosecretofitsdesiretomoverapidlytoTD-LTE.Severaleventsin2H11meanthatthisdeploymentshouldhappensooner–reachingscalein2013e,ratherthanin2014. LaunchofTD-LTEservicesinothermarkets.GiventhatChinahassponsored China:devicesalesestimates(m) Mar-11Jun-11Sep-11Dec-11eMar-12eJun-12eSep-12eDec-12e Total3Gounts,m 61.9 ChinaMobile 27.0 China 18.5 China(EV-DO)16.4 adds,m 15.1 ChinaMobile 6.3 China 4.5 China(EV-DO)4.4 3GountsNetAdditionsMarket ChinaMobile 41.6% China 29.6% China 28.9% 3GGrossAdds ChinaMobile 8.1 China 5.8 China 5.5 3GUpgradeRate ChinaMobile 1.0% China 1.0% China 1.0% Upgrades,m ChinaMobile 0.7 China 0.5 China 0.4 Impliedreplacementrate,months ChinaMobile 25.4 China 24.8 China 24.4 DeviceSales,m ChinaMobile 8.8 Ofwhichsmartphones 0.0 China 6.2 China 5.9 80.535.023.921.518.68.05.45.2Share,%43.2%29.1%27.8% 10.47.16.7 1.0%1.0%1.0% 0.90.60.6 25.424.724.5 11.30.27.77.3 101.843.230.228.421.38.16.36.9 38.2%29.5%32.3% 11.28.58.9 1.0%1.0%1.0% 1.20.80.7 25.424.824.6 12.41.39.39.6 126.350.539.935.924.57.39.77.4 29.9%39.7%30.4% 11.112.510.1 1.0%1.0%1.0% 1.41.11.0 25.424.824.5 12.51.813.511.0 154.258.751.144.327.98.311.18.5 29.6%40.0%30.4% 12.714.811.8 1.0%1.0%1.0% 1.61.41.2 25.324.724.6 14.42.716.213.0 185.568.163.354.031.39.412.29.7 30.0%39.0%31.0% 14.616.913.8 1.0%1.0%1.0% 1.91.71.5 25.324.824.6 16.53.518.615.2 220.678.876.865.135.210.613.511.1 30.3%38.3%31.4% 16.719.216.0 1.0%1.0%1.0% 2.22.11.8 25.324.724.6 18.94.421.317.8 259.990.791.677.639.312.014.812.5 30.5%37.7%31.9% 19.021.818.5 1.0%1.0%1.0% 2.52.52.1 25.324.724.6 21.55.424.320.6 Source:Companydata,HSBCestimates Dec-11eDec-12e 126.350.539.935.979.529.825.923.9 259.990.791.677.6133.640.351.641.8 37.4%32.6%30.0% 30.1%38.6%31.2% 40.962.933.872.731.160.1 1.0%1.0%0.9%1.0%0.9%1.0% 4.2 8.3 3.0 7.7 2.7 6.6 24.724.824.123.722.323.0 45.171.23.316.136.880.433.866.7 11 sMedia&TechnologyAsias17January2012 abc TD-LTEdevelopmenttosupportisequipmentandhandsetvendors,itisunlikelytowishtobeleftbehindbydeploymentsinothermarkets(suchasJapan). m’ssupportforTD.Withits8960‘Snapdragon’chipset,mconfirmedTD-LTE’sviabilityandlikelyscale.Whilethe8960ishigh-end(andmayfeatureinapatibleiPhoneforinstance)m’sdecisiontosupportTD-LTEissignificant,andwouldleadtosupportforentry-levelhandsetsinduecourse. TD-LTElaunchinothermarkets Wehavelongarguedthatthe‘capacitycrunch’meansoperatorswillincreasinglyseektoutiliseunpairedaswellaspairedspectrumallocations.Todate,withthefailureofwimaxtogaintraction,therehasbeennotechnologysuitablefordeploymentinthesebands.ThegrowingscaleofTD-LTEanditssupportbyvendorssuchasmmakesitthemosteligiblecandidate. OperatorsasdiverseasBharti,RelianceIndustries,andClearWireareallexploringTDLTElaunches.However,thelargestlaunchtodatehasbeenthatofSoftBankinJapan. SoftBanksoft-launcheditsworkinNovember2011foritsenterprisecustomers,andplanstograduallyincreasecoverage.Thisisgreatlyaidedbythefactthatitcanre-usemuchof’sinfrastructure.Italsoplanstolaunchasmartphoneonwork(providedbyZTE)inJuly2012,possiblyusingthem8960SnapDragonchipset. ChinaMobile:TD-LTEupgrade ChinaMobilecurrentlyhasc200kTD-SCDMAbasestations.WebelievethemajorityofthesecouldberelativelyquicklyupgradedtosupportTD-LTE:ChinaMobilehasknownforsometimethatthiswouldbeitspreferredtechnology,soit makessensetomaketheinfrastructurereadilyupgradeable. OurdiscussionwithZTEandindustryexpertssuggestsanupgradecostofcUSD100kperbasestation,suggestingChinaMobilecouldhavenationalTD-LTEcoveragerelativelyquicklyatacostofcUSD2bn.parestoexpected2012capexofcRMB128bn,orUSD20bn. Korea–LTEdeployment SKTandLGUpluslauncheddatacardservicesinJuly2011.SKTisusingthePETAbrand. KTinitiallyreceivedpreliminaryapprovaltoswitchoffits2Gserviceson8December2011,afterhavingtwoapplicationsrejectedonthegroundsthatremaining2Gsubscribernumbersweretoolarge.Finally(afteraggressivemarketing),subscribernumbersfelltolessthan1%oftotalcustomers–159,000users.However,workswitch-offwasthenfurtherdelayedplaintsfromtheremaining2Gusers.KTfinallybegantoshutdownits2Gserviceon3January2012.Theswitch-offbeganinSeoul,andwillextendgraduallytootherareas,concludinginMarch2012. InearlyJanuary,KTlauncheditsLTEserviceinfivemajordistrictsinSeoul,targetingfullcoveragebytheendofthemonth.Ittargets4mLTEsubscribersbyend2012,expectingLTEhandsetstobemorethanhalfofitsportfoliobyend2012. Korea:LTEcapexandcoverage SKTinitiallyplannedtorolloutin23citiesinearly2012,andachievefullcoveragebyend2012.Itsubsequentlybroughtforwardthistargetandnowaimsforcoverageof28citiesbyJanuary2012and84citiesbyApril2012,eightmonthsearlierthanoriginallyplanned.LGU+claimsthisistheresultofitsbetter-than-expectedsubscribergrowth.SKT 12 sMedia&TechnologyAsias17January2012 LTEcustomersaregenerating1.6GBoftrafficpermonth,andSKTexpectsthecurrent0.3PBoftrafficadaytoincreaseto1PBperdayby2013.LGUpluscontinuestotargetnationalcoveragebyApril2012.Itwastargetingcoverageof82citiesbyDecember2011.LGU+3GusersaregeneratingparedtoSKTat1.1GB.panyexpectsover1GBasanaverageforLTEsubscribers.KTaimstospendKRW1.3trntodeployLTEtechnologyonanationalbasis,spendingKRW1.1trnin1H2012. abc 13 sMedia&TechnologyAsias17January2012 abc Thispagehasbeenleftintentionallyblank 14 sMedia&TechnologyAsias17January2012 abc Companies 15 sMedia&TechnologyAsias17January2012 abc ChinaMobile(941) TD-LTE4Gtechnologytohavelimitedimpactbefore2013;keypotentialcatalystisimprovementinTD-SCDMAoutlook Furtherinvestmentinnon-corebusinessapotentialnegativecatalyst,includinggreaterinvolvementinthewirelinesector RetainNeutral;liftTP1%toHKD80fromHKD79 Investmentthesis ChinaMobilehasbeeneffectivelyhamstrungbyTD-SCDMAtechnology.Thishas–sofar–notresultedinasignificantchangeinmarketshare:ChinaMobilehadc40%of3Gsubscribersatend2011,downfrom44%atend-2010.Crucially,ChinaMobile’sc80mhigh-valuecustomersarenotchurningouttopetitors.Thisisclearlyreflectedinthec12miPhonecustomersonwork(restrictedtojustGSMandEDGE)byDecember2011.Wedonotexpectthesehigh-valuecustomerstoleave:manyarebusinessusersforwhomvoiceisthekeyapplicationwhodonotwanttochangetheirmobilenumber.Whilethetwo-citynumberportabilitytrialcontinues,thereseemslittleregulatoryinterestinextendingit,andwedonotexpectnumberportabilitytoberolledoutmorebroadlyinthenearterm. WherethenliestheriskforChinaMobile?
Weseetheprimaryriskasitsinabilitytobenefitfromarisingwaveofdatademand,duetoweakertechnologyandaweakerhandsetportfoliothanitspeers.Weexpectits3Gmarketsharetofallto32%by2013.WhileTD-LTEshouldlaunchinsomeformbyend-2012orearly2013,wedonotexpecthandsetsinvolumeuntil2014,withsales restrictedtodatacardsandhigh-endsmartphonesduringmostof2013. WhileChinaMobile’svaluationisundemanding,webelievethisalsoreflectspotentialcorporategovernanceissues.Forexample,ChinaMobilehastheflexibilitytoraiseitspayoutratio,butinvestorshopingforanincreaseat1H2011weredisappointed. Inaddition,withtheinvestmentinShanghaiPudongBank,webelieveitispossiblethatpanymakesmorenon-coreinvestmentsthatservetheneedsofitsmajorityshareholder(thegovernment)morethantheminorityshareholders.WebelieveoneriskthathasincreasedsinceourlastupdateisthatChinaMobilemovesintothefixed-linesector.AswewroteinourJanuary2012report‘PolicyPressures’,theNDRCinvestigationintomonopolisticpracticesatChinaandChinaindicatesadesiretoseegreaterpetition.ChinaMobile,withcUSD50bncash,couldwellberequiredtostepin.Wewouldseesuchamoveasnegativeforallthreetelcosandpositivefortheequipmentmanufacturers. Demand-sideopportunities Asweoutlineinthisreport,akeycatalystforChinaMobileisanimprovementintheoutlook 16 sMedia&TechnologyAsias17January2012 abc ChinaMobile:valuation Chinatelcos:1yrforwardPEmultiple 908070605040302010 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 CMHK CU CT Source:ThomsonDatastream ChinaMobile:average1yrforwardPEtradingranges90 85 80 75 70 65Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Price 11x 12x 13x Aug-11 Dec-11 Sep-11 Dec-11 Source:
ThomsonDatastream ChinaMobile:performancerelativetoHangSengIndex0.0050 0.0045 0.0040 0.0035 0.0030 0.0025Jan-10 Mar-10May-10 Jul-10 Sep-10Nov-10Jan-11Mar-11May-11 Jul-11 Sep-11Nov-11 Source:ThomsonDatastream 17 sMedia&TechnologyAsias17January2012 abc forTD-SCDMA.Locally-producedsmartphonesthatpetitiveinpriceandperformancetothoseofferedbypeersbegantoshipinvolumeinthefourthquarter,andweseethisascriticaltoChinaMobileholdingontohigh-valuecustomersin2012.Nevertheless,wecontinuetobelievethatitsTD-SCDMAproductportfoliowillremainweakerthanitspeersthrough2012. Consequently,weexpectChinaMobiletobenefitlessfromgrowingdemandfordatain2012and2013.Wemodelservicerevenueincreasesof6.4%and7.7%,respectively,in2012and2013,withmobileessrevenuesincreasingby55%and78%,respectively(lowerthanpeers),overthesametimeperiod. Supply-sidesufficiency ChinaMobile’scapacityfarexceedsdemandandcreatesthepossibilitythatitwillbeabletomigratetoTD-LTE(onworkside)veryquicklyindeed.Ithadc200,000TD-SCDMAbasestationsatend-2011,servingc50m3Gcustomers.Webelievethisover-buildisbeingcarriedoutwitharapidmigrationtoTD-LTEinmind,andweexpectthemajorityofthisinfrastructuretobeTD-LTEready. Bycontrast,ChinaMobile’s2G(GSMandEDGE)workisoverloaded,resultinginincreasedinvestmentinalegacytechnologyasa-gapuntiltheworkcanalleviatethestrain.Weexpectc10%ofcapitalexpendituretobeonGSMin2011. Costoutlook InourChinaMobilecostestimates,weassume: Asteadyincreaseinleased-linecosts,reflectinggrowingrequirementsforbackhaulcapacity(althoughitispossiblethatChinaMobilebuildsmoreofitsownfibre). Weexpectinterconnectioncoststoremainrelativelyflat,withgrowingvolumesoffsetbydecliningperminutecosts. Weexpectasteadyincreaseindepreciation,reflectingChinaMobile’shighcapexlevels. WeforecastpersonnelcoststoincreasebycRMB2bnperyear,reflectingcurrentwageinflationandanincreaseintotalemployees. Valuation,ratingandrisks ChinaMobiletradesatadiscountedPEmultiplerelativetoChinaandChina(chartoverleaf),reflectingbinationofweakearningsgrowth,concernsregardingitstechnologymigrationpath,andtheoutlookforminorityshareholderreturns.WhilewebelieveconcernsoverpetitivepositionareoverdoneandthatTD-LTEprovidesaviable,workmigrationstrategy,weacknowledgethatChinaMobileislikelytoremainconstrainedintheneartermbyitsTDSCDMA3Gtechnology. WecontinuetouseaPEmultipleof11xonFY12etovalueChinaMobilestock,applyingadiscounttoits2-yearaveragetradinghistoryof13x(chartonnextpage)toreflectthetechnologyandmigrationrisk.Wecontinuetouse2012eEPSofHKD7.25(RMB6.38).ThisyieldsatargetpriceofHKD80,a1%increasefromHKD79previously. parativepurposes,ourDCF-derivedfairvalueincreasestoHKD113(fromHKD106)onanimprovedviewinthelong-termsubscribertrends.WebelievethediscountimpliedinthecurrentsharepricereflectsconcernsoverChinaMobile’stechnologymigrationpathandtheriskthatitdeploysitssurpluscashininvestmentsoflimitedvaluetominorityshareholders.WeprovidebelowourDCFinputsparativepurposes: Weapplyabetaof1.2,arisk-freerateof2.6%andanequityriskpremiumof8.9%toderiveacostofequityof13.3%. 18 sMedia&TechnologyAsias17January2012 abc Weassumeacostofdebtof3.7%andadebt-tocapitalratioof30%.Thisreturnsaweightedaveragecostofcapital(WACC)of10.1%. ThisreturnsaterminalvalueofRMB1,422bn,anenterprisevalueofRMB984bnandavaluepershareofHKD113(RMB99).Thepresentvalueoftheterminalvaluerepresents58%ofourenterprisevalueestimate. Underourresearchmodel,theNeutralbandfornon-volatileChinastocksis5pptaboveandbelowthelocalhurdlerateof10%,or5%to15%aroundthecurrentshareprice.Giventhepotentialreturnof8.7%(includingthe2012edividendyieldof3.7%),wemaintainourNeutralrating.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,includingtheforecastdividendyieldwhenindicated. Risks ThekeyupsideriskstoourNeutralratingareasfollows: Afaster-than-expectedmigrationtoTD-LTEtechnology,withwideravailabilityofhandsets;andanimprovedoutlookforTD-SCDMAhandsets. Lower-than-expecteddemandforwirelessdataservices,enablingChinaMobiletobetterdefenditscurrenthigh-valuecustomers. Anincreaseinthetargetpayoutratio,upfromcurrentlevelsof43%. ThekeydownsideriskstoourNeutralratingare: Slower-than-expectedmigrationtoTD-LTEtechnologybyChinaMobile.ThepossibilitythattheregulatormandatesthatTD-LTEhandsetsbepatiblewouldalsobehighlynegative,likelyrestrictingChinaMobile’sprocurementtolocalvendorsonly. Faster-than-expectedgrowthindemandforwirelessdataamonglow-valueusers,whoaremorelikelytochooseChinaandChina’stechnologythanChinaMobile’stechnology. Abroadeningofthecurrentnumberportabilitytrialintwocitiestonationalcoverage,enablingitshigh-valuecustomerstochurntootheroperatorswhileretainingtheirphonenumber. Changestoourforecasts Weraiseour2012estimatesslightly,reflectinganimprovedoutlookforTD-SCDMAsmartphonesthisyear.However,wetrimour2011estimatesonweaker-than-expected3GgrowthinOctoberinparticular(tablebelow). Weexpectthe20%investmentinShanghaiPudongBanktoresultinassociateeofRMB4,998min2011andRMB5,957min2012. 19 sMedia&TechnologyAsias17January2012 abc ChinaMobile:HSBCevs.Consensus,previousestimates RMBm ConsensusSalesEBITDAOperatingProfitNeteEPS HSBCSalesEBITDAOperatingProfitNeteEPS,RMBEPS,HKD HSBCpriorestimates(Nov2011)SalesEBITDAOperatingProfitNeteEPS,RMBEPS,HKD HSBCvs.ConsensusSalesEBITDAOperatingProfitNeteEPS HSBCvs.PreviousEstimatesSalesEBITDAOperatingProfitNeteEPS Source:HSBCestimates,Bloomberg 2011 523,889252,059155,153125,160 6.20 2011516,505246,840150,004122,314 6.026.84 2011516,333249,937153,101124,636 6.146.97 2011-1.4%-2.1%-3.3%-2.3%-2.9% 20110.0%-1.2%-2.0%-1.9%-1.9% 2012 558,871262,653157,988128,537 6.37 2012556,470265,346160,545129,606 6.387.25 2012554,511264,855160,063129,251 6.367.23 2012-0.4%1.0%1.6%0.8%0.2% 20120.4%0.2%0.3%0.3%0.3% 2013 592,239274,325161,245133,571 6.61 2013575,122270,056160,672130,445 6.427.29 2013571,735271,705162,451131,797 6.497.37 2013-2.9%-1.6%-0.4%-2.3%-2.8% 20130.6%-0.6%-1.1%-1.0%-1.0% 11-13CAGR 6.3%4.3%1.9%3.3%3.2% 5.5%4.6%3.5%3.3%3.3% 20 sMedia&TechnologyAsias17January2012 abc Financials&valuation:ChinaMobile Financialstatements Yearto 12/2010a Profit&losssummary(CNYm) RevenueEBITDADepreciation&amortisationOperatingprofit/EBITNetinterestPBTHSBCPBTTaxationNetprofitprofit 485,231236,984-86,230150,754 4,756159,071156,050-39,047119,640116,654 Cashflowsummary(CNYm) CashflowfromoperationsCapexCashflowfrominvestmentDividendsChangedebtFCFequity 236,984-113,203-113,203-44,994-27,867 89,490 Balancesheetsummary(CNYm) IntangiblefixedassetsTangiblefixedassetsCurrentassetsCash&othersTotalassetsOperatingliabilitiesGrossdebtNetdebtShareholdersfundsInvestedcapital 37,707440,164321,882292,346861,935193,20633,646-258,700576,157314,201 12/2011e12/2012e12/2013e 516,505246,840-96,836150,004 4,441162,261159,890-39,948122,314119,617 556,470265,346-104,801160,545 2,617171,947168,565-42,341129,606126,111 575,122270,056-109,384160,672 3,076173,685170,856-42,914130,445127,816 246,840-134,291-134,291-47,487-52,390 77,042 265,346-124,382-124,382-50,208-57,026101,240 270,056-120,776-120,776-52,002-61,690109,442 37,672476,369383,588341,373965,835286,11630,283-311,090647,673270,140 37,672497,198443,749398,3991,050,963292,39130,283-368,116726,204287,830 37,672508,590508,237460,0891,133,950296,61030,283-429,806804,647297,800 Ratio,growthandpershareanalysis Yearto 12/2010a Y-o-y%change Revenue 7.3 EBITDA 4.3 Operatingprofit 2.5 PBT 3.4 HSBCEPS 3.9 Ratios(%) Revenue/IC(x) 1.7 ROIC 39.8 ROE 21.5 ROA 15.0 EBITDAmargin 48.8 Operatingprofitmargin 31.1 interest(x) Netdebt/equity -44.8 Netdebt/EBITDA(x) -1.1 CFfromdebt Persharedata(CNY) EPSRep(fullydiluted)HSBCEPS(fullydiluted)DPSBookvalue 5.965.962.2428.72 12/2011e 6.44.2-0.52.01.0 1.838.719.513.447.829.0 -47.9-1.3 6.026.022.3431.89 12/2012e 7.77.57.06.06.0 2.043.418.412.947.728.9 -50.6-1.4 6.386.382.4735.75 12/2013e 3.41.80.11.00.6 2.041.316.712.047.027.9 -53.3-1.6 6.426.422.5639.62 Valuationdata Yearto 12/2010a EV/sales 1.9 EV/EBITDA 4.0 EV/IC 3.0 PE* 10.5 P/Bookvalue 2.2 FCFyield(%) 7.5 Dividendyield(%) 3.6 Note:*=BasedonHSBCEPS(fullydiluted) 12/2011e 1.73.63.310.42.06.53.7 Neutral 12/2012e 1.53.12.99.81.88.53.9 12/2013e 1.32.82.59.81.69.34.1 Issuerinformation Shareprice(HKD)76.15 Reuters(Equity)Marketcap(USDm)Freefloat(%)CountryAnalyst 0941.HK199,593 22ChinaTuckerGrinnan
3 Targetprice(HKD)80.00 .6 Bloomberg(Equity) 941HK Marketcap(HKDm) 1,550,567 Enterprisevalue(CNYm) 881827 Sector Wirelesss Contact 85228224686 Pricerelative 12211210292827262 2010ChinaMobileLTD Source:HSBC 2011 2012 ReltoSSECOMPOSITEINDEX Note:priceatcloseof13Jan2012 122112102928272622013 21 sMedia&TechnologyAsias17January2012 abc Telstra(TLS) NBNreturnsandwirelessbusinessimprovementnowinthepriceExpectfinaldecisiononNBNandsharebuy-backwithin1-2 monthsDowngradetoNfromOWonvaluation;forecastsandTPof AUD3.40remainunchanged Investmentthesis Thec24%sharepriceappreciationsinceOctober2010suggeststhatthestrengths–highyield,earningsmomentum(drivenbymobile)andpetitiveadvantage–arenowintheprice.Whilethemobilebusinessshouldremainstrong,third-rankedoperatorVodafoneHutchisonAustraliashouldrecoversomemomentumin2012.Furtherout,Telstra’workandspectrumholdingsremainsignificantassets.AssumingtheNBNdealgetsapproved,welookforanannouncementfrompanyregardingabuy-backatitshalf-yearresultsinFebruary2012. InFY10endedJune,webelieveTelstramadeamistake.Italloweditspricestoremainhigh,petitorswerecuttingaggressively,losingsubstantialmarketshareasaresult.ThecAUD1bnincreaseinopexinFY11largelyreversedthistrend–whilethetravailsofVodafoneHutchisonAustraliaalsohighlightedthestrengthsofTelstra’sNextwork.WebelieveTelstra’sspectrumworkassetscreateasustainabledifferentiatorintheAustralianmarket,andweexpectittocontinuetoshowstrongmobilemomentuminthenexttwoyears. Downsideriskstothestockaretwo-fold,inourview: Sensisadvertisingbusiness.Performanceatthisbusinesshasbeenweakforthepasttwoyears,asitstrugglestomakethetransitionfromprinttodigitalrevenuestreams.ItsEBITDAcontributionhasnearlyhalvedfrom19%inFYendingJun-08to10.4%inFYendingJun-11. Potentialregulatorychange.Shouldtherebeachangeofpoliticaladministration,theOppositionLiberalDemocratshaspledgedtocanceltheNBNdeal.WhilethiscouldbepositiveforTelstraonamedium-termbasis,itwouldmarkareturnofregulatoryuncertaintytothesector.Theoppositionmayneedtoconsiderhowtomanagetheupgradetofibre-basedbroadbandwhilesimultaneouslycurbingTelstra’sdominance. Demanddynamics Givenstrongdemandandhighlevelsoffixedmobilesubstitution,wirelessbroadbandanddataserviceprovisionwilllikelyincreaseinimportance.Aswehavearguedinourthematicresearch,thisfavourslargeroperators–suchasTelstra–withtheabilitytoinvestmorethanits 22 sMedia&TechnologyAsias17January2012 abc peers.Essentially,webelieveworkqualitywillremainadifferentiator,withTelstrawellplacedtobenefit. Supply-sidesufficiency Telstra’sNextworkhasbeenanengineeringandfinancialessstory.workwasbuiltin11monthsandcovers2.1mkm2ofAustralia,farinexcessofTelstra’petitors.Telstraisnowaworldleaderinwirelessbroadband.Itupgradedto7.2MbpsservicesinSeptember2007,launched21Mbpsservicesatend-2008,andswitchedon40Mbpsservicesatthestartof2010(withterminalsavailableinthesecondhalf).IthasnurturedthegrowthofwirelessbroadbandservicesintoacAUD1bnbusinessinFY11,andthatwillremainadifferentiator,inourview. Valuation,ratingandrisks Telstrastockwasasolidperformerformuchof2011,reflectinganincreaseddegreefortwithpany’sprospectsandwithpany’smanagement(headedbyCEODavidThodey).ItalsoreflectsanticipationofaspecialdividendsubsequenttoanNBNdealapprovalbytheACCC(shareholdersvotedtoapprovethedealattheAGMinOctober2011).Webelievethisismostlikelytotaketheformofasharebuy-back (giventhelackoffrankingcreditstosupportaspecialdividend),withthetimingofanannouncementmostlikelyatthehalf-yearresultsinFebruary2012. WecontinuetovalueTelstrausingaone-yearforwardPEmultipleof11x,basedontheaverageofthelasttwoyears’tradingdata.AppliedtoourFY12EPSestimateofAUD0.31,amultipleof11xreturnsatargetpriceofAUD3.40(unchanged). Underourresearchmodel,forstockswithoutavolatilityindicator,theNeutralbandis5pptsaboveandbelowthehurdlerateforAustralianstocksof10%.Ourtargetpriceimpliesapotentialreturnof11.3%(includingprospectivedividendyieldof8.6%),withintheNeutralband;therefore,wearedowngradingthestocktoNeutralfromOverweight.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,includingtheforecastdividendyieldwhenindicated. Risks Keydownsideriskstoourvieware: TheriskthattheNBNdealiscancelledbyanewgovernment,leading
2 sMedia&TechnologyAsias17January2012 abc comparedtothe‘steady-state’phasewhenchangesinsubscriberandrevenuemarketsharehappenonlyslowly.Potentialnear-termstockcatalystsinclude,inourview: ChinaMobile.ThekeyupsiderisksarebetterthanexpectedavailabilityandadoptionofTD-SCDMAsmartphonesin2012,andanearlierthanexpectedlaunchofTD-LTE.Thekeydownsideriskisgreaterinvolvementinthewirelinesector(toprovidethepetitionthesectorcurrentlylacks–seeourJanuary2012report:PolicyPressures).WeadjustourforecastsslightlytoreflectOctoberandNovember2011monthlysubscribernumbersandraiseourTPfromHKD79toHKD80. Japan.Atthesectorlevel,welookforthetelcostoadjustdatapricesfromthecurrentflat-ratestructure.ForNTTDoCoMo,welookforanimprovingprofitandsmartphonesalesoutlookatthe9-monthresultsinlateJanuary,preparingthegroundforstrongerguidanceforFYMar-13inMay.WeexpecttheministrytoawardSoftBank15MHzof900MHzspectrumshortly,helpingtoworkcongestionwhen5MHzesavailableinJuly2012.Ourforecasts,targetprices,andratingsremainunchanged.WedowngradeesstoN(V)fromOW(V)onpetitioninbothwireline(fromNTT’snewlow-costfibreservice)and wireless(fromUQCommunicationsandSoftBank’swork.WehalveourtargetFY12ePEmultiplefrom8xto4xandcutourtargetpriceby42%fromJPY31,000toJPY18,000.Arisktoourviewistheawardofthe900MHzspectrumwhichweexpecttogotoSoftBank. Australia.WedowngradeTelstratoNeutralfromOverweightonvaluation.Wemakenochangestoourforecastsorvaluationmethodology.Keyingeventsforthestockarethe(expected)approvaloftheNBNdealbytheregulator(theACCC).Thiswouldclearthewayforpanytoannounceastockbuyback–perhapsassoonashalf-yearresultsinFebruary.Thekeydownsideriskremainspotentialregulatorychange:theOppositionLiberalDemocratpartyhaspledgedtocanceltheNBN,whichcouldreturnthewholetelcosectortoaperiodofprolongedregulatoryuncertainty. Korea.WeremainUnderweightLGU+,believingthatitwillstruggletoregainsubscriberslostin2H10and1H11whenitssmartphoneline-upwasweak.Conversely,weviewitsbigpushwithLTEasdestabilisingforthewholesector,poundingtheimpactofregulatorypricecontrols.Akeypotentialcatalystat4Q11results(andarisktoourview)isanaveragerevenueperuser(ARPU)growth. Keyvaluationmetrics ChinaMobile Telstra DoCoMo SoftBank ess LGU+ RatingPreviousratingTickerCurrentprice(localcurrency)TargetPrice(TP)PreviousTP%changeTarget/ImpliedFY12ePEPotentialreturnEV/EBITDA2012eFY12edividendyield,% NN941.HKHKD76.1580791%118.7%4.53.6% NOWTLS.AUAUD3.293.403.400.0% 1111.3% 4.98.50% OWOW9437.JPJPY140,800160,000160,0000.0% 1317.6% 3.13.9% OWOW9984.JPJPY2,1683,5003,5000.0% 956.8% 4.50.3% N(V)OW(V)9427.JPJPY17,22018,00031,000-41.9% 49.2% 3.64.7% UWUW032640.KSKRW6,7905,0005,0000.0%2226.4%2.81.50% Source:Companydata,HSBCestimates.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,plustheforecastdividendyield,exceptforSoftBankandLGU+,wheredividendyieldisnotincluded.Priceasofcloseofbusinesson13January2012.
3 sMedia&TechnologyAsias17January2012 abc LTE:subscriberimpacts Consumerscaremoreabouthandsetsandservicesthantheunderlyingtechnology PotentialupsideforChinaMobileifTD-SCDMAsmartphonevolumesandavailabilityimprovein2012,priortoTD-LTElaunch LimitedupsideforLGU+initsaggressivemarketingofearlyLTEhandsets Summary WeseeacleardivideinLTEmarketingpoliciesacrossAsia.KoreanoperatortacticsaresimilartotheUSinthatLGU+andSKTareusingtheirearlylaunchtopresshomeanadvantage.LTEservicesarebeingmarketedaggressivelyasaresult.Inothermarkets,LTEismorelow-key,beingpositionedasprimarilyasupply-sideinnovation. Thislatterapproachfitsourview.Weseetheprimaryinnovationinwirelesstelcoservicesoverthelastseveralyearsasthemigrationfromfeature-phonestosmartphones(andthe‘capacitycrunch’istheresultofthisshift).Wedonotseethemovefrom3G(offeringspeedsofupto42MbpswithHSPA+)toLTE(offeringspeedsofupto40-70Mbps,dependingonthesizeofthecarrier)asasimilarstep-change. Inmostmarkets,LTEwillbeintroducedgradually.ThekeypossibleexceptionisChina,whereChinaMobilehaseveryincentivetomigraterapidlytoTD-LTE,giventhebetterperformanceandesstoglobalhandsetsvendors. Handsetavailabilityiskey Contrastinggrowthrates LTEhasseenwildlydifferenttake-upratesinbothKoreaandJapan. JapanandKorea:LTEounts,monthafterservicelaunch 12001000800600400200 0123456789101112 NTTDoCoMoSKTLGU+ Source:Companydata,HSBCestimates Thisisprimarilyduetohandsetavailabilityandmarketing.WeexpectsimilaravailabilityissuesinChina. Koreanvendorsseektobuildamarketshareadvantage.HavingbeenslowtorespondtoApple’stouch-screeninnovationswiththeiPhone,KoreanvendorsareseekingtoregaintheinitiativewithLTE.AppleisnotexpectedtolaunchtheLTE-capable(probably)iPhone5
4 sMedia&TechnologyAsias17January2012 abc untillate2012,givingtheKoreantelcosc1yeartopresstheiradvantage. Japanesevendorsarefurtherbehind.InJapan,bycontrast,NTTDoCoMoonlylauncheditsfirstLTEhandset(theSamsungGalaxy)inDecember2011.Thefocusismoreonrelativesmartphoneportfolios,andlessontheinherentadvantagesofLTEtechnology.Japanesehandsetvendorshavegenerallybeenslowertomarketwithtouch-screensmartphonesthantheirKoreanpeers,andarethusfocusedfurtherbehindwithLTE. China:TD-SCDMAsmartphonesfinallyarrivinginvolume.ChinaMobilehasonlyrecentlybeguntoshipTD-SCDMAsmartphonesinvolume,andhaslostsignificantgroundtoitspeers.WhilewebelievetheoutlookforTD-SCDMAsmartphonesin2012ismuchimproved,ChinaMobileisunlikelytobenefitfromthe‘haloeffect’ofaniPhoneuntil2013. DifferentresponsestotheiPhone4S AnadditionalfactordrivingLTEadoptioninKoreaisatepidreceptiontotheiPhone4S.Webelievethisisbecause: Hardwareissues.Comparedtothelatestedition(LTE)phonesfromSamsungandLGE(amongothers),theiPhone4Sisseenashavinganinferiorscreen(resolutionandsize). Batterylifeissues.Koreanconsumershavebeenputoffbythewell-documentedbatteryissueswithiPhone. Sirivoice-recognitionservicenotavailableinKorea.ThekeysoftwareupgradetotheiPhonewastheSiriservice–unfortunatelythisisinitiallysupportedinjustafewlanguages. iPhone4Spre-ordersstartedinKoreaon11November2011.By23November,bined pre-ordersreachedc300k,butmanycustomershadregisteredformultipledevicesonworks,whilesomecancelledtheirorder–actualsalesvolumehasthereforebeenmuchlower. Revenuemarketshare ChinaMobileoutlookimproving AsweoutlinedinourNovember2011report‘Thesurge:datademandtotakeoffin2012’,ourbasecaseisforChinaMobiletoloserevenuemarketsharetoChinaandChinain2012.WhileweraiseourTD-SCDMAsmartphoneforecastsinthisreport,thisviewstillholds: Portfoliogapremains.WhileChinaMobilewillhaveamuchbroaderarrayofTDSCDMAsmartphonesin2012,thegapwithpeersstillremains–particularlyforhighvisibilitybrandssuchastheiPhone. Mindthe(speed)gap.Chinacurrentlyhastheeasiestmigrationpathinupgradingwork.ItisalreadydeployingHSPA+inmajorcities,whichcanreachpeakspeedsof42Mbps.Bycontrast,ChinaMobileandChinaareconstrainedwiththeir3Gtechnologytospeedsofc5-10Mbps.Weexpectthistoeincreasinglyapparenttousersthrough2012,tothebenefitofChina. OurestimatesassumethatChinaMobilesmartphonesalesgaingroundrapidly,reaching46%addsin2012,fromjust12%in2011.However,itslatestartmeansthatitwouldremainbehinditspeers.
5 sMedia&TechnologyAsias17January2012 abc China:wirelessmarketoutlook China:additionsmarketshare,% 60% 50% 40% 30% 20% 10% Mar-10May-10 Jul-10Sep-10Nov-10 Jan-11Mar-11May-11 Jul-11Sep-11Nov-11 ChinaMobile China China Source:Companydata ChinaMobile:subscriberbreakdownbytechnology,m 1,0009008007006005004003002001000 Dec-08 Dec-09 Dec-10Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 2G3G4G Source:Companydata,HSBCestimates China:Mobilerevenuemarketshare,% 70% 60% 50% 40% 30% 20% 10% 0% 2011 2012 2013 2014 2015 2016 ChinaMobileChinaChina Source:Companydata,HSBCestimates
6 sMedia&TechnologyAsias17January2012 abc Korea:LGU+fightsback InKorea,strongearlydemandforLTEhasbeendrivenbymassiveadvertising.WithbothSKandLGU+pushingLTE(liketheUSbutunlikemostothermarkets)andstrongvendormarketingfrombothSamsungandLGE(whichseesLTEasanopportunitytocatchuplostground),demandhasbeenstrongerthanmanyanticipated.WhiledatacardserviceswerelaunchedinJuly2011,handsetsweren’tlauncheduntilOctober.BothSKTandLGUplushaveofferedsimilarphonesthusfar:theLGEOptimusLTEphonewaslaunchedinOctober,andtheSamsungGalaxySIIHDinNovember. ThepositivefortelcosisfasterthanexpectedLTEadoptionbyconsumersmeansfastermigrationawayfromflat-ratetariffs.TheLTEdatabundlesarelarge(3GB)buttheprincipleoflinkingusagetorevenueisbeinggraduallyintroduced(again)inKorea. SubscribergrowthSKoriginallytargeted300ksubsbyend2011,6mby2013,and10mby2015.However,ithad300ksubscribersby24November,surpassingitsoriginaltargetwithease.SKTstatedthat35%ofnewcustomersaretakingLTE.Itnowexpectsc700kbyend2011and5mbyend2012.Bythe endof2012,itexpectsthathalfofitshandsetportfoliowillsupportLTE. LGUplushad550kLTEsubscribersbytheendofDec-11.BylateNovember,94%ofLTEusersweresubscribingtotariffsofavalueofKRW62korhigher,and87%hadoptedfora30-monthcontract.OnaKRW62ktariff,thisentitlesthemtoanadditionalKRW104,000revenuediscount(6x18,000monthlydiscount). China:sensitivityanalysis WeranasensitivityanalysisonourChinaMobileforecaststoassesstheimpactofchangesinourTD-SCDMAandsmartphonegrowthforecasts(tablebelow). CommontoourallscenariosistheexpectationthatTD-LTEountgrowthdrivesanearningsrecoveryin2014e.ThedifferencebetweenourbullishandbearishexpectationsistheextenttowhichTD-SCDMAountgrowthisstablein2012and2013. Inourbullcasescenario,better-than-expectedadoptionofTD-SCDMAsmartphones(33min2012asopposedto22minourbasecaseestimate)andlowersubsidycosts(drivenbyincreasedvolumes)woulddriveEPSgrowthof9%. China:3Gasa%adds100% 80% 60% 40% 20% 0%Mar-10 May-10 Jul-10 Sep-10Nov-10Jan-11 Mar-11May-11 Jul-11 Sep-11Nov-11 Source:Companydata CM CT CU
7 sMedia&TechnologyAsias17January2012 Conversely,ourbearcasescenarioproject20msmartphonesbyend2012–anountnumberachievedbypushingsubsidieshigher.TheresultingEPSgrowthwouldbejust3.2%in2012e. abc ChinaMobile:earningssensitivitytochangesinountgrowth Basecase 2011e TD-SCDMAounts,m 50 TD-LTEounts,m - Smartphoneounts,m
3 Sales,RMBmEBITDA,RMBmOP,RMBmNete,RMBmEPS,RMBEPSgrowth,% 516,505246,840150,004122,314 6.021.0% Bullcase 2011 TD-SCDMAounts,m 51 TD-LTEounts,m - Smartphoneounts,m
4 Sales,RMBmEBITDA,RMBmOP,RMBmNete,RMBmEPS,RMBEPSgrowth,% 516,550246,876150,040122,341 6.021.0% Bearcase 2011 TD-SCDMAounts,m 50 TD-LTEounts,m - Smartphoneounts,m
3 Sales,RMBmEBITDA,RMBmOP,RMBmNete,RMBmEPS,RMBEPSgrowth,% Source:Companydata,HSBCestimates 516,496246,833149,996122,308 6.021.0%
8 2012e 91322 556,470265,346160,545129,606 6.386.0% 2012100 333 561,336270,872166,068133,768 6.599.3% 201288320 555,086260,923156,122126,279 6.223.2% 2013e 12610868 575,122270,056160,672130,445 6.420.6% 201313510780 584,603280,468170,753138,023 6.803.2% 201312410867 572,783262,381153,083124,733 6.14-1.2% 2014e 160200152 614,117292,187180,297146,146 7.2012.0% 2014169198163 622,275302,635190,049153,513 7.5611.2% 2014158200150 612,180282,632170,917139,058 6.8511.5% sMedia&TechnologyAsias17January2012 abc Networkoutlook ChinaMobiletoseegreaterworkutilisation,asmixshiftsawayfromlow-usagefixed-wirelesscustomers MostoperatorstodeployLTEgradually,focusingonmetroareasChinaMobileandLGU+arepossibleexceptions:botharemore likelytorequirenationalcoverage LTEdeploymentpatterns LTEdeploymentisprogressingatvastlydifferentratesacrosstheregion,dependingontechnologyavailability,petition,andoperatordemand: China.ChinaMobilewouldliketofast-trackitsTD-LTEdeployment,duetoitsstatusasaglobaltechnology.However,itisconstrainedbypolicy.WedonotexpectTD-LTEvolumesuntil2H2013. Japan.LTEhasbeenrelativelylow-keythusfar,butweexpectoperatoractivityandconsumerinteresttopickupduetoaseriesofservicelaunchesin2012. Korea.TherehasbeenasignificantincreaseininterestinLTEservicesinlate2011,fuelledbyheavyadvertisingbyhandsetvendorsandLGUplus.Weseethisaspositive,asoperatorsareabletomigrateusersawayfromflat-rateplans,butunlikelytooffsettheimpactofheavytariffcontrols. ChinaMobile–TDoutlook AsweexplainedinourNovember2011reportThesurge:datademandtotakeoffin2012,webelievethatChinaMobileisdisadvantagedrelativetoitspeersbecauseofthelackofglobal scaleforTD-SCDMAtechnology.Theoutlookisnowimproving,enablingittosellabettermixofhandsetsthroughbothoperatorandopen-marketretailchannels.However,inourview,itwillcontinuetolacktheesstoglobalhandsetplayersandmodels(mostnotablytheiPhone)untilTD-LTEservicesarewidelyavailable.OurbasecaseisforbroaderavailabilityofTD-LTEservicesin2013,butonlysupportedinitiallybyhigh-endhandsets. Fixed-wirelessdependenceending Giventhattheessofthehome-grownTDSCDMAstandardisatechnologypolicyobjective,ChinaMobilehasbeenunderconsiderablepressuretoshowsubscribergrowth.Inourview,thishasledtotheregionalaffiliatespushingfixed-wirelessterminalsaggressively(particularlyin2010).However,TD-SCDMAchipsetmarketshareleaderSpreadtrumnotedthataslateasthefirstquarterof2011themajorityofTD-SCDMAshipmentswereforfixed-wirelessterminals.ChinaMobileprovidesneitherasplitof2Gvs3GARPU,ordifferenttypesof3Gsubscriber.Thissuggeststhat3GARPUhasbeenlowtodate,becausethemajorityofTDSCDMAcustomershavebeenusingfixed-wirelessterminals(providingrevenueofcRMB30permonth).Weestimatethatc30%(14.4m)ofChina
9 sMedia&TechnologyAsias17January2012 abc ChinaMobile:subscriberbreakdownbytype,m750 700 650 600 550 500Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source:Companydata,HSBCestimates 2GhandsetsSmartphonesDatacardsFixed-wireless Dec-12 Mobile’s48mTD-SCDMA3GountsatendNovember2011werefixed-wirelessmodems,whilec10%weredatacards.Theproportionoffixedwirelessmodemshasbeendecliningthrough2011ashandsetavailabilityimproves–weestimateitwasthemajorityofshipmentsin2010. TD-SCDMAoutlookimproving Through2011,theavailabilityofTD-SCDMAhandsetshasgraduallyimproved.Keymilestonesinclude: Featurephones.SpreadtrumnotedthatvolumeshipmentsofTD-SCDMAfeaturephonesbeganin1Q11,andwastheprimarydriverofitsexpectationoftotalTD-SCDMAshipmentsof50min2011,upsignificantlyfrom30min2010.Ofthis50m,itestimated6-7mfixedwirelessterminals,5-10msmartphones,withtheremainderfeature-phones. Distribution.Initially,TD-SCDMAproductswereonlyavailablethroughChinaMobilestores.In2011,ChinaMobilehasgraduallyopenedupitsretailchannelssomoreandmoreTD-SCDMAproductisavailableinopenmarketstores.Spreadtrumexpectstwothirdsofsalesin2012tobethroughopenmarketchannels. Smartphones.TD-SCDMAsmartphonesstartedtogathermomentumin3Q11,withthelaunchoftheSamsungGalaxySIIatthehighend,andterminalsusingMarvelchipsets.Crucially,ChinaMobileisnowseeingmoreproductsattheRMB1,000-1,500pricepoint–thisiswhereChinaandareseeingstronggrowth.monwithitspeers,ChinaMobileseemslessinterestedinpushingsmartphonesbelowtheUSD100level,assmartphonesbelowthisprice-pointareseenastoounder-powered. TD-SCDMAshipments/sales Therehasbeenconsiderableuncertaintyinthemarketovera)howtoreconcileChinaMobileTD-SCDMAdevicesaleswithshipmentestimatesfromchipsetmanufacturers,andb)theoutlookforTD-SCDMAsalesgrowthin2012. Totalmarket.Onits3Q11resultscall,SpreadtrumestimatedtotalTD-SCDMAshipmentsat50min2011,andashighasc90min2012. Smartphoneestimates.MarvelestimatesTDSCDMAshipmentsat10-12min2011,and20-30min2012. 10 sMedia&TechnologyAsias17January2012 abc Takingthetotalmarketshipmentsfirst,thediscrepancybetweenchipsetshipmentsofc50min2011andChinaMobile’saddsofc30mseemslarge,butwebelieveitcanbeexplainedasfollows: Inventory.ChipsetsareshippedtohandsetmanufacturersandthentoChinaMobileanditsdealers,resultingintwostagesofinventorybeforeadeviceissoldandregisteredasaddition. Upgrades.WeestimatethatupgradesforChinaMobilecouldbehigherascustomersupgradedfixed-wirelessmodemsasTDSCDMAhandsetsimprovedin2H2011.Thiswouldnotshowupasaaddition,butwouldboostshipmentnumbers. RegardingTD-SCDMAsmartphones,webelievetheMarvelestimateof10-12mfor2011representsalargenumberofdevices‘inthechannel’ratherthaninthehandsofendusers.However,weestimateasubstantialimprovementinsmartphonessalesbyChinaMobilein2012,to28m. China:TD-LTEoutlook Weexpectasoft-launchofTD-LTEtechnologybyChinaMobilein2H2012,withc2mountsbyyear-endgrowingsignificantlytoc43mbyend2013.ChinaMobilehasmadenosecretofitsdesiretomoverapidlytoTD-LTE.Severaleventsin2H11meanthatthisdeploymentshouldhappensooner–reachingscalein2013e,ratherthanin2014. LaunchofTD-LTEservicesinothermarkets.GiventhatChinahassponsored China:devicesalesestimates(m) Mar-11Jun-11Sep-11Dec-11eMar-12eJun-12eSep-12eDec-12e Total3Gounts,m 61.9 ChinaMobile 27.0 China 18.5 China(EV-DO)16.4 adds,m 15.1 ChinaMobile 6.3 China 4.5 China(EV-DO)4.4 3GountsNetAdditionsMarket ChinaMobile 41.6% China 29.6% China 28.9% 3GGrossAdds ChinaMobile 8.1 China 5.8 China 5.5 3GUpgradeRate ChinaMobile 1.0% China 1.0% China 1.0% Upgrades,m ChinaMobile 0.7 China 0.5 China 0.4 Impliedreplacementrate,months ChinaMobile 25.4 China 24.8 China 24.4 DeviceSales,m ChinaMobile 8.8 Ofwhichsmartphones 0.0 China 6.2 China 5.9 80.535.023.921.518.68.05.45.2Share,%43.2%29.1%27.8% 10.47.16.7 1.0%1.0%1.0% 0.90.60.6 25.424.724.5 11.30.27.77.3 101.843.230.228.421.38.16.36.9 38.2%29.5%32.3% 11.28.58.9 1.0%1.0%1.0% 1.20.80.7 25.424.824.6 12.41.39.39.6 126.350.539.935.924.57.39.77.4 29.9%39.7%30.4% 11.112.510.1 1.0%1.0%1.0% 1.41.11.0 25.424.824.5 12.51.813.511.0 154.258.751.144.327.98.311.18.5 29.6%40.0%30.4% 12.714.811.8 1.0%1.0%1.0% 1.61.41.2 25.324.724.6 14.42.716.213.0 185.568.163.354.031.39.412.29.7 30.0%39.0%31.0% 14.616.913.8 1.0%1.0%1.0% 1.91.71.5 25.324.824.6 16.53.518.615.2 220.678.876.865.135.210.613.511.1 30.3%38.3%31.4% 16.719.216.0 1.0%1.0%1.0% 2.22.11.8 25.324.724.6 18.94.421.317.8 259.990.791.677.639.312.014.812.5 30.5%37.7%31.9% 19.021.818.5 1.0%1.0%1.0% 2.52.52.1 25.324.724.6 21.55.424.320.6 Source:Companydata,HSBCestimates Dec-11eDec-12e 126.350.539.935.979.529.825.923.9 259.990.791.677.6133.640.351.641.8 37.4%32.6%30.0% 30.1%38.6%31.2% 40.962.933.872.731.160.1 1.0%1.0%0.9%1.0%0.9%1.0% 4.2 8.3 3.0 7.7 2.7 6.6 24.724.824.123.722.323.0 45.171.23.316.136.880.433.866.7 11 sMedia&TechnologyAsias17January2012 abc TD-LTEdevelopmenttosupportisequipmentandhandsetvendors,itisunlikelytowishtobeleftbehindbydeploymentsinothermarkets(suchasJapan). m’ssupportforTD.Withits8960‘Snapdragon’chipset,mconfirmedTD-LTE’sviabilityandlikelyscale.Whilethe8960ishigh-end(andmayfeatureinapatibleiPhoneforinstance)m’sdecisiontosupportTD-LTEissignificant,andwouldleadtosupportforentry-levelhandsetsinduecourse. TD-LTElaunchinothermarkets Wehavelongarguedthatthe‘capacitycrunch’meansoperatorswillincreasinglyseektoutiliseunpairedaswellaspairedspectrumallocations.Todate,withthefailureofwimaxtogaintraction,therehasbeennotechnologysuitablefordeploymentinthesebands.ThegrowingscaleofTD-LTEanditssupportbyvendorssuchasmmakesitthemosteligiblecandidate. OperatorsasdiverseasBharti,RelianceIndustries,andClearWireareallexploringTDLTElaunches.However,thelargestlaunchtodatehasbeenthatofSoftBankinJapan. SoftBanksoft-launcheditsworkinNovember2011foritsenterprisecustomers,andplanstograduallyincreasecoverage.Thisisgreatlyaidedbythefactthatitcanre-usemuchof’sinfrastructure.Italsoplanstolaunchasmartphoneonwork(providedbyZTE)inJuly2012,possiblyusingthem8960SnapDragonchipset. ChinaMobile:TD-LTEupgrade ChinaMobilecurrentlyhasc200kTD-SCDMAbasestations.WebelievethemajorityofthesecouldberelativelyquicklyupgradedtosupportTD-LTE:ChinaMobilehasknownforsometimethatthiswouldbeitspreferredtechnology,soit makessensetomaketheinfrastructurereadilyupgradeable. OurdiscussionwithZTEandindustryexpertssuggestsanupgradecostofcUSD100kperbasestation,suggestingChinaMobilecouldhavenationalTD-LTEcoveragerelativelyquicklyatacostofcUSD2bn.parestoexpected2012capexofcRMB128bn,orUSD20bn. Korea–LTEdeployment SKTandLGUpluslauncheddatacardservicesinJuly2011.SKTisusingthePETAbrand. KTinitiallyreceivedpreliminaryapprovaltoswitchoffits2Gserviceson8December2011,afterhavingtwoapplicationsrejectedonthegroundsthatremaining2Gsubscribernumbersweretoolarge.Finally(afteraggressivemarketing),subscribernumbersfelltolessthan1%oftotalcustomers–159,000users.However,workswitch-offwasthenfurtherdelayedplaintsfromtheremaining2Gusers.KTfinallybegantoshutdownits2Gserviceon3January2012.Theswitch-offbeganinSeoul,andwillextendgraduallytootherareas,concludinginMarch2012. InearlyJanuary,KTlauncheditsLTEserviceinfivemajordistrictsinSeoul,targetingfullcoveragebytheendofthemonth.Ittargets4mLTEsubscribersbyend2012,expectingLTEhandsetstobemorethanhalfofitsportfoliobyend2012. Korea:LTEcapexandcoverage SKTinitiallyplannedtorolloutin23citiesinearly2012,andachievefullcoveragebyend2012.Itsubsequentlybroughtforwardthistargetandnowaimsforcoverageof28citiesbyJanuary2012and84citiesbyApril2012,eightmonthsearlierthanoriginallyplanned.LGU+claimsthisistheresultofitsbetter-than-expectedsubscribergrowth.SKT 12 sMedia&TechnologyAsias17January2012 LTEcustomersaregenerating1.6GBoftrafficpermonth,andSKTexpectsthecurrent0.3PBoftrafficadaytoincreaseto1PBperdayby2013.LGUpluscontinuestotargetnationalcoveragebyApril2012.Itwastargetingcoverageof82citiesbyDecember2011.LGU+3GusersaregeneratingparedtoSKTat1.1GB.panyexpectsover1GBasanaverageforLTEsubscribers.KTaimstospendKRW1.3trntodeployLTEtechnologyonanationalbasis,spendingKRW1.1trnin1H2012. abc 13 sMedia&TechnologyAsias17January2012 abc Thispagehasbeenleftintentionallyblank 14 sMedia&TechnologyAsias17January2012 abc Companies 15 sMedia&TechnologyAsias17January2012 abc ChinaMobile(941) TD-LTE4Gtechnologytohavelimitedimpactbefore2013;keypotentialcatalystisimprovementinTD-SCDMAoutlook Furtherinvestmentinnon-corebusinessapotentialnegativecatalyst,includinggreaterinvolvementinthewirelinesector RetainNeutral;liftTP1%toHKD80fromHKD79 Investmentthesis ChinaMobilehasbeeneffectivelyhamstrungbyTD-SCDMAtechnology.Thishas–sofar–notresultedinasignificantchangeinmarketshare:ChinaMobilehadc40%of3Gsubscribersatend2011,downfrom44%atend-2010.Crucially,ChinaMobile’sc80mhigh-valuecustomersarenotchurningouttopetitors.Thisisclearlyreflectedinthec12miPhonecustomersonwork(restrictedtojustGSMandEDGE)byDecember2011.Wedonotexpectthesehigh-valuecustomerstoleave:manyarebusinessusersforwhomvoiceisthekeyapplicationwhodonotwanttochangetheirmobilenumber.Whilethetwo-citynumberportabilitytrialcontinues,thereseemslittleregulatoryinterestinextendingit,andwedonotexpectnumberportabilitytoberolledoutmorebroadlyinthenearterm. WherethenliestheriskforChinaMobile?
Weseetheprimaryriskasitsinabilitytobenefitfromarisingwaveofdatademand,duetoweakertechnologyandaweakerhandsetportfoliothanitspeers.Weexpectits3Gmarketsharetofallto32%by2013.WhileTD-LTEshouldlaunchinsomeformbyend-2012orearly2013,wedonotexpecthandsetsinvolumeuntil2014,withsales restrictedtodatacardsandhigh-endsmartphonesduringmostof2013. WhileChinaMobile’svaluationisundemanding,webelievethisalsoreflectspotentialcorporategovernanceissues.Forexample,ChinaMobilehastheflexibilitytoraiseitspayoutratio,butinvestorshopingforanincreaseat1H2011weredisappointed. Inaddition,withtheinvestmentinShanghaiPudongBank,webelieveitispossiblethatpanymakesmorenon-coreinvestmentsthatservetheneedsofitsmajorityshareholder(thegovernment)morethantheminorityshareholders.WebelieveoneriskthathasincreasedsinceourlastupdateisthatChinaMobilemovesintothefixed-linesector.AswewroteinourJanuary2012report‘PolicyPressures’,theNDRCinvestigationintomonopolisticpracticesatChinaandChinaindicatesadesiretoseegreaterpetition.ChinaMobile,withcUSD50bncash,couldwellberequiredtostepin.Wewouldseesuchamoveasnegativeforallthreetelcosandpositivefortheequipmentmanufacturers. Demand-sideopportunities Asweoutlineinthisreport,akeycatalystforChinaMobileisanimprovementintheoutlook 16 sMedia&TechnologyAsias17January2012 abc ChinaMobile:valuation Chinatelcos:1yrforwardPEmultiple 908070605040302010 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 CMHK CU CT Source:ThomsonDatastream ChinaMobile:average1yrforwardPEtradingranges90 85 80 75 70 65Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Price 11x 12x 13x Aug-11 Dec-11 Sep-11 Dec-11 Source:
ThomsonDatastream ChinaMobile:performancerelativetoHangSengIndex0.0050 0.0045 0.0040 0.0035 0.0030 0.0025Jan-10 Mar-10May-10 Jul-10 Sep-10Nov-10Jan-11Mar-11May-11 Jul-11 Sep-11Nov-11 Source:ThomsonDatastream 17 sMedia&TechnologyAsias17January2012 abc forTD-SCDMA.Locally-producedsmartphonesthatpetitiveinpriceandperformancetothoseofferedbypeersbegantoshipinvolumeinthefourthquarter,andweseethisascriticaltoChinaMobileholdingontohigh-valuecustomersin2012.Nevertheless,wecontinuetobelievethatitsTD-SCDMAproductportfoliowillremainweakerthanitspeersthrough2012. Consequently,weexpectChinaMobiletobenefitlessfromgrowingdemandfordatain2012and2013.Wemodelservicerevenueincreasesof6.4%and7.7%,respectively,in2012and2013,withmobileessrevenuesincreasingby55%and78%,respectively(lowerthanpeers),overthesametimeperiod. Supply-sidesufficiency ChinaMobile’scapacityfarexceedsdemandandcreatesthepossibilitythatitwillbeabletomigratetoTD-LTE(onworkside)veryquicklyindeed.Ithadc200,000TD-SCDMAbasestationsatend-2011,servingc50m3Gcustomers.Webelievethisover-buildisbeingcarriedoutwitharapidmigrationtoTD-LTEinmind,andweexpectthemajorityofthisinfrastructuretobeTD-LTEready. Bycontrast,ChinaMobile’s2G(GSMandEDGE)workisoverloaded,resultinginincreasedinvestmentinalegacytechnologyasa-gapuntiltheworkcanalleviatethestrain.Weexpectc10%ofcapitalexpendituretobeonGSMin2011. Costoutlook InourChinaMobilecostestimates,weassume: Asteadyincreaseinleased-linecosts,reflectinggrowingrequirementsforbackhaulcapacity(althoughitispossiblethatChinaMobilebuildsmoreofitsownfibre). Weexpectinterconnectioncoststoremainrelativelyflat,withgrowingvolumesoffsetbydecliningperminutecosts. Weexpectasteadyincreaseindepreciation,reflectingChinaMobile’shighcapexlevels. WeforecastpersonnelcoststoincreasebycRMB2bnperyear,reflectingcurrentwageinflationandanincreaseintotalemployees. Valuation,ratingandrisks ChinaMobiletradesatadiscountedPEmultiplerelativetoChinaandChina(chartoverleaf),reflectingbinationofweakearningsgrowth,concernsregardingitstechnologymigrationpath,andtheoutlookforminorityshareholderreturns.WhilewebelieveconcernsoverpetitivepositionareoverdoneandthatTD-LTEprovidesaviable,workmigrationstrategy,weacknowledgethatChinaMobileislikelytoremainconstrainedintheneartermbyitsTDSCDMA3Gtechnology. WecontinuetouseaPEmultipleof11xonFY12etovalueChinaMobilestock,applyingadiscounttoits2-yearaveragetradinghistoryof13x(chartonnextpage)toreflectthetechnologyandmigrationrisk.Wecontinuetouse2012eEPSofHKD7.25(RMB6.38).ThisyieldsatargetpriceofHKD80,a1%increasefromHKD79previously. parativepurposes,ourDCF-derivedfairvalueincreasestoHKD113(fromHKD106)onanimprovedviewinthelong-termsubscribertrends.WebelievethediscountimpliedinthecurrentsharepricereflectsconcernsoverChinaMobile’stechnologymigrationpathandtheriskthatitdeploysitssurpluscashininvestmentsoflimitedvaluetominorityshareholders.WeprovidebelowourDCFinputsparativepurposes: Weapplyabetaof1.2,arisk-freerateof2.6%andanequityriskpremiumof8.9%toderiveacostofequityof13.3%. 18 sMedia&TechnologyAsias17January2012 abc Weassumeacostofdebtof3.7%andadebt-tocapitalratioof30%.Thisreturnsaweightedaveragecostofcapital(WACC)of10.1%. ThisreturnsaterminalvalueofRMB1,422bn,anenterprisevalueofRMB984bnandavaluepershareofHKD113(RMB99).Thepresentvalueoftheterminalvaluerepresents58%ofourenterprisevalueestimate. Underourresearchmodel,theNeutralbandfornon-volatileChinastocksis5pptaboveandbelowthelocalhurdlerateof10%,or5%to15%aroundthecurrentshareprice.Giventhepotentialreturnof8.7%(includingthe2012edividendyieldof3.7%),wemaintainourNeutralrating.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,includingtheforecastdividendyieldwhenindicated. Risks ThekeyupsideriskstoourNeutralratingareasfollows: Afaster-than-expectedmigrationtoTD-LTEtechnology,withwideravailabilityofhandsets;andanimprovedoutlookforTD-SCDMAhandsets. Lower-than-expecteddemandforwirelessdataservices,enablingChinaMobiletobetterdefenditscurrenthigh-valuecustomers. Anincreaseinthetargetpayoutratio,upfromcurrentlevelsof43%. ThekeydownsideriskstoourNeutralratingare: Slower-than-expectedmigrationtoTD-LTEtechnologybyChinaMobile.ThepossibilitythattheregulatormandatesthatTD-LTEhandsetsbepatiblewouldalsobehighlynegative,likelyrestrictingChinaMobile’sprocurementtolocalvendorsonly. Faster-than-expectedgrowthindemandforwirelessdataamonglow-valueusers,whoaremorelikelytochooseChinaandChina’stechnologythanChinaMobile’stechnology. Abroadeningofthecurrentnumberportabilitytrialintwocitiestonationalcoverage,enablingitshigh-valuecustomerstochurntootheroperatorswhileretainingtheirphonenumber. Changestoourforecasts Weraiseour2012estimatesslightly,reflectinganimprovedoutlookforTD-SCDMAsmartphonesthisyear.However,wetrimour2011estimatesonweaker-than-expected3GgrowthinOctoberinparticular(tablebelow). Weexpectthe20%investmentinShanghaiPudongBanktoresultinassociateeofRMB4,998min2011andRMB5,957min2012. 19 sMedia&TechnologyAsias17January2012 abc ChinaMobile:HSBCevs.Consensus,previousestimates RMBm ConsensusSalesEBITDAOperatingProfitNeteEPS HSBCSalesEBITDAOperatingProfitNeteEPS,RMBEPS,HKD HSBCpriorestimates(Nov2011)SalesEBITDAOperatingProfitNeteEPS,RMBEPS,HKD HSBCvs.ConsensusSalesEBITDAOperatingProfitNeteEPS HSBCvs.PreviousEstimatesSalesEBITDAOperatingProfitNeteEPS Source:HSBCestimates,Bloomberg 2011 523,889252,059155,153125,160 6.20 2011516,505246,840150,004122,314 6.026.84 2011516,333249,937153,101124,636 6.146.97 2011-1.4%-2.1%-3.3%-2.3%-2.9% 20110.0%-1.2%-2.0%-1.9%-1.9% 2012 558,871262,653157,988128,537 6.37 2012556,470265,346160,545129,606 6.387.25 2012554,511264,855160,063129,251 6.367.23 2012-0.4%1.0%1.6%0.8%0.2% 20120.4%0.2%0.3%0.3%0.3% 2013 592,239274,325161,245133,571 6.61 2013575,122270,056160,672130,445 6.427.29 2013571,735271,705162,451131,797 6.497.37 2013-2.9%-1.6%-0.4%-2.3%-2.8% 20130.6%-0.6%-1.1%-1.0%-1.0% 11-13CAGR 6.3%4.3%1.9%3.3%3.2% 5.5%4.6%3.5%3.3%3.3% 20 sMedia&TechnologyAsias17January2012 abc Financials&valuation:ChinaMobile Financialstatements Yearto 12/2010a Profit&losssummary(CNYm) RevenueEBITDADepreciation&amortisationOperatingprofit/EBITNetinterestPBTHSBCPBTTaxationNetprofitprofit 485,231236,984-86,230150,754 4,756159,071156,050-39,047119,640116,654 Cashflowsummary(CNYm) CashflowfromoperationsCapexCashflowfrominvestmentDividendsChangedebtFCFequity 236,984-113,203-113,203-44,994-27,867 89,490 Balancesheetsummary(CNYm) IntangiblefixedassetsTangiblefixedassetsCurrentassetsCash&othersTotalassetsOperatingliabilitiesGrossdebtNetdebtShareholdersfundsInvestedcapital 37,707440,164321,882292,346861,935193,20633,646-258,700576,157314,201 12/2011e12/2012e12/2013e 516,505246,840-96,836150,004 4,441162,261159,890-39,948122,314119,617 556,470265,346-104,801160,545 2,617171,947168,565-42,341129,606126,111 575,122270,056-109,384160,672 3,076173,685170,856-42,914130,445127,816 246,840-134,291-134,291-47,487-52,390 77,042 265,346-124,382-124,382-50,208-57,026101,240 270,056-120,776-120,776-52,002-61,690109,442 37,672476,369383,588341,373965,835286,11630,283-311,090647,673270,140 37,672497,198443,749398,3991,050,963292,39130,283-368,116726,204287,830 37,672508,590508,237460,0891,133,950296,61030,283-429,806804,647297,800 Ratio,growthandpershareanalysis Yearto 12/2010a Y-o-y%change Revenue 7.3 EBITDA 4.3 Operatingprofit 2.5 PBT 3.4 HSBCEPS 3.9 Ratios(%) Revenue/IC(x) 1.7 ROIC 39.8 ROE 21.5 ROA 15.0 EBITDAmargin 48.8 Operatingprofitmargin 31.1 interest(x) Netdebt/equity -44.8 Netdebt/EBITDA(x) -1.1 CFfromdebt Persharedata(CNY) EPSRep(fullydiluted)HSBCEPS(fullydiluted)DPSBookvalue 5.965.962.2428.72 12/2011e 6.44.2-0.52.01.0 1.838.719.513.447.829.0 -47.9-1.3 6.026.022.3431.89 12/2012e 7.77.57.06.06.0 2.043.418.412.947.728.9 -50.6-1.4 6.386.382.4735.75 12/2013e 3.41.80.11.00.6 2.041.316.712.047.027.9 -53.3-1.6 6.426.422.5639.62 Valuationdata Yearto 12/2010a EV/sales 1.9 EV/EBITDA 4.0 EV/IC 3.0 PE* 10.5 P/Bookvalue 2.2 FCFyield(%) 7.5 Dividendyield(%) 3.6 Note:*=BasedonHSBCEPS(fullydiluted) 12/2011e 1.73.63.310.42.06.53.7 Neutral 12/2012e 1.53.12.99.81.88.53.9 12/2013e 1.32.82.59.81.69.34.1 Issuerinformation Shareprice(HKD)76.15 Reuters(Equity)Marketcap(USDm)Freefloat(%)CountryAnalyst 0941.HK199,593 22ChinaTuckerGrinnan
3 Targetprice(HKD)80.00 .6 Bloomberg(Equity) 941HK Marketcap(HKDm) 1,550,567 Enterprisevalue(CNYm) 881827 Sector Wirelesss Contact 85228224686 Pricerelative 12211210292827262 2010ChinaMobileLTD Source:HSBC 2011 2012 ReltoSSECOMPOSITEINDEX Note:priceatcloseof13Jan2012 122112102928272622013 21 sMedia&TechnologyAsias17January2012 abc Telstra(TLS) NBNreturnsandwirelessbusinessimprovementnowinthepriceExpectfinaldecisiononNBNandsharebuy-backwithin1-2 monthsDowngradetoNfromOWonvaluation;forecastsandTPof AUD3.40remainunchanged Investmentthesis Thec24%sharepriceappreciationsinceOctober2010suggeststhatthestrengths–highyield,earningsmomentum(drivenbymobile)andpetitiveadvantage–arenowintheprice.Whilethemobilebusinessshouldremainstrong,third-rankedoperatorVodafoneHutchisonAustraliashouldrecoversomemomentumin2012.Furtherout,Telstra’workandspectrumholdingsremainsignificantassets.AssumingtheNBNdealgetsapproved,welookforanannouncementfrompanyregardingabuy-backatitshalf-yearresultsinFebruary2012. InFY10endedJune,webelieveTelstramadeamistake.Italloweditspricestoremainhigh,petitorswerecuttingaggressively,losingsubstantialmarketshareasaresult.ThecAUD1bnincreaseinopexinFY11largelyreversedthistrend–whilethetravailsofVodafoneHutchisonAustraliaalsohighlightedthestrengthsofTelstra’sNextwork.WebelieveTelstra’sspectrumworkassetscreateasustainabledifferentiatorintheAustralianmarket,andweexpectittocontinuetoshowstrongmobilemomentuminthenexttwoyears. Downsideriskstothestockaretwo-fold,inourview: Sensisadvertisingbusiness.Performanceatthisbusinesshasbeenweakforthepasttwoyears,asitstrugglestomakethetransitionfromprinttodigitalrevenuestreams.ItsEBITDAcontributionhasnearlyhalvedfrom19%inFYendingJun-08to10.4%inFYendingJun-11. Potentialregulatorychange.Shouldtherebeachangeofpoliticaladministration,theOppositionLiberalDemocratshaspledgedtocanceltheNBNdeal.WhilethiscouldbepositiveforTelstraonamedium-termbasis,itwouldmarkareturnofregulatoryuncertaintytothesector.Theoppositionmayneedtoconsiderhowtomanagetheupgradetofibre-basedbroadbandwhilesimultaneouslycurbingTelstra’sdominance. Demanddynamics Givenstrongdemandandhighlevelsoffixedmobilesubstitution,wirelessbroadbandanddataserviceprovisionwilllikelyincreaseinimportance.Aswehavearguedinourthematicresearch,thisfavourslargeroperators–suchasTelstra–withtheabilitytoinvestmorethanits 22 sMedia&TechnologyAsias17January2012 abc peers.Essentially,webelieveworkqualitywillremainadifferentiator,withTelstrawellplacedtobenefit. Supply-sidesufficiency Telstra’sNextworkhasbeenanengineeringandfinancialessstory.workwasbuiltin11monthsandcovers2.1mkm2ofAustralia,farinexcessofTelstra’petitors.Telstraisnowaworldleaderinwirelessbroadband.Itupgradedto7.2MbpsservicesinSeptember2007,launched21Mbpsservicesatend-2008,andswitchedon40Mbpsservicesatthestartof2010(withterminalsavailableinthesecondhalf).IthasnurturedthegrowthofwirelessbroadbandservicesintoacAUD1bnbusinessinFY11,andthatwillremainadifferentiator,inourview. Valuation,ratingandrisks Telstrastockwasasolidperformerformuchof2011,reflectinganincreaseddegreefortwithpany’sprospectsandwithpany’smanagement(headedbyCEODavidThodey).ItalsoreflectsanticipationofaspecialdividendsubsequenttoanNBNdealapprovalbytheACCC(shareholdersvotedtoapprovethedealattheAGMinOctober2011).Webelievethisismostlikelytotaketheformofasharebuy-back (giventhelackoffrankingcreditstosupportaspecialdividend),withthetimingofanannouncementmostlikelyatthehalf-yearresultsinFebruary2012. WecontinuetovalueTelstrausingaone-yearforwardPEmultipleof11x,basedontheaverageofthelasttwoyears’tradingdata.AppliedtoourFY12EPSestimateofAUD0.31,amultipleof11xreturnsatargetpriceofAUD3.40(unchanged). Underourresearchmodel,forstockswithoutavolatilityindicator,theNeutralbandis5pptsaboveandbelowthehurdlerateforAustralianstocksof10%.Ourtargetpriceimpliesapotentialreturnof11.3%(includingprospectivedividendyieldof8.6%),withintheNeutralband;therefore,wearedowngradingthestocktoNeutralfromOverweight.Potentialreturnequalsthepercentagedifferencebetweenthecurrentsharepriceandthetargetprice,includingtheforecastdividendyieldwhenindicated. Risks Keydownsideriskstoourvieware: TheriskthattheNBNdealiscancelledbyanewgovernment,leading
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