Advanced Info Service: All Eyes On 5G Spectrum Auction

Summary

  • Advanced Info Service recently announced 4Q2019 and FY2019 financial results on February 6, 2020, and highlighted that mobile competition, especially in the prepaid segment, has not eased.
  • Fixed broadband segment subscriber growth is key to the company's five-year target of reducing revenue contribution of the core mobile business segment from over 90% now to 50% by 2024.
  • The 5G spectrum license auction in Thailand will take place on February 16, 2020, and things are complicated by a new CEO appointment at DTAC and the participation of state enterprises.
  • Advanced Info Service trades at 8.1 times consensus forward next twelve months EV/EBITDA and offers a consensus forward FY2020 dividend yield of 4.2%.
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Elevator Pitch

I upgrade my rating for Advanced Info Service Public Company Limited (OTCPK:AVIFY) (OTCPK:AVIVF) [ADVANC:TB] from "Bullish" to "Neutral" on valuation grounds.

Advanced Info Service's share price has declined by -14% from Bt232 as of November 7, 2019, since my last update to Bt199.50 as of February 7, 2020. Advanced Info Service trades at 8.1 times consensus forward next twelve months EV/EBITDA, which represents a slight discount to the stock's historical five-year and 10-year EV/EBITDA multiples of approximately 8.9 times and 8.6 times respectively. The stock also offers a consensus forward FY2020 dividend yield of 4.2%. Stiffer-than-expected mobile competition, especially in the prepaid segment and a negative outcome at the upcoming 5G spectrum license auction in February, remain key downside risks.

Advanced Info Service is the market leader in Thailand's mobile market with respect to the number of subscribers. The second and third largest mobile players in the country are True Corporation Public Company Limited (OTCPK:TCPFF) [TRUE:TB] and Total Access Communication Public Company Limited (OTCPK:TACYY) (OTC:TACJF) (OTC:TCCMF) [DTAC:TB], or DTAC respectively.

Please refer to my initiation article published on Advanced Info Service on August 26, 2019, and my prior update on the stock published on November 8, 2019, for more details on the company's background.

Readers are advised to trade in Advanced Info Service shares listed on the Stock Exchange of Thailand with the ticker ADVANC:TB where average daily trading value for the past three months exceeds $40 million and market capitalization is more than $18 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers, Fidelity, Charles Schwab, or local brokers operating in their respective domestic markets.

Mobile Competition Continues To Be A Concern

In my prior update on Advanced Info Service published in November 2019, I had highlighted that price competition in the prepaid segment has returned to the Thai mobile market, as mobile operators introduced unlimited data fixed speed prepaid plans to compete for subscribers. I also mentioned that Advanced Info Service is the most exposed to prepaid price competition among the three major mobile operators in Thailand because the company has the highest prepaid mobile revenue contribution and the highest prepaid ARPU of the three players.

Advanced Info Service recently announced 4Q2019 and FY2019 financial results on February 6, 2020. Mobile competition, especially in the prepaid segment, has not eased, as evidenced by the QoQ performance of Advanced Info Service's mobile business and management comments at the recent 4Q2019 earnings call.

The company's mobile business performance seemed to be decent in 4Q2019. Mobile segment revenue was up +4.1% YoY at Bt32.7 billion for 4Q2019. The total number of mobile subscribers increased +2.1% YoY to approximately 32 million; the number of postpaid subscribers grew by +11% YoY, while the number of prepaid subscribers declined marginally by -0.2% YoY over the same period. Mobile blended (postpaid and prepaid) ARPU (Average Revenue Per User) increased +2.0% YoY from Bt255 in 4Q2018 to Bt260 in 4Q2019, with a +0.1% YoY increase in prepaid ARPU to Bt572 being partially offset by a -1.7% YoY decline in postpaid ARPU to Bt173 over the same period.

However, Advanced Info Service's 4Q2019 mobile segment performance does not look as flattering on a QoQ basis. Mobile revenue was down -0.5% QoQ in 4Q2019, as compared with a +4.1% YoY growth. Advanced Info Service added approximately 455,700 net mobile subscribers in the recent quarter which represented a +1.1% QoQ increase (versus a +2.0% YoY increase), of which 350,000 net additions came from the prepaid segment, and the remaining 105,700 net additions came from the postpaid segment. Mobile blended ARPU was down -1.1% QoQ in 4Q2019 versus a +2.0% YoY increase over the same period. Notably, prepaid ARPU decreased -3.2% QoQ for 4Q2019 versus a -1.7% YoY decline.

In the company's FY2019 MD&A (Management Discussion and Analysis), Advanced Info Service highlighted that "competition in prepaid pricing escalated in 2H19" which explains the relatively weak QoQ performance for the mobile business segment in 4Q2019.

More importantly, it seems that pricing competition in the mobile market in Thailand will continue in early 2020. At the company's 4Q2019 earnings call on February 6, 2020, Advanced Info Service noted that its competitors have "reintroduced unlimited" voice and data fixed-price plans, and the company "might have to compete in the market."

On the positive side of things, there is no escalation of competition in the postpaid segment, although competition remains stiff. Advanced Info Service mentioned that it has observed "similar aggressiveness quarter-on-quarter" in the postpaid segment at the company's 4Q2019 results briefing on February 6, 2020.

Broadband Subscriber Growth Is Key To Achieving Company's Revenue Diversification Target

In my initiation article on Advanced Info Service published on August 26, 2019, I discussed about the company's five-year target of reducing revenue contribution of the core mobile business segment from over 90% now to 50% by 2024. Advanced Info Services' fixed broadband business segment has a key role to play in the company's revenue diversification efforts.

Advanced Info Service's fixed broadband business revenue grew by +30% YoY and +7% QoQ to Bt1,579 million for 4Q2019. The company increased its total fixed broadband subscribers by +42% YoY and +11% QoQ to 1,037,600 as of end-2019. Advanced Info Service had 100,600 net broadband subscriber additions in the recent quarter. At the company's 4Q2019 earnings call on February 6, 2020, Advanced Info Service reiterated its target of becoming "one of the key players within the FBB (Fixed Broadband)" market in Thailand. Despite achieving its one million broadband subscriber target by end-2019, Advanced Info Service is still only the fourth-largest player in Thailand's fixed broadband market behind True Internet (True Corporation's broadband business arm), Triple Three Broadband and TOT. The company has set a target of being among the top three broadband players by 2022.

On the flip side, while the pace of fixed broadband subscriber growth is encouraging, the decline in APRU is a concern. Advanced Info Service's fixed broadband APRU declined -7.2% YoY and -2.8% QoQ to Bt533 in 4Q2019, which implies that the company has offered competitive pricing to grab subscribers in the fixed broadband space.

Recognizing the declining broadband ARPU trend, Advanced Info Service highlighted at its recent 4Q2019 earnings call that the company will "be trying to move up the ARPU by giving more value to our customers." Strategies to improve fixed broadband ARPU include a gradual withdrawal of heavily discounted broadband plans, offering new add-on content packages, and raising the price of existing bundled plans (with mobile services).

Notably, Advanced Info Service's cross-selling efforts in terms of offering promotional fixed broadband plans to its existing mobile subscribers have been successful. Approximately 39% of the company's fixed broadband subscribers are also its existing mobile subscribers as of end-4Q2019.

All Eyes On 5G Spectrum Auction

The 5G spectrum license auction in Thailand will take place on February 16, 2020, and there have been recent developments that have complicated matters.

Advanced Info Service's peer and competitor, DTAC recently had a change of leadership, with a new CEO Mr. Sharad Mehrotra being appointed as of February 1, 2020, to replace outgoing CEO, Mrs. Alexandra Reich. In my article on DTAC published on January 30, 2020, I had highlighted market speculation on the possibility of DTAC not participating in the 5G spectrum license auction in Thailand this month.

Subsequent media reports have suggested that DTAC will participate in the 5G spectrum license auction. But DTAC will only bid for the 26GHz frequency, and not the 2600 MHz spectrum which is referred to as "the standard spectrum being used for commercial 5G service" by a January 9, 2020, Bangkok Post news article. In the medium term, there is a risk of DTAC losing mobile subscriber market share to True Corporation and Advanced Info Service as a result. A February 5, 2020, Bangkok Post article cited an unnamed industry source that attributed DTAC's decision to the company's views that "5G adoption in Thailand is still in the early stages and the company may instead wait for the 3500MHz auction."

On the other hand, state enterprises CAT Telecom and TOT are also participating in the upcoming 5G spectrum license auction, having already picked up the bidding documents. In a December 19, 2019 news article titled "DES (Digital Economy and Society) Ministry backs TOT, CAT 5G bids" published in The Bangkok Post, Advanced Info Service's chief corporate officer Weerawat Kiattipongthaworn was quoted as saying that "the company disagrees with the plan that lets the two state enterprises join the auctions, as mobile operations are not their core business." There are concerns from mobile operators like Advanced Info Service that this could be a prelude to state enterprises CAT Telecom and TOT eventually offering mobile services and competing with them.

However, there are positives associated with the participation of state enterprises CAT Telecom and TOT, as this could possibly help to ease the capital expenditure burden of Advanced Info Service and other mobile players via 5G infrastructure sharing. In early February 2020, CAT Telecom announced that it entered into an agreement with Thailand's Alt Telecom and Malaysia's edotco Group to work together on 5G infrastructure sharing in the country. This implies that CAT Telecom could potentially lease 5G infrastructure to the three mobile operators including Advanced Info Service on a wholesale basis.

Valuation

Advanced Info Service trades at 8.7 times trailing twelve months EV/EBITDA and 8.1 times consensus forward next twelve months EV/EBITDA based on its share price of Bt199.50 as of February 7, 2020. In comparison, the stock's historical five-year and 10-year EV/EBITDA multiples were approximately 8.9 times and 8.6 times respectively.

Advanced Info Service is valued by the market at a premium to its peers. True Corporation Public Company Limited and Total Access Communication Public Company Limited or DTAC trade at consensus forward next twelve months EV/EBITDA multiples of 7.7 times and 6.2 times respectively.

Advanced Info Service offers consensus forward FY2020 and FY2021 dividend yields of 4.2% and 4.7% respectively. The company recently declared a final dividend per share of Bt3.56 for 2H2019, which brings the full-year FY2019 dividend per share to Bt7.34 implying a dividend payout ratio of 70%, taking into account the 1H2019 interim dividend per share of Bt3.78 as well.

Risk Factors

The key risk factors for Advanced Info Service are stiffer-than-expected mobile competition especially in the prepaid segment, overpaying for spectrum at the upcoming 5G spectrum license auction, and lower-than-expected dividend payout going forward.

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Asia Value & Moat Stocks is a research service for value investors searching for attractive Asia-listed investment opportunities  with a huge gap between price and intrinsic value, leaning towards both deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high quality businesses, hidden champions and wide moat compounders).


Those who believe that the pendulum will move in one direction forever or reside at an extreme forever eventually will lose huge sums. Those who understand the pendulum's behavior can benefit enormously. ~ Howard Marks

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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