How To Invest in Brazilian Wireless Growth (PT, TEM, TI, BTM, TNE; ETF: EWZ)

Includes: BZF, EWZ, OIBR, PT, TEM, TI, TNE
by: Evelyn Rubin

Cellular News published a story highlighting the bright outlook for the Brazilian wireless industry. According to the article, "For cellular services companies, higher revenues and margins in the fourth quarter were the fruit of a collective decision to shift attention from subscription growth to attracting and retaining mid- and high-end users".

There are currently four wireless carriers in Brazil:

Vivo: Largest mobile carrier in South America with more than 30 million customers in Brazil. Joint Venture between Portugal Telecom (PT) and Telefónica Móviles (TEM). Vivo disappointed last quarter, particularly due to network fraud issues. The company's main unit, Telesp Celular Participacoes, recorded a net loss of BRL318 million (~$150 million) up from BRL235 million (~$110 million) in the same period last year.

Telecom Italia (TI) subsidiary Tim Participacoes: Second largest Brazilian carrier. Recorded 48.5% subscriber growth in 2005, and targets to grow 10% per year through 2008. EBITDA is projected to grow from 16.3% last year to over 20% this year and over 30% in 2008.

Brasil Telecom (BTM) subsidiary Brasil Telecom Celular: Brasil Telecom GSM entered the market in October 2004, and currently has 2.2 million subscribers. Cellular News reported that Brasil Telecom GSM posted a net loss of 599mn reais (US$281mn) in 2005. Gross revenues were 989mn reais in 2005 and net revenue 700mn reais. Ebitda was a negative 599mn reais. Deutsche Bank analyst Carlos Constantini wrote that "The mobile operator had the worst Ebitda in the sector, but this reflects its position as a late arrival in the market."

Telemar (TNE) mobile unit Oi ended 2005 with 10.3 million clients, up from 6.7 million at year-end 2004. Oi has a 26% market share in its operating region, up from 23.5% at year-end 2004. Gross mobile revenues for 2005 were up 30% over the previous year with traffic revenues almost doubled at 957mn reais compared to 592mn reais in 2004. Ebitda margins grew from 4% in 2004 to 16% in 2005.

Morgan Stanley's Vera Rossi expects consolidation in the market in the next 12-18 months. Cellular News reports that rumors continue to circulate that TI will take over Brasil Telecom, and Telemar could be sold to a wireless competitor. "The only long-term players likely to remain in the telecom industry in Latin America are Spain's Telefonica and two companies controlled by Mexican magnate Carlos Slim, America Movil and Telefonos de Mexicanos, or Telmex, said Rossi."

ETFs: There are two funds that cover Brazil; Closed End Fund Brazil Fund (BZF) has no allocation to telecom services, and iShares MSCI Brazil Index Fund (EWZ) allocates 7.63% to telecom services of which TNE is a component.

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