Our channel checks suggest concerns over competition is excessive. The below-average-ARPU prepaid package is only offered by one operator, and it is now only offered in 1-2 provinces compared to 35 in late-November, and the free calls feature has been removed. Given less undemanding valuation and attractive 4-5% dividend yield, we recommend to accumulate stocks in the sector with strong fundamentals, including ADVANC, DTAC, and INTUCH.

Competition is easing

Mobile operators announced strong earnings growth in 3Q19 (+29% yoy, flat qoq) underpinned by higher revenues, driven by the core mobile business. Revenue grew 3.8% yoy in 3Q19, outperforming GDP growth, driven by a combination of higher blended ARPU and migration from prepaid to postpaid. ARPU rose 1.9% yoy in 3Q19 due to benign competition, particularly in the postpaid market. In the meantime, prepaid subscribers continued to migrate to postpaid and the share of postpaid subs increased to 25.5% of total subs from 25% in 2Q19. Recent conversations with some operators suggest competition is less intense this quarter; the Bt90 for 2Mbps prepaid package is only offered by one operators and it is now only offered in 1-2 provinces compared to 35 in late-November, and the free calls feature has been removed.

5G will not burden cash flows

Following the media interview with Deputy Prime Minister Somkid, we maintain that the 5G auction is a priority for the government for two reasons – to attract more foreign investors to the EEC program, and keep foreign direct investment coming to Thailand. This is because other countries in ASEAN (Malaysia, Vietnam, Philippines) are scheduled to launch commercial 5G services next year, and delaying 5G rollout in Thailand might cause FDI to migrate to those countries. But reading between the lines, Mr. Somkid explicitly said the auction must not focus on securing exorbitant prices because the 5G rollout is crucial to support the economy and society. Based on the NBTC’s reserve price, pricing for 5G licenses will be reasonable. To secure the 10 licenses on 2600MHz, operators would need to pay Bt18.62b, implying Bt1.24b in annual amortization charge. That is about 3% of ADVANC’s FY20F earnings and 17% of DTAC’s. But for TRUE, this could wipe out next year’s earnings. 

Top picks: ADVANC, INTUCH and DTAC

The correction in the share prices of mobile operators in the past month reflected rising competition in late November. But competition was intense for only about two weeks and has tapered down since. Given undemanding valuation and attractive 4-5% dividend yield, accumulate ADVANC, DTAC and INTUCH