Published November 26, 2008

Asian telcos losing defensive appeal in financial turmoil

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(MACAU) Asian telecom stocks are no longer a surefire defensive play for these financially turbulent times, with even China and India expected to see pain in the short term as a gloomy economic outlook stretches into 2009.

Analysts and executives at the 2008 GSMA Mobile Conference last week in Macau warned that heavyweights such as Japan's NTT DoCoMo and South Korea's SK Telecom will struggle to wring more revenue out of saturated markets as competition intensifies. And many players in Asia's high-growth markets, led by China and India, are battling with lower ARPUs and slowing subscriber growth, while they compete to provide more value-added services such as multimedia and games as consumer expectations accelerate. ARPU, or average revenue per user, is a key performance indicator for telecom firms.

'For China, the penetration rate is relatively low, the prospects are still there. It's not saturated, but the growth will slow because of the impact of the financial crisis,' said Hong Kong-based ICEA Securities analyst Kary Sei.

'The major driver is rural customers, but they are low-end users and just pay a little. The operators are now relying on value-added services because they want to maintain their ARPU.'

Beijing in May unveiled a sweeping industry reshuffle that will see the creation of two full-service competitors - China Unicom and China Telecom - to China Mobile via mergers and acquisitions.

'Lower GDP per capita implies lower average income per capita, and hence lower subscriber growth and lower ARPUs compared with our previous expectations,' Morgan Stanley said in a research note downgrading China telcos' earnings outlook.

Executives say low penetration rates in India, the world's fastest expanding mobile market, will continue to benefit dominant player Bharti Airtel. But intense price competition and balance sheet issues will hamper foreign players such as Etisalat, Sistema and NTT DoCoMo seeking a slice of the market via stakes in local firms.

Norway's Telenor , which derives a third of its revenue from operations in Pakistan, Malaysia, Thailand and Bangladesh, is moving into India with a US$1.1 billion deal for a 60 per cent stake in India's Unitech Wireless, and planning to fund the deal with a rights issue.

But JPMorgan has estimated the deal could destroy US$2 billion of value and give earnings dilution of more than 30 per cent in the near term.

But while analysts say the current liquidity crisis will hurt greenfield operators in India, it is seen benefiting Bharti Airtel, which controls roughly a quarter of the mobile subscriber market, has strong cashflow and no immediate need to raise capital.

'New entrants have achieved very low ARPUs, which indicates revenue share stability for incumbents like Bharti despite a seemingly successful entry by new entrants,' said Citigroup, which has a 'buy' rating on Bharti and says 'no one else comes close'. Macquarie, CLSA, JPMorgan, and Goldman Sachs all say Bharti is the top pick in India's telecom sector. -- Reuters