Regional Telecommunications Switch to growth-yield mix - DBS Vickers

· 2010 result vindicate that data is benefiting telcos, especially in emerging markets.
· But emerging market telcos are trading at 30-40% discount to mature telcos’ EV/EBITDA multiples as investors continue to pay a premium for yield.
· Switch to telcos that will benefit from growth and may be re-rated with potentially higher dividends. XL, Axiata & SingTel fulfill the criteria.
· Prefer Indonesian tower operators & Chinese equipment players for pure growth.

Data led strong revenue growth in 2010. Despite fears data was cannibalising voice, cellular revenue growth in Asia was stronger in 2010 than 2009, vindicating proponents of data. Poor fixed-broadband penetration and affordable Chinese handsets (US$40-$200/unit) are supporting rising data usage in emerging markets. However, the market could still be underestimating revenue growth in 2011 due to lack of statistics to forecast growth potential of mobile-broadband.

Big opportunities for small players in China & Indonesia . China Mobile & Telkomsel have 79% and 58% revenue share in their respective markets, but that may be difficult to sustain in these three-player markets. While incumbents enjoy early-mover advantage in the voice-space due to superior network coverage, data-growth is accelerating in urban areas where coverage is on par.

Potentially lower costs in Singapore . Singapore telcos may save costs with potentially lower handset subsidies in 2011 due to (i) arrival of Android phones (requiring lower subsidies) and (ii) lower smart phone sales (after the initial frenzy in 2010). Singapore may also benefit from high purchasing power of its consumers who are able to buy tablets with 3G plans.

Cheap valuations and higher dividends are key criteria. Many emerging market telcos are trading at 4x-6x FY11F EV/EBITDA vs 7x-10x for mature telcos, who are valued by dividend yields. Sector growth is not compelling enough currently to forego dividends. Given the market’s appetite for yields, XL and Axiata may be re-rated in anticipation of higher payouts in 2011 and beyond. SingTel’s key concern is its over-exposure to regulatory risks in Asia and Africa , but its 11x FY12F (Mar-YE) PER is attractive given expected 6% yield, mid-single digit growth and proven execution.