Asian Telecoms:Positional shift being considered
Investor positioning shaken by sector divergence
15 days of marketing across EU, US, HK and SG, highlighted the high yieldhoneymoon is over, with previous investor favorites, CM, AIS, AX, DIGI, MAX,M1, STH and TLS having taken a beating as regulatory and new entrant riskbit, while other investor favorites, Softbank and CU have also suffered. It’sbeen tough, causing investor interest to shrink. The schedule wasapproximately 20% lighter than on the previous two global trips. What hasdone well is Japanese, Indonesian and Taiwanese telcos, and HKT, withinvestors tending to hold the latter two and Telkom, and Japan investorsfavoring NTT. Whether to hold their winners was a common question, asrelatively shareholder friendly policies and high pay-out vs. bonds remained.Overall, we noted more reflection occurring over long-held positions.
Our key themes
Our key themes were: 1) To Infinity and Beyond, why we expect the MSCI Asiaextelco index to rise 50% to prior highs in the medium-term, on datamonetization, IoT hype, yield compression, and FX reversion. 2) New AlphaChampions, why investors need to switch from high payout to growth, 3)Picking winners in a revamped sector, a combination of our China FITT reporton network quality/consumer survey/turn-around experience, and our mediumtermview on 50% value add potential at CT and CU. 4) Top picks: Bharti (Jio aforce for consolidation / comparison with RCom launch), CT (data monetizationthis year, plus our mid-term view), PLDT (5% DY on likely trough earnings, whyturnaround should work), SKT (5% DY, greater market profit focus emerging,higher payout possible). Softbank (discount to SOTP, buyback, and MSCI rebalas drivers, new structure as indicator of splashy move).
Questioning existing positions, considering shifting from pay-out to growth
Our Rate Risk and New Alpha Champions themes, which heavily focused onthe risk of new entrants and government involvement has played out. Andwhile these got little traction at the time, investors now are heavily focused onthese, causing regular pushback on our CT and especially CM buys. There is awidespread belief that CM is more policy tool than corporate. This thecompany will need to address – but earnings growth and a higher payout webelieve are on the way – and will turn this view somewhat. We expect a lightertouch in China, and possibly Thailand, and think the new entrant risk inSingapore while real, is not as large as the sell-off in M1 and STH suggests.Our recommendation to target growth was received quite well, with our Bhartiand SKT thesis getting a much more eager reception than in the past. OurPLDT buy found minimal traction, with investors worried about Globe takingshare (San Miguel being of less concern). Softbank was of interest to a fairlysmall subset of investors than previously. Bharti and China Telecom appearedto be held by no-one we talked to, while other top picks were rarelyacknowledged. CM is still the core holding, and we agree it should have a solid2016. CU holders