SmarTone Telecommunications:Operation stable despite MVNO entry

Competitive landscape has not deteriorated with the MVNO entry. HKBNlaunched its mobile service in Sept, with part of its network capacity leasedfrom SmarTone. So far, SmarTone has not experienced any negative impactfrom HKBN’s entry into the mobile space. Looking into 2017, as operatorshave to generate adequate earnings to pay the spectrum utilisation fee, webelieve the likelihood for irrational competition is relatively low.

SmarTone is taking prudent steps towards 5G launch. The companyrecently signed a partnership with Ericsson, choosing the latter as the solesupplier for radio access network in the coming five years. As SmarTone isknown for its disciplined approach towards capex spend and 5G launch isprobably around 2021, we do not expect 5G to impose imminent pressure onthe company’s free cash flow.

Outlook for the regulatory environment. The OFCA (regulatory body) hascompleted the first round of consultation on arrangements for 900MHz and1800MHz bands upon expiry of existing assignments. We believe the secondround of consultation is likely in late 2016/early 2017. SmarTone believes ahybrid solution (first right of refusal + open auction) could offer potentialupside as the company may obtain additional spectrum.

With Wharf T&T wireline assets acquired by private equity, SmarTone isfocusing on what it does best… wireless service. Previously, someinvestors worried SmarTone would take a stake in the wireline assets. Withthat scenario gone, we believe any overhang associated with SmarTone’spotential acquisition should be lifted.

Maintain Outperform. Our rating is based on: (1) SmarTone’s ability to growits earnings steadily in a rational competitive environment; (2) its ability to fendoff competition despite a smaller subscriber base than others; (3) thecompany’s guidance for FY17 DPS to stay at HK$0.60 (same as FY16)regardless of FY17 earnings; (4) company’s CEO to drive for innovativeservices (just like the former CEO); (5) company’s disciplined capex spendthroughout its ramp up to 5G launch.