Asia Telecoms:2017,Seeking fresh opportunities

Many good eggs but choose the basket wisely The outlook for the Asian telecom sector remains a mixed bag of risks andopportunities. Like the rest of the world, the sector had its fair share of surprisesduring 2016, and there are certain to be more during 2017. How to tell the good eggs from the bad (or rather “not as good” in most of thetelecom stock’s cases). We focus on telecom stocks that operate in relativelybenign, or at least well managed, competitive and regulatory environments withsustained earnings delivery and good dividend yields. We also like “challenger”stocks that are undergoing a strategic change when we believe this can bringlong-term growth and value creation. Overlaying this is a macroeconomicframework in which we recognize that changing fiscal and monetary policy canplay a material part.

Top stock picks

For the Asia telecom sector, we prefer stocks in China, Indonesia, Japan, andKorea. As an EM, Indonesia has the ingredients to drive sector revenue andearnings growth: market consolidation, expanding data networks, low dataconsumption and low data pricing. These four markets are also where we seerelatively better regulation/competition dynamics as well as new sources of topline growth and expanding cash flows.

Our top five telecom stock picks for the region are (in order of totalshareholder return potential): XL Axiata (+65% TSR), China Mobile(+37.0%), LG U+ (+34%), SoftBank (+27%), and NTT (+27%).We naturally tend to avoid markets where competition is heating up (eg,Malaysia, Philippines, and Singapore). Within the ASEAN markets, we rankIndonesia top and Thailand second. Investors worry about competition inThailand, and valuations today reflect this, but we see the focus on cost-basedcompetition (ie, subsidies) as less worrying than price-based competition.

Our top five stock picks in ASEAN are (in order of preference): XL Axiata,

SingTel, Telekom Malaysia, True, and ADVANC.

Shifting sands of macro policy and strategic positioningMacquarie has a cautious 2017 outlook for emerging market economies overall.Our strategist’s view is that stagflation is more likely than reflation; thus, therecent and rapid rise in yields may not be sustainable We believe the telecomsector can offer stocks that are relatively defensive in an environment ofcurrency or international uncertainties, but in a world of higher bond yields, thetelco yield offerings may be less appealing. We believe yield remains animportant part of total equity returns for the telecom sector and that stocks withquality and sustainable cash flows are relatively appealing.

Infrastructure and new technologies are also themes

In some markets, the regulator is pushing for more infrastructure sharing andbetter resource allocation (China, Indonesia, and India) and we could see moreinfrastructure asset listings in 2017 (China’s CTC, Axiata’s edotco). See also ourreport: Win-win-win: changes in infrastructure development can add value. Wealso expect to get more clarity around the roadmap and timing of 5G networkmigrations. See also our report: Do not worry about 5G.