Asia Essentials

Conclusion

We turn bullish on Philippine telcos as we continue to see signs of competitioneasing. We upgrade PLDT from Neutral to Outperform and raise our targetprice on it by 54% to P2,000. We also maintain our Outperform on GlobeTelecom with a 15% higher target price of P2,300/sh.

Impact

Signs of improvement. Competition among Philippine telcos has eased, withselling expenses down sharply. The industry’s quarterly selling andadvertising expenses averaged P3.9bn in the last two quarters, down 16%from the previous seven quarters’ average of P4.6bn. Furthermore, therehave been no significant price cuts since mid-2016. Consequently, industryEBITDA margins have averaged 42% in the last two quarters, slightly abovethe previous seven quarters’ average of 41%. We expect EBITDA margins tostay c42-43% in light of stable pricing, while promotions are kept rational.

PLDT focusing on enhancing network rather than pricing. Since thechange in management in late 2016, PLDT has been focusing on its networkrather than competing on price to gain back market share. In addition, weunderstand the company is promoting a culture of closer collaboration ratherthan multiple ‘silos’. We expect market shares of both Globe and PLDT to staystable going forward, with both telcos having said they no longer want to focuson gaining market share, but on improving their networks. Note that PLDTsaw a 400,000 subscriber net additions in 1Q17.

Globe cutting subsidies and promos. Globe recently stopped bundling freeunlimited data for Facebook with other paid services. This promotes the habitof paying for data, especially as 54% of Globe’s subscribers are already datausers. The company also reduced handset subsidies for post-paid subscribersby 21%. We believe the increasing availability of cheaper smartphones,coupled with rising disposable incomes of Filipinos, has reduced the need forsubsidised smartphones.

Little risk of a third player entering. There’s little risk of a third playerentering the Philippine telco industry, in our view, given very high barriers toentry. Not least of these are the capital requirements: there is a 40% foreignownership limit on telcos, which means any third player must have a cash-richforeign partner and a cash-rich local sponsor. Since there is no infrastructureor tower sharing in the Philippines, the required cash outlay to build a telcofrom scratch will be enormous; we estimate it would cost $2bn to cover keycities. Note that both Globe and PLDT already have fully built infrastructure,and each spends around $850mn annually on capex. With mobile SIMpenetration already at 120% of population, it will be difficult for a third playerto gain market share and remain profitable at the same time.

Outlook

We upgrade PLDT from Neutral to Outperform with a new target price ofP2,000. We also maintain our Outperform on Globe Telecom with a 15%higher target price of P2,300/sh. Our top pick in the sector is PLDT, which istrading at an EV/EBITDA of 7.0x on 2018E, below Globe’s 7.2x.