Telcos Looking Strong Next Year, but Watch Out for Price War, Policy Risks: Report
Jakarta. The outlook for Indonesia's telecommunication sector is looking strong next year, but another price war and policy risks, triggered by the government's plan to push operators to share networks, may carry downside risks, an equity report released earlier this month showed.
The sector's rating has been cut to "neutral" from "overweight," according to research by Bahana Securities, in partnership with the Daiwa Securities Group. The stock of Telekomunikasi Indonesia, known as Telkom – the country's biggest telco company – remains the top pick. Telkom controls Telkomsel, the country's biggest mobile phone operator.
The "neutral" rating means the sector is considered neither bullish, nor bearish, while "overweight" is an indication that the sector will likely outperform others.
Catalysts
The equity report mentioned several catalysts that may lift the performance of telco-related stocks, including a predicted improvement in the proportion of smartphone users in Indonesia, higher data usage among customers, and an expectation of solid revenue growth.
The report cited various projections, including from GfK, a global provider market and consumer information service, that says the proportion of smartphone users in Indonesia could grow to 90 percent of the total number of phones, compared to 50 percent currently.
"This should support data usage as well as the average revenue per user (ARPU), providing solid revenue growth for the telecommunication sector," said the report, which was presented by senior Bahana Securities research manager Leonardo Henry Gavaza during a discussion in Jakarta on Thursday (08/12).
The report further explains that about 65 percent of mobile phone purchases in Indonesia cost less than Rp 1 million ($75), with several leading manufacturers such as Samsung, having taken steps to penetrate the cheap smartphone segment, which "will likely have a huge impact on smartphone sales."
This has boosted the proportion of smartphones as part of the total to 50 percent in the third quarter of this year, up from just 25 percent in the third quarter of 2014.
"We expect this trend [of a higher proportion of smartphones] to continue as it is still low in Indonesia compared to the average 52 percent for its regional peers," the report said.
Downside Risks
"However, despite relatively stable conditions in the greater Jakarta area and several other big cities, increased risk of competition have emerged in areas outside Java, as seen by cheap promotions by XL Axiata and Indosat Ooredoo, amplified by policy risks such as network sharing," the report said.
Higher competition risks and the government's plan to push operators to implement network sharing, which may also translate into lower rental demand for towers and affect the businesses of tower providers, are the main reasons for Bahana-Daiwa cutting its rating on the sector to "neutral" from "overweight, the report said.
The price war among mobile phone operators has started in 2010, but it has intensified this year since Telkom's strongest competitors – XL Axiata and Indosat – pushed extremely low prices for telecom services, such as data, short text messaging and voice calls, to shake the domination by Telkom, currently the biggest player with the largest subscriber number and the widest network coverage in the country.
Indosat is the second-largest mobile phone operator by subscriber numbers and XL the third. The three operators control about 85 percent of the market in terms of subscriber numbers.
Nine operators, including Hutchison 3 Indonesia, Smartfren Telecom, Sampoerna Telekomunikasi Indonesia and Bakrie Telecom are fighting it out for market share, but each only controls a small segment of the market.
"We do not expect smaller telco companies to start a price war. Bakrie Telecom continues to suffer from lower ARPU and revenue, while we understand that Bakrie Telecom is planning to lease its frequency to Smartfren," the report said.
It added that the sector is expected to see consolidation into just the three-big players in the future.
Interconnection Dispute, Network Sharing
The government's policy is expected to change the landscape in the industry in 2017, the report said.
At the time when a dispute for interconnection fees has not been settled – with Telkom still protesting the government's decision to cut the charges when a subscriber uses a phone to connect with a subscriber of a rival telecommunication network – operators would have to deal with the upcoming rule on network sharing.
Communications Minister Rudiantara has said on several occasions that the government aims to make it obligatory for operators to share their backbone telecommunication infrastructure, with rental rates to be decided by a third-party valuator.
"Network sharing may only benefit ISAT and EXCL," the report said, referring to Indosat and XL Axiata. It added that if this were to take happen, Telkom's two main competitors will be allowed to use the company's backbone network.
Telkom currently dominates network coverage outside Java with more than 70 percent market share and a higher pricing strategy.
However, if the network sharing scheme is implemented, it means Indosat and XL "would only need to invest in the last mile of backbone and base transceiver stations" and it would reduce their expansion costs significantly.
Still, the Bahana-Daiwa report said "expansion to areas outside Java is likely to be challenging, as it involves local knowledge as well as licenses."
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