Published On: Mon, Dec 30th, 2013

Zong obtains LDI license – Negative impact on existing players

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Corporate news (Pakistan news)

Corporate news (Pakistan news)

Media reports confirm that China Mobile Pakistan (CM PAK) / Zong has reached an agreement with PTA (Pakistan Telecom Authority) to obtain a Long Distance International (LDI) license.

-Our first impression is that this will be an unwelcome move from other LDI operator’s perspective, as they will now have to accommodate another player in their market share agreement under the ambit of the International Clearing House (ICH) in a shrinking market environment.

Corporate news (Pakistan news)

Corporate news (Pakistan news)

-We believe it is still too early to gauge the exact impact of this news on LDI market share attrition and earnings for Pakistan Telecom Ltd (PTC) given ambiguity on how a new entrant would impact the current ICH mechanism/quota allocation.

-Our back of the envelope sensitivity analysis suggests that every 1ppt reduction in PTC’s market share will decrease PTC’s annualized earnings by 1.3%. Meanwhile our industry channel checks indicate that reduction in PTC’s LDI market share (currently 50%) is unlikely to be more than 1ppt.

-With (1) lower market share / earnings risk in the near term visible in PTC’s LDI business and (2) valuations turning somewhat punchy post strong recent price performance (PTC trading at 2014E P/E of 9.6x vs. the market’s P/E of 8.5x), we downgrade PTC one notch from ‘Hold’ to ‘Sell’.

Corporate news (Pakistan news)

Corporate news (Pakistan news)

Zong finally gets the nod for a LDI license

As per media reports, China Mobile Pakistan (CM PAK) / Zong has reached an agreement with PTA to obtain a Long Distance International (LDI) license. Recall that while Zong has been pursuing its case for a LDI license for some years now, due to the SPA (Sale-Purchase Agreement) between the government of Pakistan and Pakistan Telecom Company Ltd (PTC) at the time of privatization, the government could not issue any new LDI licenses till March 2013. Though that date expired a while ago, earlier this year the existing LDI operators succeeded in getting a Stay Order from the Sindh High Court (SHC) citing the need of a renewal in telecom policy before the issuance of any new licenses. However, last week SHC lifted the stay order, paving the way for issuance of a license to Zong.

Last among cellular operators to enter the LDI business

With a market share of 17% in the cellular business, Zong is the fourth largest cellular operator in Pakistan. Although it is the last cellular operator to enter the LDI business, note that Zong is likely to be the only cellular company to have direct exposure to the LDI segment where Ufone (PTC), Mobilink (LinkdotNet), Telenor (Telenor LDI Communications) and Warid (Wateen) all have indirect exposure through their parent companies, subsidiaries or sister companies.

‘Negative’ for existing players- quantum remains unclear

Understandably this news is negative from the perspective of the existing players in the LDI business as they will now have to accommodate another player in their market share agreement (i.e. ICH). This will be even tougher for existing players to digest given that international incoming minutes are gradually declining (post the higher ICH call rates) with grey market players infiltrating the market and more consumers switching to VoIP technology (like Skype). Our industry channel checks suggest that international incoming minutes are likely to settle around 500mn minutes in December 2013 vs. ~650mn minutes in October 2013 and ~550mn in September 2013. 

Potential EPS risk for PTC – downgrade one notch to ‘Sell’

We believe it is still too early to gauge the exact impact of this news on potential future LDI market share attrition and PTC’s earnings given the ambiguity on how a new entrant will impact the current ICH mechanism/quota allocation of incoming minutes. Recall that market shares were allotted on the basis of historical market shares before ICH was put in place. With Zong being a new entrant in the LDI business (no direct history of market share as an LDI) the basis for market share allotment for the company remains unclear for now. Meanwhile, our back of the envelope sensitivity analysis suggests that every 1ppt reduction in PTC’s market share (currently 50%), ceteris paribus, will decrease the company’s annualized earnings by 1.3% (base case 2014E EPS of Rs3.25). That said, our industry channel checks informally indicate that the reduction in PTC’s market share is unlikely to be more than 1% with Zong anticipated to get 2-3% of the LDI business based on its international incoming traffic as a cellular operator. With (1) lower market share / earnings risk in the near term visible in PTC’s LDI business and (2) valuations turning somewhat punchy post strong recent price performance (PTC is now trading at 2014E P/E of 9.6x vs. the market’s 2014E P/E of 8.5x), we downgrade PTC one notch from ‘Hold’ to ‘Sell’. Our Target Price is unchanged at Rs26.

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