We remain NEUTRAL on the regional telecoms sector as industry earnings are pressured by decelerating revenue growth, rising opex and increased depreciation from aggressive network deployment. Telcos’ uncompelling valuations, margin pressure and capex risks are the sector’s Achilles heel, invoking a stock-picking strategy to identify winners. Except for Thailand, on which we are OVERWEIGHT, we are NEUTRAL on the Malaysia, Singapore and Indonesia markets. Our top regional picks - AXIATA, STARHUB and ADVANC - are not necessarily outright buys although blessed with stock-specific catalysts.
Capex starts to weigh in. The region’s telcos are upgrading their networks to cater for the exponential growth in data consumption led by rising smartphone penetration. The capex upcycle in Indonesia has started in earnest (see Fig. 3) given the race to improve coverage and capacity. Over in Thailand, telcos are beginning to deploy 2100 MHz networks following awards of the 3G spectrum last December as illustrated on Fig. 4. In Malaysia and Singapore, capex is levelling off although there is still modest spending on 4G/LTE and legacy networks (TM). The rising opex and depreciation from network expansion and maiden 3G deployment will curtail the sector’s earnings, resulting in lackluster growth for FY13/14. Capex intensity is likely to remain high for the next 2 years before easing in 2015 as network spending normalises.