Telecom (Asia/Pacific Rim) - Industry Outlook

For the past several years, the telecom industry in Asia has been one of the fastest growing markets in the world, with year-on-year growth rates of almost 30% for the last five years. By September 2008, mobile subscriber count in Asia reached 1.4 billion, with overall penetration rate of 40%.

Market development in the region is characterized by two extremes. On the one hand are the developed countries with near-saturation penetration rates (Hong Kong, Taiwan, Singapore, South Korea), and on the other end are emerging markets still in the early to mid-growth stage (China, India, Pakistan, Bangladesh).

The effect of a recession in the U.S. would be an economic slowdown in the region, but its effect on the telecom industry in the region would be less pronounced. This is because, unlike in developed countries where the consumers are being sold on replacement/upgrade durable goods, the emerging market consumer still has large untapped potential, with many buying their first car, PC or cellular phone.

For telecom services, with its low penetration rate of 40% and low ARPU (average revenue per user), in many cases less than $10 per month, the industry in this region should be more resilient to a downturn.

OPPORTUNITIES

We have a HOLD recommendation for Philippine Long Distance Telephone Co. (PHI) because of their dominant market position in all segments of the industry. PHI is likewise expected to gain from the wave of rising broadband internet subscribers.

In addition, the company continues to generate substantial free cash flow enabling high dividend payout and share buyback. However, overall revenue growth rate will be tempered by slower wireless subscriber gains and lower ARPU.

WEAKNESSES

Some service providers in the region are cautious about the viability of introducing 3G at this time. With the low average revenue per user and expensive handset prices for 3G, the number of users willing to upgrade to 3G might be too limited for service providers to recoup their investment.

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