CGS-CIMB keeps telco sector ' overweight' as it taps on 3G spectrum to support 5G rollout

MDA proposes to refarm 2.1GHz for 5G SA rollout to existing MNOs

● In a public consultation issued yesterday, the Infocomm Media Development Authority (IMDA) is proposing to refarm the 2.1GHz spectrum for 5G standalone (SA) network deployment (existing 3G rights will expire by end-2021) to existing mobile network operators (MNOs). Of the 12 available lots of 2x5MHz each, IMDA plans to allocate 1 lot each to Singtel, StarHub and M1 on a first right of refusal (FROR) basis for the continued provision of 3G services (can be used for 5G later when IMDA approves 3G network shutdown).

● IMDA intends to impose a spectrum cap of 5 lots per MNO (including the FROR lot), which would also apply to the StarHub-M1 consortium (SMC). IMDA suggests a reserve price of S$10m-15m per lot, with 15-year rights duration starting from Jan 2022. It is currently seeking feedback, following which it will finalise its views and run the auction, likely in 4Q21F, in our view.

● If Singtel and/or SMC secure the 2.1GHz, they can use both 2.1GHz and 3.5GHz to meet their existing 5G coverage rollout obligations (50%/95% outdoor coverage by end-2022/25). If TPG, StarHub and/or M1 (bid separately) win, they must achieve: i) 50% outdoor coverage using 2.1GHz by end-2023 (i.e. 2 years), and ii) 95% outdoor coverage by end-2026 (i.e. 5 years) using 2.1GHz and any other spectrum. Winning bidders will have to provide 5G wholesale capacity to any requesting MNOs/MVNOs.

Singtel & SMC may get 5 lots of 2.1GHz each TPG may not get any

● If the above applies, we believe TPG may not get any 2.1GHz spectrum, though the Big 3 telcos may have to bid up spectrum prices to deny it. Possibly only 9 lots will be up for open auction as Singtel, StarHub and M1 will likely exercise their option for the FROR lot, in our view. We think Singtel and SMC will then bid to secure another 4 lots each in the open auction (i.e. the maximum, given IMDA&rsquo s spectrum cap). Assuming TPG is not able to outbid Singtel and SMC, it will be left with only one lot, which it may not take up as it would not be cost-effective to roll out a 5G network on just 2x5MHz (i.e. same equipment capex, despite the limited bandwidth). Assuming the final price of the 2.1GHz is 3x that of the reserve price, Singtel and SMC may have to fork out S$120m-180m for 4 lots each, plus another S$10m-15m each for the FROR lot.

Maintain Overweight on Singapore telcos top pick: Singtel

● We reiterate Overweight on the Singapore telco sector. After a 6-year bear cycle since Apr 2015 (StarHub: -74%, Singtel: -50%), we believe the earnings risk from stiffer mobile competition due to TPG&rsquo s entry is priced-in, and see progressively more stable mobile competition and enterprise revenues growing stronger in CY21-22F. Key sector downside risk: worse-than-expected competition. Singtel remains our top pick, with Singapore&rsquo s enterprise/roaming revenue recovery (post-Covid-19), resumption in Telkomsel&rsquo s topline growth, Bharti&rsquo s turnaround in FY3/22F and asset monetisation initiatives as key re-rating catalysts