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Analysts Estimate HK Telcos To Grow 31.60%; Should You Be Bullish?
Aspire, Hot Picks | 07 January 2015
By: Lim Si Jie
Articles (169) Profile

Source: Euromonitor International, 2014

With the rapid development in mobile technology, traditional telecommunication revenue such as fixed line subscription continues to decline. Fixed broadband growth continues to slow as well as household penetration exceeds 80 percent. As smartphone manufacturers continue to develop cheaper smartphones such as the popular Xiaomi, telcos are reporting growth in mobile data traffic.

Mobile Penetration Rate

The number of mobile subscribers in Hong Kong stands at 17.17 million while its population figures stand at slightly over seven million people. This represents an average mobile penetration rate in Hong Kong is of 237.3 percent, which means that each user owns an average of 2.3 SIMs as devices such as tablets and dongles gain popularity.

There is likely going to be only a small growth in new subscribers, if any at all, as the HK mobile subscription market is already saturated. Telcos will look to expand 4G services to boost growth in a saturated mobile market.

LTE Services To Increase ARPU
The current 3G spectrum licenses of the telco operators will expire in October 2016. After the latest 3G spectrum auction, all the telcos will have the 3G spectrum to launch LTE services from 2016 onwards.

Telcos will be transitioning all its 2G users and remaining 2.5G users onto the 3G/4G subscription.

With only 12.73 million users currently on 2.5G and 3G/4G network, the shift towards LTE services will be the focus of mobile operators as telcos look to monetize the switch from 2G to 3G/4G. Aggressive marketing could even see telcos try to switch users on the 2.5G network onto the 3G/4G network.

There are signs of increasing number of operators offering triple-play and even quadruple play services in a bid to drive up ARPU.


Source: SCMP

With 96 percent of smartphone users going online on their mobile, the shift towards 3G/4G will be a boon for smartphone users. We foresee that there will be a strong demand for the shift towards faster mobile data.

The shift towards faster mobile data could see telcos change their approach to pricing plans to mitigate the inevitable accelerated decline in SMS traffic volumes which is already happening. However, the strong up-take in 4G will likely see a minor lift in ARPU to stabilise the ARPU at slightly above 2014 sector average ARPU of HKD 235.

Analysts Positive On HK Telecommunications Sector
Despite the likelihood of ARPU experiencing limited growth, analysts estimate that the Hong Kong telecommunications sector will experience a growth of 31.60 percent in the next five years. Subscriptions will be expected to hit 22.4 million in 2030.

The positive estimate is reiterated by the Reuters analysts whose Institutional Brokers’ Estimate System (I/B/E/S) estimates gave an overall BUY call for the sector.

Consolidation Of Telecom Sector
Competition has also led to a consolidation of the mobile market, with regulators approving HKT’s acquisition bid for CSL. There might possibly be further consolidation deals in the sector in the upcoming year as telcos which could bring about faster rate of inorganic growth as compared to organic growth.

Where Is The Telecoms Sector Heading
We believe that the sector will remain neutral in the medium term while the longer term outlook remains slightly more positive. Telcos’ abilities to generate ample free cash-flows should keep dividend yields fairly resilient around an average of 3.0 percent.

With global markets heading towards new highs even though the global economy has not been performing as well as expected, there are a lot of mixed signals from the market.

The telecommunications sector will be a fairly strong defensive pick for long term investors especially with fears of a possible market crash as statistics and historical data point towards the end of a market cycle.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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