M1 raised its promotional monthly rate for 100Mbps

Target Price - S$2.85

Upgrade to Buy. We expect margin concerns for M1 to fade for a while as the new iPad should not cause a dent, the iPhone 5 launch is unlikely till October 2012 and the telco appears to have shed its previous aggressive stance on fibre, even as the government steps in to smoothen NBN rollout issues. Upgrade to Buy with a target price of $2.85 (including DPS of $0.145) for a total return of 14%.

No adverse margin impact expected from new iPad. When Apple’s new iPad comes onto the market, expected to be available today, we do not expect M1 to suffer a margin upset. The iPad tends to have a much smaller impact on subscriber acquisition costs than the iPhone. In fact, with all the telcos making a concerted break away from unlimited data caps on their new iPad plans (now only 10GB bundled), we are hopeful tablets will play a larger role in boosting data ARPUs.

Easing up on aggressive fibre stance.
M1 appears to be easing up on its aggressive stance on fibre. At the recent IT Show 2012, it raised its promotional monthly rate for 100Mbps home fibre broadband from $39 to $45, putting it closer to SingTel’s rate of $49.90 and StarHub’s $49.65. Even so, M1’s rate is still considered attractive vis-à-vis its peers because its price point is lower and it also includes a bundled mobile broadband plan with 5GB data cap.

Enough time for margins to recover. With the new iPad out on the market, the next iPhone (iPhone 5 or just the new iPhone?) is not expected to be launched until October. This is in line with the timing of the iPhone 4S last year, when Apple pushed back the rollout date from a traditional June launch closer to the year-end holiday season. M1’s margins had taken a beating in 4Q11, hence this will give it time – at least two quarters - for its margins to recover.

Fibre to get higher speed limit, positive for M1. The government has finally stepped in to force OpenNet to be more responsive to market needs. As OpenNet works on increasing its permanent installation capacity and comes out with a way to better handle demand fluctuations, we anticipate faster growth in fibre net-adds this year. NGNBN take-up has been slow last year, but if the teething issues are resolved, this will be a positive catalyst for M1.

Margin concerns priced in
Apple’s new iPad available today. On 7 March, Apple launched its third and latest iPad, creatively named the new iPad instead of the widely-expected iPad 3. It is expected to be available in Singapore from today.
We expect that iPad 1 users may find it compelling enough to upgrade but iPad 2 users would face a less obvious choice.
Basically, the new iPad only stands out for its higher resolution Retina screen and the upgraded 5MP rear camera. Although the processor is faster, initial tests suggest this is only noticeable when playing games that can show off the new screen. Snappiness during regular usage is apparently not significantly enhanced. Although it supports LTE, it is not clear yet whether this feature will work on local LTE networks because of the difference in frequency bands in each country.

However, we do not expect any adverse impact on margins. When iPad 2 started selling in Singapore in April last year, M1 did not register any pressure on margins in either the second or third quarter that year.

The iPad tends to have a smaller impact on subscriber acquisition costs than the iPhone, for the following reasons:
1. The typical iPad owner is, more often than not, likely to be already a smartphone owner, and most people will just take up an additional SIM card that allows them to tap into their existing iPhone voice/data plan instead of getting an additional data plan altogether. In such cases, there will be no subsidy provided.

2. Anecdotal evidence suggests that most people purchase the cheaper Wifi-only model, which does not require a contract plan. Again, no subsidy is provided.

iPhone 5 not expected to be launched until 3Q12. Apple’s products may be the best thing since sliced bread for consumers but the company itself is one of the telcos’ biggest nightmare, as subsidies are high and the new models come fast and furious. With the new iPad out, however, the iPhone 5 is not expected to be launched until 3Q12, in line with the launch of the iPhone 4S last year, when Apple pushed back the rollout date from a traditional June launch closer to the year-end holiday season. This will give time – at least two quarters - for M1’s margins to recover.

M1 shedding its aggressive stance?
At the recent IT Show 2012, M1 raised its promotional monthly rate for 100Mbps home fibre broadband from $39 last year to $45. This puts it more on par with SingTel and StarHub, which are pricing the same access speed plan for $49.90 and $49.65, respectively. However, M1’s rate is still considered attractive vis-à-vis its peers because its price point is relatively lower and it also includes a bundled mobile broadband plan with 5GB data cap.

More tablets please
Proportion of tablet plans is rising fast. M1 does not break down the number of tablet plans relative to its mobile broadband base. As at the end of last year, it had 650,000 mobile data customers, of which 204,000 users are on dongle and tablet plans, which include the iPad and other brands.

We understand that tablet plans still form a small proportion of M1’s mobile data subscriber base as tablet usage in Singapore is still low compared to smartphones. To-date, we have been unable to find any data on the size of the tablet PC market in Singapore. However, tablet penetration is likely to rise faster than any other category, including smartphones, given that Singapore has traditionally been a leader in the adoption of new technological devices.

Telcos break away from unlimited data with new iPad plans. With the new iPad plans, all the telcos including M1, are no longer offering unlimited data allowances, capping them instead at 10GB. Previously, M1 and StarHub offered unlimited data caps and while SingTel’s plan was not unlimited, it still offered a generous 50GB. This is what we want to see – a concerted move by all the telcos to reduce data allowances. Therefore, we are hopeful that with the new data-capped pay-as-you-use model, tablets will prove to be a potent boost for ARPU in future.

Tablets could swing data equation in favour of telcos. Tablets typically consume more data on 3G networks than smartphones. We reckon that they use roughly double the amount of data (1.3-1.5GB) compared to smartphones (700-800MB) a month. In our view, rising tablet penetration should create a bigger multiplier effect on data consumption and pricing, which would ultimately lead to better data monetisation for the telcos.

Fibre to get a higher speed limit
IDA steps in to put pressure on OpenNet. After widespread complaints of operational fumbling by OpenNet that has led to slower-than-expected take-up of the ultra-fast fibre broadband service, the Infocomm Development Authority of Singapore (IDA) finally intervened to speed things along. OpenNet is the company building the NGNBN network, and is also in charge of activating the fibre optic lines when customers sign up with retail service providers such as the three telcos, MyRepublic, SuperInternet and Viewqwest.

Some of the IDA’s proposed changes are:
1. Permanently increase installation capacity. The IDA wants OpenNet to permanently increase the number of weekly installation slots from 2,400 currently, or 9,600 monthly, and come up with a more effective way to manage fluctuations in demand. For example, while OpenNet temporarily increases its installation capacity ahead of major IT shows (it has added 1,150 slots for the IT Show 2012, adding up to 3,550), this is still insufficient to cope with the fluctuation in demand, leading to waiting times of up to six weeks versus the stipulated two weeks. On average, there are now 3,000 activation requests every week, with a range of 1,000 to 5,600.

2. More flexibility with end-users. Given the unpredictable waiting times, some users have cancelled their orders and incurred a cancellation fee. In addition, OpenNet has been inflexible in providing home owners continuity in their contracts when they move house, requiring them to pay a fee when they cancel their lines and pay the sign-on fee at their new home. The government wants OpenNet to be more flexible and scrap the cancellation fee.

3. More accommodating with building owners. The IDA also wants OpenNet to provide alternative access points for buildings where the owners or management committees want to work with their own service providers or if it speeds up the process. As some building owners have refused to allow OpenNet to run the cables into individual units and prefer to employ their own contractors for aesthetic reasons, OpenNet is now required to make available a separate access point to the fibre outside the individual units. OpenNet now more responsive to market demands.

OpenNet has been given until the end of this month to respond to the government’s proposed changes. On the ground, however, the telcos have confirmed that the company is now more responsive to their requirements. For example, it is providing more status updates on service activations and they are hopeful that OpenNet will find a way to permanently deal with the installation issues by the time the one-month review period is up.