Tough times await telecommunication firms in Asia
Tough times await telecommunication firms in Asia
By Angela Tan
SINGAPORE (Reuter): The telecommunications business in Asia remains a favorite for investors but deregulation has sparked a keen battle for market share that could affect short-term profits.
Analysts say the liberalization of markets spells slower than expected earnings growth over the next three years as Asian telecommunications firms pour money into advertising and engage in price wars to get a market niche.
Some said the keener competition may result in more mergers and commercial arrangements as companies try to cope with the massive capital investment needed to gain market share.
"The market suddenly opened up and is now in a stage of transition. The next three to four years will see slow growth on adjustment due to competition. In the long-term, five to 10 years, telecommunications will still grow," an analyst at a U.S. bank in Hong Kong said.
In most Asian countries, state-run monopolies have been forced to make radical changes as an unprecedented influx of new players has resulted in keen competition.
Former monopolies are cutting prices to be competitive. Most are also incurring higher costs in advertising and promotions in an effort to differentiate a service many consumers think is generic.
Thailand is one country where concerns about deregulation are seen putting the brakes on robust growth in the telecommunications industry.
"The industry will continue to grow, but at a lower rate than in the past few years," an analyst at Vicker Ballas & Co in Bangkok said.
She said the government policy of encouraging competition in the sector made existing operators, especially mobile phone services, unsure of their exclusive rights.
"They (mobile phone operators) invest billions of baht, not millions, to install networks. They want to be sure that they will have exclusive network rights for some time," she said. Bangkok analysts said the slowing demand for mobile phones and telephones was underlined by the appearance of promotions campaigns by operators.
Malaysia is another country where deregulation has not been well-received.
Analysts turned bearish on Malaysia's telecommunications sector amid worries over stiff competition after the government reversed its stand on reducing industry overcrowding.
"Everyone knows that it's overcrowded to have six players. They will try to survive, but in the process they will hurt each other," said Phua Lee Kerk, Vickers Ballas Research analyst in Kuala Lumpur.
The Malaysian government in recent years dished out a wide range of telecommunications licenses in its bid to privatise services, a move it says it now regrets.
Industry analysts said Malaysia's population of only 20 million people is too small to support so many players.
"It's negative for Telekom. Even for the whole sector we are not that positive any more," said Soon Teck Onn, analyst at ING- Barings Research in Kuala Lumpur.
However, experts said in the long run -- five to 10 years -- the deregulated industry is poised for further growth.
Analysts said deregulation is good for Philippines as the entry of new players meant more land lines, which are in tight supply.
The government requires new entrants to install land lines in exchange for licenses to operate lucrative franchises for cellular phones and international long distance calls.
The number of land lines in Philippines is projected to grow to 3.7 million by end-1997 from the existing 1.2 million. Mobile phone subscribers are expected to grow 46 percent to 1.75 million by 1998 from 468,876 in 1995.
Analysts said investors in the Asia telecommunications sector have to be very selective about which companies they put their money into.
"Investors have to be very careful and selective on how to choose telecommunications stocks in these countries. The fact that it is a growing industry does not necessarily mean earnings per share (EPS) growth will be strong and that you will be making money," the analyst at a U.S. bank said.
"EPS for all the firms is going to grow but growth will not be as high as expected," he added.
Analysts said based on EPS growth over the next three years, the pick of the crop will be companies in Indonesia.
"If you look in terms of EPS growth in the next three years, the best ones will be in Indonesia," the analyst with the U.S. bank in Hong Kong said.
Analysts said Indonesia was one of the few markets grossly under-provided in terms of telecommunication services.
Indonesia's optimal level of cellular penetration is between one to two million subscribers, they said. Presently, the number stands at only 300,000.
But most analysts still cautioned against over-expectation, saying that even for former monopolies like Indonesia's Telkom, EPS growth will not be at the heady annual 30-40 percent rates of previous years.
Analysts said in some countries like the Philippines, markets are showing signs of saturation despite relatively low number of telephones, including mobile phones.
This is evident in increasing pressure on revenue per subscriber, rising debt collection periods and rapidly declining handset prices, the European bank analyst in Hong Kong said.
"This trend is much more indicative of a maturing rather than a rapidly growing telecommunications market," he added.
"We believe that although the Philippines will continue to enjoy strong economic growth, the pace of expansion of cellular systems more than matches the pace of economic growth, resulting in much earlier than expected signs of market saturation," he said, noting that the situation is compounded by competition.
In the Philippines, the optimal level of cellular penetration is estimated at one million subscribers. The country presently has about 700,000 subscribers. Analysts expected that by year- end, the country would have about 900,000 subscribers.