The more than $1 billion AIS and True Move each paid last week for their 4G spectrum (15MHz each in the 1.8GHz band) is roughly double that paid for 2.1GHz spectrum almost exactly three years ago in Thailand, and on the high end of recent benchmarks for the band.
This will have both an immediate and ongoing drag on the operators’ profitability over the next 18 years, given amortisation over the length of their licence, according to Dominic Arena, managing director of ASEAN-based consultancy AEC Advisory.
In terms of pre-tax profit margin (or EBT, which takes into account the cost of license amortisation and financing), Arena says AIS could expect a 5 percentage point reduction based on independently forecast FY2015 results. “This means AIS EBT margin could fall from approximately 32 per cent to around 27 per cent.”
Given AIS’ higher net profit, the company is in a better position to absorb the high spectrum cost than its counterpart, True Corp. Fitch Ratings said AIS should have sufficient buffer to support the investment, although its credit metrics are likely to deteriorate.
The impact on True will be much greater as its EBT in absolute terms is less than one-tenth that of AIS. “True’s price paid for spectrum in terms of annual amortisation cost alone is equal to 67 per cent of its current EBT based on our own analysis,” Arena said.
The above assessment excludes any financing costs. “If you assume the entire purchase price was financed at 5 per cent interest, then the impact on net income roughly doubles and profits turn negative. True therefore must generate higher ARPU and/or subscriber market share to generate incremental revenues and turn a profit over the coming years.”
True CFO Noppadol Dej-Udom said the price paid for the licences were “reasonable”, given the huge growth of data in the country, the Bangkok Post reported. He said the cost of providing mobile data on a 4G network will be four times less than on a 3G network.
Fierce bidding is also expected for the 900MHz spectrum (two 10MHz blocks) going on sale next month, with prices per licence to be roughly the same as the 1.8GHz, Arena said. AIS and Jasmine International, which is rumoured to have an international partner, will likely be the winners as they appear to have the financial muscle and appetite based on the last auction.
“Also, dtac can afford to keep its powder dry for 2.5 more years and potentially snag a bargain when a further 45MHz of 1.8GHz and 10MHz of 850MHz go to auction, at which time its competitors will still be digesting and working to monetise their recent purchases”, he commented.
As for the case for a new player in the Thai market, he questions the viability of a fourth greenfield commercial infrastructure player. “Without its own towers and an infrastructure sharing regulatory framework, which is not necessarily the most proactive, renting the subset of available sites from the Digital Infrastructure Fund (formerly TrueIF) won’t be enough and the ex-concession towers of AIS and dtac are not settled.”
At these spectrum prices, he estimates, the firm will need around 10,000 base stations up very quickly to be sustainable if it wins a 900MHz licence.
Jasmine said it will announce its foreign partner before the 15 December auction.
Fitch also expects competition in the 900MHz auction to be as equally intense as the first. It said securing spectrum will be crucial to remain competitive in an environment where data is increasingly important to drive revenue growth.
The high upfront spectrum fee and sustained high capex for network expansion, however, will raise the net debt for the country’s operators, and their financial leverage is likely to deteriorate over the next two years, Fitch said.