On StarHub wins fibre Opco tender

Telecom regulator IDA has awarded the second phase of the national broadband network (NBN) project called OpCo to StarHub. Terms governing exclusivity provisions and pricing for various packages offered by OpCo (eg, IPTV service) are as yet unavailable, and this will influence SingTel's likely competitive approach. It is too early to quantity the financial effect, and we expect the stocks to be volatile in the near term.

OpCo details: Wholesale pricing ranges are S$6–106 for residential (our estimate average is S$15) and S$25–810 for corporate subs. The project is expected to cost S$1bn over 25 years. StarHub's initial investment is around S$100m, and the government will contribute S$250m subject to rollout targets (330k residential subs and 80k non-residential subs by 2015). Commercial operations are set to begin in April 2010 with 100% coverage by 2013.

StarHub's strategy: We suspect that StarHub's business case is built around defending the residential market, while seeking opportunities in the corporate market, where it lags SingTel with a very low market share (~10%). Wholesale pricing varies depending on quality of services. Although the entry level package starts at S$6 for the best-effort Internet package (100Mbps), services like TV and video streaming are expected to cost more (S$106 for 1Gbps connection).

What are SingTel's options? SingTel needs to make a “buy” or “build” decision. Given StarHub’s win, we understand that exclusivity provisions may not apply and that SingTel can build an alternative OpCo network. This would entail paying a fee to StarHub (we estimate S$4.5–6.0 per residential sub), with no government subsidy but the benefit of less regulatory oversight.

Effect on StarHub – did it overbid? Headline S$6 residential pricing is aggressive and raises fears about cannibalization of existing residential broadband/pay TV revenues. We understand this is only for the bare bones package. An average user of StarHub's existing broadband plans would have to pay more; this key missing detail will underpin StarHub’s investment case. Effect on SingTel: We see risks in the corporate market segment given SingTel's dominant market share, but a limited effect in the residential market.

We believe aggressive headline wholesale pricing for an entry level package – one of the few details released today – is designed to generate excitement among the general population about the government's key policy initiative; it is not representative of wholesale prices for the average user. Current developments are neutral/mildly positive for M1.

Investors will have to trust that StarHub’s management has done the sums correctly, with a pricing strategy that does not invoke a strong defensive reaction from SingTel. We expect both StarHub and SingTel to be volatile in the near term as we await more details. That said, based on StarHub’s track record and management commitment to shareholder value, we would view any significant weakness as an opportunity to accumulate.

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