By Myra P. Saefong
Asia's biggest markets for telecommunications will likely
continue to suffer from increasing competition in 2010, but certain
smaller markets in the region may do better following a
disappointing year for the sector, according to analysts.
"The telecoms sector was a huge underperformer in 2009, in both
absolute and relative terms -- even while broad markets across Asia
Pacific were enjoying their biggest rallies in 2009," analysts at
Macquarie said in a recent research note.
For 2010, the analysts have an overweight rating on Asia
telecoms but recommend investors to use a "cherry-picking" strategy
that's "based on the merits of individual stocks rather than a
top-down, broad-based approach."
"We are positive on stocks with some growth at reasonable
valuations or yield, in markets that are not gripped with any major
competitive or regulatory headwind incrementally," they said.
They single out the "relatively smaller" markets in South Korea,
Philippines, Indonesia and Singapore as the best bets for the
sector.
Among those, the key stocks with overweight ratings in
Macquarie's Asia telecom portfolio are Seoul's LG Telecom Co.
(LTCLF) and SK Telecom Co. (SKM), Philippine Long Distance
Telephone Co. (PHI) in Manila and StarHub Ltd. (SRHBF) in
Singapore.
The portfolio is "generally weighted towards lower beta stocks
where we see reasonable value, good yields and attractive
risk/reward dynamics," the analysts said.
The two top picks, LG Telecom and SK Telecom, were among the
worst telecom performers in 2009, and the Asia Pacific telecoms are
currently trading at around a 30% discount to the broader market as
defined by the MSCI Asia Pacific Index versus the historical
average discount of 10%, they said.
Shares of LG Telecom climbed 1.1% in late Monday morning trading
in Seoul, and SK Telecom added 0.9%.
PK Telkom PLDT's stock rose 0.6% in Manila, and StarHub was up
0.9% in Singapore.
Underperformers
But Macquarie analysts also said they are "significantly
underweight" in two of the largest telecom markets: China and
India.
"The China telecoms have significantly underperformed both China
market indices as well as regional telco peers in 2009, and we
expect this will continue in 2010," they said.
Market valuations likely do not reflect the full extent of the
"impact of intensifying competition, which has been precipitated by
the huge buildup of network capacity post the industry restructure
and issuance of 3G licenses," they said.
Macquarie expects China Mobile Ltd. (CHL) to "remain range bound
with its cash pile ... and relatively cheap valuations offsetting
intensifying competitive pressures."
The analysts were "most negative" on China Unicom Hong Kong Ltd.
(CHU), pointing to market expectations that benefits from the
company's WCDMA-driven handset advantage are "overstated."
But investors bought China's "Big Three" telecoms in Monday
trading, with shares of China Telecom Corp. (CHA) adding 0.6%,
while China Mobile gained 0.9%, and China Unicom rose 1.6%.
The gains coincided with overall strength in the region's
stocks. Hong Kong's benchmark Hang Seng Index was up 1.3%, while
the Shanghai Composite climbed 1%. South Korea's Kospi was also up
0.4%, and Australia's benchmark S&P/ASX 200 rose 0.7%.
But in Manila, the Philippines PSE Composite index was nearly
flat. The stock market in Japan was closed for a local holiday.
On Friday, India's Sensex had finished 0.4% lower, with shares
of Bharti Airtel Ltd. (BHTIF), the nation's largest wireless
operator by subscribers, down 1.2%.
For India, Macquarie analysts expect the sector to "get worse
before it gets better" with recent tariff actions likely to result
in "muted top-line growth for [the] next four [to] six quarters for
the Indian wireless operators."
They downgraded Bharti Airtel in October due to "unprecedented"
tariff cuts.
Still, for investors with "higher risk appetites and a
longer-term investment horizon," the analysts said China Telecom
and Bharti Airtel "may present good value in the longer term, as
competitive risks abate towards the end of 2010."