8 January 2009
ARPU Stabilizing
Companies look set to enter
profit recovery period
Kenji Nishimura
Research Analyst
(+81) 3 5156-6681
kenji.nishimura@db.com
Fundamental, Industry, Thematic, Thought leading
Our Equity Research Stock Selection Committee has recognized this report as
being rich in unique investment ideas and meeting its "FITT" (Fundamental,
Industry, Thematic, Thought leading) criteria. We have built a long-term forecast
for Average Revenue Per User (ARPU) for Japan's wireless industry. The model
indicates ARPU will stabilize in March 2012 after years of decline, and earnings
should finally improve.
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LOCATED IN APPENDIX 1.
FITT Research
Top picks
KDDI (9433.T),¥570,000 Buy
SoftBank (9984.T),¥1,553 Buy
Companies featured
KDDI (9433.T),¥570,000 Buy
2008A 2009E 2010E
EPS (¥) 48,810 59,270 69,984
P/E (x) 17.2 9.6 8.1
EV/EBITDA (x) 5.5 3.3 3.1
NTT DoCoMo (9437.T),¥162,300 Hold
2008A 2009E 2010E
EPS (¥) 11,391 10,616 13,180
P/E (x) 15.7 15.3 12.3
EV/EBITDA (x) 4.6 5.0 4.4
SoftBank (9984.T),¥1,553 Buy
2008A 2009E 2010E
EPS (¥) 101 90 120
P/E (x) 23.9 17.3 12.9
EV/EBITDA (x) 9.1 5.7 5.0
Fundamental: our long-term trend forecast for mobile phone charges
Japan’s mobile phone market is said to be the global technological leader, but its
mobile phone companies have responded to intense domestic competition with a
variety of price plans and discount services, resulting in an ARPU decline across the
board. The result is that these companies are not necessarily very profitable. Will
ARPU continue to fall and profits come under pressure just as Japan is stepping up its
investment in next-generation communications technology? We provide our longrange
forecast for ARPU trends.
Industry: we project a flattening out of blended ARPU in FY3/12
We think voice ARPU is likely to bottom out in FY3/12, as the penetration of various
discount services flattens out. We do not think fixed-rate data plan penetration is likely
to exceed 50% unless companies can attract more adult subscribers. We forecast
flattened data ARPU growth. Therefore, blended ARPU, which continued to fall 4.4%
annually, is likely to bottom and stabilize in FY3/12.
Thematic: marketing and services have taken a healthier direction
The business model under which sales incentives have been used to sell mobile
phone handsets cheaply has generated excessive handset demand, but this is being
offset by handset installment purchase plans. We think marketing and services at
Japan's mobile phone companies have begun moving in a much healthier direction.
We project an improvement in profitability as ARPU stabilizes.
Thought-leading: growth potential at SoftBank; KDDI needs strategy change
In Japan fixed-rate data plans generally give rise to higher data ARPU. We think
continued fixed-rate data plan penetration and accelerated data ARPU growth is
possible at SoftBank and NTT DoCoMo. We see little scope for further fixed-rate data
plan penetration for KDDI, where it is already quite high. Given its high capex, we think
KDDI’s equipment costs will increase and profit growth will be the lowest of the three.
It is important to continue to offer content that appeals to younger subscribers, but
KDDI seems to have reached saturation here. Instead, we think it should focus on
getting older subscribers to use its content.
Valuation and risks
We value communications companies based on EBITDA, as a comparison of
valuations of the world's communications companies shows a positive correlation
between medium-term EBITDA growth and EV multiples. In our view, the relationship
between the two is also influenced by the rate of shareholder returns (ie, the
percentage of NP allocated to dividends and share buybacks). As the employment
environment quickly deteriorates, the growth potential of the communications market
is likely to decrease if a large number of consumers decide not to subscribe to new
services or cancel existing services. In this scenario, we would not expect valuations
that reflect growth potential to increase.