Telecom sector
SECTOR REVIEW
Telecom stocks in 2009: filling but bland
■ We expect the telecom sector to be Japan’s largest generator of FY3/10 OP
in absolute terms, given the lack of direction in share prices and national
economies worldwide. However, three of the largest telecom stocks, NTT,
NTT DoCoMo and KDDI, were among the ten-largest negative contributors
to TOPIX. NTT in particular has the largest projected profit in the index but is
also the largest negative contributor to it. The implication is that absolute
levels of profit and earnings stability are currently negative for the share
price. The telecom sector has traded entirely on sentiment since the start of
2009, as defensive sectors have been sold and manufacturing exporters
such as the carmakers and tech stocks bought. This has pushed the sector
far below the level implied by fundamentals or valuations.
■ We revise our forecasts for the four telecom companies and add
forecasts for FY3/12. Telecom stocks in 2009 are projected to offer stability
in reported earnings and free cash flow (FCF), but, in our view, lack a
definitive catalyst to drive share prices. Apart from Softbank
(OUTPERFORM, TP ¥2,900), our top pick, the three major telecom carriers
are a mixed bag that lack dominant “stories”. Investors accumulate the three
large telecom stocks because valuations are low and they offer defensive
properties. To us, this is merely the equivalent of buying a meal to stave off
hunger rather than because it is a particularly appetizing prospect. None of
the big three telecom stocks offers any particularly greater contribution to
portfolio performance than the others. We rate NTT OUTPERFORM (TP
¥6,000) because it has the greatest potential upside in the sector from a P/B
far below 1x. We maintain our NEUTRAL ratings for NTT DoCoMo (TP
¥150,000) and KDDI (TP ¥580,000). KDDI is the worst performer to date, but
the name appears more interesting, given there is a probability now that the
company can raise its dividends for this fiscal year.
■ By contrast, we view Softbank, as the enticing meal that is bought because
of its appetizing ingredients. It offers clear catalysts and “stories” that
encourage an investor to accumulate. In addition to the primary attractions of
profit growth (driven by the mobile business) and reductions in interestbearing
debt, we anticipate that the company’s footprint in China, built up
through its investments in the Alibaba group, will emerge as a reason to
accumulate the stock.
■ Shun Maruyama, Credit Suisse’s Japan quants analyst, favors reducing
portfolio risk on the belief that the rally in economy-sensitive stocks is
running out of steam. He bases this on the observation that economysensitive
stocks are overheating in terms of relative P/B. We reiterate our
OVERWEIGHT stance on the overall telecom sector, which we recognize as
filling but bland, and our bullish stance on Softbank and NTT.
Table of contents
The position of the telecom stocks within the overall market 3
Softbank should be centerpiece of telecom sector investment in FY3/10 6
Assessing value of Softbank’s China investment and Alibaba Group 7
The Alibaba group 7
Taobao and Alipay 8
Is Alibaba GH worth ¥4.7tn? 9
Alibaba.com 9
Taobao.com 10
Softbank trades at an EV/EBITDA below 2x? 12
DoCoMo an attractive investment for dividend yield 13
Forecast revisions 16
NTT DoCoMo 16
NTT 17
KDDI 21
Softbank 23
Softbank (9984 / 9984 JP) 26
Revising forecasts 26
KDDI (9433 / 9433 JP) 32
Dividend increases could drive share price upside 32
NTT DoCoMo (9437 / 9437 JP) 35
Revising forecasts 35
Nippon Telegraph and Telephone (9432 / 9432 JP) 38
Revising forecasts 38