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Advanced Info Service

Attractive valuation in ICT sector BUY

Advanced Info Service Plc (ADVANC)

- Weak profit but low cost to keep 1Q14 profit unchanged qoq

We project ADVANC’s 1Q14 normalized profit to stay unchanged qoq at

B9.2bn. Service revenue (excluding IC) is expected to slip by 1%qoq.

Income from voice service (61% of total service revenue) is likely to

drop by 2%qoq as people have replaced voice service with data service.

Income from non-voice service (32% of total service revenue) is likely to

grow by only 3.2%qoq (versus the eight-quarter average growth of

5.4%qoq) as a result of the promotion (selling new mobile phones with

free internet; encouraging subscribers to switch to 3G network), partially

compensating for decreasing income from voice service. However,

thanks to the promotion, the number of 3G network subscribers has

increased from 16.5 million in 4Q13 to 20 million (50% of total

subscribers), lowering overall revenue sharing cost by 6.4%qoq and

reducing revenue sharing cost/service revenue ratio from 19.6% in

4Q13 to 18.4% in 1Q14. As more subscribers have been migrated from

2G network (25% revenue sharing cost) to 3G network (5.25% revenue

sharing cost), the decrease in overall revenue sharing cost can

compensate for an increase in cost of service on 3G network investment.

Consequently, 1Q14 cost of service (excluding IC) is projected to stay

unchanged. Overall, despite a decline in income, profit would stay

unchanged because advertisement expense is likely to drop by over

26%qoq after the festival in 4Q13.

- 2Q14 profit to drop from low season

For the remainder of the year, ADVANC is projected to benefit from

decreasing revenue sharing cost/service revenue ratio as more

subscribers would be migrated to 3G network. However, 2Q14 net profit

is expected to fall qoq; 2Q14 service revenue would drop as a result of a

low season. After that, net profit is projected to rebound in 3Q14 and

make the year’s high in 4Q14 thanks to strong service revenue in the

peak season. We maintain our earnings forecast; projecting ADVANC’s

FY2014 net profit to grow by 10% to B39bn.

- Attractive valuation in ICT sector. Buy

Though ADVANC’s profit grows at the slower rate than the sector’s

average (10percent for ADVANC versus the sector’s average growth at 13%),

ADVANC’s expected FY2014 P/E ratio is 16.6x, considerably lower than

the sector’s average FY2014 expected P/E ratio of 20.6x. Thus,

ADVANC’s price is likely to outperform the sector. As ADVANC’s current

share price has 21% upside with over 6.0% dividend yield, we

recommend buying.


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