Philippine Telcos:Ripe for re-rating as competitive intensity declines

    Globe’s wireless revenue market share to expand to 52% by 2019e
(from 48% in2016), as it continues to strengthen its positioning as
network leader and significantcontent partnerships. This positioning has
enabled a faster transition of Globe’swireless revenue to data which
stood at 38% in 2016 (vs. 29% of revenue for PLDT).

    Globe’s revenue market share gains to continue in wireless
segment.

    Retain Buy on PLDT with a higher TP as we expect its leverage to
reduce.

    PLDT’s EBITDA growth should be driven by margin expansion of 840bps
over2016-19e due to various cost efficiency initiatives. This, along
with non-core assetsales, should see net debt/EBITDA fall to 1.7x by
2019e. Our EBITDA forecasts are3-8% ahead of consensus. Key catalyst is
evidence of EBITDA margin expansion.

    Upgrade Globe to Buy with revised TP, as we expect margins to
expand.

    The Philippines has the best telco market structure (i.e. duopoly)
across ASEAN.

Competitive intensity to decline as Globe attains 50% market share.

    We see Globe’s EBITDA growth being driven by: (a) revenue growth on
the back ofmarket share gains, and (b) margin expansion of 140bps over
2016-19e as we expecthandset subsidies to fall and other cost
efficiencies. Our EBITDA forecasts are 1-2%ahead of consensus. Key
catalyst is stability in tariffs as competitive intensity declines.

    However, ROIC for the leader is much lower than ASEAN peers, which
suggestsscope for improvement with a stable competitive environment. We
expect ROIC forPhilippine telcos to expand (or be stable) on the back of
a decline in competitiveintensity as Globe achieves 50% revenue market
share. The risk of a potential newentrant persists; however, the
operators’ strategy of investing in networks significantlyreduces the
regulatory incentive to introduce a new operator.

    With this note, Piyush Choudhary assumes primary coverage of Globe
Telecom andPhilippine Long Distance.