Tuesday, Nov 4, 2014 3Q14 Result Notes ADVANCED INFO SERVICE ADVANC Rec. : BUY Good profit projected in 4Q14 and 2015 3Q14 profit rebounded as projected due to lower cost. Further profit growth is foreseen in the high season in 4Q14. Although FY2014 profit would stay flat from 2013, the growth of 15% can be expected in 2015. We have changed to use 2015 fair value; the upside is still attractive for investment. 3Q14 profit rebounds as projected ADVANC announced 3Q14 net profit at B8.96bn or the growth of 5.7%qoq (+7.4%yoy), recovering from the prior quarter as projected. Excluding an extraordinary expense of B74m (net impairment of assets after FX gain), normalized profit grew 2.9%qoq (+5.4%yoy) to B9.0bn, thanks to a 1.6%qoq decrease in cost of service (IC excluded) since the increasing cost of network and depreciation expense from accelerating investment on 3G network coverage expansion to 97% nationwide were negated by a 14.9%qoq decrease in regulatory cost (see page 2). Moreover, selling and administrative expense declined 7.8%qoq mainly because advertising cost lowered from 2Q14, which was 2014 World Cup period. The decreasing cost helped compensate for service revenue (IC excluded) that decreased 0.7%qoq (+1.5%yoy) in 3Q14 as a result of a low season. Good profit projected in 4Q14 and 2015 We project ADVANC’s profit to continue improving in 4Q14 due to seasonal effect (boosting revenue). A decrease in regulatory cost from 25% to 5.25% of total revenue after subscriber migration from 2G to 3G (by the end of the year, the proportion of 3G subscribers is projected to increase to 90% of total subscribers, from 88% in 3Q14) and increasing number of 3G-supported smartphone users (resulting in less dependency on 2G network) would offset an increase in marketing expense during the high season and rising cost of network from capacity expansion in high usage intensity areas. 9M14 profit accounts for 74% of FY2014 forecast; we maintain our forecast, projecting the profit to stabilize yoy at B36bn in 2014 and grow 15% in 2015 owing to rising revenue following the economic rebound, decreasing regulatory cost for a full year, and a benefit from the company’s stopping recognizing amortization expense for 2G equipment since September 15, 2015. Fair value provides 20% upside Source : ASP Research FY12A 145,651 34,885 35,160 11.73 18.2 10.90 5.1% 14.65 14.5 9.5 FY13A 146,813 36,274 37,139 12.20 17.5 12.15 5.7% 15.44 13.8 10.1 Upside : 19.7% Dividend Yield : 5.1% Total Return : 24.8% Market Cap. (Bm) : 710,569 CG Score: Technical Chart ASP vs IAA concensus EPS (B) We have switched to use 2015 fair value of B285 (DCF, 8.9% WACC, 2% terminal growth), which implies as much as 19.7% upside. Dividend yield can be expected at 5-6% p.a. on average. BUY is reiterated. Key Data FY: Dec 31 Sales (Bm) Net Profit (Bm) Norm. Profit (Bm) EPS (B) PER (x) DPS (B) Dividend Yield (%) BVS (x) PBV (X) EV/EBITDA Current Price (B): 238.00 Target Price (B): 285.00 FY14F 145,629 36,373 37,237 12.23 17.4 12.23 5.7% 16.42 13.0 10.0 FY15F 151,225 42,324 42,324 14.24 15.0 14.24 6.7% 17.52 12.2 8.9 FY16F 150,072 53,054 53,054 17.84 11.9 17.85 8.4% 19.51 10.9 8.2 ASP Cons %diff 2014F 12.23 12.39 -1% 2015F 14.24 14.21 0% Source: IAA concensus and ASP Kawee Manitsupawong License No. : 003974 Kawee.re@asiaplus.co.th Suwat Wattanapornprom License No. : 044015 Suwat.re@asiaplus.co.th This report is a rough translation of one of our Thai-language research products. It is produced primarily with time efficiency in mind, so that English-reading clients can see what the main recommendations are from our Thai-language research team. Given that this is a rough-and-ready translation, Asia Plus Securities pcl cannot be held responsible for translation inaccuracies.) The reports and information contained herein are compiled from public data sources and our analysts' interviews with executives of listed companies. They are presented for informational purposes only and not to be deemed as solicitations to buy or sell any securities. Best attempts have been made to verify information from these vast sources, but we cannot guarantee their accuracy, adequacy, completeness and timeliness. The analyses and comments presented herein are opinions of our analysts and do not necessarily reflect the views of Asia Plus Securities. Regulatory cost lower than usual due to roaming agreement The regulatory cost of ADVANC decreased at a greater rate than other quarters in 3Q14. Regulatory cost to service revenue (IC excluded) ratio in 3Q14 stood at 15.6%, versus 18.2% in 2Q14 (or an average decrease of 0.51% per quarter in recent quarters) due to three following reasons: 1) Like the previous quarter, more subscribers of ADVANC will be migrated from 2G network, which has regulatory cost of 25%, to 3G network, which has regulatory cost of only 5.25% (3G subscribers in 3Q14 account for 88% of ADVANC’s total subscribers, up from around 80% in 2Q14). 2) The proportion of ADVANC’s 3G subscribers who use smartphone (capable for 3G) rose from 46% in 2Q14 to 49% in 3Q14, reducing the company’s dependency on 2G network (which has higher regulatory cost). 3) 51% of the subscribers migrated from 2G to 3G network still use oldfeature mobile phones that cannot support 3G service, which means they still have to depend on 2G network (old concession) for data roaming. The roaming rate from 2G to 3G is B0.6 per minute with a sliding scale discount when the usage reaches the agreed limit. In this regard, ADVANC has to pay regulatory cost to TOT, a 2G concession owner, at a rate of around 30% of the roaming revenue. Since the roaming usage in 3Q14 exceeded the limit, regulatory cost for the roaming revenue in 3Q14 would decline significantly. Quarterly Earnings Result (Bm) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 % qoq % yoy 9M14 9M13 % yoy Sales & Services (incl. IC) 38,526 37,027 34,460 36,802 36,449 36,480 35,354 -3.1% 2.6% 108,283 110,013 -1.6% Service (excl. IC) 29,500 29,103 28,947 29,010 28,967 29,603 29,381 -0.7% 1.5% 87,951 87,550 0.5% Cost of Sale & Service (incl. IC) (23,185) (21,946) (19,513) (20,528) (20,463) (20,392) (19,278) -5.5% -1.2% (60,133) (64,644) -7.0% Cost Service (excl. IC) (14,755) (14,509) (14,336) (13,210) (13,266) (13,603) (13,385) -1.6% -6.6% (40,254) (43,600) -7.7% Gross Profit 15,341 15,081 14,947 16,274 15,986 16,088 16,076 -0.1% 7.6% 48,150 45,369 6.1% Selling & admin. Expenses (2,906) (3,350) (3,873) (4,117) (3,768) (4,823) (4,449) -7.8% 14.9% (13,040) (10,129) 28.7% EBITDA 16,614 15,825 15,396 15,944 16,430 15,687 16,623 6.0% 8.0% 48,740 47,836 1.9% Net Profit 9,922 9,195 8,342 8,816 9,481 8,474 8,955 5.7% 7.4% 26,911 27,459 -2.0% Norm Profit 9,867 9,349 8,570 9,354 9,646 8,773 9,029 2.9% 5.4% 18,419 19,217 -4.2% Norm EPS 3.32 3.14 2.88 3.15 3.24 2.95 3.04 2.9% 5.4% 6.20 6.46 -4.2% Gross Profit Margin 39.8% 40.7% 43.4% 44.2% 43.9% 44.1% 45.5% 44.5% 41.2% Norm Profit Margin 25.6% 25.2% 24.9% 25.4% 26.5% 24.0% 25.5% 17.0% 17.5% Source : Financial Statement/ ASP Research Non-Voice revenue Source : ADVANC Voice revenue Source : ADVANC Cost of Revenue Source : ADVANC Debt repayment schedule Source : ADVANC 2014-2016F Earning Forecast Income Statement (Bm) Year ended 31 Dec Sales and serivce revenue Cost of sales & services Cash Flow Statement (Bm) 2013 2014F 2015F 2016F 146,813 145,629 151,225 150,072 47,240 47,078 54,584 68,653 Year ended 31 Dec Net profit 36,230 Gross profit 194,053 192,707 205,809 218,725 Non cash items Selling and admin. Expenses (14,245) (17,359) (17,977) (18,629) Depreciation & amortization Operating profit 179,808 175,348 187,832 200,097 Unrealized gain/loss on FX - - - - Profit sharing from equity method 2013 2014F 2015F 787 16,541 Others 36,373 (39) 19,133 42,324 (37) 2 3 4 5 222 47 (0) 64,568 (315) (410) (784) Changes in net working captial (4,022) 5,150 515 (1,002) (1,390) (1,386) (1,632) Net cash flow from operation 51,329 60,350 61,348 Net income before taxes 243,374 173,643 186,036 197,681 Cash flow from investment Income taxes (10,008) (9,458) (11,012) (14,075) Inc./Dec. in short-term investment Net income before minorities interest 233,366 164,186 175,024 183,607 Inc./Dec. in fixed assets 44 144 141 110 36,274 36,373 42,324 53,054 (28,460) Others 0 Net cash flow from investment Norm profit 37,139 37,237 42,324 53,054 Cash flow from financing activities EPS 12.49 12.52 14.23 17.84 Inc./Dec. in loans Norm EPS 12.49 12.52 14.23 17.84 Inc./Dec in other liabilities Inc./Dec in capital & share premium (35) 11,913 73 Other incomes/expenses Minorities interest 53,054 19,193 Interest expenses Net profit 2016F Cash flow from operation (219) 64,413 (38) (38) (39) (40,000) (20,000) (20,000) (3,656) 0 0 (28,460) (43,694) (20,038) (20,039) (4,486) (1,490) (3,341) (3,341) 7,783 15,645 - 4,000 - - - - Adjustment in shareholder equities Sales growth (YoY%) 1% -1% 4% -1% Dividend payments (33,889) (33,463) (39,051) (47,153) Gross profit growth (YoY%) -1% -1% 7% 6% Net cash flow from finacing activities (31,572) (19,307) (42,392) (46,494) Operting profit growth (YoY%) -3% -2% 7% 7% Inc./Dec. in net cash (8,703) (2,651) (1,083) (2,119) 4% 0% 16% 25% Cash on hand 11,473 8,833 7,759 5,648 4Q13 1Q14 2Q14 3Q14 2016F Net profit growth (YoY%) Quarterly Income Statement (Bm) Balance Sheet (Bm) 2014F 2015F Sales and serivce revenue 36,802 36,449 36,480 35,354 Cash and cash equivalent 11,473 8,833 7,759 5,648 Cost of sales & services 20,528 20,463 20,392 19,278 Receivables 15,116 6,621 6,184 6,166 Gross profit 16,274 15,986 16,088 16,076 2,865 1,893 1,966 1,951 4,117 3,768 4,823 4,449 153 156 159 163 35,922 69,585 81,248 90,911 Selling and admin. Expenses Interest expenses Profit sharing from equity method (241) (228) (229) (369) - - - - Net income before taxes 11,506 11,915 10,696 11,259 Income taxes (2,438) (2,708) (2,443) (2,226) Net income before minority interest Minority interests Net income Extraordinary items Norm profit 110 110 110 (228) (538) (165) (299) (538) 9,354 9,481 (165) 9,646 8,474 (299) 8,773 Inventory Other current assets Fixed assets Assets under concessions 141 8,816 Year ended 31 Dec 8,955 (74) 20,500 9,280 - - Total assets 112,026 120,727 120,686 127,227 Payables 11,718 11,624 12,070 11,978 2,817 2,845 2,873 2,902 Long-term loans 15,355 31,000 31,000 35,000 Total liabilites 66,133 71,903 68,781 69,212 Portion of long-term loans within 1 yr 9,029 Paid-up capital Sales growth (YoY%) -6% Gross profit growth (YoY%) -5% 2013 -1% 3% 2,973 2,973 2,973 2,973 Premium on common stock 22,372 22,372 22,372 22,372 32,314 10% 4% 7% 8% Retained earnings. 20,229 23,140 26,413 Operting profit growth (YoY%) 5% -2% -4% 5% Total shareholders' equities 45,893 48,810 52,091 58,000 Net profit growth (YoY%) 4% -4% -6% 5% Total liabilities & equities 112,026 120,727 120,886 127,227 2013 2014F 2015F 2016F Financial Ratio Year ended 31 Dec Key Assumption Year ended 31 Dec 2013 2014F 2015F 2016F Current ratio (x) 0.8 0.6 0.6 0.6 Subscribers - postpaid (Bm) 4.0 4.8 5.4 5.8 Receivable turnover (x) 9.7 22.0 24.5 24.3 - prepaid (Bm) 34.3 36.7 39.8 40.1 Payable turnover (x) (4.0) (4.1) (4.5) (5.7) Debts to equitiy (x) 1.4 1.5 1.3 1.2 Postpaid 3G 758 710 650 645 ROAA 0.3 0.3 0.4 0.4 Prepaid 3G 217 199 176 157 Blended ARPU 249 227 223 215 ROAE Source: Financial Statement / ASP Research 79.0% 74.5% 81.3% 91.5% ARPU