Thailand Telecom: An injunction on the 3G auction – Neutral

Event: Yesterday, the Central Administrative Court issued an injunction on the upcoming 3G auction regarding the lawsuit filed by CAT Telecom. The Court ruled that an interpretation on the bidding needs to wait until the new regulator is set up as part of the new Frequency Allocation Act (FAA). Today, the regulator plans to appeal the ruling to the Supreme Admin Court. The auction will be cancelled if there is no court order by Monday at 9.00 a.m.


Comment:

Timeframe of the Supreme Admin Court is the key

With the tight schedule (only three days left), the chance that the Supreme Court will rule before the auction is low, in our view. We thus expect the auction to be delayed from 20 Sep. The injunction ruling will negatively impact telco share prices, particularly DTAC and TRUE, which have rallied by 23% and 117% since July on optimism over 3G licensing.

… Auction likely delayed despite a favorable ruling after Sep

If the ruling comes out after Sep, even one in favor of the NTC, the expiring terms of three commissioners at the end of Sep will weaken the legal authority of the regulator in proceeding with the auction. With the upcoming approval of the Frequency Allocation Act (FAA), which will be discussed below, the auction is unlikely to be resumed.

… only hope for 3G auction happening is a favorable ruling within next week

If a favorable ruling comes out within next week, then the regulator can legally proceed with the auction. However, risk persists as there is still uncertainty over the verdict in the CAT lawsuit. The winning bidders may delay their investment, and this should cause downside to the expected benefit from 3G licenses.

3G by end of 2011 at the earliest

The FAA is now being subjected to final scrutiny by a joint committee before submission for parliamentary approval, which is expected by Nov. The establishment of the new regulator, the National Broadcasting and Telecom Commission (NBTC), should take at least six months, and an overhaul of the 3G licensing terms will take another six months.

Upside to 2010F DPS

Without CAPEX on 3G, we raise our 2010F DPS by approximately 50% for both telcos under our coverage. We now expect Bt9.3/sh for ADVANC and Bt2.9/sh for DTAC.

Recommendation:

- We downgrade our recommendation to ‘underweight’ (from under review) for the sector. Disappointment over 3G will overshadow recovery in the 2G business in the near term.

- Stripping out 3G value from our TPs, our new TPs are reduced to Bt96/sh (from Bt110/sh) for ADVANC and Bt50/sh (from Bt60/sh) for DTAC. The current prices offer limited upside to our new TPs. We therefore reduce our recommendation to HOLD (from under review) for both ADVANC and DTAC.

- A deep dip in share prices should provide an opportunity to BUY for their attractive dividend yields. We prefer ADVANC dividend yield-wise.