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Regulatory risk is key to the fortunes of Asian telecom markets, according to UBS
An assessment of the potential change in risk momentum in Asia Pacific's telecom markets included in UBS's Q-Series research report, Asia Telecom - Themes and Strategy, yields a unique insight into future share prices across the region's markets. Focusing on Hong Kong, China, Taiwan, India, Korea, Thailand, Philippines and Australia/New Zealand, the report's key underlying theme is asymmetric regulation, particularly where it might be introduced, or indeed, repealed.
"Operators in markets with falling regulation risk such as Hong Kong, India, Korea and Thailand have clear upside potential. Likely beneficiaries include: PCCW in Hong Kong; Bharti Televentures, Mahanagar Tel Nigam and Hutchison Telecom International Limited in India; SK Telecom in Korea; and Total Access and True Corp in Thailand," notes Bill SOHN, Head of Asian Telecom Research.
"China, Australia, Philippines and Taiwan, on the other hand, face rising risk momentum and could be hurt. The report concludes that companies exposed to greatest risk include: China Telecom and China Mobile in mainland China; Telstra and TCNZ in Australasia; PLDT in Philippines; and Chunghwa Telecom in Taiwan," he added.
"In an effort to promote competition, the Hong Kong regulator, OFTA (The Office of the Telecommunications Authority) is repealing asymmetric policies. Key changes include the declassification of PCCW as a dominant provider allows for more effective competition. In addition, OFTA is backtracking on ULL (Unbundled local loop) which means that new entrants will no longer be able to rely on sharing PCCW's 'last mile'. This regulatory change is positive for PCCW going forward but some regulatory risk remains,' said Sohn.
Jinjin Wang, China telecom analyst at UBS, cites emerging regulatory risk in mainland China. "First, we believe the government will mandate the construction of a full TD-SCDMA network. China Telecom, as the likely TD-SCDMA licensee, is expected to face a high level of technology risk, while China Netcom may be exposed.
"The second risk emerges from the 3G new competition and capex. Timing of the granting of 3G licences remains uncertain. While it could happen in the second half of this year, there is a possibility that it will be delayed until the first half of 2007. If that is the case, China Mobile and China Unicom will be most exposed to new entrant competition risk with 3G, while all will be weighed by capex costs.
"Lastly, the general pro-competition sentiment is likely to move towards the wireless space. We expect the Chinese government to unveil a general roadmap of asymmetric regulations, potentially favouring new mobile players, after the issuance of 3G licenses. Based on the experience of Korea, we think asymmetric mobile number portability would be a negative for China Mobile," said Wang.
"We also expect a more competitive market to emerge in Taiwan. The current relaxed regulatory environment could change and trigger a longer-term risk for Chunghwa Telecom, while the introduction of VoIP and WiMax may challenge the company's competitive edge," Sohn added.
"In India, ongoing reforms are addressing industry bottlenecks including a fragmented market; restrictions on license transfers; an inadequate spectrum; and high license fees. Recent reforms, which have included a reduction in regulatory fees, have paved the way for consolidation, and helped propel growth.
"In Korea, which remains one of the most highly-regulated telecom markets in the world, declining regulatory risk is unlikely to go away yet there are also a number of signs of declining asymmetric policy. While in Thailand, the optimal scenario hinges on access fees and interconnection," said Sohn.
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