A Satisfied M1 Investor
- Original Post from (The) Boring Investor

I started investing in $M1(B2F.SI) in Jan last year. At that time, it was to take advantage of the crash in telco stocks due to fear of the fourth telco. Since then, I have added to my positions several times. My current position is now 5 times the initial one. This is because despite all the headwinds that telcos face, from SIM-only plans, data upsize plans, Mobile Virtual Network Operators (MVNOs) to the fourth telco, M1 has performed admirably. Below is a summary of what I like about M1.



SIM-Only Plans



When M1 launched SIM-only plans in Jul 2015, I had not invested in telco stocks yet. But my initial thoughts were that SIM-only plans would lead to a drop in revenue and a smaller drop in profitability, as SIM-only plans would lead to some subscribers downgrading from the more expensive regular telco plans with handphone subsidies to the SIM-only plans. SeeImpact of SIM-Only Plans on Telcos. As it turns out, although SIM-only plans indeed led to a drop in revenue, they are value-accretive at the EBITDA level, as they attract new customers in addition to existing subscribers who downgrade. An analogy would be the regular telco plans are like full-service airlines while SIM-only plans are like budget airlines. Although SIM-only plans cannibalise regular telco plans, they also create new demand of their own. SeeWill SIM-Only Plans Cannibalise Regular Telco Plans?for more information. The popularity of SIM-only plans (together with Circles.Life) has led to strong growth in M1's post-paid customer base. See Fig. 1 below for the growth rate (note: M1's post-paid customer base includes that of Circles.Life, the MVNO that works with it).






Fig. 1: Changes in M1's Post-Paid Customers



In this aspect, I have to acknowledge that M1 knows what it is doing and is doing better than I thought.



Data Upsize Plans



This is another initiative that M1 started in Mar 2016 before I became a shareholder. Again, I believed that this would lead to lower profitability, as subscribers who used to exceed their data bundles and pay excess data charges of as high as $10.70/GB now need to pay only $5.90 per month to upsize their data bundles. See Impact of Data Upsize Plans on Telcos.



This time, I am not wrong about the impact on revenue and profitability, but M1 has bigger plans. Instead of stopping at 3 levels of upsize, M1 launched big data plans in Aug 2017, including an unlimited data plan. The big data plans are clearly ahead of competition, which is quite unusual since all telcos will try to match each other. See No Competition for M1's Big Data Plans for more information. M1's prices are comparatively lower than that of the other 2 telcos, so much so that I feel that M1 did not maximise profits by pricing them closer to the competition (but also see the section on Narrowband Internet of Things).



Mobile Virtual Network Operators (MVNOs)



Long before the recent spate of MVNOs like Zero Mobile, Zero1 and MyRepublic, M1 had already worked with a MVNO called Circles.Life in May 2016 to roll out mobile services to niche segments of customers that M1 did not cater for. Since MVNOs have to buy network capacity from traditional telcos, they will never be able to offer a better deal than traditional telcos on a sustainable basis. So, MVNOs are a way of getting some extra revenue from niche market segments without taking the risks.



I would like to say that the collaboration with Circles.Life has been a successful one. Customer numbers have been increasing as shown in Fig. 1 above. Furthermore, Singtel and Starhub have recently been copying M1 in working with MVNOs as TPG's timeline for setting up operations in Singapore by Dec 2018 approaches. As they say, imitation is the best form of flattery.



I might be wrong in this aspect, but I somehow suspect that M1 learnt something useful from Circles.Life's operations. Customers of Circles.Life use an app known as CirclesCare to manage their plans, including activating additional services on-demand. SeeCirclesCare features.M1's app has similar features, which saves customers' time from not having to call the customer service line and reduces the no. of staff they need to service customers.



Narrowband Internet of Things (NB-IoT)



NB-IoT is a new 4.5G network designed for machine-to-machine communications to facilitate Internet-of-Things (IoT). Like most other new services, M1 is the first telco to roll out this new service in Aug 2017. There are some advantages in being the first mover and the lowest cost provider in big data, but it is still a fairly new service and not many companies are ready to launch IoT devices, so it is worth watching whether this new service will bring in good revenue for M1.

In an earlier section on data upsize plans, I mentioned that although M1 has a cost advantage in big data, it has not taken advantage of it to maximise profits. This might be because M1 is trying to attract more companies to use its NB-IoT services. Once on board, M1 could upsell to customers its data analytics services to derive better value. Furthermore, compared to traditional 4G services that cater to individuals, NB-IoT has higher switching costs and hence, customers are less likely to switch to a different telco. See NB-IoT – The Next Frontier for Telcosfor more information. Thus, I am willing to accept that M1 has priced its big data plans lower than necessary to capture this new market segment.



Overall



M1 is the smallest telco in Singapore. Perhaps cognisant of its small size, it has always been willing to try out new things. It is the first telco to launch 3G mobile services in Feb 2005, mobile broadband in Dec 2006, fibre broadband in Sep 2010, 4G mobile services in Sep 2012, 4.5G mobile services in Dec 2014, etc. Nevertheless, despite being the first to deliver, it has always come in last in terms of market share. Yet, it knows that if it is not the first to deliver, it will not only come in last, but also become irrelevant, given that it had no Pay TV, cable/DSL broadband and analogue/digital voice businesses (before the Next Generation Nationwide Broadband Network came on board and disrupted the playing field). To stay relevant and survive, M1 has to constantly innovate. Innovations are in M1's DNA.

The innovations mentioned in earlier sections represent a desire to disrupt itself and competitors to stay ahead of the competition. Contrary to conventional wisdom, the disruptions in the telco industry in recent years did not come from the fourth telco; they came from M1 (and Singtel to a smaller extent). All these disruptions have also made the fourth telco fairly irrelevant, even if TPG were to start operations in Dec 2018 as scheduled. M1 has established a clear lead in big data (for now) and a toehold in NB-IoT. Perhaps this time round, it would not come in last among the 3 telcos.

On my investment in M1, despite averaging down 4 times, I am still sitting on a small paper loss. Nevertheless, the actions that M1 took make me confident that it is a matter of time before the market recognises M1 is a technology disruptor rather than the disrupted and the share price recovers to my cost price. I am satisfied with my investment in M1.

P.S. I am vested in M1, Netlink Trust and Singtel.


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13 likes 7 comments
insp_k

what is the next price that you will avg down?

WK888

Sometimes to abandon the bost can be a wise choice...

thosai

Reply to @WK888 : Now too low to sell...

WK888

Hope ure not wrong on this boat... continue to drift aimlessly in the wide n open sea...

luxcan

Reply to @WK888 : relax, tpg isn't in the picture yet. based on regional historical data, Telco prices will recover back to its original price after 2 years.

reannng

what about starhub?

luxcan

same thoughts since the announcement of 4th Telco. I am vested in netlink and m1.

didn't go into singtel but it is in my watchlist as well.


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The Telco Landscape in Singapore
- Original Post from (The) Boring Investor

The telco regulator in Singapore, Infocomm Media Development Authority (IMDA), regularly publishes a list of facts & figures about the telco industry. It is interesting to look at the figures occasionally to understand the trends affecting telcos and review whether telcos worth investing.

$SingTel(Z74) $StarHub(CC3) $M1(B2F)




Mobile Services



To investors of the 3 local telcos, the most important figure must be the no. of mobile subscriptions. Fig. 1 below shows the no. of subscribers according to type of network (3G/4G) and payment mode (pre-paid/ post-paid) for 2016 up to Nov.






Fig. 1: Mobile Subscriptions



From the figure, it should come as no surprise that 4G subscriptions are rising as more subscribers switch from 3G to 4G. However, what is surprising is that the 3G pre-paid segment (red line in Fig. 1 above) is fairly resilient, dropping only by 3.4% over the 11 months of 2016 even as the 3G post-paid segment shrank by 22.1%. The 3G pre-paid segment remains the second largest market segment, commanding a market share of 32% of the mobile services market.



Why do 3G pre-paid subscribers choose not to upgrade to the 4G pre-paid network? To mobile subscribers, the main difference between the 3G and 4G networks is faster data throughput on the 4G network. Thus, subscribers who use mobile data will be keen to upgrade to the new network. However, for subscribers who use only voice and SMS but no data, there is very little difference between the 3G and 4G networks. Given that pre-paid subscriptions do not come with much data (you need to buy a data add-on), there are little incentives for 3G pre-paid subscribers to move on to the 4G network.



Internet Broadband



Besides mobile services, telcos also sell internet broadband services, in the form of fibre, cable and xDSL broadband. Fig. 2 below shows the no. of broadband subscribers for the 11 months of 2016.






Fig. 2: Broadband Subscriptions



Again, it should come as no surprise that fibre broadband subscriptions are rising as they offer faster speeds of 300Mbps or more. This growth is at the expense of cable and xDSL broadband, which Starhub and Singtel operate respectively. Thus, Starhub and Singtel should be wary of declining revenue from their respective cable/ xDSL broadband business. Although both will gain from increased fibre broadband business, the fibre broadband segment is a competitive one with many operators such as the 3 telcos and MyRepublic. Telcos have found it necessary to bundle mobile broadband and home digital lines to improve their offerings.



Finally, there is 1 particular chart that all wired broadband operators should worry about, which is that the no. of residential wired broadband subscriptions have peaked in 3Q 2015 (see Fig. 3 below)!






Fig. 3: Residential Wired Broadband Subscriptions



Where did broadband subscribers go to for their internet consumption? Fig. 4 below provides the answer.






Fig. 4: Wireless Broadband Subscriptions



Fig. 4 shows that even as broadband subscribers begin to terminate their wired broadband subscriptions, they have continued to subscribe to mobile broadband. This reflects changing internet consumption habits of consumers, who access internet and watch online videos on the go instead of being tied to accessing them at home.




The penetration rate of mobile broadband as at Nov 2016 is 196.7%, even higher than that of mobile services at 149.2%! There are more mobile broadband subscriptions than mobile service subscriptions! Again, this reflects more people having more mobile devices such as phones, tablets, smartwatches, etc.



Entry Points for 4th Telco



A key reason for the analysis above is to understand whether there are any market segments for TPG, the fourth telco, to exploit and enter the Singapore market in a big way. When MyRepublic made its way into the fibre broadband market, it did so at a time when the fibre broadband market was still nascent and the telcos were reluctant to reduce prices so as not to cannibalise their existing broadband businesses. This provided MyRepublic a chance to slash prices aggressively, gain widespread publicity and lead the competition.



Looking at the figures above, the 3G pre-paid market segment is a potential market that TPG could exploit. It is 32% of the mobile services market. Currently, none of the existing telcos could entice 3G pre-paid subscribers to move to 4G in a big way. If TPG could offer a compelling reason to 3G pre-paid subscribers, it could capture large market share from the 3 existing telcos and entrench itself in the mobile services market.



In the fibre broadband market, competition is already very intense. While TPG will enter this market and provide fibre broadband services, I do not expect any innovative offerings.



In the mobile broadband market, the penetration rate is already very high at 196.7%, which is equivalent to each person having 2 mobile broadband subscriptions. Having said the above, the next big bang will be the Internet of Things, whereby everything is connected to and streaming data to the internet. When this happens, the market for mobile broadband will expand significantly and all telcos, including TPG, will stand to gain.



P.S. I am vested in M1 and Singtel.





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Can Telcos Stop the Decline in Profitability?
- Original Post from (The) Boring Investor

All 3 telcos have reported their financial results for the quarter ending Dec 2016. Both M1 and Starhub reported a significant drop in net profit of 27.1% and 33.2% respectively while Singtel reported a slight 1.8% rise in net profit. Starhub even dropped a bombshell by announcing that dividends for 2017 will be cut by 20% to 16 cents. Can telcos stop the decline in profits, or will profits continue to decline? As M1 is closest to a pure mobile telco company, this analysis is carried out using M1's results.

$M1(B2F) $SingTel(Z74) $StarHub(CC3)


Fig. 1 below shows the overall service revenue and costs excluding handset sales, which are very volatile. As shown below, the service revenue is fairly stable, hovering around $200M per quarter in FY2015 and FY2016. Service costs, however, are on the rise, especially in the last 2 quarters, leading to a decline in quarterly profits.






Fig. 1: M1's Service Revenue & Cost



Service Revenue



Fig. 2 below shows the breakdown of the service revenue. The bulk of the revenue comes from mobile services, which constitute 79% of the total service revenue. The rest of the service revenue comes from IDD calls and fixed services (i.e. fibre broadband).






Fig. 2: Breakdown of Service Revenue



As shown in the figure above, mobile services revenue is on the decline, which explains why the telco profits are declining. Some of the reasons for the decline are discussed in Impact of SIM-Only Plans on Telcos and Impact of Data Upsize Plans on Telcos. Since this business segment has the largest impact on telco profitability, I will come back again to discuss the trends affecting this segment.



IDD revenue is on the decline, which is not surprising given the popularity of over-the-top (OTT) services such as Whatsapp, which allows any Whatsapp user to make a phone call to fellow Whatsapp users anywhere in the world using WiFi or mobile data instead of voice. Very likely, this downward trend in IDD revenue will continue.



On the other hand, revenue from fixed services is growing strongly as more people subscribe to fibre broadband. In the short term, this segment is still expected to grow, but perhaps not as strongly as before as it faces many competition from other telcos as well as broadband service providers like MyRepublic. Already, M1 has to bundle mobile broadband and home digital voice to improve its offering among the competition.




Service Costs



Fig. 3 below shows some of M1's largest cost components necessary to earn the service revenue discussed above.








Fig. 3: M1 Service Costs (Extracts)



As shown in Fig. 3, depreciation and amortisation costs, which is the largest cost component, is on the rise, as M1 continues to invest in building its network. In fact, in the latest financial results, M1 reported that the estimated capital expenditure (capex) for FY2017 is around $170M. For FY2016, the capex was $141.2M, excluding a spectrum rights payment of $64.1M. Depreciation is definitely on the rise moving forward.



The next largest cost component, staff cost, is fairly stable. In my opinion, this cost component is unlikely to rise, because TPG, the fourth telco, would likely not have any physical stores and would rely on third-party dealers to sell its services. The 3 current telcos, which have their own physical stores and sales staff, would be under pressure to contain staff cost.



The third largest cost component, facilities expenses, is also on the rise. I am not sure if facilities refer to physical stores or telco network facilities. If it is referring to physical stores, this cost will be contained for the same reason as discussed above for staff cost. However, if it is referring to telco network facilities, this cost will be on the rise in tandem with capex. To be conservative, I assume that it is referring to telco network facilities and will continue to rise.



The last major cost component, fixed services cost, is rising as well. However, this is of no concern, as the rise is in tandem with the rising revenue from fixed services shown in Fig. 2. Deducting the cost of $11.2M from the revenue of $27.2M, this segment earned a gross profit (excluding all sales-related costs like staff costs, rental leases, etc.) of $16.0M for 4Q2016. This is a rise from $10.8M in 1Q2015.



Revenue Drivers



Based on the discussion so far, service costs are likely to continue rising due to expansion of the network infrastructure. Thus, if M1 is unable to halt the decline in service revenue in its main mobile services segment, it is likely face declining profits and dividends, even before the fourth telco opens for business.



2 of the factors affecting the mobile services revenue havebeen discussed in previous blog posts, namely, Impact of SIM-Only Plans on Telcos and Impact of Data Upsize Plans on Telcos. Both these factors are negative on revenue and profitability. The impact of SIM-only plans will be spread out over 2 years, as subscribers can only switch from regular plans to SIM-only plans when their contracts expire, and the typical contract period is 2 years. On the other hand, the impact of data upsize plans is fairly immediate, as subscribers need not wait for their contracts to expire before subscribing to the upsize plans. Having said that, when comparing results on a year-on-year (YOY) basis, it will take 1 more year for the effect to fully disappear from the financial statements.



Although there are headwinds from SIM-only plans and data upsize plans, there are, nevertheless, silver linings. As previously discussed in Impact of Data Upsize Plans on Telcos, the larger data allowance is encouraging subscribers to use more data, as shown in Fig. 4 below (note: M1 changed the way it measures the percentage of subscribers who exceed their original data allowance in FY2016. The figures for 2015 and 2016 are not directly comparable).






Fig. 4: M1's Subscriber Data Usage



Perhaps as a result of the introduction of SIM-only plans, the number of post-paid subscribers has also jumped. The blue line in Fig. 5 below shows the YOY growth in number of post-paid subscribers, which jumped from 1.8% in 2Q2015 to 3.0% in 3Q2015, the quarter when M1 introduced SIM-only plans. The growth has continued to rise and recently stablised at around 4.5%. This rise in post-paid subscribers will counteract the fall in revenue due to conversion from regular plans to SIM-only plansby existing subscribersand data upsize plans.






Fig. 5: Trends in Post-Paid Customer Revenue



Also on the rise is the percentage of post-paid subscribers on tiered data plans (see red line in Fig. 5 above). Prior to the introduction of tiered data plans (and smartphones), some subscribers had very large data allowances under their very old mobile subscription plans. Tiered data plans cap the mobile data allowance according to the monthly price plans and subscribers have to pay more for having more data.



In conclusion, there are both headwinds and tailwinds for the mobile services operations.



Finally, please note that although all 3 telcos have mobile services operations, Starhub has other business segments and Singtel has overseas operations and investments.



P.S. I am vested in M1 and Singtel.





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Impact of Data Upsize Plans on Telcos
- Original Post from (The) Boring Investor

$M1(B2F)

Competition among the 3 local telcos used to be fairly stale, until things started to heat up in Mar 2016 when all 3 telcos launched data upsize plans as a way to pre-empt competition from a potential fourth telco. The upsize plans provide subscribers with more data with the payment of an extra monthly fee. How does that impact the revenue and profitability of telcos? As M1 is closest to a pure mobile telco company, with 79% of its service revenue derived from mobile telco services, this analysis is carried out using M1's results.



Data X2




The table below shows the monthly cost and data allowance of M1's regular plans without data upsize and with Data X2 upsize (Note: each telco calls its plans differently and has different data sizes. I am using Singtel's naming convention for ease of reference). M1's Data X2 upsize costs an additional $5.90 monthly for all regular plans.












Plan Lite Lite+ Reg Reg+ Max Max+
Monthly Cost $28.00 $42.00 $62.00 $82.00 $102.00 $228.00
Original Data (GB) 0.3 3 4 5 7 13
Data X2 Cost
$47.90 $67.90 $87.90 $107.90 $233.90
Data X2 (GB)
5 7 9 13 25



Prior to the launch of data upsize plans, M1 charged $10.70/GB for excess data usage beyond the data allowance. Thus, a subscriber who previously had to pay $10.70/GB for excess data usage now only has to pay $5.90 to upsize his data allowance. He saves at least $4.80 per month on excess data usage. This has a direct impact on M1's revenue and gross profit, since the network infrastructure is already set up and the marginal cost of providing the additional data is likely to be small.



Using M1's financial results for 4Q2015, which is just before the 3 telcos launched their data upsize plans in Mar 2016, the percentage of subscribers who exceeded their data allowance was 21%. I assume conservatively that these subscribers exceed their data allowance by not more than 1GB, because those who exceed their data allowance by between 1-2GB would have to pay $21.40 more in excess data usage and are better off subscribing to the next tier regular plan, which costs $20 more only. Thus, M1 potentially loses $4.80 per month for every subscriber who chooses to upsize their data allowance. As at 4Q2015, the number of post-paid subscribers was 1.195M. The number of subscribers who exceeded their data allowance was 251K (21% of 1.195M). The potential revenue loss is 251K x $4.80 x 12 months or $14.5M. This works out to be 2.4% of FY2015's revenue of $591M. It is also equivalent to 6.6% of FY2015's pre-tax profit of $218.4M.

Unlike the SIM-only plans, which subscribers could only switch when their 2-year contracts expire, subscribers could choose to upsize their data allowance at any time. Thus, while the impact of SIM-only plans are spread out over 2 years, the impact from data upsize plans is fairly immediate.



Fig. 1 below shows the year-on-year changes in M1's revenue and post-paid ARPU, with timeline of the launches of the SIM-only plans and Data X2/X3/X4 plans superimposed on the chart. To understand the impact of SIM-only plans, please refer toImpact of SIM-Only Plans on Telcos.






Changes In M1's Revenue & ARPU



From Fig. 1, M1's revenue and ARPU have actually started falling in 2Q2015, but the decline accelerated from 3Q2015 onwards, which was when M1 launched the SIM-only plans. Things got worse in 1Q2016, which coincided with the launch of data upsize plans.



Given that the impact of data upsize plans is fairly immediate, I am unable to explain why M1's revenue continued to fall at a rapid pace after 2Q2016. The reasons M1 gave for the decline in net profit were lower IDD and roaming revenue, higher handset subsidy and higher depreciation and amortisation. Thus, there are other factors at play besides SIM-only plans and data upsize plans.



Data X3/X4



As if Data X2 plans are not good (or bad) enough, Singtel launched Data X3 plans in Sep 2016, just after TPG, MyRepublic and airYotta submitted bids to be the fourth telco. M1 followed suit in Nov 2016 with not just Data X3 but also Data X4 plans!



As M1 did not disclose the number of subscribers who exceed their Data X2 allowance, it is difficult to assess what is the impact to revenue and profitability of Data X3/X4 plans. My personal opinion is the number of such subscribers is likely to be small and thus, the impact on revenue and profitability is likely to be small as well. Data X3/X4 plans are likely to be marketing gimmicks.



What's Next



Data upsize plans may be bad for telcos, but there is a silver lining. The higher data allowance of the upsize plans are enticing some subscribers to use more data. Fig. 2 below shows the average data usage and percentage of subscribers who exceed their original data allowance.






Fig. 2: M1's Subscriber Data Usage




As shown in Fig. 2, there is an uptick in average data usage after 2Q2016, which is after the launch of data upsize plans in Mar 2016. The percentage of subscribers who exceed their original data allowance is also on the rise (note: M1 changed the way it measures this metric in FY2016. The figures for 2015 and 2016 are not directly comparable). This will eventually translate to increased revenue and profitability as subscribers who now exceed their original data allowance and upsize have to pay at least $5.90 extra per month.



Conclusion



Data upsize plans have a direct and immediate negative impact on telco's revenue and profitability. However, they are also enticing subscribers to use more data, which will gradually translate to higher revenue and profitability (assuming all other factors remain constant).

Finally, please note that although all 3 telcos have mobile telco operations, Starhub has other business segments and Singtel has overseas operations and investments.



P.S. I am vested in M1 and Singtel.





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Impact of SIM-Only Plans on Telcos
- Original Post from (The) Boring Investor

$M1(B2F)

I recently switched my telco subscription plan from the regular ones to SIM-only plans. How do these SIM-only plans impact the revenue and profitability of the 3 local telcos?



Before we begin, let me explain what are SIM-only plans. As the name implies, SIM-only plans only provide voice, SMS and data but do not come with subsidised handphones. The tables below show the amount of voice, SMS and data for regular and SIM-only plans for M1, the telco which I subscribe to. The last table shows the difference in the amount of voice, SMS and data between the 2 types of plans. As you can see, SIM-only plans have generally the same amount of voice but less SMS and more data than regular plans. As people seldom SMS but rely more on data nowadays, I would argue that SIM-only plans provide better value than regular plans at lower costs!

























Regular Plans





Plan Lite Lite+ Reg Reg+ Max Max+
Monthly Cost 28 42 62 82 102 228
Voice (mins) 100 200 300 400 800 Unlimited
SMS/MMS 500 1000 1200 1500 2000 5000
Data (GB) 0.3 3 4 5 7 13







SIM-Only Plans





Plan MS+ 15 MS+ 20 MS+ 30 MS+ 45 MS+ 75 MS+ 125
Monthly Cost 15 20 30 45 75 125
Voice (mins) 100 150 300 400 800 Unlimited
SMS/MMS 600 800 1000 1200 2000 Unlimited
Data (GB) 1 4 6 8 13 20







Differences





Monthly Cost -13 -22 -32 -37 -27 -103
Voice (mins) 0 -50 0 0 0 0
SMS/MMS 100 -200 -200 -300 0 Unlimited
Data (GB) 0.7 1 2 3 6 7



What is the impact of SIM-only plans on telco's revenues? We have to assume a particular handset to illustrate the impact. Let us use Samsung S7 as the handset. If you purchase it under the regular plans, the price you pay ranges from $608 to $0, depending on which plan you choose. This sale of handset contributes to the overall revenue of the telco. However, for SIM-only plans, there is no sale of handset, so handset sale no longer contributes to the overall revenue. Not only that, the service revenue is also lower. The table below shows the revenue impact of SIM-only plans. Using Lite/ mySIM+ (MS+) 15 plans as an example, the total revenue over a 24-month period is $1280 under the regular plan, but only $360 under the SIM-only plan. The decline in revenue is $920, or 72% of the revenue under the regular plan! As we move towards the more expensive plans, the percentage decline becomes lower. Thus, we can expect telco revenue to drop, depending on how many people switch to SIM-only plans.

















Lite Lite+ Reg Reg+ Max Max+

MS+ 15 MS+ 20 MS+ 30 MS+ 45 MS+ 75 MS+ 125
Handset Price





Regular 608 458 128 58 0 0
SIM-Only 898 898 898 898 898 898
Total Revenue





Regular 1280 1466 1616 2026 2448 5472
SIM-Only 360 480 720 1080 1800 3000
Difference -920 -986 -896 -946 -648 -2472
% Difference -72% -67% -55% -47% -26% -45%



For M1, the expected decline in revenue shows up in their latest financial statement for FY2016 released last week. Fig. 1 below shows that handset sales dropped by 23.7% in FY2016 and mobile telco revenue dropped by 4.2% despite the total no. of mobile customers rising by 4.7%! Likewise, Fig. 2 below shows that the Average Revenue Per User (ARPU) dropped by 6.0%.






Fig. 1: M1's Revenue






Fig. 2: M1's ARPU



Having said the above, please note that the reasons M1 gave for the decline in net profit were lower IDD and roaming revenue, higher handset subsidy and higher depreciation and amortisation. So, perhaps not many people switched over to SIM-only plans.



Although revenue is expected to drop with SIM-only plans, if the cost of sales drop correspondingly, the impact to profit would not be significant. Here, I will attempt to estimate the profit impact from SIM-only plans. A few assumptions need to be made. Firstly, I will assume that M1 is a pure mobile telco company, even though it also has international call services and fixed services, which together constitute 21% of its service revenue in FY2016.



In FY2016, M1 reported gross profit of $180.0M on total revenue of $1,060.9M, giving it a profit margin of 17.0% (Based on FY2014 financial results, which is before M1's launch of SIM-only plans in Jul 2015, the gross profit margin was 20.4%. We will use the more conservative and latest figure of 17.0% in this analysis). Since this profit margin includes both the sale of handsets and mobile telco services, it is assumed to be the profit margin for the regular plans.












Overall Handset Service
Revenue 1060.9 255.4 805.5
Expenses 880.9 343.9 537.0
Gross Profit 180.0 -88.5 268.5
% Profit 17.0% -34.7% 33.3%


A breakdown of the revenue and expenses shows that handset sales contributed $255.4M to the overall revenue and $343.9M to the costs. In other words, M1 subsidised $88.5M for the sale of handsets to its regular plan customers. Removing the revenue and expenses from handset sales, the service revenue is $805.5M and the cost of service is $537.0M, giving it a gross profit of $268.5M or a profit margin of 33.3% on mobile telco services alone. This is assumed to be the profit margin for SIM-only plans, since they only provide mobile telco services.


Finally, I will further assume that the profit margins of 17.0% and 33.3% apply for all regular and SIM-only plans respectively, which is likely to be incorrect. I understand that a lot of assumptions have been made here, but these assumptions provide at least a starting point for analysing the impact of SIM-only plans on telco profitability. If you have better figures, please let me know.

Applying these profit margins to the revenue discussed above, the gross profit for the various plans are shown in the table below.













Lite Lite+ Reg Reg+ Max Max+

MS+ 15 MS+ 20 MS+ 30 MS+ 45 MS+ 75 MS+ 125
Gross Profit





Regular 217 249 274 344 415 928
SIM-Only 120 160 240 360 600 1000
Difference -97 -89 -34 16 185 72
% Difference -45% -36% -12% 5% 44% 8%


Using the Lite/ MS+ 15 plans as an example, the gross profit for the regular plan is $217 (17.0% x $1280) but only $120 (33.3% x $360) for the SIM-only plan. The difference is $97 or 45% of the gross profit of the regular plan. However, as we move towards the more expensive plans, this difference turns from a loss into a profit! The reason is pure mobile telco services has a higher profit margin. Thus, the more expensive the plan is, the more profit the telco makes!

The same analysis repeated for iPhone 7 (128GB) is shown below. Likewise, it shows that there is a significant drop in revenue but the impact to profit depends on which plan the subscriber chooses.





















Lite Lite+ Reg Reg+ Max Max+

MS+ 15 MS+ 20 MS+ 30 MS+ 45 MS+ 75 MS+ 125
Handset Price





Regular 880 745 560 380 190 0
SIM-Only 1218 1218 1218 1218 1218 1218
Total Revenue





Regular 1552 1753 2048 2348 2638 5472
SIM-Only 360 480 720 1080 1800 3000
Difference -1192 -1273 -1328 -1268 -838 -2472
% Difference -77% -73% -65% -54% -32% -45%
Gross Profit





Regular 263 297 347 398 448 928
SIM-Only 120 160 240 360 600 1000
Difference -143 -137 -107 -38 152 72
% Difference -54% -46% -31% -10% 34% 8%


So, the next 2 big questions are: (1) how many people will choose to switch from regular plans to SIM-only plans, and (2) which plans are they on currently?

I do not have much insights on these 2 questions. On the first question, my opinion is that people who choose to switch include those who are cost-conscious, do not need an expensive phone and/or tired of upgrading phones every 2 years. The possible profiles of these groups of people would be the elderly and young children (if they are not already on the pre-paid plans). To cut a long story short, I do not think a lot of people will switch.

Another point to note is that M1 launched the SIM-only plans in Jul 2015. Since the typical contract period is 2 years, we are approximately 75% into the first renewal cycle. Nevertheless, it is also possible that some subscribers could have missed the SIM-only plans when they previously renewed and choose to make the switch in the next cycle.

On the second question, based on Fig. 2 above, the ARPU is $58, which is closest to the Reg plan that costs $62 per month. For this plan, the SIM-only equivalent will result in lower profit based on the analysis for Samsung S7 and iPhone 7 (128GB) above.

Hence, in conclusion, for each subscriber who chooses to switch, SIM-only plans will result in a significant drop in revenue. The impact to profit is also negative but smaller than the decline in revenue. However, the no. of subscribers who choose to switch to SIM-only plans is likely to be small.

P.S. I am vested in M1.

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Has the fundamentals of M1 and SPH caught up with valuation
- Original Post from Sillyinvestor

I doubt anyone would disagree with me that the fundamentals of these 2 companies are being affected by competition. $M1(B2F) by a highly possible 4th Telcom player and $SPH(T39) by alternative news digital platforms.

But that is only half the question, a better question would be "has the challenging outlook being reflected in the shares price, and has it overshoot to the downside?"

Personally, between the 2 companies, I would go for M1, notwithstanding the fact that its latest quarter results sucks. It blames the fall in net profits to higher depreciation and ammortization costs, but there is more than meets the eye.

If you look at 9 months result, there is indeed a significant increase in amortization and depreciation from 86,1mio to 93.3 mio, but if you look at 3Q results by itself, the difference in YoY depreciation and amortization is a mere 1.3 mio. The real cause is the reduction in ARPU. The lower handset sales while affect revenue will also cause higher cost of sales, so in a while, it will offsets one another.

Is reduction of ARPU worrying? You bet, since the competition has not even started.

I have assume the following in the face of a 4th Telcom.

1) It costs a 10% fall in ARPU to the price competition
2) It manage a 10% market share within 2 years, and cause 25% reduction in M1 mobile's market shares.
3) M1 continues to pay out 80% of earnings.
4) M1 is able to maintain its NP before the "war" begins

I expect a 5% dividend yield with the reduced earnings in 2018, and the price should be $2.2 I made a bid for today but did not get anything. But I will not bid anymore tomorrow.

Because as you can see, assumption 1 should be worse since without competition, it had already worsen by 10%.





Since I gave a damning report, why did I still say I chose M1 over SPH.



Any real fight with the 4th Telcom will only starts in 2018 earliest (10% market share), I assume of the 10% loss, half of it comes from M1. It might not be too bad.



I do think with a reduced earnings, M1 can sustain its operations albeit at a lower earnings. There are also 2 silver linings in M1 report, cash flow is still strong, and they are still growing their subscribers base. However, it is due to a higher penetration rate, and I suspect Singtel and STarhub will both report an increase in subscribers.



With SPH, it is not going to easy. It has already increase ASP, but its reduced dividends of 18 cents is already above 100% payout.



I do not think print will go the way of the dodo, but I seriously do not know the "bottom" and hence I cannot predict what price is a fair price since I cannot predict future earnings and hence yield.



However, SPH shares price's fall is not as bad as M1. If you ask me, SPH competition is 2 folds. One is direct advertising competition, such as google and other online platforms. Next, readership. If readership of papers continue to fall the attractiveness of advertising through print is going to be even lower.



SPH is in news business. Beside speed of updates in news, there is another issue of news print. I get news alert from 4 different news apps on my phone. If I want my finance news, I go for reuters and bloomberg, there is no need to wait for Straits Times to reproduce their news.



Then why is the price holding up relatively well. I think its due to the speculation of timing of injection of Seletar Mall into SPH reit and the possibility of special dividends.



However, I will watch M1 closely.








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