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We maintain our Bullish sector stance: The telecom sector has been out of
favor with investors since the beginning of 2009. However, we maintain our
Bullish sector stance. First, we expect stable profit growth and a quick recovery
in free cash flow. Second, we think the telecommunications industry is poised
to be an axis for structural recovery in Japan. Third, despite these expectations
we think telecom stocks remain undervalued based on a global comparison of
EV/EBITDA.
• An era that will put telecoms’ capabilities as “pipe providers” to the test:
We expect telecoms’ capabilities as “pipe providers” to be put to the test even
more over the longer term as the shift to open computing (for mobile handsets,
software, and services) and the proliferation of IPTV put the focus on whether the
telecoms can provide users with high-quality, value-priced broadband lines. At the
same time we think a vital longer-term issue for the telecoms will be finding a way
to organically link their own eco-platforms with open platforms to avoid becoming
subordinated as simple pipe providers. We highlight KDDI and NTT based on
the high quality of their “pipes,” their proprietary eco-platforms (rich with
differentiation potential), and the undervaluation evident in their share prices
(i.e., the substantial upside potential implied by our price targets).
• Upgrading NTT from Neutral to Overweight and downgrading Softbank
from Neutral to Underweight: Our price targets suggest that the stock with the
greatest upside potential is KDDI (83.6% implied upside potential), followed in
order by NTT (50.1%), NTT DoCoMo (26.8%), Okinawa Cellular (18.3%), IIJ
(14.9%),and Softbank (9.9%). From a short-term perspective, NTT’s investment
appeal may be limited, but we think the company derives its competitiveness
from an emphasis on networks and farsighted business strategy. The share price
also looks attractive, with a P/BV multiple of less than 1x. We expect Softbank
to post large profit gains for at least the next two quarters, thanks mainly to
subscriber growth and cost reductions. We also note the company’s unrealized
gains on its roughly 30% stake in Alibaba Holdings. At the same time, we are
concerned about the risk of customer attrition resulting from Softbank’s
excessive restraint on capex. If Softbank’s share price rises on strong earnings
results, we think this might provide a good opportunity to take profits.
• 1Q FY2009 results preview: Our 1Q operating profit forecasts by company are
as follows, in order of growth rate: Softbank ¥104.2 billion (+22.4%), KDDI
¥137.6 billion (+10.6%), Okinawa Cellular ¥2.343 billion (+1.4%), NTT ¥324.0
billion (-12.9%), NTT DoCoMo ¥252.2 billion (-14.9%), and IIJ ¥168 million
(-59.2%).
Table of Contents
Sector Stance: Still Bullish......................................................3
Rating Changes ........................................................................7
1Q FY2009 Results Preview...................................................13
Investment Ratings ................................................................14
NTT (9432, from Neutral to Overweight): April 2010 price target ¥5,600 ...............14
Softbank (9984, from Neutral to Underweight): April 2010 price target ¥1,910.......17
KDDI (9433, Overweight): April 2010 price target ¥951,000...................................20
Internet Initiative Japan (3774, Overweight): April 2010 price target ¥223,000 .......23
NTT DoCoMo (9437, Neutral): April 2010 price target ¥175,000............................24
Okinawa Cellular Telephone (9436, Underweight): April 2010 price target ¥190,000
..................................................................................................................................26
An Era that Will Put Telecoms’ Capabilities as “Pipe
Providers” to the Test ............................................................34
From Voice to Data: the Long Journey to All-IP.......................................................34
Surging Internet Traffic .............................................................................................35
Expanding Mobile Broadband ...................................................................................37
3.9G Capex Plans Now Clear ....................................................................................39
3.9G System Installation Plans by Company.............................................................41
No Need for FTTH?...................................................................................................43
The Wave of Transition to Open Source....................................................................52
Goodbye to the Walled Garden Model?.....................................................................55
Tethering....................................................................................................................56
Cloud Computing.......................................................................................................57
Time to Sow or Reap?............................................................60
RoCAPEX..................................................................................................................61
Capital Investment per Subscriber .............................................................................61
Losses Shrinking in FTTH Business..........................................................................62
“Pipes” (Network) Are Heart of Communications Business .....................................65
How Is Japan Like the Galapagos? ............................................................................68
Union of Open Platform and Proprietary Eco-Platform.............................................69
Japan’s Economy: No Growth without Structural Reform ........................................71
Regulations.............................................................................74
Earnings Models.....................................................................76
Appendix ...............................................................................141
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