Brief Equities Bottom-Up: AIS Growth Has Been Slowing as DTAC Returns to the Scene. 2019 Outlook Uncertain. and more

In this briefing:

1. AIS Growth Has Been Slowing as DTAC Returns to the Scene. 2019 Outlook Uncertain.
2. Rakuten to Covertly Cut Merchant Commission Rates?

1. AIS Growth Has Been Slowing as DTAC Returns to the Scene. 2019 Outlook Uncertain.

We met AIS (ADVANC TB) earlier this week at their Analyst Day in Bangkok. The recent results confirm our concerns over market growth slowing, with service revenue flat YoY. The guided 4-6% growth for 2019 may be difficult to achieve. On the mobile side, AIS is feeling competitive pressure from a resurgent DTAC (DTAC TB) and continuing gains from TRUE (TRUE TB) . While “hostilities” have eased recently (less aggressive price offers), we remain wary of the outlook for 2019. On the fixed side, AIS is making slow progress and we continue to think M&A is warranted.

There was a fair amount of discussion around 5G at the meeting, but this looks like a long term issue for AIS. Thailand has never been in the forefront on telecom technology upgrades in the past and there is plenty to do with 4G and fixed broadband still. 

Chris Hoare remains cautious on AIS in the current slowing environment, and ahead of delayed elections. Earnings forecasts have edged lower recently and that is translating to lower dividends (a 70% payout ratio to be retained for now). We remain at Neutral with a target price of THB187.

2. Rakuten to Covertly Cut Merchant Commission Rates?

Rakuten (4755 JP) has been under pressure recently from Amazon (AMZN US) and other competitors in its core online mall business and now seems to be giving more attention once again to the original Rakuten Ichiba, including a plan to cut shipping fees, although this also looks like a face-saving way to cut merchant commissions.

Rakuten is also investing in new logistics infrastructure to try and match the customer services levels of Amazon and ZOZO (3092 JP).

As part of this effort, Rakuten just announced a 9.9% stake in a logistics firm called Kantsu. The deal is part of Rakuten’s strategy to accelerate the move towards consolidated shipments of orders on Rakuten Ichiba – one of the key weaknesses of the Rakuten model compared to Amazon and Zozo.

Rakuten also just announced its year-end results this week: Domestic GMVs rose 11.2% to ¥3.4 trillion for the year ending December 2018. While GMVs rose and revenue increased by 9.2% to ¥426 billion, operating income on domestic e-commerce fell 17.7% to ¥61.3 billion partly due to higher logistics costs. For 4Q2018, operating income fell 27.3%.