Brief Equities Bottom-Up: NTT (9432 JP) Remains the Broadband King in Japan, Both for Fixed Line and Mobile and more

In this briefing:

1. NTT (9432 JP) Remains the Broadband King in Japan, Both for Fixed Line and Mobile
2. Intel. Dogged By Headwinds In The Year Of The Pig
3. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)
4. Yes Bank’s New CEO Should Not Be a Yes Man
5. Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.

1. NTT (9432 JP) Remains the Broadband King in Japan, Both for Fixed Line and Mobile

With its nationwide fiber optic network infrastructure, NTT continues to dominate the fixed line broadband market in Japan with 68% market share. In this Insight we explore the fixed line broadband market in Japan today and how it is evolving, especially with the increasing dominance of “collaboration” offerings that bundle fiber with mobile services.

Mobile services are getting a lot of attention today, especially in the run up to 5G launches over the coming 12 months, but without fiber backhaul, 5G would be a nonstarter. In this Insight we investigate what 5G will bring and what is needed to support it as well as the telcos’ latest plans. 

NTT is not just an incumbent telecom operator, it’s also a key player for future technologies and provides the physical infrastructure and architecture for many of the industries new services.With all the talk about 5G it is sometimes easy to forget that fixed line networks are still necessary. With NTT’s strong fiber-based network and its collaborations with NTT Docomo and many other partners in mobile and data, we believe NTT is well positioned to be a key and winning player in the evolving telecom and technology space. 

2. Intel. Dogged By Headwinds In The Year Of The Pig

Intel‘s fourth quarter 2018 results last week missed on earnings to the tune of $360 million. That, combined with a tepid outlook for 2019 YoY growth of just 1% spooked investors, sending the stock down over 5% on three times the normal trading volume the following day. 

Lagging process technology leadership, ever increasing competition from ARM, AMD and NVIDIA, lower modem sales as iPhone unit shipments decline, falling NAND prices, data center spending significantly reduced as the hyperscalers digest and optimise their record-breaking build-out will all weigh heavily on the company in the coming quarters. 

After a record breaking 2018 which saw the company’s annual revenue grow 13% to edge north of the $70 billion mark for the first time ever, Intel now faces a growing array of headwinds which will dog the company for the Year of the Pig. 

3. HK Connect Discovery Weekly: CRRC, Car Inc/UCar (2019-01-25)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight that CRRC’s outflow coincides with media reports that highlight the risks of China’s investment in high-speed railway. We also see a very substantial southbound flow into Car Inc. 

4. Yes Bank’s New CEO Should Not Be a Yes Man

Yes Bank has appointed Ravneet Gill as the bank’s CEO, effective latest from March 1, 2019, for a 3-year term. The announcement led to a spurt in the bank’s share price, as the leadership issue was finally resolved.  While investors rejoiced, it remains to be seen whether the new CEO will be influenced by Rana Kapoor, who will step down as founder-CEO on January 31, 2019. Normally, in India, founders are reluctant to cede managerial control, and in banks, their influence often disrupts operational management even when the regulator has compelled founders to step down from the board. It is therefore imperative that once Rana Kapoor steps down as CEO his role should only be restricted to a founder shareholder without any operational involvement even as an advisor.  Gill’s actions as Yes Bank CEO will need to be closely monitored as some board appointees have already been made prior to his taking charge. In particular, we need to closely watch how he manages the close associates of Rana Kapoor, one of whom has been elevated to the board, subject to the regulator’s approval. If Gill starts inducting experienced bankers from outside in senior positions in Yes Bank, it will demonstrate to the public that he is not under the yoke of the founder, but if he continues with the existing team of senior executive management or permits an advisory role for the departed founder-CEO it will indicate the continued strong influence of Rana Kapoor on the bank he co-founded.

5. Chinese Telcos: Rising Capex Expectations a Risk. Downgrade China Mob and China Tel to Neutral.

We have been positive on the Chinese telcos, in part due to our thesis that peak 5G capex expectations were too high for China Mobile. That has largely played out as capex expectations have come down and the stock has performed well. The telcos see a steady state approach to 5G capex as the best way forward given the lack of a current business case. However, there are larger forces at work which imply higher capex – the need to support Huawei/ZTE (763 HK) given the moves against Chinese equipment manufacturers internationally, and the likelihood of economic stimulus packages.

We have downgraded China Mobile (941 HK) and China Telecom (728 HK) to Neutral as the risk now is that capex expectations start to rise again. China Unicom (762 HK) remains a BUY as it trades at a much lower multiple. We reiterate our preference for China Tower (788 HK) which is exposed positively to rising telecom capex.

We have increased our 2020 capex expectations for Chinese Telcos. China Mobile most affected (RMB bn)