Taiwan’s telecom stocks are often seen as a safe haven by investors, offering lavish dividend yields of between 4.8 percent and 5.7 percent as evidenced last year by the nation’s top three telephone companies.
Yet intensifying competition and colossal investment in 4G equipment have scared away some investors who are concerned about those companies’ eroding profitability.
Shares of Chungwha Telecom Co (中華電信), the nation’s top phone company, had tumbled 3.73 percent to NT$92.9 on Friday since May 29 — when it became the first local telecom operator to launch 4G services — compared with an increase of 3.59 percent on the TAIEX during the same period.
Cathay Financial Holding Co (國泰金控), the nation’s biggest financial services provider, made it clear on Friday that its life insurance subsidy Cathay Life Insurance Co (國泰人壽) is cutting its holding of domestic telecom stocks.
As of the end of June, Cathay Life Insurance had reduced its holding in Chunghwa Telecom to 188 million shares, down about 36 percent from 292 million shares a year ago.
“We expect price competition over 4G services to sharpen going forward as telecom operators vie for market share, thereby squeezing profit margins,” group president Lee Chang-ken (李長庚) told investors.
New entrant Taiwan Star Telecom Co (台灣之星) offers a budget plan of NT$599 a month for unlimited use of its 4G network and voice calls for two years, setting the industry’s lowest rate. Its aggressive pricing has set off a domino effect in this sector and sabotaged existing players’ efforts to educate consumers on the benefits of tiered pricing data plans.
Last week, the “big three” telecom operators announced second-round price cuts and introduced their flat-rate plans and free voice calls for 4G subscribers, against the global trend of speed limitation on 4G network.
The price competition is more drastic than in the 3G era as Chunghwa Telecom lowered the threshold of its flat-rate package to a NT$1,136 monthly minimal charge, compared with NT$1,343. Taiwan Mobile Co (台灣大哥大) and Far EasTone Telecommunications Co (遠傳電信) also introduced similar plans starting from NT$1,399.
“We’ve been saving costs in every area to fight this battle,” Lin Kuo-feng (林國豐), president of Chunghwa’s mobile business unit, said on the sideline of a media briefing on Thursday. “Intensifying competition has made it an uphill job to recover the massive 4G investment.”
Last year, via a government-held 4G-license auction, Chungwha Telecom obtained 35-megahertz spectrum for NT$39.075 billion (US$1.3 billion). The nation’s six 4G license holders pay a total of NT$118.65 billion for 4G spectrum, 2.3 times higher than the floor price of NT$35.9 billion and 1.4 folds of 3G spectrum cost of NT$48.9 billion.
Chunghwa plans to spend as much as NT$38 billion on 4G network construction. Lin said the company aims to boost nationwide population coverage to 90 percent by the end of this year, rather than next year.
Chunghwa, Taiwan Mobile and Far EasTone only started making profits from their 3G business about eight years after they launched commercial operation of the 3G services in 2005.
Smaller competitor Asia Pacific Telecom Co (亞太電信) swung into profits in 2009 after offering 3G services in 2003, while Vibo Telecom Inc (威寶電信) has not turned a profit since it began operation in 2005.
Asia Pacific is in the process of merging with Ambit Microsystems Corp (國碁電子) to provide 4G services, which is a subsidy of Hon Hai Precision Industry Co (鴻海精密).
“We believe competitive landscape, rather than technology upgrade or pricing structure change, is the key driver to the trend of average revenue per user (ARPU),” UBS analyst Jinjin Wang (王晶晶) said in a report released on Aug. 11. “We are concerned the competition among the ‘big three’ could escalate.”
JPMorgan Securities Ltd analyst Michelle Wei (魏子清) is also cautious about the local telecom sector and sees the risk of much intensified competition next year, but Goldman Sachs analyst Tina Hou believes unlimited data plans introduced by more telecom carriers would help accelerate local consumers’ transition to 4G service from 3G.
The brokerage forecast 4G data usage in Taiwan could reach 5 gigabytes (GB) per month or more, from the average smartphone data usage of 2.5GB per month in the fourth quarter of last year, Hou said in a research note on Friday.
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