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Saudi telecom sector continues to surprise, as EFG-Hermes uplifts market forecasts
Source: BI-ME , Author: Moussa Ahmad
Posted: Tue June 17, 2008 12:00 am

SAUDI ARABIA. In a research note EFG-Hermes says the Saudi mobile market racked up impressive subscriber growth in 2007 as the two incumbents Saudi Telecom Company (STC) and Etihad Etisalat (Mobily) ramped up growth ahead of the entry of the third operator. Subscribers came in at 27.0 million at the end of 2007, 10% higher than forecast, implying a penetration rate of 109%.

Market shares were broadly in line with expectations as STC’s market share was 64% in 2007, down from 69% at the end of 2006, while that of Mobily was 36%, up from 31%. The investment bank said it expects Zain Saudi, which will start operations in July 2008, to have 1.3 million subscribers at the end of 2008, implying a market share of 4.0%.

In the longer term, or in 2015, it is expected that STC will still have the highest market share, at 50%, followed by Mobily at 35% and Zain Saudi at 15%.

The bank revised upwards its subscriber forecasts to reflect higherthan-expected growth in 2007. It now expect total subscribers to reach 33.4 million in 2008, implying a penetration rate of 131%, up from 113% in the previous forecast. The mobile penetration rate in Saudi Arabia, at 109% at end-2007, was above the MENA average of 84% but still below that of Qatar, Bahrain and the UAE.

The entrance of the third operator, Zain Saudi, will stir up competition and push the penetration rate above the previously estimated addressable market size for its first two years. Once Zain Saudi starts operations, it is expected to gain a large market share, and it will opt for an aggressive strategy that may put pressure on prices, but it is likely to do so in a rational way.

We can expect even more aggressive competition once Zain Saudi launches its commercial operations in light of the current high penetration rate, and based on the evidence of a pro-new-entrant regulatory environment that has helped Mobily gain a 31% market share in less than two years of operation. There is also the high fee that Zain paid for its mobile licence (SAR22.9 billion) which is fuelling expectatiions.

Fixed-line subscribers in Saudi Arabia grew modestly to 4.1 million lines at end-2007, implying a penetration rate of 16.6%, slightly lower than the estimate for the year. EFG=Hermes said it expects that fixed-line growth will be driven by growth in the ADSL segment and not by demand for voice services. Broadband penetration therefore will increase to 33.2% in 2015, up from only 2.5% in 2007. 

EFG-Hermes says it remains buyers of both STC and Mobily and it upgrades the forecast and long term fair value for both companies to reflect stronger-than-expected mobile market performance in Saudi Arabia and the integration of STC’s the newly acquired operations (Maxis, Oger Telecom and Kuwaiti operator) into the forecasts.

The bank initiated coverage of Zain Saudi with a 'sell' recommendation. The company is expected to commence operations in the second half of 2008. The stock was listed at par of SAR 10.0 but the price has since shot up 175% to SAR 27.5 and is currently trading at a 157% to 54% premium to the estimated equity value range.

Exceeding expectations

In its initiation note on the Saudi telecom market 'A Blue Ocean Market in the GCC' in July 2007, EFG-Hermes forecasted that in 2007 subscriber growth in the Saudi market would be strong. In fact, the mobile market exceeded all expectations, adding some 7.4 million subscribers in 2007 versus the 4.9 million expected.

This was the Saudi mobile market’s largest yearly subscriber addition ever. The total subscriber base increased to 27.0 million from 19.6 million as of end-2006, a 38% year-on-year increase and a substantial 10% above the forecast of 24.5 million. Saudi Telecom Company (STC) added 3.77 million subscribers, 91% more than the estimate, while Etihad Etisalat (Mobily) added 3.63 million, which was 23% more.

This implies a penetration rate of around 109% by the end of 2007 versus the 100% that had been expected, taking into account an adjustment in the 2007 actual population figure to 24.69 million, higher than the forecast 24.55 million.

The better-than-expected subscriber mobile growth to the following factors. There was a ramp up of additions prior to entry of the third operator: Both STC and Mobily have sped up efforts to snap up subscribers by introducing new packages and promotions ahead of Zain’s entrance at the end of
June 2008.

An important factor driving subscriber additions has been a decline in prepaid tariffs, which dropped by a minimum 15% and helped spur further growth in the mobile market. There was also a larger-than-expected addressable market: In a previous report, EFG-Hermes estimated that the Saudi mobile addressable market would be around 30.4 million, or 121% of the population, at the end of 2008. The substantial growth witnessed last year, however, suggests an underestimation of the addressable market size. The new forecasts suggest that the addressable market could well be around 41.2 million, or 141% of the population in 2012, versus the previous forecast of 126%.

Risk to subscriber numbers

The Communications and Information Technology Commission (CITC), Saudi Arabia’s telecom regulatory authority, recently issued a directive requiring all operators to report their active subscribers based on the following definition 'Any subscriber making at least one chargeable event in a 90-day period'. This decision will be effective starting first quarter 2008. The absence of a clear definition that operators must adhere to may imply a downside risk to these subscriber numbers, should any of these operators be using a definition less stringent than that newly issued by the CITC.

According to the CITC annual report for 2007, STC’s subscribers reached 17.3 million at the end of 2007, while Mobily’s subscribers reached 11.1 million. EFG-Hermes however uses 9.7 million active subscribers or Mobily, which it estimates to be the active number of subscribers and the same 17.3 million for STC, as indicated by the company’s management as the active number.

During 2007, STC’s and Mobily’s quarterly net additions were roughly equal. According to estimates, the highest additions were in the fourth quarter, partly due to the annual pilgrimage (Hajj), when around 2 million to 3 million pilgrims visited Saudi Arabia.

Subscriber forecasts

We can expect mobile additions of 6.4 million in 2008, lower than the 7.4 million added in 2007. Additions are expected to slow in 2009 to 5.3 million as the penetration to the addressable market hits the 100% mark. This should bring the total number of mobile subscribers in Saudi Arabia to 33.4 million in 2008 and 38.8 million in 2009. As with other MENA markets, we can expect the contribution of prepaid subscribers to the total to continue increasing, rising to 82% in 2008 from 76% in 2006. Neither company reports its prepaid/postpaid subscriber breakdown on a regular basis.

This new subscriber forecasts suggest a penetration rate of 131% in 2008, up from 113% in the old forecasts. The entrance of the third operator, Zain Saudi, is expected to stir up competition that may result in the penetration rate exceeding our estimated addressable market size for its first two years, a trend we have seen in the UAE since the entrance of the second mobile operator du in February 2007. Penetration in the UAE as of the end of March 2008 jumped to 161% from 126% a year earlier, higher than the addressable market estimate of 139%.

Going forward, net additions in the Saudi market are forecast to fall to around 2.8 million in 2010 and eventually to stabilise at around 1.0 million annually. We forecast total subscribers to climb to 44.0 million by 2012, which represents a five-year CAGR of 10%. The penetration rate is expected to reach a peak of 152% by 2011 and to stabilise going forward at the 144% level.

The mobile penetration rate in Saudi Arabia, at 109%, is above the MENA average of 84% but still below those of Qatar, Bahrain and the UAE, which exceeded 140% in 2007. Since the bank's last report, the mobile penetration rate in Saudi Arabia increased to 109% in 2007 from around 82% in 2006.

According to estimates and based on management indication, STC ended 2007 with a 64% market share, down from 69% in 2006, while Mobily ended the year at 36%, up from 31%. This was in line with the expected 63% and 37% market share split for 2007.

For 2008, it is forecast that Zain Saudi, with 1.3 million subscribers, will be able to capture a 4.0% market share in its first year of operation. EFG-Hermes expects that most of the incumbents’ market share loss will come from STC, whose market share we forecast will fall to 59%. Mobily’s market share, on the other hand, will remain at the 37% level. Going forward, it forecasts that Mobily will be able to preserve a market share in the range of 34% to 35%, while STC as the incumbent with the highest number of subscribers will stabilise its market share at around 50%. STC plans to stabilise its market share at around 55%, according to management.


Fixed line, Internet and data

Until now, STC continues to maintain a monopoly over the fixed-line segment, as the three new entrants that received fixed-line licences in April 2007 from the CITC have yet to launch their services. The market had been expecting their entry in mid-2008, but Etihad Atheeb, the consortium led by Bahrain’s Batelco, now expects to launch services in late 2008, while the two other consortiums led by Hong-Kong’s PCCW and US’s Verizon will launch in 2009.

EFG-Hermes expects STC to maintain its lead in market share, as it forecasts that the cumulative market share of the three new entrants will reach 23% in 2015 and their share of new additions will increase to around 45% in 2009 and around 70% in 2015. Over the past few months, STC has tried to stimulate subscriber additions through several fixed-line products and offers. These include Jood, a new fixed-line product that allows subscribers to make unlimited local and national calls for a flat monthly subscription of SAR 99. Subscribers can also choose two mobile numbers that they can call at a 25% discount.

In its initiation of coverage in July 2007, EFG-Hermes held the view that the broadband and high-bandwidth segment (both fixed-line and mobile) would lead the second wave of telecom growth after voice usage growth began to slow down. This was based on extremely low ADSL penetration levels (less than 1% for DSL) and favourable demographics. The surprisingly aggressive move on the part of the CITC to licence three new fixed-line operators proved that the Saudi regulator understood clearly that the broadband market was underpenetrated and that it was willing to take sufficient measures to increase its growth.

It is estimated that Saudi DSL subscribers grew 186% year-on-year to 623,000 subscribers as of end-2007, up from 218,000 as of end-2006. This implies a penetration rate of around 2.5% in 2007, up from 0.9% in 2006. STC had 602,704 DSL subscribers at the end of 2007, with an estimated market share of 97%. If we estimate one broadband line for each 2.5 users, this implies a user penetration rate of around 6.5%, still very low compared with the OECD average of 18.8%. Saudi Arabia lies significantly below average, even when compared with countries with similar GDP per capita.

The the number of broadband subscribers should exceed 1 million in 2008 and 2 million in 2009, when all three new fixed-line licensees will have become operational. STC intensified its efforts over the past few months to assert its presence in the market prior to the arrival of the competition through a number of offers and promotions, including decreasing monthly DSL subscription rates by 17% to 26%, increasing the speeds available in preparation for more advanced services and eliminating connection fees when installing new landlines.

Mobily, on the other hand, is focusing increasingly on wireless broadband services to ensure a place in the burgeoning segment; its acquisition of data-service provider Bayanat al-Oula after it failed to obtain a fixed line licence is a case in point.

 

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