What Starhub Ltd’s Management Wants Investors To Know About The Impending Mobile Wars

A fourth telco may be arriving in Singapore soon, heating up the competition.

In a recent interview, StarHub Ltd’s (SGX: CC3) chief financial officer, Dennis Chia, gave a candid assessment on the competition that a fourth telco in Singapore’s mobile space could bring. Chia said:

“Whether you want to label it a price war or not – certainly it is an unpleasant term – the value-add is through accretive pricing at the onset. As the new kid on the block, it will not be able to offer anything better in terms of network quality.”

In his view, the combination of a crowded mobile space and a new telco could lead to competitors resorting to price wars.

A crowded space

Chia talked about how the mobile space has evolved since StarHub’s arrival 16 years ago in 2000. Back then, Singapore’s mobile penetration rate was just 48%. It has since increased to 148% today.

Chia mused about the crowded mobile space in the interview:

“We are a very small country with a very small market, despite being very technologically advanced. With close to 150% penetration, the truth of it is that there’s not a lot of growth ahead in terms of penetration.

The way for a fourth operator to generate financial returns on its investment is to take market share away from incumbents. It’s inevitable that very intensive competition will be the result.”

Thing is, StarHub’s mobile services segment is a significant cash generator for the business (more on this shortly). A price war could be cause for some concern.

The mobile cash cow

StarHub generates its revenue from five major sources: mobile services, pay TV services, broadband services, enterprise network services, and handset sales. The first four are collectively referred to as services revenue.

Mobile services, though, is by far the largest revenue generator, as alluded to earlier.

In 2015, mobile services revenue accounted for over 55% of services revenue. In the first quarter of 2016, the same ratio was over 50%. In the earnings briefing for StarHub’s 2016 first-quarter results, Chia also said that the mobile services segment was one of the two segments with the highest profit margins.

It is possible that a price war could hurt StarHub’s margins here.

The incumbent’s advantage

However, StarHub is unlikely to give up without a fight. Chia also noted:

“StarHub has a strong balance sheet and can ride out any headwinds for a time. We have built a war chest and will leverage on it when we need to.”

In the aforementioned earnings briefing, Tan Tong Hai, StarHub’s chief executive, spoke about the competition that StarHub has had to face since his arrival more than three years ago.

It started with the loss of the English Premier League (EPL) broadcasting license for the pay TV services. A year later came challenges for broadband services. It would seem like it is now time for stiffer challenges at the mobile services segment. In his interview, Chia added his thoughts:

“We’re used to competition. We need to continue to be relevant in the future, regardless of whether a fourth operator emerges. The larger issue of competition due to disruptive technologies is something we still need to address”

The telco space in Singapore will keep evolving. Liberty Wireless launched a regional mobile virtual network operator (MVNO) called Circles.Life in Singapore. It will be leasing capacity from StarHub’s peer, M1 Ltd  (SGX: B2F). Meanwhile, substitute services like the mobile app Whatsapp offer messaging and voice call services which may reduce usage of StarHub’s traditional telecommunications services.

Investors need to be aware of the ongoing challenges in the mobile space and observe how StarHub will respond to them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.