Asia telecoms firms look beyond borders for growth

SEOUL (Reuters) - Asia's top telecoms firms are casting their eyes overseas for acquisitions to drive new growth as their home markets reach saturation, but investors fret the increased competition may hit margins and pile up debt.

With mobile phone penetration in the region's wealthier nations at 70 percent and above, operators such as Singapore Telecommunications Ltd, South Korea's SK Telecom Co and Hong Kong-based Hutchison Telecommunications International Ltd are spending billions of dollars entering new markets.

The biggest prizes are in countries with large populations and very low mobile usage such as Indonesia, India and China.

"There are big growth opportunities out there to compensate for the slowing growth story in the domestic market," said Yang Jong-in, an analyst at Korea Investment & Securities.

"But risks exist as well and it's not just low penetration rate operators have to consider. They have to decide level of income and competition in the target market and need a strong case to persuade shareholders preferring more dividend to risky investments."

Most of the big regional operators currently trade cheaply as investors shun the sector amid weakening growth momentum.

SingTel trades around 13.4 times its forecast annual earnings, Telekom Malaysia around 18.9 and SK Telecom around 8.6, compared with an average for the MSCI AsiaPacific telecoms sector of around 49.8.

Focus on India

India is attracting the most overseas attention and growth rates have soared to 2.5 million new subscribers per month, helped by the world's cheapest call rates of 1-2 US cents a minute and the opening up of the sector to foreign competition.

"The mobile markets in many South Asian countries offer immense business potential due to their very low penetration rates," said Peter Heng, a spokesman for SingTel, one of the most active overseas investors in the region.

Asia's fifth-largest phone firm by market value derives about 75 percent of revenue overseas after investing US$11 billion in recent years, with its tentacles stretching to India, Australia, the Philippines, Indonesia and Bangladesh.

Hutchison is eyeing expansion in India through buying stakes in networks controlled by its local partner, the Essar Group.

And SK Telecom, which has half South Korea's US$17 billion mobile market, is looking at three or four Indian firms, including Tata Teleservices Ltd, for possible investment.

"The Indian market has very strong growth potential...and we'll consider other Asian markets as well," SK Telecom chief executive Kim Shin-bae recently said of its expansion strategy.

Fewer than 6 percent of India's billion-plus population have cell phones. Research firm Gartner estimated sales would jump 62 percent this year to 34 million phones, potentially overtaking Chinese demand by 2009 on likely sales of 139 million handsets.

India's still-tiny mobile penetration rate compares with 20 percent in Indonesia, 25 percent in China and 40 percent in the Philippines.

At the other end of the scale, 63 percent of Malaysians have a mobile phone and more than 70 percent of people in Japan. In South Korea the figure is 78 percent and in Singapore it is over 90 percent.

Risky strategy

But aggressive overseas forays also raise concerns that enticing margins will be cut as operators offer deep discounts and phone subsidies to new subscribers.

Hutchison, with operations in Thailand, Israel, Macau, Ghana and Sri Lanka, posted a deeper-than-expected net loss in the first half as its net finance costs jumped 41 percent to HK$612 million (US$78.76 million), mainly hit by increased debt to fund expansion.

It recently purchased a stake in Indonesian mobile start-up PT Cyber Access Communications for US$120 million, while Malaysia's top mobile carrier Maxis Communications Bhd has a controlling stake in another minor operator in Indonesia, where the market is expected to grow 50 percent this year.

Adding more competition, Telekom Malaysia plans to raise its 27.3 percent stake in Indonesia's third-largest mobile carrier, PT Excelcomindo Pratama, to a majority interest.

Telekom, Malaysia's second most valuable firm, has also bought an 18 percent stake in Singapore's third-ranked MobileOne Ltd to diversify its operations.

"This acquisition is a departure from its regional expansion strategy to pursue large population economies with low telecommunication penetration rates," DBS Vickers Securities commented in a recent research note. "We see little synergies, except management skills."

Meanwhile in Japan, operators are taking a more cautious approach after a series of unsuccessful forays overseas.

Japan's top mobile operator NTT DoCoMo Inc has shied away from big deals after its 1.9 trillion yen (US$17 billion) investments in firms such as US operator AT&T Wireless Services and Dutch operator KPN Mobile NV flopped.

Additional reporting by Jennifer Tan in Singapore, Yukari Iwatani Kane in Tokyo, Sophie Taylor in Hong Kong.