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Mobile market outlook

Global trends

Renaissance Capital

8 January 2019

EMEA telecoms

According to GSMA, mobile internet users will rise by 1.6bn over 2018-2025 globally with c. 40% attributable to China and India while additions in Nigeria, Pakistan and Indonesia will amount to 50-75mn each. The rest comprises a ‘long’ tail mainly represented by SSA and South East Asia (see Figure 4). The growth is to be driven by higher smartphone affordability (e.g. in 2013-2017, the average selling price of a smartphone in Kenya declined 45% to $115) and a reduction in mobile data pricing (see Figure 6). GSMA’s analysis of developing countries shows that the mid-level tariff bundle (600 MB to 2 GB) declined from 2-3% of average disposable income in 2015 to 0.5%-1% in 2017.

Social and messaging services are an integral part of the smartphone ecosystem, while video streaming and especially e-commerce are yet to be monetised and represent one of the main growth opportunities for telcos, according to GSMA. We discussed the first topic at the beginning of 2016: EM and FM telecoms: What price for a video? – and concluded then that while video is the main traffic generator and revenue driver for telcos, cheaper pricing and competition may neutralise most of the growth. As for the e-commerce opportunity and the wider use of payments by mobile operators, we discussed this at length in EMEA & South Asia: Telecom mobile – Mobile money: Where does it work? and concluded that few countries offer strong potential for mobile money development (e.g. Pakistan) while prospects elsewhere are either modest (Turkey) or immaterial (Egypt).

Figure 4: Increase in mobile internet users by country between mid-2018	Figure 5: Unique mobile penetration across emerging markets
and 2025, mn

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%			Algeria	Indonesia							Nigeria
Russia	Ukraine	China			Kazakhstan	Egypt	Turkey	Kenya	India	Bangladesh		Pakistan
Source: GSMA Intelligence										Source: GSMA Intelligence

Figure 6: Monthly data bundle costs in major emerging markets. Tariff as percentage of monthly income (medium bundle)

Figure 7: Mobile ecosystem adoption. Activity performed at least once a month – percentage of smartphone users

Source: GSMA Intelligence

Source: GSMA Intelligence

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vk.com/id446425943

Renaissance Capital

8 January 2019

EMEA telecoms

Concerning top-line growth and revenue streams, GSMA takes a conservative stance on global mobile growth until 2025 (see Figure 8) due to a slowing of unique subscriber growth, regulatory interventions and increased competition.

GSMA sees upside risks to its conservative top-line forecasts coming from 5G and IoT services, not so much from plain connectivity but more from the development of new services. As long as the revenue potential for carriers from IoT and 5G is unproven, GSMA sees mobile connectivity being commoditised, with the related revenues demonstrating the slowest growth rates and losing market share in the growing global IoT pie (see Figure 9), as operators struggling to compete with applications, platforms and service providers (including cloud data analytics and security), and professional services (systems integration, consulting and managed services).

We think 5G will become a bigger focus for us and for operators as the year progresses. It will be interesting to watch how two competing strategies to attract (keep) customers unfold in the US: on the one hand, that of Verizon which has focused on a quick rollout of 5G and is betting on connectivity quality; and on the other, that of AT&T, which, after the acquisition of Time Warner, is betting on content quality and a potential boost to its advertising revenues. In EM/FM, we are likely to see 5G auctions and licensing only in Russia, possibly Turkey but unlikely anywhere else. Still, we see the potential for 5G auction and frequency allocations to affect (likely negatively) operators’ financial performance.

Figure 8: Projected growth in global mobile revenue

Figure 9: Global IoT revenue projections. Percentage of total IoT revenues

Source: GSMA Intelligence

Source: GSMA Intelligence

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vk.com/id446425943

Renaissance Capital

8 January 2019

EMEA telecoms

Figure 10: Growth in connections, 2017-2025 (mn)

Source: GSMA Intelligence

Markets under our coverage

Russia is the most penetrated country across our universe (albeit with notoriously high churn rates), while we see room for organic growth in Pakistan, Bangladesh, Kenya and Guinea: something that should continue benefiting GTH, Safaricom and Sonatel. Competition remains fierce across these countries though.

Figure 11: Mobile penetration across developing and frontier markets

180%

160%

140%

120%

100%

80%

60%

40%

20%

0%

Russia

Kazakhstan

Ukraine

Egypt

Turkey

Figure 12: Mobile penetration across frontier markets

140%

120%

100%

80%

60%

40%

20%

0%

Algeria

Mali

Sierra Leone

Senegal

Guinea

Bangladesh

Kenya

Pakistan

Source: Euromonitor

Source: Euromonitor

Despite strong growth of 3G and 4G connections, smartphone adoption in Russia is significantly lower than in Turkey and developed countries, although consumer demand

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vk.com/id446425943

Renaissance Capital

8 January 2019

EMEA telecoms

for smartphones is increasing, as a growing share of more affordable devices (Xiaomi, Huawei, ZTE) should bring smartphone adoption to 85% by 2025 from 62% currently, according to GSMA. We believe demand for more data, supported by growing smartphone penetration, will be the main driver of ARPU in Russia as data pricing is extremely low given the highly competitive backdrop (the cost of a 5 GB high-end basket in Russia is $8/month with the same level in Italy vs $15 in Netherlands, $21 in Spain, $24 in Germany and $38 in the US, according to GSMA).

Figure 13: Smartphone adoption dynamics (selected countries). Smartphone connections as a percentage of total mobile connections

Figure 14: Daily mobile internet usage in 2017, minutes (selected countries)

100%				2017		2025			250
90%									200
80%
70%									150
60%
50%									100
40%
30%
20%									50
10%
0%									0
	Turkey	Russia		Ukraine			Kazakhstan Developing
							markets			Kenya	Egypt	Turkey	Russia
									Note: Based on survey of internet users aged 16-64
							Source: GSMA Intelligence						Source: Hootsuite

Turkey has demonstrated the highest ARPU growth across our universe, driven by the successful expansion of digital telco services (the OTT video market in Turkey is dominated by Turkcell TV+ – a rare win of a telco over OTT players) and carriers’ ability to adjust prices upwards given high inflation rates.

Ukraine, Bangladesh, Pakistan and Kenya are the countries with the lowest ARPU across our universe, but with potential to grow due to ongoing expansion of mobile broadband and increasing smartphone affordability, we believe.

Figure 15: Mobile ARPU dynamics across developing and frontier markets, $ (at constant 2015 FX rate)

Figure 16: Mobile ARPU dynamics across frontier markets, $ (at constant 2015 FX rate)

14				2015		2016		2017		2018E			9				2015			2016		2017		2018E
	11.8												8	7.6
12
													7
10
													6
															5.1
8													5
																		4.2
6		5.5					5.1		5.2				4
																					3.3
4													3
																								1.9
											2.4		2												1.5
2
													1
0													0
	Turkey	Russia				Kazakhstan				Egypt	Ukraine			Senegal	Algeria			Mali			Pakistan			Kenya Bangladesh
Note: Avg. levels based on companies’ data under our coverage (excl. Vodafone Egypt)													Note: Avg. based on companies’ data under our coverage
							Source: Company data, Renaissance Capital estimates														Source: Company data, Renaissance Capital estimates

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Renaissance Capital

8 January 2019

EMEA telecoms

Figure 17: Mobile ARPU dynamics across developing and frontier markets, $ (at current FX rates)

Figure 18: Mobile ARPU dynamics across frontier markets, $ (at current FX rates)

10				2015		2016		2017		2018E			9				2015		2016		2017			2018E
														8.1
9													8
8													7
	6.7
7
													6
6
		5.1											5		4.4			4.4
5
													4
4							3.3
																				2.8
													3
3									2.3		2.0
																								1.6	1.4
													2
2
													1
1
0													0
	Turkey	Russia				Kazakhstan				Egypt	Ukraine			Senegal	Algeria			Mali			Pakistan			Kenya	Bangladesh
Note: Avg. levels based on companies’ data under our coverage (excl. Vodafone Egypt)													Note: Avg. based on companies’ data under our coverage
							Source: Company data, Renaissance Capital estimates													Source: Company data, Renaissance Capital estimates

Consolidated telecom EBITDA margins across selected countries stood at 35-50% in 9M18 with notable contraction in Kazakhstan, Algeria and Bangladesh and expansion in Ukraine, Turkey, Kenya and Pakistan. We would point out that some companies have already adopted IFRS16 reporting standards, with others to adopt them from 1 January 2019, which should lead to an overall uplift in EBITDA margins – e.g. MTS saw its EBITDA margin expand by 6.5 ppts once it adopted the new policy in 2018. The change to net income and cash flows is likely to be minimal though.

Figure 19: Telecom EBITDA margin dynamics (consolidated) across developing and frontier markets

Figure 20: Telecom EBITDA margin dynamics (consolidated) across frontier markets

50%			2015		2016			2017		9M18			60%			2015		2016			2017			9M18
48%													55%
	45%
46%
44%		43%												50%
													50%				48%
42%																						44%
						39%
40%													45%
									37%
38%
											36%
													40%
36%																									35%
34%
													35%
32%
30%													30%
	Egypt	Ukraine				Russia				Turkey	Kazakhstan			Kenya		Pakistan						Algeria			Bangladesh
Note: Excl. new IFRS standards and non-recurring items; avg. levels based on companies’ data under our coverage													Note: Avg. levels based on companies’ data under our coverage
(excl. Vodafone Egypt; and incl. MFON for Russia)
											Source: Company data														Source: Company data

Capex/sales stood between 15-25% in 2018 with higher than average historical spending in a period of new technology adoption: e.g. 3G in Ukraine in 2015 and LTE in Turkey.

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																								Renaissance Capital
																								8 January 2019
																								EMEA telecoms
Figure 21: Capex/sales average ratio dynamics across developing and frontier													Figure 22: Capex/sales average ratio dynamics across frontier markets
markets
			2015		2016			2017		2018E						2015			2016		2017		2018E
45%													30%
														25%
40%													25%
35%
														20%			19%
30%													20%
	25%																					16%		15%
25%																									14%
		21%				20%							15%
20%										17%
15%													10%
											11%
10%													5%
5%
0%													0%
	Ukraine		Turkey			Russia				Egypt*	Kazakhstan			Bangladesh Senegal				Pakistan			Algeria			Kenya	Mali
Note: Excl. licenses; based on average companies’ data under our coverage (excl. Vodafone Egypt)													Note: Excl. licenses; based on companies’ data under our coverage
*9M18
							Source: Company data, Renaissance Capital estimates														Source: Company data, Renaissance Capital estimates

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