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1、,TMTBrazil telecomsBrazil telecomsAnatel publishes PGMC rulesChange in consolidated EBITDA estimates,abcGlobal Research Regulator introduces new obligationsfor operators designated as havingsignificant market power(SMP)Unbundled and wholesale access tolegacy copper and coaxial networks,2013e,2014e,2
2、015e,2016e,Nextel(USDm),NewOldChange,1,2901,2671.8%,1,4501,3289.2%,1,5601,41510.2%,1,5701,5034.4%,Steeper MTR cuts for 2014-15 andpartial bill&keep for smaller operators,Telefonica Brasil New,12,409,12,836,12,913,13,239,(BRLm)TIM(BRLm)Source:HSBC,OldChangeNewOldChange,12,428-0.2%5,5695,4132.9%,12,94
3、9-0.9%5,7495,856-1.8%,13,216-2.3%5,9166,243-5.2%,13,485-1.8%6,2476,589-5.2%,Brazilian regulator Anatel has published the Plano Geral deMetas de Competio(PGMC),which places significantobligations on operators deemed to have significant marketpower(SMP).We have long highlighted the risk of tougher,reg
4、ulation in LatAm see,most recently,our October 2012report,In the SpotlightLatAm TMT:The age of scale andscope.The PGMC rules take effect immediately and include therequirement for SMP operators to provide both full unbundledand“bitstream”(wholesale)access to their fixed-line copperand coaxial cable
5、networks.Although,in absolute terms,suchregulation is negative for Brazils SMP operators,bothunbundled and wholesale access rates will be commerciallynegotiated with Anatel only imposing a regulated price(basedon a retail-minus methodology)in the case of disputes altogether a much less hardline appr
6、oach than the cost-pluspricing methodology for unbundled local loop(ULL)inEurope.New fiber broadband networks will also be subject tosimilar regulations but only after a so-called regulatory“holiday”of nine years(to November 2021).,13 November 2012Richard DineenAnalystHSBC Securities(USA)Inc,Steeper
7、 MTR cuts and partial bill&keep for smallerplayers.While 2012-13 mobile termination rates remainunchanged Anatel will make steeper cuts in 2014 with a 25%,+1 212 525 6707,reduction to BRL0.25 per minute(versus the previous planned,Sean GlickenhausAnalystHSBC Securities(USA)Inc+1 212 525 4131 View HS
8、BC Global Research at:http:/Issuer of report:HSBC Securities(USA)IncDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,which forms part of it,6.6%cut)with an additional 33.3%cut to BRL16.7 in 2015.These r
9、ates will apply to termination of traffic between SMPmobile operators Vivo,TIM,Claro and Oi.For smaller non-SMP operators like Nextel,interconnection with SMP operatorswill be settled on a partial bill-and-keep basis.From Jan 2013-Feb 2015,for non-SMP players outbound 3G voice trafficconstituting le
10、ss than 80%of total voice traffic exchanged withindividual SMP operators will not be subject to mobiletermination.(However,SMP operators must still paytermination on outbound traffic to non-SMP operators above20%of the total exchanged).Although this could be asignificant savings for Nextel,the sums
11、involved appearrelatively insignificant for larger players.,TMTBrazil telecoms13 November 2012New regulation in Brazil PGMC introduces new regulations to spur competition in fixedand mobile markets Operators must provide full unbundling and wholesale access tolegacy copper and coaxial networks;new f
12、iber builds will beexempt for nine years Steeper MTR cuts in 2014-15 with a move to partial bill-and-keepfor smaller operators,abc,Key PGMC initiativesBrazilian telecoms regulator Anatel approved thePlano Geral de Metas de Competio(PGMC)on12 November 2012.The new rules come intoeffect immediately an
13、d place obligations onoperators deemed to have significant marketpower(SMP)in certain segments of the industry.Operators may file to lift SMP designations inspecific municipalities within 180 days of beingBrazil:2011-2015 Mobile termination rates(MTR)0.460.440.420.400.380.360.340.320.300.280.260.240
14、.220.200.180.160.140.120.100.080.060.040.020.00,notified of SMP status.SMP operators mustcreate business division to managing unbundledlocal loop(ULL)and wholesale offers by 12 May2013.ULL and wholesale offers are to beapproved by Anatel by 12 May 2013.,2011,2012,2013,2014,2015,2,Source:Anatel,Old,N
15、ew,TMTBrazil telecoms13 November 2012MobileTraffic between mobile operators with significantmarket power(SMP)including Vivo,TIM,Claroand Oi will continue to be settled under thecurrent mobile termination rate(MTR)system(often referred to in Brazil as VU-M)at thefollowing per-minute rates:BRL0.334 in
16、 2013 BRL0.2505 in 2014(representing a 25%reduction year-on-year;steeper than thepreviously proposed cut of 6.6%to BRL31.2)BRL0.167 in 2015.For non-SMP mobile operators,trafficterminating on the networks of SMP mobileoperators will be settled on a partial bill-and-keep(PB&K)basis.Initially,from 1 Ja
17、n 2013 until 23Feb 2015,the system will use an 80:20 ratio.So ifNextels outbound 3G voice traffic to Vivo(oranother SMP-designated operator)is less than80%of the total voice traffic exchanged betweenthe two then Nextel will not pay any terminationfees.For any traffic over 80%Nextel must payterminati
18、on on the excess.However,as the systemis designed to be asymmetric SMP operators mustpay termination fees to Nextel for excess voicetraffic over 20%of the total exchanged betweenthe two.From 24 Feb 2015 until 23 Feb 2016,theratio will be adjusted to 60:40,after which datenon-SMP operators will rever
19、t to the regularsystem of MTRs.It is important to note that thePB&K system will only apply to calls involvingNextels 3G customers(of which there arepresently none with the company only expectedto launch 3G services in Q2 2013).Anatel hasstated its aim to continue reducing MTRs untilthey are reflecti
20、ve of the underlying cost of,Other measures in the PGMC pertaining to themobile industry include rules that SMP operators(again:Vivo,TIM,Claro,Oi)must offer nationalmobile roaming with a reference offer to beapproved by Anatel by 12 May 2013.SMPoperators must also provide wholesale access to aportio
21、n of their passive infrastructure includingtowers,masts,ducts,manholes etc with areference offer to be approved by Anatel by12 May 2013;SMP operators must reserve 10%of such facilities for wholesale purposes.Through steeper cuts to MTRs Anatel aims toreduce the market distortion(as well as barriers
22、tocompetition)created by the current high mobiletermination rates in Brazil.High MTRs make off-net calls expensive and arguably undermine theeconomic benefits of what would otherwise bemore free and fluid communications betweencustomers of different mobile networks.Steeperreductions in the“glide pat
23、h”for MTRs aredesigned to remedy this over time.However,thereis also a competitive aspect too.As on-net calls donot incur MTRs they are considerably cheaperthan off-net calls thus operators with highermarket shares also benefit competitively as ahigher portion of a customers calls will typicallybe o
24、n-net and thus at lower rates.Implementationof PB&K for smaller operators will eliminate thiscompetitive disadvantage and in fact wouldactually allow smaller operators to undercut largerrivals by pricing off-net calls even below the pricefloor effectively set by the termination rate.Additionally mea
25、sures such as mandated nationalroaming and passive infrastructure sharing arealso designed to benefit smaller scale operators atthe expense of larger players like Vivo,TIM,Claro and Oi.,abc,providing the service(Anatel has not yet opinedon what level this might be but the commonconsensus among Europ
26、ean regulators is aroundUSD2c per minute).3,TMTBrazil telecoms13 November 2012Fixed-lineUnder the new PGMC rules fixed-line operatorsdesignated as having SMP must provide unbundledand“bitstream”(i.e.wholesale)access to copperlines with data rates less than or equal to 10Mbps.SMP will be determined o
27、n a municipality-by-municipality basis(see table next page for expectedSMP designations).Both unbundling and wholesalerates will be commercially negotiated but must beset out in published reference offers and pricing mustbe transparent and non-discriminatory.In the case ofdisputes,pricing will deter
28、mined by Anatel based ona“retail minus”methodology(indicated as 20%below the operators lowest retail price forunbundling and 15%below retail for wholesaleoffers).20%of SMP operators physical capacitymust be reserved for wholesale purposes.Coaxialcable networks(with speeds less than or equal to10Mbps
29、)must also be unbundled at commerciallynegotiated rates or at retail minus 15%in the caseof disputes.In order not to dissuade operators from investing,new fiber networks will be exempted fromunbundling and wholesale requirements(a so-calledregulatory“holiday”)for a period of nine years untilNovember
30、 2021.In the case of high capacity transport networks(leased lines,backhaul,long distanceinterconnection):SMP operators must provideaccess to transport networks with data speedsBrazil:PGMC measures,below 34Mbps(equivalent to the E3 standard forleased lines).Operators must reserve up to 20%ofphysical
31、 capacity of leased lines andinterconnection and 50%of backhaul forwholesale access.We expect Oi to be designated as having significantmarket power(SMP)in fixed interconnection inapproximately 5,000 out of c5,500 total Brazilianmunicipalities by far the most among Brazilsfixed-line operators.Note th
32、at Oi also derives themajority of its revenue from fixed line telecoms.Weexpect Telefonica Brasil to be designated SMP inaround 600 municipalities,the second-most after Oi,although Telefonica now derives less than half itstotal revenues from fixed-line activities.Note thatdue to Brazils regional inc
33、umbent structure,Oicould utilize wholesale services from Telefonica inRegion III,while Telefonica could utilize wholesaleservices from Ois in Regions I and II.TIM,Claroand Nextel would be the clearest net beneficiaries ofregulated wholesale fixed-line access(e.g.forbackhaul,transport etc)in our view
34、.Although the introduction of new rules to provideregulated access to network facilities is negative inabsolute terms for Brazils SMP-designated fixed-line operators,we note that the actual terms andconditions are relatively lenient.Whereas regulatorsin Europe have typically set very low ULL rates b
35、yusing a cost-plus pricing approach,Anatel will setboth wholesale and unbundling rates at a muchhigher level using a retail-minus pricing,abc,Fixed access networkup to 10Mbps,Mobiletermination,Nationalroaming,Transport up to34Mbps,Passiveinfrastructure,SMP designation,By municipality case-by-Claro,O
36、i,TIM,Vivo Vivo,Oi,TIM,Clarocase,By municipalitycase-by-case,Oi,Telefonica,Telmex,TIM,CTBC,Minimum resource requirement Guarantee 20%ofphysical capacity,Guarantee 20%ofphysical capacityGuarantee 50%ofbackhaul,Guarantee 10%ofphysical capacity,Pricing methodology,Use lowest retail priceminus 20%for co
37、pper andminus 15%for coax/cable,Use a lower valuethan lowest pricecharged,Use as reference,prices establishedMay 2012,Reference pricedetermined bymarket research,Source:Anatel,HSBC4,TMTBrazil telecoms13 November 2012Brazil:Designation of significant market power(SMP)by number of municipalities in di
38、fferent market segments,abc,Pay-TV,Fixed MobileBroadband interconnection interconnection Local transport,Long-distancetransport,Non-SMP operators,5,470,1,210,1,024,913,Telefonica Brasil,547,645,645,606,311,Telefonica Brasil/Telmex,44,295,Telemar(Oi),3,758,4,919,4,919,3,934,3,247,Telemar/TelmexTelmex
39、,94,5,687111,Total(municipalities),5,564,5,564,5,564,5,564,5,564,5,564,Source:Anatel,HSBC,methodology.Similarly whereas operators in Europewill not receive any regulatory“holiday”fromunbundling or wholesale rules for new fiberbroadband networks,operators in Brazil that chooseto invest will receive a
40、 nine-year exemption fromunbundling or wholesaling requirements.Change in estimatesThe following are summaries of our changes inestimates for Nextel,Telefonica Brasil and TIM.Full financials for each may be found on pages8-10 of this report.NII Holdings(aka Nextel)We are adjusting our estimates for
41、Nextelfollowing Q3 results and to account for lowerMTRs in Brazil as well as implementation ofpartial bill and keep for Nextel 3G traffic(expected 3G launch Q2 2013).However,despitethese benefits,we maintain our target price ofUSD5 as the company reported significantlyNextel:Change in estimates,high
42、er net debt of USD2,955m as of Q3 2012(upfrom USD2,657m in Q2 2012)which negativelyimpacts our valuation.Telefonica BrasilWe are adjusting our estimates for TelefonicaBrasil following Q3 results and to account forreductions in the mobile termination rate(MTR)glide path for 2014-2016.We had previousl
43、yfactored in a 6.6%cut for 2014 with 10%reductions in years thereafter.We are nowincorporating 25%and 33.3%cuts for 2014 and2015 respectively,and then assuming a 20%annual reduction thereafter,to reach a rate ofBRL0.04 by 2021.Lower MTRs drive c4%lowerrevenue estimates for 2015 and 2016.Our 2014reve
44、nue estimate remains unchanged,however,offset by higher expected handset and fixed-linerevenues.Our 2012-2016e net income estimatesare 7.6-14.3%lower as we are removing fiscalsynergies related to Telesps 2011 acquisition ofVivo,although we continue to include a cash flow,USDm except EPSRevenueNewOld
45、%Change,2012e6,1136,0630.8%,2013e6,2616,1581.7%,2014e6,3306,2930.6%,2015e6,4376,492-0.9%,2016e6,5646,660-1.4%,benefit for Telefonica Brasil,and as such there isno resulting impact on valuation.,EBITDA,NewOld%Change,934938-0.5%,1,2901,2671.8%,1,4501,3289.2%,1,5601,41510.2%,1,5701,5034.4%,Net income,N
46、ewOld%Change,-169-12535.5%,68122-44.5%,847511.8%,15412225.9%,162175-7.8%,EPS,NewOld%Change,-0.98-0.7335.5%,0.390.71-44.6%,0.490.4411.7%,0.890.7125.8%,0.941.02-7.8%,Source:HSBCe5,TMTBrazil telecoms13 November 2012Telefonica Brasil:change in estimates,Valuation and risks,abc,BRLm except EPS,2012e,2013
47、e,2014e,2015e,2016e,Revenue,NII Holdings(aka Nextel),NewOldChangeEBITDANewOldChangeNet incomeNewOldChangeEPSNewOldChange,33,92433,7080.6%11,83011,894-0.5%4,0614,397-7.6%3.633.93-7.7%,34,84334,7190.4%12,40912,428-0.2%4,6185,063-8.8%4.214.61-8.8%,35,06235,460-1.1%12,83612,949-0.9%4,8865,483-10.9%4.455
48、.00-10.9%,34,79936,147-3.7%12,91313,216-2.3%4,8235,625-14.3%4.395.13-14.3%,35,52736,835-3.6%13,23913,485-1.8%5,1065,849-12.7%4.655.33-12.7%,We rate Nextel shares(NIHD.O)Underweight(V)with a 12-month target price of USD5.We valueNIHD using a DCF approach employing a 12.0%WACC,comprised of a 7.0%cost
49、of debt and a13.8%cost of equity(3.0%risk-free rate,4.0%market risk premium for the US,3.0%weightedaverage country risk premium,and 1.4 beta).Underour research model,for stocks with a volatilityindicator,the Neutral band is 10ppts above and,Source:HSBCeTIMWe are adjusting our estimates for TIM follo
50、wingQ3 2012 results and to account for lower MTRs.We originally factored in a 6.6%cut in 2014 and10%each year thereafter.We are now includingthe 25%and 33.3%MTR cuts for 2014 and 2015,then assuming a glide path of 20%annual cutsthereafter to reach a rate of BRL0.04 in 2021.Thisdrives reductions of 6
