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Morningstar | Feedback from NTT DoCoMo Presentation at Morningstar Conference

At Morningstar's Management Behind the Moat Conference, NTT DoCoMo provided further details on the company’s medium-term plan announced at the recent second-quarter fiscal 2018 result. It also highlighted its planned 5G network deployment and some of the more interesting applications it is working on to run over the network. We make no changes to our fair value estimate of JPY 2,500 and USD 22 per ADS. Our narrow moat rating is retained given forecast returns remain above WACC. NTT DoCoMo’s current share price is now in line with our fair value after briefly falling below immediately post the result. We are also now forecasting flat JPY 110 per share dividends over the next five years, instead of our previous forecast of a steady rise in dividend given the forecast earnings decline over the next two years.

At its second-quarter result, concern was on its plans to return JPY 400 billion, or close to 10% of its fiscal 2017 revenue, to retail customers. The timing is of interest, in our view, as the government has previously commented on high mobile prices and little was done by the operators. DoCoMo noted the strategy was purely commercial with no political pressure and partially driven by customer feedback. More importantly, this strategic pre-emptive strike against Rakuten as the latter enters the market as a fourth mobile operator. Plans of the JPY 400 billion customer return is still under consideration. With DoCoMo previously working with Rakuten under a MVNO agreement before the latter’s recent partnership with KDDI, DoCoMo has some understanding of Rakuten’s customer base. The company will consider strategies targeting their customer base. DoCoMo is looking to generate JPY 120 billion in revenue on the enterprise side to offset the decline in retail revenue. On the expense side, the company is likely to reduce handset subsidies.

On 5G, DoCoMo does not believe the timeline for the network rollout is ambitious and is in line with the timeline for previous technology in 3G and 4G. The precommercialisation of 5G during the Rugby World Cup in 2019 will provide a test run and the commercialisation will proceed in 2020 in major cities, Tokyo and Osaka. Capital expenditure of JPY 1 trillion will be evenly spread across the five-year rollout period. Spectrum availability is not a concern and DoCoMo will participate in the upcoming spectrum auction. Despite a consolidation in equipment manufacturers and handset makers, the company does not expect its bargaining power to erode and cited its long history with partnering with multiple vendors. The company is open to working with all equipment manufacturers in the 5G rollout, including Chinese equipment manufacturers. On the handset side, Huawei handsets are available on DoCoMo’s network.

The monetisation of the 5G network includes the "Internet of Things." The strategy will focus on enterprise solutions, which DoCoMo believes are under served. One example cited was an experiment with no-moat-rated Komatsu, where heavy equipment was successfully controlled remotely over a long distance. Most technology is currently developed in house, with DoCoMo citing its engineering expertise. The company is also partnering with over 1,500 companies and is open on direct investments, which provides them with a competitive advantage, including niche content. This is the same strategy employed by telecoms around the region. The merit of investing directly or a partnership varies on a case-by-case basis and DoCoMo considers all return metrics.

With the 5G rollout costing JPY 1 trillion over the next five years and JPY 400 billion being knocked off the top line and returned to customers, DoCoMo reassured the focus is on maintaining a 60% payout ratio. The strong free cash flow generation and strength of its balance sheet will also allow the company to take on debt and increase gearing. At the result, management indicated that there would not be any decrease in dividends, despite the short-term forecast profit decline so we have assumed a flat JPY 110 per share dividend over the next five years.

The company will maintain its small stakes in overseas telecom operators and divestment of its stakes are unlikely at this stage.