KDDi (9433) Positive Story Goes On (and On)
This report reflects on our views post the FY15 results, which had highlighted a number of concerns facing the Japanese wireless industry. These had led to our decision to take down the weighting in the sector to neutral, and to switch our preferred play, KDDi, for SoftBank (9984).
While technically our strategy turned out to be the right thing to do, the subsequent strong earnings performance in the Q1, plus the government’s crackdown on subsidies being less of an issue, in the event, have given us reasons for a rethink. In addition, the Pokémon GO effect, as well as the potential sales from a FeliCa-enabled iPhone 7 generating more data consumption, adds weight to our decision to now move our weighting in the sector to a more positive stance.
For KDDi, in particular, its late entry into both the wallet phone business and the iPhone business could now put it firmly in the game with SoftBank. We think there may be an opportunity for KDDi from account holders taking up an iPhone + iPad combination to keep them entertained on their long commute – carrier aggregation being good news for data consumption. Longer term, we see KDDi’s new value-added initiatives protecting earnings, should there be a slowdown in data in FY17.
Key Points
- Winning more mobile customers; and not only are customers getting more mobile devices, they are downloading more data.
- We eagerly await the response to the FeliCa-enabled iPhone 7; given the inclusion of Apple Pay, it should be greater than previous models.
- A wild card is the government’s eagerness to develop the MVNO market: We think that it will want to see the MVNO market share up to around 15% before another assault on pricing occurs.
- Data usage is key to earnings growth in FY16 and beyond.
- It is important that KDDi’s varied “value added” initiatives start to come good. History with the ramp-up of au Smart Value and au Smart Pass suggests we can be confident.
KDDI is a telecommunications company. Along with its affiliates, Co. operates in four principal business segments: personal, value, business, and global. Co. is engaged in the sale of mobile handset; and the provision of mobile telecommunication services under "au" brand name, Internet contents, settlement service, and electronic money service for individual customers. Co. offers information and communication technology ("ICT") solution services and data center services for domestic corporate customers, overseas companies and individual customers. Co. is also involved in the call center business, the research and technological development, and the telecommunication facilities maintenance.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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