Altimo Mobile Development Index

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Issue 2 (H1, 2007)

Altimo is pleased to publish the second edition of the Altimo Index which monitors the relative attractiveness of mobile phone industry markets from an investor’s point of view. The second edition is based on industry developments from Q3 2006 to Q2 2007.

The first edition combined the work of academics at the three leading institutions in the world, Cambridge University, London Business School, and New Economic School (Moscow) and was published in March 2007. The objective was to produce a useable and practical review of the respective investment attractions of the global telecom markets. The index will be updated every six months to maintain monitoring of developing industry trends and to seek reliable forecasts for the future of the mobile industry in over 70 national markets globally.

Altimo Index 2002- H1 2007 trends by region

The first edition of the Altimo Index, which was presented to investment analysts and investors in London in April 2007, showed that:

1. The top ten leading investment targets for mobile telephony are in the rapidly growing markets in Asia and the former Soviet Union, reflecting relatively low mobile penetration levels. Despite a relatively low level of GDP per capita, these markets enjoyed a high rating due to unusually low Average Revenue Per Customer (ARPC) and, except for India, high EBITDA margins. The emerging markets of Southern, Eastern and South-Eastern Asia, and CIS republics including Russia, constituted the top ten most attractive markets.

2. In comparison, the developed markets of Western Europe (as well as some of their East European neighbours) showed little potential for further investment. Western Europe has reached saturation, with stable revenue levels that are not expected to rise, and falling capital expenditure. Moreover, their size makes it difficult for Western European markets to compete with their Asian rivals, as investors believe that one large investment project is economically more attractive than numerous smaller undertakings. In terms of the first edition of the index the least attractive mobile industries included African countries such as Nigeria, Tanzania, Congo, and Mozambique, which are characterised by low national income and low operator profitability.

3. While South Asia, South Easter Asia and Western Europe constituted the two extremes, the area between them was occupied by a number of markets that are potentially interesting to analyse. Hong Kong, perhaps surprisingly, was among the favourites in the first index. Among the developed economies, Canada and the United States were found to have the most attractive mobile industry due mostly to a relatively low penetration rate and, as a result, low ARPC. Eastern Europe’s relative lack of attractiveness reflected its limited growth potential, which is also reflected in low levels of capital expenditure (CAPEX). Latin America showed a mixed picture, with reasonable, but far from impressive, profitability and limited potential for revenue growth.

The second edition of the index covers economic data from both companies and markets as of 1 October, 2007, thus covering companies’ results in the first half of 2007 and the latest national product updates made in September.

Again we compare the Altimo Index across the countries and regions, describe a medium-term outlook for the world telecoms industry, and discuss recent trends by region along with the key drivers for future growth.

The Altimo Index reflects key factors that determine the attractiveness of mobile markets in different countries from the perspective of investors (see tables and charts below). A review of the historic data in relation to the results of the 2007 Altimo Index identifies the following medium-term trends for the world telecoms industry:

(1) Average Revenue Per Use (ARPU) has decreased by 2% per quarter and this downward trend is likely to continue in 2008-2009. Technological progress and growing global competition have made mobile services cheaper, such that the greater part of value added services have been introduced in the largest emerging markets. An increase in ARPU will be sparked by new products associated with the G3-G4 family and the growth of mobile internet services. However, ARPU dynamics seem to have only a marginal impact on margins as the aggregate EBITDA margin has remained flat over last 4-5 years at around 35%.

(2) Although every country now has wireless communication, the world’s aggregate penetration rate is still low (currently about 45%). This means that the world mobile industry has good potential and will grow in value between 2008 and 2011. Since penetration is not uniform around the globe, some large markets have not yet fully realised their potential. In the next five years we expect massive growth in major markets such as China (~36%), India (~16%) and Indonesia (~33%).

The results of the latest Altimo Index sees the investment attractiveness of all markets divided into four main clusters based on the current level of market development and growth potential rated from poor to excellent:

1. African markets have poor economic prospects and do not have a favourable short-term outlook for mobile investors. The region has been disappointing for investors over the past few years and, Sub-Saharan Africa continues to show an unattractive investment environment, due to poor economic growth prospects and political instability. Income levels for most of the population is low and the political risk of running businesses remains high. However, since penetration is low, African countries will make a lot of progress in the future, but most likely not before 2012 when macroeconomic factors are expected to drive an “African boom” Nonetheless, even now investors can find good bargains in selected countries such as Algeria, Angola, and Tunisia.

Key points

• Poor short and mid-term outlook

• Investment return starting from 2012

• Opportunistic deals only in 2008-2011

2. Latin American markets are growing slowly but steadily. Even though the markets are reasonably mature, profit margins are substantially below industry average possibly reflecting sputtering economic performance and high industry competition in these countries. It is not clear when these markets will show substantial growth, but it appears likely ARPU levels will increase slowly from 2008.

Key points

• Reasonably poor short and mid-term outlook

• Strong industry competition

• Probable ARPU growth starting 2008

3. North America, Western Europe, most of Eastern Europe, and some developed countries in Asia (e.g., Japan, South Korea) have saturated mobile markets with high penetration levels (over 90%), stable earnings streams and a modest growth outlook. These markets are unlikely to show substantial growth in the future, unless new technologies and products appear and are taken up meaningfully. In North America, there is marginal growth potential in the US due to relatively low penetration levels. However, Canada’s Altimo Index rating has fallen since 2006 due to declining profitability. Saturated Western European markets do not appeal to investors other than as cash cows. The exception appears to be Italy, which showed high customer growth last year and a favourable Index rating. Key points

• Modest growth potential

• Only significant impact likely from new technologies and products

• Italy is the only country with recent high growth

4. The CIS region is becoming somewhat less attractive for investors as the largest markets in Russia and Ukraine are approaching saturation levels Nonetheless, these markets are likely to maintain reasonable profit margins in 2008-2009 due to the growth of ARPU. The new dynamic markets in Central Asia such as rapidly-expanding Uzbekistan and Kazakhstan offer high profit margins and are expected to benefit from increasing spending on mobile services.

Key points

• Approaching saturation

• High profit margins in largest Central Asian markets.

5. The major markets of Asia have a highly dynamic mobile industry offering outstanding investment opportunities. Recent economic growth has spurred a mobile spending boom and a rise in the customer base, despite income inequality remaining an issue.

Southern Asia and Eastern Asia are among leading regions according to the Altimo Index, attracting investors with high growth levels in per capita GDP and significant capital expenditures. Bangladesh, China, and India, which led the pack half a year ago, remain in the top ten. India has shown a significant decline in indicators, following a sharp rise in competition and market penetration. ARPU remains extremely low, and likely to remain between US$ 4-6 over the next two years.

In 2007, countries from South East Asia offer the most attractive opportunities for investment in the mobile industry. The Philippines, Indonesia and Vietnam have risen to occupy the top three spots in the Altimo Index ranking due to high expected growth in mobile spending and rising penetration. South East Asian countries with large populations and growing economies are likely to keep the highest growth rates in mobile revenues and offer the most attractive profit margins between 2008 and 2010.

Key points

• Growing economies

• Increasing penetration

• Growth in mobile spending

• The most attractive investment opportunities in 2008 to 2010

Index Methodology

The index aggregates six country-specific factors (see Table 1) that determine the future profitability of a mobile company.

Table 1. Determinants of the Altimo Index

The average revenue per capita (ARPC) is measured as the total spending on mobile communication divided by the country’s population. Alternatively, it can be computed as the product of ARPU and penetration rate. ARPCgrowth is derived from the cross-country regression of log ARPC on log GDP, which is re-estimated every time using the latest annual data. For example, in 2006, this regression is as follows¹:

¹Estimation is derived using ordinary least squares (OLS) method. If t-statistics (below the coefficients) are in absolute value above 1.96, this implies that the respective coefficient is significant at 5% level. R2 is the percentage of the dependent variable’s variance explained by the independent variables.

Where ei is the regression residual, which by construction has zero expectation and is orthogonal to log GDP. ARPCgrowth is the difference between the predicted value of log ARPC and its actual value (i.e., the negative of the residual in (1)).

The six variables that define a market’s attractiveness are then combined into a single index using user-defined weights. The aggregate index is computed as a simple linear combination of the standardized variables taken in logs (marked by underlining) using the weights described in the last column of Table 1:

Indexi = 0.3*ARPCgrowthi + 0.3*EBITDAmi + 0.1*PENgrowthi +        

+0.1*CAPEX/REVi + 0.1*POPULATIONi + 0.1*GDPi       (3)

The variables (in logs) are standardized by substracting the sample average and dividing by the sample standard deviation, e.g.:

GDPi = [log(GDPi) – mean(log(GDP))] / std(log(GDP))    (4)

By construction, the standardized variables are on average zero and have unit standard deviation. This implies that each standardized variable and the aggregate index may be negative. Therefore, to make sure that the mobile development index takes only positive values, we compute Altimo Index as a linear function of Index:

Altimo Indexi = 0.5*(1 + Indexi)    (5)

The quarterly data on mobile companies are provided by Wireless Intelligence (https://www.wirelessintelligence.com/) and mobile companies’ websites. The annual measures are calculated as the average over the last four quarters with available data. The country-specific mobile industry measures such as ARPC and EBITDA margin are computed as weighted averages of the corresponding company data, with weights proportional to the company’s number of SIM-cards. The annual data on the country’s GDP per capita and population are taken from the World Bank (http://www.worldbank.org/).

The index is computed for countries that have no missing data on the five factors. If the country has no data on CAPEX/REV in the current year, we substitute the last-year value. In addition, we winsorized the most extreme values of CAPEX/REV and EBITDAm. If the observed CAPEX/REV was below 0 (above 0.8), it was replaced with 0 (0.8). Similarly, if the observed EBITDAm was negative, it was replaced with 0. The index is calculated for eleven geographical regions: Africa, CIS, Eastern Europe, Eastern Asia, Latin America, Mideast, North America, Oceania, South Asia, South-Eastern Asia, and Western Europe (see Table 2 for the composition of the regions). The regional index is computed as a weighted average of the respective country indices, with weights proportional to the number of SIM-cards in a given country.

Table 2. Composition of the regions

The annual values of the index are available for individual countries as well as regions from 2004

Altimo Index H1 2007 Normalised values by country

Altimo Index H1 2007 by country