Issue 5 (Q4 2008-Q1, 2009)

Project Contributors:

May 2009

EXECUTIVE SUMMARY

Altimo is proud to release the Fifth edition of the Altimo Index computed on the basis of the mobile industry data for Q4 2008 – Q1 2009.

The Altimo Index was launched in March 2007 and is a product of joint efforts by professors from three leading academic institutions: Cambridge University, London Business School, and New Economic School (Moscow). Its objective is to produce a regular, practical review of the attractiveness to investors of the world’s national mobile telecoms markets.

The Index is updated every six months, which allows us to build trends of development and to make reliable forecasts for the future of mobile industry in 81 markets world-wide.

INTRODUCTION

The long term outlook for the global mobile telecoms industry has not been seriously affected by the global crisis. Although it has experienced lower ARPU and falling profit margins, together with lower penetration growth and lower levels of capital expenditure, the industry has shown strong resilience. Its strong, long term, macroeconomic fundamentals make it still one of the most attractive investment propositions at a time of global economic turmoil.

Investor’s initial response to the downturn was to see increasing attractions in the developed telecoms markets but now they are once again seeing the appeal of emerging markets, with their stronger opportunities for growth and profitability when compared to mature markets.

ALTIMO INDEX Q4 2008 – Q1 2009 KEY RESULTS:

The telecoms industry has not been entirely immune from the impact of the global economic crisis. But, in recent months, a number of factors mean the industry is already seeing the re-emergence of the strongest investor attractions. This has been rapid and is reflected in the capitalisation growth in Q1 2009 of the key players in a number of emerging markets such as CIS.

This change has been driven by healthy macroeconomic fundamentals, including good levels of infrastructure investment, the implementation of new technologies in the past years and moderate elasticity in price of the core telecommunication services. Additionally the industry has shown itself to be very flexible under the pressure of external economic factors and its ability to react quickly to these has ensured its rapid recovery. Valuations of telecoms companies have fallen as a result of the global recession but expectations of a loosening regulatory environment, with the opportunities that offer greater flexibility and efficiency, add to the longer term attractions of the leading markets in the sector in the next two years.

Investors’ first, almost psychological, reaction to the global recession was to shift attention to the less risky, but also less profitable markets of developed economies, notwithstanding the high levels of competition and penetration characteristic of those markets. But the move has been a temporary one, and attention is once again focused on the telecom markets of emerging economies. In the light of the global recession their regular risks are treated as less important when compared with the opportunities they offer.

ASIA

• Despite the crisis, major Asian markets including China and India stay among the leaders with Vietnam, Indonesia and Philippines remaining in the Top five of the Altimo Index.
   
• This shows that investors prefer the relatively high risks of emerging markets, which have low penetration levels combined with recent infrastructure investment, compared to mature, slow-growth developed markets.
   
• The Asian telecom markets will remain attractive for at least the next three years and will grow strongly despite global economic turmoil. Although penetration growth dropped from 5.88% to 3.63% quarter on quarter in South East Asia, it remains a favourable place for investment. Continued growth in Asia will be supported by secondary, non-voice services, as it has been in the developed markets.
   

CIS

• The CIS region shows the largest increase in MPI due to strong performance of Russia and especially Uzbekistan, which saw continued, impressive penetration growth and continued high profit margins.
   
• CIS reaffirms its position among the most attractive regions.
   

NORTH AMERICA, EUROPE

• Mature mobile markets in North America and Western Europe offer bleak prospects during the crisis for investors. The competition remains high and profit margins are as tight as ever. According to the index, in total in 2008, there was a global decline of 44.3 million in the number of cellular connections.
   
• Most of the fall was in Europe, which was attributed to strong competitive pressure in the mature markets, and the effect of new regulations, rather than the economic slowdown. By the end of 2008, the number of cellular connections in the developing markets of Eastern Europe, at 445 million, was catching up with the figure with the developed markets of Western Europe, where connections reached 503 million.
   
• Again this highlights the maturity of the market in Western Europe, and the poor outlook for investing in the region. Italy continues to be the strongest growth market in Europe and North America is almost as weak as Europe.
   

MIDDLE EAST

• Strong performance from Iraq resulting from penetration development.
   
• Selected countries may be attractive, although Turkey, the largest economy in the region, is highly integrated to global economic trends.
   

LATIN AMERICA

• Latin America has also shown resilience to the crisis, with its major markets continuing to attract new clients and show robust profit margins.
   
• All the major telecoms markets in the region show significant Y2Y growth.
   

AFRICA

• Africa’s MPI figure suggest that the region’s mobile industry hasn’t been greatly affected by the global crisis
   
• Tunisia is the leader with rising capital expenditure and profitability.
   

Graph 1. ALTIMO INDEX Q4 2008 – Q1 2009 by country

Graph 2. ALTIMO INDEX Q4 2008 – Q1 2009 trends by region

TECHNICAL DESCRIPTION OF THE ALTIMO INDEX

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 follows:

           (1)

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:

¹ Estimation is done 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.

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. 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.

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