Issue 7 (Q4 2009—Q1 2010)

Project Contributors:

June 22 2010

INTRODUCTION

• Altimo is pleased to release the Seventh edition of the Altimo Index, prepared on the basis of mobile industry data for Q4 2009 — Q1 2010.
   
• The Altimo Index was launched in March 2007 and was developed by contributing professors from three leading academic institutions: Cambridge University, London Business School, and the New Economic School (Moscow). Its objective is to produce a regular, practical review of the international mobile telecoms market’s attractiveness to investors.
   
• The Index now covers 92 countries. It is updated every six months and combines relevant data from the Wireless Intelligence database, companies’ reports and websites, proprietary Altimo market sources and from the contributing academic institutions.
   

ALTIMO INDEX Q4 2009 — Q1 2010 KEY RESULTS:

Investors are no longer interested in mobile penetration growth

• The Altimo Index shows that overall penetration has continued to develop strongly, especially in Asia. The developing economies will reach the levels of penetration growth seen in mature economies in the next two to three years, leveling off at around 2–3% growth per year. An exception is Africa which will need an additional two years to achieve this level.
   
• As a result, while in the past it was penetration levels which primarily drove the value of telecom assets and created opportunities for investment, this is no longer the case.
   
• Investor interest will now be focused on developing the quality of earnings and this is likely to create a new wave of investor interest in the next 12 to 18 months.
   
• This will support the development of new technologies and non-voice 3G/4G services which will be the major determinant of the global telecoms investment climate.
   

From recession to expansion

• The global recession has reduced consumer activity and affected mobile spending all over the world. At the same time it has also made investors more cautious and limited the resources deployed for further investment in industry development.
   
• Emerging markets businesses will soon become attractive again with the development and roll out of new technologies such as LTE networks which will enable mobile broadband. But operators will need to move fast to make use of these opportunities.
   
• After almost two years of decline, ARPU has a positive growth trend with increases of almost 4.5% in Western Europe, 7.9% in Africa and 3.4% in CIS and Eastern Europe. This trend will inevitably lead to global CAPEX growth, which will reach 15–20% in 2011. Both trends will renew the attractions of investment in the telecoms industry.
   

VAS/mobile broadband leadership

• ARPU growth was significantly impacted by growth in data services.
   
• In developing markets VAS accounts for growth in ARPU of 5–7% per half-year, similar to the levels seen in Western markets around three years ago. If developing countries’ experience mirrors that seen in the West, we can expect to see that rise to the 11–15% VAS growth per half year.
   
• In most developed markets mobile data traffic is almost equal to the voice traffic. In the US data traffic exceeded voice traffic for the first time last year.
   
• We estimate broadband revenues will more than double annually for the next three years. We also expect that 4G global implementation will be followed by price competition to secure the leading mobile broadband position.
   

LONG TERM TRENDS

Since the index was launched in 2007 it has tracked a number of interesting long term developments:

• Chile has been a growth leader over the last three years, with its index rising from 0.1 to 0.56. Despite it being the most mature market in Latin America, with close to 100% mobile penetration, its performance in the Altimo Index is driven by market transparent regulation, a healthy financial system and exceptional technological development of the Chilean mobile market. The country is the technology pioneer in Latin American markets.
   
• Vietnam and Kazakhstan are no longer in the top 10. Vietnam has shown the most significant decline, from 1.0 to 0.66, as the market reaches saturation, while further value added development is constrained by comparatively low consumer spending.
   
• Russia and Mexico joined the index top 10 in 2008. Russia continues to see a positive trend based on strong consumer spending and intensive technological developments rising in the index from 0.85 in to 0.91 this year. Mexican growth has been supported by extensive development in rural areas that is now over. The combination of saturation and slow economic recovery has resulted in an index ranking decline (from 0.85 to 0.75 points.).
   

TRENDS BY REGIONS AND COUNTRIES

Asia
Six out of the top ten countries in the Altimo Index are from Asia: China, Indonesia, Philippines, Sri Lanka, Bangladesh and India. Strong profit margins and continuing growth of the subscriber base, together with substantial CAPEX into building and upgrading networks, make them relatively attractive for investors in the long-term. In recent years intensive investments in mobile telecom infrastructure in countries such as China and India, and prospective development of the markets in Indonesia and the Philippines markets via international M&A still support investors’ interests.

China: the most attractive from amongst both developed and emerging markets
A combination of healthy macroeconomic factors and strong domestic demand makes China the most attractive investment proposition (1.1 points in Altimo Index). The subscriber base continues to expand due to attracting a young generation and population of rural areas where landline services are weak. Large CAPEX investment by operators into 3G and data services will return stable profit margins.

The Asian region continues to be attractive but this is for reasons of substantial growth of the ARPU and EBITDA margins, which offer the promise of high returns on invested capital, rather than the historic attractions of growth in penetration levels.

CIS
Russia and Uzbekistan remain in the top ten
Russia and Uzbekistan have shown the greatest resistance to the impact of the financial crisis and remain in the top ten countries in the index. With high current levels of penetration, the Russian mobile market now faces the challenge of developing and exploiting VAS and data services in the same way that these have been recently developed in North America and Europe. The demand for mobile services remains strong due to high consumer spending activity, which has helped mobile operators sustain robust profit margins and to keep investing in the new mobile services. Russian consumer spending was not seriously affected by the crisis as the economy remained healthy, supported by high levels of gas exports. Beyond Russia, however, the CIS was affected by the crisis and Ukraine and Kazakhstan fell down the index due to the reduction in consumer spending and a slowdown in penetration growth.

Africa
African mobile markets — Nigeria, Algeria, Angola, and Morocco — are moving to index leading positions.
With some of the fastest growing economies in Africa, the economic crisis hasn’t influenced their telecom sectors as much as in other regions and this is reflected in steadily growing ARPU (7.9% per year). The combination of the opportunity to develop penetration levels and population growth provides an attractive market which will continue in the medium term. Together with the intensive growth in penetration (15% per year), APRU is the critically important factor of African investment attractiveness of the last year. In general African markets are of sustainable attractiveness for strategic investments.

North America, Europe
Germany is the most attractive European market, scoring a similar level to the middle ranking Asian markets.
In general, Western countries with saturated penetration did not change their position in the Altimo index, as two opposing trends kept telecom income relatively flat for the last two years. While decreasing consumer spending negatively influenced voice-services ARPU, data traffic services grew rapidly and increased its share of operators’ profits. The combination of improving earnings quality with established barriers to entry and falling valuations make European and American companies attractive targets for investors as part of the post-crisis global asset consolidation trend.

Middle East
While Iran keeps its place in the top ten, damped growth in the subscriber base, slowdown of penetration growth and weak competition conditions in the economy, mean that this market has been losing its attractions over the last three years. Markets with large populations such as Egypt, Oman, and Sudan continue to increase penetration and invest heavily and so continue to perform well in the index.

Latin America
Mexico remains in the top ten due to sustaining the highest profit margin in the region, even despite weak penetration growth. With many markets close to saturation, the investment attractions are moderate except for countries that continue to attract new mobile customers and earn stable profits, such as Peru, Ecuador, and Chile.

Graph 1: Altimo Index 7 by country

Graph 2. Altimo Index Leaders 2007 — 2010

Graph 3. Altimo Index 7, 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. ARPC growth 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 2009, this regression is as follows:

      (1)

where e_i is the regression residual, which by construction has zero expectation and is orthogonal to log GDP. ARPC growth 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:

INDEX_i = 0.3*ARPCgrowth_i + 0.3*EBITDA_mi + 0.1*PENgrowth_i + 0.1*CAPEX/REV_i + 0.1*POPULATION_i + 0.1*GDP_i      (2)

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

GDP_i = [log(GDP_i) – mean(log(GDP))] / std(log(GDP))      (3)

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 INDEX_i = 0.5*(1 + INDEX_i)      (4)

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 2002.