Issue 6 (Q1 2009-Q3 2009)

Project Contributors:

London Business School
Cambridge University
New Economic School (Moscow)

November 26 2009

INTRODUCTION

• Altimo is pleased to release the Sixth edition of the Altimo Index computed on the basis of the mobile industry data for Q1 2009 — Q3 2009.
   
• 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 markets attractiveness to investors.
   
• The Index is updated every six months, and incorporates relevant data from Wireless Intelligence, companies’ reports and websites, proprietary Altimo market sources, and the contributing academic institutions.
   

ALTIMO INDEX Q1 2009 — Q3 2009 KEY RESULTS:

The Mobile Development Index has expanded its coverage by 13 countries to 94.

• The Sixth Altimo Index shows sensational growth in Africa, which is fast becoming a leading investment target for telecoms investors. Having traditionally been one of Index outsiders, Africa has emerged in late 2009 as the region with the most investment potential, despite the effects of the economic crisis. We predict that overall in Africa that mobile penetration rate will exceed 50% by 2012.
   
• Markets in South East Asian (SEA) and South Asian (SA), at same time, show signs of saturation. Still being the leaders of the Index ranking countries like Indonesia, China, Vietnam and others are very close to the investment attractiveness peak. In Vietnam, the nominal penetration rate is close to 100%. We predict the investors’ interest in most of SEA and SE markets will start to decline in 2011.
   
• The CIS markets are demonstrating fast recovery from the economic crisis with increasing profit margins compared to 2008. Telecoms are becoming one of the key engines for growth, despite other parts of the economy being in decline. The operators have improved the quality of their subscriber base, which has resulted in steady growth in Minutes of Use (MOU) and Average Revenue Per User (ARPU). The CIS region remains an attractive target for mobile investments in the medium-term.
   
• The MOU figure in 2009 will be higher than the 2008 level in the majority of markets, especially in Africa, Middle East, and Latin America, which could result in renewed ARPU growth provided that these economies emerge from recession soon.
   
• The financial crisis precipitated a wave of consolidation in the international telecommunications markets. A number of major players, including Vodafone, Orange, T-Mobile, Altimo, Telenor, TeliaSonera, Hutchison Whampoa, Qatar Telecom, Temasek and others announced merger deals. Strong players operating globally will be able to upgrade their networks swiftly to 4G, essentially broadening the possibilities for mobile telecommunications. The consolidation will give additional impetus to faster increase of mobile telecom penetration level worldwide, leaving the traditional landline industry heading for oblivion at a faster rate than anyone could predict.
   

TRENDS BY REGIONS

ASIA

As predicted, Asian markets demonstrate impressive growth in penetration, ARPU and MOU, despite the global economic turmoil. Consequently, the number of prospective mobile markets in Asia is approaching saturation; in the previous year, penetration levels in the leading Asian Mobile Development Index countries grew by an average of 20–30% and they are still soaring.

We highlight Indonesia, Vietnam and the Philippines where, in Q3 2009, the technical penetration level peaked at 65% in Indonesia, and nearly 100% in Vietnam and the Philippines.

We are of the opinion that these countries may lose their position in the Index rating in the mid-term because of the high level of penetration.

In comparison, Bangladesh, with its huge population, relatively well-developed mobile infrastructure, and a relatively lower penetration seems to be one of most attractive Asian mobile markets.

The Asian region will keep its high upside potential in the mid-term as the substantial growth of the ARPU and EBITDA margins promise high return on invested capital.

CIS

The CIS region shows a stable performance as Kazakhstan and Uzbekistan continue to lead with penetration growth and robust margins. Further to this, low penetration levels and growing ARPU margins in Moldova, Kyrgyzstan, Tajikistan and Turkmenistan make investments in these countries potentially attractive.

Russia and Ukraine marginally improved their position in the Index ranking as they manage to sustain EBITDA margin at a higher level than many other markets. However, the saturation in these markets indicates high costs of entry for new investors and potentially disappointing profits in the near term.

AFRICA

Africa is becoming a leader in client base growth and we predict that the penetration rate will catch up with Asia in 4 to 5 years from now.

Africa offers investors the most potential annual growth in the value of their investments and this facet has attracted a growing number of investors from all over the world.

Local governments finally realized the potential of mobile telecoms development and attracted foreign investors for rolling out networks. At this stage, even quite poor countries like Ghana, Malawi, Congo show impressive growth in output and private spending thus increasing penetration, revenues and profit margins of mobile operators.

The most successful economies of the region demonstrate a sustained growth in their Index ratings in all three quarters of 2009. We highlight Tanzania, Burkina-Faso, Sudan, Zambia and Kenya as countries with significant ranking improvements.

NORTH AMERICA, EUROPE

The rolling out of 4G networks is substantially improving the investment perspectives of the Western markets including East Europe.

However, the effects of the emergence of 4G have not been enough to counteract the impact of the financial crisis on North America and Western European where in the mature mobile markets ARPU has declined and profit margins have become even slimmer.

MIDDLE EAST

The flow of oil revenues in most Middle-eastern countries has been conducive to swift development of mobile networks, resulting in more than 100% penetration level in most of the region.

Even in Middle-eastern countries such as Iran and Iraq where telecoms development has been slower, penetration is likely to catch up with their more advanced neighbors as soon as 2011.

Impoverished Yemen and conflict-riven Lebanon are the Index outsiders because of slow growth trends in the period from 2007 to 2009.

On the contrary, Syria and Jordan have demonstrated impressive growth in the same period in terms of penetration, which has remained at an attractive level for prospective investors.

LATIN AMERICA

Most Latin American countries have been resistant to the crisis and are keeping ARPU relatively high. The investment perspective remains moderate in the region. The leaders, Mexico, Brazil, Argentina and Chile are already saturated with little room for growth potential in the margins.
In contrast, we identify Ecuador and Peru as markets with highest potential for return-on-invested-capital (ROIC) in Latin America.

Graph 1: Altimo Index Q1 2009 — Q3 2009 by country

Graph 2. Altimo Index Q1 2009 — Q3 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

Variable	Description	Index weight
ARPCgrowth	Difference between the predicted and actual log ARPC (average mobile spending per capita)	0.3
EBITDAm	Earnings before interest, taxes, depreciation and amortization relative to revenue	0.3
PENgrowth	Growth in the penetration rate over the last four quarters	0.1
CAPEX/REV	Capital expenditures relative to revenue	0.1
POPULATION	Population	0.1
GDP	GDP per capita adjusted for the purchasing power parity	0.1

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:

INDEXi = 0.3*ARPCgrowthi + 0.3*EBITDAmi + 0.1*PENgrowthi + 0.1*CAPEX/REVi + 0.1*POPULATIONi + 0.1*GDPi      (2)

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

GDPi = [log(GDPi) – 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 INDEXi = 0.5*(1 + INDEXi)      (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.