The outlook for the Saudi telecom sector remains bullish despite the saturating mobile penetration levels, with data segment to drive growth, Al Rajhi Capital said in its "Saudi Telecom Sector" report released Sunday. It forecast that the information and communications technology services will only grow in importance over time. Broadband remains the key growth driver for telecom operators in Saudi Arabia, as increasing smartphone penetration levels and changing usage patterns of consumers are expected to result in a sharp rise in data consumption. With mobile penetration reaching 187.5 percent in Saudi Arabia, the report said "broadband data is the growth driver for the maturing telecom sector in Saudi Arabia." The report believes the adoption of 4G services will increase with the launch of a number of 4G supporting mobiles phones (like Iphone 5). Even as 3G users transfer to 4G services, 2G users will continue to migrate towards 3G as most low-end and mid-level phones now support 3G technology. Moreover, fixed broadband subscriptions have increased 10 fold from 0.22 million subscribers in 2006 to 2.21 million at the end of H1 2012. However, mobile broadband has only caught consumer fancy over the past three years, as subscribers rose from 1.31 million at the end of 2009 to 12.62 million at the end of H1 2012. The Kingdom's mobile broadband penetration has reached 43.4 percent at the end of H1 2012, which is high compared to countries like Germany, Italy and Canada. However, mobile broadband penetration level in the Kingdom is still low compared to the US (76.1 percent), and the UK (53.0 percent). Currently Mobily obtains about 20-25 percent of its revenues from data services, and Al Rajhi expects it to increase to 30 percent by 2013. STC generated about 18 percent of its consolidated revenues from data services in the first three quarters in 2012, up from about 13 percent in 2011. This figure is likely to continue to increase steadily over the next few quarters. Zain has also seen an increasing percentage of revenues from the data segment. As a result of the rapid growth in data consumption, all three telecom players are competing to garner maximum share in the segment. To entice customers to adopt the 4G technology data subscription, Zain is offering the first 100,000 customers' double data limit for life, at no extra cost. That is, the first 100,000 customers can enjoy for example. 10 GB data limit at the price of 5 GB for life. Mobily is also wooing customers by offering an extra 10 GB of data limit on 5GB plans for two consecutive month renewals. STC, which has the biggest market share in the Kingdom, also have very competitive packages. Mobily remains Al Rajhi Capital 's top pick in the sector, as it continues to outpace its peers, while STC will benefit from improving profitability from its international businesses. On the other hand, Zain is struggling to improve performance both on financial and operational fronts. The report slashed its target price on Zain KSA but continue with Neutral rating, considering a more than 50 percent correction in the stock price post restructuring. Mobily maintains its growth trajectory, it noted, expecting that it will continue to post robust growth next year, driven by rising subscriber base and data consumption. The company has increased its dividend payout in line with its financial performance, a move which was well received by the market. We expect the dividend payout to increase to SR5 per share in 2013, implying a dividend yield of 6.6 percent. In the case of STC, international business is key trigger, Al Rajhi Capital said in the report. STC's international business provides new avenues for growth in a saturating domestic mobile market. Recent financials have signaled that the profitability of its international businesses has been improving. The stock looks attractive at the current level. However, in the case of Zain, it needs to reduce its debt, Al Rajhi Capital said in the report. Despite the capital restructuring the company has not been able to refinance its debt obligations yet. The weak operating performance during 9M 2012 has added to the company's woes. The report maintained the Overweight rating on Mobily and STC with a revised target price of SR88.7 and SR47.2, respectively. The report assigned Neutral rating on Zain KSA, after it slashed target price to SR10 per share. The report further said favorable demographics would support data revenues. Saudi Arabia is one of the youngest countries in the world, with 30 percent population is below 15, while about 50 percent below the age of 26 years, according to CIA World Fact book. In addition, the Kingdom's population is growing at a rate of about 2.3 percent, the World Bank said, which is greater than the MENA region as a whole and also higher compared to emerging countries such as Brazil, China and India. Both these factors of high population growth and the high percentage of youth augur well for the telecom sector. A study conducted by Neilsen in 2011 showed that the Saudi youth led their peers in the BRIC countries and even the US in downloads of screen savers and ring tones, and were second only to US in checking e-mails. This data indicates that the current Saudi generation is increasingly IT-literate. Thus, the young population of Saudi Arabia is likely to drive data usage, as the youth are more technology savvy. Rising smartphone penetration The availability of relatively cheap entry-level and mid-level smartphones are giving a boost to smartphone sales in the Kingdom. According to estimates by Informa telecoms & media, smartphone penetration in Saudi Arabia stood at 25 percent at the end of 2011, and is expected to jump to 48.5 percent by 2016. The report also said that its talks with various operators in the country has also indicated that smartphone penetration on their network is around 30 percent currently and about 50 percent of new phones being sold are smartphones which reflects huge potential of data usage in years to come. According to estimates by CISCO, a smartphone generated 35 times more mobile data traffic than a basic feature phone in 2011, as users were able to download digital content (applications/games/ringtones/wallpapers) easily and stay connected (e-mails/instant messaging applications). Thus, rising smartphone penetration will lead to huge growth in data consumption. In addition, smartphones are also being increasingly used in our daily lives as people use mobile banking, mobile payments, make online purchases etc. According to estimates by CISCO, data consumption by an average smartphone has trebled from 2010 to 2011, indicating that people are increasingly using data services on their smartphones. CISCO estimates that the mobile data traffic in the MENA region will grow at a CAGR of more than 100 percent from 2011 to 2016. Since Saudi Arabia is one of the biggest mobile markets, the Al Rajhi Capital report forecast that the Kingdom will lead the rise in data consumption in the region. Launch of LTE (4G) services to augment data usage LTE (also called 4G) services were launched in Saudi Arabia in late 2011 with all three telecom operators claiming to be the first to launch such service in the Kingdom. This technology can support speeds of up to 100Mbps, compared to 3G speed of up to 7Mbps and 3.5G HSPA+ speed of up to 42.2 Mbps. 3G services were launched in Saudi Arabia in 2006, and data usage has grown exponentially since then. Now with the launch of 4G services, data consumption will get another impetus, as 4G will enable users to watch high quality video content and live mobile TV with ease. 4G will also accelerate access to streaming video and audio data, and accelerate video conferencing. The Saudi Gazette
