Category: Boring Investor

A Satisfied M1 Investor

I started investing in M1 in Jan last year. At that time, it was to take advantage of the crash in telco stocks due to fear of the fourth telco. Since then, I have added to my positions several times. My current position is now 5 times the initial one. This is because despite all the headwinds that telcos face, from SIM-only plans, data upsize plans, Mobile Virtual Network Operators (MVNOs) to the fourth telco, M1 has performed admirably. Below is a summary of what I like about M1.
SIM-Only Plans
When M1 launched SIM-only plans in Jul 2015, I had not invested in telco stocks yet. But my initial thoughts were that SIM-only plans would lead to a drop in revenue and a smaller drop in profitability, as SIM-only plans would lead to some subscribers downgrading from the more expensive regular telco plans with handphone subsidies to the SIM-only plans. See Impact of SIM-Only Plans on Telcos. As it turns out, although SIM-only plans indeed led to a drop in revenue, they are value-accretive at the EBITDA level, as they attract new customers in addition to existing subscribers who downgrade. An analogy would be the regular telco plans are like full-service airlines while SIM-only plans are like budget airlines. Although SIM-only plans cannibalise regular telco plans, they also create new demand of their own. See Will SIM-Only Plans Cannibalise Regular Telco Plans? for more information. The popularity of SIM-only plans (together with Circles.Life) has led to strong growth in M1’s post-paid customer base. See Fig. 1 below for the growth rate (note: M1’s post-paid customer base includes that of Circles.Life, the MVNO that works with it).
Fig. 1: Changes in M1’s Post-Paid Customers
In this aspect, I have to acknowledge that M1 knows what it is doing and is doing better than I thought.
Data Upsize Plans
This is another initiative that M1 started in Mar 2016 before I became a shareholder. Again, I believed that this would lead to lower profitability, as subscribers who used to exceed their data bundles and pay excess data charges of as high as $10.70/GB now need to pay only $5.90 per month to upsize their data bundles. See Impact of Data Upsize Plans on Telcos
This time, I am not wrong about the impact on revenue and profitability, but M1 has bigger plans. Instead of stopping at 3 levels of upsize, M1 launched big data plans in Aug 2017, including an unlimited data plan. The big data plans are clearly ahead of competition, which is quite unusual since all telcos will try to match each other. See No Competition for M1’s Big Data Plans for more information. M1’s prices are comparatively lower than that of the other 2 telcos, so much so that I feel that M1 did not maximise profits by pricing them closer to the competition (but also see the section on Narrowband Internet of Things).
Mobile Virtual Network Operators (MVNOs)
Long before the recent spate of MVNOs like Zero Mobile, Zero1 and MyRepublic, M1 had already worked with a MVNO called Circles.Life in May 2016 to roll out mobile services to niche segments of customers that M1 did not cater for. Since MVNOs have to buy network capacity from traditional telcos, they will never be able to offer a better deal than traditional telcos on a sustainable basis. So, MVNOs are a way of getting some extra revenue from niche market segments without taking the risks.
I would like to say that the collaboration with Circles.Life has been a successful one. Customer numbers have been increasing as shown in Fig. 1 above. Furthermore, Singtel and Starhub have recently been copying M1 in working with MVNOs as TPG’s timeline for setting up operations in Singapore by Dec 2018 approaches. As they say, imitation is the best form of flattery. 
I might be wrong in this aspect, but I somehow suspect that M1 learnt something useful from Circles.Life’s operations. Customers of Circles.Life use an app known as CirclesCare to manage their plans, including activating additional services on-demand. See CirclesCare features. M1’s app has similar features, which saves customers’ time from not having to call the customer service line and reduces the no. of staff they need to service customers. 
Narrowband Internet of Things (NB-IoT)
NB-IoT is a new 4.5G network designed for machine-to-machine communications to facilitate Internet-of-Things (IoT). Like most other new services, M1 is the first telco to roll out this new service in Aug 2017. There are some advantages in being the first mover and the lowest cost provider in big data, but it is still a fairly new service and not many companies are ready to launch IoT devices, so it is worth watching whether this new service will bring in good revenue for M1.

In an earlier section on data upsize plans, I mentioned that although M1 has a cost advantage in big data, it has not taken advantage of it to maximise profits. This might be because M1 is trying to attract more companies to use its NB-IoT services. Once on board, M1 could upsell to customers its data analytics services to derive better value. Furthermore, compared to traditional 4G services that cater to individuals, NB-IoT has higher switching costs and hence, customers are less likely to switch to a different telco. See NB-IoT – The Next Frontier for Telcos for more information. Thus, I am willing to accept that M1 has priced its big data plans lower than necessary to capture this new market segment.

Overall
M1 is the smallest telco in Singapore. Perhaps cognisant of its small size, it has always been willing to try out new things. It is the first telco to launch 3G mobile services in Feb 2005, mobile broadband in Dec 2006, fibre broadband in Sep 2010, 4G mobile services in Sep 2012, 4.5G mobile services in Dec 2014, etc. Nevertheless, despite being the first to deliver, it has always come in last in terms of market share. Yet, it knows that if it is not the first to deliver, it will not only come in last, but also become irrelevant, given that it had no Pay TV, cable/DSL broadband and analogue/digital voice businesses (before the Next Generation Nationwide Broadband Network came on board and disrupted the playing field). To stay relevant and survive, M1 has to constantly innovate. Innovations are in M1’s DNA.

The innovations mentioned in earlier sections represent a desire to disrupt itself and competitors to stay ahead of the competition. Contrary to conventional wisdom, the disruptions in the telco industry in recent years did not come from the fourth telco; they came from M1 (and Singtel to a smaller extent). All these disruptions have also made the fourth telco fairly irrelevant, even if TPG were to start operations in Dec 2018 as scheduled. M1 has established a clear lead in big data (for now) and a toehold in NB-IoT. Perhaps this time round, it would not come in last among the 3 telcos.

On my investment in M1, despite averaging down 4 times, I am still sitting on a small paper loss. Nevertheless, the actions that M1 took make me confident that it is a matter of time before the market recognises M1 is a technology disruptor rather than the disrupted and the share price recovers to my cost price. I am satisfied with my investment in M1.

P.S. I am vested in M1, Netlink Trust and Singtel.

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Will MVNOs Cannibalise Telcos’ Business?

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Will SIM-Only Plans Cannibalise Regular Telco Plans?

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How To Select a Housing Loan Package

After selecting our desired condominium, the next step is to choose a housing loan package. There is a variety of loan packages, such as fixed or floating interest rates. For fixed interest rate packages, you could choose whether to fix the interest rates for 1, 2 or 3 years, after which the loan reverts to floating interest rates. For floating interest rate packages, you could select whether to peg the interest rates to the Singapore Interbank Offered Rate (SIBOR), Swap Offer Rate (SOR) or fixed deposit rates. Assuming that you choose a SIBOR or SOR package, you have to further decide whether to peg to the 1-month or 3-month SIBOR/ SOR. Likewise, for fixed deposit rate packages, you can choose between 9-month, 15-month or 36-month fixed deposit rates. The choices can be fairly overwhelming.
Step 1: Fixed or Floating
The first step to decide is whether to go for a fixed or floating interest rate package. Given that US Federal Reserve (Fed) has increased interest rates 5 times since Dec 2015 and plans to increase them another 4 times this year, we decided it is prudent to choose a fixed interest rate package instead of a floating interest rate package.
Step 2: Fix for How Many Years
This is a tricky question. Thankfully, there are some hints. Besides setting the current interest rates, the US Fed governors also provide their projections of future interest rates. By plotting the interest rate projections, we can see how US interest rates are likely to move in the coming years. Fig. 1 below shows the current Fed dot plot, which indicates that the median interest rate projections will rise from 1.375% in 2017 to 2.125% in 2018, 2.6875% in 2019 before finally peaking at 3.0625% in 2020. Having said that, do note that these are just projections by individual US Fed governors. The actual interest rates may differ from the projections depending on how strong the economy is in the coming years.
Fig. 1: US Fed Dot Plot
Given the rise in interest rates over the next 3 years, it makes sense to fix the interest rates for 3 years. However, on the other hand, a 3-year fixed interest rate package is naturally more expensive than a 2-year package, since banks bear the risks of interest rates rising rapidly. Using the bank that we chose as an example, the interest rates for a 2-year and 3-year package are as follows:
2-Year 3-Year
Year 1 1.48% 1.68%
Year 2 1.48% 1.68%
Year 3 15M FD+1.43% 1.68%
Afterwards 15M FD+1.43% 15M FD+1.55%
As shown above, not only is the fixed portion of the interest rates higher, the margin for the floating portion of the interest rates is also higher (note: not all loan packages are as such). For a $650,000 loan over a 25-year tenure, we will end up paying $11,867 more in total interest if we were to select the 3-year loan package. That is equivalent to an extra interest of 1.83% on the $650,000 loan. For the 2-year loan package to be more expensive than the 3-year loan package, the 15-month Fixed Deposit (15M FD) rate, which is currently 0.25%, has to reach close to 2.0%.
We decided on the 2-year loan package. In the event interest rates continue to rise, we can choose to re-finance and fix the interest rates when the lock-in period expires. If conditions permit at that time, we might also choose to pay down some of the loan.

Step 3: Peg to Which Base Interest Rate
As discussed above, we selected a loan package that is pegged to the fixed deposit rates. Fixed deposit rates are actually board rates set by individual banks and are therefore less transparent compared to SIBOR and SOR, which are set collectively by a group of banks. The conventional wisdom is that if banks were to raise their fixed deposit rates to earn more interest on the loans, they would also have to pay more interest on the fixed deposits. Hence, banks are less likely to raise fixed deposit interest rates. However, the reality is that 98% of local banks’ deposits have maturity of less than 1 year. Raising the interest rates on fixed deposits of more than 1 year maturity will not hurt them. See Behind Fixed Deposit Home Loan Rates for more info.
On the other hand, although SIBOR and SOR are more transparent, they are more volatile compared to fixed deposit rates. The shorter the SIBOR/ SOR tenure (i.e. 1-month vs 3-month SIBOR/ SOR), the more volatile the rates are. Also, between SIBOR and SOR, SOR is affected by the USD/SGD exchange rate and therefore fluctuates more than SIBOR. See Why Singapore Interest Rates Might Rise Faster than Expected for more info.
Comparing between the transparency of SIBOR/ SOR loan packages and the stability of fixed deposit loan packages, we went for stability as they provide greater visibility on the amount we have to pay every month, which helps us in planning other expenses.
Conclusion
There is a large variety of housing loan packages. It can get overwhelming at times, especially since you have to decide on a loan package quickly after you sign the option to purchase the property. Choosing the right loan package can save you some money and offer greater visibility in later years.

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