Telecommunication industry key metrics and stock performance

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL GRADUATION PROJECT TELCOMMUNICATION INDUSTRY: KEY METRICS AND STOCK PERFORMANCE Tô Đức Trung Hanoi - 2020 VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL GRADUATION PROJECT TELECOMMUNICATION INDUSTRY: KEY METRICS AND STOCK PERFORMACE SUPERVISOR: Dr Lê Đức Thịnh STUDENT: Tô Đức Trung CODE: 16071259 COHORT: AC2016A MAJOR: Accounting, Analyzing and Auditing Hanoi – 2020 INFORMATION ON FINAL THESIS Full name: Tô Đức Trung Sex: Male Date of birth: March 1998 Place of birth: Đồng Nai Official thesis title: Telecommunication industry: Key metrics and stock performance Major: Accounting, Analyzing and Auditing Code: 16071259 Guider Lecturer: Dr Lê Đức Thịnh Summary of the findings of the thesis: By analyzing the correlation between nine key metrics and total shareholder returns, the study found that the metrics specially used in analyzing the operational conditions including ARPU, Churn rate, Subscriber Growth and Operational Expense per Subscriber of telecommunications have more significant relationship with TSR than other standards metrics like Gross Margin, ROA, Revenue Growth and EPS growth The study also finds multiple regression models to tests the impact of key metrics on total shareholder returns The result collected by analyzing the correlation between nine key metrics and total shareholder returns, the study found that the metrics specially used in analyzing the operational conditions including Revenue Growth, ROA, Gross Margin, CLV and OPEX/Subs have more significant relationship with TSR than other metrics ARPU, Churn rate or Subscriber Growth With TSR 2, ROA and ARPU are two metrics have the most significant relationship than other metrics Another remarkable finding is that featured metrics of telecommunication from the US has more significant on TSR than that of other countries With the type of regression using ROA as dependent variables and featured metrics as independent variables, the model suggest There are six metrics have significantly linear relationship with ROA in which Churn rate, Customer’s lifetime value and Gross Margin show positive linear relationship while ARPU per month, Subscriber Growth and Revenue Growth have negative linear relationship with ROA 10 Practical applicability, if any: This study is an academic research which examines and provides the better and overall understanding about the featured metrics used in analyzing and evaluating the effectiveness and efficiency of telcommunication’s core business and other common metrics used in fundamental analysis The study also contributes to the research part of financial analysis and stock evaluation By using findings of this study, the marketer financial analyst or investor can have knowledge about what metrics are important in evaluating each communication companies and their stock performance Furthermore, this research provides a guideline or at least a direction for the Vietnamese telecommunication companies of how leading companies in world disclose their operational and financial situation for the stakeholders using the special metrics It also somewhat indicate the attitude of investors toward the operational and financial ratios that they started to care more about the sustainable growth and long-term development of the telecommunication industry rather than focus on the net income on the income statement Date: Signature: Full name: Tô Đức Trung Acknowledgement I would first like to thank my instructor Dr Le Duc Thinh of the International School, Vietnam National University for the continuous support of my study and research, for his patience, motivation, enthusiasm, and immense knowledge His guidance helped me in all the time of research and writing of this thesis I could not have imagined having a better advisor and mentor for my study at the university I would also like to acknowledge my friends who have helped me to their support during all the time I studied at VNU-IS as well as the period of doing thesis and I am gratefully indebted to his/her for them Letter of Declaration I hereby declare that the Graduation Project Telecommunication Industry: Key metrics and stock performance is the results of my own research and has never been published in any work of others During the implementation process of this project, I have seriously taken research ethics; all findings of this project are results of my own research and surveys; all references in this project are clearly cited according to regulations I bear full responsibility for the fidelity of the number and data and other contents of my graduation project Hanoi, May 27 2020 Tô Đức Trung List of abbreviation ARPU Average Return Per User BMA Bayesian Model Average COGS Cost of Goods Sold ESPG Earnings Per Share growth GM Gross Margin OPEX Operating Expense ROA Return on Assets RG Revenue Growth Subs Subscriber TSR Total stock return List of table and figures Figure Average TSR and TSR of 20 telecommunication companies 20 Figure Average ARPU and Churn rate of 20 telecommunication companies 21 Figure Average Customer Lifetime Value of 20 telecommunication companies 22 Figure Average Subscriber Growth of 20 telecommunication companies 23 Figure Average OPEX/Subscribers of 20 communication companies 24 Table of contents Chapter 1: Introduction 10 The necessity of topic: 10 The goal of topic: 10 Research outcomes: 11 Practical contributions: 11 Chapter 2: Literature review and Research methodology 12 Literature review 12 1.1 Theoretical background 12 1.2 Key metrics 13 Research questions, methodology and scope 17 2.1 Research questions 17 2.2 Methodology 17 2.3 Scope of research 18 Facilities and the difficulty of the researching process 19 3.1 Facilities: 19 3.2 Difficulty: 19 Chapter 3: Main results 20 Descriptive statistics: 20 Analyzing the correlation of metrics with TSR 25 2.1 Summary of Correlation of companies between featured metrics and TSR and TSR 25 2.2 Summary of Correlation of companies between standard metrics and TSR1 and TSR2 31 2.3 Summary of correlations between all metrics with both TSR and TSR 38 Analyzing the multiple regression 42 3.1 Multiple regression models for TSR (based on fiscal year) 42 3.2 Multiple regression models for TSR (based on the published date of financial statement) 42 3.3 Multiple regression models for ROA 43 Case study in China Mobile Limited: Churn rate vs TSR 43 Chapter 4: Conclusion, Implication and Recommendation 51 Conclusion and discussion 51 Implications 52 2.1 Literature implications 52 2.2 Practical implications 52 Limitations 53 Recommendation 53 References 55 Chapter 1: Introduction The necessity of topic: In the most of companies, stock investments have become one of the various investment options (Maryyam, 2016), [1] Investors and managers learn from stock prices (Benjamin, Rene & Zexi, 2019) [2] Therefore, the stock price has become one of the most important indicator which affects the investment decision of many investors Besides the stock return, data in the financial reporting is to provide about the fiscal health and financial performance of the firms (Maryyam, 2016) Many investors use these data to help them to evaluate the firm’s productivity and performance After that, they relied on those information in order to decide whether to put their money on a company or not There are a plenty of research which intends to enlighten relationship between firm’s performance and their stock return For example, Fama & French (1993) [3] analyzed stock return average on market risk, company size, finance leverage, stock holders’ salary bond value to market value, stockholders’ salary and profit to price ratio by regression; Bagherzadeh, Safania & Roohi (2013) [4] aimed to describe the relationship between current ratio and stock prices of the firms listed on the NSE, India using the cross-sectional correlation technique; Irungu (2013) [5] explored the impact of the financial performance indicators on the stock prices of the commercial banks in Kenya Inspired by these researches, this research paper aims to analyze the correlation between key metrics and stock performance of a specific industry – telecommunication industry The goal of topic: This thesis provide an empirical study to identify the relationship between key metrics including financial ratios or featured indicators and total stock return of 10 Model 1: y = -1.305e-02 + 4.106e+00(x2) - 3.873e-04(x4) + 3.730e-06(x5); R^2 = 0.128 Model 2: y = 3.600e-02 + 2.662e-04(x1) - 4.014e-04(x4) + 1.053e+00(x9); R^2 = 0.125 Model 3: y = 8.885e-03 + 2.852e-04(x1) + 2.090e-01(x3) - 4.209e-04(x4) + 1.265e+00(x9); R^2 = 0.145 Now the BMA package shows that OPEX/SUBs(x4) has the highest probability of appearing in any regression model, followed by ROA(x9) OPEX/SUBs has a negative linear relationship with log returns y = ln(1+TSR2), while ROA has a positive linear relationship with log returns y 3.3 Multiple regression models for ROA We also consider ROA as the dependent variable y, the other key metrics are independent variables Then BMA packages gives us models with cumulative posterior probability = (so there are only possible models) Here are they: Model 1: y = 3.368e-02 + 9.872e-01(x2) - 4.778e-02(x3) - 8.702e-05(x4) + 1.101e-06(x5) 9.849e-02(x7); R^2 = 0.564 Model 2: y = 8.063e-03 + 9.767e-01(x2) - 4.854e-02(x3) - 8.359e-05(x4) + 1.128e-06(x5) 9.867e-02(x7) + 3.941e-02(x8); R^2 = 0.57 Model 3: y = 3.648e-02 + 2.486e-05(x1) + 8.404e-01(x2) - 4.335e-02(x3) -1.050e-04(x4) + 9.863e-07(x5) - 1.046e-01(x7); R^2 = 0.568 Model 4: y = 3.361e-02 + 9.885e-01(x2) - 4.770e-02(x3) - 8.711e-05(x4) + 1.108e-06(x5) 2.378e-04(x6) - 9.906e-02(x7); R^2 = 0.565 We can see that Churn rate(x2), Subscriber Growth(x3), OPEX/SUBs(x4), Customer's lifetime value(x5) and Revenue growth(x7) appear in all models Churn rate(x2) and Customer's lifetime value(x5) both have a positive linear relationship with ROA, while Subscriber Growth(x3), OPEX/SUBs(x4) and Revenue growth(x7) all have a negative linear relationship with ROA Case study in China Mobile Limited: Churn rate vs TSR 43 The case study also focus on another company which is China Mobile Limited and its Churn rate China market is the biggest market with the highest population in the world China Mobile Limited provides the services for those people with its subscriber amounted for 950,000,000 users reported in the annual report of the company A telecommunications company's future revenue growth has much to with its ability to grow its customer base and add new subscribers Subscriber growth is, therefore, an extremely important metric A steady subscriber growth rate indicates a competitive telecommunications company that is keeping up with technology trends, thereby keeping customers happy and attracting new customers When reporting subscriber growth, telecommunications companies will often report what is called "net additions" and will break down this category by product line Therefore, the number of subscribers growth of China Mobile Limited will be discussed below In 2010, MMS is a technology that allows users to exchange multimedia communications, such as graphics, animated color pictures, sound files and short text messages, over wireless networks Mobile Paper is a business that we have developed in cooperation with mainstream media in Mainland China and elsewhere, which provides customers with updated information services (including contents such as news, sports, entertainment, cultural activities and lifestyle) through MMS, Mobile Internet Access and other types of services Revenue generated from MMS (including Mobile Paper) business reached RMB3,540 million in 2010, compared to RMB3,306 million in 2009 As of December 31, 2010, the number of registered customers of Mobile Paper was approximately 72.8 million (including 41.5 million paying customers who subscribed to Mobile Paper via our central platform for information broadcasted nationwide, compared to 49.1 million as of December 31, 2009 44 In 2011, China Mobile Limited (The Company) made efforts to build up open platforms through our Mobile Market in the past few years Mobile Market serves as a platform for software developers and their applications as well as our own businesses so that our customers may use their terminals to download applications and subscribe for our businesses We intend to build Mobile Market into a sales platform for our customers to subscribe for our businesses, a platform for developers to upload their applications and a platform that provides support to our terminal and content suppliers We will also make available our five major capacities, namely cloud services for Mobile Market, “Internet of Things”, eCommerce, location-based services and “Fetion+”, to the users through Mobile Market As of December 31, 2011, the cumulative number of registered customers of Mobile Market reached 158 million, with the number of application downloads from Mobile Market exceeding 630 million In 2012, The Company has been making efforts to build up open platforms through our Mobile Market in the past few years Mobile Market serves as a platform for software developers and their applications as well as our own businesses so that our customers may use their terminals to download applications and subscribe for our businesses We intend to build Mobile Market into a sales platform for our customers to subscribe for our businesses, a platform for developers to upload their applications and a platform that provides support to our terminal and content suppliers As of December 31, 2012, the cumulative number of registered customers of Mobile Market reached 270 million, with the number of application downloads in 2012 from Mobile Market reaching 610 million we expanded the application of “Internet of Things” to various areas such as urban management, smart transportation and industrial control, and have developed standardized “Internet of Things” products including home security service, fleet management service, QR code and remote surveillance We have also built high quality and centralized “Internet of Things” networks The number of “Internet of 45 Things” users increased from 13.05 million in 2011 to 22.45 million in 2012 Our “Wireless City” platform provides citizens with various information services covering government affairs, traffic control, public administration and other areas, and is a platform that facilitates communications among the government authorities, corporations and citizens In 2012, the cumulative number of customers using “Wireless City” reached 70 million In 2013, The Company expanded the application of “Internet of Things” to various areas such as urban management, smart transportation and industrial control, and have developed standardized “Internet of Things” products including home security service, automobile fleet management service and remote surveillance We are also in the process of building high quality and centralized “Internet of Things” networks The number of “Internet of Things” users increased from 22.45 million in 2012 to 32.00 million in 2013 Our “Wireless City” platform provides citizens with various information services covering government affairs, traffic control, public administration and other areas, and is a platform that facilitates communications among government authorities, corporations and citizens In 2014, The Company expanded the application of “Internet of Things” to various areas such as urban management, smart transportation and industrial control, and have developed standardized “Internet of Things” products including home security service, automobile fleet management service and remote surveillance We are also in the process of building high quality and centralized “Internet of Things” networks The number of “Internet of Things” users increased from 32.00 million in 2013 to 43.38 million in 2014 In 2015, we expanded the application of Internet of Things to various areas such as urban management, smart transportation and industrial control, and have developed standardized Internet of Things products including home security services, automobile fleet management services and remote surveillance We also 46 established high quality and centralized public Internet of Things networks The number of Internet of Things connections increased to over 60 million in 2015 In 2016, The Company expanded the application of IoT to various aspects such as urban management, smart transportation and industrial control, and have developed standardized IoT products including home security services, automobile fleet management services and remote surveillance We also established centralized public IoT networks with IoT connections reaching over 100 million Besides, we have established the OneNET platform, which enables developers to connect with IoT manufacturers and leverage our computation, network and communication capacity to quickly launch and promote their applications As of December 31, 2016, OneNET platform connected more than seven million devices, serving approximately 30,000 developers and more than 3,000 companies Additionally, The company have closely kept track of the industry trend in our development of applications and information services, and therefore extend our business to various emerging areas, such as NFC and mobile payment The Company have established various specialized companies, including, among others, China Mobile IoT Company Limited, China Mobile Internet Company Limited and MIGU Company Limited, all of which focus on digital contents, mobile Internet, IoT and other digital services Nonetheless, this is an area that we believe to be in its initial stage of development, and The company can make more achievements by continuing our efforts in digital services We continue to promote our digital services and explore new operating models for China Mobile, in order to further advance the marketorientated mechanism and to strengthen our position in the competitive digital landscape through continuous innovation In 2017, The Company closely monitor and follow the industry trend in our development of applications and information services, and have extended our business into various emerging areas, such as IoT, home digital services, mobile payment, digital contents and other services We have established several 47 specialized companies, including, among others, China Mobile IoT Company Limited, China Mobile Internet Company Limited and MIGU to focus on these areas In 2017, we advanced the application of IoT in aspects such as urban management, smart transportation and industrial control, and have developed standardized IoT products including home security services, automobile fleet management services and remote surveillance We also established centralized public IoT networks with IoT connections reaching 229 million, which is the largest dedicated network for IoT in the world in terms of the number of connections Our home digital services include high-definition video-on-demand services provided through Mobaihe set-top box, Smart Home Gateway, “and-Mu” family surveillance camera and IMS fixed line services Subscribers to Mobaihe reached 57.25 million at the end of 2017, compared to 22.8 million at the end of 2016 Moreover, in 2017, our mobile payment service “and-Wallet” exceeded RMB2.1 trillion in transaction value, significantly increased from that of RMB1 trillion in 2016 We also promoted our “and-Video” service, which provides streaming media and video-ondemand on mobile, and “and-Reading” service, which offers a mobile-based platform of digital books and magazines We will continue to promote our digital services, explore new growth drivers, further advance our the market-orientated innovation, so as to strengthen our position in the competitive digital landscape In 2018, The company closely monitor and follow the industry trend in our development of applications and information services, and have extended our business into various emerging areas, such as IoT, home digital services, mobile payment, digital contents and other services We have established several specialized companies, including, among others, China Mobile IoT Company Limited, China Mobile Internet Company Limited and MIGU to focus on these areas In 2018, we advanced the application of IoT in aspects such as urban management, smart transportation and industrial control, and have developed standardized IoT products including home security services, automobile fleet 48 management services and remote surveillance We also established centralized public IoT networks with IoT connections reaching 551 million, which is one of the largest dedicated network for IoT in the world in terms of the number of connections Our home digital services include high-definition video-on-demand services provided through Mobaihe set-top box, Smart Home Gateway, “and-Mu” family surveillance camera and IMS fixed line services Subscribers to Mobaihe reached 96.81 million at the end of 2018, compared to 57.25 million at the end of 2017 Moreover, in 2018, our mobile payment service “and-Wallet” exceeded RMB2.5 trillion in transaction value, increased from that of RMB2.1 trillion in 2017 We also promoted our “MIGU Video” service, which recorded 4.3 billion views of its 2018 FIFA World Cup-related contents, and “MIGU Reading” service, the revenue from which in 2018 exceeded RMB2.3 billion We will continue to promote our digital services, explore new growth drivers, further advance our the market-orientated innovation, so as to strengthen our position in the competitive digital landscape In 2019, We closely monitor and follow the industry trend in our development of applications and information services, and have extended our business into various emerging areas, such as IoT, home digital services, mobile payment, digital contents and other services We have established several specialized companies, including, among others, China Mobile IoT Company Limited, China Mobile Internet Company Limited and MIGU to focus on these areas We also established centralized public IoT networks with 884 million customers as of December 31, 2019 Our home digital services include highdefinition video-on-demand services provided through Mobaihe set-top box, smart home network deployment, “and-Mu” family surveillance camera and IMS fixed line services Subscribers to Mobaihe reached 122 million at the end of 2019, compared to 96.81 million at the end of 2018 Moreover, the monthly active users for our “MIGU Video” service, which provides streaming media and video-on49 demand on mobile, and for the core functions of “and-Wallet”, our mobile payment service, increased by 46.4% and 58.9% year-on-year, respectively We will continue to promote our digital services, explore new growth drivers, further advance our the market-orientated innovation, so as to strengthen our position in the competitive digital landscape Year Churn rate Increase/Decrease Increase/Decrease of Churn rate of TSR or Match 2019 2.25% I I Yes 2018 2.13% D D Yes 2017 2.06% D D Yes 2016 2.32% D I No 2015 2.78% D D Yes 2014 3.13% D I No 2013 3.25% I D No 2012 3.21% No I/D I X 2011 3.21% D D Yes 2010 3.22% Table Churn rate with TSR and TSR of China Mobile Limited In the case of China Mobile Limited, the table shows the correlation between Churn rate with the TSR or TSR because in ten years period, there have out of have exactly matched between Churn rate and TSR or TSR This relationship is also being supported by the correlation index at 0.4954 with p-value < 10%  In summary, only the correlation index mentioned in the table to table shows the impact of those metrics on TSR The other which is not in those table will not have much impact on TSR Therefore, the investors may consider this research to invest based on the correlation between some metrics and TSR 50 Especially, Subscriber Growth of China Mobile Limited company in ten year period from 2010-2019, The company is constantly focusing on developing new services to attract new customers These include key services such as calling and messaging, 3G, 4G, wireless, IoT (internet of things), or recently services such as e-commerce, online video streaming, Or e-wallet,… Combined with that, the company is providing telecommunications services in the most populous country in the world, so the large number of users is not surprising However, due to the increasing mobile penetration rate and intensified competition among telecommunications operators and from competitors in related industries, our mobile customer base may not continue to grow as fast as it has over the past few years, if at all The increasing competition from other telecommunications services providers and competitors in related industries and changes in the competitive landscape of the telecommunications industry in Mainland China may reduce market share and decrease profit margin of China Limited Company Chapter 4: Conclusion, Implication and Recommendation Conclusion and discussion This study analyze annual data of twenty telecommunication companies in the USA, Europe, Asia and Australia in a ten-year period (2010-2019) to see if there are positive/negative linear relationship between total shareholder returns and some key metrics including standard metrics used in corporate finance and featured metrics for telecommunication industry By analyzing the correlation between nine key metrics and total shareholder returns, the study found that the metrics specially used in analyzing the operational conditions including Revenue Growth, ROA, Gross Margin, CLV and OPEX/Subs have more significant relationship with TSR than other metrics ARPU, Churn rate or Subscriber Growth With TSR 2, ROA and ARPU are two metrics have the most 51 significant relationship than other metrics Another remarkable finding is that featured metrics of telecommunication from the US has more significant on TSR than that of other countries This study find multiple regression models to test the impact of key metrics on total shareholder returns The result collected using the Bayesian Model Average (BMA) package in R shows that only ROA may have significant positive impact on stock returns This result is reasonable since ROA measures the profitability of the companies and it directly affect the return of shareholders That why it has significant effect on the stock performance of telecommunication companies With the type of regression using ROA as dependent variables and featured metrics as independent variables, the model suggest There are six metrics have significantly linear relationship with ROA in which Churn rate, Customer’s lifetime value and Gross Margin show positive linear relationship while ARPU per month, Subscriber Growth and Revenue Growth have negative linear relationship with ROA Implications 2.1 Literature implications Regarding to theoretical contribution, this study is an academic research which examines and provide the better and overall understanding about the special metrics used in analyzing and evaluating the effectiveness and efficiency of telecommunication’s core business and other common metrics used in fundamental analysis This research provide evidences to support relationship between ROA – a common metrics used in corporate financial analysis with the special key metrics only used in analyzing and evaluating telecommunication’s performance 2.2 Practical implications In terms of the implications of study findings, this study is an academic work to contribute to the research part of financial analysis and stock evaluation As a role of the financial analyst or investor, in terms of telecommunication fundamental analysis, it is essential to have greater thought and comprehension towards the key metrics and 52 their impacts on the fluctuation of stock price By using findings of this study, the marketer financial analyst or investor can have knowledge about what metrics are important in evaluating each telecommunication company and its stock performance Furthermore, this research provides a guideline or at least a direction for the Vietnamese telecommunication companies of how leading companies in world disclose their operational and financial situation for the stakeholders using the special metrics It also somewhat indicate the attitude of investors toward the operational and financial ratios that they started to care more about the sustainable growth and long-term development of the telecommunication industry rather than focus on the revenue on the income statement As telecommunication is an promising industry owing to the people’s increasing demand for communicating, this research propose that Vietnamese telecommunication companies, at the early stage of being listed on the stock exchange, should consider to disclose the featured metrics showing the prospective of their telecommunication companies to attract investment from investors, especially the foreign ones Limitations Since the necessary data are not fully disclose on the financial statement and the limited access to those, together with time limitation, this study covers the data for 20 out of 2000 telecommunication companies in the world which may be not representative enough to give overall conclusion for all telecommunication industry Moreover, as the Vietnamese telecommunication companies are on their early stage of listing on stock exchange, they not disclose data needed to calculate the featured metrics Therefore, there is no Vietnamese telecommunication company being included in this study Future research can also consider to examine more featured metrics such as subscriber acquisition cost or the bottom line to have the reliable results Recommendation 53 The future research can continue to examine the relationship between mentioned metrics and the TSR with the quarter data 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Declaration I hereby declare that the Graduation Project Telecommunication Industry: Key metrics and stock performance is... 1998 Place of birth: Đồng Nai Official thesis title: Telecommunication industry: Key metrics and stock performance Major: Accounting, Analyzing and Auditing Code: 16071259 Guider Lecturer: Dr Lê