Company Reports

Narrow-moat KDDI’s fiscal 2023 result (ending March 2024) was in line with our expectations on an underlying basis despite narrowly missing its full-year guidance and pushing out its previous midterm earnings per share growth target by one year. We retain our fair value estimate for KDDI of JPY 4,500 and see KDDI shares as fairly valued following a share price correction since late January 2024.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s third-quarter fiscal 2023 result (quarter-ending December 2023) was slightly below our expectations, but the company should still be on track to achieve its unchanged full-year guidance of operating revenue rising 2.3%, and both operating income and net profit rising 0.4%, in our opinion. Third-quarter operating revenue increased by 3.1%, with operating profit up 0.9%. The result was driven by a strong performance from the business services segment, which saw revenue grow 20.6% year on year and operating income grow 11.4%, offsetting the 2.3% year-on-year operating income decline from the larger personal services segment. Business services is being driven by data centers with the company opening new facilities in Frankfurt and Paris in 2023 and purchasing facilities in Canada. Mutibrand communications average revenue per user declined by JPY 0.8 billion year on year in the third quarter and was broadly flat over the first three quarters, with management forecasting a return to growth in the fourth quarter.

Narrow-moat KDDI’s second-quarter fiscal 2023 result (quarter ended September 2023) was ahead of our expectations, making up for a weaker first quarter and leaving the business on track to beat its unchanged full year guidance of operating revenue rising 2.3%, and both operating income and net profit rising 0.4%, in our opinion. Second quarter operating revenue increased by 4.1% with operating profit up 12.3%. Most importantly, Muti-Brand communications ARPU revenues grew JPY3.7 billion year-on-year in the second quarter, having fallen by JPY 30.6 billion in the corresponding quarter a year ago and by JPY 2.9 billion in the first quarter. Mobile prices seem to have stabilized and KDDI should also gain from the extension of the roaming arrangement between KDDI and Rakuten announced in May, which should benefit KDDI by between JPY 10 billion and JPY 20 billion compared with previous estimates. We make slight upgrades to our forecasts and our fair value for KDDI increases to JPY4,500 from JPY4,400 previously. Our forecasts now assume KDDI increases fiscal 2023 operating profit by 3.1% and net profit by 7.3%. At this fair value, KDDI would trade on a fiscal 2023 price/earnings ratio of 13.6 times, with a 3.1% dividend yield. We see both KDDI and NTT as broadly fairly valued at current levels and would prefer them over SoftBank Corp.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s first-quarter fiscal 2023 result (quarter-ending June 2023) was slightly behind our expectations due to accounting changes, but the underlying result leaves the business on track to hit its unchanged full-year guidance of operating revenue rising 2.3%, and both operating income and net profit rising 0.4%. First-quarter operating revenue decreased by 1.4% with operating profit down 10.3%. An accounting change negatively affected the operating profit by JPY 18.2 billion with a further JPY 4 billion from the negative increase of power price increases on the electricity business, leaving underlying operating profit down around 2.8%. Part of the expected turnaround for the full-year growth comes from the extension roaming arrangement between KDDI and Rakuten announced in May which should benefit KDDI by between JPY 10 billion and JPY 20 billion compared with previous estimates. The two parties are also in discussion about a further extension of this agreement to the central business districts but an agreement on this has yet to be reached. We make no changes to our forecasts or our fair value estimate for KDDI of JPY 4,400. At this fair value, KDDI would trade on a fiscal 2023 price/earnings ratio of 13.3 times with a 3.1% dividend yield. We see both KDDI and SoftBank as broadly fairly valued at current levels and would prefer NTT.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s fiscal 2022 result (year ending March 2023) was better than our expectations, with operating profit up 1.4% and net profit up 0.7%, despite a difficult year due to costs associated with the two-day network outage in July, the impact of fuel price hikes, losses from the energy business related to fuel price volatility, and the price reductions in the key mobile business. While the reported full-year operating profit missed the company’s guidance of increasing by 3.7%, after the first nine months we had thought full-year operating profit could see a slight decline. Fourth-quarter operating income increased by 25% year on year. The company is guiding to fiscal 2023 operating revenue rising 2.3%, and both operating income and net profit rising 0.4%. However, Rakuten and KDDI announced an extension of their roaming arrangement on the same day the result was released, which is likely to mean more roaming revenue flowing to KDDI in fiscal 2023. Management couldn’t give exact guidance on this, but did indicate that it was likely to benefit by at least JPY 10 billion. We estimate this would imply guidance of around 2%-3% operating profit and net profit growth. We make 5%-10% increases to our net profit forecasts, partly taking into account increased share buybacks and the new roaming deal, and as a result, our fair value estimate for KDDI increases to JPY 4,400 from JPY 4,100 previously. At this fair value, KDDI would trade on a fiscal 2023 price/earnings ratio of 13.3 times with a 3.1% dividend yield. We see both KDDI and SoftBank as broadly fairly valued at current levels, and would prefer NTT.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by SoftBank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s third-quarter fiscal 2022 result (quarter-ending December 2022) was slightly below our expectations with operating profit down 5.5% and net profit down 7.7%. Costs associated with the two-day network outage in July, the impact of fuel price hikes, and losses from the energy business related to fuel price volatility, cost the company JPY 31.2 billion in the first nine months of the fiscal year and excluding these, first nine-month operating profit would have been flat. However, KDDI’s first-quarter results were boosted by a temporal accounting effect in its financial business relating to home mortgages which added around JPY 18 billion to operating profit, so underlying first nine-month operating profit was down around 2% on our estimate.

Narrow-moat KDDI’s second-quarter fiscal 2022 result (quarter ending September 2022) was slightly below our expectations with operating profit down 4.5% and net profit down 5.2%. Costs associated with the two-day network outage in July and the impact of fuel price hikes cost the company JPY 14.8 billion in the first half of the fiscal year and excluding these, first-half operating profit would have been flat. However, KDDI’s first-quarter results were boosted by a temporal accounting effect in its financial business relating to home mortgages that added around JPY 18 billion to operating profit, so underlying first-half operating profit was down around 3% on our estimate. Despite this, KDDI maintained its full-year guidance of reported operating income increasing by 3.7%, which implies an 11% year-on-year operating profit increase in the second half. The company is expecting a JPY 80 billion benefit as SoftBank Corp and NTT Docomo have outlined their intentions to switch off 3G services in January 2024 and March 2026, respectively.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by Softbank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s first-quarter fiscal 2022 result (quarter ending June 2022) was solid with revenue and subscriber growth prioritized over profit. Revenue increased 4.0% with operating profit declining 0.8% and net profit up 1%. KDDI’s first-quarter results were boosted by a temporal accounting effect in is financial business relating to home mortgages which added around JPY 18 billion to operating profit.

Narrow-moat KDDI’s guidance for fiscal 2022 (year ending March 2022) was solid, forecasting 2.1% revenue growth, 3.7% operating income growth and 2.3% net profit growth. It is also aiming to average double-digit operating profit growth over the three years to fiscal 2025. The fiscal 2022 guidance stands in stark contrast to competitor SoftBank Corp’s guidance that we estimate implies a 13%-14% decline in underlying operating profit, mainly due to the impact of mobile price cuts. KDDI’s guidance is likely helped by the fact that it has already shut down its 3G network.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by Softbank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s third-quarter fiscal 2021 result (quarter ending December 2021) was slightly ahead of our estimates. Revenue increased 0.2% year over year, with operating income up 6.8% and net profit up 9.6%, with the operating income helped by a 4.4% reduction in depreciation expense related to the planned closure of the 3G network and a review of depreciation lives.

KDDI is Japan's second-largest telephone company, and Japan is one of our favorite wireless markets. In addition, the firm is now addressing most of our concerns regarding its long-term wireless strategy. Japan has three incumbent wireless operators, all of which have traditionally competed more on service and handset features than on price. Industry regulation in the country has been fairly benign, and the industry has traditionally successfully weathered threats to this competitive balance. In 2008, a fourth carrier, eMobile, entered the market, but it was acquired by Softbank after only gaining about 3% share. This relatively benign competitive environment has allowed the industry to operate as an oligopoly, as evidenced by churn rates among the lowest in the world at less than 1% per month.

Narrow-moat KDDI’s second-quarter fiscal 2021 result (quarter ending September 2021) was slightly below our estimates. Revenue increased 2.3% year over year, with operating income down 8.1% and net profit down 2.4%. While the revenue was OK the profit growth levels were behind those implied by the company’s unchanged full-year guidance of 0.7% revenue growth, 1.2% operating profit growth and 0.5% net profit growth. KDDI’s total mobile customers have also declined over the first half of this fiscal year by 145,000. We are seeing signs of increased competition in the core mobile business with churn having crept up to an average of 0.78% per month in 2021 from 0.5% in 2020. KDDI responded by revamping pricing for its online brand, “povo," in September and claims it has seen a turnaround in mobile customer numbers since then and retains its target to increase total mobile customer numbers by March 2022. KDDI’s financial guidance for fiscal 2021 is also retained and our fair value estimate of JPY 4,100 and USD 20 per ADR are both unchanged. At this fair value, KDDI would trade on a price/earnings ratio of 13.9 times with a 3.0% dividend yield.