Do Co MO, Worried About Cdma> WSJ
June 1, 1999
Heard in Asia
NTT DoCoMo Profit Surge
May Be a Blip, Some Warn
By PETER LANDERS
Staff Reporter of THE WALL STREET JOURNAL
In a grim Japanese earnings season, even corporate standard-bearers like
Toyota Motor and Matsushita Electric Industrial saw earnings fall sharply
-- and reported little hope for growth in the current year.
Amid the rubble, though, one company did stand out: NTT Mobile
Communications Network, otherwise known as NTT DoCoMo. Japan's
leading mobile-phone operator, DoCoMo saw its group profit rise 70% to
205 billion yen ($1.7 billion) as mobile-phone use in Japan surged.
Many institutional investors, foreign and Japanese, have taken a shine to
NTT DoCoMo shares. They see it as perhaps Japan's only trustworthy
blue-chip stock, a company with a solid growth record and a good chance
to keep up the pace.
But be wary of this bandwagon, warn some investors and analysts. Despite
its enviable record, NTT DoCoMo shares could hit the skids in a few
years if the rapid growth some peters out, as some predict it will.
'Very Defensive, Good Quality'
"It's very defensive, good quality -- but does it have upside potential? I'm
not so sure," says one Tokyo fund manager, who spoke about the shares
only on the condition he not be identified.
NTT DoCoMo started as the mobile-phone division of Nippon Telegraph
& Telephone, the former government phone monopoly that was privatized
in 1985. Last October, DoCoMo shares were floated on the Tokyo Stock
Exchange in the largest-ever global public offering (even though NTT
retained a 67.1% stake).
NTT DoCoMo's offering share price was 3.9 million yen. It has risen
steadily since the listing, closing Monday at 6.75 million yen, up 140,000
yen. That is slightly below the high for the year of 7.68 million yen.
Fueling the rise: explosive growth in mobile-phone users in Japan, despite
the country's recession. As of the end of April, Japan had 48 million
mobile-phone subscribers -- 42 million for standard phones and six million
for a slimmed-down type called Personal Handyphone System. Of those,
nearly 26 million were NTT DoCoMo customers.
But the growth can't continue forever. Japan's population is 127 million,
and within a few years most potential customers will already have a mobile
phone. What's more, rival mobile-phone companies are eating into NTT
DoCoMo's dominant share of the market. While NTT DoCoMo has 57%
of all subscribers, it took only 50% of new subscribers in April.
New Weapon
Its rivals' weapon is CDMA One, a new mobile-phone standard based on
technology (dubbed Code Division Multiple Access) developed by
Qualcomm of the U.S. CDMA One offers better voice quality than the
existing Japanese standard. Handsets sold by DoCoMo rivals IDO Corp.
and DDI Celluar, a unit of DDI Corp., got off to a good start in April.
At some point, NTT DoCoMo may have to cut prices to win back market
share, says Akihiro Ito, a telecommunications analyst at Deutsche
Securities. "It's the exact reverse of the position until now," with NTT
DoCoMo able to charge a premium by offering superior service, Mr. Ito
says.
Not everyone worries that NTT DoCoMo can't keep up the pace. By
early 2001 the company plans to offer "third-generation" phones
better-suited to data transmission and other interactive services. Already
NTT DoCoMo has started an "i-mode" service, enabling users to access
the Internet, check their bank accounts and buy tickets with their portable
phones. The service attracted 220,000 users in its first three months, and
NTT DoCoMo says the number could increase to three million by next
March.
More Profits
All those services mean more customer time on the phone and more profits
for NTT DoCoMo. The company is looking to go further with its
third-generation phones. In May it announced an agreement with Symbian,
a maker of operating-system software for mobile communications devices,
to cooperate in developing phones that can send images as well as text via
e-mail.
In the end, debate about the stock comes down to valuation. NTT
DoCoMo's market capitalization -- the value of all shares outstanding --
stands at 12.8 trillion yen. Relative to profits, that makes NTT DoCoMo
somewhat less valuable than peers in the U.S. and Europe. Kate Lye, a
telecommunications analyst at Warburg Dillon Read in Tokyo, says that
with the "substantial demand for data services," NTT DoCoMo is likely to
match its peers' growth rate. She rates the stock a buy.
But Mr. Ito of Deutsche Securities thinks European and American
mobile-phone operators have much more room to grow. That makes NTT
DoCoMo's current value -- which is about triple Sony's -- look high. Like
most analysts, Mr. Ito doesn't recommend dumping NTT DoCoMo
shares. But he warns that investors looking for a fast-growing issue should
probably call elsewhere.
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