Ride on Smart Nation Technology for Growth in Your Investment Portfolio

smart-singapore

Graphic: The Straits Times

  • Singapore is at the forefront of an technological revolution with the Smart Nation launch as announced by PM Lee Hsien Loong last November
  • IDA followed up with concrete pilot plans such as HetNet in Jurong and driverless vehicles in Sentosa in April this year
  • Local telcos would benefit from higher mobile usage as Smart Nation gains traction and firms produce new products to facilitate this transformation
  • We can ride on this financially by investing in companies that progress with the growth of Smart Nation

The best investment decisions sometimes come from riding the next big change in society. An example was the computer revolution in the 1970s and the birth of Internet. On hindsight, if you have spotted the potential of Microsoft when it first listed in April 1986, you could have got in at $0.11 a share. Today Microsoft is at $47 and this is how Bill Gates became the richest man in the planet.

Almost every computer in the world uses Microsoft Windows as its operating system and MS Office as its office applications with the notable exception of Apple products. With so many people lining up to pay Microsoft whenever they turn on their computer, it is not hard to be rich. While it is easy to talk about the success of Microsoft on hindsight, it would be slightly more difficult to identify the next big thing in real time.

However we don’t have to look too far because we are in Singapore. Singapore has been on the forefront of change and the first to push the envelope when forced to change with the tides of time. It is with this in mind that I introduce the Smart Nation Programme.

PM Unveils Smart Nation Programme

This idea was first mooted by Prime Minister Lee Hsien Loong at the National Infocomms Award on 24 November 2014. The Smart Nation Programme seemed to have come out of a science fiction movie. Imagine a world where cars move automatically without anyone driving them. You would have 24-hour connectivity, no matter where you are on the island through your mobile phone. Your home, TV, and electrical appliances will be connected to the Internet and you can control your home lighting and air-conditioning with the touch of your smartphone. In short, this is the government’s push towards technology to play a more prominent role in raising living standards and productivity.

In a sense, this drive towards technology is not a totally new concept. For example, we have been trained to file our taxes electronically where our salaries are reported automatically to IRAS by our companies. Everyone saves a lot of time and effort filing taxes this way. Technology also applies to other parts of our lives such as the purchase of groceries and airline tickets online and even for making police reports for minor incidents.

”One important advantage which we have which we must take full advantage of is to use technology extensively and systematically, particularly IT. Not just piecemeal, individual gadgets, individual programmes and systems – that we are already doing, and all sorts of devices and applications have technology and IT in them.”

This is a quote from the Prime Minister and it underlines the concept of Smart Nation. In order to achieve that, he is setting up an office under the Prime Minister Office to be headed by Minister of Environment and Water Resource Vivian Balakrishnan. This office will coordinate the efforts of various agencies such as A*Star, Land Transport Authority, Urban Development Agency, Ministry of Manpower and Infocomm Development Authority (IDA). Therefore this idea will have widespread adaption to the entire government and the entire nation.

IDA – Government Vanguard of the Smart Nation Programme

This is not just talk. As we have seen in the role of technology in government agencies in the previous decade, the government is taking concrete steps to roll this out. The latest initiative was announced by the IDA just a few weeks back on 22 April 2015. The IDA will be testing the Heterogeneous Network (HetNet) in Jurong District and driverless vehicles in Sentosa. HetNet is the initiative for better internet coverage across the island compared to the spotty coverage today where telco signals weaken in MRT stations underground.

At this stage, IDA is the lead agency to promote the Smart Nation Programme both as regulator and as champion of leading edge technology. This would involve all the leading telcos in Singapore such as Singtel, StarHub, M1 and even the new kid of the block MyRepublic.

We already have driverless trains on our North East Line network and IDA is pushing the envelope for driverless vehicles. IDA will be collaborating with Sentosa Development Corporation (SDC) to push for driverless vehicle trials on the island before it is deployed on mainland Singapore.

Expanding Market for Telcos

We are likely to see greater government spending for the local telcos in this development phase. After this phase, as there is increased data coverage on the island, we are going to see greater revenue for these telcos as consumers come to rely more on their smartphones.

infocomm-rev

We can see from the IDA chart above that revenues have been on a steady increase for the telecommunications industry. This is attracting new entrants such as MyRepublic and OMG. In this environment, the renewed push towards greater integration of technology in our lives will enhance their attractiveness. These telcos are the gatekeepers because without the internet connectivity which they provide, there is no Smart Nation.

Indeed we are over-saturated in terms of mobile phone penetration. We started off with a high base of 85% in 2003 and we are now at 148% in 2014. This means that some of us are carrying two phones. It is common for us to know a relative or friend who carries a blackberry for work and an iPhone for personal use.

mobile-penetration

Also, Singaporeans are consuming more data than ever on their smartphones.

mobile-data-usage

Phone technology will get more advanced over time to support this mobile data. So while SMS usage has dropped, the advent of messaging apps such as WhatsApp and WeChat will encourage more data usage. Singaporeans are also getting the hang of consuming media products such as music on Spotify through their mobile device. This also means that Singaporeans will be less tolerant of service disruptions as recently seen from Singtel.

Of the three major telcos, I prefer StarHub as it is the most successful with its integration of mobile coverage, residential data coverage, and its cable television business. Its capabilities across these three sectors are the most balanced among all the telcos here in Singapore. All three elements are integral to the Smart Nation initiative and StarHub has recently signed up with IDA to push Smart Nation to local small and medium enterprises.

StarHub – Boring But Profitable

StarHub is now leveraging on its connectivity strength to persuade these businesses to use their cloud services to enhance their productivity in a cost-efficient manner. The new business line called SmartBusiness is pushing for software as a service where businesses pay a monthly subscription and get to use the latest products instead of the old model of buying software off the shelf and installing it. This will mean that businesses will get more efficient as they will have constant access to new and better products in their workplace with applications such as Microsoft Office 365 and security solutions such as McAfee Endpoint Protection.

This SmartBusiness initiative is really smart because it is a new revenue stream for StarHub and at the same time, it boosts data consumption as businesses have to connect to its cloud service online. The challenge comes from the initial stages of convincing businesses to sign up. Once they do that, StarHub will have them hooked as they will slowly get used to paying a smaller monthly fee compared to paying hefty upfront technology costs. This is assuming that StarHub continues to provide a good level of service for its clients.

This Smart Nation push will mean a greater infrastructure upgrade for StarHub going forward. This is not something that will happen overnight but the trend is clear. The risk here is in the implementation of the new business line and how it adapts to the changing requirements and preferences of their clients.

starhub-chart

StarHub has been pretty stable the past 12 months – gaining 4.11%. It distributed $0.20 per share as dividends last year on $0.22 of earnings per share. One of the reasons why StarHub is not soaring despite its promising new business line is that it is not able to control costs. Its revenue grew from $2.37 billion in 2013 to $2.39 billion in 2014 but its net income shrank from $380 million to $371 million.

It is spending more money in this experimental stage of the new business. However StarHub has stable and experienced management at the helm, this means that it is likely to implement its new business with satisfactory margins. If they can show credible signs of doing so, then it would not be surprising for their results and share price to improve in the coming year or two.

IoT: Z-Wave Home Control System

StarHub is the stable play but if you are looking for something with more potential growth, you have to look beyond our shores. This is because the really big money will come from companies that are able to come up with solutions to the Internet of Things (IoT).

Our Prime Minister made this statement in his speech last year:

“Take a family heading down to Jurong Lake for a day out on a weekend. You are rushing and in your rush, you forgot to turn off your lights and your air-conditioner. In the old days, you either run all the way home or wait till the end of the day and kilowatt hours are burnt and money spent. But today you should be able to get your iPhone, connect to your home and find out what the status is and if your air-conditioning is on, turn it off, and if your lights are on, turn them off. Save energy, save bills, save anxiety.”

That sounds wonderful indeed. However have you thought of the technology needed to transform this from fantasy to reality? After all, as the old saying goes money doesn’t drop from the sky and solutions do not magically appear.

One of the leading home control technology providers in the market right now is Z-Wave. With Z-Wave, you can do everything from opening your doors, turning on your lights, making coffee, switching off the alarm system with the touch of your phone. Every single thing which can be networked into the system can be included in the Z-Wave home control system.

Sigma Design – Promising But Unprofitable

The company that provides this will play a leading role in this technology change in the world. One such company is Sigma Design. Sigma Design is based in California, USA and has branches all over the world in China, Denmark, Hong Kong, Israel, Japan, Taiwan and right here in Singapore. Z-wave owns its proprietary home control standard which allows them to earn bigger margins. This is about to get better as more families discover the convenience of home control technology. This is a nascent and high growth market in the IoT segment which will attract more users in the future.

Besides the IoT market, Sigma Design is also in the smart TV business by producing the chipset necessary to transform the traditional TV set into a smart television where you can stream video from NetFlix, play video games, connect to your to Android mobile phones, and a myriad other functions. Their chipsets are accepted by Tier 1 television manufacturers such as Sharp and possibly Samsung in the future.

sigma-designs-chart

Sigma Design (Nasdaq: SIGM) has gained 131.79% in the last year. However, Sigma Design is not making money. In its latest report for FY2014, it reported $188 million in revenue, but managed to lose $21 million. Major expenses include research, sales and production. Research ate up $67 million, $42 million went to sales costs, and $93 million to the cost of production.

In short, SIGM is quite a risky addition to your portfolio but the upside is that they have good products in a high growth area. It would be silly to say that SIGM shot up because Singapore announced its Smart Nation Programme. But it is clear that Sigma Design can play a big role in home technology around the world and Singapore’s Smart Nation if they can grow their revenues and start turning stable profits.

If management is not able to turn it around, a big technology firm could to acquire it. This would be possible because its share price will likely to remain depressed (making it cheap to acquire) relative to its true potential. That said, there is also the possibility that SIGM has to endure more years of financial weakness as it has to invest more in research as they are the first movers in this nascent technology field.

Conclusion

Technology and connectivity are going to continue growing around the world and Singapore’s Smart Nation Programme is testament to this trend. As trends takes off, there are great growth opportunities to be found and it’s up to you to decide how you would like to ride on it.

Ong Kai Kiat is an avid investor. His expertise and focus is on how global macroeconomic affairs affect investment outlook and choices. He writes regularly about topics related to the economy, market outlook, ETFs and the occasional stock article.

2 Comments

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