Nippon Downgraded to Neutral - Analyst Blog

We downgrade our recommendation for Nippon Telegraph & Telephone Corp. (NTT) to Neutral based on grounds of valuation. Nippon is currently trading at the high-end of its 52-week price range, which in our view provides limited upside potential. Despite facing intense pricing pressure from smaller telecom service providers and its leveraged balance sheet, we believe Nippon will improve its performance in future reporting periods due to its continuous effort to provide upgraded products with cutting-edge technology.

The mobile wing, NTT DoCoMo (DCM) performed extremely well as a result of a significant growth of smartphones in Japan generating massive revenue from data communications. DoCoMo implemented a new business strategy whereby it reduced subsidies on mobile handsets while offering customers lower priced monthly plans and installment facilities. DoCoMo is all set to launch super-fast 4G Long-Term Evolution (LTE) network in Japan by end-2010. We believe the deployment of LTE will significantly boost DoCoMo's financials going forward.

Nippon has taken a major strategic move to boost its cloud computing and integrated communications services business. The company has acquired South Africa-based leading global IT solutions firm, Dimension Data for about $3.23 billion. Nippon will try to integrate the Dimension Data business with its NTT Communications division, which offers IP VPN, data center, and network security services to several large and geographically diversified business enterprises.

Dimension Data is concentrated mainly on the West Coast of the U.S., Latin America, Western Europe, Africa, the Middle East, Australia, and the Indian subcontinent. On the other side, NTT Communications has a solid presence in South-East Asia, Central & Eastern Europe, and East Coast of the U.S. Acquisition of Dimension Data will give Nippon the necessary scale and technology to formidably compete with other giant cloud computing firms.

However, at the same time, we believe all these positives are already reflected in the current valuation leaving little room for any above market gain. We believe the stock will perform mostly in line with the broader market in the near term.

 
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