Investing in Brazil's Exploding Telecom Sector
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Brazil faces an infrastructure crunch thanks to two upcoming major sporting events, the 2014 World Cup for soccer and the Summer Olympics in 2016.
The expected huge influx of travelers will put unprecedented strain on all of Brazil's inadequate infrastructure including roads, airports, hotels and telecommunications. The country's telecoms network is already under a strain as Brazil is one of the world's fastest growing telecommunications markets thanks to the rapid expansion in the number of middle class citizens.
It's a middle class that is youthful and therefore has taken to the mobile internet and social media quite rapidly. Just take a look at one subsector...e-commerce. The sector is forecast to be worth $11.6 billion by the end of 2012, up 25 percent up from last year. This follows gains of 26 percent and 40 percent, respectively, in the previous two years.
One ADR with exposure to the sector in Brazil and that is listed in the US is MercadoLibre ADR (NASDAQ: MELI), which hosts online commerce and payment platforms across Latin America. Last quarter, the company reported a revenue increase of 36 percent, net income growing by 40 percent and transactions rising by a whopping 88 percent.
The only thing holding down the growth in the e-commerce industry from an even faster pace is logistics. That is, getting the goods purchased to the customer in a timely manner. And that again comes back to the poor quality of Brazil's roads, ports and airports.
Getting back to the telecommunications sector specifically, the Brazilian government and its telecoms companies are moving forward with upgrading telecom services in the country so as to avoid embarrassment when the whole world will be watching Brazil in a few years thanks to the World Cup and the Olympics.
The government recently held a spectrum auction for high-speed 4G networks and all of Brazil's major mobile phone carriers were active in the auction, ponying up a total of $1.4 billion. Purchasing spectrum at the auction were Claro, controlled by Mexico's America Movil ADR (NYSE: AMX); Vivo or Telefonica Brasil SA ADR (NYSE: VIV), which is owned by Spain's Telefonica; Oi SA ADR (NYSE: OIBR), which is partly owned by Portugal Telecom; and TIM Participacoes SA (NYSE: TSU), which is owned by Telecom Italia. George Soros' Sunrise Telecomunicacoes also bought spectrum.
The goal of the government and the phone companies is that all cities with a population of more than 100,000 people will be integrated into fourth-generation telecoms networks by the year 2016, in time for the Olympics. Of course, cities that are serving as World Cup host cities will have to be integrated into 4G networks by the end of 2013.
Installation of 4G networks across the country should lead to an even faster uptake of the mobile internet in Brazil. This should lead to more profits for the Brazilian telecoms firms and their stockholders over the next several years. Any investor initiating positions now in these stocks is picking them at good valuations since the Bovespa index has been among the globe's weaker performers, down 8.3% since the beginning of the year and down 13% in May. And as a bonus, while investors hold positions in these stocks, they can collect a nice dividend yield in addition on many of these stocks.
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