ASEAN Industry Focus Telecom Sector - DBS Group Focus Telecom Sector Page 3 Valuation metrics change...

ed-TH / sa- YM/AS, PY

Ride on shift in valuation metrics

Shifting valuation metric to lead to re-rating or

de-rating of stocks

Indosat and XL are top picks – Indosat to shift

from EV/EBITDA to PER in 2Q17; XL to reverse

revenue share loss although re-rating likely in

4Q17

Top SELL – DTAC, Maxis as focus to shift from

dividend yield to PER with potential cut in

dividends

Pay attention to revenue share trends and shift in the

valuation metrics. We continue to see revenue share as a critical success factor for telco stocks in ASEAN. From 2010 -2016, we noted 5-6 instances of market shifting its valuation metrics in the sector. On average, the preceding metric improved by 26% over four quarters following the shift from EV/EBITDA to PER or PER to Dividend Yield.

Re-rating due in Indonesia. XL stands to benefit from the reversal of revenue share loss due to a sharp 86% increase in 3G base stations by 3Q16. Indosat & XL are minimising their exposure to USD debt and improving capex efficiency through the use of 900MHz spectrum and network sharing. This should improve their earnings, transitioning them from EV/EBITDA to PER as the primary metrics. We expect Indosat to see a ~25% improvement in share price in FY17 (20% due to re-rating) as it trades at EV/EBITDA of only 4x versus ASEAN average of 8.4x.

After sharp correction in 2016, Sing telcos to be stable in

2017. Potential revenue share loss to the new entrant TPG is partially mitigated by co-operation between StarHub and M1 to share active networks. This will lead to an estimated 20% capex savings from 2018 onwards and help them to sustain dividends. We think 13-14x FY17F PE is fair, translating into dividend yield of 6.0-6.5% justified by higher risk-free rate and potential decline in earnings. A near-term would be potentially high price of 700 MHz spectrum in 1Q17.

After small correction in 2016, Malaysian telcos to de-

rate sharply in 2017. Potential earnings decline due to smaller players such as U Mobile receiving additional spectrum and an aggressive mobile entrant - Telekom Malaysia - could shift the focus from dividends to earnings. DiGi and Maxis are trading at 23-24x FY17 PE and 13-14x FY17 FY17F EV/EBITDA.

Thailand suffers from twin issues. Data pricing in Thailand remains the cheapest in the region while handset subsidies continue to be high. DTAC continues to lose revenue share sharply versus moderate loss by AIS. Even if DTAC scraps its dividends in 2017, its net debt-to-EBITDA will rise above 4x by 2021 in our estimates.

STI : 2,993.00Analyst Sachin MITTAL +65 6682 3699 [email protected] Woo Kim TOH +60 32604 3917, [email protected] William SIMADIPUTRA +62 2130034939; [email protected] Wasu MATTANAPOTCHANART +66 2657 7826 [email protected]

STOCKS

Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 11 Jan 2017

Country Rating Indonesia Overweight Singapore Neutral (Upgrade from Underweight) Thailand Neutral Malaysia Underweight

Shifting valuation metrics with change in growth & cash flow

Source: DBS Bank

DBS Group Research. Equity 16 Jan 2017

ASEAN Industry Focus

Telecom SectorRefer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

LCL US$m LCL 3 mth 12 mth Rating

XL Axiata 2,690 2,170 3,300 3.1 (19.4) BUY Indosat 6,200 2,543 8,000 (2.8) 16.4 BUY Telekom Malaysia 6.13 5,170 7.20 (8.5) (6.3) BUY M1 2.06 1,342 2.09 (9.3) (20.2) HOLD StarHub 2.93 3,547 3.01 (13.1) (17.2) HOLD Axiata Group 4.69 9,466 4.45 (8.8) (24.1) HOLD

Telekomunikasi Indonesia 3,960 30,133 4,100 (4.4) 29.4 HOLD

Advanced Info Service

155 13,001 154 3.3 7.3 HOLD

Digi.Com 4.91 8,567 4.35 (1.6) (4.8) HOLD

Total Access Communication

42.50 2,839 33.00 44.1 38.2 FV

Maxis Bhd 6.12 10,315 5.10 1.2 (7.7) FV

Industry Focus

Telecom Sector

Analysts Sachin MITTAL +65 6682 3699 [email protected] Woo Kim TOH +60 32604 3917 [email protected] William SIMADIPUTRA +62 2130034939 [email protected] Wasu MATTANAPOTCHANART +66 2657 7826 [email protected]

Table of contents

Valuation metrics change with company's growth prospects 3 Shift in valuation metrics is a good indicator of re-rating potential 4 Our views on individual countries Singapore – Network sharing to mitigate revenue loss 6 Indonesia – Small players to halt revenue share loss? 11 Thailand – DTAC losing the battle for revenue share 16 Malaysia – Dividend cuts and high spectrum costs 20 Sector Valuations 23 Company Guides 24

M1 25

StarHub 32

Axiata Group 39

Digi.com 47

Maxis Bhd 55

Telekom Malaysia 63

Advanced Info Service 71

Total Access Communication 78

Indosat 85

Telekomunikasi Indonesia 94

XL Axiata 103

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Industry Focus

Telecom Sector

Valuation metrics change with company's growth prospects Market values different companies using different metrics depending on the performance of the companies. Over time, as these companies' prospects improve or decline, the valuation metrics applied by the market also change. EV/EBITDA, PER and Dividend Yield are the key valuation metrics used by markets to evaluate most of the listed space. Early stage companies are evaluated on EV/EBITDA. Companies at an early point in their growth cycle focus more on building market share and revenue. A company’s earnings base, at this stage, is often small due to less focus on earnings improvement and a lack of scale efficiencies. Further, high levels of depreciation and interest expenses compared to revenues due to immature investments would depress earnings. As a result, earnings-based valuation metrics such as PER do not offer much clarity, since they tend to be too high to be viewed as reliable benchmarks. In such an environment,

EBITDA becomes a better metric to evaluate the company’s profitability and growth. Also, it is often a better visibility of the cash generation. Consistent earnings; market looks at PER. As companies mature, their EBITDA growth starts to slow down due to higher base and lower capital expenditure. Better-managed companies should be generating some free cash flow, reducing net debt or improving net cash. As interest costs and depreciation becomes lower compared to the revenue, such companies start to show consistent profitability. Mature companies tend to be valued on Dividend yields. As a company reaches maturity, it should generate enough cash flows to maintain a stable payout of dividends and efficient management of its capital base. During this stage, investors often use dividend yield as a yardstick for valuation. Companies that use share repurchases as a means of distributing earnings, tend to be valued on dividend yield.

The change of focus and valuation metrics over different stages of growth

Source: DBS Bank

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Industry Focus

Telecom Sector

Shift in valuation metrics is a good indicator of re-rating potential We believe that companies with a history of negative or low earnings or oscillating net profits are valued using EV/EBITDA by the market. However, as these companies start to show consistent healthy profitability (net profit), and PERs below 25x, the market will switch to a PER-based valuation for the stock. Between 2010 and 2016, we identified one instance of this transition, with XL in 2010. Similarly, as companies mature and start to offer consistent and predictable dividends, the market will start to view such

companies as dividend yield-based stocks, especially if the company’s growth slows and PERs recede. To identify instances where companies transitioned from EPS-based stocks to DPS-based stocks, we compared the correlation of DPS and share prices (over five years) of dividend paying stocks and correlation of EPS and share prices (over one-year periods). When the correlation of EPS and share prices dropped below the correlation of DPS and share prices for multiple quarters, we assumed these were the instances of such transitions.

Maxis share price and Earnings

Source: DBS Bank

Maxis share price correlation with EPS and DPS

For example, Maxis share price shared strong positive correlation to its EPS, prior to 1H12. However, this relationship was weakened in 2Q12, which resulted in the correlation of EPS and share prices going below the correlation of DPS and share prices. This instance was identified as a transition. We found six such instances between 2010 and 2016.

Corretion of the share price became higher with dividends than earnings over 2011-13 for many stocks

Source: DBS Bank

Company TransitionChange

timing

Correlation of

EPS and Share

price before

change (1 Year)

Correlation of

EPS and Share

price after

change (1 Year)

Correlation of

DPS and Share

price (5 years)

M1 PER to Div Yield 3Q11 0.91 ‐0.84 0.74

DTAC PER to Div Yield 4Q11 0.60 ‐0.49 0.29

TLKM PER to Div Yield 4Q12 0.24 0.01 0.22

Maxis Bhd PER to Div Yield 2Q12 0.80 ‐0.95 0.65

Telekom PER to Div Yield 2Q13 0.65 ‐0.92 ‐0.21

Axiata Group PER to Div Yield 4Q12 0.64 ‐0.27 0.62

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Industry Focus

Telecom Sector

Our investigations on ASEAN telco shares over the past 5-6 years revealed that as markets shift their views on the valuation metrics for a share, it goes through a re-rating. Between 2010 and 2016, we noted 5-6 instances of market shifting up its

valuation metrics either from EV/EBITDA to PER or PER to dividend yield. And on average, the past metric used saw an increase of 26% over the following four quarters.

Preceding valuation metric saw significant re-rating after the switch to a new valuation metric

Source: DBS Bank Focus on companies that will switch valuation metrics. By focusing on the companies that have a potential to be re-rated due to the shift in valuation metrics, we believe investors will be able to capture a higher gain than the forecasted

profitability would suggest. In this backdrop we believe, Indonesian counters Indosat and XL offer better prospects, as their profitability recover following a relatively tough 12-24 months.

Shifting valuation metrics with change in growth & cash flow

Source: DBS Bank

Company

Initial

valuation

metric

Change

timing

Subsequent

valuation

metric

Initial valuation

metric 12 months

leading in to change

Initial valuation

metric 12 months

after change

Change

M1 PER 3Q11 Div Yield 13.1 13.9 6%

DTAC PER 4Q11 Div Yield 10.9 16.5 52%

XL EV/EBITDA 2Q10 PER 5.4 6.3 17%

TLKM PER 4Q12 Div Yield 13.2 15.2 15%

Maxis Bhd PER 2Q12 Div Yield 15.0 20.0 34%

Telekom PER 2Q13 Div Yield 15.1 19.1 26%

Axiata Group PER 3Q12 Div Yield 17.4 22.3 28%

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Industry Focus

Telecom Sector

Singapore – Network sharing to mitigate revenue loss StarHub’s mobile revenue share dropped from 38% to 31% over 2006-16

M1’s mobile revenue share dropped from 23% to 16% over 2006-16

StarHub and M1 have been losing mobile revenue share even in a three-player market. StarHub’s revenue share losses, however, did not translate into earnings decline mainly due to rising National Broadband Network-related grants recognised under “Other Income”. However, we project StarHub’s “Other Income” to fall from S$46m in 2015 to S$35m in 2016F and disappear in 2-3 years as adoption grants are fully utilised. As the market becomes a 4-player market, we expect further loss of revenue share at M1 and StarHub. Heavy discounts on offer for data

Source: Companies, DBS Bank

Expect weak revenue even before the launch of mobile network by TPG in 2018. Singapore’s incumbent mobile players slashed mobile data prices in March 2016 for postpaid users in an effort to discourage the entrance of a fourth player, whereby effective monthly pricing for additional data was lowered by 25-50%. The discount set on data pricing contributes to a slower data revenue growth coupled with decline in voice and SMS revenue. TPG the new entrant to Singapore’s mobile market

TPG secures the fourth player spectrum license. TPG, a fixed and mobile virtual network operator (MVNO) operator from Australia, snatched the spectrum licenses to become the 4th mobile operator in Singapore at the fourth player spectrum auction held on the 14th of December 2016. The winning bid was a whopping S$105m, three times the reserve price of S$35m. Accordingly TPG will be allocated a total bandwidth of 60MHz (2x10MHz of 900MHz band and 40MHz of 2.3GHz TDD) and will have an opportunity to expand its spectrum assets further at the general spectrum auction, expected to be held in 1Q17. TPG’s spectrum rights to commence on 1st April 2017. The new spectrum rights will commence on the 1st of April 2017 and TPG will be required to provide nationwide street level coverage for 4G within 18 months from the start of the new spectrum rights. Road tunnels and buildings would need to be covered within 30 months and coverage for MRT underground stations/lines would need to be achieved within 54 months from the start of the new spectrum rights. Challenging days ahead for the mobile market. With a FY16 underlying EBITDA of A$ 775m and a net debt to EBITDA ratio of 1.6x, TPG has enough balance sheet strength to raise S$ 200 - 300m it intends to spend on initial network rollouts. TPG expects to start delivering mobile network services to customers in 2018 and capture 5-6% of market share within a short period of time (specifics not given), at which point its Singapore operations would be EBITDA positive. we believe TPG would be able to gain 8.5% of mobile revenue market share by 2022. Price competition will lead to mobile market contracting. TPG would likely resort to capturing subscribers through price competition as it has done in the fixed broadband segment at home. Singaporean telcos have already slashed data prices in anticipation of an aggressive fourth player, which has led to the Singaporean mobile market contracting over the past 2-3 quarters. Further price cuts are likely in the coming 12-24 months as TPG introduces its services in Singapore. We believe this would result in a 4% contraction of the overall Singapore mobile market, compared to 2015 by 2022.

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Industry Focus

Telecom Sector

Incumbent markets shares will decline

Source: DBS Bank Market share trends in the Australian broadband market

Source: DBS Bank

*Telstra has a data cap of 1000GB. All other plans offer unlimited data. Source: Companies TPG base case ROI is ~16% over 13 years. Under our base case assumptions of 8.5% revenue share for TPG by 2022, we believe TPG would be able to achieve a ROI of 16% by 2030. We have assumed TPG would be able to achieve a long term EBITDA margin of ~20% with an 8.5% market share considering M1 EBITDA margin of ~40% with 18% market share at present. In addition, we have assumed TPG would incur an investment of ~S$ 250m as network capex in addition to ~S$ 105m as spectrum payments during the

period. We have also assumed a 0.5% long term growth rate in the Singaporean mobile market post 2022. Singapore’s overall revenues will contract due to price competition

Source: DBS Bank In a scenario where TPG is able to provide a high quality service level with minimum technical issues, we may see TPG out performing our base-case expectations. If TPG’s performance beats our expectations, we believe TPG could reach up to 10% of revenue share during the same time frame. Hence, in our bear case scenario (from the point of view of incumbents) the resulting higher revenue level would contribute to a ROI of 82% by 2030, if capex investment remains same. We expect a slightly higher long term EBITDA margin in such a case. Conversely if TPG’s service quality underwhelms Singapore consumers, TPG may only reach a revenue share of 6%. In our bull-case scenario TPG will only achieve a -18% ROI in our view.

Source: DBS Bank TPG faces an uphill battle in the Singapore wireless market. TPG lacks experience in the wireless industry. TPG does not possess any prior experience in operating a mobile network. Their mobile operations in Australia is an MVNO operation and may find it difficult to build a network from scratch to compete with some of the best network operators in the world. In addition, TPG will need to find suitable base station sites, which can become difficult with Singapore’s urban density. Singapore does not have a passive infrastructure pool that can be freely leased by third parties. This was a key concern raised by MyRepublic when it showed interest to enter the Singapore mobile market initially.

ADSL2+ Plans

Broadband plans Monthly A$

Telstra* 95.00

Optus 80.00

Dodo 74.90

TPG 59.99

AusBBS 59.75

2018 2019 2020 2021 2022

StarHub 1,198 1,166 1,134 1,102 1,071

M1 697 663 630 597 565

TPG 69 136 203 270 335Singapore Mobile

Revenue (S$m) 4,037 4,013 3,989 3,965 3,941

Bull case* Base case* Bear case*

Market share (2022F) 6.0% 8.5% 10.0%

Long term growth 0.5% 0.5% 0.5%

LT EBITDA margin 20% 20% 25%

Revenue (2030F, S$m) ~250 ~350 ~410

ROI (%) ‐18% 16% 82%

*From incumbent's point‐of‐view

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Industry Focus

Telecom Sector

Lack on a physical presence and bundling capabilities could make life even more difficult. TPG also does not have a mature on-the-ground operation in Singapore. This means they will need to build supporting infrastructure such as retail networks, agents, and service points from the ground up. Furthermore, TPG also faces the disadvantage of not having a fixed broadband operation unlike the incumbents. Players such as StarHub has already rolled out plans that feature fixed-mobile bundling lock-in customers from moving to a new player. TPG’s modus operandi may be in the way of service quality. TPG rely on strict controls on operating costs to compete against larger players due to its strategy of price competition. However, in the past the company has seen instances of pursuing lower costs impacting its service quality. For example, TPG implemented a number of cost control methods including downsizing and off-shoring certain functions in iiNet, which it acquired in 2H15. Though, this cannot be directly linked to lower service quality, iiNet saw a ~50% increase in complaints about its services in 2015/2016 (year starting 1st July), compared to the previous year according to a report by Australian Telecommunications Industry Ombudsman. TPG starting from a position of weakness. Singapore’s regulators prescribe strict quality guidelines for its operators. In addition, TPG will compete against telcos that have years of operating history in Singapore. Singaporean telco operators maintain high quality networks with the highest LTE speeds in the world according to OpenSignal. All three operators at present have 4G networks that cover over 99% of the outdoor spaces and 95%+ in most of MRT tunnels. Therefore, Singapore subscribers are generally used to higher service quality levels compared to other regions in the world. TPG will need to create a positive impression of its network quality and overall service level from the get go, to capture and keep Singaporean mobile customers Acquisitions the way to go?

An acquisition in Singapore could cure some initial headaches. TPG could potentially overcome some of the challenges of setting up its operations through an acquisition in the telco space. Though TPG is unlikely to acquire an existing wireless service provider, as any such attempt is likely to be blocked by the regulator, Info-communications Media Development Authority of Singapore (IMDA), TPG could potentially acquire an already operational fixed operation in Singapore. This would give TPG a head start in deploying its support infrastructure along with an ability to bundle mobile and fixed broadband TPG has a history of inorganic expansion. TPG has been an active investor in the Australian internet scene, having made a number of acquisitions to consolidate its position as a broadband service provider.

Past Acquisitions done by TPG

Source: Reuters, DBS Bank Potential acquisition targets in Singapore. At present the Singapore Market has 3 fixed-only operators catering to both retail and corporate customers.

MyRepublic ViewQwest SuperInternet

TPG should be willing to pay S$ 50-60m for a fixed operator. In past fixed broadband acquisitions, acquisition targets have generally been valued at ~$ 500-1,200 per subscriber. However, in these acquisitions include considerable fixed broadband assets including fibre backbones and data centre assets. Since Singaporean fixed broadband players such do not own their own core network, the enterprise value per subscriber for them would at least have a 25% discount in our view. MyRepublic, is the largest of these players and had ~50,000 fixed subscribers as at the end of 2015 with another ~40,000 fixed subscribers in Indonesia and New Zealand. Given the Singapore’s smaller fibre broadband operators expanded their total fibre subscribers by only 12,500 subscribers in the first nine months of 2016, we estimate MyRepublic’s Singapore operations to have ~60,000 subscribers at present. Similarly, ViewQuest the second largest fixed broadband player with corporate and retail businesses had ~20,000 as of September 2016. As a result, we believe MyRepublic’s Singapore business would be worth S$ 35-80m while ViewQuest’s Singapore business could be worth S$ 11-27m. We believe, TPG would be willing to pay a S$ 50-60m for such an acquisition in our view as this would get them a fully formed ground operation which, in the case of MyRepublic, is already EBITDA positive. No major regulatory concerns in acquiring a fixed operator. Antitrust regulations relating to the telecommunication industry in Singapore comes under the purview of the IMDA and is governed by the Telecom Competition code. According to the Telecom Competition code, IMDA has the right to block, or force conditions upon any acquisitions that may reduce competition and create a disadvantage towards public interest. This also extends to cases where M&A can eliminate a potential future competitor or limit the ability of competitors to use a service that is essential for service delivery.

Year Acquirer Target CountryEnterprise Value

of target (USDm)

Subs of the

target (millions)EV/Sub (USD)

2015 TPG iiNet Australia 1,545 1.300 1189

2015 M2 Group CallPlus New Zealand 186 0.430 433

2015 Vocus M2 Group Australia 1,887 1.900 993

2013 M2 Group Dodo Australia 212 0.400 530

2012 M2 Group Primus Australia 199 0.165 1207

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Industry Focus

Telecom Sector

Bear-case mobile revenue projections for incumbents

Source: DBS Bank Positvely surprised on potential active network sharing by incumbents. M1 and StarHub have signed a Memorandum of Understanding (MOU) to study potential collaboration in mobile infrastructure sharing, with a focus on sharing radio access network (RAN), backhaul and access assets. For many years, M1 and StarHub have been sharing mobile infrastructure such as antenna systems, in-building fibre and tunnel cables. Both the companies intend to share mobile network radio elements while keeping individual mobile core networks. Not much details are diclosed at this stage. We estimate ~20% capex savings for both the companies from 2018 onwards. Various industry estimates suggest 20% capex savings on sharing of RAN and 40% capex savings on sharing of RAN, core network and spectrum. M1-StarHub intend to share RAN as per MOU. In highly dense and urbanized Singapore, we estimate RAN to account for most of the capex with sharp rise in data. A number of telcos in Europe including Telenor, Vodafone and O2 have been sharing active networks. More importantly, TPG may find it more challenging to compete with players having sizable network capacity in our opinion.

Increasing asset savings and improving cash flows with more extensive sharing

Model Asset

savings Cash flow

improvement

Roaming N/A N/A

Passive JV ~10% Up to 13%

TowerCo ~20% Up to 17%

Active and passive JV

~20% Up to 23%

Wholesale ~40% Up to 31%

Models including active sharing

Source: Ericsson M1 will be most impacted from the entry of a fourth operator. We believe the entry of a new player will be most felt by M1 due to its higher exposure to cellular revenue (~68% in 3Q16) and a more price-sensitive subscriber base. As a result, we expect the revenue share of M1 to drop from 18% in 2015 to 14% by 2022 resulting in total revenues contracting by 19% by 2022 from 2015 levels. Hence, we expect M1's earnings to drop by 38% during the same timeframe. StarHub has a lower reliance on mobile revenue (~51% in 3Q16) and a stickier, less price-sensitive customer base. StarHub has also introduced more fixed-mobile bundling offers to reduce revenue share loss to a new entrant. As a result, we expect StarHub to be less affected by the fourth player's entry compared to its local peer M1. We expect StarHub’s revenue share to drop from 30% in 2015 to 27% by 2022. Due to lower revenues and lower grant income, we project group earnings to drop by 25% from 2015 levels by 2022.

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Industry Focus

Telecom Sector

What to look for in 2017?

Source: IMDA, DBS Bank Source: DBS Bank

Period Event Description Potential Upside Potential Downside 1Q17 General Spectrum

Auction - 700MHz, 900MHz and 2.5GHz bands

General spectrum auction for the incumbent operators and new entrant is expected to take place in 1Q17. Following slots will be available for bidding.

A smooth auction would ensure that each player renews its expiring rights at a reasonable price.

An overly aggressive TPG could elevate the auction price for 700MHz spectrum much above the reserve price, forcing the incumbents to resort to higher prices.

Period Event Description Potential Upside Potential Downside 1H17 Commencement

of TPG's spectrum rights. TPG may enter the Singapore wireless market

TPG would be assigned the spectrum rights to 2x10MHz in the 900MHz band and 40MHz in the 2.3GHz TDD bands from 1 April 2017, which is theoretically the earliest possible start date for TPG. The company may begin to offer promotional wireless services from 2H17, if it manages to establish a roaming agreement with an incumbent operator.

-

An aggressive pricing strategy by TPG to lure customers off competitors could lead to a 4% contraction in industry revenues.

Spectrum band Lot size LotsRights

duration

Reserve

price per

lot

700 MHz 2x5MHz 9 15 Years S$ 20m

900 MHz 2x5MHz 4 16 Years S$ 20m

2.5 GHz TDD 5MHz 9 16 Years S$ 3m

General spectrum auction ‐ with new entrant

Expiring spectrum rights

900 MHz Expiry date

SingTel 15 MHzx2 31‐Mar‐17

StarHub 5 MHzx2 31‐Mar‐17

M1 10 MHzx2 31‐Mar‐17

1,800 MHz (Reallocated in 2013)

SingTel 25 MHzx2 31‐Mar‐17

StarHub 25 MHzx2 31‐Mar‐17

M1 25 MHzx2 31‐Mar‐17

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Industry Focus

Telecom Sector

Indonesia – Small players may halt revenue share loss Telkomsel has been gaining mobile revenue share

sharply since 2014

Source: Companies, DBS Bank XL has lost significant revenue share since 2014

Source: Companies, DBS Bank ISAT has gained some revenue share since 2014


XL has almost doubled the number of 3G base stations over the past nine months. XL has increased its 3G base stations by 15,700 (+86%) in the first nine months of 2016 with more than 10,000 coming in 3Q16 using 900MHz, which are further upgradable to 4G. We believe that much of the 3G investments are focused on improving coverage and service quality in ex-Java regions, where we are continuing to see steady legacy growth. We believe the investment would reduce the network weakness of XL in 3G outside Java. Indosat, in comparison, has been ahead of XL in the use of 900MHz spectrum in 3G, leading to comparatively stronger performance over the past 18 months. XL continues to develop 3G coverage

Source: Companies XL has the lowest number of subscribers per 3G base station implying network advantage now

Source: Companies

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Industry Focus

Telecom Sector

Telkomsel’s dominance challenged by network sharing between XL and Indosat. XL has also entered into a network sharing agreement with Indosat, to deploy a 4G LTE network outside Java. The two companies are already running shared 4G LTE networks in several cities and intends to extend this collaboration to deploy a greenfield LTE network outside Java. According to PWC, active network sharing could bring about capex and opex savings of as much as 40%, benefitting the two operators. While the deal is still under consideration by the regulator, a positive nod could lead to the two companies instigating the deployment of the network as soon as 1H17, which could boost 4G coverage outside the Java region. With one of the highest number of subscribers per 1MHz spectrum in the region and the intentions of the regulator to level the playing field between smaller operators and larger ones by allowing network sharing, it is very much likely that the regulator will set up a regulatory framework and grant approval for the sharing of spectrum among Indonesian operators. Indonesia has one of the highest number of subscribers per 1MHz

Source: DBS Bank

XL and ISAT could hugely benefit out of such an arrangement as:

I. XL has a relatively stronger presence in the Sumatra region while Indosat is more prominent in Kalimantan. The two operators, if willing, could benefit off each other’s network strengths in the respective areas.

II. The combined spectrum assets of the two entities in lower-spectrum bands far exceed spectrum assets held by TLKM. This, coupled with the ~20-40% cost-savings made available through Multi-Operator Core Network (MOCN), would allow XL and ISAT to expand 3G coverage outside Java fairly faster. The new base stations would also be readily upgradable to 4G, challenging TLKM’s existing legacy network when expanding 4G coverage outside Java. This may tilt the competitive landscape on 4G outside Java in favour of XL and ISAT, as the two already have strong promotional campaigns in Java providing users with free/discounted smartphones when shifting to 4G, along with free data quotas for streaming videos and music online. Similar strategies outside Java may help XL and Axiata shift the competitive dynamics outside Java from legacy services to data.

In terms of revenues, assuming that TLKM losses 15% market share in the ex-Java region over the next eight years if spectrum sharing is allowed, XL/ISAT could add ~IDR 14t/5t (~65%/25% of FY15 revenues) to their top lines.

18,030 89,106

602,069 954,934

Singapore Malaysia Thailand Indonesia

Subs per 1MHz among major operators

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Industry Focus

Telecom Sector

2G/3G network coverage – XL (Sumatra region is circled)

Source: Opensignal 2G/3G network coverage – Indosat (Kalimantan region is circled)

Source: Opensignal Spectrum holdings in Indonesia

Source: Indosat XL revenue likely to outperform the market. Indonesian telcos have adopted “upfront” pricing strategies, where users are charged heavily for the first few minutes of voice services, better monetising the use of legacy services. Telkomsel has also adopted a cluster-based pricing strategy by charging premiums for the use of legacy services from users outside the Java region, where smartphones are less prevalent. However, we believe the increasing affordability of smartphones, better network quality of XL and Indosat, and high cost of legacy services, would act as catalysts for increasing adoption of OTT services in Indonesia, leading to declines in legacy revenues over the next 2-3 years. With an improving network, we

believe XL is likely to show a higher top-line growth than its competitors due to historically lower exposure to legacy revenues.

850MHz 900MHz 1800MHz 2100MHz 2300MHz Total (In

MHz)

Telkomsel 4.5MHz x 2 7.5MHz x 2 22.5MHz x 2 15MHz x 2 15MHz 114

Indosat 2.5MHz x 2 10MHz x 2 20MHz x 2 10MHz x 2 15MHz 100

XL Axiata 7.5MHz x 2 22.5MHz x 2 15MHz x 2 90

Hutchison 10MHz x 2 10MHz x 2 40

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Industry Focus

Telecom Sector

Voice and SMS pricing has been going up

Source: Companies XL and Indosat shedding USD debt will stabilise bottom line. XL and Indosat have continued to shed USD debt to reduce exposure to fluctuations in foreign exchange. ISAT reduced its total debt by ~30% and USD debt by 85% over the past six quarters. Proportion of USD debt to total debt fell from 55% in 2Q15 to 12% by 3Q16. ISAT expects to reduce this further to ~5% by the end of FY17. Similarly, XL has reduced its total debt by ~48% of over the past six quarters with foreign currency-denominated debt as a percentage of total debt falling to ~30% from 71% over the same period. We believe lower foreign debt would limit downside risk and earnings volatility from forex movements for the two operators and be accretive to their bottom lines in the long term.

Curtailing Foreign debt

Source: DBS Bank Indosat to get re-rated from change of valuation metrics. Indosat has had three quarters of positive earnings due to lower forex-related losses. Given the company’s willingness to shed much of the remaining exposure, we believe Indosat will be able to post consistent earnings over the next 4-8 quarters, even with a relatively meagre top-line growth. Indosat’s bottom line should also benefit from network sharing agreement with XL. Indosat is trading at FY17F/18F PE of 24x/14x at current market prices. As a result, the market could shift their valuation metric for Indosat from EV/EBITDA to PER as early as 2Q17. We believe this would result in a ~20% appreciation of Indosat’s EV/EBITDA. EV/EBITDA at -2SD is a good entry point for XL with re-rating possibly by end-2017. Despite having paid down a significant portion of its debt, there has been relatively little improvement in interest expenses (from 1Q15-3Q15 levels). This was due to a higher effective interest rate as XL paid off its US$500m low-cost shareholder loan in 2Q16, replacing some of it with higher-cost IDR loans. Furthermore, XL has higher forex exposure (~30%) compared to Indosat (~12%). As a result, we believe XL will only start to show a sustained positive bottom line by end-FY17. XL is trading at only 5.5x FY17F EV/EBIITDA (close to -2SD of its five-year average), reflecting expectations of further revenue share loss to Telkomsel. In our view, XL is likely to stem revenue share loss as evident from its big 3G network expansion outside Java. XL’s 3G network expansion on the 900MHz spectrum and 4G network sharing with Indosat would help stabilise its share.

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Industry Focus

Telecom Sector

What to look for in 2017

Period Event Description Potential Upside Potential Downside 1Q17 Government's

review of the decision to cut interconnection rates.

The Indonesian Telecom regulator, BRTI, in June 2016 announced its decision to lower interconnection fees among operators by ~18% starting from the 1 September 2016. The decision was however delayed due to strong opposition from incumbent operators, particularly TLKM. The government has appointed a task-force for a review of the appropriate ranges of interconnection fees, the results of which are expected to be unveiled in 1Q17. The final decision on interconnection fees however could be delayed further to 2H17.

A reduction in interconnection costs could favour smaller operators such as XL and Indosat as they would be able to offer more competitive tariffs in remote locations, challenging TLKM's dominance in ex-Java regions.

A reduction in interconnection costs could lead to a cut-back in capex by TLKM, reducing the pace of expansions in network and coverage.

2H17 Government establishes proposals for active-network and spectrum sharing

Indonesian Communications and Information Ministry announced that it favours plans by incumbent operators to share their networks in a bid to save capex spending and accelerate access to broadband services. Indosat and XL are presently waiting for guidance on a regulatory framework on active network sharing, including the sharing of spectrum assets, to expand and deepen their network sharing agreements. The government may release a regulatory framework outlining the legal requirements for active network sharing within the next year.

A nod from the regulator for active network sharing, including the sharing of spectrum assets, would help XL and Indosat expand their networks outside Java, forming a formidable threat on TLKM's dominance in the region. This could provide the two operators with a boost in earnings, backed by lower opex and higher ex-Java subscriber acquisitions while reducing the cash flow burdens attached to network deployments.

A more restrictive approach by the regulator could further benefit TLKM, allowing it to continue its dominance outside Java. Rates outside the region may remain uncompetitive while smaller players struggle to compete with TLKM's herculean network.

Source: DBS Bank

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Industry Focus

Telecom Sector

Thailand - DTAC losing the battle for revenue share AIS has been losing mobile revenue share gradually since 2013

Source: Companies, DBS Bank DTAC has been losing mobile revenue share sharply since 2013

Source: Companies, DBS Bank TRUE has been gaining mobile revenue share sharply since 2013


Aggressive TRUE to keep competitive landscape tough. TRUE has set an aggressive target of capturing a third of the revenue market share by 2018, implying a highly competitive market in the mobile space over the next two years. TRUE has been successful in increasing its market share over the last three years due to aggressive sales practices and better network quality. Its market share has increased from 16.0% in 2Q13 to 25.3% in 3Q16, mostly at DTAC’s expense. TRUE is likely to maintain this trend with its expressed commitment to expand coverage of 3G and 4G networks and its ownership of a strong portfolio of spectrum assets. As a result, the competitive landscape is likely to remain tough for the incumbents in our view. DTAC likely to lose No. 2 position in near future. DTAC has eased its efforts in promoting free handsets (no separate sales booth, less advertisements). DTAC’s reluctance to continue matching TRUE and AIS’s offerings of free handsets implies that its revenue market share will continue to decline, as it is losing prepaid clients faster that it is adding new postpaid subscribers. We believe this would eventually result in DTAC losing its number two position to TRUE by the end of this year. The revenue share at the end of June 2016 was 49.2% for ADVANC, 25.5% for DTAC and 25.3% for TRUE. TRUE market share going up

Source: Companies, DBS Bank TRUE is most aggressive followed by AIS, and then DTAC. The latest discounts offered on smartphones for new customers were largely similar between AIS and TRUE but varied greatly between DTAC and the other two operators. For most brands, AIS and TRUE offered similar discounts, although AIS set a higher entry price on its packages to be eligible for its discounts. ADVANC is likely to defend its revenue share. Following the 900MHz spectrum win in May 2016, AIS has re-calibrated its capex strategy to a more aggressive 3G/4G network expansion, from a defensive one previously. AIS plans to achieve 80% 4G population coverage by end-FY16 compared

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Industry Focus

Telecom Sector

to pre-900MHz spectrum win target of 50% with 65% population coverage already achieved. Further, AIS plans to provide competitive handset bundling offers to subscribers given the current market environment. As a result, we believe AIS will likely maintain its revenue market share in the immediate term. Data prices woefully low. With the competition and telcos scrambling to capture market share through data services, Thailand’s data pricing has slid to the lowest levels in the region. With legacy revenues being pressured in Thailand, data is a key growth driver and the currently low pricing levels is dampening the top-line growth potential of Thai telcos. However, TRUE has guided for EBITDA margins to improve in 2H16, signaling a potential ease on the price competition which could provide a much needed boost. Thailand data prices extremely low

Source: Companies, DBS Bank Infrastructure costs to weigh down earnings of AIS. AIS is seeing its D&A escalating due to higher capex following its network expansions. The D&A costs increased 40% q-o-q in 3Q16. We expect a 25% increase in depreciation and amortisation expenses from the two new licences (1.8GHz and 900MHz) and an elevated capex level (c. Bt40bn) for FY17. In addition, AIS’s returns are expected to be pressured in FY17 due to the higher expenses for TOT’s towers, equipment and spectrum (FY16F: Bt3.8bn versus FY17F: Bt10.0bn). The surge in expenses should lead to net margin contraction (FY16F: 20% versus FY17F: 18%) and 9.5% decline in earnings. Fibre broadband will be the next growth driver for AIS. AIS has continued to invest in its fixed infrastructure and has looked to expand its coverage over the past couple of years. Since its launch in mid-2015, AIS has managed to capture ~2% of the market share with ~200,000 subscribers. The company is relatively bullish with its projections with an expectation of reaching 1 million and 2 million subscribers by end-2017 and 2018 respectively, making it one of the largest players in Thailand. At present, TRUE is the largest of the fixed

broadband service providers with 2.6 million subs with Triple T and TOT with 2.0 million and 1.6 million subs. Given the relative low level of household penetration of broadband (~6 million of 20 million households), AIS’s targets seem reasonable. If the targets are met, this could mean a 1%/4% net increase for AIS's EBITDA in FY17/FY18, according to our estimates. Subscriber and EBITDA of TRUE Online

3Q16

Revenue 7240

ARPU 590

EBITDA 2480

Subs 2600000

EBITDA margin 34%

Our estimates for Fiber broadband business for AIS 3Q16 FY17 FY18

Revenue 232 3464 8434

Fiber ARPU 498 483 469

Fiber Subs 195000 1000000 2000000

Fiber EBITDA margin 25% 32%

Fiber EBITDA 866 2699

% EBITDA contribution to AIS 1% 4%

Capex levels going up

Source: Companies, DBS Bank Expiring spectrum, a massive dark cloud hanging over DTAC. Unlike its competitors, DTAC did not win any spectrum rights in the spectrum auctions held through 2015 and 2016. DTAC did not have any spectrum expiring in the recent past, and hence had less urgency compared to AIS in winning spectrum. However, DTAC’s concession with CAT is expiring in September 2018, putting DTAC in a similar position as AIS was in late 2015. DTAC will lose the rights to use 10MHz in 900MHz spectrum and 25MHz in 1,800MHz with the expiry. NBTC is likely to schedule spectrum auctions similar to the 2015 spectrum auction, potentially resulting in competitive bidding between DTAC and its competitors.

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Industry Focus

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For DTAC to directly have comparable spectrum resources with its competitors, the company will have to at least retain its current 900MHz spectrum and half of 1,800MHz spectrum (AIS and TRUE have other spectrum resource indirectly under their purview through deals with state players). If the spectrum auction(s) see the same level of interest, DTAC can be expected to pay up to ~Bt120bn to retain the above-mentioned spectrum. Potential payment for spectrum by DTAC

Source: DBS Bank Current capex levels with spectrum payments unsustainable for DTAC. Due to the constant market share losses and price competition, DTAC’s profitability has started to slip over the past couple of years. DTAC’s EBITDA fell over 9% in FY15 with a 2.3% contraction in its EBITDA margin amid higher depreciation

and operational expenses. DTAC’s net profits have also shrunk nearly 48% over the past four years, from Bt11bn in FY12 to Bt5.9bn in FY15. To minimise the market share losses due to network weakness, DTAC has ramped up its capex over the past couple of years to ~Bt20bn per annum. However, due to the lower cashflow generation following market share losses, we believe DTAC would be hard pressed to maintain the current capex spend, especially considering the spectrum payments likely to be seen post 2018. DTAC's management does not expect an improvement in EBITDA for FY16 while they maintain their current dividend policy of 50% payout. As spectrum payments are likely to happen through 2018-2021 (judging by the most recent spectrum auction), we believe DTAC will need to improve its EBITDA by ~6.8% per annum from FY17 onwards to maintain its net debt/EBITDA below 3x, even if the company completely cut dividends from FY17 onwards. AIS has indicated that it may maintain a net debt/EBITDA target of ~2x, which the market may expect from DTAC as well. Under such circumstances, DTAC will need to improve its EBITDA by a whopping 19% per annum on average from FY17 onwards.

DTAC’s net debt-to-EBITDA could rise to 4x by 2021 even if it fully scraps its dividends from FY17F onwards

Source: DBS bank

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Industry Focus

Telecom Sector

What to look for in 2017

Source: DBS Bank

Period Event Description Potential Upside Potential Downside 1H17 5G Spectrum

auction The Thai regulator, NBTC recently announced plans to auction the 80MHz of the 2600MHz band, primarily for testing and developing 5G services. The regulator expects operators to provide commercial 5G services by 2020.

Early access to spectrum on which 5G can be deployed (industry norm - >2.5GHz) would help Thailand become one of the first few markets to deploy 5G services.

-

2H17 NBTC announces the auction of CAT's 850/900MHz due for expiry in 2018

10MHz of 850/900MHz and 25MHz of the 1800MHz band held by CAT are due for expiry in September 2018. The government has already announced that it will be auctioning 45MHz of the 1800MHz band in July 2018 with a reserve price set at Bt45bn per 15MHz block. We expect NBTC to announce the auction of the expiring 850MHz/900MHz band latest by the 2H17.

- -

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Industry Focus

Telecom Sector

Malaysia – Dividend cuts and high spectrum costs U Mobile has been steadily gained market share over the recent years. Digi has been stable

Source: MCMC, Companies, AllianceDBS

Almost equal spectrum distribution. 2017 will be the start of the year where the fourth player, U Mobile will have an almost equal amount of spectrum relative to the incumbents. The spectrum re-farming exercise by the government in 2016 favoured smaller operators like U Mobile at the expense of bigger players like Celcom and Maxis (Refer to the spectrum allocation table below). Armed with new spectrum assets, we believe it is reasonable to expect U Mobile to be more aggressive in order to gain market share, which currently stands at about 10% versus 25-28% each for DiGi, Maxis, and Celcom as per the latest MCMC statistics. Entry of Telekom Malaysia woes an already heated market. Webe, a subsidiary of leading fixed line operator Telekom Malaysia (TM), entered the mobile market in August 2016, causing further disruption to an already rocky telecom market. Webe has already startled the incumbents by offering unlimited voice/SMS and data for as low as RMB79. Webe is also able to cross-sell its mobile services by offering discounts for bundling (i.e. quad-play services) to TM’s already established customer base. Furthermore, with the 2G/3G domestic roaming agreement with Celcom, Webe has extensive 2G/3G network coverage (covering 95%/85% on 2G/3G) while continuing to progressively build out its own LTE network coverage on 850MHz and 2600MHz bands. Webe's entry could cause severe disruptions in an already intense postpaid market.

Spectrum allocations effective from 1 July 2017

Source: MCMC, AllianceDBS

Earnings risks skewed to the downside. Our/consensus forecasts are still projecting flattish revenue and earnings for incumbents in 2017. Mobile penetration rate is unlikely to rise further, implying that everything will remain status quo in 2017, with U Mobile and TM’s Webe barely gaining any market share in 2017 – the best-case scenario that the incumbents could hope for. Certainly, this shows that the market has yet to price in potential market share loss for the incumbents (especially in the long run), which is a bit unrealistic in view of the new spectrum gained by U Mobile and loss of spectrum by Maxis and Celcom. We certainly expect downward revisions to earnings in 2017, as competition has remained as intense as ever in recent months even before the 900MHz and 1800MHz spectrum re-allocation in 2017. Besides that, we also believe the government might conduct another spectrum allocation exercise in 2017 (for

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Industry Focus

Telecom Sector

700MHz, 2100MHz, and 2600MHz). This would further lead to: 1) Higher interest cost due to increase in debt to fund any upfront payment, and 2) Additional yearly spectrum expenses. Another spectrum reallocation in 2017 would prompt dividend cuts. With existing licences of 2100MHz and 2600MHz bands expiring in April 2018 and December 2017 respectively, we believe the regulator, MCMC will likely call for another spectrum allocation exercise in 2017. This could be followed by the 700MHz band which is targeted to be freed up by 2018 at the earliest, after complete migration of analogue TV to digital TV broadcasting in Malaysia. Based on Singapore's spectrum reserve pricing, we estimate this round of spectrum allocation exercise could cost up to RM9.0bn for the mobile industry. With limited debt headroom available, we believe mobile operators such as Axiata and Maxis would need to cut their

dividend payments in order to fund any upfront spectrum fee. DiGi is in a better position given its stronger balance sheet, but it still faces dividend risks due to the lack of retained earnings. Premium valuation unsustainable. With the move towards a new regime for spectrum allocation as well as a stronger fourth player, we believe questions will eventually be raised on competition risk and margin sustainability, as well as premium valuation versus regional peers for the Malaysian mobile operators. Domestic-focused operators such as DiGi and Maxis are trading at around 12.8-13.8x CY17 EV/EBITDA relative to the regional average of 8.0x. With potential earnings risks and falling FCF translating into lower dividends going forward, we do not think the current premium valuation is justified.

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Industry Focus

Telecom Sector

What to look for in 2017?

Period Event Description Potential Upside Potential Downside 1Q17 Impact of the

one-time fee on spectrum allocations unveiled.

Release of FY16 and 1Q17 results would unveil the impact of the one-time spectrum allocation fee telcos were required to make for the recently completed spectrum re-farming programme. FY17 would also see the impact of annual spectrum charges impacting the results of Malaysian operators.

-

One-off re-farming fees could negatively impact highly levered players such as Maxis. Annual spectrum allocation fees would also put pressure on the cash flows of levered operators, especially amid aggravating competitive dynamics, leading to possible cutbacks in distributions to shareholders.

1Q17 Webe's RMB79 promotion comes to an end. The company may reveal new plans to compete with the offerings of the incumbents

Webe's current promotion of offering unlimited voice/SMS and data for RMB79 is expected to end on 11 February 2017, with the price surging to RMB199 thereafter. Webe will likely unveil its new plans to compete with the offerings of the incumbent players by this date. Price points and usage allowances offered by Webe could lead to changes in mobile plans by the incumbents.

A rational pricing strategy by Webe could help preserve industry-wide earnings and bring more clarity to the future of the Malaysian mobile market.

Setting up price points of packages at unsustainably low-levels to drive off competitors would lead to an industry-wide contraction of earnings.

3Q17 Re-farmed spectrum allocations come in to effect from 1st July 2017

Re-farmed spectrum allocations will come in to effect from the 1st of July 2017, with smaller players like Digi and U Mobile gaining at the expense of larger operators like Celcom and Maxis.

Re-farming levels the playing field among smaller operators and large incumbents, promoting healthy competition and improving the overall allocative efficiency of the market.

Irrational competitive behaviour of small operators and the new player could drive tariffs to unsustainably low levels, threatening the long-term profitability of incumbent operators.

Source: DBS Bank

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Industry Focus

Telecom Sector

Sector Valuations

Singapore Telecom 16 & 17 earnings respectively

Source: Bloomberg Finance L.P., DBS Bank

Mkt Price T arget CA GRCompany Cap S$ Price % 16-18

(US$m) 12-J an LCL Upside Rcmd (%) 17F 18F 17F 18F 16F 17F 17F 18F

China / Hong Kong SHCOMP Index 3,165

China Mobile 222,597 84.30 110.00 30% BUY 6 14.3 13.6 3.1% 3.2% 1.6x 1.5x 4.1x 3.8x

China Telecom 38,722 3.71 5.10 37% BUY 8 13.6 12.8 2.4% 2.4% 0.8x 0.8x 3.6x 3.4x

China Unicom 28,443 9.21 9.20 0% HOLD 151 30.7 18.9 2.1% 2.1% 0.8x 0.8x 3.5x 3.2x

Smartone Telecom 1,478 10.62 12.00 13% HOLD 3 13.3 13.1 5.6% 5.6% 2.7x 2.6x 4.9x 4.7x

Hutchison Telecom 1,578 2.54 2.50 -2% HOLD 9 15.5 14.2 4.8% 5.3% 1.0x 1.0x 5.9x 5.4x

HKT Trust 9,179 9.40 12.30 31% BUY 6 14.2 13.4 6.4% 6.7% 1.9x 1.9x 8.4x 8.1x

Malay sia KLCI Index 1659.82

Digi.Com 8,551 4.90 4.35 -11% HOLD 0 24.1 23.3 4.2% 4.3% 73.1x 73.1x 13.5x 13.1x

Maxis Bhd 10,367 6.15 5.10 -17% FULLY VALUED 4 23.5 23.1 3.6% 3.9% 10.1x 9.4x 13.0x 12.8x

Telekom 5,069 6.01 7.20 20% BUY 15 25.0 21.1 3.6% 4.3% 2.9x 2.9x 7.1x 6.5x

Axiata Group 9,363 4.65 4.45 -4% HOLD 5 22.3 20.3 3.8% 4.2% 1.7x 1.7x 7.5x 7.2x

Singapore ST I Index 2954.14

M1 1,299 2.00 2.09 5% HOLD -4 12.7 13.1 6.3% 6.1% 4.6x 4.3x 6.9x 6.9x

Starhub 3,472 2.87 3.01 5% HOLD -4 14.3 14.8 6.9% 6.9% 23.3x 22.9x 8.0x 8.1x

T hailand SET Index 1571.05

Advanced Info Serv ice 12,787 153.50 154.00 0% HOLD 2 16.5 14.4 4.8% 5.5% 10.3x 10.0x 8.3x 7.7x

Total Access Comm. 2,753 41.50 33.00 -20% FULLY VALUED 27 36.2 24.3 2.0% 3.0% 3.8x 3.6x 4.6x 4.5x

Indonesia J CI Index 5325.504

Indosat 2,441 6,000 8,000 33% BUY nm 19.3 nm 0.0% 0.0% 2.5x 2.2x 3.4x 2.9x

PT Telekom 29,814 3,950 4,100 4% HOLD 19 17.4 14.2 4.6% 5.7% 5.0x 4.9x 6.7x 6.0x

XL Axiata 2,049 2,560 3,300 29% BUY nm 43.3 22.5 1.4% 2.7% 1.4x 1.4x 6.1x 5.7x

PT Sarana Menara 2,689 3,520 4,900 39% BUY nm 17.2 14.8 1.5% 1.7% 3.8x 3.2x 8.9x 7.6x

Tower Bersama 1,796 5,000 6,400 28% HOLD 61 25.8 19.1 0.8% 1.0% 12.4x 9.0x 11.6x 10.6x

EV /EBITDAPE (x) Div idend Y ield (%) P/BV

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Industry Focus

Telecom Sector

COMPANY GUIDES

Page 24

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: AS, PY

HOLD (Upgrade from FULLY VALUED)

Last Traded Price ( 12 Jan 2017): S$2.08 (STI : 2,993.00) Price Target 12-mth: S$2.09 (0% upside) (Prev S$1.78) Potential Catalyst: General spectrum auction in 1Q17 Where we differ: FY17 EPS inline Analyst Sachin MITTAL +65 6682 3699 [email protected]

What’s New M1 and StarHub announce agreement to expand

network sharing

Significant capex and opex reductions; reduce

capex by 20% from FY18 for M1

Upgrade to HOLD with revised TP of S$ 2.09

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 1,157 1,115 1,100 1,077 EBITDA 342 322 323 316 Pre-tax Profit 218 186 178 172 Net Profit 179 153 147 142 Net Pft (Pre Ex.) 179 153 147 142 Net Pft Gth (Pre-ex) (%) 1.5 (14.1) (4.3) (3.2) EPS (S cts) 19.1 16.4 15.7 15.2 EPS Pre Ex. (S cts) 19.1 16.4 15.7 15.2 EPS Gth Pre Ex (%) 0 (14) (4) (3) Diluted EPS (S cts) 19.1 16.4 15.7 15.2 Net DPS (S cts) 15.4 13.1 12.6 12.2 BV Per Share (S cts) 44.2 45.3 47.8 50.5 PE (X) 10.9 12.7 13.2 13.7 PE Pre Ex. (X) 10.9 12.7 13.2 13.7 P/Cash Flow (X) 8.1 5.4 6.8 7.0 EV/EBITDA (X) 6.7 6.9 6.9 6.9 Net Div Yield (%) 7.4 6.3 6.0 5.8 P/Book Value (X) 4.7 4.6 4.3 4.1 Net Debt/Equity (X) 0.8 0.6 0.7 0.5 ROAE (%) 44.2 36.7 33.8 30.9 Earnings Rev (%): 0 0 2 Consensus EPS (S cts): 16.9 15.7 14.5 Other Broker Recs: B: 3 S: 11 H: 8

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Fourth player concerns reduced by network sharing

We project new entrant TPG to gain 8.5% mobile revenue share by 2022 With an annual EBITDA of A$775m and FY16 (July year-end) net debt-to-EBITDA of 1.6x, TPG has enough capital to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from the entry of TPG to be acute, and project TPG to secure 8.5% revenue share by 2022. In our bull-case and bear case scenarios for M1, we project TPG to secure 6% and 10% revenue share respectively. We reduce M1’s capex by 20% from FY18 onwards due to network sharing. M1 and StarHub have signed a Memorandum of Understanding (MOU) for collaboration in mobile infrastructure sharing, with a focus on sharing radio access network (RAN), backhaul and access assets. Given the considerable synergies, especially in capital expenditure, we believe network capex of M1 could reduce by 20% post FY18, as the network sharing takes hold. M1 most impacted from the entry of a fourth operator. We believe the potential entry of a new player will be most felt by M1 due to its higher exposure to mobile revenue and a more price-sensitive subscriber base. We project M1’s mobile revenue share to contract from 18% at present to 14%, down from 15% in our previous estimates. Further, we expect M1’s earnings to contract by 38% by 2022 from 2015 levels, compared to the 31% drop we previously expected.

Valuation:

Upgrade to HOLD with a higher TP. Our revised DCF-based (WACC 7.1%, terminal growth 0%) TP is S$2.09 as we reduce capex estimates. Our bull-case & bear case TP for M1 is S$2.35 & S$1.95 assuming 6% & 10% revenue share for TPG by 2022 respectively Key Risks to Our View:

Limited uptake of TPG’s services. As an inexperienced operator, TPG could struggle to deploy and maintain a network that could challenge the network quality of M1. Under this bull-case scenario, our TP is S$2.35 for M1. At A Glance Issued Capital (m shrs) 930 Mkt. Cap (S$m/US$m) 1,934 / 1,355 Major Shareholders (%) Axiata Investments 28.5 Keppel Corp Ltd 19.2 Singapore Press 13.4

Free Float (%) 38.9 3m Avg. Daily Val (US$m) 3.1 ICB Industry : Telecommunications / Mobile Telecommunications

DBS Group Research . Equity 13 Jan 2017

Singapore Company Guide

M1 Version 9 | Bloomberg: M1 SP | Reuters: MONE.SI Refer to important disclosures at the end of this report

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ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

M1

WHAT’S NEW

M1 and StarHub sign MOU for network sharing

StarHub and M1 to expand infrastructure sharing: StarHub and M1 signed an MOU to study potential further collaboration in mobile infrastructure sharing, with a focus on sharing radio access network, backhaul and access assets. The telcos have been sharing mobile infrastructure including the combined antenna systems, in-building fibre and tunnel cables. The new MOU will focus on sharing mobile network radio elements while keeping mobile core networks separate.

Considerable benefits in network sharing: Higher level of network sharing could eliminate significant amounts of equipment and installation cost duplication, reducing overall capex, while achieving similar levels of coverage and capacity for multiple service providers. In addition, overall running costs of the networks can be reduced by removing certain operational costs relating to staff, maintenance, security, etc.

We expect capex to drop by 20% from FY18 onwards: According to Groupe Spéciale Mobile Association (GSMA) sharing part, or all, of the radio access network (RAN) could result in up to 20% increase in free cashflows for a typical European operator. Similarly, according to TMG, a consultancy specialising in telecommunications, RAN sharing can save 30–40% in costs. Given the considerable synergies, especially in capital expenditure, we believe network capex of M1 and StarHub will each reduce by 20% post FY18, as network sharing takes hold


Company Guide

M1

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

M1 will be most impacted from the entry of a fourth operator. We believe the entry of a new player will be most felt by M1 due to its higher exposure to cellular revenue (~68% in 3Q16 vs. 51% for Starhub) and a more price sensitive subscriber base. As a result, we expect the revenue share of M1 to drop from 18% in 2015 to 14% by 2022. We project M1’s total revenues will contract by 19% by 2022 from 2015 levels and earnings to drop by 38% during the same timeframe. Fair value accounting will exacerbate the impact on revenues. M1 is the only telco in Singapore to use fair value accounting for iPhones and hence its revenue will be more adversely impacted in the face of slowing iPhone sales. M1 had accrued handset revenue of S$67m in 3Q16, which will continue to adversely impact its service revenue over the next 2-3 years. This will be on top of declines in voice and SMS revenues due to cannibalisation from Over-the-top (OTT) players and increasing popularity of SIM-only plans pressuring postpaid average revenue per user (ARPU), which will continue to shrink service revenues of the industry. Growth from fixed broadband is encouraging but not material. M1 is seeing healthy growth in the sector at the expense of incumbents. We believe the company could see decent growth till its fixed broadband market share reaches 20%+. In addition, broadband pricing is seeing some stabilisation. However, broadband accounted for only 11% of M1's revenue in 9M16 and EBITDA margins tend to be lower than the mobile business. As such, the impact on M1’s bottomline is likely to be limited. Roaming revenue may take time to stabilise. Roaming revenue accounts for about 10% of M1’s mobile revenue but is falling with the substitution of OTT services for roaming calls. Roaming revenues has continuously declined on a q-o-q basis over the past eight quarters, with revenues dropping as much as S$7m (-31%) over this two-year period. Introduction of data passport plans by M1 in 2015, whereby customers can use their local data bundles when overseas by paying a monthly subscription fee of S$10 (S$50 in Europe) has had little impact on roaming revenues, indicating that the decline is likely to take time to stabilise. We anticipate roaming revenue to decline further but at a slower rate.

Post paid ARPU

Net Handset Subsidy

Postpaid subscribers (K)

Source: Company, DBS Bank

55.653.8

51.649.9 48.4

0.0

8.0

16.0

24.1

32.1

40.1

48.1

56.2

2014A 2015A 2016F 2017F 2018F

-84.99 -84.2

-76.55

-72.52

-93.5

-86.9

-80.4

-73.8

-67.3

-60.7

2014A 2015A 2016F 2017F 2018F

11491195 1207 1195 1183

0.00

246.22

492.44

738.65

984.87

1231.09

2014A 2015A 2016F 2017F 2018F


Company Guide

M1

Balance Sheet:

Capex spend to remain high. M1’s balance sheet has remained strong with the relatively consistent capital expenditure and dividend payments. The company expects to incur S$140m in capex in FY16 excluding possible spectrum payments. We believe M1’s cash generation will remain strong and be sufficient to support its future spectrum auction bids and network expansion plans. Share Price Drivers:

TP revised up due to better free cash flow projections. We believe M1 will be able to reduce its capex by 20% from FY18 onwards from the current expected levels if the network sharing agreement takes hold. The resultant reduction in depreciation would have a ~15-20% improvement in free cash flows in the medium term. This improves our DCF-based (WACC 7.1%, terminal growth 0%) TP for M1 to S$ 2.09. If capex savings are higher than expected, M1’s TP could improve up to S$ 2.40 in our view. M1 Capex savings vs Share price

Capex saving 0% 10% 20% 30% 40% M1 TP (S$) 1.78 1.94 2.09 2.25 2.40 Source: DBS Bank

Key Risks:

Limited uptake of TPG’s services could reduce threat to mobile market share. As an inexperienced operator, TPG might struggle to deploy and maintain a network that could challenge the network quality of the incumbents. Further, as the company has limited bundling capabilities, incumbents may be able to limit their revenue share losses. In this scenario, we expect TPG to only capture 6% of the revenue share from the incumbents leading to a relief rally for M1. Under this bull-case scenario, our TP is S$2.35 for M1. Company Background

M1 is the smallest of the three telecom operators in Singapore. M1 provides mobile services and has also started to provide fixed broadband services by riding on the National Broadband Network.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.8

0.9

0.9

1.0

1.0

1.1

1.1

0.00

0.20

0.40

0.60

0.80

1.00

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2014A 2015A 2016F 2017F 2018F

Avg: 17.2x

+1sd: 19.1x

+2sd: 21x

‐1sd: 15.4x

‐2sd: 13.5x

10.9

12.9

14.9

16.9

18.9

20.9

22.9

Jan-13 Jan-14 Jan-15 Jan-16

(x)

Avg: 7.25x

+1sd: 8.55x

+2sd: 9.84x

‐1sd: 5.96x

‐2sd: 4.67x

3.8

4.8

5.8

6.8

7.8

8.8

9.8

10.8


(x)


Company Guide

M1

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Post paid ARPU 55.6 53.8 51.6 49.9 48.4 Net Handset Subsidy (85.0) (84.2) (76.6) (72.5) (59.5) Postpaid subscribers (K) 1,149 1,195 1,207 1,195 1,183

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Post Paid Cellular 591 591 580 572 553 Pre Paid Cellular 80.1 76.9 77.3 75.6 73.0 IDD Revenue 89.4 68.7 61.8 58.7 53.5 Fixed network services 70.6 85.9 92.8 104 114 Others 245 335 304 290 283 Total 1,076 1,157 1,115 1,100 1,077

Income Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 1,076 1,157 1,115 1,100 1,077 Cost of Goods Sold (743) (822) (800) (783) (768) Gross Profit 334 336 315 317 309 Other Opng (Exp)/Inc (113) (112) (124) (133) (129) Operating Profit 221 223 191 185 181 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (4.0) (4.9) (5.3) (6.8) (8.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 217 218 186 178 172 Tax (41.3) (39.9) (32.5) (31.1) (30.1) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 176 179 153 147 142 Net Profit before Except. 176 179 153 147 142 EBITDA 336 342 322 323 316 Growth Revenue Gth (%) 6.8 7.5 (3.6) (1.3) (2.1) EBITDA Gth (%) 7.4 1.8 (5.9) 0.6 (2.4) Opg Profit Gth (%) 12.1 1.0 (14.3) (3.4) (2.2) Net Profit Gth (Pre-ex) (%) 9.8 1.5 (14.1) (4.3) (3.2) Margins & Ratio Gross Margins (%) 31.0 29.0 28.3 28.8 28.7 Opg Profit Margin (%) 20.5 19.3 17.2 16.8 16.8 Net Profit Margin (%) 16.3 15.4 13.8 13.3 13.2 ROAE (%) 44.5 44.2 36.7 33.8 30.9 ROA (%) 17.5 16.9 13.8 12.6 11.5 ROCE (%) 23.0 21.7 17.9 16.5 14.9 Div Payout Ratio (%) 100.0 80.5 80.0 80.0 80.0 Net Interest Cover (x) 55.3 45.6 36.0 27.1 21.1


Mobile decline due to new entrant


Company Guide

M1

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 278 308 258 240 249 Cost of Goods Sold (192) (223) (175) (160) (176) Gross Profit 85.2 85.0 82.6 80.4 73.2 Other Oper. (Exp)/Inc (29.1) (29.2) (29.7) (29.2) (30.5) Operating Profit 56.1 55.9 52.9 51.2 42.7 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1.3) (1.3) (1.3) (1.6) (1.9) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 54.8 54.6 51.6 49.6 40.8 Tax (9.9) (11.0) (9.1) (8.5) (6.4) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 44.9 43.6 42.5 41.0 34.4 Net profit bef Except. 44.9 43.6 42.5 41.0 34.4 EBITDA 86.7 88.2 83.2 82.3 74.6 Growth Revenue Gth (%) 0.3 10.9 (16.3) (6.7) 3.6 EBITDA Gth (%) 3.7 1.7 (5.7) (1.1) (9.4) Opg Profit Gth (%) 2.0 (0.4) (5.4) (3.2) (16.6) Net Profit Gth (Pre-ex) (%) 1.4 (2.9) (2.5) (3.5) (16.1) Margins Gross Margins (%) 30.7 27.6 32.1 33.4 29.4 Opg Profit Margins (%) 20.2 18.2 20.5 21.3 17.1 Net Profit Margins (%) 16.2 14.2 16.5 17.1 13.8

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 686 714 730 743 730 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 116 112 84.7 155 136 Cash & ST Invts 22.8 10.0 91.7 102 207 Inventory 30.3 51.5 32.2 31.8 31.1 Debtors 150 166 160 158 155 Other Current Assets 23.1 33.1 33.1 13.1 13.1 Total Assets 1,028 1,086 1,132 1,202 1,272 ST Debt 52.0 354 354 354 354 Creditor 157 146 200 198 193 Other Current Liab 65.2 62.5 44.4 43.0 42.0 LT Debt 250 0.0 0.0 50.0 100 Other LT Liabilities 109 111 111 111 111 Shareholder’s Equity 395 413 423 447 472 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,028 1,086 1,132 1,202 1,272 Non-Cash Wkg. Capital (19.4) 42.5 (19.2) (37.7) (36.5) Net Cash/(Debt) (279) (344) (262) (302) (247) Debtors Turn (avg days) 49.9 49.8 53.4 52.8 53.0 Creditors Turn (avg days) 98.3 78.6 94.3 112.7 112.8 Inventory Turn (avg days) 17.3 21.2 22.8 18.1 18.1 Asset Turnover (x) 1.1 1.1 1.0 0.9 0.9 Current Ratio (x) 0.8 0.5 0.5 0.5 0.7 Quick Ratio (x) 0.6 0.3 0.4 0.4 0.6 Net Debt/Equity (X) 0.7 0.8 0.6 0.7 0.5 Net Debt/Equity ex MI (X) 0.7 0.8 0.6 0.7 0.5 Capex to Debt (%) 59.1 40.1 37.8 32.7 22.8 Z-Score (X) 3.7 3.3 3.0 2.8 2.7


Mobile decline due to roaming and voice & SMS decline


Company Guide

M1

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 217 218 186 178 172 Dep. & Amort. 114 118 130 139 135 Tax Paid (29.0) 39.6 (36.8) (32.5) (31.1) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (29.6) (137) 79.8 (0.1) (0.2) Other Operating CF 0.0 0.0 0.0 0.0 0.0 Net Operating CF 273 239 359 284 276 Capital Exp.(net) (178) (142) (134) (132) (103) Other Invts.(net) 0.0 0.0 0.0 (69.0) 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (178) (142) (134) (201) (103) Div Paid (197) (177) (144) (123) (117) Chg in Gross Debt 52.0 51.8 0.0 50.0 50.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 18.8 15.1 0.0 0.0 0.0 Net Financing CF (126) (110) (144) (72.7) (67.4) Currency Adjustments (0.1) 0.0 0.0 0.0 0.0 Chg in Cash (31.7) (12.8) 81.7 10.2 105 Opg CFPS (S cts) 32.9 40.3 29.9 30.4 29.5 Free CFPS (S cts) 10.3 10.4 24.1 16.3 18.4


Target Price & Ratings History

Source: DBS Bank

Analyst: Sachin MITTAL

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 19 Jan 16 2.50 2.60 HOLD

2: 19 Feb 16 2.54 2.60 HOLD

3: 29 Mar 16 2.59 2.60 HOLD

4: 14 Apr 16 2.44 2.56 HOLD

5: 03 Jun 16 2.42 2.60 BUY

6: 05 Jul 16 2.74 3.30 BUY

7: 18 Jul 16 2.71 3.30 BUY

8: 22 Aug 16 2.71 2.85 HOLD

9: 29 Aug 16 2.65 2.85 HOLD

10: 21 Sep 16 2.39 2.15 FULLY VALUED

11: 26 Sep 16 2.37 2.15 FULLY VALUED12: 19 Oct 16 2.21 1.97 FULLY VALUED13: 02 Nov 16 2.10 1.97 FULLY VALUED14: 17 Nov 16 2.00 1.97 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 15 Dec 16 1.95 1.78 FULLY VALUED

1

2

3 4 5

6

7

8

9

1011

12

1314

151.81

2.01

2.21

2.41

2.61

2.81

3.01

Jan-16 May-16 Sep-16 Jan-17

S$

Capex decline due to network sharing

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:JC, PY

HOLD (Upgrade from FULLY VALUED)

Last Traded Price ( 12 Jan 2017): S$2.92 (STI : 2,993.00) Price Target 12-mth: S$3.01 (3% upside) (Prev S$2.65) Potential Catalyst: General Spectrum Auction in 1Q17 Where we differ: FY17 EPS 3% above concensus Analyst Sachin MITTAL +65 6682 3699 [email protected]

What’s New StarHub and M1 to expand spectrum sharing

Potential drop in capex and opex after FY18

Capex estimates cut by 20% from FY18 onwards

Upgrade to HOLD on revised TP of S$3.01

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 2,444 2,423 2,418 2,405 EBITDA 712 723 709 700 Pre-tax Profit 440 439 409 395 Net Profit 372 374 348 336 Net Pft (Pre Ex.) 357 364 348 336 Net Pft Gth (Pre-ex) (%) (3.6) 1.7 (4.3) (3.4) EPS (S cts) 21.5 21.6 20.1 19.4 EPS Pre Ex. (S cts) 20.7 21.0 20.1 19.4 EPS Gth Pre Ex (%) (4) 2 (4) (3) Diluted EPS (S cts) 21.5 21.6 20.1 19.4 Net DPS (S cts) 19.9 19.9 19.9 19.9 BV Per Share (S cts) 10.8 12.5 12.8 12.3 PE (X) 13.6 13.5 14.5 15.0 PE Pre Ex. (X) 14.1 13.9 14.5 15.0 P/Cash Flow (X) 9.3 8.2 8.3 8.3 EV/EBITDA (X) 7.8 7.8 8.0 8.1 Net Div Yield (%) 6.8 6.8 6.8 6.8 P/Book Value (X) 26.9 23.3 22.9 23.7 Net Debt/Equity (X) 2.7 2.8 2.9 3.0 ROAE (%) 221.2 184.6 158.8 154.9 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 20.5 19.5 18.2 Other Broker Recs: B: 2 S: 11 H: 9


Boost from network sharing We project new entrant TPG will gain 8.5% mobile revenue share by 2022. With an annual EBITDA of A$775m and FY16 (July year-end) net debt-to-EBITDA of 1.6x, TPG has enough room to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from TPG’s entry will be acute and project TPG to secure 8.5% revenue share by 2022. In our bull-case and bear case scenarios for the existing telcos, we project TPG to secure 6% & 10% revenue share respectively. Reduce StarHub’s capex by 20% from FY18 onwards due to network sharing. M1 and StarHub signed a Memorandum of Understanding (MOU) for collaboration in mobile infrastructure sharing, with a focus on sharing radio access network (RAN), backhaul and access assets. Given the considerable synergies, especially capital expenditure, we believe StarHub’s network capex could reduce by 20% post FY18, as network sharing takes hold. StarHub to fare better than its local peer M1. StarHub has a lower reliance on mobile revenue (~51% in 3Q16 vs. 68% for M1) and a stickier, less price sensitive customer base. StarHub has also introduced more fixed-mobile bundling offers to reduce the loss of revenue share to a new entrant. We expect StarHub’s revenue share to drop from 30% in 2015 to 27% by 2022, leading to 25% drop in group earnings by 2022 versus 2015

Valuation:

Upgrade to HOLD with a higher TP of S$3.01. Our revised DCF-based (WACC 6.5%, terminal growth 0%) TP is S$3.01 as we factor in the impact of lower capex. Our bull-case and bear case TPs for StarHub are S$3.40 and S$2.84 assuming 6% and 10% revenue share for TPG by 2022 respectively. Key Risks to Our View:

Sharper-than-expected decline in adoption grant. The adoption grant for fibre is likely to decline going forward. We project StarHub’s “Other Income” to decline from S$46m in 2015 to S$41m in 2016F and S$20m in 2017F due to this. However, the drop could be sharper than expected At A Glance Issued Capital (m shrs) 1,728 Mkt. Cap (S$m/US$m) 5,045 / 3,534 Major Shareholders (%) Asia Mobile Holdings Pte Ltd 55.9 Nippon Telegraph & Telephone Co 9.9



Singapore Company Guide

StarHub Version | Bloomberg: STH SP | Reuters: STAR.SI Refer to important disclosures at the end of this report

72

92

112

132

152

172

192

212

2.5

3.0

3.5

4.0

4.5

5.0

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Relative IndexS$

StarHub (LHS) Relative STI (RHS)


Company Guide

StarHub

WHAT’S NEW

MOU between M1 and StarHub on mobile infrastructure sharing

StarHub and M1 to expand infrastructure sharing: StarHub and M1 signed an MOU to study potential further collaboration in mobile infrastructure sharing, with a focus on sharing radio access network, backhaul and access assets. The telcos have been sharing mobile infrastructure including the combined antenna systems, in-building fibre and tunnel cables. The new MOU will focus on sharing mobile network radio elements while keeping mobile core networks separate. Considerable benefits in network sharing: Higher level of network sharing could eliminate significant duplication of equipment and installation costs, reducing overall capex, while achieving similar levels of coverage and capacity for multiple service providers. In addition, overall running costs of

the networks can be reduced by removing certain operational costs relating to staff, maintenance, security, etc. Expect capex to drop by 20% from FY18 onwards: According to Groupe Spéciale Mobile Association (GSMA), sharing part, or all, of the radio access network (RAN) could result in up to 20% increase in free cashflows for a typical European operator. Similarly, according to TMG, a consultancy specialising in telecommunications, RAN sharing can save 30–40% in costs. Given the considerable synergies, especially in capital expenditure, we believe network capex of M1 and StarHub will reduce by 20% post FY18, as network sharing takes hold.


Company Guide

StarHub


Earnings Drivers:

Mobile business to perform better than its local peer M1. StarHub has a lower reliance on mobile revenue (~51% in 3Q16 vs. 68% for M1) and a stickier, less price sensitive customer base. StarHub has also introduced more fixed-mobile bundling offers to reduce revenue share loss to a new entrant. As a result, we expect StarHub to be less affected by the entry of a fourth player compared to its local peer M1. We expect StarHub’s revenue share to drop from 30% in 2015 to 27% by 2022. As a result, we expect group earnings to drop by 25% from 2015’s level by 2022. This is higher than our earlier expectation of 21% from 2015’s level due to higher revenue share gain expected by TPG. Stabilising Fixed Broadband business (10% of service revenue) is positive. Broadband revenue is showing encouraging signs of recovery with improvements in average revenue per user (ARPU) and subscribers. Though ARPU is still 20%+ below FY12 levels, it has improved ~9% since 1Q15. The recovery in broadband revenue and ARPU will provide much needed support for StarHub’s top line with broadband currently contributing c.10% of service revenue. Enterprise Fixed business (18% of service revenue) continues to grow. This segment encompassing managed services, cloud and other enterprise services, is seeing encouraging growth. Management is intent on developing the segment as an alternative revenue generator to the traditional telco business and is likely to maintain investments in the segment. The segment also offers superior margins compared to the other segments, and thus could provide better bottom-line performance. Pay TV business (18% of service revenue) faces limited threat in the medium term. Netflix entered the Singapore market in early 2016. StarHub saw its pay TV subscribers drop 1.5% q-o-q in 1Q16 due to Netflix’s entry and StarHub ending its “TV lite” promotion. Netflix has a price tag of S$11 per month, at c.60% discount to Starhub’s entry level of S$27. However, Netflix does not offer comprehensive local language and sports content, which is a key driver in the Singapore pay TV market. As a result, we may see only a marginal impact (2-3%) on Pay TV revenue going forward.

Mobile EBITDA Margins

CATV & Broadband EBITDA Margins

Fixed Network EBITDA Margins


36.333.8 34.5 35.1 35.1

0.0

5.2

10.5

15.7

21.0

26.2

31.4

36.7

2014A 2015A 2016F 2017F 2018F

18.4 18 18 17.9 17.9

0.0

3.8

7.5

11.3

15.0

18.8

2014A 2015A 2016F 2017F 2018F

36.8 36.8 36.6 36.5 36.5

0.00

7.51

15.01

22.52

30.03

37.54

2014A 2015A 2016F 2017F 2018F


Company Guide

StarHub

Balance Sheet:

Balance sheet remains strong. StarHub raised S$300m through medium-term notes in 2Q16. This and the strong cash flows will enable StarHub to comfortably maintain its current dividend payment and the higher capex (due to the impending spectrum auction). Even with the additional debt, Starhub’s gearing remains at a comfortable level. Share Price Drivers:

Better free cash flows improve TP. We believe StarHub will be able to reduce capex by 20% from FY18 onwards from the currently expected levels if the network sharing agreement takes hold. The resultant reduction in depreciation would have a ~12-13% improvement in free cash flows in the medium term. This improves our DCF-based (WACC 6.5%, terminal growth 0%) TP for StarHub to S$ 3.01. If the capex savings are higher than expected, StarHub’s TP could improve up to S$ 3.37 in our view. StarHub Capex savings vs Share price

Capex saving 0% 10% 20% 30% 40% StarHub TP (S$) 2.65 2.83 3.01 3.19 3.37 Source: DBS Bank Key Risks:

Limited uptake of TPG’s services could reduce the threat to mobile market share. As an inexperienced operator, TPG could struggle to deploy and maintain a network that could challenge the network quality of the incumbents. Further, as the company has limited bundling capabilities, incumbents may be able to limit their revenue share losses. In this scenario, we expect TPG to only capture 6% of the revenue share from the incumbents. Under this bull-case scenario, our TP is S$ 3.02 for StarHub. Sharper-than-expected decline in adoption grant. StarHub has guided that the adoption grant for fibre is likely to decline going forward. We project StarHub’s “Other Income” to decline from S$46m in 2015 to S$41m in 2016F and S$20m in 2017F due to this. However, the drop could be sharper than expected, depending on the fibre adoption rate. Company Background

StarHub is the second largest of the three telecom operators in Singapore. The company provides mobile services, pay TV, fixed broadband and fixed voice services, popularly known as quadruple play services.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.2

1.2

1.3

1.3

1.3

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2014A 2015A 2016F 2017F 2018F


S$m

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

2014A 2015A 2016F 2017F 2018F

Avg: 18.6x

+1sd: 20.3x

+2sd: 22x

‐1sd: 17x

‐2sd: 15.3x

12.3

14.3

16.3

18.3

20.3

22.3


(x)

Avg: 61.42x

+1sd: 96.05x

+2sd: 130.68x

‐1sd: 26.79x

-7.0

13.0

33.0

53.0

73.0

93.0

113.0

133.0

153.0


(x)


Company Guide

StarHub

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Mobile EBITDA Margins 36.3 33.8 34.5 35.1 35.1 CATV & Broadband 18.4 18.0 18.0 17.9 17.9 Fixed Network EBITDA 36.8 36.8 36.6 36.5 36.5

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Mobile 1,248 1,240 1,241 1,223 1,196 Cable TV & Broadband 592 591 589 588 586 Fixed Network 378 385 406 422 443 Equipment sale 170 228 187 185 180 Others Total 2,387 2,444 2,423 2,418 2,405 EBITDA (S$m)

Mobile 453 419 428 430 419 Cable TV & Broadband 109 106 106 105 105 Fixed Network 139 142 148 154 162 Equipment sale 46.6 45.6 41.0 20.5 14.4 Others Total 748 713 724 709 700 EBITDA Margins (%)

Mobile 36.3 33.8 34.5 35.1 35.1 Cable TV & Broadband 18.4 18.0 18.0 17.9 17.9 Fixed Network 36.8 36.8 36.6 36.5 36.5 Equipment sale 27.5 20.0 21.9 11.1 8.0 Others Total 31.3 29.2 29.9 29.3 29.1

Income Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,387 2,444 2,423 2,418 2,405 Cost of Goods Sold (1,957) (2,049) (2,015) (2,009) (2,004) Gross Profit 430 396 408 409 401 Other Opng (Exp)/Inc 46.6 45.6 41.0 20.5 14.4 Operating Profit 477 441 449 429 416 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 (0.3) (0.3) (0.3) (0.3) Net Interest (Exp)/Inc (20.6) (15.8) (18.9) (19.9) (19.9) Exceptional Gain/(Loss) 0.0 15.0 10.0 0.0 0.0 Pre-tax Profit 456 440 439 409 395 Tax (85.6) (67.9) (65.9) (61.4) (59.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 371 372 374 348 336 Net Profit before Except. 371 357 364 348 336 EBITDA 748 712 723 709 700 Growth Revenue Gth (%) 0.7 2.4 (0.9) (0.2) (0.5) EBITDA Gth (%) 0.7 (4.7) 1.5 (2.0) (1.3) Opg Profit Gth (%) 0.7 (7.4) 1.7 (4.3) (3.2) Net Profit Gth (Pre-ex) (%) (2.8) (3.6) 1.7 (4.3) (3.4) Margins & Ratio Gross Margins (%) 18.0 16.2 16.8 16.9 16.7 Opg Profit Margin (%) 20.0 18.1 18.5 17.8 17.3 Net Profit Margin (%) 15.5 15.2 15.4 14.4 14.0 ROAE (%) 319.8 221.2 184.6 158.8 154.9 ROA (%) 19.3 19.1 19.5 18.1 17.6 ROCE (%) 39.9 37.1 36.9 34.8 33.7 Div Payout Ratio (%) 92.9 92.4 92.1 98.9 102.4 Net Interest Cover (x) 23.1 27.9 23.7 21.6 20.9


Mobile revenue decline due to TPG’s entry


Company Guide

StarHub

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 603 634 591 586 585 Cost of Goods Sold (416) (491) (420) (402) (413) Gross Profit 187 143 171 184 172 Other Oper. (Exp)/Inc (56.3) (51.3) (53.1) (58.0) (59.3) Operating Profit 131 91.9 118 126 113 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (0.2) (0.1) (0.2) (0.3) (0.9) Net Interest (Exp)/Inc (3.7) (4.5) (4.7) (5.1) (6.3) Exceptional Gain/(Loss) 15.0 0.0 0.0 9.50 0.0 Pre-tax Profit 142 87.3 113 130 106 Tax (23.4) (6.5) (19.9) (21.6) (19.5) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 119 80.8 92.8 109 86.0 Net profit bef Except. 104 80.8 92.8 99.1 86.0 EBITDA 199 157 183 192 178 Growth Revenue Gth (%) 2.3 5.1 (6.8) (0.9) (0.1) EBITDA Gth (%) 2.2 (21.1) 16.7 4.7 (7.0) Opg Profit Gth (%) 5.2 (29.8) 28.0 7.2 (10.6) Net Profit Gth (Pre-ex) (%) 4.6 (22.1) 14.9 6.8 (13.2) Margins Gross Margins (%) 31.1 22.6 28.9 31.4 29.4 Opg Profit Margins (%) 21.7 14.5 19.9 21.5 19.3 Net Profit Margins (%) 19.7 12.7 15.7 18.5 14.7

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 911 890 1,000 1,025 1,012 Invts in Associates & JVs 0.0 27.5 27.2 26.9 26.6 Other LT Assets 405 388 388 388 388 Cash & ST Invts 264 173 74.1 48.2 49.0 Inventory 42.4 54.3 53.8 53.7 53.4 Debtors 162 153 152 152 151 Other Current Assets 203 223 223 223 223 Total Assets 1,987 1,909 1,918 1,916 1,902 ST Debt 200 138 138 138 138 Creditor 796 687 681 680 676 Other Current Liab 197 203 188 184 182 LT Debt 488 550 550 550 550 Other LT Liabilities 158 144 144 144 144 Shareholder’s Equity 149 188 217 221 213 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,987 1,909 1,918 1,916 1,902 Non-Cash Wkg. Capital (586) (460) (441) (436) (431) Net Cash/(Debt) (423) (514) (613) (639) (639) Debtors Turn (avg days) 21.8 23.5 23.0 22.9 23.0 Creditors Turn (avg days) 167.7 152.3 143.5 143.7 144.0 Inventory Turn (avg days) 9.3 9.9 11.3 11.4 11.4 Asset Turnover (x) 1.2 1.3 1.3 1.3 1.3 Current Ratio (x) 0.6 0.6 0.5 0.5 0.5 Quick Ratio (x) 0.4 0.3 0.2 0.2 0.2 Net Debt/Equity (X) 2.8 2.7 2.8 2.9 3.0 Net Debt/Equity ex MI (X) 2.8 2.7 2.8 2.9 3.0 Capex to Debt (%) 46.8 47.6 56.0 44.3 39.5 Z-Score (X) 3.2 3.4 3.4 3.4 3.3



Company Guide

StarHub

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 456 440 439 409 395 Dep. & Amort. 271 271 275 280 285 Tax Paid (65.3) (92.7) (80.6) (65.9) (61.4) Assoc. & JV Inc/(loss) 0.0 0.30 0.30 0.30 0.30 Chg in Wkg.Cap. 2.50 (108) (4.2) (1.0) (2.6) Other Operating CF (9.6) 33.5 (10.0) (10.0) (10.0) Net Operating CF 655 545 620 613 606 Capital Exp.(net) (322) (327) (385) (305) (271) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (12.0) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 2.80 38.9 0.0 0.0 0.0 Net Investing CF (319) (300) (385) (305) (271) Div Paid (345) (346) (344) (344) (344) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 6.20 10.6 10.0 10.0 10.0 Net Financing CF (339) (335) (334) (334) (334) Currency Adjustments 0.20 0.30 0.0 0.0 0.0 Chg in Cash (2.7) (90.8) (99.3) (25.9) 0.80 Opg CFPS (S cts) 37.9 37.7 36.0 35.4 35.2 Free CFPS (S cts) 19.4 12.6 13.6 17.8 19.3



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 17 Feb 16 3.56 3.30 FULLY VALUED

2: 19 Feb 16 3.46 3.30 FULLY VALUED

3: 29 Mar 16 3.31 3.30 FULLY VALUED

4: 06 May 16 3.32 3.30 FULLY VALUED

5: 16 May 16 3.39 3.30 HOLD

6: 04 Aug 16 3.92 4.10 BUY

7: 22 Aug 16 3.75 3.65 HOLD

8: 21 Sep 16 3.40 3.00 FULLY VALUED

9: 26 Sep 16 3.39 3.00 FULLY VALUED

10: 02 Nov 16 3.38 2.80 FULLY VALUED

11: 03 Nov 16 3.27 2.80 FULLY VALUED12: 17 Nov 16 2.96 2.80 FULLY VALUED13: 15 Dec 16 2.81 2.65 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

6

7

89 10

1112

132.62

2.82

3.02

3.22

3.42

3.62

3.82

4.02

Jan-16 May-16 Sep-16 Jan-17

S$

20% capex decline due to network sharing

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY

HOLD Last Traded Price ( 24 Nov 2016): RM4.31 (KLCI : 1,624.21)

Price Target 12-mth: RM4.45 (3% upside) (Prev RM4.95)

Potential Catalyst: Recovery in Celcom operations; de-gearing exercise

Where we differ: Valuation assumptions are more conservative than

consensus Analyst Regional Research Team; [email protected]

What’s New 3Q16 results below expectations due to weak

performance (Celcom, XL, and associates) as well as higher finance costs

Challenging conditions across most markets that Axiata has presence

Cut FY16-18F EPS by 6-12%. Maintain HOLD with lower SOP-based TP of RM4.45

Price Relative

Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F

Revenue 19,883 20,367 21,307 21,904 EBITDA 8,301 7,824 8,477 8,817 Pre-tax Profit 3,331 2,777 2,995 3,343 Net Profit 2,554 1,815 1,837 2,019 Net Pft (Pre Ex.) 2,071 1,815 1,837 2,019 Net Pft Gth (Pre-ex) (%) (7.5) (12.4) 1.2 9.9 EPS (sen) 29.0 20.6 20.8 22.9 EPS Pre Ex. (sen) 23.5 20.6 20.8 22.9 EPS Gth Pre Ex (%) (10) (12) 1 10 Diluted EPS (sen) 23.5 20.6 20.8 22.9 Net DPS (sen) 20.0 17.5 17.7 19.5 BV Per Share (sen) 267 270 273 276 PE (X) 14.9 20.9 20.7 18.8 PE Pre Ex. (X) 18.3 20.9 20.7 18.8 P/Cash Flow (X) 6.0 6.3 5.8 5.6 EV/EBITDA (X) 6.2 7.6 7.1 6.9 Net Div Yield (%) 4.6 4.1 4.1 4.5 P/Book Value (X) 1.6 1.6 1.6 1.6 Net Debt/Equity (X) 0.4 0.7 0.7 0.7 ROAE (%) 11.5 7.7 7.7 8.3 Earnings Rev (%): (6) (12) (12) Consensus EPS (sen): 22.8 26.3 28.4 Other Broker Recs: B: 2 S: 3 H: 24


Competition is everywhere Maintain HOLD, lower RM4.45 TP. We maintain our HOLD call on Axiata with a lower TP of RM4.45. We see no near-term re-rating catalysts for the stock given weak operating performance at Celcom which contributes a substantial 50-60% of FY16-18F earnings. Recovery would not be easy in view of the rising competition and challenges in the Malaysian mobile market. Besides that, all the other operating subsidiaries and associates are also facing a relatively hard time at their home countries due to competition, tax issues, and regulatory uncertainties. Gearing level increased post-acquisition of Ncell. After completing the acquisition of Ncell in April 2016, Axiata’s gearing had risen to 1.6x net debt-to-EBITDA, which is relatively high compared to its peers. We think any major M&A activities are likely to be on hold for now, at least until Axiata reduces its gearing level by listing its subsidiaries such as edotco. Monetisation of tower assets. Axiata has plans to eventually monetise and list its tower arm, edotco. To boost its IPO profile, edotco has been focusing on reducing capex, improving operating efficiencies, and raising the tenancy ratio of its tower assets over the last 12 months (1.5x of approximately 17,000 towers). It recently acquired another 12.5%-stake in Myanmar Tower Co Ltd (MTC), bringing its stake in MTC to 87.5%. Valuation:

Our RM4.45 TP for Axiata is based on sum-of-parts valuation,

which implies 21x FY17 PE and 7.4x EV/EBITDA.

Key Risks to Our View:

Forex risks. Axiata is exposed to forex risks given that all of its

subsidiaries and associates are foreign, except for Celcom. It is

also exposed to fluctuations in USD due to USD-denominated

debt, mainly at the holding company level. At A Glance Issued Capital (m shrs) 8,971

Mkt. Cap (RMm/US$m) 38,666 / 8,693

Major Shareholders (%)

Khazanah 44.5

EPF 14.0

Skim ASB 8.5

Free Float (%) 32.9

3m Avg. Daily Val (US$m) 5.6

ICB Industry : Telecommunications / Mobile Telecommunications

DBS Group Research . Equity

25 Nov 2016

Regional Company Guide

Axiata Group Version 6 | Bloomberg: AXIATA MK | Reuters: AXIA.KL Refer to important disclosures at the end of this report

68

88

108

128

148

168

188

208

3.9

4.4

4.9

5.4

5.9

6.4

6.9

7.4

7.9

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Relative IndexRM

Axiata Group (LHS) Relative KLCI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES


Axiata Group

WHAT’S NEW

3Q16 results – Competition is everywhere

Below expectations. Axiata booked a core net profit of

RM506m in 3Q16 (-2% y-o-y), taking 9MFY16 core earnings

to c.70% of our and consensus’ full-year estimates. Given the

tough operating environment, we believe its earnings are

unlikely to improve significantly in 4Q16 and would likely miss

our full-year estimates by about 5-6%. Notwithstanding the

weak performance by its subsidiaries and associates, Axiata’s

earnings were also dragged by higher finance cost due to: 1)

higher debt level following the Ncell acquisition, and 2)

higher interest cost for XL after refinancing its USD loan to

IDR loan.

Normalised group PATAMI contribution

Sources: Companies, DBS Bank

Celcom – service revenue stabilised but margins are

lower. 3Q16 service revenue was stable at +1.2% q-o-q, but

was still down quite substantially by 11% on a y-o-y basis.

EBITDA margins were also a lot weaker in 3Q16 at about

35.1% due to higher network expenses and staff costs.

Competition remains a thorny issue for Celcom given the

current aggressive data pricing by almost all the mobile

operators in Malaysia.

Robi – merger with Airtel completed. The merger

between Robi and Airtel was completed on 16 November,

and Axiata will own approximately 68.7% of the merged

entity. However, given that Airtel is loss making currently,

management estimates that the merger will result in some

dilution to Robi’s EBITDA in FY17 and PATAMI in FY17-18.

Potential write-down on Idea investment. Axiata’s

associates are also not doing well due to intense competition

in India (for Idea Cellular) and potential entry of a fourth

player in Singapore (for M1). The book value of its investment

in Idea Cellular might need to be written down further due to

lower rate of returns.

USD debt position. Axiata currently has about USD2.7bn

USD-loan (~RM11.2bn), roughly 56% out of its RM19.9bn

total debt. 47% of its USD loan is hedged. This means about

USD1.3bn of unhedged USD loan, or ~30% of total debt.

Cut FY16-18F EPS by 16-18%. We cut our FY16-18F

earnings forecasts by 6-12% after adjusting for higher

finance cost and lower contribution from associates.

SOP-based TP revised lower to RM4.45. This is following a

lower valuation being ascribed to XL and M1 (DBS TP), as well

as Idea Cellular (consensus TP).

SOP Valuation

1,056

(37)

152 129

0

140

217

759

(81)

197

99

260 205

(98)(200)

0

200

400

600

800

1,000

1,200

Celcom XL Dialog Robi Ncell Smart Associates+ Others

9M15 9M16

Subsidiaries Valuation Method Effective Valuation Valuation Per Axiata

stake (RMm) per share share

Celcom DCF (WACC 7.4%, TG 1.5%) 100.0% 19,694 2.23

XL DBS TP 66.6% 5,060 Rp3,300 0.57

Ncell 6x CY16 EBITDA 80.0% 6,403 0.73

Dialog Market Price 83.3% 2,061 Rp10.4 0.23

Robi 6x CY16 EBITDA 92.0% 5,384 0.61

Idea Cellular Consensus TP 20.0% 3,375 Rs. 82.4 0.38

M1 DBS TP 29.2% 1,574 SGD 1.97 0.18

Others (Cambodia, MTCE, Multinet etc)Book value 550 0.06

Total value of subsidiaries 44,101 4.99

Holding company net cash (debt) (4,848) -0.54

Total equity value 39,253 4.45



Axiata Group

Axiata Group 3Q16 result review

Key financials (RM m) 3Q2015 2Q2016 3Q2016

Chg

y-o-y

Chg

q-o-q Comments

Revenue 5,065.1 5,310.1 5,457.0 7.7% 2.8% Higher revenue mainly due to the consolidation of Ncell

EBITDA 1,864.0 2,066.0 2,062.0 10.6% -0.2%

Operating profit 1,455.6 857.8 821.2 -43.6% -4.3%

Pretax profit 784.2 409.6 451.5 -42.4% 10.2%

Net profit 891.4 188.9 256.6 -71.2% 35.8%

Core net profit 516.0 371.0 505.6 -2.0% 36.3% Adjusted for forex losses

Margins (%)

EBITDA 36.8 38.9 37.8 1.0 pt -1.1 pts

Pretax 15.5 7.7 8.3 -7.2 pts 0.6 pt

Core net profit 10.2 7.0 9.3 -0.9 pt 2.3 pts

Revenue breakdown

- Celcom 1,803 1,678 1,628 -9.7% -3.0% Q-o-q, mainly due to lower handset sales

- XL 1,706 1,580 1,617 -5.2% 2.3% Driven by strong growth in data

- Dialog 560 577 605 8.0% 4.9%

- Robi 696 636 718 3.2% 12.9%

- Ncell - 484 551 - 13.8% Acquisition completed in April 2016

- Other/Eliminations 299 353 338 13.0% -4.2%

EBITDA breakdown

- Celcom 667 585 517 -22.5% -11.6% Impacted by higher network costs

- XL 665 660 632 -5.0% -4.2%

- Dialog 188 193 215 14.4% 11.4%

- Robi 251 204 233 -7.2% 14.2%

- Ncell - 310 313 - 1.0%

- Other/eliminations 93 114 182 95.7% 59.6%



Axiata Group

3Q16 Celcom Operating Statistics

3Q2015 2Q2016 3Q2016 Chg

y-o-y Chg

q-o-q Comments Celcom (RM m)

Revenue 1,801 1,682 1,630 -9.5% -3.1% Q-o-q decline largely because of lower handset sales

EBITDA 737 642 572 -22.4% -10.9%

EBITDA margin (%) 40.9 38.2 35.1 -5.8 pts -3.1 pts Dragged by higher network expenses and staff costs

Net profit 333 261 216 -35.1% -17.2%

Core net profit 408 320 276 -32.4% -13.8%

Revenue breakdown (RM m)

Service revenue 1,688 1,484 1,501 -11.0% 1.2% Some signs of stabilisation

- Voice & SMS 1,165 928 914 -21.5% -1.5%

- Data 522 555 587 12.4% 5.7%

Other (Handset sales, etc.) 113 198 129 13.5% -35.1%

Prepaid ARPU (RM) 32 29 30 -6.3% 3.4%

Postpaid ARPU (RM) 84 76 76 -9.5% 0.0%

Blended ARPU (RM) 42 39 41 -2.4% 5.1% Slight improvement in ARPU

Prepaid subscribers ('000) 9,707 8,338 8,285 -14.6% -0.6% 53k net churn in 3Q16

Postpaid subscribers ('000) 2,802 2,897 2,869 2.4% -1.0% 28k net churn in 3Q16

Total subscribers ('000) 12,509 11,235 11,154 -10.8% -0.7%

Source of all data: Company, DBS Bank



Axiata Group


Earnings Drivers:

Heightened competition affecting Celcom. Teething IT issues

had prevented Celcom from launching new plans in 2014, and

this had affected dealers’ confidence. This issue was finally

resolved by 2Q15 after some delays. But the damage was done,

as reflected in the decline in subscriber base as well as ARPU in

FY14-15. In order to regain momentum, Celcom was more

aggressive in the market in 1H15 and initially showed some

positive results (net adds of 61k in 2Q15). However, rivals had

responded with aggressive pricing, leading to a net churn in

Celcom subscribers as well as decline in ARPU by end-2015.

We think growth could still be tough for Celcom in FY16

because of rising competition in Malaysia’s mobile market.

Overall, we estimate Celcom's revenue will fall further by 11%

in FY16F (FY15: -5%), before recovering by 1-2% in FY17-18F,

in line with industry growth.

XL: new management and strategy. After the appointment of a

new CEO early this year, XL has changed its strategy to focus on

profitability and accelerate Axis-XL integration. Management

plans to adopt a dual-brand strategy – XL will be the premium

digital lifestyle brand while Axis will be a tactical brand to serve

the lower-end market. The company will also move away from

its 'minute factory' strategy (i.e. high-gross-add model), and

concentrate instead on improving EBITDA by attracting mid-

and high-value subscribers. Though revenue growth will be

relatively muted for XL in the near term, Axiata believes these

are the right strategies for XL going forward and remains

committed to them.

Dialog and Robi. Contribution from Dialog has been relatively

stable as it is already the largest telecom operator in Sri Lanka.

On the other hand, contribution from Robi has been growing

significantly since FY11 on the back of healthy subscriber

growth amid heavy capex investment from Axiata.

The competitive landscape in Bangladesh is also improving,

following the recent proposed merger between Robi and Airtel

Bangladesh, which will create the second largest mobile

operator in Bangladesh.

Stable EBITDA margins. Overall, group EBITDA margins took a

hit in FY15 following the poor performance of Celcom and the

XL-Axis integration. We believe margins should improve

gradually going forward on the back of a recovery in XL

operations and positive contribution from Ncell.

Revenue contribution (in RM m)

Celcom subscribers and blended ARPU

XL Axiata subscribers and blended ARPU

Group EBITDA margins (%)


-

5,000

10,000

15,000

20,000

25,000

FY12 FY13 FY14 FY15 FY16F FY17F FY18F

Celcom XL Axiata Ncell Dialog Robi Smart & Others

49

48

46

43

41 42 42

36

38

40

42

44

46

48

50

9,000

10,000

11,000

12,000

13,000

14,000


Total subscriber ('000) Blended ARPU (RM)

32.0

26.8 25.9 25.3

38.0 38.6 39.8

20.0

25.0

30.0

35.0

40.0

45.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0


Total subscriber (m) Blended ARPU ('000 IDR)

42.1%

39.6%

37.4%36.6%

38.4%

39.8%40.3%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%




Axiata Group

Balance Sheet:

Comfortable gearing, but will trend up once Ncell acquisition is

completed. As at end-3Q16, Axiata’s gearing was comfortable

at 1.6x net debt-to-EBITDA. To reduce its gearing level, we

believe Axiata will eventually monetise and list its tower arm,

edotco.

Capex to remain high. We expect FY16-18F capex to remain

elevated at 20-25% of revenue for Axiata due to aggressive

network rollout to boost mobile data leadership in key markets

such as Malaysia, Indonesia and Bangladesh.

Share Price Drivers:

Strong turnaround in Celcom and XL. Collectively, Celcom and

XL contribute more than 70% of our earnings forecasts and

SOP-valuation for Axiata. As such, we believe a strong

turnaround in the current sluggish performance of Celcom and

XL will be a key catalyst for the stock to re-rate.

Tower arm IPO. Axiata has plans to eventually monetise and list

its tower arm, edotco. To boost its IPO profile, edotco has been

focusing on reducing capex, improving operating efficiencies,

and raising the tenancy ratio of its tower assets over the last 12

months. It also recently acquired a 75%-stake in MTC, an

independent tower operator in Myanmar.

Key Risks:

Forex risks. Axiata is exposed to forex risks given that all of its

subsidiaries and associates are foreign, except for Celcom.

Irrational competition. Given the already high mobile

penetration rate and low ARPU in the various key markets that

Axiata operates in, any irrational competition will hurt its

subsidiaries’ growth as well as profitability.

Company Background

Axiata Group is a telecommunications group in Asia which has

controlling interests in mobile operators in Malaysia, Indonesia,

Sri Lanka, Bangladesh and Cambodia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.3

0.3

0.4

0.4

0.4

0.4

0.4

0.5

0.5

0.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2014A 2015A 2016F 2017F 2018F


0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 26.6x

+1sd: 29.7x

+2sd: 32.9x

-1sd: 23.5x

-2sd: 20.4x

15.6

20.6

25.6

30.6

35.6


(x)

Avg: 2.62x

+1sd: 2.98x

+2sd: 3.33x

-1sd: 2.27x

-2sd: 1.92x

1.4

1.9

2.4

2.9

3.4


(x)



Axiata Group

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Celcom revenue growth (%)

(3.5) (5.1) (12.8) (2.2) 1.69

Celcom EBITDA margins (%)

42.9 41.8 39.0 39.5 40.5

XL revenue growth (%) 8.66 1.13 (5.2) 2.96 4.91

XL EBITDA margins (%) 35.3 37.2 38.6 38.8 38.5

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (RMm)

Celcom 7,729 7,338 6,402 6,260 6,366

XL Axiata 6,475 6,657 6,644 6,841 7,177

Robi 2,085 2,623 2,499 2,412 2,387

Dialog 1,686 2,121 2,265 2,338 2,402

Others 737 1,144 2,557 3,457 3,572

Total 18,712 19,883 20,367 21,307 21,904

Income Statement (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 18,712 19,883 20,367 21,307 21,904

Cost of Goods Sold (11,713) (12,599) (12,543) (12,831) (13,086)

Gross Profit 6,999 7,284 7,824 8,477 8,817

Other Opng (Exp)/Inc (3,702) (3,581) (4,204) (4,373) (4,384)

Operating Profit 3,297 3,703 3,620 4,104 4,433

Other Non Opg (Exp)/Inc (125) (648) 0.0 0.0 0.0

Associates & JV Inc 382 451 158 110 140

Net Interest (Exp)/Inc (548) (658) (1,001) (1,219) (1,230)

Exceptional Gain/(Loss) 109 483 0.0 0.0 0.0

Pre-tax Profit 3,114 3,331 2,777 2,995 3,343

Tax (770) (695) (677) (780) (881)

Minority Interest 4.25 (81.9) (286) (378) (443)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 2,349 2,554 1,815 1,837 2,019

Net Profit before Except. 2,240 2,071 1,815 1,837 2,019

EBITDA 7,133 8,301 7,824 8,477 8,817

Growth

Revenue Gth (%) 1.9 6.3 2.4 4.6 2.8

EBITDA Gth (%) (5.3) 16.4 (5.8) 8.3 4.0

Opg Profit Gth (%) (19.7) 12.3 (2.2) 13.4 8.0

Net Profit Gth (Pre-ex) (%) (18.9) (7.5) (12.4) 1.2 9.9

Margins & Ratio

Gross Margins (%) 37.4 36.6 38.4 39.8 40.3

Opg Profit Margin (%) 17.6 18.6 17.8 19.3 20.2

Net Profit Margin (%) 12.6 12.8 8.9 8.6 9.2

ROAE (%) 11.6 11.5 7.7 7.7 8.3

ROA (%) 5.1 4.9 3.1 2.9 3.2

ROCE (%) 6.4 6.8 5.6 5.7 6.1

Div Payout Ratio (%) 80.4 69.0 85.0 85.0 85.0

Net Interest Cover (x) 6.0 5.6 3.6 3.4 3.6


Intense competition in the market



Axiata Group

Quarterly / Interim Income Statement (RMm)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 5,065 5,360 5,009 5,310 5,457


Gross Profit 1,864 1,964 1,872 2,066 2,092

Other Oper. (Exp)/Inc (738) (1,058) (1,463) (1,215) (1,149)

Operating Profit 1,126 906 409 851 943

Other Non Opg (Exp)/Inc (412) 63.8 376 3.25 4.85

Associates & JV Inc 112 48.1 67.5 19.1 (3.6)

Net Interest (Exp)/Inc (175) (242) (204) (282) (244)

Exceptional Gain/(Loss) 376 53.0 (96.0) (182) (249)

Pre-tax Profit 1,027 830 552 410 452

Tax (72.2) (314) (151) (177) (156)

Minority Interest (63.7) (48.0) (32.9) (43.3) (39.2)

Net Profit 891 467 368 189 257

Net profit bef Except. 515 414 464 371 506

EBITDA 1,858 2,201 2,017 2,264 2,247

Growth

Revenue Gth (%) 7.6 5.8 (6.6) 6.0 2.8

EBITDA Gth (%) (1.3) 18.4 (8.3) 12.2 (0.7)

Opg Profit Gth (%) 37.3 (19.5) (54.9) 108.0 10.9

Net Profit Gth (Pre-ex) (%) (12.0) (19.6) 12.1 (20.1) 36.3

Margins

Gross Margins (%) 36.8 36.6 37.4 38.9 38.3

Opg Profit Margins (%) 22.2 16.9 8.2 16.0 17.3

Net Profit Margins (%) 17.6 8.7 7.4 3.6 4.7

Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 19,933 23,134 31,152 32,179 33,058

Invts in Associates & JVs 7,557 8,311 8,470 8,579 8,720

Other LT Assets 13,321 14,816 14,816 14,816 14,816

Cash & ST Invts 5,116 5,511 3,799 3,343 3,143

Inventory 79.5 155 136 142 146

Debtors 3,062 3,955 4,073 4,261 4,381

Other Current Assets 58.9 236 236 236 236

Total Assets 49,127 56,118 62,682 63,557 64,500

ST Debt 1,949 2,348 2,348 2,348 2,348

Creditor 8,375 9,643 9,648 9,870 10,066

Other Current Liab 236 499 499 499 499

LT Debt 11,945 14,045 20,045 20,045 20,045

Other LT Liabilities 4,066 3,860 3,860 3,860 3,860

Shareholder’s Equity 20,745 23,525 23,797 24,073 24,376

Minority Interests 1,813 2,199 2,485 2,863 3,307

Total Cap. & Liab. 49,127 56,118 62,682 63,557 64,500

Non-Cash Wkg. Capital (5,410) (5,796) (5,702) (5,729) (5,803)

Net Cash/(Debt) (8,778) (10,882) (18,594) (19,050) (19,249)

Debtors Turn (avg days) 56.0 64.4 71.9 71.4 72.0

Creditors Turn (avg days) 328.7 391.4 422.2 421.2 418.1

Inventory Turn (avg days) 3.2 5.1 6.4 6.0 6.0

Asset Turnover (x) 0.4 0.4 0.3 0.3 0.3

Current Ratio (x) 0.8 0.8 0.7 0.6 0.6

Quick Ratio (x) 0.8 0.8 0.6 0.6 0.6

Net Debt/Equity (X) 0.4 0.4 0.7 0.7 0.7

Net Debt/Equity ex MI (X) 0.4 0.5 0.8 0.8 0.8

Capex to Debt (%) 28.0 30.9 28.7 24.1 23.5

Z-Score (X) 1.7 1.6 1.4 1.4 1.4


Higher net debt due to the acquisition of Ncell


ed: CK / sa:BC, PY

HOLDLast Traded Price ( 19 Oct 2016): RM5.00 (KLCI : 1,668.27)

Price Target 12-mth: RM4.35 (-13% downside) (Prev RM4.35)

Potential Catalyst: Less intense competition pressure

Where we differ: FY16-18F slightly below consensus

Analyst Regional Research Team; [email protected]

What’s New 3Q16 results in line with estimates; declared

5.6sen interim DPS (100% payout)

Margins improved thanks to rationalisation of IDD

segment in prepaid which led to lower traffic costs

Maintain HOLD with DCF-based TP of RM4.35

Price Relative


Revenue 6,914 6,711 6,761 6,898 EBITDA 2,982 2,898 2,961 3,063 Pre-tax Profit 2,309 2,159 2,110 2,180 Net Profit 1,723 1,619 1,582 1,635 Net Pft (Pre Ex.) 1,723 1,619 1,582 1,635 Net Pft Gth (Pre-ex) (%) (15.2) (6.0) (2.3) 3.3 EPS (sen) 22.2 20.8 20.4 21.0 EPS Pre Ex. (sen) 22.2 20.8 20.4 21.0 EPS Gth Pre Ex (%) (15) (6) (2) 3 Diluted EPS (sen) 22.2 20.8 20.4 21.0 Net DPS (sen) 22.0 20.8 20.4 21.0 BV Per Share (sen) 6.68 6.68 6.68 6.68 PE (X) 22.6 24.0 24.6 23.8 PE Pre Ex. (X) 22.6 24.0 24.6 23.8 P/Cash Flow (X) 17.4 17.3 16.8 16.1 EV/EBITDA (X) 13.4 14.1 13.8 13.4 Net Div Yield (%) 4.4 4.2 4.1 4.2 P/Book Value (X) 74.9 74.9 74.9 74.9 Net Debt/Equity (X) 2.0 3.7 4.0 4.3 ROAE (%) 285.8 311.7 304.7 314.8

Earnings Rev (%): 0 0 0 Consensus EPS (sen): 21.6 21.8 21.8 Other Broker Recs: B: 5 S: 11 H: 13


Keeping costs in check

Heightened competition. We maintain our HOLD call on DiGi with an unchanged TP of RM4.35. We see no re-rating catalysts for the stock as its growth would be relatively muted in FY16-18F due to heightened competition stemming from a stronger fourth player (U Mobile gained new spectrum) and TM’s entry into the mobile space. The saving grace for DiGi is its 4.2% net dividend yield, currently the highest relative to other Malaysian telcos.

Strong balance sheet but dividend payout is capped at 100%. DiGi has the lowest gearing level among Malaysian telcos at 0.4x net debt-to-EBITDA. However, its dividend payout has been capped at 100% due to limited retained earnings available for dividend distribution.

No funding issues for spectrum reallocation fee. The regulator has fixed the spectrum fee for the 900MHz and 1800MHz band, where DiGi needs to pay RM599m upfront and RM51m annually over the 15-year licence period. Compared to its peers who are more leveraged, DiGi is in a relatively better position to fund the spectrum fee with its stronger balance sheet. Getting a slice of the 900MHz spectrum, which it lacks, will help to level the playing field for DiGi against Maxis and Celcom, though this will be partly offset by increased competition from U Mobile.

Valuation:

Our RM4.35 TP for DiGi is based on DCF valuation, assuming

7.3% WACC and 1.5% terminal growth. Maintain HOLD.


Irrational competition. Given the already-high mobile

penetration rate in Malaysia, any irrational competition in the

market will hurt DiGi’s growth as well as the industry's.

At A Glance Issued Capital (m shrs) 7,775

Mkt. Cap (RMm/US$m) 38,875 / 9,339


Telenor 49.0

Employee Provident Fund 14.1

PNB 5.0

Free Float (%) 33.7



DBS Group Research . Equity 20 Oct 2016


Digi.Com Version 6 | Bloomberg: DIGI MK | Reuters: DSOM.KL Refer to important disclosures at the end of this report

70

90

110

130

150

170

190

210

3.9

4.4

4.9

5.4

5.9

6.4

6.9

Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

Relative IndexRM

Digi.Com (LHS) Relative KLCI (RHS)



Digi.Com

WHAT’S NEW

3Q16 Results: Keeping costs in check

In line with estimates. DiGi’s 3Q16 earnings increased by

4% q-o-q to RM438m, taking 9MFY16 earnings to c.76% of

our and consensus full-year forecasts. Besides that, an

interim DPS of 5.6 sen was declared, translating to an almost

100% payout ratio.

Better margins despite flattish service revenue growth.

Excluding devices sales, service revenue is actually flat q-o-q

for both the prepaid and postpaid markets. However, there

was a big improvement in EBITDA margins to 47.9% (2Q16:

44.4%), largely driven by the rationalisation of the IDD

segment in the prepaid market which led to much lower

traffic costs (-13% q-o-q). Traffic costs have actually increased

quite substantially since 2015 because of the weaker ringgit

and higher IDD minutes usage (given attractive pricing and

promotions).

Rationalisation of IDD segment in prepaid. Although DiGi

lost 138k prepaid subscribers in 3Q16, it is quite evident that

these are low-quality and/or multi-SIM subscribers as ARPU

and revenue had remained flat. Most of the churns are

coming from the migrant workers segment, following DiGi’s

decision to move away from the irrational IDD price war and

reduce its dependency on voice IDD revenue.

DiGi’s quarterly prepaid segment trend


Postpaid ARPU diluted by competition. The postpaid

segment continued to see positive traction, gaining 40k net

subscribers in 3Q16. However, ARPU was diluted from RM82

to RM80 due to aggressive competition in the market where

all players are increasing the data allocation and giving out

various freebies (free data for weekend, video streaming,

etc.). Due to the higher data allocation, we think some

subscribers might have: 1) downgraded to lower-priced plans

that match their usage pattern; and 2) took up multi-SIM

sharing to share their high data quota.

DiGi’s quarterly postpaid segment trend


Revised 2016 guidance. Service revenue growth was revised

downwards to low single-digit decline (from flat previously).

But this was compensated by better EBITDA margin guidance

of “slightly below 45%”, compared to “sustain at 2015 level

of 43%”. Net-net, it was a slightly positive revision arising

from the rationalisation of the IDD segment in the prepaid

market.

900MHz and 1800MHz spectrum. By 1 Nov, DiGi will

decide whether to pay the RM599m upfront fee in a lump

sum or by instalment. Nonetheless, the accounting treatment

should be the same where total spectrum cost (upfront +

annual fee payment) will be capitalised and amortised over

the spectrum period of 15 years. Management confirmed

that this new structure will replace the annual licence fee

under the old structure. As such, the incremental spectrum

expense is quite minimal. We have reflected the spectrum

fees in our forecast.

1,154 1,141 1,141 1,137

1,096 1,065 1,065

9,933 10,044 9,899 10,285 10,434 10,393 10,255

800

900

1,000

1,100

1,200

1,300

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Prepaid revenue (RM m) Prepaid subs ('000)

434 448 443 450

464

492 489 1,758 1,771 1,776

1,840 1,902

1,954 1,994

300

350

400

450

500

550

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Postpaid revenue (RM m) Postpaid subs ('000)



Digi.Com

3Q16 Results Review

3Q15 2Q16 3Q16 % Chg

y-o-y

% Chg

q-o-q

Comments

Key financials (RM m)

Revenue 1,674.7 1,655.4 1,619.1 -3.3 -2.2 Q-o-q, service revenue is flat across both prepaid and postpaid segment

EBITDA 718.9 735.3 775.1 7.8 5.4

Operating profit 549.1 591.7 600.9 9.4 1.6

Pretax profit 537.0 575.6 585.4 9.0 1.7

Net profit 396.6 420.6 438.4 10.5 4.2

Core net profit 424.6 420.6 438.4 3.3 4.2

Margins (%)

EBITDA 42.9 44.4 47.9 4.9 pts 3.5 pts Led by better IDD margins and lower devices sales volume

Pretax 32.1 34.8 36.2 4.1 pts 1.4 pts

Net profit 23.7 25.4 27.1 3.4 pts 1.7 pts

Other highlights

Revenue breakdown

- Prepaid voice 713 655 631 -11.5 -3.7 Partly because of lower IDD traffic

- Postpaid voice 180 194 188 4.4 -3.1

- Data 691 708 735 6.4 3.8 Higher data usage

- Others 91 98 65 -28.2 -33.9

Prepaid ARPU (RM) 38 34 34 -10.5 0.0 Stable ARPU

Postpaid ARPU (RM) 81 82 80 -1.2 -2.4 Affected by competition in the market

Blended ARPU (RM) 45 42 41 -8.9 -2.4

Prepaid subscribers (‘000) 9,899 10,393 10,255 3.6 -1.3 138k net churn in 3Q16

Postpaid subscribers (‘000) 1,776 1,954 1,994 12.3 2.0 40k net adds in 3Q16

Total subscribers (‘000) 11,675 12,347 12,249 4.9 -0.8




Digi.Com


Earnings Drivers:

Heightened competition. DiGi achieved above-industry-average

growth in FY11-14 as it played catch-up to rival Maxis and

Celcom, especially on 3G services where its licence was

obtained much later on. Its 3G network coverage has improved

significantly following a network modernisation exercise which

was completed in 3Q13, and this has helped to drive subscriber

acquisitions in new geographical areas.

Nonetheless, revenue declined by 1.5% in FY15 due to intense

price competition in the market and confusion over the GST’s

implementation on prepaid subscribers. We believe growth

would be challenging in FY16-18F as competitive pressures

could remain elevated due a more formidable U Mobile (gaining

new spectrum) and TM’s entry into the mobile space.

Smart bundling in prepaid segment. Since FY11, DiGi has been

able to maintain its lead in the prepaid market, gaining

subscribers ahead of Maxis and Celcom. Its prepaid division has

relatively higher minutes-of-usage and ARPU, thanks to its

stronghold in the youth and migrant worker segments. The

company has implemented various initiatives such as affordable

smartphone bundling to drive up Internet penetration among its

prepaid subscribers, which now stands at 61%. This is crucial to

drive revenue growth going forward, as prepaid subs make up

>70% of DiGi's revenue. Nonetheless, given the rising

competition, we expect DiGi to achieve weaker ARPU in FY16-

18F.

Competing in postpaid mass market. Network quality was

slightly affected during its network modernisation exercise in

FY12-13, but DiGi managed to avoid postpaid subscriber loss,

thanks to promotional activities. We do not foresee huge gains

in subscribers for DiGi going forward as the postpaid market is

quite competitive, especially in the low-end/mid-range segment.

Price competition had slightly affected postpaid ARPU in FY15,

and we think it will likely stay at current levels despite better

data monetisation of its LTE network.

Subdued EBITDA margins. DiGi recorded a decline in EBITDA

margins in FY15 due to intense price competition and higher

network traffic costs. Given the heightened competition in the

market, we expect EBITDA margins to remain subdued at 43-

44% in FY16-18F.

Revenue and y-o-y growth

Postpaid segment

Prepaid segment

EBITDA margins (%)


6.7% 5.9%

4.2%

-1.5%

-2.9%

0.7%

2.0%

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2013 2014 2015 2016F 2017F 2018F

in RM m

84

83 83

81

80 80

81

77

78

79

80

81

82

83

84

85

-

500

1,000

1,500

2,000

2,500

2012 2013 2014 2015 2016F 2017F 2018F

Postpaid subs ('000) ARPU (in RM)

41

41

41

38

36

35 35

32

33

34

35

36

37

38

39

40

41

42

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

2012 2013 2014 2015 2016F 2017F 2018F

Prepaid subs ('000) ARPU (in RM)

46.0%

45.2%

45.1%

43.1% 43.2%

43.8%

44.4%

40.5%

41.5%

42.5%

43.5%

44.5%

45.5%

46.5%

47.5%

2012 2013 2014 2015 2016F 2017F 2018F



Digi.Com

Balance Sheet:

Lowest gearing. DiGi has the lowest gearing level among

Malaysian telcos, with its net debt-to-EBITDA at 0.4x.

Nonetheless, its dividend payout has been capped at 100% due

to limited retained earnings available for dividend distribution.

Management is exploring a business trust structure to solve this

issue, but there has not been any concrete progress so far.

Capex for LTE rollout in FY16-17F. We see DiGi keeping its

capex level intact at RM800-900m per annum for further

expansion of its LTE network. Additional funding needs for 2G

spectrum reallocation fee should not be a problem for the

company given its strong balance sheet.


Transition into business trust. A business trust structure will

solve DiGi's retained earnings issue and enable a higher

dividend payout. Assuming DiGi is comfortable to gear up to

1.2-1.5x net debt-to-EBITDA, we estimate that the company

could distribute additional dividends of up to 40-50 sen/share.

Further market share gains. In relative terms, DiGi's share price

has re-rated significantly and outperformed its peers over the

last few years as it gained market share and achieved above-

industry-average growth. Nevertheless, further market share

gains may not be easy for DiGi going forward, given the

intensifying competition with the potential entry of a new

competitor (i.e. Telekom Malaysia).

Key Risks:



market will hurt DiGi’s growth as well as the industry's.

Company Background

Owned by Sweden-based Telenor, DiGi.Com is primarily a

domestic mobile wireless operator in Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

0.00

1.00

2.00

3.00

4.00

5.00

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

2014A 2015A 2016F 2017F 2018F

Avg: 23.3x

+1sd: 26.3x

+2sd: 29.3x

-1sd: 20.3x

-2sd: 17.3x

15.5

17.5

19.5

21.5

23.5

25.5

27.5

29.5

31.5


(x)

Avg: 75.93x

+1sd: 93.15x

+2sd: 110.37x

-1sd: 58.72x

-2sd: 41.5x37.3

57.3

77.3

97.3

117.3

137.3

157.3


(x)



Digi.Com

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Total subscribers 11,421 12,125 12,335 12,545 12,755

Blended ARPU (RM) 47.4 44.7 42.6 42.3 42.5

EBITDA margins (%) 45.1 43.1 43.2 43.8 44.4

Capex (RM m) 900 897 1,499 900 900

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (RMm)

Postpaid voice 787 736 727 713 706

Prepaid voice 3,096 2,880 2,749 2,649 2,607

Data 2,450 2,732 2,782 2,954 3,136

Others 686 566 453 444 448

Total 7,019 6,914 6,711 6,761 6,898


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 7,019 6,914 6,711 6,761 6,898


Gross Profit 4,920 4,881 4,698 4,746 4,856



Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (25.8) (45.7) (80.8) (109) (117)

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 2,645 2,309 2,159 2,110 2,180

Tax (614) (586) (540) (527) (545)

Minority Interest 0.0 0.0 0.0 0.0 0.0


Net Profit 2,031 1,723 1,619 1,582 1,635


EBITDA 3,163 2,982 2,898 2,961 3,063

Growth

Revenue Gth (%) 4.2 (1.5) (2.9) 0.7 2.0

EBITDA Gth (%) 4.0 (5.7) (2.8) 2.2 3.5

Opg Profit Gth (%) 23.4 (11.9) (4.9) (0.9) 3.5

Net Profit Gth (Pre-ex) (%) 19.1 (15.2) (6.0) (2.3) 3.3

Margins & Ratio

Gross Margins (%) 70.1 70.6 70.0 70.2 70.4



ROAE (%) 301.5 285.8 311.7 304.7 314.8

ROA (%) 50.4 38.4 31.9 28.0 28.2

ROCE (%) 112.5 83.7 62.8 50.1 49.6

Div Payout Ratio (%) 99.5 99.3 100.0 100.0 100.0



Lower ARPU due to intense competition



Digi.Com


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 1,675 1,725 1,653 1,655 1,619

Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0

Gross Profit 0.0 0.0 0.0 0.0 0.0

Other Oper. (Exp)/Inc (1,098) (1,192) (1,105) (1,064) (1,018)

Operating Profit 577 532 548 592 601



Net Interest (Exp)/Inc (12.1) (13.1) (14.7) (16.0) (15.6)

Exceptional Gain/(Loss) (28.0) 0.0 0.0 0.0 0.0

Pre-tax Profit 537 519 534 576 585

Tax (140) (137) (135) (155) (147)


Net Profit 397 382 399 421 438


EBITDA 747 701 704 735 775

Growth

Revenue Gth (%) (2.8) 3.0 (4.2) 0.2 (2.2)

EBITDA Gth (%) (5.2) (6.1) 0.4 4.5 5.4

Opg Profit Gth (%) (9.5) (7.7) 3.0 7.9 1.6

Net Profit Gth (Pre-ex) (%) (8.6) (9.9) 4.4 5.4 4.2

Margins



Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 2,382 2,643 2,977 3,240 3,431

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0

Other LT Assets 502 599 1,105 1,001 943

Cash & ST Invts 519 234 360 491 365

Inventory 64.5 117 67.1 67.6 69.0

Debtors 744 922 839 845 862


Total Assets 4,308 4,662 5,496 5,793 5,818

ST Debt 804 1,269 1,269 1,269 1,269

Creditor 1,844 2,056 1,914 1,907 1,925


LT Debt 244 25.4 1,025 1,325 1,325

Other LT Liabilities 290 360 360 360 360

Shareholder’s Equity 686 519 519 519 519

Minority Interests 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 4,308 4,662 5,496 5,793 5,818


Net Cash/(Debt) (528) (1,060) (1,933) (2,102) (2,229)




Asset Turnover (x) 1.7 1.5 1.3 1.2 1.2

Current Ratio (x) 0.5 0.4 0.4 0.4 0.4

Quick Ratio (x) 0.4 0.3 0.3 0.4 0.3

Net Debt/Equity (X) 0.8 2.0 3.7 4.0 4.3


Capex to Debt (%) 85.2 69.3 65.3 34.7 34.7

Z-Score (X) 9.6 8.1 6.7 6.4 6.4


Excluding lower devices sales, service revenue is flat q-o-q

Net debt-to-EBITDA is relatively healthy at 0.4x



Digi.Com

Cash Flow Statement (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 2,645 2,309 2,159 2,110 2,180

Dep. & Amort. 492 628 659 741 766

Tax Paid (501) (601) (540) (527) (545)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (39.4) (121) (33.3) (10.4) 6.82

Other Operating CF (62.9) (93.0) 0.0 0.0 0.0

Net Operating CF 2,699 2,228 2,244 2,313 2,408

Capital Exp.(net) (892) (896) (1,499) (900) (900)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 12.6 10.7 0.0 0.0 0.0

Net Investing CF (880) (886) (1,499) (900) (900)

Div Paid (2,006) (1,889) (1,619) (1,582) (1,635)

Chg in Gross Debt 295 243 1,000 300 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CF (1,711) (1,646) (619) (1,282) (1,635)

Currency Adjustments 0.0 17.6 0.0 0.0 0.0

Chg in Cash 108 (286) 127 131 (127)

Opg CFPS (sen) 35.2 30.2 29.3 29.9 30.9

Free CFPS (sen) 23.2 17.1 9.59 18.2 19.4



Source: DBS Bank

Analyst: Regional Research Team

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 19 Oct 15 5.72 5.85 HOLD

2: 27 Oct 15 5.30 5.60 HOLD

3: 29 Jan 16 4.88 5.60 HOLD

4: 10 Feb 16 4.88 5.00 HOLD

5: 08 Apr 16 4.77 5.00 HOLD

6: 25 Apr 16 4.69 4.40 HOLD

7: 12 Jul 16 4.75 4.40 HOLD

8: 01 Sep 16 5.01 4.35 HOLD


1

2

3

4

5

6

7

8

4.16

4.36

4.56

4.76

4.96

5.16

5.36

5.56

5.76

5.96

Oct-15 Feb-16 Jun-16 Oct-16

RM

Includes RM599m upfront payment for spectrum

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY

FULLY VALUED Last Traded Price ( 19 Oct 2016): RM6.01 (KLCI : 1,668.27)

Price Target 12-mth: RM5.10 (-15% downside) (Prev RM5.10)

Potential Catalyst (Negative): Lower dividend payout; weak earnings

Where we differ: Our TP is one of the lowest among consensus as we

are more conservative on valuation


What’s New 3Q16 results within expectations; 5-sen DPS

declared

Strong prepaid performance driven by higher mobile Internet penetration

Valuation is rich; Maintain FULLY VALUED with

DCF-based TP of RM5.10

Price Relative


Revenue 8,601 8,412 8,356 8,427 EBITDA 4,517 4,276 4,248 4,285 Pre-tax Profit 2,460 2,525 2,652 2,705 Net Profit 1,739 1,868 1,963 2,001 Net Pft (Pre Ex.) 1,952 1,868 1,963 2,001 Net Pft Gth (Pre-ex) (%) 2.6 (4.3) 5.1 2.0 EPS (sen) 23.2 24.9 26.1 26.6 EPS Pre Ex. (sen) 26.0 24.9 26.1 26.6 EPS Gth Pre Ex (%) 3 (4) 5 2 Diluted EPS (sen) 26.0 24.9 26.1 26.6 Net DPS (sen) 20.0 20.0 22.0 24.0 BV Per Share (sen) 55.8 60.7 64.8 67.5 PE (X) 26.0 24.2 23.0 22.6 PE Pre Ex. (X) 23.1 24.2 23.0 22.6 P/Cash Flow (X) 11.1 13.2 13.4 13.1 EV/EBITDA (X) 11.9 12.7 12.8 12.6 Net Div Yield (%) 3.3 3.3 3.7 4.0 P/Book Value (X) 10.8 9.9 9.3 8.9 Net Debt/Equity (X) 2.0 2.0 1.9 1.8 ROAE (%) 39.1 42.7 41.7 40.3 Earnings Rev (%): 0 0 0 Consensus EPS (sen): 24.8 25.0 24.7 Other Broker Recs: B: 0 S: 15 H: 14


Mobile Internet drives higher prepaid revenue Rich valuation. We affirm our FULLY VALUED rating for Maxis with a TP of RM5.10. The stock is trading at a rich valuation of 23x FY17F PE, the most expensive among Malaysian telcos. We do not believe its premium valuation is justified given the lower dividend payout and deteriorating industry dynamics as a result of intensifying competition. Highly-leveraged. Maxis is also the most leveraged Malaysian telco at 1.7x net debt-to-EBITDA (vs. 0.4-1.5x for peers). The increase in gearing level over the years was largely to fund the gap created by the annual 40-sen DPS which was above free cash flow (FCF). The company has an internal gearing limit of 2.0x net debt-to-EBITDA, suggesting limited debt headroom ahead. Spectrum reallocation fee could lead to cut in dividends. The regulator has fixed the spectrum fee for the 900MHz and 1800MHz band, where Maxis needs to pay RM817m upfront and RM70m annually over the 15-year licence period. We estimate the upfront payment could raise Maxis gearing level to 2.0x net debt-to-EBITDA by end-2016. Valuation:

We value Maxis based on the DCF method (WACC 6.8%;

terminal growth 1.5%) to derive a TP of RM5.10. Maxis’

valuation is not cheap at 23x FY17F PE, which is at a premium

to regional peers’. We maintain our FULLY VALUED call.


Irrational competition

Given the already-high mobile penetration rate in Malaysia,

any irrational competition in the market will hurt Maxis’ as well

as the industry’s growth. At A Glance Issued Capital (m shrs) 7,510

Mkt. Cap (RMm/US$m) 45,137 / 10,762


Binariang GSM 64.9

PNB 8.3

EPF 5.6

Free Float (%) 30.0




20 Oct 2016


Maxis Bhd Version 6 | Bloomberg: MAXIS MK | Reuters: MAXC.KL Refer to important disclosures at the end of this report


Page 2


Maxis Bhd

WHAT’S NEW

3Q16 results: Mobile internet drives higher prepaid

revenue

Within expectations. Maxis booked higher core earnings of

RM512m (+20% q-o-q) in 3Q16, taking 9MFY16 results to

c.75% of our and consensus full-year forecasts. As expected,

the company also declared a third interim dividend of 5 sen.

Higher service revenue and better margins. Service

revenue rose 2.8% q-o-q in 3Q16 on the back of a strong

performance in prepaid. This pushed EBITDA margins

upwards to 52.8% (vs. 47.9% in 2Q16), also partly aided by

higher income from the completion of major one-off projects

as well as lower realised forex losses.

Strong MI drove prepaid ARPU. Similar to DiGi, Maxis saw

a net churn of 101k prepaid subscribers, most of them who

are low-quality and/or multi-SIM users. Coupled with strong

mobile Internet uptake, ARPU significantly increased to RM41

in 3Q16 vs RM38 in 2Q16. We believe the strong mobile

Internet uptake was largely due to introduction of the Hotlink

FAST plan which comes with free 2GB of 4G data every

weekend.

Maxis’ quarterly prepaid segment trend


Competition in postpaid. Though subscriber trend have

turned positive, the postpaid segment still posted lower

revenue as intense competition in the market brought down

ARPU from RM102 to RM100 in 3Q16. As a result of higher

data allocation given to subscribers, there was some

downward migration to lower-priced plans as well as

supplementary lines where data quota can be shared.

Maxis’ quarterly postpaid segment trend


Data usage surge continues. The average data usage per

subscribers surged by another 25-30% in 3Q16 (see chart

below). This was on the back of: 1) Re-pricing of Maxis

postpaid plans (allocating more data quota) in response to

competitors’ offering; and 2) Introduction of free 4G data for

prepaid subscribers. Needless to say, these did not lead to a

huge increase in ARPU for Maxis. Despite the higher data

traffic, management said the incremental network cost is quite

minimal for now as most of its sites (especially 4G) are

fiberised. Nonetheless, we think this is not sustainable in the

long term as effective data monetisation is crucial to ensure

continuous investment into network infrastructure.

Average data usage for Maxis subscribers


1,049

1,012

1,074

1,038 1,013

959

1,022

8,992 9,068 8,850

8,520 8,196 8,108 8,007

800

900

1,000

1,100

1,200

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Prepaid revenue (RM m) Prepaid subs ('000)

970 972 972

1,009

992

975

960

2,823 2,796 2,784 2,765

2,696 2,660 2,678

900

940

980

1,020

1,060

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Postpaid revenue (RM m) Postpaid subs ('000)

1.501.72

1.88 1.93

2.95

3.67

1.161.26

1.441.55

2.00

2.60

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Postpaid (GB/mth) Prepaid (GB/mth)


Page 3


Maxis Bhd


3Q15 2Q16 3Q16 % Chg

y-o-y

% Chg

q-o-q

Comments

Revenue (RM m) 2,166 2,102 2,156 -0.5 2.6

EBITDA (RM m) 1,021 1,006 1,139 11.6 13.2

Operating profit (RM m) 676 750 778 15.1 3.7

Pretax profit (RM m) 566 648 680 20.1 4.9

Net profit (RM m) 420 488 503 19.8 3.1

Core net profit (RM m) 508 426 512 0.8 20.2 Normalised for forex and accelerated depreciation

Margins

EBITDA (%) 47.1 47.9 52.8 5.7 pts 5.0 pts Lower IDD expenses and partly helped by higher other income

Core net profit (%) 23.5 20.3 23.7 0.3 pt 3.5 pts

Revenue breakdown

- Prepaid revenue 1,074 959 1,022 -4.8 6.6 Driven by higher ARPU from strong mobile Internet uptake

- Postpaid revenue 972 975 960 -1.2 -1.5 Lower mainly due to lower ARPU

- Device sales 4 12 23 475.0 91.7

- Fixed + Home services 108 121 131 21.3 8.3

- Hubbing/ Network income 8 35 20 150.0 -42.9

Prepaid ARPU (RM) 39 38 41 5.1 7.9 Focus on quality subs and driving uptake in mobile Internet

Postpaid ARPU (RM) 98 102 100 2.0 -2.0 Downward migration and additions of supplementary lines

Blended ARPU (RM) 53 54 56 5.7 3.7

Prepaid subscribers (‘000) 8,850 8,108 8,007 -9.5 -1.2 101k net churn in 3Q16

Postpaid subscribers (‘000) 2,784 2,660 2,678 -3.8 0.7 18k net adds in 3Q16

WBB subscribers (‘000) 322 247 218 -32.3 -11.7 29k net churn in 3Q16

Total subscribers (‘000) 11,956 11,015 10,903 -8.8 -1.0



Page 4


Maxis Bhd


Earnings Drivers:

The mobile leader. Maxis remains the leader in the Malaysia

mobile market with approximately 39% revenue market share

(as at end-1Q16), though its leadership position has weakened

slightly over the years as revenue growth was subpar and below

the industry average in FY11-14. After significantly revamping

its distribution channels, growth resumed in FY15 on the back

of the recovery in the prepaid segment. Nevertheless, we expect

a slight decline in revenue for Maxis in FY16-17F given the

intense competition in the market.

Leading share in postpaid. Compared to the industry, Maxis has

the largest share of postpaid subscribers (~41%) with the

highest ARPU. It has a strong franchise in the high-end

segment, which mainly comprises business and enterprise

customers. In order to maintain good customer experience,

Maxis had deliberately lowered pay-per-use pricing for data and

roaming services, which caused ARPU to take a hit in FY13-14.

There was strong adoption of Maxis’ bundled OnePlan in FY15,

which lifted ARPU. In response to competition, Maxis has given

higher data allocation to its postpaid subscribers. We believe

this would limit ARPU uplift from rising data usage going

forward.

Declining prepaid segment. Maxis had been lagging behind its

peers in the prepaid market due to its weak distribution channel

and uncompetitive offerings. Under the helm of a new CEO,

these were significantly revamped in FY14, which helped to

stem subscriber loss. Nonetheless, with U Mobile gaining new

spectrum by July 2017, we expect competition to intensify

further and lead to loss of prepaid subscribers for the

incumbents in FY17-18F.

Best-in-class EBITDA margins. Thanks to higher contribution

from postpaid (~49% of mobile revenue), Maxis commands the

highest EBITDA margins among its peers. Margins dipped in

FY12 as a result of higher device sales and increase in low-

margin international hubbing business. This improved

subsequently on the back of staff reduction exercise in FY13.

Despite pressure on data pricing, we believe Maxis will be able

to sustain its EBITDA margins at this level given a more efficient

network from 4G rollout.

Revenue and y-o-y growth (%)

Postpaid segment

Prepaid segment

EBITDA margins (%)


1.9% 1.3%

-7.7%

2.5%

-2.2%

-0.7%

0.9%

6,500

7,000

7,500

8,000

8,500

9,000

9,500

2012 2013 2014 2015 2016F 2017F 2018F

in RM m

107

102

97

98 98 98 98

92

94

96

98

100

102

104

106

108

-

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015 2016F 2017F 2018F

Postpaid subs ('000) ARPU (in RM)

33

41 40

38 38 38 39

-

5

10

15

20

25

30

35

40

45

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

2012 2013 2014 2015 2016F 2017F 2018F

Prepaid subs ('000) ARPU (in RM)

50.3%

48.6%

49.8%

50.4%

50.8% 50.8% 50.8% 50.8%

47.0%

47.5%

48.0%

48.5%

49.0%

49.5%

50.0%

50.5%

51.0%

51.5%

2011 2012 2013 2014 2015 2016F 2017F 2018F


Page 5


Maxis Bhd

Balance Sheet:

Highly leveraged. Maxis is currently the most leveraged

Malaysian telco at 1.7x net debt-to-EBITDA (vs. 0.3-1.3x for

peers). The increase in gearing level over the years was largely

to fund the gap between its annual 40-sen DPS and FCF. In

order to maintain a gearing level of below 2.0x net debt-to-

EBITDA, Maxis had cut its dividend payout in FY15.

Sustained capex in FY16-17F. We see Maxis sustaining its capex

level for now at RM1.1-1.3bn over FY16-17F for the rollout of

its LTE network. Due to the reduced spectrum holding, Maxis

may need to incur additional capex in order to maintain its

network quality, unless more spectrum is secured in the future.


Spread between bond yield and dividend yield. Despite

unexciting growth, valuation for Malaysian telcos (including

Maxis) has re-rated significantly since 2011 on yield

compression play. Hence, we believe the share price

performance and sustainability of Maxis’ premium valuation

going forward largely hinges on: 1) changes in bond yield at the

macro level; and 2) its dividend payout. Going forward, dividend

payout for Maxis should be more in line with FCF generation.

Key Risks:

Spectrum reallocation fee. The regulator has re-allocated

spectrum in the 900 MHz and 1800 MHz band recently, with

fees to be determined later. This could lead to further cut in

dividend payout because Maxis’ gearing level is approaching its

internal 2.0x net debt-to-EBITDA limit.



market will hurt Maxis’ growth as well as the industry’s.

Company Background

Maxis is the largest mobile operator in Malaysia in terms of

revenue market share. It has a strong lead in the postpaid

segment that has helped to drive above-average EBITDA

margins vs. peers.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Page 6


Maxis Bhd

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue growth (%) (7.7) 2.53 (2.2) (0.7) 0.85

Total subscribers 11,863 11,579 11,259 11,189 11,169

Blended ARPU 54.7 53.2 53.1 53.4 54.0

EBITDA margins (%) 50.4 50.8 50.8 50.8 50.9

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (RMm)

Mobile 8,018 8,177 7,967 7,893 7,941

Enterprise & fixed 252 253 266 276 290

Home services 119 171 180 187 196

Total 8,389 8,601 8,412 8,356 8,427


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 8,389 8,601 8,412 8,356 8,427


Gross Profit 5,682 5,873 5,881 5,999 6,072






Exceptional Gain/(Loss) (185) (213) 0.0 (0.2) 0.0

Pre-tax Profit 2,436 2,460 2,525 2,652 2,705

Tax (711) (713) (656) (690) (703)

Minority Interest (7.0) (8.0) 0.0 0.0 0.0


Net Profit 1,718 1,739 1,868 1,963 2,001


EBITDA 4,405 4,517 4,276 4,248 4,285

Growth

Revenue Gth (%) (7.7) 2.5 (2.2) (0.7) 0.9

EBITDA Gth (%) (2.5) 2.5 (5.3) (0.7) 0.9

Opg Profit Gth (%) (4.7) 2.8 (3.4) 4.6 1.5

Net Profit Gth (Pre-ex) (%) (9.0) 2.6 (4.3) 5.1 2.0

Margins & Ratio

Gross Margins (%) 67.7 68.3 69.9 71.8 72.1



ROAE (%) 32.1 39.1 42.7 41.7 40.3

ROA (%) 9.7 9.4 9.9 10.3 10.5

ROCE (%) 14.5 14.6 14.4 14.7 14.7

Div Payout Ratio (%) 174.9 86.4 80.4 84.2 90.1



Intense competition amid already high mobile penetration rate


Page 7


Maxis Bhd


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 2,166 2,176 2,140 2,102 2,156

Cost of Goods Sold (689) (676) (656) (700) (682)

Gross Profit 1,477 1,500 1,484 1,402 1,474

Other Oper. (Exp)/Inc (801) (726) (644) (652) (696)


Other Non Opg (Exp)/Inc 88.0 7.00 (36.0) (62.0) 9.00


Net Interest (Exp)/Inc (110) (101) (106) (102) (98.0)

Exceptional Gain/(Loss) (88.0) (7.0) 36.0 62.0 (9.0)

Pre-tax Profit 566 673 734 648 680

Tax (144) (203) (214) (165) (175)

Minority Interest (2.0) (2.0) (2.0) 5.00 (2.0)

Net Profit 420 468 518 488 503


EBITDA 1,100 1,159 1,159 1,032 1,131

Growth

Revenue Gth (%) 2.7 0.5 (1.7) (1.8) 2.6

EBITDA Gth (%) (4.3) 5.4 0.0 (11.0) 9.6

Opg Profit Gth (%) (8.2) 14.5 8.5 (10.7) 3.7

Net Profit Gth (Pre-ex) (%) 3.3 (6.5) 1.5 (11.6) 20.2

Margins

Gross Margins (%) 68.2 68.9 69.3 66.7 68.4



Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 4,008 4,227 4,365 4,433 4,397


Other LT Assets 11,523 11,939 12,537 12,455 12,387

Cash & ST Invts 1,531 1,296 685 787 920

Inventory 12.0 13.0 16.8 16.7 16.9

Debtors 971 1,218 1,052 1,044 1,053


Total Assets 18,109 18,984 18,947 19,027 19,065

ST Debt

880 1,077 1,077 1,077 1,077

Creditor 3,002 3,467 3,064 2,833 2,672


LT Debt 8,118 8,801 8,801 8,801 8,801



Minority Interests 22.0 30.0 30.0 30.0 30.0

Total Cap. & Liab. 18,109 18,984 18,947 19,027 19,065


Net Cash/(Debt) (7,467) (8,582) (9,193) (9,091) (8,958)




Asset Turnover (x) 0.5 0.5 0.4 0.4 0.4

Current Ratio (x) 0.6 0.6 0.5 0.5 0.6

Quick Ratio (x) 0.6 0.5 0.4 0.4 0.5

Net Debt/Equity (X) 1.6 2.0 2.0 1.9 1.8


Capex to Debt (%) 10.8 15.3 20.4 11.1 10.1

Z-Score (X) 3.3 3.0 3.0 3.1 3.2


Driven by higher mobile Internet revenue in prepaid

Net debt-to-EBITDA is close to its internal limit of 2.0x


Page 8


Maxis Bhd


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 2,436 2,460 2,525 2,652 2,705

Dep. & Amort. 1,404 1,432 1,298 1,131 1,120

Tax Paid (636) (681) (656) (690) (703)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. 449 139 (241) (223) (170)

Other Operating CF 454 723 494 494 494

Net Operating CF 4,107 4,073 3,419 3,364 3,446

Capital Exp.(net) (974) (1,510) (2,017) (1,100) (1,000)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (258) (369) (17.4) (16.1) (16.5)

Net Investing CF (1,232) (1,879) (2,034) (1,116) (1,016)

Div Paid (3,002) (2,327) (1,502) (1,652) (1,802)

Chg in Gross Debt 1,227 341 0.0 0.0 0.0

Capital Issues 14.0 18.0 0.0 0.0 0.0

Other Financing CF (391) (461) (494) (494) (494)

Net Financing CF (2,152) (2,429) (1,996) (2,146) (2,296)


Chg in Cash 723 (235) (611) 102 133

Opg CFPS (sen) 48.7 52.4 48.7 47.8 48.1

Free CFPS (sen) 41.7 34.1 18.7 30.1 32.6



Source: DBS Bank


Includes RM817m upfront payment for spectrum

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:BC, PY

BUY Last Traded Price ( 25 Nov 2016): RM6.22 (KLCI : 1,627.26)

Price Target 12-mth: RM7.20 (16% upside) (Prev RM7.50)

Potential Catalyst: Faster take-up rate for mobile services

Where we differ: FY16-18F EPS in line with consensus


What’s New 3Q16 earnings of RM208m slightly below our

estimates on lower-than-expected margins

Cut FY16-18F EPS by 6-15%

Maintain BUY with lower RM7.20 TP; we still like

TM for stable growth of its fixed-line business

Price Relative


Revenue 11,722 12,077 12,606 13,180 EBITDA 3,830 3,788 3,942 4,277 Pre-tax Profit 912 943 1,137 1,427 Net Profit 700 813 905 1,071 Net Pft (Pre Ex.) 895 813 905 1,071 Net Pft Gth (Pre-ex) (%) (4.9) (9.2) 11.3 18.3 EPS (sen) 18.6 21.6 24.1 28.5 EPS Pre Ex. (sen) 23.8 21.6 24.1 28.5 EPS Gth Pre Ex (%) (6) (9) 11 18 Diluted EPS (sen) 23.8 21.6 24.1 28.5 Net DPS (sen) 21.4 19.5 21.7 25.6 BV Per Share (sen) 207 209 212 214 PE (X) 33.4 28.8 25.8 21.8 PE Pre Ex. (X) 26.1 28.8 25.8 21.8 P/Cash Flow (X) 7.9 8.0 7.6 7.2 EV/EBITDA (X) 7.1 7.4 7.2 6.6 Net Div Yield (%) 3.4 3.1 3.5 4.1 P/Book Value (X) 3.0 3.0 2.9 2.9 Net Debt/Equity (X) 0.4 0.6 0.6 0.6 ROAE (%) 9.1 10.4 11.4 13.4 Earnings Rev (%): (6) (12) (15) Consensus EPS (sen): 22.8 24.9 27.4 Other Broker Recs: B: 13 S: 5 H: 11


Stable growth in fixed-line business Maintain BUY; RM7.20 TP. The recent weakness in Telekom Malaysia (TM)’s share price seems to reflect concerns over government initiatives to reduce fixed broadband prices. However, we believe this has been overdone given that: 1) TM does not tend to cut prices outright (instead, it offers more value for its plans); and 2) negotiation with the government is still on-going. We remain optimistic that the rollout of the High-Speed Broadband Phase 2 (HSBB2) project, Sub-Urban Broadband (SUBB) project, and Webe mobile services would drive long-term growth for TM, as the company expands the coverage of its high-speed broadband network to more areas. Maintain BUY with RM7.20 TP. Details still sketchy for broadband price reduction. TM said the ‘50% reduction in broadband prices over two years’ might be only applicable to the connectivity portion of its triple-play services. As such, the price points of its Unifi packages may not necessary be significantly lower in the future as TM could mitigate this by bundling its packages with higher speed as well as more value-added services.

Webe:full steam ahead. Webe was officially launched to the public in September. To attract more subscribers, TM is currently running a promotional offer for its unlimited postpaid plan for RM79/month, regardless whether they are existing P1/TM broadband customers and using smartphones that are compatible with 850MHz LTE (to be eligible for the discounts). Besides postpaid, Webe is looking to introduce prepaid plans, possibly by 2H17.

Valuation:

Following the earnings cut, our DCF-based TP for TM is revised

lower to RM7.20, assuming 8.0% WACC and 1.5% terminal

growth. Maintain BUY call as we still like TM for the stable

growth of its fixed-line business


Regulatory risks. TM is subject to regulatory risks, such as

mandatory access pricing, for example. The regulators also

have the power to mandate an organisational split between its

wholesale and retail divisions in order to promote fair market

practice, if required.

At A Glance Issued Capital (m shrs) 3,758

Mkt. Cap (RMm/US$m) 23,374 / 5,240


Khazanah Nasional 28.7

EPF 15.1

PNB 11.6

Free Float (%) 30.9


ICB Industry : Telecommunications / Fixed Line Telecommunications


28 Nov 2016


Telekom Malaysia Version 4 | Bloomberg: T MK | Reuters: TLMM.KL Refer to important disclosures at the end of this report



Telekom Malaysia

WHAT’S NEW

3Q16 results – Stable fixed-line growth

Slightly below expectations. TM reported 3Q16 core net

profit of RM208m (+24% q-o-q), accounting for c.68% of

our as well as consensus full-year forecasts. We think this is

slightly below our and consensus despite 4Q earnings are

typically stronger due to lumpy customer projects. We believe

the key variance was lower-than expected EBIT margins of

10% (normalised 9MFY16), compared to our full-year

forecast of about 11%.

3Q16 revenue dropped 4% q-o-q. 3Q16 revenue was

weaker (-4% q-o-q), dragged by lower revenue contribution

from the wholesale and global segment (-12% q-o-q).

However, TM’s normalised EBIT margins expanded to 10.5%

in 3Q16 (vs. 8.5% in 2Q16), which seems to be largely due to

lower accelerated depreciation at Webe (RM29m in 3Q16 vs.

RM63m in 2Q16) and lower bad debt expenses. Effective tax

rate was on the high side because of prevailing losses at

Webe.

Capex could be at the lower range of 30-35% guidance.

Capex for 9M16 was approximately RM1.7bn, or 18.7% of

revenue. Nonetheless, TM still expects full-year capex to be at

the lower range of its 30-35% ratio guidance. This implies

that 4Q16 could potentially see a sharp ramp-up in capex

spending by TM, possibly due to network rollout by Webe.

Underlying trend for fixed-line still positive. TM added

21k new Unifi subscribers in 3Q16, and managed to achieve

higher ARPU (average revenue per user) of RM197 (see

Exhibit below) thanks to higher take-up rate of faster speed

packages and premium IPTV content. Currently, 75% of its

Unifi customers are on packages with more than 10Mbps

speed and above.

On the other hand, there were about 17k net churns for

Streamyx customers in 3Q16, but this was offset by the

slightly higher ARPU of RM90.

Unifi quarterly subscriber and ARPU trend


Webe going full steam. Webe was officially launched to the

public in September. To attract more subscribers, TM is

currently running a promotional offer where customers could

subscribe to its unlimited postpaid plan for RM79/month,

regardless whether they are existing P1/TM broadband

customers and using smartphones that are compatible with

850MHz LTE (to be eligible for the discounts). Besides

postpaid, Webe is also looking to introduce prepaid plans

possibly by 2H17.

Cut FY16-18F EPS by 6-15%. We cut our FY16-18F earnings

forecasts by 6-15% after adjusting for lower margins

assumptions as well as higher effective tax rate. The

magnitude is larger for FY17-18F as our assumptions were a

bit more bullish previously (especially for Webe).

Lower DCF-based RM7.20 TP. Following the earnings cut,

our DCF-based TP is revised to RM7.20, assuming 8.0%

WACC and 1.5% terminal growth.

189

192

190

190

192

190

192

194197

170

175

180

185

190

195

500

600

700

800

900

1000

3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Unifi subs ('000) ARPU (RM)



Telekom Malaysia


FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq

Revenue 2,923 3,045 2,923 0.0 (4.0)

Cost of Goods Sold 0.0 0.0 0.0 N/A N/A

Gross Profit 2,923 3,045 2,923 0.0 (4.0)

Other Oper. (Exp)/Inc (2,474) (2,765) (2,619) 5.9 (5.3)

Operating Profit 449 280 304 (32.2) 8.6

Other Non Opg (Exp)/Inc (91.9) (6.7) 11.7 nm nm

Associates & JV Inc 6.40 8.30 8.10 26.6 (2.4)

Net Interest (Exp)/Inc (42.6) (57.7) (57.3) (34.5) 0.7

Exceptional Gain/(Loss) (61.4) (28.0) (47.7) 22.3 (70.4)

Pre-tax Profit 259 196 219 (15.5) 11.7

Tax (124) (97.2) (99.6) (19.5) 2.5

Minority Interest 31.6 40.8 40.6 28.5 (0.5)

Net Profit 167 140 160 (4.2) 14.6

Net profit bef Except. 228 168 208 (9.1) 23.9

EBITDA 952 954 958 0.6 0.3

Margins (%)

Opg Profit Margins 15.3 9.2 10.4

Net Profit Margins 5.7 4.6 5.5

2Q16 Results Review

3Q2015 2Q2016 3Q2016 Chg

y-o-y

Chg

q-o-q

Comments

Revenue breakdown

- Retail voice 699 682 664 -5.0% -2.6% Lower STD traffic minutes

- Retail data 400 401 388 -3.0% -3.2%

- Internet & multimedia 797 906 920 15.4% 1.5% Driven by larger subscriber base and higher ARPU for Unifi

- Wholesale & Global 507 493 433 -14.6% -12.2% Lower voice revenue from bilateral minutes

- Others/Elimination 520 563 518 -0.3% -8.0%

- - -

Fixed-line voice subs ('000) 3,426 3,319 3,280 -4.3% -1.2%

Blended ARPU (RM) 29 29 27 -6.9% -6.9% Lower voice minutes usage

Broadband subs ('000)

- Streamyx 1,501 1,465 1,448 -3.5% -1.2% 17k net churn in 3Q16

- Unifi 793 900 921 16.1% 2.3% 21k net adds in 3Q16

ARPU - Streamyx (RM) 87 89 90 3.4% 1.1%

ARPU - Unifi (RM) 192 194 197 2.6% 1.5% Higher ARPU due to take-up of higher speed package and premium IPTV content




Telekom Malaysia


Earnings Drivers:

The broadband champion. Despite the structural decline in

traditional voice services, TM still managed to achieve healthy

revenue growth of 6-9% in FY12-15, thanks to the strong

demand for Internet and data services. We believe this trend will

continue, and forecast a decent 3-5% revenue growth for TM

in FY16-18F, underpinned by the rollout of the High-Speed

Broadband Phase 2 (HSBB2) project, Sub-Urban Broadband

(SUBB) project, and Webe LTE mobile services.

HSBB2 to boost Unifi subs. Since its first rollout in 2010, TM’s

fibre broadband service, Unifi, has enjoyed strong take-up rates

due to pent-up demand for high-speed broadband connectivity.

As at end-3Q16, TM had 921k Unifi subscribers, representing

46% penetration rate out of 2.0m premises passed. Although

subscriber growth momentum is slowing down, TM managed

to offset this by boosting ARPU in FY14-15 through various

upselling activities.

The rollout of the RM1.8bn HSBB2 project will see TM upgrade

95 exchanges to expand its Unifi coverage to state capitals and

secondary cities in Malaysia. We believe this could accelerate

Unifi subscriber growth for TM, especially from FY17F onwards.

SUBB will improve Streamyx speed. Running on existing copper

network, Streamyx was the only fixed-line broadband service

offered by TM before Unifi came into the picture. The decline in

Streamyx subscribers over the years was the result of existing

customers switching to Unifi service when it became available.

Streamyx enjoyed rising ARPU in FY11-14, as more subscribers

took up or upgraded to higher-value packages with faster

speeds.

Under the RM1.6bn SUBB project, TM will upgrade its 400

existing sub-urban exchanges to support higher speeds for

Streamyx broadband services. We believe this is positive for

ARPU accretion as well as ensuring better customer experience

going forward.

Near-term showing dampened by Webe losses. TM suffered

lower EBITDA margins after consolidating Webe’s operation in

FY14. We believe this will continue to drag margins in the near

term, as it would take some time for Webe to roll out its LTE

network and fully write-off the legacy WiMAX business. In

addition, the increase in the minimum retirement age from 55

to 60 has also affected TM’s medium-term plan to trim its

bloated workforce through natural attrition.

Revenue breakdown, by segments (in RM m)

Unifi subscribers (‘000)

Streamyx subscribers (‘000)

EBITDA margins (%)


-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F

Retail - Voice Retail - Internet

Retail - Data & Others Wholesale & Global

Shared Services / Others

184

182182

189190

189 189189

178

180

182

184

186

188

190

192

0

200

400

600

800

1000

1200

1400


Unifi subs ('000) ARPU (RM)

78

80

83

86

88

86

8888

72

74

76

78

80

82

84

86

88

90

1,400

1,450

1,500

1,550

1,600

1,650

1,700


Streamyx subs ('000) ARPU (RM)

33.7%

32.3%

33.2%

32.4%

31.5%31.4% 31.3%

32.5%

30.0%

31.0%

32.0%

33.0%

34.0%

35.0%




Telekom Malaysia

Balance Sheet:

Dividend reinvestment keeps gearing in check. TM has been

consistent in its dividend payout, which is at a minimum of

RM700m or 90% of normalised PATAMI whichever is higher. To

keep its gearing in check with higher capex requirements going

forward, the company initiated a dividend reinvestment scheme

in 2014. This has kept TM’s gearing level at a comfortable level

of 1.2x net debt-to-EBITDA as at end-Sep 2016.

Likely higher capex in FY16-17F. Our RM2.3-3.2bn capex

assumption for FY16-18F has factored in e additional capex for:

1) the RM1.8bn HSBB2 project; 2) the RM1.6bn SUBB project;

and 3) Webe LTE network rollout.


Progress on mobile services launch. Webe was officially

launched to the public in September. We believe faster take-up

rate of its mobile services will help to minimise the losses at

Webe and drive a re-rating in TM’s share price.

Take-up rate for broadband services. With the HSBB2 and SUBB

projects formally awarded, we believe the market will track the

progress of the network rollout and eventually, the take-up rate

of its high-speed broadband services.

Key Risks:

Regulatory risks. TM is subject to regulatory risks, especially

mandatory access pricing where it needs to make its network

available to access seekers at regulated rates. The regulators

also have the power to mandate an organisational split

between its wholesale and retail divisions in order to promote

fair market practice, if required.

Company Background

Telekom Malaysia is the dominant fixed-line operator in

Malaysia with the largest fixed-line subscriber base. With the

acquisition of P1, TM now has access to LTE spectrum in the

2600MHz, apart from its own 850MHz. TM has launched its

mobile services by Sep-2016, transforming into a quad-play

service provider in Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)




Telekom Malaysia

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue growth (%) 5.71 4.33 3.03 4.38 4.55

EBITDA margin (%) 31.9 31.2 31.0 30.9 32.1

Capex (RM m) 2,021 2,493 3,200 2,700 2,300

Unifi subscribers ('000) 729 839 949 1,069 1,189


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 11,235 11,722 12,077 12,606 13,180


Gross Profit 3,481 3,571 3,647 3,807 4,139



Other Non Opg (Exp)/Inc (43.1) (211) 0.0 0.0 0.0



Exceptional Gain/(Loss) (36.8) (136) 0.0 0.0 0.0

Pre-tax Profit 1,106 912 943 1,137 1,427

Tax (263) (320) (283) (307) (357)

Minority Interest (10.7) 109 153 75.0 0.0


Net Profit 832 700 813 905 1,071

Net Profit before Except. 941 895 813 905 1,071

EBITDA 3,672 3,830 3,788 3,942 4,277

Growth

Revenue Gth (%) 5.7 4.3 3.0 4.4 4.6

EBITDA Gth (%) 1.4 4.3 (1.1) 4.1 8.5

Opg Profit Gth (%) (9.0) 4.6 (15.8) 19.5 21.5


Margins & Ratio

Gross Margins (%) 31.0 30.5 30.2 30.2 31.4



ROAE (%) 11.3 9.1 10.4 11.4 13.4

ROA (%) 3.8 3.0 3.3 3.7 4.3

ROCE (%) 5.8 4.9 4.3 5.4 6.7

Div Payout Ratio (%) 101.8 115.0 90.0 90.0 90.0



Higher FY16-17F capex due to HSBB2, SUBB and Webe.



Telekom Malaysia


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 2,923 3,184 2,855 3,045 2,923

Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0

Gross Profit 2,923 3,184 2,855 3,045 2,923



Other Non Opg (Exp)/Inc (91.9) 91.8 (14.9) (6.7) 11.7


Net Interest (Exp)/Inc (42.6) (41.0) (47.7) (57.7) (57.3)

Exceptional Gain/(Loss) (61.4) (67.2) 119 (28.0) (47.7)

Pre-tax Profit 259 225 393 196 219

Tax (124) (65.9) (103) (97.2) (99.6)


Net Profit 167 193 322 140 160


EBITDA 952 953 965 954 958

Growth

Revenue Gth (%) 2.9 9.0 (10.3) 6.7 (4.0)

EBITDA Gth (%) 2.6 0.2 1.2 (1.1) 0.3

Opg Profit Gth (%) 47.2 (47.7) 40.9 (15.3) 8.6

Net Profit Gth (Pre-ex) (%) 3.9 13.8 (21.8) (17.5) 23.9

Margins



Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 14,785 15,187 16,171 16,729 16,605


Other LT Assets 1,350 1,902 1,902 1,902 1,902

Cash & ST Invts 3,455 4,027 2,981 2,505 2,576

Inventory 116 237 242 252 264

Debtors 2,825 2,947 3,019 3,152 3,295

Other Current Assets 84.9 86.4 86.4 86.4 86.4

Total Assets 22,623 24,413 24,427 24,653 24,754

ST Debt 197 408 408 408 408

Creditor 3,605 4,367 4,437 4,631 4,759

Other Current Liab 1,055 1,047 1,047 1,047 1,047

LT Debt 6,251 7,175 7,175 7,175 7,275



Minority Interests 389 258 75.1 (29.9) (59.9)

Total Cap. & Liab. 22,623 24,413 24,427 24,653 24,754


Net Cash/(Debt) (2,993) (3,557) (4,603) (5,078) (5,108)




Asset Turnover (x) 0.5 0.5 0.5 0.5 0.5

Current Ratio (x) 1.3 1.3 1.1 1.0 1.0

Quick Ratio (x) 1.3 1.2 1.0 0.9 0.9

Net Debt/Equity (X) 0.4 0.4 0.6 0.6 0.6


Capex to Debt (%) 31.2 32.8 42.2 35.6 29.9

Z-Score (X) 2.0 1.8 1.8 1.8 1.9


Weaker sales at wholesale and global segment

Gearing levels remain comfortable



Telekom Malaysia


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 1,106 912 943 1,137 1,427

Dep. & Amort. 2,341 2,437 2,616 2,541 2,575

Tax Paid (114) (333) (283) (307) (357)

Assoc. & JV Inc/(loss) (9.3) (24.7) 0.0 0.0 0.0

Chg in Wkg.Cap. (85.9) 504 (7.2) 51.5 (27.3)

Other Operating CF (272) (738) (354) (354) (354)

Net Operating CF 3,014 2,942 2,915 3,069 3,264

Capital Exp.(net) (2,010) (2,484) (3,200) (2,700) (2,300)

Other Invts.(net) 155 (45.4) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (307) (20.2) 0.0 0.0 0.0

Net Investing CF (2,162) (2,550) (3,200) (2,700) (2,300)

Div Paid (932) (848) (732) (815) (964)

Chg in Gross Debt (213) 743 0.0 0.0 100

Capital Issues 779 269 0.0 0.0 0.0

Other Financing CF (14.2) (22.2) (30.0) (30.0) (30.0)

Net Financing CF (380) 143 (762) (845) (894)

Currency Adjustments (0.3) 1.20 0.0 0.0 0.0

Chg in Cash 472 536 (1,047) (475) 70.5

Opg CFPS (sen) 83.3 64.9 77.8 80.3 87.6

Free CFPS (sen) 27.0 12.2 (7.6) 9.82 25.7



Source: DBS Bank


Higher capex for HSBB, SUBB and Webe

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY

HOLD Last Traded Price ( 8 Nov 2016): Bt153 (SET : 1,509.84) Price Target 12-mth: Bt154 (1% upside) (Prev Bt160) Potential Catalyst: A decline in handset subsidy Where we differ: More bearish FY17F earnings Analyst Sachin MITTAL +65 6682 3699 [email protected] Wasu MATTANAPOTCHANART +66 2657 7826 [email protected]

What’s New 3Q16 earnings missed street forecasts

4Q16F profit to still show y-o-y decline

Cut FY16-18F profit due to high handset subsidies

No impact from falling out with CPALL so far

Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F Revenue 155,276 151,673 154,769 157,902 EBITDA 71,100 62,457 67,546 76,219 Pre-tax Profit 49,165 36,976 35,286 40,430 Net Profit 39,152 30,467 27,596 31,613 Net Pft (Pre Ex.) 38,924 30,467 27,579 31,613 Net Pft Gth (Pre-ex) (%) 8.0 (21.7) (9.5) 14.6 EPS (Bt) 13.2 10.2 9.28 10.6 EPS Pre Ex. (Bt) 13.1 10.2 9.28 10.6 EPS Gth Pre Ex (%) 8 (22) (9) 15 Diluted EPS (Bt) 13.2 10.2 9.28 10.6 Net DPS (Bt) 13.1 10.2 7.43 8.51 BV Per Share (Bt) 16.3 14.9 15.4 18.0 PE (X) 11.6 14.9 16.5 14.4 PE Pre Ex. (X) 11.7 14.9 16.5 14.4 P/Cash Flow (X) 7.4 8.3 7.4 6.6 EV/EBITDA (X) 7.1 8.6 8.2 7.6 Net Div Yield (%) 8.6 6.7 4.9 5.6 P/Book Value (X) 9.4 10.3 10.0 8.5 Net Debt/Equity (X) 1.0 1.8 2.2 2.3 ROAE (%) 82.3 65.7 61.4 63.7 Earnings Rev (%): (8) (9) (6) Consensus EPS (Bt): 10.5 10.5 10.8 Other Broker Recs: B: 19 S: 4 H: 6


Three key hurdles

ADVANC faces three key hurdles. TRUE wants to overtake No.2 mobile player DTAC in revenue share by 2016 end. ADVANC is offering high handset subsidies to defend its share. In addition, data pricing is extremely cheap in Thailand almost 40% cheaper than Indonesia. ADVANC may also cut its dividend payout guidance to 80% or lower in FY17F versus 100% currently due o expensive spectrum price. Cut FY16-18F earnings 9%-6%. The weak handset margin of -4.6% in 9M16 prompts us to cut handset margin from -1.7% to -4.1% in FY16F and from 0.3% to -1.7% in FY17F. We also raise D&A expenses by 19% and 16% in the respective years as ramping up of 4G coverage (now 65% of population) is faster than expected. FY17F earnings to drop 9.5% y-o-y due to higher D&A and payments to TOT for the full year. FY17F earnings will be pressured by i) higher expenses for TOT’s towers, equipment and spectrum (FY16F: Bt3.8bn vs FY17F: Bt10.0bn), and ii) 25% increase in depreciation and amortisation expenses from the two new licences (1.8GHz and 900MHz) and the elevated capex level (c.Bt40bn). The surge in expenses, coupled with only 2% revenue growth, should lead to net margin contraction (FY16F: 20% vs FY17F: 18%) and 9.5% decline in earnings. Valuation:

Our DCF-based TP is Bt154 as we model in the assumption that ADVANC will secure a new block of 1800MHz spectrum in 2018 for Bt40bn. With limited upside potential, we maintain our non-consensus HOLD call on ADVANC. Nineteen out of 29 analysts (66% of the total) have BUY ratings on ADVANC, but that number could change once they cut earnings forecasts. Key Risks to Our View:

With TRUE looking to gain market share, ADVANC may have to continue maintaining handset subsidies, which could lead to lower-than-expected earnings. Conversely, if all three telcos raise data pricing, earnings could be better than expected. At A Glance Issued Capital (m shrs) 2,973 Mkt. Cap (Btm/US$m) 454,884 / 12,999 Major Shareholders (%) Intouch Holdings 40.5 Singtel Strategic Investments Pte Ltd. 23.3 Thai NVDR 5.2


DBS Group Research . Equity 9 Nov 2016

Thailand Company Guide

Advanced Info Service Version 8 | Bloomberg: ADVANC TB | Reuters: ADVA.BK Refer to important disclosures at the end of this report


Company Guide


WHAT’S NEW

Softer competition not in sight

3Q16 earnings missed our forecast and the consensus: ADVANC reported normalised profit of Bt6.5bn (-26% y-o-y, -31% q-o-q), which is lower than our and the street’s forecasts by 16% and 11%, respectively. Although the topline was in-line, the bottom-line missed estimates as its handset losses and depreciation expenses were higher than expected. 3Q16 handset losses came in at Bt814m (3Q16F: Bt113m); as TRUE is the leading aggressor in handing out free handsets to prepaid customers, ADVANC retaliates by offering attractive contractual handset campaigns to postpaid subscribers. Depreciation and amortisation (D&A) expenses accelerated to Bt6.3bn (+5% y-o-y, +39% q-o-q) on the back of winning the 900MHz licence in June and rather concentrated capex during 9M16 (93% of the full-year budget).

4Q16F profit to still show y-o-y decline: We preliminarily forecast 4Q16 normalised profit of Bt6.5bn (-39% y-o-y, flat q-o-q). The sharp y-o-y decline is due to higher D&A expenses arising from the two new licences (900MHz and 1.8GHz spectra) and rising capex for 4G network. Also, ADVANC has entered into the 2100MHz spectrum commercial trial agreement with TOT – costing the firm Bt325m per month since October 2016.

Cut FY16-18F earnings for higher handset subsidies: 9M16 handset margin was -4.6%, and this leads us to cut handset margin from -1.7% to -4.1% in FY16F and from 0.3% to -1.7% in FY17F. We also raise D&A expenses by 19% and 16% in the respective years as the company is ramping up 4G coverage (65% of population) faster than expected. The adjustments lead to earnings cuts of 8% in FY16F and 9% in FY17F.

No noticeable impact from falling out with CPALL so far: ADVANC informed us that the amount of top-up payments by prepaid customers rose m-o-m in October despite the fact that CPALL’s 7-11 outlets stopped selling ADVANC’s prepaid top-up packages. We believe that the continuing growth is due to three major factors: i) less than 1m prepaid subscribers (out of 33.8m) rely on 7-11 as a top-up channel, ii) some customers resort to other sales channels such as ATM, mpay (electronic wallet), AIS Buddy (cellphone shops with partnership with ADVANC), service centres at department stores (Big C and Tesco), Refill-On-Mobile (ROM) agents, and FSMART’s top-up kiosks (Boonterm), and iii) ADVANC’s heavy promotion of handset campaigns that usually come with required upfront top ups. ADVANC and CPALL are still negotiating on the new terms for selling top-up packages.

Quarterly / Interim Income Statement (Btm)


Revenue 36,778 36,482 37,096 0.9 1.7

Cost of Goods Sold (20,399) (17,424) (20,768) 1.8 19.2

Gross Profit 16,379 19,059 16,327 (0.3) (14.3)

Other Oper. (Exp)/Inc (4,935) (6,494) (7,299) 47.9 12.4

Operating Profit 11,445 12,564 9,028 (21.1) (28.1)

Other Non Opg (Exp)/Inc 215 96.8 45.4 (78.9) (53.1)

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc (416) (791) (1,258) (202.4) (59.1)

Exceptional Gain/(Loss) (132) 179 67.4 nm (62.2)

Pre-tax Profit 11,112 12,049 7,883 (29.1) (34.6)

Tax (2,495) (2,456) (1,371) (45.1) (44.2)

Minority Interest 1.42 (0.1) 17.4 1,121.8 (14,479.3)

Net Profit 8,616 9,596 6,530 (24.2) (32.0)

Net profit bef Except. 8,748 9,418 6,462 (26.1) (31.4)

EBITDA 17,611 17,165 15,230 (13.5) (11.3)

Margins (%)

Gross Margins 44.5 52.2 44.0


Net Profit Margins 23.4 26.3 17.6



Company Guide



Earnings Drivers:

New deals and handset subsidies to hurt FY16F earnings For our full-year forecast for FY16F, we have assumed flat service income (on par with management guidance) while earnings will be hit by i) Bt3.8bn payment to TOT, and ii) Bt7.3bn handset subsidies. However, consensus has modelled a Bt7.5bn payment to TOT in FY16, which makes our FY16F earnings slightly above consensus forecasts. ADVANC is likely to defend its revenue share. TRUE has gained revenue share in the cellular market, which stood at 25% in 2Q16, up from 17.5% in 1Q14. Most of the gains were made at the expense of DTAC, which lost close to 4.5ppts in market share over the same period. TRUE is likely to maintain this trend with its expressed commitment to expand coverage of 3G and 4G networks and its ownership of a strong portfolio of spectrum assets. TRUE remains the aggressor in the market, as it is aiming for 33% market share, up from 25% in 2Q16. TRUE claims to have further improved its market share during 3Q16 and is aiming to be the number two player in the market by the end of 2016. DTAC, who has lagged its competitors in terms of capex and network quality, is the most at risk of losing market share. Regulatory costs to decline with increasing use of licences. With the acquisition of 10MHz on the 900MHz spectrum, all of ADVANC’s bandwidth is now under a licensing scheme which could push down regulatory costs to just over 7.0% of service income ex. IC in 2016 from 11.7% in 2015. AIS witnessed a sudden jump in its regulatory costs in 1Q16 due to a one-time charge of Bt2.2bn. ADVANC and TOT are holding hands. On 26 Jan 2016, ADVANC and TOT officially announced a partnership on TOT’s 2.1GHz network (15MHz). The terms have been agreed by both parties, and the contract is being reviewed by the Office of the Attorney General. The deal should help ease concerns of an overcrowded network once ADVANC’s 2G migration is complete because ADVANC will have 55MHz of bandwidth. We expect ADVANC to pay Bt10bn to TOT per year from FY17F onwards. However, ADVANC is likely to book only expenses of Bt3.8bn for tower and equipment rental from TOT in 2H16F.

Service Revenue

Sale of Handsets

Other Operating Income

EBITDA Margins

Free Handsets (booked in SG&A)



Company Guide


Balance Sheet:

Net gearing ratio is expected to go up from 1.0x in FY15 to 1.9x in FY16F. Higher debt loads are for i) Bt38-Bt40bn 3G/4G capex p.a., and ii) instalments of licence fees. Net debt to EBITDA will rise to 1.4x in 2016 from 0.8x in 2015, while dividend payout will need to be reduced to 70% from FY17 onwards to maintain a net debt to EBITDA ratio not too far above 2x. Share Price Drivers:

Data pricing trends. TRUE has guided for EBITDA margins to improve in 2H16, signalling lower competitive intensity in 2H16F. The real driver for the share price would be all three telcos raising data pricing significantly as that will lead to better top-line growth and lower capex. Dividend cut in FY17. With relatively low earnings upside due to competition and spectrum agreements, a dividend cut in FY17 could have a negative impact on ADVANC’s share price. DPS is expected to drop 27% y-o-y in FY17F as we expect the dividend payout ratio to drop from 100% to 80%. Key Risks:

High handset subsidies. With TRUE looking to gain market share, we may see high levels of handset subsidies in the postpaid segment. To retain its clients, ADVANC may have to continue maintaining handset subsidies for a longer period. Company Background

ADVANC is the largest cellular operator in Thailand with over 40% market share.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Service Revenue 125,397 127,414 127,764 130,859 133,277 Sale of Handsets 22,949 27,465 23,909 23,910 24,625 Other Operating Income 4,691 4,544 4,589 4,635 4,682 EBITDA Margins 0.44 0.46 0.41 0.44 0.48 Free Handsets (booked in 0.0 0.0 7,320 4,600 0.0

Income Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 149,329 155,276 151,673 154,769 157,902 Cost of Goods Sold (83,548) (84,819) (82,730) (88,413) (90,916) Gross Profit 65,781 70,457 68,943 66,357 66,985 Other Opng (Exp)/Inc (19,044) (20,301) (28,554) (26,268) (20,527) Operating Profit 46,737 50,157 40,389 40,089 46,458 Other Non Opg (Exp)/Inc 330 448 448 342 349 Associates & JV Inc 0.0 0.0 0.0 0.0 1.00 Net Interest (Exp)/Inc (1,157) (1,668) (3,861) (5,162) (6,378) Exceptional Gain/(Loss) 0.0 229 0.0 16.8 0.0 Pre-tax Profit 45,910 49,165 36,976 35,286 40,430 Tax (10,080) (9,999) (6,507) (7,689) (8,814) Minority Interest 30.0 (2.4) (1.9) (1.7) (2.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 36,033 39,152 30,467 27,596 31,613 Net Profit before Except. 36,033 38,924 30,467 27,579 31,613 EBITDA 65,988 71,100 62,457 67,546 76,219 Growth Revenue Gth (%) 4.6 4.0 (2.3) 2.0 2.0 EBITDA Gth (%) 4.0 7.7 (12.2) 8.1 12.8 Opg Profit Gth (%) 0.3 7.3 (19.5) (0.7) 15.9 Net Profit Gth (Pre-ex) (%) (1.3) 8.0 (21.7) (9.5) 14.6 Margins & Ratio Gross Margins (%) 44.1 45.4 45.5 42.9 42.4 Opg Profit Margin (%) 31.3 32.3 26.6 25.9 29.4 Net Profit Margin (%) 24.1 25.2 20.1 17.8 20.0 ROAE (%) 77.9 82.3 65.7 61.4 63.7 ROA (%) 30.2 25.4 13.8 10.4 10.8 ROCE (%) 45.1 35.8 18.0 13.2 13.9 Div Payout Ratio (%) 100.0 99.6 100.0 80.0 80.0 Net Interest Cover (x) 40.4 30.1 10.5 7.8 7.3



Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 36,778 39,784 37,252 36,482 37,096 Cost of Goods Sold (20,399) (20,412) (19,721) (17,424) (20,768) Gross Profit 16,379 19,372 17,532 19,059 16,327 Other Oper. (Exp)/Inc (4,935) (5,717) (8,131) (6,494) (7,299) Operating Profit 11,445 13,656 9,401 12,564 9,028 Other Non Opg (Exp)/Inc 215 107 99.5 96.8 45.4 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (416) (555) (706) (791) (1,258) Exceptional Gain/(Loss) (132) 196 25.2 179 67.4 Pre-tax Profit 11,112 13,404 8,820 12,049 7,883 Tax (2,495) (2,598) (754) (2,456) (1,371) Minority Interest 1.42 (0.5) (0.2) (0.1) 17.4 Net Profit 8,616 10,791 8,073 9,596 6,530 Net profit bef Except. 8,748 10,595 8,048 9,418 6,462 EBITDA 17,611 17,351 13,574 17,165 15,230 Growth Revenue Gth (%) (3.6) 8.2 (6.4) (2.1) 1.7 EBITDA Gth (%) (3.2) (1.5) (21.8) 26.5 (11.3) Opg Profit Gth (%) (9.4) 19.3 (31.2) 33.7 (28.1) Net Profit Gth (Pre-ex) (%) (10.9) 21.1 (24.0) 17.0 (31.4) Margins Gross Margins (%) 44.5 48.7 47.1 52.2 44.0 Opg Profit Margins (%) 31.1 34.3 25.2 34.4 24.3 Net Profit Margins (%) 23.4 27.1 21.7 26.3 17.6

Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 69,441 84,291 108,444 129,624 138,509 Invts in Associates & JVs 0.0 0.0 0.0 0.0 1.00 Other LT Assets 17,783 59,464 117,660 108,763 140,180 Cash & ST Invts 19,510 14,617 15,925 14,321 14,433 Inventory 2,520 5,059 3,043 3,013 2,983 Debtors 10,415 16,389 10,903 10,794 10,686 Other Current Assets 6,682 1,942 5,316 5,263 5,210 Total Assets 126,351 181,761 261,292 271,779 312,001 ST Debt 2,572 12,856 0.0 0.0 0.0 Creditor 11,903 27,751 11,223 11,448 11,772 Other Current Liab 28,431 16,927 17,772 18,660 19,592 LT Debt 34,478 52,577 97,000 115,000 140,000 Other LT Liabilities 2,101 23,158 90,865 80,913 86,948 Shareholder’s Equity 46,750 48,376 44,314 45,638 53,569 Minority Interests 114 117 119 120 122 Total Cap. & Liab. 126,351 181,761 261,292 271,779 312,003 Non-Cash Wkg. Capital (20,718) (21,288) (9,732) (11,037) (12,485) Net Cash/(Debt) (17,540) (50,815) (81,075) (100,679) (125,567) Debtors Turn (avg days) 25.3 31.5 32.8 25.6 24.8 Creditors Turn (avg days) 66.7 112.5 116.4 67.5 68.9 Inventory Turn (avg days) 15.2 21.5 24.2 18.0 17.8 Asset Turnover (x) 1.3 1.0 0.7 0.6 0.5 Current Ratio (x) 0.9 0.7 1.2 1.1 1.1 Quick Ratio (x) 0.7 0.5 0.9 0.8 0.8 Net Debt/Equity (X) 0.4 1.0 1.8 2.2 2.3 Net Debt/Equity ex MI (X) 0.4 1.1 1.8 2.2 2.3 Capex to Debt (%) 83.6 116.7 49.5 43.6 45.8 Z-Score (X) 6.3 4.0 2.6 2.5 2.3



Company Guide


Cash Flow Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 45,910 49,165 36,976 35,286 40,430 Dep. & Amort. 18,922 20,495 21,620 27,115 29,411 Tax Paid (10,080) 0.0 (6,507) (7,689) (8,814) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 (1.0) Chg in Wkg.Cap. (233) (778) (1,151) 1,175 1,311 Other Operating CF 536 (7,252) 4,099 5,395 6,641 Net Operating CF 55,054 61,629 55,036 61,283 68,978 Capital Exp.(net) (30,964) (76,369) (48,040) (50,126) (64,146) Other Invts.(net) 67.3 (499) 302 (3.1) (3.2) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 2,165 22,801 1,137 675 345 Net Investing CF (28,731) (54,067) (46,601) (49,454) (63,804) Div Paid (35,052) (37,760) (34,529) (26,271) (23,684) Chg in Gross Debt 12,392 27,214 31,568 18,000 25,000 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (2,526) (1,410) (3,861) (5,162) (6,379) Net Financing CF (25,186) (11,955) (6,822) (13,433) (5,063) Currency Adjustments 0.0 0.0 0.0 0.0 1.00 Chg in Cash 1,136 (4,393) 1,613 (1,604) 112 Opg CFPS (Bt) 18.6 21.0 18.9 20.2 22.8 Free CFPS (Bt) 8.10 (5.0) 2.35 3.75 1.63



Source: DBS Bank


Wasu MATTANAPOTCHANART

Anti-corruption Progress Indicator Certified

Corporate Governance CG Rating 2015 THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of August 29, 2016) are categorised into:

Score Description

Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description 90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass <50 No logo given N/A

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:CS, PY

FULLY VALUED Last Traded Price ( 6 Jan 2017): Bt42.00 (SET : 1,571.48)

Price Target 12-mth: Bt33.00 (-21% downside)

Potential Catalyst: -

Where we differ: More conservative FY16-17F earnings

Analyst Sachin MITTAL +65 6682 3699 [email protected] Wasu MATTANAPOTCHANART +66 2657 7826 [email protected]

What’s New Modest subsidies have led to market share losses

Heading for record-low normalised profit in 4Q16F

Cut FY16F/17F profit by 14%/10%

Price Relative

Forecasts and Valuation FY Dec (Bt m) 2015A 2016F 2017F 2018F

Revenue 87,753 84,478 85,771 87,277 EBITDA 27,784 27,981 28,990 29,236 Pre-tax Profit 7,445 2,811 3,392 5,049 Net Profit 5,893 2,187 2,715 4,040 Net Pft (Pre Ex.) 6,188 2,504 2,715 4,040 Net Pft Gth (Pre-ex) (%) (42.3) (59.5) 8.4 48.8 EPS (Bt) 2.49 0.92 1.15 1.71 EPS Pre Ex. (Bt) 2.61 1.06 1.15 1.71 EPS Gth Pre Ex (%) (42) (60) 8 49 Diluted EPS (Bt) 2.49 0.92 1.15 1.71 Net DPS (Bt) 2.93 0.68 0.85 1.26 BV Per Share (Bt) 11.5 11.2 11.7 12.5 PE (X) 16.9 45.5 36.6 24.6 PE Pre Ex. (X) 16.1 39.7 36.6 24.6 P/Cash Flow (X) 4.0 3.8 3.5 3.6 EV/EBITDA (X) 4.8 4.8 4.6 4.5 Net Div Yield (%) 7.0 1.6 2.0 3.0 P/Book Value (X) 3.7 3.8 3.6 3.4 Net Debt/Equity (X) 1.2 1.3 1.2 1.1 ROAE (%) 21.6 8.3 9.8 13.6 Earnings Rev (%): (14) (10) (7) Consensus EPS (Bt): 1.13 1.17 1.66 Other Broker Recs: B: 7 S: 15 H: 7


4Q16F profit could reach record low Relatively modest handset subsidies have caused DTAC to lose prepaid subscribers. DTAC has eased its efforts in promoting free handsets for prepaid customers. Its reluctance to continue matching TRUE’s and ADVANC’s offerings of free handsets implies that its revenue market share will continue to decline, causing it to lose its number two position to TRUE by the end of the year. The revenue share at the end of Sep 2016 was 50% for ADVANC, 25% for DTAC and 25% for TRUE. Heading for record-low normalised profit in 4Q16F. We expect DTAC to generate 4Q16F normalised profit of Bt132m (-86% y-o-y, -80% q-o-q) due to falling service revenue ex. IC (-2% y-o-y, +0% q-o-q), rising depreciation and amortisation (+27% y-o-y, +9% q-o-q) and depressed handset margin (4Q16F: -10% vs 4Q15: -1%). The top line should continue falling in 4Q16F as DTAC is still losing market share (especially that of prepaid subscribers) to its competitors. The higher amortisation is due to accelerated capex in concessionary assets from 2015 to 1H16F. Cut FY16F/17F profit by 14%/10% In Dec 16, the government launched a Bt15k shopping tax deduction in a bid to boost consumer spending before yearend. The tax measure caused the three operators to boost their already aggressive handset subsidies for both old and new devices, and DTAC had to sell the new iPhone 7 at a loss (compared to breakeven in FY15 and marginal profit in FY14). This prompted us to raise FY16F handset losses from Bt2.0bn to Bt2.3bn, resulting in 14% fall in FY16F earnings. FY17F handset losses are also raised as DTAC may have to reintroduce handset subsidies for prepaid customers to defend market share. Valuation:

We have a TP of Bt33.00, based on DCF valuation and

assuming 2% terminal growth rate. Nevertheless, DTAC’s

earnings have been very volatile due to higher network opex

and depreciation costs from concessionary assets.


All of DTAC’s concessions will expire in August 2018. Failing to

win the bandwidth back (in terms of licences) will result in a

substantial drop in service quality. At A Glance Issued Capital (m shrs) 2,368

Mkt. Cap (Btm/US$m) 99,448 / 2,783


Telenor Asia Pte Ltd 42.6

Thai Telco Holdings Limited 15.0

Thai NVDR 10.4

Free Float (%) 29.4




9 Jan 2017

Thailand Company Guide

Total Access Communication Version 7 | Bloomberg: DTAC TB | Reuters: DTAC.BK Refer to important disclosures at the end of this report


Page 2

Company Guide



4Q15 3Q16 4Q16F % y-o-y % q-o-q 2016F % y-o-y

Service revenue ex. IC 16,627 16,195 16,259 -2.2% 0.4% 64,711 -2.3%

IC revenue 1,207 1,124 1,124 -6.9% 0.0% 5,444 -3.4%

Service revenue 17,834 17,319 17,383 -2.5% 0.4% 70,155 -2.4%

Handset revenue 5,280 1,949 5,943 12.6% 204.9% 14,059 -8.8%

Total revenue 23,249 19,536 23,594 1.5% 20.8% 84,478 -3.7%

Cost of services -11,657 -11,671 -12,283 5.4% 5.2% -46,028 4.2%

Cost of handsets -5,335 -2,579 -6,537 22.5% 153.5% -16,326 -11.0%

Gross profit 6,257 5,286 4,774 -23.7% -9.7% 22,124 -12.3%

SG&A -4,744 -4,114 -4,281 -9.8% 4.1% -17,740 8.1%

FX gain/loss 58 7 0 -100.0% -100.0% 77 -126.1%

Interest income 55 45 38 -30.9% -15.6% 160 17.6%

Other income and share profit 27 17 17 -38.9% 0.0% 161 0.0%

EBIT 1,653 1,241 547 -66.9% -55.9% 4,548 -49.4%

Finance cost -372 -383 -383 3.0% 0.0% -1,580 14.1%

Tax -283 -199 -33 -88.4% -83.5% -626 -59.8%

Non-controlling interest 0 0 0 NA NA 2 -59.5%

Net profit 998 659 132 -86.8% -80.0% 2,187 -62.9%

Norm. profit 940 652 132 -86.0% -79.8% 2,504 -59.5%

Profitability ratios GPM - overall 26.9% 27.1% 20.2%

26.2%

GPM - service ex. IC 36.9% 34.4% 30.9%

36.9% GPM - handset -1.0% -32.3% -10.0%

-16.1%

Regulatory costs (% of service revenue ex. IC) 17.4% 15.6% 15.5%

17.0%

EBITDA margin - overall 28.7% 36.8% 29.8%

33.1% EBITDA margin - ex. Handset 37.5% 44.5% 43.2%

43.1%

Effective tax rate 23% 23% 20%

21% NPM 4.3% 3.4% 0.6%

2.6%

Norm. net margin 4.0% 3.3% 0.6%

3.0%



Page 3

Company Guide



Earnings Drivers:

Valuation takes into account the need for new licences in 2018

All of DTAC’s concessions (55MHz) will expire in August 2018.

The 10MHz bandwidth under the 850MHz spectrum will likely

be returned to the State Railway of Thailand, while 45MHz

under the 1.8GHz spectrum will be up for bidding in late 2018

or 2019. DTAC needs to win 30MHz (two licences) to bring its

holdings back to 45MHz, which is close to the 50MHz level it is

utilising currently. We expect DTAC to pay Bt44bn for each

1800MHz licence in the 2018 auction, based on the auction

price of the 1800MHz licence in November 2015 and 3%

inflation p.a. We have deducted a net amount of Bt21.50 per

share – representing net present value of cash outflows (-Bt25

per share) and tax savings (+Bt3.5 per share) from the new

licences in 2018 – from DTAC’s valuation, to derive our Bt33 TP.

Better prepared financially for the next auction

DTAC is confident of winning at least one licence in the next

1.8GHz auction that will take place 3-4 years from now. The

strain on its financials will be lower, as it did not win any new

licences in the recent two auctions, and it will no longer have

the high revenue-sharing scheme in its portfolio after the expiry

of all of its concessions. On 3 February 2016, the company

announced that its dividend payout will be cut from 80% to

50%.

Still committed to providing services in Thailand

DTAC plans to spend around Bt20bn capex per year on the

3G/4G network in FY17-18F. It now has 3G coverage of 95% of

the population and nationwide 4G coverage; the 4G coverage

should be boosted to 95% by 1Q-2Q17. Of the total 50MHz on

hand, 20MHz from 2.1GHz (5MHz) and 1.8GHz (15MHz)

spectra will be used for 4G services.

Scenario analysis implies target price in the range of Bt25 to

Bt39

For our base-case TP of Bt33.00 (TG = 2%), we assume service

income growth of -1.3% in FY16F, 0% in FY17F and 1.5% in

FY18F. Our bearish-case TP of Bt25.00 is based on declining

revenue and 1% terminal growth; in this case, service income

declines by 2% p.a. in FY17-18F as customers’ perception of

network quality does not improve, and the company continues

losing a significant number of subscribers to TRUE. Our bullish-

case TP is Bt39.00, assuming that TRUE eases its free-handset

campaign earlier than expected, customers’ perception

improves along with actual quality, and DTAC’s revenue grows

by 2% p.a. in FY17-18F.

Service Revenue

Sale of Handsets

Other Operating Income

EBITDA Margins



Page 4

Company Guide


Balance Sheet:

We expect DTAC’s gearing ratio to decline from 1.8x in FY15F

to 1.7x in FY16F and 1.4x in FY17F, as there will be no

additional burden from new licences.


Revenue decline comes to a halt

We expect DTAC’s service income to fall this year as the

company is gradually losing subscribers to TRUE. A reversal of

this trend could boost its share price.

Key Risks:

Inability to win new licences in 2018

All of DTAC’s concessions will expire in August 2018. Failure to

win the bandwidth back (in term of licences) will result in a

substantial drop in service quality.

Company Background

DTAC is the second largest cellular operator in Thailand with a

subscriber base market share of 30%.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Page 5

Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Service Revenue 74,968 71,858 70,155 70,745 71,808

Sale of Handsets 15,443 15,411 14,059 14,762 15,205

Other Operating Income 264 484 264 264 264

EBITDA Margins 0.34 0.32 0.33 0.34 0.33

Income Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 90,415 87,753 84,478 85,771 87,277


Gross Profit 29,028 25,231 22,124 22,704 24,788



Other Non Opg (Exp)/Inc 292 165 165 165 91.6


Net Interest (Exp)/Inc (1,175) (1,248) (1,420) (1,294) (1,329)

Exceptional Gain/(Loss) 0.0 (295) (317) 0.0 0.0

Pre-tax Profit 13,281 7,445 2,811 3,392 5,049

Tax (2,551) (1,557) (626) (679) (1,010)



Net Profit 10,729 5,893 2,187 2,715 4,040


EBITDA 31,080 27,784 27,981 28,990 29,236

Growth

Revenue Gth (%) (4.4) (2.9) (3.7) 1.5 1.8

EBITDA Gth (%) 4.5 (10.6) 0.7 3.6 0.9

Opg Profit Gth (%) (11.0) (37.7) (50.3) 3.1 39.0


Margins & Ratio

Gross Margins (%) 32.1 28.8 26.2 26.5 28.4



ROAE (%) 32.9 21.6 8.3 9.8 13.6

ROA (%) 10.1 5.3 2.0 2.6 2.1

ROCE (%) 17.0 9.8 4.8 5.3 7.0

Div Payout Ratio (%) 152.5 117.7 74.0 74.0 74.0




Page 6

Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 19,695 23,249 21,676 19,799 19,537


Gross Profit 6,017 6,259 6,373 5,326 5,288


Operating Profit 1,839 1,514 1,862 917 1,174

Other Non Opg (Exp)/Inc 120 26.0 20.0 13.9 15.7



Exceptional Gain/(Loss) (27.8) 58.0 73.1 (397) 6.84

Pre-tax Profit 1,603 1,281 1,585 169 858

Tax (377) (283) (329) (27.7) (199)


Net Profit 1,228 998 1,256 141 659

Net profit bef Except. 1,255 940 1,183 539 652

EBITDA 6,762 6,677 7,200 6,557 7,202

Growth

Revenue Gth (%) (10.2) 18.0 (6.8) (8.7) (1.3)

EBITDA Gth (%) 5.0 (1.3) 7.8 (8.9) 9.8

Opg Profit Gth (%) (13.1) (17.7) 23.0 (50.8) 28.1

Net Profit Gth (Pre-ex) (%) (8.7) (25.1) 25.8 (54.5) 21.0

Margins

Gross Margins (%) 30.6 26.9 29.4 26.9 27.1



Balance Sheet (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 66,354 68,715 66,380 65,577 68,219


Other LT Assets 16,358 16,056 15,270 14,539 102,127

Cash & ST Invts 5,823 10,121 8,542 6,463 8,305

Inventory 3,891 2,826 3,636 3,691 3,756

Debtors 10,453 9,722 9,767 9,917 10,091

Other Current Assets 3,547 3,526 3,314 3,364 3,424

Total Assets 106,426 110,965 106,909 103,551 195,920

ST Debt

5,664 10,000 9,000 4,000 18,000

Creditor 31,301 29,868 30,319 30,522 30,478

Other Current Liab 7,938 9,975 5,180 5,394 93,888

LT Debt 28,000 33,000 35,000 35,000 23,000

Other LT Liabilities 925 899 917 935 954


Minority Interests 7.11 2.13 0.12 (2.1) (5.3)

Total Cap. & Liab. 106,426 110,965 106,909 103,551 195,920


Net Cash/(Debt) (27,841) (32,879) (35,458) (32,537) (32,695)




Asset Turnover (x) 0.8 0.8 0.8 0.8 0.4

Current Ratio (x) 0.5 0.5 0.6 0.6 0.2

Quick Ratio (x) 0.4 0.4 0.4 0.4 0.1

Net Debt/Equity (X) 0.9 1.2 1.3 1.2 1.1


Capex to Debt (%) 43.5 49.2 47.9 60.3 62.2

Z-Score (X) 1.3 0.9 0.9 1.0 (0.1)



Page 7

Company Guide


Cash Flow Statement (Btm)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 13,281 7,445 2,811 3,392 5,049

Dep. & Amort. 16,624 18,796 23,432 24,303 22,858

Tax Paid (2,551) (1,557) (626) (679) (1,010)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (158) (168) (59.6) (43.6) (36.3)

Other Operating CF 2,855 260 823 1,454 821

Net Operating CF 30,051 24,776 26,380 28,427 27,682

Capital Exp.(net) (14,631) (21,157) (21,097) (23,500) (25,500)

Other Invts.(net) 15.8 4.34 (30.5) (33.6) (36.9)

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (5,529) (2,420) (5.1) (56.1) (103)

Net Investing CF (20,144) (23,572) (21,133) (23,590) (25,640)

Div Paid (10,800) (11,242) (4,040) (1,882) (2,672)

Chg in Gross Debt 5,315 14,336 (4,000) (5,000) 2,000

Capital Issues (5,516) 0.0 0.0 0.0 0.0

Other Financing CF 1,445 0.12 1,214 (34.1) 472

Net Financing CF (9,556) 3,094 (6,826) (6,916) (200)


Chg in Cash 351 4,297 (1,578) (2,079) 1,841

Opg CFPS (Bt) 12.8 10.5 11.2 12.0 11.7

Free CFPS (Bt) 6.51 1.53 2.23 2.08 0.92



Source: DBS Bank


Wasu MATTANAPOTCHANART

THAI-CAC Certified

Corporate Governance CG Rating 2016

THAI-CAC is Companies participating in Thailand's Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorised into:

Score Description

Declared Companies that have declared their intention to join CAC

Certified Companies certified by CAC.

Corporate Governance CG Rating is based on Thai Institute of

Directors (IOD)’s annual assessment of corporate governance practices of listed companies. The assessment covers 235 criteria in five categories including board responsibilities (35% weighting), disclosure and transparency (20%), role of stakeholders (20%), equitable treatment of shareholders (10%) and rights of shareholders (15%). The IOD then assigns numbers of logos to each company based on their scoring as follows:

Score Range Number of Logo Description

90-100 Excellent

80-89 Very Good

70-79 Good

60-69 Satisfactory

50-59 Pass

<50 No logo given N/A

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

BUY (Upgrade from HOLD)

Last Traded Price ( 11 Jan 2017): Rp6,200 (JCI : 5,301.20) Price Target 12-mth: Rp8,000 (29% upside) (Prev Rp5,900) Potential Catalyst: Quartery earnings performance Where we differ: ISAT deserves valuation re-rating

Analyst

Sachin MITTAL +65 66923699 [email protected] William SIMADIPUTRA +62 2130034939 [email protected]

What’s New Upgrade ISAT to BUY with new of TP Rp8,000

Lower foreign debt to lead to better earnings and

shift to PE valuation

Switch to PE to lead to 20% rise in EV/EBITDA

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 26,769 28,839 31,881 33,799 EBITDA 11,297 12,430 13,897 14,739 Pre-tax Profit (1,786) 1,461 2,492 3,309 Net Profit (1,310) 935 1,692 2,287 Net Pft (Pre Ex.) (1,310) 935 1,692 2,287 Net Pft Gth (Pre-ex) (%) 34.9 nm 81.0 35.2 EPS (Rp) (241) 172 311 421 EPS Pre Ex. (Rp) (241) 172 311 421 EPS Gth Pre Ex (%) 35 nm 81 35 Diluted EPS (Rp) (241) 172 311 421 Net DPS (Rp) 0.0 0.0 0.0 0.0 BV Per Share (Rp) 2,297 2,469 2,780 3,201 PE (X) nm 36.1 19.9 14.7 PE Pre Ex. (X) nm 36.1 19.9 14.7 P/Cash Flow (X) 4.3 3.2 2.9 2.7 EV/EBITDA (X) 4.9 4.2 3.4 2.9 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 2.7 2.5 2.2 1.9 Net Debt/Equity (X) 1.6 1.2 0.8 0.4 ROAE (%) (10.1) 7.2 11.9 14.1 Earnings Rev (%): 0 45 58 Consensus EPS (Rp): 187 340 480 Other Broker Recs: B: 21 S: 0 H: 6

Source of all data on this page: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P

Steadier earnings outlook to pave the way for valuation re-rating Upgrade to BUY with new target price of Rp8,000. We upgrade ISAT to BUY with a new target price of Rp8,000 as we roll forward our valuation year to FY17. Our new target price implies FY17 EV/EBITDA of 5.0x, still at a discount relative to TLKM's 8x. We turn positive on ISAT on the back of its resilient revenue and earnings growth outlook, leading to a switch to PE valuation from EV/EBITDA. We turn positive on ISAT in view of better earnings visibility. Indosat has had three quarters of positive earnings due to lower forex-related losses. Given the company’s willingness to shed much of the remaining exposure, we believe Indosat could post consistent earnings over the next 4-8 quarters, even with a relatively meagre topline growth and stable operating profitability. Indosat’s bottomline should also benefit from its network sharing agreement with XL. As a result, in our view, the market also could shift to PE from EV/EBITDA currently used for valuing Indosat as early as 2Q17. We believe this would result in a ~20% appreciation of Indosat’s EV/EBITDA Steady revenue growth outlook. We project 8% service revenue CAGR over 2016-18 on the back of its strategy to attract subscribers keen on video streaming and data-intensive application. Valuation:

We upgrade ISAT to BUY with a new target price of Rp8,000. Our DCF-based TP assumes 10.1% WACC and 1% terminal growth rate. Our target price implies 5.0x FY17F EV/EBITDA and 25.7x FY17F P/E. Key Risks to Our View:

Disruption to benign competition. If any player tries to be aggressive in gaining market share, the whole sector could be impacted. At A Glance Issued Capital (m shrs) 5,434 Mkt. Cap (Rpbn/US$m) 33,690 / 2,543 Major Shareholders (%) Ooredoo Asia (%) 65.0 Govt of Indonesia (%) 14.3 Oredoo Asia Pte Ltd 65.00%

Free Float (%) 20.7 3m Avg. Daily Val (US$m) 0.21 ICB Industry : Telecommunications / Telecommunications


Indonesia Company Guide

Indosat Version 3 | Bloomberg: ISAT IJ | Reuters: ISAT.JK Refer to important disclosures at the end of this report


Company Guide

Indosat

WHAT’S NEW

Steadier earnings outlook to pave the way for valuation re-rating

Upgrade to BUY rating with new target price of Rp8,000. We upgrade ISAT to BUY with a new target price of Rp8,000 as we roll forward our discounted cash flow (DCF) valuation year to FY17. Our new target price implies FY17 EV/EBITDA of 5.0x, still at a discount relative to TLKM's 7.8x and, despite its positive revenue and earnings growth outlook going forward. We turn positive on ISAT on the back of its resilient revenue and earnings growth outlook, thanks mainly to its steady subscribers addition and average revenue per user (ARPU) outlook, coupled with its undemanding valuation. ISAT’s latest quarterly financial performance also showed resilient top line growth, with its steady profit performance alleviating our concerns over data revenue cannibalisation on this counter. Moreover, on the back of the reduced foreign exchange gain or loss component in ISAT P/L, the market also could shift to PE from EV/EBITDA currently used for valuing Indosat as early as 2Q17. We believe this would result in a ~20% appreciation of ISAT’s EV/EBITDA. Our valuation multiple is also relatively higher than ISAT’s historical EV/EBITDA multiple average of 4.3X. We believe ISAT deserves a valuation re-rating to higher level vs. its historical level given its operational and financial performance improvement. Lower foreign debt exposure also will increase ISAT's earnings predictability and in our view, we can also expect the company to pay dividends to shareholders. Historically, ISAT stock price de-rated in the past two years given the concern over data revenue cannibalization post its network modernisation program, which will hurt both its consolidated revenue growth and overall profitability performance. Coupled with its heavily exposed to USD debt, ISAT earnings tend to swing widely on the back of foreign exchange rate fluctuations. New earnings forecast mainly on higher revenue. We have higher earnings forecast for ISAT mainly on a brighter revenue growth outlook. A softer revenue cannibalisation outlook also means ISAT can grow its revenue at faster pace than we had previously expected. A higher revenue growth forecast implies that the multiplier effect of higher revenue will translate into higher EBITDA, and mainly ISAT's NPAT. Our new forecast is largely in line with consensus forecast. Our new 2017/2018 revenue forecast is 4%/7% higher than our previous forecast, mainly on a brighter cellular services revenue outlook. Our 2017/2018 revenue growth assumption is 10.5% y-o-y and 6.0% y-o-y, well above the Indonesia's industry average of 6%-7% annually. Coupled with ISAT’s stable profitability outlook, the higher revenue growth outlook could provide a meaningful lift, mainly to its NPAT. ISAT still relies on the third-party financing to fund its capital expenditure, hence it still has meaningful financing cost in its P&L. Solid core operating earnings, coupled with more visibility NPAT; we turn more positive on ISAT. Indosat has had three quarters of positive earnings due to lower forex-related losses. Given the company’s willingness to shed much of the remaining exposure, we believe Indosat will be able to post consistent

earnings over the next 4-8 quarters, even with relatively meagre top line growth and stable operating profitability. ISAT posted steady revenue and EBITDA growth on the back of its steady subscribers addition and stable average revenue per user (ARPU). Revenue grew steadily even in q-o-q in the past couple of quarters. – a sign that ISAT can successfully manage its profitability amid the rising data revenue trend. XL and Indosat shedding USD debt will stabilise bottom line. XL and Indosat have continued to shed USD debt to reduce its exposure to fluctuations in foreign exchange. ISAT reduced its total debt by ~30% and USD debt by 85% over the past six quarters. The proportion of USD debt to total debt fell from 55% in 2Q15 to 12% by 3Q16. ISAT expects to reduce this further to ~5% by the end of FY17. Similarly, XL has reduced its total debt by ~48% over the past six quarters, with foreign currency-denominated debt as a percentage of total debt falling to ~30% from 71% over the same period. We believe lower foreign debt would limit downside risk and earnings volatility from forex movements for the two operators and be accretive to the bottom line in the long term. Steady revenue growth outlook. Going forward, ISAT's will sustain its revenue growth and subscribers addition on the back of its strategy to balance between product pricing and offering reasonable data quota. Indosat will attract subscribers keen on video streaming and data-intensive applications.

Quarterly EBITDA trend

Source: Company, DBS Bank, DBS Vickers

34%

36%

38%

40%

42%

44%

46%

48%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

EBITDA (Rpbn) ‐ LHS EBITDA margin (%) ‐ RHS


Company Guide

Indosat

Quarterly revenue trend

Subscribers trend

Balance sheet and gearing (X) trend


Five-year forward EV/EBITDA band

Earnings trend


Earnings revision summary

2016F 2017F 2018F Rpbn Old New Changes Old New Changes Old New Changes

Revenue 28,839 28,839 0% 30,524 31,881 4% 31,573 33,798 7% Operating profit 2,840 2,840 0% 3,346 4,041 21% 3,499 4,614 32% EBITDA 12,430 12,430 0% 13,190 13,897 5% 13,582 14,739 9% Net profit 934 934 0% 1,170 1,692 45% 1,450 2,287 58%

Capex 6,921 6,921 0.0% 7,224 7,545 4.4% 7,367 7,886 7.0%


5,7885,920

6,091 6,055

5,773 5,840

6,104

6,368

6,093

6,527

6,9627,187

6,824

7,129

7,572

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000


Revenue (Rpbn)

55.9 56.553.8

59.6 59.754.9 54.2

63.266.5 68.5 69 69.7 69.8

80.5 81.6

0

10

20

30

40

50

60

70

80

90


Subscribers (mn subs)

2.7 2.7

2.4 2.4 2.4

1.97 2.03

1.66

0%

10%

20%

30%

40%

50%

60%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Gross debt/EBITDA (X) ‐ LHS USD debt/ total debt (%) ‐RHS

Average

+1 stdev

+2 stdev

-1 stdev

-2 stdev

2.0

3.0

4.0

5.0

6.0

7.0

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

(x)

(71.1)(160.1)

(1,535.0)

(990.4)

800.1

(573.8)

(1,549.3)

(664.2)

(455.6)(278.2)

(388.5)

(187.7)

217.2 210.9

417.3

(2,000.0)

(1,500.0)

(1,000.0)

(500.0)

‐

500.0

1,000.0


NPAT


Company Guide

Indosat

Scenario analysis

Bear Base Bull

Terminal growth rate 0.0% 1.0% 1.0%

FY16-18F subscriber growth 3% 5.5% 10%

FY16-18F blended ARPU growth 0.0% 2.7% 5.0%

FY16-18F service revenue growth 5.0% 8.0% 10.0%

FY17F EBITDA margin 38.0% 43.5% 51.0%

Target price (Rp) 5,600 8,000 12,000

FY17 EV/EBITDA 3.4 5.0 8.0

Source : DBS Bank, DBS Vickers

Base-case scenario: We assume FY16-18F CAGR revenue growth of 8.0%, based on 5.5% subsriber growth and ARPU growth of 2.7% in FY16-18F. A softer data revenue cannibalisation can lead to a better revenue growth outlook for ISAT, coupled with a stable EBITDA margin of 43.5%. In our forecast, we also believe ISAT will be able to sustain its solid subscriber acquisition, even without the significant bonus quotas – in other words, ISAT can acquire profitable subscribers going forward. Our base-case-scenario DCF-based target price stands at Rp8,000, assuming WACC and terminal growth rate of 10.1% and 1.0% respectively. Our target price implies FY17F EV/EBITDA of 5.0x, or +1 SD of its five-year average multiple, but still at a discount relative to TLKM's FY17F target EV/EBITDA multiple of 8.0x. Bear-case scenario: Our bear -case scenario implies that the data revenue will continue to cannibalise its legacy voice and SMS service revenue, which is reflected in its lower consolidated revenue growth of 5.0% CAGR in FY16-18F. The annibalisation can also lead to profitability contraction, given that its data service revenue has relatively lower profitability vs. its legacy revenue. ISAT’s subscriber growth will only reach 3.0% CAGR in FY16-18F, as we assume that the subscribers will only turn to ISAT for its large bonus quota. Our bear-case-scenario DCF based target price stands at Rp5,600, with WACC and terminal growth rate assumption of 10.1% and 0% respectively. Our

bear-case target price implies FY17F EV/EBITDA of 3.4x, in line with ISAT's five-year average EV/EBITDA. Under this scenario, given the cannibalisation concerns surrounding its revenue and earnings growth outlook, ISAT should deserve a valuation where the share price is currently at. Bull-case scenario: Our bull-case scenario assumes that ISAT can perform as well as Telkomsel. Thus, it would grow its subscribers at 10% CAGR in FY16-18F, given its ability to grab more market share from Telkomsel and ISAT’s stable service quality performance mainly in the Java areas. The growing number of Indosat product packages also enables ISAT to raise its ARPU faster than the market ARPU CAGR of 5% in FY16-18F. The ability to grow its subscribers and raise its ARPU could underpin ISAT’s stellar profitability, putting it on par with Telkomsel in this arena. Our bull-case-scenario DCF-based target price stands at Rp12,000, which implies an FY17 EV/EBITDA of 7.2x. The bull-case-scenario valuation multiple is close to our valuation multiple of 8x for TLKM. A major re-rating catalyst could emerge if ISAT can replicate Telkomsel's earnings growth in both Java and ex. Java markets.


Company Guide

Indosat


Earnings Drivers:

Steady revenue and EBITDA growth in FY17-18. We adjusted our top line and EBITDA forecast, in line with the new management guidance. We still remain convinced that ISAT's SMS and voice revenues will continue to drop after it completed its network modernisation programme last year. Moreover, ISAT ha also guided for relatively modest top line growth this year, in line with the industry – Telkomsel and XL’s growth is slightly above the market’s. This signals further upside to revenue and EBITDA for this year will be limited. Growing subscriber base, coupled with modest growth in ARPU are the key revenue growth driver. ISAT will grow its subscriber base by 5% CAGR over FY15-17, in line with the industry’s growth. But we expect blended ARPU to edge up by 2% to Rp29.5k per user in FY15-17. This implies top line revenue growth of around 7%-7.5% or in line with the industry’s growth rate going forward; also in line with management’s new guidance. EBITDA margin sustainable at 42%, but bottom line is subject to forex fluctuations. EBITDA margin will sustain at 41%-43% going forward on the back of its stable operational costs. ISAT's NPAT also will be more predictable given its lesser exposure to the foreign currency debt. ISAT USD debt outstanding is only 12% to the total outstanding debt, lower than its historical level at 50%. Stable capex outlook after the successful network modernisation. In line with industry trends, ISAT’s capex will reach Rp6-7tr in FY17-18 after the network modernisation back in 2015. The major capex allocation is to expand its BTS network in order to maintain its revenue growth momentum and market share, alongside efforts to continuously improve its service quality. Beside its core business, ISAT also plans to tap the fibre optic business, like TLKM.

Subscribers (m)

Blended ARPU (Rp k)

EBITDA Margin %

Capex (Rp tn)

EBITDA (Rpbn)



Company Guide

Indosat

Balance Sheet:

Lower gearing ratio on lower capex outlook. ISAT's balance sheet restructuring via replacing its expensive US$ loan with a series of IDR bond issuances is also positive for its balance sheet and cash flows. ISAT's US$ loan portion dropped to 25% in 4Q15, lower than its three-year historical average of 55%. Gearing ratio will drop going forward as ISAT has lower capex outlook post its network modernisation completion last year. Divestment of non-core assets. ISAT can divest its non-core assets, mainly tower assets, to raise more funds. ISAT owns 8,500 towers and may be able to raise up to US$850m. Share Price Drivers:

Market waiting for better earnings growth. ISAT is trading below its 5-year average EV/EBITDA multiple (-1SD of mean) because the market is waiting for better revenues and profitability post-network modernisation. IDR volatility also pressuring share price. Since ISAT’s balance sheet has strong exposure to foreign debt, the share price will be pressured by the weakening IDR as investors continue to underweight companies with high exposure to USD debt. Key Risks:

Disruption to benign competition. If any player tries to be aggressive in gaining market share, the whole sector could be impacted. Depreciation of Indonesian rupiah. Due to high foreign debt, a weak Indonesian rupiah could adversely impact its bottom-line. Indosat booked net losses in the past two years on forex translation losses and the trend may persist if the IDR continues to weaken. Company Background

Telecommunication and information service provider in Indonesia that provides cellular services (both prepaid and postpaid), fixed data services or MIDI (Multimedia, Internet & Data Communication) and fixed voice including fixed wireless access services.


Capital Expenditure

ROE (%)

Forward EV/EBITDA Band (x)

PB Band (x)


Average

+1 stdev

+2 stdev

-1 stdev

-2 stdev

2.0

3.0

4.0

5.0

6.0

7.0

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

(x)


Company Guide

Indosat

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Subscribers (m) 63.2 66.5 72.4 76.4 80.6 Blended ARPU (Rp k) 29.0 28.7 29.4 30.4 31.0 EBITDA Margin % 36.3 42.2 43.1 43.6 43.6 Capex (Rp tn) 4.90 9.80 6.90 7.50 7.90 EBITDA (Rpbn) 8,732 11,297 12,430 13,897 14,739

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) FWA & IDD 1,096 1,119 1,119 1,231 1,207 Cellular 19,481 21,896 23,966 26,521 28,546 MIDI 3,509 3,754 3,754 4,129 4,046 Others 0.10 0.10 0.10 0.10 0.10 Total 24,085 26,769 28,839 31,881 33,799

Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 24,085 26,769 28,839 31,881 33,799 Cost of Goods Sold (23,438) (24,100) (25,999) (27,840) (29,185) Gross Profit 647 2,669 2,840 4,041 4,614 Other Opng (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 647 2,669 2,840 4,041 4,614 Other Non Opg (Exp)/Inc (345) (1,844) (110) (115) (119) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (2,264) (2,611) (1,269) (1,435) (1,186) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (1,962) (1,786) 1,461 2,492 3,309 Tax 77.9 622 (365) (623) (827) Minority Interest (129) (147) (161) (177) (195) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit (2,014) (1,310) 935 1,692 2,287 Net Profit before Except. (2,014) (1,310) 935 1,692 2,287 EBITDA 8,732 11,297 12,430 13,897 14,739 Growth Revenue Gth (%) 1.0 11.1 7.7 10.5 6.0 EBITDA Gth (%) (15.4) 29.4 10.0 11.8 6.1 Opg Profit Gth (%) (57.1) 312.6 6.4 42.3 14.2 Net Profit Gth (Pre-ex) (%) 41.6 34.9 nm 81.0 35.2 Margins & Ratio Gross Margins (%) 2.7 10.0 9.8 12.7 13.7 Opg Profit Margin (%) 2.7 10.0 9.8 12.7 13.7 Net Profit Margin (%) (8.4) (4.9) 3.2 5.3 6.8 ROAE (%) (13.7) (10.1) 7.2 11.9 14.1 ROA (%) (3.7) (2.4) 1.7 3.2 4.1 ROCE (%) 1.5 6.2 5.2 7.5 8.1 Div Payout Ratio (%) N/A N/A 0.0 0.0 0.0 Net Interest Cover (x) 0.3 1.0 2.2 2.8 3.9


Better earnings visibility on lower foreign currency debt exposure


Company Guide

Indosat

Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 6,962 7,187 6,813 7,129 7,583 Cost of Goods Sold (5,762) (6,849) (5,965) (6,271) (6,552) Gross Profit 1,200 338 848 858 1,030 Other Oper. (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 1,200 338 848 858 1,030 Other Non Opg (Exp)/Inc (1,093) 98.6 87.9 11.0 134 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (867) (569) (565) (519) (545) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (760) (133) 370 350 619 Tax 413 (16.5) (115) (104) (170) Minority Interest (41.0) (38.3) (38.1) (35.0) (32.1) Net Profit (389) (188) 217 211 417 Net profit bef Except. (389) (188) 217 211 417 EBITDA 3,242 2,825 2,961 3,080 3,425 Growth Revenue Gth (%) 6.7 3.2 (5.2) 4.6 6.4 EBITDA Gth (%) 21.9 (12.9) 4.8 4.0 11.2 Opg Profit Gth (%) 90.7 (71.8) 150.8 1.2 20.1 Net Profit Gth (Pre-ex) (%) (39.6) 51.7 nm (2.9) 97.9 Margins Gross Margins (%) 17.2 4.7 12.4 12.0 13.6 Opg Profit Margins (%) 17.2 4.7 12.4 12.0 13.6 Net Profit Margins (%) (5.6) (2.6) 3.2 3.0 5.5

Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 40,776 41,822 39,905 38,345 36,858 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,887 3,648 3,422 3,196 2,970 Cash & ST Invts 3,480 3,623 2,615 6,776 11,280 Inventory 49.4 39.3 246 270 286 Debtors 2,094 2,730 2,307 2,551 2,704 Other Current Assets 2,968 3,526 3,015 3,252 3,413 Total Assets 53,255 55,389 51,511 54,389 57,511 ST Debt 10,947 7,586 3,000 3,000 3,000 Creditor 691 764 738 809 858 Other Current Liab 9,510 11,703 11,341 12,279 12,871 LT Debt 11,350 16,607 16,607 16,607 16,607 Other LT Liabilities 6,561 5,465 5,465 5,465 5,465 Shareholder’s Equity 13,509 12,483 13,417 15,109 17,395 Minority Interests 687 781 942 1,120 1,315 Total Cap. & Liab. 53,255 55,389 51,511 54,389 57,511 Non-Cash Wkg. Capital (5,089) (6,171) (6,510) (7,016) (7,326) Net Cash/(Debt) (18,817) (20,569) (16,991) (12,831) (8,327) Debtors Turn (avg days) 33.1 32.9 31.9 27.8 28.4 Creditors Turn (avg days) 12.2 17.2 16.7 15.7 16.0 Inventory Turn (avg days) 1.0 1.0 3.2 5.2 5.3 Asset Turnover (x) 0.4 0.5 0.5 0.6 0.6 Current Ratio (x) 0.4 0.5 0.5 0.8 1.1 Quick Ratio (x) 0.3 0.3 0.3 0.6 0.8 Net Debt/Equity (X) 1.3 1.6 1.2 0.8 0.4 Net Debt/Equity ex MI (X) 1.4 1.6 1.3 0.8 0.5 Capex to Debt (%) 22.1 40.6 35.3 38.5 40.2 Z-Score (X) 1.0 1.2 1.4 1.6 1.7


NPAT turned positive in the last three quarters on the back of lower foreign exchange translation gain or losses, given ISAT lower exposure to USD debt

Healthy gearing level amid ISAT's stable capex outlook post network modernisation programme


Company Guide

Indosat

Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit (1,962) (1,786) 1,461 2,492 3,309 Dep. & Amort. 8,273 8,774 9,065 9,331 9,600 Tax Paid 64.0 547 (183) (494) (725) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 316 485 156 377 207 Other Operating CF 0.0 (155) 0.0 0.0 0.0 Net Operating CF 6,691 7,866 10,499 11,705 12,391 Capital Exp.(net) (4,918) (9,815) (6,921) (7,545) (7,886) Other Invts.(net) 0.0 (34.7) 0.0 0.0 0.0 Invts in Assoc. & JV 26.1 32.3 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (4,892) (9,817) (6,921) (7,545) (7,886) Div Paid 0.0 (16.1) 0.0 0.0 0.0 Chg in Gross Debt (135) 1,896 (4,586) 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (418) 241 0.0 0.0 0.0 Net Financing CF (552) 2,121 (4,586) 0.0 0.0 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 1,247 170 (1,008) 4,160 4,504 Opg CFPS (Rp) 1,173 1,358 1,903 2,085 2,242 Free CFPS (Rp) 326 (359) 658 766 829



HOLD Last Traded Price ( 15 Nov 2016): Rp3,840 (JCI : 5,078.50) Price Target 12-mth: Rp4,100 (7% upside) (Prev Rp4,100) Potential Catalyst: Dividend and quarterly earnings announcements Where we differ: We believe TLKM’s strong performance outlook is already well priced in Analyst

Sachin MITTAL +65 6682 3699; [email protected] Sachin MITTAL +65 6682 3699 [email protected] SIMADIPUTRA +62 2130034939 [email protected]

What’s New Raise TP to Rp4,100 and maintain HOLD rating

New earnings forecast on faster top-line growth

Market has priced in its positive growth outlook

TLKM's valuation at five-year historical high

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 102,470 114,401 122,292 129,890 EBITDA 51,415 58,872 63,536 70,991 Pre-tax Profit 31,342 39,499 43,573 50,719 Net Profit 15,462 19,757 22,651 27,844 Net Pft (Pre Ex.) 15,462 19,757 22,651 27,844 Net Pft Gth (Pre-ex) (%) 5.6 27.8 14.6 22.9 EPS (Rp) 155 198 227 279 EPS Pre Ex. (Rp) 155 198 227 279 EPS Gth Pre Ex (%) 6 28 15 23 Diluted EPS (Rp) 155 198 227 279 Net DPS (Rp) 124 158 182 223 BV Per Share (Rp) 753 787 816 873 PE (X) 24.8 19.4 16.9 13.8 PE Pre Ex. (X) 24.8 19.4 16.9 13.8 P/Cash Flow (X) 9.0 8.1 7.3 6.7 EV/EBITDA (X) 7.9 7.0 6.5 5.9 Net Div Yield (%) 3.2 4.1 4.7 5.8 P/Book Value (X) 5.1 4.9 4.7 4.4 Net Debt/Equity (X) 0.0 CASH CASH CASH ROAE (%) 21.6 25.7 28.3 33.0 Earnings Rev (%): 0 (9) (8) Consensus EPS (Rp): 194 226 249 Other Broker Recs: B: 21 S: 0 H: 10


Stellar performance already priced in Raise our TP to Rp4,100, maintain HOLD. We maintain our HOLD rating with a higher target price, as we bump up our earnings forecasts and roll forward our DCF valuation to 2017. Telkomsel will continue to outperform its peers in EBITDA growth, thanks to its strong presence in both Java and ex. Java markets. However, we believe the market has largely priced in TLKM's positive outlook, reflected in its implied EV/EBITDA and PE multiples– currently within their five-year historical highs of 6.5x and 16.9x respectively. Legacy revenue is a puzzle in FY17F. We project Telkomsel’s voice and SMS revenue (65% of service revenue) to grow by 4% in FY17F similar to FY16F. However, legacy revenue has been declining at its peers and if Telkomsel’s FY17F legacy revenue shows 2% or lower growth, our TP will decline to Rp3,200 Net cash balance sheet will sustain on stable capex outlook. TLKM’s stable capital expenditure, at 25% of capex per sales, gives rise to a net-cash balance sheet. TLKM has the strongest balance sheet among the three big operators, which enables it to pay steady dividends and roll out capital expenditure to maintain its revenue growth momentum and market leadership in the cellular operator space. Valuation:

We roll forward our DCF valuation to 2017, resulting in a higher TP of Rp4,100, with 9.4% weighted average cost of capital (WACC) and 1.0% terminal growth assumption. Our TP implies an EV/EBITDA multiple of 7.8x. Key Risks to Our View:

Disruption of its strong presence outside Java. Any efforts to disrupt Telkomsel’s strong presence in ex. Java areas will hurt its revenue growth and profitability, as it relies on ex. Java non-data-centric subscriber monetisation to boost its overall financial performance. At A Glance Issued Capital (m shrs) 100,800 Mkt. Cap (Rpbn/US$m) 387,072 / 29,081 Major Shareholders (%) Govt. of Indonesia (%) 51.0

Free Float (%) 49.0 3m Avg. Daily Val (US$m) 29.9 ICB Industry : Telecommunications / Telecommunications

DBS Group Research . Equity 16 Nov 2016


Telekomunikasi Indonesia Version 3 | Bloomberg: TLKM IJ | Reuters: TLKM.JK Refer to important disclosures at the end of this report


Company Guide

Telekomunikasi Indonesia

WHAT’S NEW

TLKM's stellar performance already priced in

Raise our TP to Rp4,100, maintain HOLD

We maintain our HOLD rating with a higher target price of Rp4,100, as we bump up our earnings forecasts and roll forward our DCF valuation to 2017. We believe that Telkomsel will continue to outperform its smaller peers in terms of revenue and EBITDA growth, thanks to its strong presence in both Java and ex. Java markets. However, at the same time, we also believe that the market has largely priced in TLKM's positive earnings growth outlook, which is reflected in its implied stock price EV/EBITDA and PE multiples –currently at their five-year historical highs of 6.5x and 16.9x respectively.

New earnings forecasts Our new revenue forecasts take into account a better subscriber growth outlook and rising ARPU. Data revenue remains the top-line growth driver, followed by the high-margin business wireless voice services of its cellular subsidiary Telkomsel. Our new FY17 and FY18 revenue forecasts are 9% and 12% higher than our previous forecasts respectively.

The higher revenue forecasts also led to higher EBITDA and NPAT numbers on the back of TLKM's stable profitability outlook. Our new FY17 and FY18 EBITDA forecasts are 14% and 18% higher than our previous numbers, with our FY17 and FY18 earnings forecasts being 18% and 25% higher relative to our old figures respectively. Our new forecasts are now relatively in line with consensus forecasts. Consensus figures impute Telkomsel’s stellar performance outlook in the next two years.

We believe TLKM’s profitability outlook is stable, on the back of 1) sustainable growth for its high-margin voice and SMSsegments in ex. Java areas, with subscribers sticking to legacy services instead of migrating to data-based services, 2) stable overall operational cost, thanks to stable rental rates offered by Indonesia’s major tower companies, and 3) an unlevered balance sheet that provides NPAT visibility, underpinned by low financing cost and the absence of foreign exchange translation volatility. Moreover, we believe its fixed-line business expansion will not hurt margins as we had expected previously, given the still small contribution of this business relative to TLKM’s consolidated earnings in the next two years.

High financial flexibility vs. other operators TLKM’s stable capital expenditure, at 25% of capex per sales, does not require TLKM to raise external funds for its expansion. TLKM has the strongest balance sheet among the three big operators, which enables it to pay steady dividends and roll out capital expenditure to maintain its revenue growth momentum and market leadership in the cellular operator space.

Scenario analysis We have conducted a scenario analysis, mainly to stress test our base-case target price according to two main scenarios; whether Telkomsel can sustain its dominance in voice and SMS services in the ex. Java market. Note that TLKM's stellar performance is partly due to its capability in monetising its legacy business.

1) Base caseOur new TP of Rp4,100 implies an FY17 EV/EBITDA of 7.8x or +2SD of its five-yeas EV/EBITDA multiple. Our base-case scenario assumes that TLKM can maintain its dominance in the ex. Java market, where Telkomsel has been continuously monetising its cashcow business voice and SMS services in the ex. Java area via raising prices, while growing its subscribers meaningfully.

Our base-case scenario assumes that there is no disruption in the ex. Java market, especially after EXCL and ISAT announced their intention to explore a new avenue of growth via a network sharing plan and expanding the data penetration outside Java. Telkomsel’s double-digit topline growth also will provide meaningful contribution to TLKM’s EBITDA – hence, TLKM will enjoy stable margins, even while growing the fixed-line segment.

2) Bear caseOur bear-case scenario takes into account muted revenue growth and profit contraction, on the back of slowing legacy services voice and SMS monetisation. Without the high-margin legacy segment, Telkomsel could not sustain its profitability at the current level – the highest among Indonesia operators.

We also assume Telkomsel will face hurdles to compete with the other operators in the Java area, hence, it cannot deliver strong profitability and revenue growth that are in with its three-year historical performance. In other words, Telkomsel will face revenue cannibalisation in the same vein as the other smaller operators, thus causing further EBITDA margin contraction to 48%, which is the lowest in the past five years.

Our bear-case TP of Rp3,200 implies an EV/EBITDA multiple of 7.0x, still higher vs. the smaller operators as we still believe that in spite of its persistently strong overall financial performance and ongoing domination in the industry, it will grow at a slower pace with a more moderate profitability outlook. Moreover, TLKM's strong balance sheet will provide the financial flexibility to maintain its capital expenditure to continuously expand its presence in the both Java and ex. Java markets.

3) Bull caseOur bull-case scenario TP of Rp5,300 implies an FY17 EBITDA of 9.6x. Higher EBITDA growth could come from Telkomsel and its other subsidiaries. We assume Telkomsel will maintain its total dominance in the ex. Java market given the muted expansion by the other operators. In the meantime, Telkomsel has also successfully built a strong footprint in the Java area by providing the most reliable operator services and capturing subscribers that value service quality. Faster cellular growth in Telkomsel vs. TLKM's other businesses also enables TLKM’s consolidated profit to grow at a rate that is closer to Telkomsel's 55%.

Under this scenario, we believe TLKM deserves a premium valuation relative to its peers or even at the highest level in the last five years – beyond +2SD of its five-year EV/EBITDA multiple. To achieve the latter, we think that TLKM needs to re- rate to a degree such that its historical valuation becomes less relevant, on the back of its persistent dominance in the industry, which could translate into strongest revenue and earnings

growth in the industry.


Company Guide


Five-year forward EV/EBITDA band


Quarterly revenue trend per segment


TLKM vs. Telkomsel’s EBITDA margin trend

Source: Company, DBS Banks, DBS Vickers

Subscriber addition trend (m)


Average

+1 stdev

+2 stdev

-1 stdev

-2 stdev

3.0

4.0

5.0

6.0

7.0

8.0

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

(x)

0

2,000

4,000

6,000

8,000

10,000

12,000


Voice SMS Data

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%


Telkomsel TLKM

0

1

2

3

4

5

6

100

110

120

130

140

150

160

170


Quarterly net addition Subscribers


Company Guide



2016F 2017F 2018F

Old New Changes Old New Changes Old New Changes

Revenue (Rpbn) 107,593 114,400 6% 112,229 122,292 9% 115,599 129,890 12%

Operating profit (Rpbn) 35,680 41,266 16% 37,624 45,422 21% 41,850 52,524 26%

EBITDA (Rpbn) 53,286 58,872 10% 55,627 63,536 14% 60,069 70,991 18%

Net profit (Rpbn) 17,688 19,757 12% 19,163 22,651 18% 22,223 27,844 25%

Source : DBS Bank , DBS Vickers

Scenario analysis

Bear Base Bull

Terminal growth rate 0.0% 1.0% 1.0%

FY16-18F subscriber growth 0% 3.0% 10%

Voice and SMS revenue growth 2.0% 4.0% 6.0%

FY16-18F service income growth 3.0% 6.6% 8.0%

FY17F EBITDA margin 48.0% 52.0% 55.0%

Target price (Rp) 3,200 4100 5,300

FY17 EV/EBITDA (X) 7.0 7.8 9.6

Source : DBS Bank, DBS Vickers


Company Guide



Earnings Drivers:

Strong growth driven by Telkomsel. Telkomsel continues to guide for double-digit revenue growth in FY16, and we believe this is sustainable for the next three years. While data pricing has declined so far, Telkomsel is willing to test the waters by raising data pricing in the near term, especially for loose-competition clusters.

Telkomsel is Indonesia’s leading cellular operator. Telkomsel, TLKM's cellular business subsidiary, will remain the group’s key top-line and earnings growth driver, given its strong footprint and network infrastructure in both Java and ex-Java areas. Telkomsel accounts for 60% of TLKM’s top-line with an 85% share of the country’s cellular customer base. Telkomsel derives 70-75% of revenues from ex Java, while its peers only derive 20%.

Monetising strong ex. Java footprint. Unlike Java’s data-centric subscribers, ex-Java subscribers communicate mainly through voice and SMS. Given Telkomsel’s strong network infrastructure and ability to maintain good network quality, it is able to raise prices without losing market share.

Rejuvenating fixed-line business. TLKM will replace its copper- based fixed-line network with fibre and offer the 'triple play' package (Internet, IPTV and phone). TLKM's strong copper-based fixed-line footprint in Indonesia means that there will be no infrastructure and product marketing issues.

Strong profitability. We forecast TLKM's EBITDA margin to be sustained at 50%. Our forecast accounts for profitability dilution in the early stage of the newly acquired digital businesses. TLKM's profitability is more predictable because unlike its peers, its balance sheet has no debt (net cash), and hence, no exposure to foreign exchange rate movements.

GSM Subscribers (m)

Data revenue

EBITDA Margin %

Net Capex (Rp tr)

EBITDA (Rptn)



Company Guide


Balance Sheet:

No exposure to foreign debt. TLKM has the strongest balance sheet among peers because of zero exposure to foreign debt, and the lowest gross debt to equity ratio of 0.25x. The low leverage also means TLKM has better flexibility to acquire digital or other businesses.

Capex sustainable at 20-25% of revenue. TLKM's capex will be sustainable at 20-25% of revenue, at Rp25tr in FY16. Major capex allocation for the mobile business will be mostly to add BTS in order to maintain market share (4G/3G). The capex also accounts for digital businesses M&A possibilities this year.


Defensive play with steady dividends. TLKM’s share price has been defensive amid the weakening IDR because of zero exposure to foreign debt. The stable operations also enable TLKM to offer a steady dividend payout ratio of 60%, which implies 3.5% dividend yield. We expect the dividend payout to be stable going forward.

Key Risks:

Disruption of its strong presence outside Java. Any efforts to disrupt Telkomsel’s strong presence in ex. Java areas will hurt its revenue growth and profitability, as it relies on ex. Java non-data-centric subscriber monetisation to boost its overall financial performance.

Fixed-line business. If the fixed-line business does not stabilise, TLKM may not meet our earnings forecasts and target price.

Disruption to benign competition. If any player becomes aggressive in gaining market share and triggers a new wave of price wars, the whole sector could suffer.

Company Background

TLKM Indonesia is the largest telecommunication and network provider in Indonesia. The company offers a wide range of network and telecommunication services, including fixed-line connection services, cellular services, network and interconnection services, as well as Internet and data communication services.

TLKM also operates multimedia businesses such as content and applications, completing its business portfolio that spans Telecommunication, Information, Media, Edutainment and Services (TIMES).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

GSM Subscribers (m) 141 153 175 182 189 Data revenue 36.4 46.5 57.2 64.0 71.1 EBITDA Margin % 51.1 50.2 51.5 52.0 54.7 Net Capex (Rp tr) 18.8 27.4 25.7 26.3 26.0 EBITDA (Rptn) 45.8 51.4 58.9 63.5 71.0

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (Rpbn)

Fixed Line 8,881 7,833 8,225 8,636 9,068 Wireless Voice 34,290 34,290 34,290 34,290 34,290 Interconnection 4,708 4,290 4,290 4,076 3,790 Data/Internet & SMS 36,432 46,470 57,158 64,017 71,059 Others 5,385 9,587 10,438 11,274 11,683 Total 89,696 102,470 114,401 122,292 129,890


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 89,696 102,470 114,401 122,292 129,890 Cost of Goods Sold (43,852) (51,055) (55,528) (58,757) (58,898) Gross Profit 45,844 51,415 58,872 63,536 70,991 Other Opng (Exp)/Inc (17,131) (18,534) (17,606) (18,113) (18,467) Operating Profit 28,713 32,881 41,266 45,422 52,524 Other Non Opg (Exp)/Inc 664 (463) 0.0 0.0 0.0 Associates & JV Inc (17.0) (2.0) (2.1) (2.2) (2.2) Net Interest (Exp)/Inc (576) (1,074) (1,765) (1,848) (1,803) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 28,784 31,342 39,499 43,573 50,719 Tax (7,338) (8,052) (9,480) (10,457) (12,172) Minority Interest (6,808) (7,828) (10,262) (10,464) (10,702) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 14,638 15,462 19,757 22,651 27,844 Net Profit before Except. 14,638 15,462 19,757 22,651 27,844 EBITDA 45,844 51,415 58,872 63,536 70,991 Growth

Revenue Gth (%) 8.1 14.2 11.6 6.9 6.2 EBITDA Gth (%) 9.7 12.2 14.5 7.9 11.7 Opg Profit Gth (%) 10.5 14.5 25.5 10.1 15.6 Net Profit Gth (Pre-ex) (%) 3.0 5.6 27.8 14.6 22.9 Margins & Ratio

Gross Margins (%) 51.1 50.2 51.5 52.0 54.7 Opg Profit Margin (%) 32.0 32.1 36.1 37.1 40.4 Net Profit Margin (%) 16.3 15.1 17.3 18.5 21.4 ROAE (%) 22.8 21.6 25.7 28.3 33.0 ROA (%) 10.9 10.1 11.6 12.4 14.0 ROCE (%) 19.3 19.4 22.4 22.9 24.1 Div Payout Ratio (%) 75.0 80.0 80.0 80.0 80.0 Net Interest Cover (x) 49.8 30.6 23.4 24.6 29.1



Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 26,879 26,751 27,542 28,912 29,734 Cost of Goods Sold (13,345) (12,410) (12,887) (14,772) (14,151) Gross Profit 13,534 14,341 14,655 14,140 15,583 Other Oper. (Exp)/Inc (4,711) (5,030) (4,405) (4,334) (4,618) Operating Profit 8,823 9,311 10,250 9,806 10,965 Other Non Opg (Exp)/Inc 207 (893) (663) 520 (557) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (274) (396) (271) (144) (289) Exceptional Gain/(Loss) (156) 0.0 0.0 0.0 0.0 Pre-tax Profit 8,600 8,022 9,316 10,182 10,119 Tax (2,242) (2,042) (2,423) (2,412) (2,613) Minority Interest (2,260) (2,036) (2,307) (2,430) (2,700) Net Profit 4,098 3,944 4,586 5,340 4,806 Net profit bef Except. 4,213 3,944 4,586 5,340 4,806 EBITDA 13,534 14,341 14,655 14,140 15,583

Growth

Revenue Gth (%) 6.6 (0.5) 3.0 5.0 2.8 EBITDA Gth (%) 21.1 6.0 2.2 (3.5) 10.2 Opg Profit Gth (%) 17.9 5.5 10.1 (4.3) 11.8 Net Profit Gth (Pre-ex) (%) 19.8 (6.4) 16.3 16.4 (10.0) Margins

Gross Margins (%) 50.4 53.6 53.2 48.9 52.4 Opg Profit Margins (%) 32.8 34.8 37.2 33.9 36.9 Net Profit Margins (%) 15.2 14.7 16.7 18.5 16.2


FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 94,809 103,650 111,784 120,015 127,525 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 12,324 14,561 14,559 14,557 14,555 Cash & ST Invts 20,469 30,985 31,681 37,340 45,991 Inventory 474 528 686 726 728 Debtors 6,465 7,517 8,309 8,882 9,434 Other Current Assets 6,354 8,932 8,590 8,936 8,986 Total Assets 140,895 166,173 175,609 190,456 207,218

ST Debt 7,709 4,444 491 491 491 Creditor 11,830 13,994 15,638 16,547 16,587 Other Current Liab 12,247 16,975 15,452 16,517 17,328 LT Debt 15,743 30,168 29,723 29,278 28,833 Other LT Liabilities 7,241 7,164 7,164 7,164 7,164 Shareholder’s Equity 67,807 75,136 78,587 81,441 87,095 Minority Interests 18,318 18,292 28,554 39,019 49,720 Total Cap. & Liab. 140,895 166,173 175,609 190,456 207,218

Non-Cash Wkg. Capital (10,784) (13,992) (13,505) (14,519) (14,767) Net Cash/(Debt) (2,983) (3,627) 1,467 7,571 16,667 Debtors Turn (avg days) 25.4 24.9 25.2 25.7 25.7 Creditors Turn (avg days) 160.0 144.9 142.6 144.5 149.6 Inventory Turn (avg days) 6.7 5.6 5.8 6.3 6.6 Asset Turnover (x) 0.7 0.7 0.7 0.7 0.7 Current Ratio (x) 1.1 1.4 1.6 1.7 1.9 Quick Ratio (x) 0.8 1.1 1.3 1.4 1.6 Net Debt/Equity (X) 0.0 0.0 CASH CASH CASH Net Debt/Equity ex MI (X) 0.0 0.0 CASH CASH CASH Capex to Debt (%) 80.2 79.2 85.2 88.5 88.6 Z-Score (X) 6.5 5.3 5.7 5.6 5.7



Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 28,784 31,342 39,499 43,573 50,719 Dep. & Amort. 17,131 18,534 17,606 18,113 18,467 Tax Paid (6,660) (7,155) (10,383) (10,213) (11,744) Assoc. & JV Inc/(loss) 17.0 2.00 2.10 2.20 2.20 Chg in Wkg.Cap. (701) 3,811 416 770 (181) Other Operating CF 143 (3,776) 0.0 0.0 0.0 Net Operating CF 38,714 42,758 47,140 52,245 57,263 Capital Exp.(net) (18,818) (27,425) (25,740) (26,344) (25,978) Other Invts.(net) 2,612 (11.4) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (12,368) 0.0 0.0 0.0 0.0 Net Investing CF (28,574) (27,436) (25,740) (26,344) (25,978) Div Paid (12,979) (14,374) (16,306) (19,796) (22,190) Chg in Gross Debt 3,196 11,160 (4,398) (445) (445) Capital Issues 2,545 (1,740) 0.0 0.0 0.0 Other Financing CF 74.0 127 0.0 0.0 0.0 Net Financing CF (7,164) (4,827) (20,704) (20,241) (22,635) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 2,976 10,495 696 5,660 8,650 Opg CFPS (Rp) 395 390 468 516 576 Free CFPS (Rp) 199 154 214 260 313



Source: DBS Bank, DBS Vickers


William SIMADIPUTRA

William SIMADIPUTRA


BUY Last Traded Price ( 27 Oct 2016): Rp2,340 (JCI : 5,416.80) Price Target 12-mth: Rp3,300 (41% upside) (Prev Rp4,100) Potential Catalyst: Positive subscribers addition Where we differ: We believe EXCL's management can turnaround the company

Analyst Sachin MITTAL +65 6682 3699 [email protected] William SIMADIPUTRA +62 2130034939 [email protected]

What’s New Share price is at our bear-case scenario TP

Currently trading at low-end EV/EBITDA multiple

Service quality improvement should attract subs

Maintain our BUY rating with lower TP of Rp3,300

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 22,876 22,146 22,361 23,013 EBITDA 8,393 8,327 8,399 8,739 Pre-tax Profit (631) 529 843 1,622 Net Profit (25.3) 396 632 1,216 Net Pft (Pre Ex.) (25.3) 396 632 1,216 Net Pft Gth (Pre-ex) (%) 97.9 nm 59.5 92.3 EPS (Rp) (2.4) 37.1 59.2 114 EPS Pre Ex. (Rp) (2.4) 37.1 59.2 114 EPS Gth Pre Ex (%) 98 nm 60 92 Diluted EPS (Rp) (2.4) 37.1 59.2 114 Net DPS (Rp) 0.0 22.3 35.5 68.3 BV Per Share (Rp) 1,318 1,983 2,020 2,099 PE (X) nm 63.1 39.6 20.6 PE Pre Ex. (X) nm 63.1 39.6 20.6 P/Cash Flow (X) 3.6 9.7 4.0 3.6 EV/EBITDA (X) 6.1 5.6 5.5 5.2 Net Div Yield (%) 0.0 1.0 1.5 2.9 P/Book Value (X) 1.8 1.2 1.2 1.1 Net Debt/Equity (X) 1.8 1.0 1.0 0.9 ROAE (%) (0.2) 2.2 3.0 5.5 Earnings Rev (%): (30) (29) (13) Consensus EPS (Rp): 27.1 111 164 Other Broker Recs: B: 17 S: 1 H: 6


Valuation hits five-year low We maintain our BUY rating for EXCL. We have a BUY rating on EXCL with a lower target price of Rp3,300. We believe its share price correction on slower-than-expected turnaround progress is overdone. Currently, EXCL is trading at 5.5x FY17 EV/EBITDA, close to -2SD of its five-year average EV/EBITDA multiple. The current share price level is near our bear-case scenario target price of Rp2,200, which implies an EV/EBITDA of 5.0x, or at the low end (-2SD) of its five-year EV/EBITDA multiple (see next page for our scenario analysis). New earnings forecast. Our new earnings forecast takes into account some short-term impact on EXCL transformation efforts such as the drop in voice and SMS usage in the Java area, as EXCL reinvigorates its service quality and incurs higher selling & marketing expenses to overhaul its traditional distribution channel. Our new FY17 and FY18 EBITDA forecasts are 5% lower than our previous forecasts. 3Q16 EBITDA met our expectation. EXCL’s 3Q16 revenue of Rp5.3tr and EBITDA of Rp1.9tr met our expectations, with major improvements in subscriber acquisition being evident. EBITDA margin inched down q-o-q on higher selling and marketing expenses due to its subscriber acquisition efforts. Valuation:

We rate EXCL a BUY with a new DCF-based TP of Rp3300, assuming 9.4% WACC and 1% terminal growth rate. Our target price implies FY17 EV/EBITDA of 6.7x. Key Risks to Our View:

Disruption to benign competition. If any player gets aggressive in gaining market share, the whole sector could be affected. Slower-than-expected turnaround effort. Slower-than-expected turnaround efforts can lead to lower-than-expected revenue and earnings growth. At A Glance Issued Capital (m shrs) 10,688 Mkt. Cap (Rpbn/US$m) 25,010 / 1,916 Major Shareholders (%) Axiata Group 66.6 Elisalat Intl 13.3 Parkmix Ltd 13.3


DBS Group Research . Equity 31 Oct 2016


XL Axiata Version 3 | Bloomberg: EXCL IJ | Reuters: EXCL.JK Refer to important disclosures at the end of this report


Company Guide

XL Axiata

WHAT’S NEW

EXCL's share price is trading at our bear-case scenario TP, as its valuation hit a five-year low

EXCL’s slow turnaround priced in We believe the market has priced in EXCL’s slow business turnaround at the current share price. EXCL is trading at 5.0x FY17 EV/EBITDA, its five-year historical low. EXCL’s new management strategy is to transform itself from a low cost operator into a value operator, by focusing on acquiring high value and profitable subscribers. Scenario analysis We have conducted a target price scenario analysis on EXCL with the key variables being subscriber acquisition, revenue growth and EBITDA margin outlook that can determine its overall financial performance. Base case – TP of Rp3,300 We have a BUY rating with a target price of Rp3,300 for EXCL, which implies an FY17F EV/EBITDA of 6.7x. We believe EXCL’s share price correction on slower-than-expected turnaround progress is overdone. Currently, EXCL is trading at 5.3x FY17 EV/EBITDA, close to -2SD of its five-year average. We believe EXCL’s financial performance will improve going forward on the back of Indonesia’s positive ARPU trend, coupled with its new subscriber addition. We believe EXCL is capable of growing its profitable subscribers given its improving service quality by leveraging its biggest chunk of 1,800MHZ spectrum. Bear case – TP of Rp2,200 Our bear-case scenario assumes EXCL being unable to acquire subscribers in the next two years. This leads to a negative growth outlook for services revenue, i.e. flattish performance in FY16-18F. Our scenario also takes into account the lower EBITDA margin of 35%, in case EXCL needs to incur larger-than-expected marketing expenses to accelerate its both traditional and modern distribution channels. Our base-case DCF target price is Rp2,200 with an FY17F EV/EBITDA multiple of 5.0x and zero terminal growth rate. Our bear-case target price implies -2SD of its five-year EV/EBITDA multiple, or the valuation level of c.2012 when price wars were raging. Bull case – TP of Rp4,900 Our bull-case scenario assumes EXCL acquires subscribers at a faster pace, which implies an expected subscriber CAGR of 10% over FY16-18F. The better outlook for subscriber acquisition will also be followed by better service revenue CAGR of 7% in FY16-18F. There is further EBITDA margin upside if EXCL successfully renegotiates its tower lease rate at Rp10m per month, or lower than the existing tower lease market price. Moreover, if EXCL modern channel distribution starts to pick up, it can lower overall selling & marketing expenses. Our bull-case

scenario target price DCF is Rp4,900, which implies an FY17F EV/EBITDA of 7.2x. 3Q16 performance came in line with our expectations 9M16 EBITDA met our forecast. 3Q16 EBITDA reached Rp1.98tr (-9.9% y-o-y, -9.7% q-o-q), bringing its 9M16 EBITDA to Rp6.2tr (+3% y-o-y) – forming 74% of our FY16 EBITDA forecast of Rp8.55tr, which we deem in-line. EBITDA margin was stable at 38% in 3Q16, given the stable operational costs (mainly marketing expenses) and despite EXCL’s continuous efforts to grow its subscribers. Its NPAT turned positive in 9M16 to the tune of Rp160bn vs a net loss of Rp460bn in the previous year. Revenue also met our expectation. 3Q16 revenue came in at Rp5.2tr (-10.3% y-o-y, -6.9% q-o-q), brining 9M16 revenue to Rp16tr – also meeting our expectation. EXCL booked a positive subscriber addition of 8% y-o-y, similar to Telkomsel’s pace in 3Q16, to bring its subscribers to 45m. The ARPU trend is also still positive, coming in at Rp36k per user (+13% y-o-y). Earnings revision summary Our new earnings forecast takes into account some short-term impact from EXCL transformation efforts such as the drop in voice and SMS usage in the Java area, as EXCL effort revamps its service quality. Higher data service quality could lead to further voice cannibalization, as subscribers will take advantage of the better data service quality by utilising application-based calling services such as Whatsapp. We also expect higher selling & marketing expenses for revamping its traditional distribution channel. EXCL’s traditional channel revamp seems to be successful, as evidenced by its 3Q16 subscriber addition of 8% y-o-y. However, this also entails higher marketing and selling expenses, which could reach 7% of its revenue – higher than the historical level of 6%. Our new FY17 and FY18 EBITDA forecasts are 5% lower than our previous forecasts. Our overall forecast is lower than consensus, as we are mainly more conservative on EXCL’s top-line growth.


Company Guide

XL Axiata

Scenario analysis summary

Five-year forward EV/EBITDA multiple (X)




Revenue 5,831 5,616 5,229 (10.3) (6.9)

Cost of Goods Sold (534) (405) (526) (1.5) 30.0

Gross Profit 5,297 5,212 4,704 (11.2) (9.8)

Other Oper. (Exp)/Inc (4,781) (4,892) (4,524) (5.4) (7.5)

Operating Profit 515 320 179 (65.2) (43.9)

Other Non Opg (Exp)/Inc (390) 468 108 nm (77.0)

Net Interest (Exp)/Inc (185) (546) (378) (103.6) 30.8

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit (59.7) 242 (90.6) (51.7) nm

Tax 404 (72.2) 25.6 m, (135.4)

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 344 169 (65.0) nm nm

Net profit bef Except. 344 169 (65.0) nm nm

EBITDA 2,196 2,191 1,979 (9.9) (9.7)

Margins (%)

Gross Margins 90.8 92.8 89.9


Net Profit Margins 5.9 3.0 (1.2)

Source of all data: Company, DBS Bank, DBS Vickers


2016F 2017F 2018F Old New Changes Old New Changes Old New Changes Revenue 22,146 22,146 0% 22,802 22,361 -2% 23,922 23,013 -4% Gross profit 18,935 18,935 0% 19,564 19,185 -2% 20,621 19,838 -4% EBITDA 8,548 8,326 -3% 8,849 8,399 -5% 9,202 8,739 -5% NPAT 562 396 -30% 887 632 -29% 1,404 1,216 -13%

Subscribers (m) 62,581 62,581 0.0% 65,710 62,581 -4.8% 68,995 66,110 -4.8% Blended ARPU (Rp '000) 38 37.5 0.0% 38.6 38.6 0.0% 39.8 39.8 0.0% Source : Company, DBS Bank, DBS Vickers

Average

+1 stdev

+2 stdev

-1 stdev

-2 stdev

4.0

6.0

8.0

10.0

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

(x)Bear Base BullTerminal growth rate 0.0% 1.0% 1.0%FY16-18F subscriber growth 0% 3.0% 10%FY16-18F service income growth -2.8% 2.0% 7.0%FY17F EBITDA margin 34.5% 37.6% 40.0%

Target price (Rp) 2,200 3,300 4,900 FY17 EV/EBITDA 5.0 6.7 7.2 Source : DBS Vickers


Company Guide

XL Axiata


Earnings Drivers:

New management, new strategy. After the appointment of the new CEO, EXCL has changed its strategy to focus on profitability and accelerating Axis-EXCL integration. EXCL plans to adopt the dual-brand strategy – XL will be the premium digital lifestyle brand while Axis will be a tactical brand to serve the lower-end market. EXCL also intends to change the distribution model in Indonesia. It wants to control and directly deal with the retail outlets and end customers. The role of the big distributors will change to that of a fulfilment centre. Focus on profitability rather than pricing wars. Going forward, EXCL will move away from its 'minute factory' strategy (i.e. high gross add model) and focus on improving EBITDA instead of attracting mid- and high-value subscribers. Axiata has committed to the new strategy and is willing to sacrifice some revenues in the near term. Largest beneficiary when operators consolidate. Indonesia’s telecommunication industry is bottoming out as operators are now trying to raise data pricing. The consolidation could take off in the next 2-3 years according to our channel checks. The government has also given the green light. Uptrend in ARPU, but data yield still low. Despite raising headline pricing, telco operators have failed to raise effective pricing per MB. Data plans are costing consumers more but operators are also offering larger data volumes, which is hurting per MB data revenue. However in the 4G era, operators can maximise their data capacity potential from the new 4G network without incurring extra cost – hence, the lower data yield does not always translate into margin compression. Lower data pricing is hurting Indonesian telcos more due to high reliance on SMS revenues. SMS and voice services contributed around 40% of XL's revenues. But these will be cannibalised by rising data usage as EXCL’s subscribers and service areas are mainly in the greater Java region. Greater Java subscribers use more data than SMS services, given the better network infrastructure and data services in Java areas. Transformation takes time. Beyond the top-line growth, we continue to see turnaround efforts by management such as the 10% y-o-y EBITDA growth in 1H16 and better y-o-y EBITDA margin of 39%.

Subscribers (m)

ARPU (Rp K)

EBITDA margins (%)

Capex (Rp tn)

EBITDA (Rpbn)



Company Guide

XL Axiata

Balance Sheet:

Exposure to foreign debt. This means EXCL’s earnings would be affected by movements in foreign exchange rates. EXCL will continue to deleverage its balance sheet. EXCL also plans to divest non-core assets such as towers, like what Protelindo did in February this year. Stable capex to expand BTS network. EXCL’s capex will be stable at Rp6.5tr on average for the next three years, which implies capex per sales of 30%. The bulk of the capex will be allocated for network and BTS expansion in order to maintain market share and grow revenues. Share Price Drivers:

Stock de-rating on delayed completion of Axis network integration. The share price de-rated in the last year because of the integration with Axis’s network took longer than expected, which resulted in EXCL missing consensus earnings expectations. IDR volatility also pressuring share price. Since EXCL’s balance sheet has a larger exposure to foreign debt, the share price is also pressured by a weakening IDR as investors continue to underweight companies with high exposure to USD debt. Key Risks:

Disruption to benign competition. If any player becomes aggressive in gaining market share and triggers a new wave of price wars, the whole sector could be hurt. Weaker rupiah. Due to high foreign debt, a weak rupiah could adversely hurt bottom-line. EXCL booked net losses in the past two years due to foreign exchange translation losses. Slower-than-expected turnaround effort. Slower-than-expected turnaround effort can cause lower-than-expected revenue and earnings growth. Company Background

EXCL provides a wide range of mobile telecommunication services in Indonesia. EXCL is owned by Axiata Group Berhad through Axiata Investments (Indonesia) Sdn Bhd (66.5%) and the public (33.5%).


Capital Expenditure

ROE (%)

Forward EV/EBITDA Band (x)

PB Band (x)


Average

+1 stdev

+2 stdev

-1 stdev

-2 stdev

4.0

6.0

8.0

10.0

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

(x)


Company Guide

XL Axiata

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Subscribers (m) 60.8 66.3 63.0 63.0 66.1 ARPU (Rp K) 25.9 25.3 37.5 38.6 39.8 EBITDA margins (%) 35.3 36.7 37.6 37.6 38.0 Capex (Rp tn) 7.10 8.30 6.00 5.70 5.60 EBITDA (Rpbn) 8,161 8,393 8,327 8,399 8,739

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) GSM Revenue 18,445 19,454 18,988 18,511 19,043 GSM interconnect 3,007 2,308 2,308 3,000 3,120 Other GSM 197 0.0 0.0 0.0 0.0 Others 1,457 1,115 850 850 850 Total 23,106 22,876 22,146 22,361 23,013 (Rpbn)


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 23,106 22,876 22,146 22,361 23,013 Cost of Goods Sold (3,465) (2,321) (3,211) (3,175) (3,176) Gross Profit 19,641 20,555 18,935 19,186 19,838 Other Opng (Exp)/Inc (18,301) (19,298) (16,393) (16,329) (16,496) Operating Profit 1,340 1,258 2,542 2,857 3,342 Other Non Opg (Exp)/Inc (1,390) (808) (8.7) (8.7) (8.7) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1,346) (1,080) (2,005) (2,005) (1,712) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (1,397) (631) 529 843 1,622 Tax 179 605 (132) (211) (405) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit (1,218) (25.3) 396 632 1,216 Net Profit before Except. (1,218) (25.3) 396 632 1,216 EBITDA 8,161 8,393 8,327 8,399 8,739 Growth Revenue Gth (%) 8.2 (1.0) (3.2) 1.0 2.9 EBITDA Gth (%) (5.8) 2.8 (0.8) 0.9 4.0 Opg Profit Gth (%) (53.8) (6.1) 102.1 12.4 17.0 Net Profit Gth (Pre-ex) (%) nm 97.9 nm 59.5 92.3 Margins & Ratio Gross Margins (%) 85.0 89.9 85.5 85.8 86.2 Opg Profit Margin (%) 5.8 5.5 11.5 12.8 14.5 Net Profit Margin (%) (5.3) (0.1) 1.8 2.8 5.3 ROAE (%) (8.3) (0.2) 2.2 3.0 5.5 ROA (%) (2.4) 0.0 0.7 1.0 1.9 ROCE (%) 3.1 2.5 3.7 3.9 4.5 Div Payout Ratio (%) N/A N/A 60.0 60.0 60.0 Net Interest Cover (x) 1.0 1.2 1.3 1.4 2.0



Company Guide

XL Axiata


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 5,831 5,954 5,237 5,616 5,229 Cost of Goods Sold (534) (557) (418) (405) (526) Gross Profit 5,297 5,397 4,820 5,212 4,704 Other Oper. (Exp)/Inc (4,781) (4,958) (4,844) (4,892) (4,524) Operating Profit 515 439 (24.2) 320 179 Other Non Opg (Exp)/Inc (390) 1,132 413 468 108 Net Interest (Exp)/Inc (185) (555) (415) (546) (378) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (59.7) 1,016 (26.1) 242 (90.6) Tax 404 (197) 81.6 (72.2) 25.6 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 344 480 55.5 169 (65.0) Net profit bef Except. 344 480 55.5 169 (65.0) EBITDA 2,196 2,320 2,065 2,191 1,979 Growth Revenue Gth (%) 3.9 2.1 (12.0) 7.2 (6.9) EBITDA Gth (%) 9.8 5.6 (11.0) 6.1 (9.7) Opg Profit Gth (%) 136.4 (14.9) nm nm (43.9) Net Profit Gth (Pre-ex) (%) nm 39.5 (88.4) 205.1 nm Margins Gross Margins (%) 90.8 90.6 92.0 92.8 89.9 Opg Profit Margins (%) 8.8 7.4 (0.5) 5.7 3.4 Net Profit Margins (%) 5.9 8.1 1.1 3.0 (1.2)


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 35,859 33,427 32,568 32,765 32,967 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 14,538 15,266 15,266 15,266 15,266 Cash & ST Invts 6,951 3,312 7,680 7,991 8,889 Inventory 77.2 79.0 38.5 39.2 40.3 Debtors 1,130 898 532 537 552 Other Current Assets 5,151 5,863 5,863 5,863 5,863 Total Assets 63,707 58,844 61,946 62,460 63,578 ST Debt 4,077 4,290 4,290 4,290 4,290 Creditor 4,445 5,257 5,304 5,393 5,549 Other Current Liab 6,877 6,201 2,118 2,148 2,273 LT Debt 27,628 25,054 25,054 25,054 25,054 Other LT Liabilities 6,720 3,950 3,982 3,982 3,982 Shareholder’s Equity 13,961 14,092 21,198 21,593 22,429 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 63,707 58,844 61,946 62,460 63,578 Non-Cash Wkg. Capital (4,963) (4,619) (989) (1,103) (1,367) Net Cash/(Debt) (24,753) (26,032) (21,664) (21,353) (20,455) Debtors Turn (avg days) 13.0 16.2 11.8 8.7 8.6 Creditors Turn (avg days) (483.1) (367.8) (749.1) (824.8) (899.0) Inventory Turn (avg days) (6.0) (5.9) (8.3) (6.0) (6.5) Asset Turnover (x) 0.4 0.4 0.4 0.4 0.4 Current Ratio (x) 0.9 0.6 1.2 1.2 1.3 Quick Ratio (x) 0.5 0.3 0.7 0.7 0.8 Net Debt/Equity (X) 1.8 1.8 1.0 1.0 0.9 Net Debt/Equity ex MI (X) 1.8 1.8 1.0 1.0 0.9 Capex to Debt (%) 22.4 28.3 20.4 19.6 19.1 Z-Score (X) 0.9 0.9 1.2 1.2 1.3



Company Guide

XL Axiata


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit (1,397) (631) 529 843 1,622 Dep. & Amort. 6,821 7,135 5,784 5,542 5,397 Tax Paid (518) (15.5) (66.1) (171) (308) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 362 513 (3,664) 74.4 167 Other Operating CF 1,881 0.0 0.0 0.0 0.0 Net Operating CF 7,150 7,002 2,583 6,288 6,878 Capital Exp.(net) (7,095) (8,317) (5,979) (5,739) (5,600) Other Invts.(net) (9,583) 0.0 1,054 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (16,678) (8,317) (4,925) (5,739) (5,600) Div Paid (540) 0.0 0.0 (238) (379) Chg in Gross Debt 16,070 (2,360) 0.0 0.0 0.0 Capital Issues 0.0 35.8 6,710 0.0 0.0 Other Financing CF (370) 0.0 0.0 0.0 0.0 Net Financing CF 15,161 (2,325) 6,710 (238) (379) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 5,633 (3,639) 4,368 311 898 Opg CFPS (Rp) 635 607 584 581 628 Free CFPS (Rp) 5.18 (123) (318) 51.4 120



Source: DBS Bank, DBS Vickers


William SIMADIPUTRA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 01 Feb 16 3689 4902 BUY

2: 30 Mar 16 3946 4902 BUY

3: 13 Apr 16 3822 4902 BUY

4: 21 Apr 16 3803 4902 BUY

5: 11 May 16 3265 4902 BUY

6: 30 May 16 3470 4902 BUY

7: 24 Aug 16 3150 4100 BUY


1

2

3

4

5

6

7

2175

2675

3175

3675

4175

Oct-15 Feb-16 Jun-16

Rp

Industry Focus

Telecom Sector

Page 25

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 16 Jan 2017 07:38:47 (SGT) Dissemination Date: 16 Jan 2017 08:45:38 (SGT)

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Industry Focus

Telecom Sector

Page 26

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in

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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 16 Jan 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position China Mobile, China Telecom, China Unicom, SmarTone, Hutchison Telecom, HKT Trust, M1, StarHub, Advanced Info Service, Total Access Communications recommended in this report as of 30 Dec 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position

exceeding 0.5% of the total issued share capital in M1 recommended in this report as of 30 Dec 2016. 4. DBS Bank Ltd, DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity

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Peter Seah Lim Huat, Chairman & Director of DBS Group Holdings, is a Director of Starhub as of 1 Jan 2017.

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Industry Focus

Telecom Sector

Page 27

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Industry Focus

Telecom Sector

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