Osk Report Regional Telco Update Hold the Line Please 20130312 IDjw336244637513e806e5c635

7/29/2019 Osk Report Regional Telco Update Hold the Line Please 20130312 IDjw336244637513e806e5c635

1/16

RHB Research PP 7767/09/2012 (030475)12 Mar 2013

RHB Research | See important disclosures at the end of this reportA comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from

www.rhbinvest.com

1

Powered by Enhanced Datasystems EFA PlatformFor further information on this report, kindly contact Jeffrey Tan at +603 9207 7633

MARKET DATELINE

ASIA PACIFIC EQUITY

Investment ResearchSector UpdateRegional Telecoms

Hold The Line, Please

We remain NEUTRAL on the regional telecoms sector as industry earnings

are pressured by decelerating revenue growth, rising opex and increaseddepreciation from aggressive network deployment. Telcos uncompellingvaluations, margin pressure and capex risks are the sectors Achilles heel,invoking a stock-picking strategy to identify winners. Except for Thailand,

on which we are OVERWEIGHT, we are NEUTRAL on the Malaysia,

Singapore and Indonesia markets. Our top regional picks - AXIATA,STARHUB and ADVANC - are not necessarily outright buys althoughblessed with stock-specific catalysts.

Capex starts to weigh in. The regions telcos are upgrading their networks to

cater for the exponential growth in data consumption led by rising smartphone

penetration. The capex upcycle in Indonesia has started in earnest (see Fig. 3) giventhe race to improve coverage and capacity. Over in Thailand, telcos are beginning todeploy 2100 MHz networks following awards of the 3G spectrum last December asillustrated on Fig. 4. In Malaysia and Singapore, capex is levelling off although thereis still modest spending on 4G/LTE and legacy networks (TM). The rising opex anddepreciation from network expansion and maiden 3G deployment will curtail the

sectors earnings, resulting in lackluster growth for FY13/14. Capex intensity is likelyto remain high for the next 2 years before easing in 2015 as network spending

normalises.

Monetising data an uphill battle. In most markets, data monetisation continues

to be an issue given the relative disjoint between consumption/data traffic and the

operatorsability to appropriately charge for usage. Competition from over-the-top(OTT) applications presents an added threat to data revenue. We expectmonetisation efforts to remain an uphill task until data adoption reaches criticalmass (likely after non-voice revenue reaches 60% of mobile revenue) and as themobile operators find the sweet spot in pricing data on their networks after having

experimented with various pricing models.

In Singapore, SingTel, StarHub and M1s shift to tiered pricing models has begun toshow some degree of monetisation, lifting ARPU modestly although it is early daysyet. The Big-3 Indonesian operators are phasing out unlimited data packages andshould be able to progressively monetise usage on the back of higher smartphone

penetration. At the same time, the Malaysia and Singapore cellcos are coughing outsubstantial subsidies on handsets with bundled plans, which have led to compressedmargins, although most are seeing a significant uplift in data traffic.

The Research Team603 9207 7633

[email protected] Tee Yang603 9280 [email protected]

Chan Jit Hoong603 9207 [email protected]

NEUTRAL

Stock Price Target Mkt Cap Volume ROE DY P / NTA (x) Rating

USDm m Dec-13F Dec-14F Dec-13F Dec-13F 1 mth 3 mth 12 mth Dec-13F

Maxis MYR6.52 MYR6.90 15,719.8 8.346 23.4 23.2 37.3% 6.2% 0.0% -2.0% 5.0% 8.9 NEUTRAL

Axiata MYR6.42 MYR6.60 17,567.4 16.041 19.1 18.2 12.5% 4.0% 0.7% 0.7% 19.5% 2.4 NEUTRAL

DiGi MYR4.67 MYR5.10 11,671.2 10.404 21.9 20.3 636.3% 4.3% -4.5% -5.4% 12.7% 141.6 NEUTRAL

TM MYR5.33 MYR5.80 6,140.6 9.373 26.1 24.0 10.3% 3.7% -1.3% -6.9% 2.4% 2.7 NEUTRAL

TDC MYR3.67 MYR4.95 676.1 1.118 14.0 13.2 5.7% - -0.2% -3.4% -1.0% 0.9 BUY

SingTel SGD3.45 SGD3.15 44,014.8 21.020 14.6 14.3 17.5% 4.9% -3.9% -3.2% 0.6% 2.4 NEUTRAL

StarHub SGD4.18 SGD4.18 5 ,741.6 2.129 22.0 19.0 1087.1% 4.8% 5.7% 2.1% 28.9% 160.7 NEUTRAL

M1 SGD2.85 SGD2.70 2,088.4 0.953 15.8 13.6 43.7% 5.3% 3.4% -1.4% 3.9% 7.4 NEUTRAL

Telkom IDR10,750 IDR10,600 22,367.6 2 1.108 15.1 13.6 26.6% 4.7% 2.9% 4.1% 27.6% 4.1 NEUTRAL

XL Axiata IDR5,350 IDR6,000 4,708.0 5.030 15.9 13.4 19.0% 2.5% -11.7% -19.7% -4.2% 3.0 NEUTRAL

Indosat IDR6,600 IDR7,100 3,701.5 1.537 29.2 37.1 7.6% 0.3% -12.3% -4.2% 2.0% 1.8 NEUTRAL

ADVANC THB217 THB240 21,642.5 5.911 18.4 16.3 84.5% 5.7% 3.1% -13.2% 0.3% 15.0 BUY

DTAC THB84.5 THB103 6,711.8 5.306 19.5 16.7 32.3% 4.1% -8.5% -18.7% -13.8% 5.6 BUY

P /E (x) Rel. Performance (%)

Share price as at 8 March 2013Source: Company data, RHBRI estimates


2/16



www.rhbinvest.com

2


Figure 1: Capex/Sales (%) Malaysia Figure 2: Capex/Sales (%) Singapore

0%

5%

10%

15%

20%

25%

30%

Maxis Axiata DiGi Industry (M'sia)

6%

8%

10%

12%

14%

16%

Singtel Group Starhub M1 Industry (S'pore)

Source: Companies, RHB Source: Companies, RHB

Figure 3: Capex/Sales (%) Indonesia Figure 4: Capex/Sales (%) Thailand

0%

10%

20%

30%

40%

50%

60%

Telkom Indosat XL Industry (Indon)

0%

5%

10%

15%

20%

25%

30%

35%

ADVANC DTAC True Group Industry (Thai)

Note : XL partially front-loaded FY13 capex into FY12

Source: Companies, RHB


Capital management still high on the agenda. Capital management and

dividend expectations were the key catalysts fuelling the sectors sharp re-rating in2012 against the backdrop of macro-economic uncertainties, with telcos seen as a

defensive play. We expect capital management to remain high on the agenda of thetelcos in Malaysia and Singapore due to their strong FCFs, low net debt/EBITDA andeasing capex.

Valuations are rich - stick to telcos with good execution track records. Wemaintain our Neutral recommendation on the regional telecoms sector due toslowing industry revenue growth as well as rising opex and capex. After having

outperformed most of the Asian markets in 2012, the sectors valuations appearstretched, at 20x FY13 EPS and 19x FY14 EPS and FY13 and FY14 EV/EBITDA of 9xand 8x respectively. Telcos face an uphill battle in their data monetisation efforts

and are feeling the brunt of aggressive network deployments while the mismatch indata pricing and traffic are diluting margins.

Our preferred exposure to the regional telecoms sector may not be outright buys but

they encapsulate strong longer-term earnings prospects with capital management

potential to boot.

Valuations are demanding


3/16



www.rhbinvest.com

3


Table 1: Share price performance and valuation metrics of telcos around the region

Stock

Absolute Relative Absolute Relative Dec-13F Dec-14F Dec-13F Dec-14F

Maxis 20.9 9.3 -2.0 -0.1 23.4 23.2 12.1 11.8

Axiata 31.8 20.2 -2.6 -0.6 19.1 18.2 7.8 7.4

DiGi 38.8 27.3 -11.2 -10.1 21.9 20.3 11.9 11.2

TM 25.8 14.2 -11.8 -10.1 26.1 24.0 6.6 6.2

TDC 6.8 -4.8 -7.1 -4.0 14.0 13.2 11.2 9.4

SingTel 5.1 -12.7 4.5 -0.2 14.6 14.3 8.5 8.4

StarHub 29.8 12.0 10.3 5.7 22.0 19.0 10.3 9.3

M1 8.8 -9.0 5.2 0.9 15.8 13.6 9.0 7.9

Telkom 28.4 15.0 18.8 6.2 15.1 13.6 5.1 4.9

XL Axiata 27.4 14.0 -6.1 -17.7 15.9 13.4 5.8 5.1

Indosat 15.2 1.9 2.3 -7.3 29.2 37.1 5.0 4.8

ADVANC 42.7 8.3 3.8 -7.8 18.4 16.3 10.8 9.6

DTAC 30.7 -3.6 -2.4 -14.8 19.5 16.7 8.2 7.4

2012 returns (%) YTD returns (%) P / E (x) EV / EBITDA (x)

Source: Bloomberg, RHB

KEY HIGHLIGHTS

MALAYSIA (NEUTRAL)

We downgraded the Malaysian telcos to Neutral from Overweight following ourrecent downgrade on TM to Neutral (previously Buy) after it announced its 4Q12

results. We have a Buy call on Timedotcom (TdC) as its valuations are cheaperversus its domestic peers and there is a strong growth outlook for its regionalbandwidth business. The sectors valuations are not cheap, but dividend yields look

attractive and sustainable. Maxis offers a 6% yield, while we think there is amplescope for capital management to boost Axiata's payout.

Data to anchor steady growth. Revenue growth of the telcos will likely remainsteady in 2013, with data still the key growth driver while voice revenue may remain

stable. There is still growth potential in the fibre market as it is still in its earlymaturity stage, while the introduction of LTE services could breathe new life into thewireless broadband market after a dismal 2012.

Maxis leads the cellcos in 4Q12. Maxis had a strong 4Q12 as revenue jumped4.1% q-o-q, partly boosted by a maiden full-quarter contribution from U Mobilesroaming fees (RM31m) as well as handset sales. The launch of new smartphones

such as the iPhone 5 also led to stronger sequential revenue growth for DiGi (+3%)and Celcom (+2%). Following the strong 4Q due to festivities and the timing of newsmartphone launches, the sectors sequential revenue growth is likely to moderatein 1Q13.

Handset subsidies chip on margins. Aggressive handset subsidies continue to be

the main culprit for the erosion in most cellcos EBITDA margins, as other cost itemshad stayed largely stable. TMs EBITDA margin shrank 1.7ppt q-o-q to 30.1%,mainly weighed down by higher maintenance costs. In the case of TdC, higher Astro

customer installation costs was one of the main reasons for the 4.7ppt q-o-q drop inEBITDA margin to 30.1%.

Maxis ups the ante on fiber. The fibre broadband market will become morecompetitive for TM once Maxis goes full speed ahead with its home services, whichwill bundle Astro IPTV with fibre by end-1Q13. However, it is interesting to note thatTM still expects fairly strong revenue growth after outlining a FY13 KPI target of 6%.Not surprisingly, it is only natural to expect UniFis growth momentum to moderate,

especially after it has achieved a take-up rate of 35%. Nonetheless, TM stillcommands about 80% of the industrys fibre net adds. In view of compelling content

from Astro, we believe the speed at which Maxis can raise its share of fibre net addswill depend on the pricing of this service.

Data to remain key growth driver

Expect a seasonally softer 1Q13

Subsidies continue to crimp margin

Maxis new IPTV service will putfurther pressure on TMs Unifi


4/16



www.rhbinvest.com

4


Figure 5: TM's Unifi net adds decelerating

0

10,000

20,000

30,000

40,000

50,00060,000

70,000

80,000

90,000

0

100,000

200,000

300,000

400,000

500,000

600,000

Unifi Net-add

Source: TM, RHB

Figure 6: Maxis Home Fibre Service (FTTH) subscriber trend

0

5,000

10,000

15,000

20,000

25,000

30,000

FTTH subscribers Net adds

Source: Maxis, RHB

LTE revenue will not be significant. The mobile operators appeared ratherupbeat on the possibilities offered by LTE, although we believe the revenueopportunities may be limited at first, seeing as 4G coverage will be rolled out

selectively in the urban areas in the initial phase. The 2600Mhz spectrum offers highcapacity but poor coverage, thus limiting the extent of the 4G rollout. Maxis was the

first to introduce LTE services in January, but only to selected areas within andaround the Klang Valley. Celcom is planning to commercially launch LTE in 2Q13,while we expect DiGi to do so upon modernising its network in 2H13. We believeCelcom and DiGi would follow Maxis cue in terms of pricing by charging users basedon usage to prevent abuse on their networks.

The 4G market not only faces a lack of handsets but is also constrained by theunwillingness of prepaid users - comprising a dominant share of the market to payfor data, with postpaid users being more receptive to paying for its use. However,the potential market for LTE services could change if the mobile operators are ableto refarm the 1800Mhz spectrum for LTE use. We gather that discussions are being

held with the regulator to obtain approval for this purpose. Flagship smartphonessuch as iPhone 5 are not LTE-compatible since iPhone 5 only works with 2100Mhzand 1800Mhz, while the LTE spectrum is based on 2600Mhz.

Revenue opportunities limited forLTE

Refarming of the 1800MHzspectrum will augur well for thebigger operators


5/16



www.rhbinvest.com

5


Back to the big screen. While the wireless broadband market saw its weakestyearly growth of just 70k in 2012, there is optimism that this market will recover in

2013. DiGi is revisiting the large screen market, which may be viable uponmodernising its network by year-end, having the proper pricing structure with

quotas, and by closing the 3G population coverage gap (targeting 80% by end-2013) with its competitors. Meanwhile, despite still seeing churn, Maxis remainsoptimistic in the longer term in addressing the nomadic broadband dongle users and

those not served by UniFi who may want high-speed wireless Internet.

Gearing generally stable. Except for TM, we observe that the gross gearing ofmost telcos were largely flat in 4Q12. TMs gearing rose q-o-q following the issuance

of RM550m worth of new debt. We believe there is scope for TM to declare specialdividends in FY13, although not at the quantum that shareholders used to enjoy inthe past, after disappointing the market with zero dividends in FY12 (FY11: RM1bn,or 30 sen/share). Management had argued that the absence of further co-investment by the Government was a factor in arriving at this decision. Also, capex

intensity (capex/revenue) is expected to decline just marginally to 24% in FY13(FY12: 25.5%), which suggests that the companys free cash flow would not rise soquickly in the short term.

More special dividends from Axiata? Management has remained guarded on the

possibility of paying more special dividends going forward. We estimate thecompanys cash balance to decline to RM5.6bn from RM7.9bn after it distributesRM1.3bn in final dividends (15 sen/share) and RM1bn in special dividends (12

sen/share). Going forward, we are assuming a 75% payout for FY13, whichtranslates into a DPS of 25 sen (or 4% net dividend yield), and also see scope formore special dividends.

Downgrade to Neutral. TDC, Axiata the Top Picks. We downgrade the sector toNeutral from Overweight following our downgrade on TM (NEUTRAL, FV: RM5.80)

to Neutral (previously Buy). Our only Buy call is on TDC (BUY, FV: RM4.95) for itscheaper valuations versus its domestic peers and the strong growth prospects of itsregional bandwidth business. The sector should see fairly sustained revenue growth

in 2013, although margins may come under some pressure from handset subsidiesin the face of intense competition. Nonetheless, dividends should remain intact.

Maxis dividend yields looks attractive at 6% while we think there is ample scope forcapital management to boost AXIATA (NEUTRAL, FV: RM6.60). Despite ourneutral rating on Axiata, we continue to like the stock s longer term earningsprospects, buoyed by its regional footprint.

The respective telcosheadline KPIs and management guidance are tabled below.

Table 2: Axiatas FY13 KPIs Table 3: FY13 guidance From Maxis

FY12 FY13 FY13(RHB)

Revenue Growth (%) 7.3 7.6 5.7

EBITDA Growth (%) 4.2 0.2 5.6

ROIC (%) 11.9 10.3 NA

Capex (RM bn) 4.6 4.5 4.4

FY12 FY13 FY13(RHB)

Revenue Growth (%) 1.9 Mid-single digit 3.5

EBITDA Margin (%) 48.6 Stable 49.0

Capex (RM bn) 0.8


6/16



www.rhbinvest.com

6


SINGAPORE (NEUTRAL)

We do not see a significant shift in the Singapore telecom sectors prospects in 2013given the mature industry landscape (SIM penetration of over 140%) and therepublics open economy. Both factors underpin our neutral weighting on the sector.That said, the telcosattractive dividend yields and capital management prospects

will lend support to its respective share prices. We expect LTE contribution to pick

up in 2H2012 as more 3G subscribers make the switch to 4G and the cellcos beef updata monetization efforts.

A tame 2012. The FY12 results of the telcos were subdued, with mobile revenueinching up 2.2% in 2012, down from 5.8% in 2011 and 9.7% in 2010. Theindustrys mobile revenue ticked up 3% q-o-q in 4Q12 (+2.1% y-o-y), fuelled byrobust growth in data revenue, which rose 4% q-o-q and 3.3% y-o-y. Although

exhibiting the typical year-end seasonality, the cellcos overall revenue continued tobe depressed by weaker roaming revenue as a rising number of roamers opted forlocal SIM cards when travelling abroad. The bilateral reduction in roaming rates

between Singapore and Malaysia from May 2011 also negatively impacted IDDrevenue as the traffic between both destinations makes up a significant portion ofthe estimated 8%-15% of revenue derived by SingTel, StarHub and M1 from

roaming. The cellcos are guiding for single digit revenue growth for 2013.

Figure 7: Singapore mobile y-o-y revenue growth (%)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Singtel Starhub M1 Industry (S'pore)


Handset subsidy, content investment will still squeeze margins. IndustryEBITDA margins continued to come under pressure in 2012 from: (i) tightersubsidies on handsets, and (ii) rising investments in content. The cellcos havecontinued to aggressively subsidise handsets, with an average payback period ofbetween six and nine months. Meanwhile, the race to capture a bigger slice of the

lucrative pay-TV market saw SingTel winning the rights to broadcast the BarclaysPremier League (BPL) for the second consecutive term, albeit on a non-exclusivebasis. SingTel also expanded its channel offerings to over 130 after inking additionalcontent from Fox International, thus narrowing the gap with StarHub.

LTE offers better data monetization opportunities. We expect datamonetization to improve as the cellcos increase their LTE base and provide island-wide coverage by mid-2013. In a bid to better monetize data, SingTel, StarHub and

M1 introduced tiered data plans in 2011/2012 that offered lower data caps of2Gbps-3Gbps versus 12Gbps previously. SingTel said of the 17% of its postpaidcustomers who switched to LTE, 9% consumed in excess of their data caps, thusallowing the company to immediately monetize those users. M1 saw ARPU lifted bySGD5.50/month in Dec 2012 as users switched to its tiered LTE packages. Webelieve the telcos will put off charging consumers for LTE (current priced similar to

3G services) until a more meaningful base of LTE subscribers is achieved.

Expect 2013 to be no different from2012 for the mobile segment

The telcos are slowly but surelymonetizing data as usage grows.Conversion of LTE is expected to

pick up with island-wide coverage in2Q13


7/16



www.rhbinvest.com

7


Adequate 4G spectrum to go around. The Singapore government is allocatingthe remaining 1800Mhz and 2500MHz spectrum blocks for the rollout of 4G services.We expect the 1800Mhz block to garner the most interest as it has better coverage.While there were concerns over the operators potentially overpaying for the new

spectrum, the Infocomm Development Authority (IDA) had, early this year,increased the spectrum available for auction. Assuming the telcos bid for the optimal

2x20MHz, there is still more than enough spectrum to go around, lowering the riskof a bidding war. The reserve price of the 1800Mhz spectrum has been fixed atSGD16 per 2x 5MHz block, or a minimum SGD64m for 2x20Mhz.

Lower risk of capex upside. We do not foresee major upside surprises in capexfrom the Singapore telcos as LTE spending has generally trended in line withexpectations. That said, M1 surprised the market during the 4Q12 results call with

its higher capex guidance for FY13 to meet the IDAs quality of service (QOS)standards and coverage requirements.

SingTel: Solid market share gains at home muted by challenges abroad.SingTel continued to execute well in its home base, taking away market share fromits peers across the mobile, pay-TV and broadband segments (including the NGN).That said, competitive headwinds abroad and concerns over margin dilution arisingfrom its new digital life business have capped its share price performance. The

group also faces stiff competition from Down Under as its wholly-owned Australianmobile unit, Optus, has had to contend with a more aggressive Telstra. SingTels

overseas Opcos in Australia, India, Indonesia, Philippines and Thailand areexperiencing varying degrees of mobile competition, which have dampened theirearnings prospects. These countries make up 60% of SingTels core earnings. Wegather from the media that SingTel is among the more than 90 companies that have

lodged their expression of interest for Myanmars two mobile licenses up for grabs.

Figure 8: SingTel and StarHub pay-TV subscribers (m)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

SingTel StarHub % subs growth q-o-q


Low risk of bidding war for 4Gspectrum auction

Capex spending not likely tosurprise

SingTel is winning the game athome but faces competitiveheadwinds overseas


8/16



www.rhbinvest.com

8


Figure 9: SingTel is gaining mobile share

15%

20%

25%

30%

35%

40%

45%

50%

SingTel StarHub M1


NEUTRAL on Singapore telcos StarHub our preferred exposure. We areNEUTRAL on the Singapore telecoms sector by virtue of our neutralrecommendations on the three stocks under our coverage and the dearth of anearnings catalyst. Despite the rally in its share price, we continue to like STARHUB(NEUTRAL, FV: SGD4.18) for its good execution, decent dividend yield andpotential for capital management given its lower-than-industry-average netdebt/EBITDA of 0.4x.

Table 6: Guidance from the operatorsSingTel* StarHub M1

Revenue growth Low single digit Single-digit -

EBITDA Stable About 31% -

Net profit - - Moderate growthCapex SGD950m 13% of revenue SGD130-150m

Dividend 55-70% of net profit 20cents/share 80% payout

* SingTel Spore operations only


INDONESIA (NEUTRAL)

The Indonesian telcos are taking their data game seriously, from significantupgrades on their network to improved 3G coverage and capacity. These lead tohigher opex and depreciation, which will have a negative impact on earnings. While

the telcos had initially expected a better 2013, we noted a more cautious stanceduring the 4Q12 results conference calls. We are keeping our neutral weighting on

the sector.

The data story continues. We think Indonesia is at the early stages of anexplosion in 3G data usage. Currently, mobile 3G coverage is estimated at under30% but should rise to 50% by 2015 due to the aggressive 3G node-B expansion

programs by the operators. The network upgrades are also spurred by risingsmartphone penetration, which we estimate to increase from 15% currently to 21%by end-2012. The latter is being fuelled by the decline in price-points forsmartphones and the influx of Chinese white-label, feature-rich handsets which aresparking a new wave of upgrades. Small-screen data access is favoured in Indonesiaowing to the affordability of these devices and Indonesias relatively poor fixed

broadband connectivity and low PC penetration.

StarHub is our top pick in Singapore

Indonesias smartphone penetrationis currently at 15%


9/16



www.rhbinvest.com

9


Figure 10: Mobile data revenue contribution ramping up among the Big-3

0%

10%

20%

30%

40%

50%

60%

Telkomsel Indosat XL Industry (Indon)


Competition looking rational and tariffs are on the mend Apart from theseasonal marketing campaigns in 2Q/3Q12, the Indonesian mobile market has

exhibited relatively good pricing discipline over the past 12 months, with operatorsfocusing squarely on data. We note that with the exception of Indosat (ISAT), theindustry average revenue per minute (ARPM) has continued to climb in response tothe tightening of tariffs and lesser free minutes bundled.

The widespread practice of offering free SMS is now a thing of the past for the

industry. following the introduction of the SMS interconnect ruling in June 2012.Although this added to the margin pressure faced by the telcos, it has also allowedthe operators to partially recover the revenues lost from the ban of premium SMS,

which crimped revenue derived from value-added services (VAS). We gather fromour discussions with the telcos and industry checks that smaller operators such asHutchison and Axis continued to be aggressive on data. We think the recent

purchase of a 35% stake by a group led by an Indonesian tycoon and TPG inHutchison could trigger more aggressive behaviour from Hutchison in the comingmonths.

Figure 11: ARPM of the Big-3 (USD/min)

0.00

0.01

0.02

0.03

0.04

0.05

Telkomsel Indosat XL


Industry RPM on the mend buttelcos are seeing pressure on

margins from the SMS interconnectruling implemented in June 2012


10/16



www.rhbinvest.com

10


All eyes on Telkomsel and ISAT. We expect investors to focus their attention onTelekomunikasi Indonesia (Telkom) and ISAT in 2013, as both companies revamped

their management teams in 2012. Signs of improving operational and marketingexecution should be well received by the market, in our view, given the inherentissues at both organisations in the past. The higher-profile appointments were madeat ISAT level with Erik Meijer taking up the position of Chief Commercial Officer

(CCO). Erik was previously attached to Telkomsel and Bakrie Telecom and had beenlargely accredited for ISATs improved marketing traction in 3Q12, which led to an

above-industry mobile revenue growth. Meanwhile, Alexander Rusli, anotherindustry veteran. replaced Harry Sasongko as the Group CEO. Telkomsel alsoreplaced its CEO and CFO last year.

Towering high. Indonesian tower operators are benefiting from the surge indemand for data and the telcosaggressive 3G network deployments. The increasingtrend of telcos monetising their tower assets augur well for the tower industry while

the operators are able to lower their capex and maintenance cost.

Mixed showing in 4Q12. The Indonesian operators reported a mixed bag of

results for 4Q12. The industry grew in the low-teens in 2012. Telkomsel reportedthe strongest revenue growth in 4Q12 of 1.6% while ISAT and XL recorded revenue

contractions of 0.2%-6% q-o-q, following the high base of Lebaran in the precedingquarter. ISAT reported the strongest y-o-y growth in mobile revenue of 23% in4Q12 from 17.5% in 3Q12, reflecting the early success in its efforts to streamline

brands and good improved marketing traction. The telcos have mostly guided for: i)in line with industry growth which we project in the mid to high single-digit level for2013, (ii) weaker EBITDA margin from rapid network expansion, and (iii) higher 3Gcapex.

Table 7: Guidance from the operatorsTelkom Indosat XL Axiata

Revenue - In line or higher

than industry

In line or higher

than industry

EBITDA margin - Mid - 40s (from

46.5% in FY12)

Low - 40s (from

(46% in FY12)

Capex (IDRtrn) - 8-9 8 (+/- 10%)

Capex (USDm) - 800-920 ~800

Note: Telkom has yet to release its guidance for FY13


THAILAND (OVERWEIGHT)

We stay OVERWEIGHT on the Thai telcos as the transition from the Build-Transfer-

Operate (BTO) model to a single licensing framework will pave the way for

significant regulatory cost savings in the medium to longer term, resulting in a leg-

up in earnings. That said, the telcos bottom-line will likely be crimped by higherdepreciation and amortisation in the short term. We maintain our BUY calls onADVANC and DTAC for their attractive valuations when stacked against theirregional peers, coupled with their good dividend yields.

Telkomsel and ISAT are on ourwatch list

Patchy voice revenue growth andcannibalization from data

Thailand is our only OVERWEIGHT

as valuations are still undemandingand earnings are expanding


11/16



www.rhbinvest.com

11

Still good to talk? Despite having one of the highest MOUs in the region, thestructural voice erosion in the Thai mobile market appears to be gaining momentum,further aggravated by the introduction of interim 3G services in 3Q11, as illustratedin Figure 12. We expect ADVANC to capitalize on its up-country advantage to sustainvoice growth (FY12: +4.8% y-o-y). The telcos product segmentation strategy has

worked well in 2012 and we believe it can be successfully replicated this year. Afterhaving overlooked its voice business in 2012, we expect DTAC to embark on voiceresuscitation activities to stimulate its voice segment (FY12: -1.7% y-o-y). Wegather that it has approximately 30% share in the upcountry market, behind the50% commanded by ADVANC.

Figure 12: Trends in the components of revenue

-10%

-5%

0%

5%

10%

15%

20%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

y-o-y

growth(%)

Voicerevenue(THBbn)

ADVANC DTAC TRUE ADVANC DTAC TRUE

-40%

-20%

0%

20%

40%

60%

80%

100%

0.0

2.0

4.0

6.0

8.0

y-o-ygrowth(%)

Non-voicerevenue(T

HBbn)

0%

5%

10%

15%

20%

25%

30%

35%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Non-voice/mobileservicerev(%)

Handsetrevenue(THBbn)


Voice cannibalization is intensifyingwith interim 3G services

Introduction of interim 3G services

Voice erosion worsens,declining y-o-y growth

Non-voice revenue continuesto grow robustly. We expect

this trend to persist in FY13

Sales of iPhone4

(23 Sept 10)

Sales of iPhone4S

(16 Dec 11)

Sales of iPhone5

(2 Nov 12)

Contribution from non-voiceis becoming more significant

Handset sales have grown considerably for the

past two years and FY13 is no exception.Smartphone penetration is still low at only 20%


12/16



www.rhbinvest.com

12

Playing the data game. We expect a further lift in industry non-voice revenue in2013 given the insatiable appetite for data, along with the declining price-points ofsmartphones and tablets in Thailand. Data revenue for ADVANC and DTAC jumped71% in 2012, above the 45% growth posted in 2011.

The launch of 3G on the 2100MHz band in 2Q13 will see the operators roll out moreaggressive packages to compel more 2G subscribers to convert into 3G. The telcosstand to benefit from significant regulatory cost savings from the switch to a singlelicensing framework. Nonetheless, we expect mobile competition to remain rationalas the operators pick their fights wisely. We think the operators are unlikely to

resort to a price war on 3G, based on the experience of other 3G markets in Asia.

3G capex to spike in 2013-2014. The telcos are expected to see a significant risein capex spending this year from the 3G rollout. The National Broadcasting andTelecommunications Commission (NBTC) has set a target for the operators to cover

50% of the population within two years of rollout and 80% of the population withinfour years. ADVANC revealed that it would be investing THB70bn between 2013-

2015 to cover 97% of the population on 3G while DTAC is looking to spend THB34bnover the same period to reach 80% coverage.

Figure 13: Impact from 3G-2.1GHz capex (ADVANC) Figure 14: Impact from 3G-2.1GHz capex (DTAC)

0%

5%

10%

15%

20%

25%

30%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Capex (THBbn) Capex / Sales (%) Core Earnings Margin (%)

0%

4%

8%

12%

16%

20%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Capex (THBbn) Capex / Sales (%) Core Earnings Margin (%)

Source: ADVANC, RHB Source: DTAC, RHB

Strong earnings uplift in 2014. The steep 3G capex of the telcos will result inhigher depreciation expenses for the telcos, with earnings also sapped by highermarketing costs to promote 3G services. That said, we expect a strong uplift inearnings for FY14 as more subscribers switch over to 3G. Handset sales, from theentry level to premium models saw brisk sales in 2012 which we expect to continue.We estimate 3G smartphone penetration at just 10% of the subscribers with a 3G

handset in Thailand, presenting a substantial upside for telcos to migrate more 2Gsubscribers to 3G.

3G capex to accelerate in2013/2014

FY14 to see an earnings leg up fromregulatory cost savings and thedecline in corporate tax rate


13/16



www.rhbinvest.com

13

Figure 15: Quarterly smartphone subscribers andpenetration rate

Figure 16: Quarterly 3G subscribers and penetration rate

10%

13%

15%

18%

20%

23%

25%

0.0

1.5

3.0

4.5

6.0

7.5

Smartphonepenetration(%)

Smartphonesubscribers(m)

ADVANC DTAC ADVANC DTAC

0%

3%

6%

9%

12%

15%

0.0

1.5

3.0

4.5

6.0

3Gpenetration(%)

3Gsubscribers(

m)

ADVANC DTAC ADVANC DTAC

Source: Companies, RHB Source: Companies, RHB

Maintain OVERWEIGHT- ADVANC is our TOP PICK. We maintain OVERWEIGHTon the sector as we expect earnings to re-rate significantly in 2014 from theregulatory cost savings under the new single licensing framework. ADVANC andDTAC are BUYS, with FVs at THB240 and THB103 respectively. Both offer goodearnings growth opportunities along with their attractive dividend yields of 4%-6%.

ADVANC is our top telecom pick for its superior execution and strong balance sheet.

Table 8: Management guidance and RHB forecast for FY13

ADVANC Management

guidance

RHB forecast DTAC Management

guidance

RHB forecast

Service revenue grow th

(% y-o-y)

6.0-8.0 7.4 Revenue growth

(% y-o-y)

High s ing le d igit 6.3

Voice revenue growth

(% y-o-y)

2.0-3.0 2.1 EBITDA margin (%) 30.0-31.0 29.3

Non-voice revenue growth

(% y-o-y)

25.0-30.0 29.0 Capex (THBbn) 34 within 3 years 37 within 3

years

EBITDA margin (%) 41.0-42.0 41.5

Capex (THBbn) 70 w ithin 3 years Same

ADVANC DTAC

FYE Dec (THBm) FY12 FY13f FY14f FYE Dec (THBm) FY12 FY13f FY14f

Revenue 141,568.3 148,083.6 160,226.5 Revenue 89,497.4 95,102.9 98,982.1

EBITDA 61,436.0 61,516.8 69,508.5 EBITDA 26,809.4 27,896.4 30,924.4

Core earnings 34,883.2 34,994.4 39,494.4 Core earnings 11,235.1 10,268.6 12,002.3

EPS (THB) 11.8 11.8 13.3 EPS (THB) 4.7 4.3 5.1

PER (x) 18.5 18.4 16.3 PER (x) 17.8 19.5 16.7

EV/EBITDA (x) 10.5 10.8 9.6 EV/EBITDA (x) 8.4 8.6 7.6

Dividend yield (%) 5.0 5.7 6.1 Dividend yield (%) 6.0 4.1 4.8

Margins (%) Margins (%)

EBITDA 43.4 41.5 43.4 EBITDA 30.0 29.3 31.2

Core earnings 24.6 23.6 24.6 Core earnings 12.6 10.8 12.1



14/16



www.rhbinvest.com

14

Table 9: Regional valuation comparison

Company Bloomberg Currency Price Mkt Cap

Ticker (USDm) FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

Malaysia

Axiata AXIATA MK MYR 6.42 17,567.4 19.1 18.2 7.8 7.4 2.4 2.3 4.0 4.2

DiGi DIGI MK MYR 4.67 11,671.2 21.9 20.3 11.9 11.2 141.6 141.6 4.3 4.9

Maxis MAXIS MK MYR 6.52 15,719.8 23.4 23.2 12.1 11.8 8.9 9.9 6.2 6.2

TM T MK MYR 5.33 6,140.6 26.1 24.0 6.6 6.2 2.7 2.7 3.7 3.7

Time dotCom TDC MK MYR 3.67 676.1 14.0 13.2 11.2 9.4 0.9 0.8 - -

Singapore

SingTel ST SP SGD 3.45 44,014.8 14.6 14.3 8.5 8.4 2.0 1.9 4.9 4.9

StarHub STH SP SGD 4.18 5,741.6 22.0 19.0 10.3 9.3 160.7 148.0 4.8 4.8

M1 M1 SP SGD 2.85 2 ,088.4 15.8 13.6 9.0 7.9 6.9 5.9 5.3 5.0

Indonesia

Telkom TLKM IJ IDR 10,750 22,367.6 15.1 13.6 5.1 4.9 3.6 3.2 4.7 4.8

XL Axiata EXCL IJ IDR 5,350 4,708.0 15.9 13.4 5.8 5.1 2.7 2.4 2.5 3.0

Indosat ISAT IJ IDR 6,600 3,701.5 29.2 37.1 5.0 4.8 1.7 1.7 0.3 0.6

Thailand

ADVANC ADVANC TB THB 217.00 21,642.5 18.4 16.3 10.8 9.6 14.3 13.9 5.7 6.1

DTAC DTAC TB THB 84.50 6,711.8 19.5 16.7 8.2 7.4 6.9 6.2 4.1 4.8

Simple Avg. - Malaysia Telcos 20.9 19.8 9.9 9.2 31.3 31.5 4.5 4.7

Simple Avg. - Singapore Telcos 17.5 15.6 9.2 8.5 56.5 51.9 4.9 4.9

Simple Avg. - Indonesia Telcos 20.1 21.4 5.3 4.9 2.7 2.4 2.5 2.8

Simple Avg. - Thailand Telcos 18.9 16.5 9.2 8.2 10.6 10.1 4.9 5.5

Simple Avg. - Regional Telcos 19.6 18.7 8.6 7.9 27.3 26.2 4.2 4.4

P/E (x) EV/EBITDA (x) P/BV (x) DY (%)

Source: Bloomberg, RHB


15/16


www.rhbinvest.com

15

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make anyrepresentation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to beconstrued as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or

otherwise. This report is general in nature and has been prepared for information purposes only. It is intended for circulation to theclients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specificinvestment objectives, financial situation and the particular needs of any specific addressee. This report is for the information ofaddressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legalor financial advice to independently evaluate the particular investments and strategies.

RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own orhave positions in securities of the company(ies) covered in this research report or any securities related thereto, and may fromtime to time add to, or dispose off, or may be materially interested in any such securities. Further, RHB, its affiliates and related

companies do and seek to do business with the company(ies) covered in this research report and may from time to time act asmarket maker or have assumed an underwriting commitment in securities of such company(ies), may sell them or buy them fromcustomers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwritingservices for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entitymentioned in this research report.

RHB and its employees and/or agents do not accept any liability, be it directly, indirectly or consequential losses, loss of profits ordamages that may arise from any reliance based on this report or further communication given in relation to this report.

The term RHB shall denote where applicable, the relevant entity distributing the report in the particular jurisdiction ment ionedspecifically herein below and shall refer to RHB Research Institute Sdn Bhd, its holding company, affiliates, subsidiaries and relatedcompanies.

All Rights Reserved. This report is for the use of intended recipients only and may not be reproduced, distributed or published for

any purpose without prior consent of RHB and RHB accepts no liability whatsoever for the actions of third parties in this respect.

Malaysia

This report is published and distributed in Malaysia by RHB Research Institute Sdn Bhd (233327-M), Level 11, Tower One, RHBCentre, Jalan Tun Razak, 50400 Kuala Lumpur, a wholly-owned subsidiary of RHB Investment Bank Berhad (RHBIB), which in turnis a wholly-owned subsidiary of RHB Capital Berhad.

As of 04 Mar 2013, RHBIB does not have proprietary positions in the subject companies, except for:a) -

As of 04 Mar 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered inthis report, except for:a) -

Singapore

This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-ownedsubsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia (OSKIB) andDeutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member ofthe Singapore Exchange Securities Trading Limited and is a subsidiary of OSKIB, which in turn is a wholly-owned subsidiary of RHBCapital Berhad. DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for itscorporate finance or its dealing activities; this report is therefore classified as a non-independent report.

As of 04 Mar 2013, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not haveproprietary positions in the subject companies, except for:a) -

As of 04 Mar 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered inthis report, except for:a) -


16/16


www rhbinvest com

16

Special Distribution by RHB

Where the research report is produced by an RHB entity (excluding DMG & Partners Research Pte Ltd) and distributed in Singapore,it is only distributed to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities andFutures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", thisresearch report is not intended for you and you should disregard this research report in its entirety. In respect of any mattersarising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd.

Hong Kong

This report is published and distributed in Hong Kong by OSK Securities Hong K ong Limited (OSKSHK), a subsidiary of OSKInvestment Bank Berhad, Malaysia (OSKIB), which in turn is a wholly -owned subsidiary of RHB Capital Berhad.

OSKSHK, OSKIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of thesubject company. OSKSHK, OSKIB and/or other affiliates may, within the past 12 months, have received compensation and/orwithin the next 3 months seek to obtain compensation for investment banking services from the subject company.

Risk Disclosure Statements

The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may becomevalueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Pastperformance is not a guide to future performance. OSKSHK does not maintain a predetermined schedule for publication of research

and will not necessarily update this report

Indonesia

This report is published and distributed in Indonesia by PT OSK Nusadana Securities Indonesia, a subsidiary of OSK InvestmentBank Berhad, Malaysia, which in turn is a wholly-owned subsidiary of RHB Capital Berhad.

Thailand

This report is published and distributed in Thailand by OSK Securities (Thailand) PCL, a subsidiary of OSK Investment Bank Berhad,Malaysia, which in turn is a wholly-owned subsidiary of RHB Capital Berhad.

Other Jurisdictions

In any other jurisdictions, this report is intended to be distributed to qualified, accredited and professional investors, in compliancewith the law and regulations of the jurisdictions.

Kuala Lumpur Hong Kong Singapore

Malaysia Research OfficeRHB Research Institute Sdn BhdLevel 11, Tower One, RHB Centre

Jalan Tun RazakKuala Lumpur

MalaysiaTel : +(60) 3 9280 2185Fax : +(60) 3 9284 8693

OSK SecuritiesHong Kong Ltd.

12th FloorWorld-Wide House19 Des Voeux RoadCentral, Hong Kong

Tel : +(852) 2525 1118Fax : +(852) 2810 0908

DMG & PartnersSecurities Pte. Ltd.

10 Collyer Quay#09-08 Ocean Financial Centre

Singapore 049315Tel : +(65) 6533 1818Fax : +(65) 6532 6211

Jakarta Shanghai Phnom Penh

PT OSK NusadanaSecurities Indonesia

Plaza CIMB Niaga14th Floor

Jl. Jend. Sudirman Kav.25Jakarta Selatan 12920, Indonesia

Tel : +(6221) 2598 6888

Fax : +(6221) 2598 6777

OSK (China) InvestmentAdvisory Co. Ltd.

Suite 4005, CITIC Square1168 Nanjing West Road

Shanghai 20041China

Tel : +(8621) 6288 9611

Fax : +(8621) 6288 9633

OSK Indochina Securities LimitedNo. 1-3, Street 271

Sangkat Toeuk Thla, Khan Sen SokPhnom PenhCambodia

Tel: +(855) 23 969 161Fax: +(855) 23 969 171

Bangkok

OSK Securities (Thailand) PCL10th Floor ,Sathorn Square Office Tower

98, North Sathorn Road,SilomBangrak, Bangkok 10500

ThailandTel: +(66) 862 9999Fax : +(66) 108 0999

Documents

Osk Report Regional Telco Update Hold the Line Please 20130312 IDjw336244637513e806e5c635