16.00
December 2, 2020
Converge ICT Solutions Inc. (CNVRG PM) BUY High-speed fiber, high-speed Share Price PHP 16.00 12m Price Target PHP 24.50 (+53%)
growth
Bringing fiber internet to the masses; initiate BUY Company Description
Converge ICT is the largest pure play high speed fixed Converge ICT Solutions Inc. (Converge) is the largest pure play high- broadband operator in the Philippines. speed fixed broadband operator in the Philippines, with a market share of 54.7%. Converge operates two business segments: residential and enterprise. They also own and operate their end-to-end fiber network, stretching over 44,000km over the island of Luzon, reaching 5.1m homes. Statistics The network consists of two high-speed technologies: fiber-to-the-home 52w high/low (PHP) na/na or fiber-to-the-premises (FTTH/FTTP) and hybrid-fiber-coaxial (HFC), 3m avg turnover (USDm) 9.6 which offer up to 100x faster speeds vs. legacy copper networks. Initiate Free float (%) 23.0 BUY with a DCF-based TP of PH24.50 (WACC 8.6%, LTG 1.0%). Issued shares (m) 7,526
Market capitalisation PHP120.4B Telecommunications Focused on fixed broadband USD2.5B Major shareholders: The Philippine fixed broadband market is underserved with a market Comclark Net & Tech Corp 63.3% penetration of only 14%, vs an average of 38% in Southeast Asia. Coherent Clound Inv 13.8% Converge has a relatively newer broadband network that utilizes a more Skandinaviska Enskilda Banken 0.1%
robust technology vs legacy copper lines, which are still used by 37% of Price Performance subscribers. Port utilization is over 60% take-up rate in the long run, and 40% within 12 months. This is nearly 4x faster than industry, due to their 17.0 104 full control over the network rollout strategy allowing them to target 16.5 102
demand pockets and match port deployment with market demand. 16.0 100 Philippines Household demand driving rapid growth 15.5 98 15.0 96 Converge is the fastest growing broadband operator with residential subs 14.5 94 increasing 12.2x from 2016-9M20 to 900,531 and accelerated by higher demand for high-speed broadband services during the COVID-19 14.0 92 13.5 90 pandemic. We estimate 56% earnings CAGR from 2019-22F, faster than Oct-20 Nov-20 Nov-20 Nov-20 Nov-20 Nov-20
industry decline of 15.5%. This is driven by our est. residential revenue Converge ICT Solutions Inc. - (LHS, PHP) CAGR of 56%, which is driven by port rollouts and utilization rates. Converge ICT Solutions Inc. / PSEi Philippine SE Index - (RHS, %) -1M -3M -12M DCF-based equity value of PHP183b, TP PHP24.50 Absolute (%) 8 na na We based our PHP183b equity valuation on DCF, which appropriately Relative to index (%) (2) na na captures the rapid growth of the company. This implies a 2021F Source: FactSet
EV/EBITDA multiple of 14.8x vs regional broadband peers’ multiple range of 9.2x-15.4x. We believe the premium valuation reflects its industry- leading earnings CAGR 2019-22F (3Y) of 56% (vs industry’s -23%) in a large, underserved and growing market.
FYE Dec (PHP m) FY18A FY19A FY20E FY21E FY22E Acronyms used: Revenue 5,055 9,139 15,233 24,009 34,641 FTTH: Fiber-to-the-home EBITDA 2,665 4,420 7,020 11,228 16,026 Core net profit 1,257 1,960 2,657 5,011 7,847 FTTP: Fiber-to-the-premises Core FDEPS (PHP) 10.06 15.68 0.35 0.67 1.04 HFC: Hybrid fiber-coaxial Core FDEPS growth(%) 2.2 55.9 (97.7) 88.6 56.6 Net DPS (PHP) 0.00 0.02 0.00 0.00 0.00 Core FD P/E (x) na na 45.3 24.0 15.3 P/BV (x) na na 4.4 3.8 3.0 Net dividend yield (%) na na 0.0 0.0 0.0 ROAE (%) 32.3 23.4 13.5 16.9 21.8 ROAA (%) 14.2 8.9 6.4 8.8 11.2 EV/EBITDA (x) 46.0 27.6 7.7 10.9 7.6 Net gearing (%) (incl perps) 48.8 14.1 net cash 6.7 4.6 ESG Consensus net profit - - 2,860 4,531 7,516 Tear Sheet Insert MKE vs. Consensus (%) - - (7.1) 10.6 4.4
Romel Libo-on [email protected] (63) 2 8849 8844
THIS REPORT HAS BEEN PREPARED BY MAYBANK ATR KIM ENG SECURITIES INC SEE PAGE 55 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Converge ICT Solutions Inc.
Value Proposition Price Drivers
. Converge is the largest pure play high-speed fixed Historical share price trend broadband operator in the Philippines, with a market 3 17.0 1 104 share of 54.7%. 16.5 102 . Fastest growing broadband operator with residential subs 16.0 100 increasing 12.2x from 2016-9M20 to 900,531 and 2 15.5 98 accelerated by higher demand during the pandemic. 15.0 96 . Port utilization is over 60% take-up rate in the long run, 14.5 94 and 40% within 12 months, nearly 4x faster than industry, due to their full control over the network rollout strategy. 14.0 92 13.5 90 . Owns and operates end-to-end fiber network, stretching Oct-20 Nov-20 Nov-20 Nov-20 Nov-20
over 44,000km over the island of Luzon, reaching 5.1m Converge ICT Solutions Inc. - (LHS, PHP) homes, comprised of FTTH and HFC. Converge ICT Solutions Inc. / PSEi Philippine SE Index - (RHS, %)
Overall fixed wired broadband share of net adds Source: Company, Maybank Kim Eng
1. Converge ICT Solutions lists on the Philippine Stock Exchange (PSE) on 6 Oct 2020 under the ticker CNVRG PM. The only IPO during the lockdown in the Philippines. 2. Headline press release on 9M20 results. 3. Network back to normal after downtime due to a power infrastructure issue. Announces plans to build a data centre within 30 days to prevent future outages.
Source: Company, Maybank Kim Eng
Financial Metrics Swing Factors
. We estimate consolidated revenue CAGR of 56% from 2019- Upside 22F (Fig.67), driven by growth in new subscribers adds coming from newly deployed ports, in addition to . Faster than expected port rollout, leading to increase of increasing port utilization rates from older vintages. homes coverage to help sustain customer acquisition. . The largest growth comes from FTTH revenues, forecasted to grow by 92% compounded p.a. from 2019-22F. FTTH to . Sustained subscriber adds in new locations in the island comprise 73% of 2021E revenues from just 10% in 2017. of Luzon, and potential expansion in Visayas in Mindanao . EBITDA margins to improve from 49.7% in 2017 to 52.5% in upon the completion of the network backbone. 2021E as the higher margin FTTH business increases its contribution and leased line costs decrease as they . Further market share gains from other internet providers. complete their network rollout.
Revenue segments and EBITDA margins Downside
PHPm 52.5% 25,000 53.0% . Reactionary competitive tactics from larger telcos could 51.0% 51.1% 3,399 lead to ARPU compression. 20,000 50.4% 49.7% 3,090 51.0% 15,000 . Delay in completion on nationwide backbone could push- 3,066 49.0% back expansion in areas outside Luzon island. 10,000 2,869 2,786 17,520 47.0% 5,000 2,479 1,904 9,298 . Faster adoption of 5G technology could curtail demand 1,421 2,004 3,875 - 1,213 307 1,147 45.0% for broadband connections. 2017 2018 2019 2020E 2021E FTTH revenues HFC revenues Enterprise revenues EBITDA margins (rhs)
Source: Company, Maybank Kim Eng
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ESG [email protected] Business Model & Industry Issues
. The telco industry faces benign ESG pressure. Telcos are not major emitters and thus do not pose a significant threat to the environment. Major S issues relate to digital inclusion and data protection, and can be well-managed from an operational standpoint. Converge is starting to baseline their sustainability metrics, following SEC’s reporting requirements. . Converge’s fiber optic network provides them with inherent energy advantages over traditional copper networks maintained by local peers as they expend less energy to transmit data, thus requiring fewer cooling and control systems. . The founder’s vision to provide high speed internet access to underserved populations is in line with the increasing reliance on the internet to allow access to work, retail, entertainment, and education, during the pandemic. . Overall, we see marginal ESG risk for Converge. Maintaining reliable internet connectivity especially for work and schooling requirements is becoming an important S factor under current mobility restrictions. . We think they can mitigate this S risk as they are now building a backup data center and improving their service responsiveness as their subscribers continue to increase.
Material E issues Key G metrics and issues
. Telco companies, especially Converge, have a minimal . Converge has 7 board members, composed of 3 environmental footprint compared to other industries. independent directors (43%), 2 non-executive directors . Converge’s existing fiber network expends significantly (29%), and 2 executive directors (29%). less energy compared to traditional copper lines. Copper . 2 of its members have served at the board since the lines take up to 3.5 watts to transmit light pulses over 100 company’s inception as the co-founders. 1 member meters, vs 1 watt for fiber optic cables. served at the board since 2019, and the rest were . FTTH or fiber optic cables are 85% more energy efficient appointed in Jun 2020. than copper as it has lower cooling system requirements . Dennis Anthony H. Uy and Maria Grace Y. Uy both and fewer central nodes as they generate less heat. executive directors, are spouses and co-founders of the . Converge is compliant with environmental regulations. Its firm. planned nationwide submarine cable network linking the . The audit, corporate governance, board risk & related major island groups of the country, will require an party transactions, and corporate governance environmental compliance certificate (ECC) prior to committees are chaired by an independent director. rollout. . There is only one female member of the board (14%). . In 2019, the board of directors received total remuneration of PHP62m (3.2% of earnings). The CEO
Material S issues and key management officers received PHP51m in salaries and other variable pay (2.6% of earnings). All other officers as a group, received PHP4.3m (0.2% of . Converge was established with a vision to provide high- earnings). speed fixed broadband access to millions of unserved and . PWC (Isla Lipana) is the external auditor since 2016. underserved households in the Philippines. The current audit partner has served the role since . Converge and Metroworks combined headcount comprise 2018. The auditors were paid a total of 840 female (29%) and 2,084 male (71%) employees. PHP4.5m/PHP1.3m in 2019 in audit and non-audit fees Attrition rate at 13.5%/6.5% for Converge/Metroworks. (0.2%/0.06% of earnings) Total training hours provided reached 16,378. . Related party transactions entered at arm’s length . During the pandemic, Converge provided the government’s agreements are limited to real estate leases and Inter-Agency Task Force (IATF) with fiber internet service agreements with affiliates Comclark, and a connection, to allow for the fast and timely dissemination services agreement with Pacific Kabelnet Holdings Co of information between the agencies and the public. (PKN). Due to related parties amount to PHP198m . The company has also provided free fiber internet service (11.7% of earnings). to the state university’s scholars in Luzon who are in need . Converge typically participates in competitive bidding of support with the new mode of online learning. for government-related projects and accounts, . Continuously ramping up capability to respond to typically comprising 10-15% of enterprise revenues, OR customers due to a surge of inquiries and service requests 2-4% of total revenues. as internet use spiked during the pandemic.
. Converge to put up a new data centre, before the end of the year, to protect against future internet outages.
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Table of Contents
1. Investment thesis: High-speed fiber, high-speed growth ...... 5 2. Focus charts ...... 7 3. Corporate information ...... 8 4. Investment Merit 1: Market leader in high-speed fixed broadband ...... 13 5. Investment Merit 2: Pure play fixed broadband operator well-positioned to capture burgeoning market ...... 19 6. Investment Merit 3: Superior offering based on understanding customers’ priorities ...... 24 7. Investment Merit 4: End-to-end control of network value chain ...... 30 8. Financials ...... 34 9. Valuation ...... 42 10. Key risks ...... 47 Appendix 1: Management ...... 49 Appendix 2: Products ...... 50 Appendix 3: Other sensitivity scenarios ...... 51
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1. Investment thesis: High-speed fiber, high- speed growth
1.1 Market leader in high-speed fixed broadband
Converge is the market leader in the high-speed broadband space, with a subscriber market share of 54.7%, as of end-1H20, based on Media Partners Asia (MPA) estimates. More recently, the company has seen an acceleration in residential gross subscriber additions, driven by household demand during the quarantine, capturing 61.4% of new subscriptions from the onset of the lockdown. Fixed broadband market penetration is only 14.1% in the Philippines, vs an average of 38% in Southeast Asia, with an estimated fiber broadband market size of 22.6m households by 2025, 15.1x larger than their current market size of fiber broadband households. There is also room to grow in the underserved enterprise services market, as high bandwidth enterprises such as IT-BPOs and financial services are still increasing.
1.2 Pure play fixed broadband operator, well-positioned to capture burgeoning market
Converge is solely focused on the underserved fixed broadband market in the Philippines. The company is well-positioned to grow their subscriber base, unencumbered by the tougher wireless industry segment which is dominated by the two telco incumbents, Globe Telecom (GLO PM, PHP2,008, Not Rated) and PLDT (TEL PM, PHP1,383, Not Rated), with the impending entry of a third major telco player, Dito CME (DITO PM, PHP6.64, Not Rated), expected to commercially launch by Mar 2021. Converge uses the latest broadband technology available in the market and has a significantly newer broadband infrastructure utilizing a more reliable and robust FTTH/FTTP technology, vs legacy copper lines (DSL) which are still utilized by 37% of broadband users. Converge has grown residential subscribers by 93% p.a. and enterprise customers by 33% p.a. from 2016-19, outpacing its competitors.
1.3 Superior offering based on understanding customers’ priorities
Converge offers mainly FTTH/FTTP (87% of total network) and HFC broadband technologies to residential, enterprise businesses, and microbusinesses/SMEs. These technologies allow faster speeds and less signal degradation vs DSL. Their most popular fiber plan (FiberX 1500), costs USD30/month, with a maximum speed of 25 Mbps and no data cap. Converge has led residential customer survey scores across speed, reliability, affordability, availability, and customer services criteria. Converge also led survey scores for enterprise customers, across product, customer service, and affordability criteria.
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1.4 End-to-end control of network value chain
Converge owns and operates a proprietary, end-to-end fiber network in the Philippines, extending from the backbone to the last mile. This includes a fiber network spanning over 44,000km and an average network age of one year. Their network currently serves 36% of households in their coverage area, representing an aggregate 5.1m homes passed over both their FTTH/FTTP and HFC networks. Ownership of the network is critical as it allows Converge full control over the network rollout strategy, allowing the firm to target specific demand pockets, and saving expenses to lease lines. Converge’s fiber port take-up rate reaches 40% within 12 months of deployment, four times faster than the industry average of just 10%. On a blended basis, port utilization rate for all vintages are at 31% in 1H20, vs just 15% in 2016, with the improvement driven by maturing port utilization for older vintages. Converge has also managed to achieve faster take-up in their newer vintages as compared to older vintages, achieving 40% utilization in 12 months for ports (289K) deployed in 2019, vs more than 20 months for ports (39K) deployed in 2017.
1.5 56% earnings CAGR fuelled by residential demand, faster than industry average decline of 15.5%.
We estimate 56% earnings and 57% EBITDA CAGR from 2019-22F (3Y), driven by a similarly robust 56% revenue CAGR. Largest contributor to this growth is our estimated 7.4x increase in residential FTTH revenues from 2019-22F. We estimate port deployment growth from 2.0m in 2019 to 5.6m by 2022F. We also estimate the average revenue per user (ARPUs) to remain stable from 2019 levels. Enterprise revenues are also estimated to grow 1.5x over the same period.
1.6 Equity value of PHP184b; DCF-based TP of PHP24.50
We used a DCF-based valuation methodology to better reflect the period of rapid growth as the firm continues to grow its network reach and utilization rate. Our DCF value is PHP184b, implying a 2021F EV/EBITDA multiple of 14.8x (2022F: 10.4x). This implied multiple is within its regional broadband peers’ 2021E EV/EBITDA multiple range of 9.2x-15.4x. At the implied EV/EBITDA multiple of 14.8x, it is 3.7% lower than NetLink’s 15.4x. We believe the multiple is justified given Converge’s high growth prospects (56% 3Y earnings CAGR 2019-22F), which is ahead of the industry and its broadband peers, as well as having the largest equity value among its regional broadband peers at USD3.7b (PHP50.00:USD1). Its peers’ market capitalisation ranges from USD2.1b to USD2.8b.
1.7 Key risk factors
In our view, the key risks that could significantly affect our outlook, earnings estimates and valuation for Converge include: 1) competition from PLDT, Globe Telecom and Dito CME, which have larger balance sheets and wider reach especially on the wireless side; 2) technology risk from fast technological advancement including future 5G Fixed Wireless Access (FWA) deployment, affecting fixed broadband demand; 3) network risk from potential physical or natural disruption of network lines; and 4) regulatory risk, which is inherent in operating under a heavily-regulated telco industry.
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2. Focus charts
Figure 1: Converge captures >50% of high-speed market share Figure 2: Underserved Philippines fixed broadband market
Source: Media Partners Asia Source: Media Partners Asia
Figure 3: Revenue segment contribution Figure 4: Improving EBITDA margins
Source: Company Source: Company
Figure 5: Rapid residential subscriber growth Figure 6: Port utilization ahead of industry
Source: Company Source: Company; 40% utilization rate within 12 months
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3. Corporate information
3.1 Description
Converge is the largest pure play high-speed fixed broadband operator in the Philippines, in terms of high-speed residential fixed broadband subscription, with a 54.7% market share as of end-1H20, according to MPA.
The company designs broadband packages to address customers’ needs for more reliable and affordable packages at faster speeds by utilizing a younger and more advanced technology (FTTP/FTTH and HFC). This has more fiber optic cable pair count, end-to-end fiber infrastructure, and unique design and model where ports are located closer to homes.
Converge was founded in 2007 by Dennis Anthony H. Uy (Chief Executive Officer) and Maria Grace Y. Uy (Chief Resources Officer), with the vision to provide high-speed fixed broadband to underserved households and businesses in the Philippines. The organization is focused on becoming the market leader in the high speed fixed broadband market.
Figure 7: Corporate structure
Source: Company
Converge has exhibited stellar growth in their operations, not typically seen in the industry. From 2017-19, revenues grew at a CAGR of 76.3%, quite exceptional compared to its peers both domestically and internationally (Fig.8) but the faster growth was expected given the lower base effect. Adjusted EBITDA margin was at 50.8% in 2019, a 3.8ppt increase from 47.2% in 2016. ROIC was at 19.7% in 2019, indicating high utilization and returns from its assets.
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Figure 8: Historical revenue growth, 2017-19 CAGR
Source: Company, Media Partners Asia
Figure 9: EBITDA margins
Source: Company
3.2 Business segments
Converge operates two business segments: 1) residential business, which offers high-speed fixed broadband internet services to residential households; and 2) enterprise business, which offers high-speed fixed broadband internet, private data network solutions, cloud and colocation services, and other enterprise solutions.
Converge offers products for residential businesses, enterprise businesses, and microbusinesses/SMEs. High-speed technologies like FTTH/FTTP, comprising 87% of total network, or HFC are used for these products. FTTH/FTTP technology allows for the fastest speed at a maximum of 10,000 Mbps and has minimal degradation even at long range, but costs more and requires end-to-end ownership of infrastructure for seamless service delivery. HFC on the other hand can be deployed over the existing cable infrastructure and costs less, but has slower speed at a maximum of 1,000 Mbps.
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Figure 10: Operating segments’ revenue
Source: Company
3.3 Strategy
The strategies of Converge can be categorized into two main approaches: expanding distribution and having a superior network rollout.
3.3.1 Expanding distribution The company aims to expand distribution and last-mile networks in existing and new coverage areas and adopts the “Go Deep” and “Go National” strategies.
“Go Deep” focuses on deepening penetration in areas already served by the company. Based on a market study conducted by MPA, Converge covers 5.1m household in Luzon (as of Sep 2020), implying that there is tremendous opportunity to expand to the remaining 72% of the 14.4m households in Luzon. By merely maximizing readily available ports, Converge should be able to accommodate an additional 1.7m new subscribers at zero incremental capex.
Converge goes beyond the conventional customer acquisition methods to tap into potential subscribers. The company leverages on Filipinos’ rising digital footprint to increase touchpoints, such as the use of tele-digital sales channels, which makes it easier for potential customers to subscribe.
Aside from growing its customer base, migrating current subscribers to higher-speed broadband services and/or offering add-on products, like Speed Boosts and Pay TV, through the same network should raise the ARPU generated by existing subscribers. Converge spurs this migration through its highly flexible product offerings at differentiated price points. As a result of this, ARPU in 2018-19 increased from PHP1,178 to PHP1,293 (+9.8% YoY).
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“Go National” is their strategy that aims to expand to new market areas outside of Luzon, in Visayas and Mindanao, which are also underserved by other operators. According to OpenSignal, a London-based company that specialises in mapping wireless coverage, the slowest internet speeds are present in Visayas and Mindanao. The World Bank, in its Philippine Economic Update report, also stated that apart from below-average speeds, people residing in the south of the country need to pay 1.5-26.0x more to get the same internet speed in Metro Manila.
3.3.2 Superior Network Rollout To operationalise “Go Deep” and “Go National”, Converge boasts of having the most advanced high-speed technology in the country comprising of 87% FTTH/FTTP and 13% HFC, which are both superior to copper, the technology used by its domestic peers. These, along with the use of a unique design where ports are closer to homes and fiber infrastructure is used from end-to-end, allows the company to offer broadband connections that are up to 100x faster than other operators and be more cost-efficient. Its newer and younger technology also serves as an advantage over peers since it is more uneconomical to build new fiber networks and migrate existing customers to the newer technology. This means that competitors will either have to stick with a less advanced technology that is slower and less cost-efficient, or be forced to increase expenditures significantly in order to match Converge’s network.
Converge also aims to link the Philippines with key regional hub markets like China, Southeast Asia, North Asia, and the US through subsea cable projects that will expand the country’s international connectivity. Based on the International Telecommunication Union, a specialized agency of the United Nations responsible for ICT concerns, developing countries not yet served by undersea communications cables are forced to rely on higher priced satellite access. This project will remedy that concern and increase the ability to exchange traffic not just locally but regionally and internationally as well.
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3.4 Key company milestones
Figure 11: Company history 2007-Present Year Milestone Converge was incorporated in Pampanga, Central Luzon but remained dormant until 2012 2007 as it awaited licenses and approvals to operate. RA 9707 granted Converge its franchise to construct, install, establish, operate and 2009 maintain telecommunications system throughout the Philippines for a term of 25 years. Converge was issued a license from NTC to install, operate and maintain a broadband 2011 internet network in the Philippines in June. 2012 Converge commercially offered its fixed broadband internet packages. 2015 Converge reached 50,000 residential subscribers. Converge surpassed 100,000 residential subscribers and ended the year with almost 2017 130,000 subscribers. Revenue growth with a CAGR of 76.3%, with an Adjusted EBITDA margin of 50.8%, and a 2017-2019 return on invested capital (ROIC), computed as net income less dividends, over invested capital, of 19.7%. GoFiber.ph was launched to provide an online portal for customers where they can apply 2019 for subscriptions pay bills, and manage accounts. The construction of a domestic backbone that will connect Luzon to Visayas and 2019 Mindanao, to commence the Go National strategy. Converge executed an USD225.0m agreement with Warburg Pincus for the funding of its 2019 nationwide expansion plans. Converge completed a group reorganization to streamline operations, leading to MetroWorks becoming a wholly owned subsidiary of Converge. MetroWorks is a company 2019 that provides microtrenching infrastructure services. This method enables the deployment of fiber cables at a faster and less disruptive method that also makes future repairs more efficient. Converge surpassed 500,000 residential subscribers by the end of the year and reported 2019 FY revenues of PHP9.1b and an adjusted EBITDA of PHP4.7b. Converge recorded their highest numbers of single-month gross subscriber additions for 2020 three consecutive months in 2020, with 49,421 in May, 60,608 in June, ~65,000 in July, and between 65,000 and 70,000 estimated in August. Converge secured PHP32.7b of long-term credit commitments from Philippine banks in 2020 June, and had 60,000 new residential subscribers for the month which exceeded the May 2020 record by 20%.
Source: Company
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4. Investment Merit 1: Market leader in high- speed fixed broadband
4.1 Market leadership in high-speed broadband segment
Converge is the market leader in the high-speed residential broadband space, with subscriber market share of 54.7% (Fig.12) as of end-1H20, based on MPA estimates. This represents an increase of 42.7ppt in market share from 2017 to 1H20, taking market share from the larger and more experienced players in the industry.
From a larger picture, Converge’s overall fixed wired broadband market share growth shows a similar pattern (Fig.13). From 2017 to 9M20, we estimate that market share grew from just 4.6% to 21.6%, representing a 17.0ppt increase in 2.75 years.
Figure 12: High-speed residential broadband market share Figure 13: Overall fixed wired broadband market share
Source: Company, Media Partners Asia Source: Company, Media Partners Asia; *Maybank Kim Eng estimates
Figure 14: Overall fixed wired broadband share of net adds Figure 15: Acceleration in residential gross adds
Community quarantine period
Source: Company, Media Partners Asia; *Maybank Kim Eng estimates Source: Company
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The driver for this growth in market share has been the growth in the company’s share in net subscriber additions (Fig.14), as they have been taking up an increasingly larger portion of the new subscribers over the same period, especially after Converge introduced its FiberX 1500 plan in 2017 which has proven popular at its price point of PHP1,500 (USD30) per month.
More recently, the company has seen an acceleration in residential gross subscriber additions, vs pre-quarantine months in January and February (Fig.15). The imposed lockdown beginning 17 Mar 2020 drove data demand in households as mobility was severely restricted and work-from-home arrangements were adopted by corporates. This trend is likely to continue as the Philippine government has further extended the duration of the quarantine, which will sustain high levels of household data demand.
Corporates have also begun to rethink their working arrangements, allowing for a greater adoption of work-from-home (WFH) set ups for their employees, which will drive data usage outside the central business districts (CBDs) and towards the suburbs and provinces where workers live. Non-corporate demand continues to rise as well, as lockdown restrictions have encouraged household purchases via online transactions, and content consumption increases due to a lack of entertainment options outside the home. The government’s planned rollout of online education has also led to a scramble for mobile devices for student’s use and surge in demand for more reliable internet for streaming class sessions.
4.2 Underserved and growing residential market
The residential broadband market continues to be underserved and underpenetrated, in our view. The Philippines has a relatively high internet usage rate vs countries in East Asia and the rest of the world (Fig.17), which is evident in Filipinos use of social media, with nearly 80m individuals using social media, roughly 73% of the total population. This is also underscored by around 12m overseas Filipinos which often use the internet as the primary means for communication with their family, friends, and relatives elsewhere in the world.
Despite this, data from World Bank suggests that broadband penetration in the Philippines remains below the norms in East Asia and the rest of the World, at just 4.5 broadband subscribers per 100 individuals (Fig.18) suggesting that while internet connectivity is high, the quality and speed of connectivity could be improved further.
With an estimated 4.5 subscribers per 100 people, and an estimated Philippine population of nearly 110m, that translates to around 5m users that presently have access to broadband subscriptions. If the Philippines were to even approach the world average of 18.4 subs per 100 people, it would translate to 20m users, a delta of 15m users that could be the potential untapped target market.
Figure 16: Fixed broadband market penetration
Source: Media Partners Asia December 2, 2020 14
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Figure 17: Internet usage as % of population Figure 18: Broadband subs per 100 people
Source: World Bank, Maybank Kim Eng Source: World Bank, Maybank Kim Eng
Figure 19: Social media users in the Philippines Figure 20: Facebook users 2020 – top 10 countries
Source: Statista, We Are Social, DataReportal, Hootsuite, as of July 2020 Source: Statista, We Are Social, DataReportal, Hootsuite, as of July 2020
The estimated total addressable market for fiber broadband seems massive compared to the existing households with installed fiber broadband (Fig.21), which MPA estimates to be around 1.5m connections. The immediate addressable demand comprises 2m non-fiber broadband households and 15m households with no fixed line internet connections. These two segments combined are 11.3x larger than the existing number of fiber broadband households.
In addition, there is a projected 4.1m additional demand from 2020-25E, as the number of households and household incomes increase. Total future addressable market, including this additional demand, would put total fiber broadband households at 22.6m, or 15.1x larger than the existing number of fiber broadband households.
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Figure 21: Estimated total addressable market
Source: Media Partners Asia
4.3 Underserved enterprise market
Compared to peers in the region, the enterprise market in the Philippines lags behind as a percentage of its gross domestic product (GDP) at just 0.18% vs Malaysia’s 0.30%, Thailand’s 0.23% and Indonesia’s 0.19%, despite having a large services sector contribution to GDP. Services would comprise the Information-Technology Business Process Outsourcing (IT- BPO) sector in which the Philippines has a 12% global BPO market share. IT-BPO companies typically require 3-4x higher bandwidth usage vs other sectors due to the nature of the work and the high number of employees.
Figure 22: Enterprise market penetration
Source: Media Partners Asia
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Figure 23: IT-BPO revenue growth
Source: IBPAP
Demand drivers in the Enterprise segment include the growth of increasing adoption of ICT, digitalization of operations, increased cloud adoption, increasing number of multi-location enterprises, and growing prevalence of distributed working.
Taken altogether, these trends are expected to increase the share of high bandwidth enterprises and broadband usage per employee, spur the rise in demand for higher-APRU services, and higher demand for more advanced connectivity solutions for enterprises.
Figure 24: Breakdown of employees by usage intensity Figure 25: Increasing broadband usage / employee
Source: Media Partners Asia, Enterprise Survey Source: Media Partners Asia, Enterprise Survey
Figure 26: Rising demand for higher-ARPU services Figure 27: Enterprises increasingly demanding more advancedd connectivity solutions
Source: Media Partners Asia, Enterprise Survey
Source: Media Partners Asia, Enterprise Survey
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4.4 Telco capex heavily tilted towards wireless services
Industry capex spending has historically been skewed towards the wireless business as this comprises almost 70% of service revenues (Fig.28). In addition, the Philippines has the lowest tower density in the region (Fig.29), necessitating continuous investments in that area to improve wireless services. Hence, prior to 2018 and 2019, we saw muted investments into fixed line business for the industry. The impending entry of the third mobile player, Dito CME, by 2021, backed by China Telecom, will also renew competition in the wireless space, diverting attention again from the fixed line business.
Figure 28: Incumbents’ capex skewed towards wireless business
Source: Company
Figure 29: Low tower density – future wireless capex spending
Source: TowerXChange, We Are Social
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5. Investment Merit 2: Pure play fixed broadband operator well-positioned to capture burgeoning market
5.1 Converge is solely focused on fixed broadband segment
Converge is solely focused on the underserved fixed broadband market in the Philippines. We believe the company is well-positioned to grow their subscriber base, unencumbered by the tougher wireless industry segment dominated by the two telco incumbents, Globe Telecom and PLDT, with the impending entry of Dito CME expected to commercially launch by Mar 2021.
The wireless business continues to be the largest contributor to the industry’s top line, with broadband comprising around 31% of revenues for the sector as of 2019. This puts an inordinate amount of attention on the wireless business, especially as they seek to fend off incoming competition.
Converge has the latest technology and significantly newer broadband infrastructure, being a relatively new player in the field. This is in contrast with the incumbents that have to deal with legacy infrastructure, particularly those that still utilize copper wires. The newer FTTH/FTTP lines are more robust and reliable compared to older lines, providing an advantage to Converge.
Figure 30: Industry revenue breakdown – broadband vs. wireless
Source: Company
Figure 31: Industry broadband revenues
Source: Company
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5.2 Pandemic unlocks latent data demand
The COVID-19 pandemic has accelerated data demand by both mobile and internet users as shown previously in Fig.15. Internet usage has also grown substantially as the quarantine period was being extended. PLDT reported an increase in network traffic of 25% YoY in 2Q20, while Globe Telecom reported an over 40% increase in residential data traffic in the first three weeks of the lockdown. This has increased the utilization and demand for wireless data and fixed line internet of households.
The imposed mobility and physical restrictions under the quarantine have increased the consumers’ reliance on the internet for daily tasks, including: 1) WFH arrangements, 2) online shopping and 3) online education for students.
Surveys conducted by MPA, indicates a paradigm shift in connectivity requirements due to the pandemic. On the residential front, 66% of respondents reported at least 30% increase in internet usage, probably connected to WFH and content consumption at home (Fig.32). At the same time, 43% of respondents have indicated an increase or have increased their internet spending by at least 30%, at the onset of the pandemic (Fig.33).
Enterprises surveyed also echoed the shift towards WFH arrangements, with 83% of participants, responding that WFH initiatives are important to ensure competitiveness in the future (Fig.34). A large number of enterprise respondents (72%) are paying for all or part of employees WFH internet costs during the pandemic (Fig.35).
An estimated 250GB to 480GB of data consumption is needed per household, assuming a new normal of full work and school from home environment due to WFH and online learning arrangements (Fig.36). The internet speed requirements of these common internet activities, assuming three to four activities in parallel, would require at least 25 Mbps, which would make high-speed broadband essential going forward (Fig.37).
Figure 32: Surge of residential internet usage Figure 33: Increase in willingness to spend
Source: Media Partners Asia Source: Media Partners Asia
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Figure 34: Necessity of continuing WFH arrangements Figure 35: Enterprises willing to cover employee costs
Source: Media Partners Asia Source: Media Partners Asia
Figure 36: Significant data consumption going forward Figure 37: Data consumption requires high speed broadband support
Speed requirement Common internet activities (Min / recommended)
Video (SD / HD) 5 Mbps/ 10 Mbps
Social media 3 Mbps / 10 Mbps
Video conferencing 2 Mbps / 10 Mbps
Web browsing / WFH 3 Mbps / 5 Mbps
Online games 6 Mbps / 25 Mbps
Music streaming 1 Mbps / 1 Mbps
Household with 3-4 activities ongoing > 25 Mbps
Source: Media Partners Asia Source: Media Partners Asia
5.3 Customer acquisition strategy relies on both traditional and non-traditional channels
Customer acquisition on the residential business is done through both third-party sales channels and internal sales channels. Majority of subscribers are engaged through third-party channels, comprising 71% and 68% of the total in 2019 and 1H20, respectively. Third-party sales channels are classified as marketing service agencies (MSAs), who conduct door-to- door sales, or managed service providers (MSPs), who perform outsourced services.
An increasing number of subscribers are signed up through internal sales channels, categorized under 1) business centres, 2) tele-digital sales platform and 3) customer referral programs.
Converge operates 59 business centres where customers can subscribe and pay for their bills, as well as request for technical support. Their tele- digital sales platform, on the other hand, is a cost-effective means to market and sell their products. This channel, through their self-service portal GoFiber.ph has become increasingly important during the quarantine period, as mobility was severely restricted. The national sales contribution of the tele-digital platform increased from 23.5% in Jan to 35.1% in Jun 2020, and we expect this trend to continue as the lockdown is further extended, which should help reduce subscriber acquisition costs. Lastly, the company has promoted customer referral programs, giving existing subscribers a one-off rebate on their monthly subscription,
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equivalent to 50% of the monthly fee of the plan that was successfully referred.
Figure 38: Residential subscribers Figure 39: Residential ARPU (PHP) [poss to add %ch yoy line? Chk units]
Source: Company Source: Company
Figure 40: Enterprise customers Figure 41: Enterprise ARPU (PHP) [poss to add %ch yoy line? Chk units]
Source: Company Source: Company
Figure 42: Homes passed Figure 43: Household coverage
Source: Company Source: Company
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Figure 44: Number of ports Figure 45: Customer churn rate (%)
Source: Company Source: Company, 9M20 based on average quarterly churn
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6. Investment Merit 3: Superior offering based on understanding customers’ priorities
6.1 Product offerings Converge offers products for residential households, enterprise businesses, and microbusinesses/SMEs. High-speed technologies like FTTH/FTTP or HFC are used for these products. FTTH/FTTP technology allows for the faster speeds at 10,000 Mbps at most, and has minimal degradation even at long range, but requires end-to-end ownership of infrastructure for seamless service delivery. HFC, on the other hand, can be deployed over existing cable infrastructure, but at a speed maxed at 1,000 Mbps (Fig.46).
Figure 46: Latest Converge product catalogue Product Technology Business Maximum Speed Data Package Monthly Fee (PHP) FiberX 1500 FTTH Residential 25 Mbps No data cap 1,500 FiberX 2500 FTTH Residential 75 Mbps No data cap 2,500 FiberX 3500 FTTH Residential 150 Mbps No data cap 3,500 FiberXtreme 4500 FTTH Residential 300 Mbps No data cap 4,500 FiberXtreme 7000 FTTH Residential 500 Mbps No data cap 7,000 Air Internet 1000 HFC Residential 5 Mbps No data cap 1,000 Air Internet 1250 HFC Residential 10 Mbps No data cap 1,250 Air Internet 1350 HFC Residential 15 Mbps No data cap 1,350 MicroBiz 2000 FTTH Micro/SME 25 Mbps No data cap 2,000 MicroBiz 3000 FTTH Micro/SME 50 Mbps No data cap 3,000 IBIZ 10 FTTP Micro/SME 10 Mbps No data cap 4,000 IBIZ 20 FTTP Micro/SME 20 Mbps No data cap 6,000 IBIZ 30 FTTP Micro/SME 30 Mbps No data cap 9,000 IBIZ 40 FTTP Micro/SME 40 Mbps No data cap 12,000 IBIZ 50 FTTP Micro/SME 50 Mbps No data cap 15,000 Direct Internet - Enterprise 2 Mbps – 10 Gbps - 16,300 – 5.4m Access Local Data Network - Enterprise 2 Mbps – 10 Gbps - 2,500 – 3m Services International Data - Enterprise 2 Mbps – 10 Gbps - 2,500 – 1.3m Network Services Ethernet-Cloud Direct Connect - Enterprise 10 Mbps to 10 Gbps - 2,500 – 3m Service Colocation Services - Enterprise - - 18,000 – 26,000
Source: Company
Figure 47: Comparison of FTTH/FTTP subscription plans Provider Speed (Mbps) Data Cap Monthly Subscription Rate (PHP) Entry-Level Plans (< PHP2,000 per month) PLDT 10 – 30 Unlimited 1,299 – 1,899 Globe 5 – 25 Unlimited 1,299 – 1,899 Converge 25 Unlimited 1,500 Entry-Level Plans (< PHP2,000 per month) PLDT 50 – 100 Unlimited 2,099 – 3,099 Globe 50 – 100 Unlimited 2,499 – 2,899 Converge 75 – 150 Unlimited 2,500 – 3,500 Entry-Level Plans (< PHP2,000 per month) Converge 300 – 500 Unlimited 4,500 – 7,000 Globe 500 – 1,000 3TB – 6TB 6,999 – 9,499
Source: Company
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6.2 Leadership in key customer criteria
Converge is the leader in speed, connection reliability, perception of affordability, service availability and customer service among residential customers, based on a survey conducted by Nielsen last Jun 2020:
Speed: Converge provides internet connections that are at least 2.2x faster than competitors, and in Feb 2020, Netflix, a major global streaming service ranked the company as best in performance even during prime-time hours for 40 months consecutively. (Fig.48)
Connection reliability: MPA stated that the internet connections of Converge were roughly 2.3x more reliable than peers, and 67.0% of subscribers rarely experienced issues. (Fig.49)
Perception of affordability: Converge got the highest rating of 8.3 out of 10.0 for affordability which is at least 17.0% higher than peers as revealed by the MPA. (Fig.50)
Service availability: Converge, with a score of 8.4 out of 10.0, was deemed to be more readily available to customers. (Fig.51)
Customer service: Results revealed that apart from a higher satisfaction with regard to customer service, Converge also ranked better than peers when it came to installation time scoring 8.0 out of 10.0, and resolution of issues with a 70.0% rate of resolution within 24 hours compared to the 41.0% and 48.0% of the other 2 operators. (Fig.52)
Figure 48: Internet speed score Figure 49: Connection reliability score
Source: Nielsen Company (Philippines) Inc Source: Nielsen Company (Philippines) Inc
Figure 50: Affordability score Figure 51: Service availability score
Source: Nielsen Company (Philippines) Inc Source: Nielsen Company (Philippines) Inc
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Figure 52: Customer service score
Source: Nielsen Company (Philippines) Inc
Overall, Converge’s residential subscribers were more satisfied (Fig.53) and had higher perception of value for money (Fig.54) as compared to its competitors which we think is reflective of high customer criteria scores vs. its product price point compared to peers.
Figure 53: Overall satisfaction index Figure 54: Overall value for money index
Source: Nielsen Company (Philippines) Inc Source: Nielsen Company (Philippines) Inc
The same positive results were gathered from a survey conducted for enterprise customers (Fig.55)
Product: 55.0% of customers deemed Converge to be superior when it comes to meeting Service-Level Agreements (SLAs), a commitment between a service provider and a client.
Customer service: Rated as superior to peers by 80.0% of customers due to dedicated account managers that eliminate the need for subscribers to go through the inconveniences of general customer services hotlines.
Affordability: Because of products perceived to be of good value for money, 33.0% of customers rated Converge as superior to other operators when it comes to affordability, while 56.0% ranked it as on par with other operators. It is worth noting though that despite the high percentage of customers that deem Converge to be at par with peers when it comes to prices, the products it offers generally have higher speeds than those of competitors.
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Figure 55: Enterprise survey results
Source: Nielsen Company (Philippines) Inc and Media Partners Asia (MPA)
6.3 Affordability
Converge’s entry-level fiber plan at PHP1,500 (USD30) per month, is one of the most affordable offerings in the market. The company estimates that households from the fifth income decile and higher would consider their entry level plan to be affordable at roughly 4-5% of their average household income (Fig.56).
Figure 56: Affordability estimates
Source: Philippine Statistics Authority; (1) Projected 2020E average HH income assuming 5.5% CAGR, (2) Projected 2025E average HH income assuming 5.5% CAGR; (3) USD30 (PHP1,500) entry level fiber plan
We also analysed the ability of households to spend for the entry-level fiber plan based on average family expenditures (Fig.57). Communication expenditures ranges from 0.5% to 3.0% of total expenses, equivalent to PHP22-1,582 (USD0.43 to USD31.64) per month, which makes it seem as though the entry level broadband plan is only affordable to households in the PHP500K and over income bracket. However, we expect that a realignment of expenses is likely to occur by substituting recreation, miscellaneous, and other expenses for additional internet expenses due to higher demand post pandemic. Under that assumption, we estimate that households with income brackets from PHP100K and above are able to afford the entry level plan. This comprises a total of 22.1m families and corroborates the 22.6m future addressable market size estimate by MPA (Fig.21).
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Figure 57: Affordability estimates Under 60,000 - 100,000 - 250,000 - 500,000 Philippines 40,000 99,999 249,999 499,999 and over Number of families (in thousands) 440 2,084 11,350 7,078 3,661 % of total 2% 8% 46% 29% 15% Average annual expenditure (USD) 1,119 1,711 3,246 6,053 12,479 Monthly family expenditure (USD) 93 143 270 504 1,040 Food expenditures 58.9 58.3 52.8 44.1 31.4 Alcoholic beverages 0.8 0.8 0.7 0.6 0.4 Tobacco 1.4 1.7 1.7 1.4 0.7 Other vegetables‐based products 0.1 0.1 0.0 0.0 0.0 Clothing and footwear 2.0 2.3 2.3 2.4 2.9 Furnishings, household equipment and household maintenance 2.4 2.2 2.0 1.9 2.8 Health 1.9 1.8 1.9 2.6 3.6 Housing, water, electricity, gas and other fuels 21.4 18.4 18.7 20.8 21.3 Transportation 3.5 4.2 5.6 6.6 7.7 Education 0.4 0.8 1.5 2.3 4.1 Accommodation services 0.0 0.0 0.1 0.2 0.2 Communication 0.5 0.7 1.2 2.2 3.0 Recreation and culture 0.3 0.5 0.6 0.6 1.0 Miscellaneous goods and services 4.5 4.9 5.6 6.6 7.5 Other expenditure 2.1 3.2 5.2 7.6 13.4
Entry level USD30 plan as % of monthly expenditure 32.2 21.0 11.1 5.9 2.9
Communication (%) 0.5 0.7 1.2 2.2 3.0 Communication/Recreation/Misc/Other (%) 7.3 9.3 12.7 17.1 24.9
Communication expenses (USD) 0.43 1.02 3.38 11.30 31.64 Communication/Recreation/Misc/Other expenses (USD) 6.80 13.23 34.29 86.22 258.94
Source: Philippine Statistics Authority; Projected 2020E average HH income assuming 5.5% CAGR
6.4 Low residential subscriber churn
The combination of superior product offering, affordable plans, and churn management best practices have kept monthly churn rates low at just 0.62% in 2019 vs industry average of 1% to 2%, as per MPA. There are two types of churn: 1) voluntary churn, where a customer voluntarily discontinues service, and 2) involuntary churn, where the company disconnects the service of a subscriber for payments outstanding for more than two months. Voluntary churn represented only 6% of total disconnections, while involuntary churn formed 94% of the total in 1H20.
Converge requires customers to sign fixed-term contracts for a 24-month period, and an upfront payment comprising of a security deposit and installation fee. Termination of subscriptions also require a termination fee. In the company’s experience, nearly all of their subscribers retain Converge as their internet service provider, even after the initial 24- month period. In 1H20, only 0.3% of customers that had expiring contracts churned in the first month after expiry.
Converge sends payment reminders to its customers by SMS before the two-month overdue date, conducts subscriber outreach before disconnecting its service, and retains security deposits and installation fees for disconnected delinquent accounts. During the enhanced community quarantine (ECQ) period, the company granted 30-day payment extensions for subscribers who need it, in line with the government’s mandate to provide flexible payment terms during the quarantine period.
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FTTH/FTTP subscribers average churn rate was only 0.8% in 9M20, compared to 1.6% for its HFC subscribers. The lower churn rate for FTTH/FTTP is indicative of higher customer satisfaction due to the higher quality of internet service through this technology. The shift towards FTTH/FTTP subscribers is a key driver of the declining overall churn rate.
More recently, Converge’s churn rate decreased further during the ECQ period due to significant dip in voluntary churn and minimal subscriber relocations, and a drop in involuntary churn due to a 30-day payment extension implemented during the quarantine period.
Enterprise churn is at 0.2% and 0.4% in 2019 and 9M20, still low due to high satisfaction levels among enterprise customers.
Figure 58: Low subscriber churn (2017-9M20)
% 2.0 1.77 1.8 1.62 1.59 1.6 1.4 1.2 0.97 1.0 0.80 0.8 0.6 0.4 0.4 0.27 0.23 0.22 0.2 0.2 0.0 2017 2018 2019 9M20
Enterprise churn rate (%) FTTH churn rate (%) HFC churn rate (%)
Source: Company
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7. Investment Merit 4: End-to-end control of network value chain
7.1 Proprietary fiber network
Converge owns and operates a proprietary, end-to-end fiber network in the Philippines, extending from the backbone to the last mile. This includes a fiber network spanning over 44,000km, and average network age of one year. Their fiber network backbone stretches from north to south of Luzon island, the largest island in the Philippines, where the capital, Metro Manila is located. Converge expects to complete its primary connectivity loop on their domestic backbone linking Luzon, Visayas, and Mindanao to be substantially completed by 2021, reducing the need to lease network lines from third parties in those areas.
Their network currently serves 36% of households in their coverage area, representing an aggregate 5.1m homes passed over both their FTTH/FTTP and HFC networks. FTTH/FTTP and HFC comprise 87% and 13% of the network, respectively. These home broadband connections can offer speeds up to 100x faster than legacy copper networks by their competitors, based on MPA’s analysis. Furthermore, 37% of fixed broadband users in the country are still on DSL, which could be a potential market for high-speed broadband upgrades.
Ownership of the network is critical as it allows Converge full control over the network rollout strategy, allowing the firm to target specific demand pockets, and saving expenses on leasing lines.
Figure 59: Converge vs. Industry network comparison Converge Criteria Industry (as of Mar Converge differentiation 2020) Technology deployed 40% 100% Enables faster access speeds Share of high-speed ports (%) Network age 6.2 1.0 Requires lower maintenance capex and opex Average age of broadband network (Years) Backbone capacity 80 126 Significant network capacity to address future demand Fiber pair / km Fiber network density 17 29 Able to establish "first-mover" advantage Fiber ports per 100 household Port take-up rate 10% 40% Ports deployed to specific demand pockets % ports fulfilled within 12 months of deployment Proximity to household Distance of network access point to household 250 175 Faster rollout of connections to households at a lower cost (meters)
Ready to services FTTH/FTTP ports 0.65 1.02 Able to add ~1m subscribers with minimal capex
Source: Company, Media Partners Asia
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Figure 60: Comparison of fixed wired broadband technologies Maximum Speeds Technology Downstream benefits Considerations (Mbps) xDSL * 24 Mbps * Maximizes value of legacy copper network * Bandwidth lower than HFC / FTTx (ADSL/ADSL2+) * Easy and relatively cheap to deploy and performance degrades with *100 Mbps (very high distance from exchange bit-rate digital * Outdated technology, high up-front subscriber line capital expenditure for fiber ("VDSL")) upgrades * Shorter range for VDSL requires installation of additional street cabinets HFC 1,000 Mbps (DOCSIS * Can be deployed over existing cable TV * Some speed limitations compared to 3.0) infrastructure FTTH/FTTP * Active network (requires power- consuming devices and equipment in the field) FTTH/FTTP 10,000 Mbps * Delivers fastest speeds * Rollout cost higher than HFC and * Minimal signal degradation even at long range ADSL (but has reduced over the last few years) * End-to-end ownership of infrastructure is critical for seamless service delivery
Source: Company, Industry sources, Media Partners Asia
Figure 61: Large number of fixed broadband users (37%) are on DSL
Source: Media Partners Asia
7.2 Long term port utilization rate reaches 60%
Converge’s fiber port take-up rate reaches 40% within 12 months of deployment, four times faster than industry average of just 10%. Over the long run, port utilization rates reach 60%. More recent deployments (referred to as a “vintage”) have achieved significantly faster take-up compared to earlier deployments, indicative of more effective sales and deployment strategies. This, in turn, sustains high ROIC on more efficient use of deployed capex for ports. On a blended basis, port utilization rate for all vintages was at 31% in 1H20, vs just 15% in 2016, with the improvement driven by maturing port utilization for older vintages. Converge has also managed to achieve faster take-up in their newer vintages as compared to older vintages, achieving 40% utilization in 12 months for ports (289K) deployed in 2019, vs more than 20 months for ports (39K) deployed in 2017.
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Figure 62: Port utilization analysis for all regions Figure 63: Port utilization analysis for Metro Manila
Source: Company Source: Company
Figure 64: Blended port utilization rate
Source: Company
7.3 MetroWorks is a key component to rollout strategy
MetroWorks, the company’s wholly owned subsidiary, executes their network rollout strategy. This allows Converge to retain full visibility over their end-to-end network design and rollout functions. Converge is the sole customer of MetroWorks. Monthly port rollout reached 120K and 150K in Jun and Jul 2020, significantly higher than 3,100 monthly rollout in Dec 2016.
Microtrenching (MT) is the primary means by which Converge deploys its fiber network. MT deployment is so-named for its relatively shallower trench digging of 24 inches (2 feet) deep and one to two inches wide, compared to traditional trenches. This makes deployments faster and repairs due to fiber cuts easier to accomplish.
MetroWorks purchases its MT equipment from a French manufacturer and has been the first to deploy this technology in the Philippines. The deployment footprint of MT equipment and potential disruptions to road traffic are quite minimal, making it easier for local government units to allow deployments in their areas. MetroWorks owns more than 88% of MT machines operating in the country.
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Figure 65: Microtrenching equipment by MetroWorks
Source: Company
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8. Financials
8.1 9M20 results review
Converge’s 9M20 earnings reached PHP2.2b, up 42.8% YoY, driven by strong topline performance, with gross revenues growing 67.0% YoY. Revenues reached PHP10.7b in 9M20, on the back of exceptionally strong residential FTTH revenues, which grew 139.6% YoY to PHP6.3b (Fig.66). FTTH revenue contributed 58.9% to gross revenues vs. just 41.0% in the previous year. Residential HFC revenues grew 17.8% YoY to PHP2.1b.
Combined, residential revenues grew 89.9% YoY to PHP8.4b. Growth in residential revenues was spurred by an increase in residential subscribers by 98.2% YoY, to 901K , adding 446K subs YoY. FTTH subscribers comprised 75% of total residential, growing 150% YoY. HFC comprised the rest, growing 22.6% YoY. Converge attributes this growth to deeper presence in their service areas and continuous expansion of their network to new areas, especially during the pandemic. We estimate blended residential ARPUs increased by 4.2% in 9M20 to PHP1,425 (3Q20: PHP1,352) resulting from increasing contribution of FTTH subscribers in its customer mix and upselling to more premium packages and add-on packages. Converge disclosed that as of Sep 20, 14% of its entry-level FiberX 1500 subscribers had taken up their "10-for-99" add-on promotion.
Enterprise revenues were up 15.3% YoY to PHP2.3b, driven by the adoption of new enterprise products including a "time-of-day" plan allowing enterprise customers to double their bandwidth during peak periods. Enterprise customers increased 13.8% YoY to 10,953 customers, adding 1,332 customers YoY. Enterprise ARPU declined 11.4% to PHP23,920, reflecting pandemic-related headwinds on enterprise spending.
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Figure 66: 9M20 summary of results FYE Dec (PHP m) 3Q20 3Q19 % YoY 9M20 9M19 % YoY 1H20 1H19 % YoY
FTTH revenues 2,679.0 1,090.6 145.6 6,285.5 2,623.4 139.6 3,606.6 1,533.0 135.3 HFC revenues 756.2 627.0 20.6 2,127.4 1,805.8 17.8 1,371.2 1,178.8 16.3 Enterprise revenues 752.1 733.5 2.5 2,264.3 1,964.0 15.3 1,512.2 1,230.5 22.9 Gross revenues 4,187.4 2,451.3 70.8 10,677.3 6,393.7 67.0 6,489.9 3,942.4 64.6 Cost of services -1,925.8 -1,212.1 58.9 -4,943.9 -3,112.3 58.9 -3,018.1 -1,900.2 58.8 Gross profit 2,261.6 1,239.2 82.5 5,733.4 3,281.4 74.7 3,471.8 2,042.2 70.0 GAEx -694.7 -343.5 102.2 -1,771.4 -979.9 80.8 -1,076.7 -636.5 69.2 Provisions -166.5 -140.3 18.7 -490.8 -369.6 32.8 -324.3 -229.3 41.4 Unrealized FV loss 0.0 0.0 na -40.6 0.0 na -40.6 0.0 na Other income (loss), net 51.6 13.4 na 166.0 -13.1 na 114.4 -26.5 na Profit from operations 1,452.0 768.8 88.9 3,596.6 1,918.8 87.4 2,144.6 1,149.9 86.5 Financial costs -106.9 -85.4 25.2 -454.2 -222.1 104.5 -347.3 -136.7 154.1 Profit before income tax 1,345.1 683.4 96.8 3,142.4 1,696.7 85.2 1,797.3 1,013.2 77.4 Income tax expense -413.6 -174.0 137.7 -952.2 -362.5 162.7 -538.6 -188.5 185.7 Net profit 931.5 509.4 82.9 2,190.2 1,334.2 64.2 1,258.7 824.7 52.6 Adjusted EBITDA 2,261.9 1,265.8 78.7 5,575.7 3,204.7 74.0 3,313.8 1,980.2 67.3
Subscribers/customers 3Q20 3Q19 % YoY 9M20 9M19 % YoY 1H20 1H19 % YoY
Residential 168,968 73,095 131.2 900,531 454,438 98.2 731,563 381,343 91.8 FTTH 160,408 60,004 167.3 673,005 268,883 150.3 512,597 208,879 145.4 HFC 8,560 13,091 -34.6 227,526 185,555 22.6 218,966 172,464 27.0 Enterprise 449 1,035 -56.6 10,953 9,621 13.8 10,504 8,586 22.3
ARPU (PHP) 3Q20 3Q19 % YoY 9M20 9M19 % YoY 1H20 1H19 % YoY
Residential 1,352 1,330 1.7 1,425 1,368 4.2 1,270 1,343 -5.4 FTTH 1,467 1,454 0.9 1,578 1,504 4.9 1,384 1,491 -7.2 HFC 1,046 1,164 -10.1 1,108 1,210 -8.4 1,041 1,191 -12.6 Enterprise 23,370 25,574 -8.6 23,920 27,008 -11.4 24,491 26,442 -7.4
3Q20 3Q19 ppt 9M20 9M19 ppt 1H20 1H19 ppt Margins (%) YoY YoY YoY Gross profit 54.0 50.6 3.5 53.7 51.3 2.4 53.5 51.8 1.7 Operating profit 34.7 31.4 3.3 33.7 30.0 3.7 33.0 29.2 3.9 Adjusted EBITDA 54.0 51.6 2.4 52.2 50.1 2.1 51.1 50.2 0.8 Profit before tax 32.1 27.9 4.2 29.4 26.5 2.9 27.7 25.7 2.0 Net income 22.2 20.8 1.5 20.5 20.9 -0.4 19.4 20.9 -1.5
Source: Company
Gross margins improved by 2.4ppt YoY to 53.7% as cost of services increased slower than revenues. Depreciation and amortization jumped 51.5% to PHP1.7b due to the continuing rollout of their fiber network. Bandwidth and leased line costs increased by 72.3% to PHP997.8m due to the purchase of additional bandwidth capacity from international carriers. Network and materials and supplies costs increased by 48.4% to PHP807.4m due to expansion of residential subscriber base.
Operating margins improved as well, to 33.7%, higher by 3.7ppt YoY, as provisions increased at a slower pace than revenues. Provisions increased by 32.8% to PHP490.8m, due to a significantly higher level of receivables outstanding for more than 90 days, resulting from a 30-day payment extension that the company implemented during the ECQ period. General & administrative expenses (GAEx) increased 80.8% to PHP1.8b as personnel costs and professional fees jumped by 106.4% and 143.8%, due to an increase in headcount needed to support the business as it grew in scale and higher number of consultants and retainers related to their initial public offering.
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Adjusted EBITDA margin improved to 52.2% in 9M20 vs 50.1% in 9M19, resulting from management of direct costs such as international bandwidth and leased line costs. Net profit margin declined slightly by - 0.4ppt to 20.5%. This was caused by higher finance costs (+104.5%) as they drew down on additional long-term loans to fund their fiber and subscriber base expansion. Taxes also increased by 185.7% YoY, with an effective tax rate of 30.3% in 9M20, vs 21.4% in 9M19, due to higher profit before taxes.
8.2 Key revenue assumptions
Converge’s revenues come from two streams: 1) the residential business segment offering FTTH/FTTP and HFC services, and 2) enterprise business segment providing services to corporate clients.
Port deployment. We assume port deployment growth from 2.0m in 2019 to 5.4m by 2022, averaging 1.1m new ports per year (Fig.67). New ports deployed will be all-FTTH/FTTP, increasing gross FTTH/FTTP ports by 56% p.a. from 2019 to 2022. Assuming port utilization rate of 40% within the first 12 months, this leads to residential subscriber growth of 61% p.a. for the same period. We believe this level of high subscriber growth can be sustained due to a large estimated addressable market size; 15.1 times bigger than the current fiber broadband subscriber market size (Fig.21). For the enterprise business, we assume growth of customers from 10K to 13.3K from 2019 to 2022.
ARPU. We assume residential FTTH and HFC ARPU levels to be sustained, similar to 2019 levels of PHP1,399 and PHP1,155, respectively. For the enterprise business, we assume ARPU decline of 11% in 2020, a temporary decline because of the impact of the pandemic, before recovering in 2021 (+2.5%) and 2022 (+3.0%), as corporates are affected by the lockdown and prolonged economic slowdown in 2020.
Figure 67: Revenue assumptions 3Y CAGR 2019- 2017A 2018A 2019A 2020F 2021F 2022F 2022F (%) Residential - FTTH FTTH ports deployed (m) 0.106 0.381 1.212 2.541 3.736 4.636 56% FTTH ARPU (PHP) 1,561 1,293 1,399 1,399 1,399 1,399 0% FTTH subscribers 24,823 118,662 330,621 777,091 1,310,169 1,958,923 81% FTTH residential revenues (PHPm) 307 1,147 3,875 9,298 17,520 27,441 92% Residential - HFC HFC ports deployed (m) 0.508 0.670 0.798 0.811 0.811 0.811 1% HFC ARPU (PHP) 1,124 1,112 1,155 1,155 1,155 1,155 0% HFC subscribers 102,669 146,203 199,008 214,964 230,920 246,876 7% HFC residential revenues (PHPm) 1,213 2,004 2,479 2,869 3,090 3,311 10% Enterprise Enterprise ARPU (PHP) 22,319 24,857 27,462 24,491 25,103 25,856 -2% Enterprise customers 6,043 6,539 10,083 10,783 11,783 13,283 10% Enterprise revenues (PHPm) 1,421 1,904 2,786 3,066 3,399 3,889 12% Total revenues (PHPm) 2,941 5,055 9,140 15,233 24,009 34,641 56%
Source: Company, Maybank Kim Eng
We estimate consolidated revenue CAGR of 56% from 2019-22F (Fig.67), driven by growth in new subscribers adds coming from newly-deployed ports, in addition to increasing port utilization rates from older vintages.
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Converge ICT Solutions Inc.
The largest growth driver comes from residential FTTH revenues, which we forecast to grow by 92% compounded p.a. from 2019-22F. This results in higher revenue contribution by residential FTTH from 42% in 2019 to 79% in 2022F.
We forecast 10% residential HFC CAGR from 2019-22F, with revenue contribution expected to decline from 27% in 2019 to 10% in 2022F, due to the outsized contribution by residential FTTH.
Lastly, we forecast enterprise revenue compounded growth of 12% p.a. from 2019-22F. Revenue contribution is expected to decline from 30% in 2019 to 11% in 2022F, similar to residential HFC, also due to the larger contribution of residential FTTH.
Figure 68: Revenue growth Figure 69: Revenue segment contribution
Source: Company, Maybank Kim Eng Source: Company, Maybank Kim Eng
Figure 70: Residential subscriber growth Figure 71: Port deployment
Source: Company, Maybank Kim Eng Source: Company, Maybank Kim Eng
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Converge ICT Solutions Inc.
Figure 72: Residential ARPU Figure 73: Enterprise customers and ARPU
Source: Company, Maybank Kim Eng Source: Company, Maybank Kim Eng
8.3 P&L assumptions
Cost of services (CoS). We assume CoS, excluding depreciation, to range from 33-35% of total revenues from 2020- 22F (2019: 32%). Bandwidth and leased line costs are the largest contributor to CoS, roughly 8% to 9% of total revenues and 23-25% of total costs. We estimate transit costs comprise 56-63% of bandwidth costs, while leasing of international capacity comprise the rest. For network materials and supplies, comprising 6% to 8% of total revenues, we assume FTTH/FTTP cost of USD45 per addition and HFC cost of USD20 per addition, based on historic costs and assuming 5% cost inflation for the period.
General & administrative expenses (GAEx). We estimate GAEx to range from 15-16% of total revenues. Personnel costs contribute the most to this expense, roughly 32-37% of total GAEx, representing 5% to 6% of total revenues. We assume average personnel cost of USD9K/headcount/year.
Finance costs and income tax. We assume a blended interest cost of 3.5-3.9%. Converge has undrawn debt facilities worth USD422m. Effective tax rate was at 23.7% in 2019 and we maintain the same rate throughout the forecast period.
Figure 74: Profit & loss statement FYE 31 Dec (PHPm) 2017A 2018A 2019A 2020F 2021F 2022F Revenues 2,940 5,055 9,139 15,233 24,009 34,641 Cost of services (1,050) (2,328) (4,441) (8,311) (12,387) (16,758) Gross profit 1,890 2,726 4,699 6,922 11,623 17,883 Gen & admin expenses (442) (913) (1,415) (2,448) (3,534) (5,564) Provisions (78) (125) (530) (762) (1,372) (1,979) Other income (loss), net (72) 51 18 - - - Operating profit 1,299 1,740 2,772 3,713 6,717 10,340 Finance costs (11) (71) (275) (327) (333) (342) Earnings before tax 1,287 1,669 2,497 3,386 6,385 9,998 Income tax (57) (427) (593) (803) (1,515) (2,372) Net income 1,230 1,242 1,905 2,582 4,870 7,626 Minority interest (0) (15) (55) (75) (141) (221) Net income to common 1,231 1,257 1,960 2,657 5,011 7,847 PF Adjusted EBITDA 1,460 2,549 4,665 7,782 12,599 18,005
Source: Company, Maybank Kim Eng, *adjusted EBITDA includes pro forma adjustments from 2017-2019
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Converge ICT Solutions Inc.
Figure 75: Growth and profitability metrics Margins (%) 2017A 2018A 2019A 2020F 2021F 2022F Gross profit 64.3 53.9 51.4 45.4 48.4 51.6 Operating profit 44.2 34.4 30.3 24.4 28.0 29.9 PF Adjusted EBITDA 49.7 50.4 51.0 51.1 52.5 52.0 Profit before tax 43.8 33.0 27.3 22.2 26.6 28.9 Net income 41.9 24.6 20.8 17.0 20.3 22.0 Net income to common 41.9 24.9 21.4 17.4 20.9 22.7 ROAE 38.1 32.1 23.4 13.5 16.9 21.8 Growth (%) 2017A 2018A 2019A 2020F 2021F 2022F Revenue 55.2 71.9 80.8 66.7 57.6 44.3 Gross profit 52.5 44.2 72.4 47.3 67.9 53.9 Operating profit 121.8 34.0 59.4 33.9 80.9 53.9 PF Adjusted EBITDA 63.4 74.6 83.0 66.8 61.9 42.9 Net income 114.2 0.9 53.4 35.6 88.6 56.6 Net income to common 114.2 2.2 55.9 35.6 88.6 56.6
Source: Company, Maybank Kim Eng
8.4 Capex assumptions
Converge has spent around PHP23b of capex from Jan 2016 to Jun 2020, mainly on backbone, distribution, and customer-premises equipment (CPE) infrastructure. We estimate PHP32b of total capex spending in 2020 and 2021. On backbone, construction of the extension to Visayas and Mindanao started in Jun 2019 and is due to be completed by 2021. On distribution, high port additions were seen in Jun and Jul 2020 with 120K and 150K ports, respectively.
We forecast total capex spending of PHP48b from 2020 to 2022 (Fig.76), mainly on CPE and IT-related spending on port additions, comprising 22.9- 47.4%, and distribution network expansion spending, comprising 37.6- 50.3%, of total capex, with the rest of spending for core network and backbone expansion (Fig.77).
Figure 76: Capex components Capex (PHP m) 2020F 2021F 2022F Core network and backbone 4,582 3,317 2,357 Distribution network 8,570 7,743 5,876 CPE and IT-related 3,898 4,023 7,416 Total capex (PHPm) 17,050 15,084 15,649
Source: Maybank Kim Eng; USD:PHP 50
Figure 77: Capex breakdown
Source: Maybank Kim Eng
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Converge ICT Solutions Inc.
8.5 Balance sheet
We expect total assets to grow from PHP31b in 2019 to PHP77b by 2022F. Growth in total assets is led by an increase in PPE from PHP16b in 2019 to PHP51b in 2022F, driven by large capex spending on network infrastructure to support expansion activities (Fig.78).
Total liabilities are expected to increase to PHP37b by 2022F from PHP19b in 2019, as we expect the company to finance their capital expenditures via debt. Debt service coverage ratio (DSCR) is seen to grow to 7.2x by 2022F, within their financial covenant of up to 1.2x. Retained earnings are expected to grow at a 69% CAGR, from 2019-22F.
Figure 78: Balance sheet FYE 31 Dec (PHPm) 2017A 2018A 2019A 2020F 2021F 2022F CURRENT ASSETS Cash and cash equivalent 421 477 6,233 9,973 6,943 7,051 Trade and other receivables, net 472 918 2,106 3,509 5,531 7,980 Due from related parties 30 474 587 622 659 699 Network materials and supplies 641 1,443 1,314 1,412 1,510 1,608 Deferred contract costs 65 177 489 738 621 778 Other current assets 33 142 475 793 1,249 1,802 Total current assets 1,662 3,631 11,204 17,047 16,513 19,917 NON-CURRENT ASSETS PPE, net 3,212 7,891 15,589 29,773 40,679 51,083 Right-of-use assets, net - - 1,638 1,475 1,311 1,147 Intangible assets, net 83 537 670 1,084 1,765 2,885 Advances to fixed assets suppliers - 336 1,214 1,214 1,214 1,214 Deferred contract costs, net 33 80 229 346 291 364 Deferred input value-added tax, net 7 105 75 75 75 75 Deferred income tax assets, net 38 57 539 539 539 539 Financial asset at FV through profit or loss - 19 - - - - Total non-current assets 3,372 9,025 19,955 34,505 45,874 57,307 TOTAL ASSETS 5,034 12,656 31,159 51,552 62,387 77,224 CURRENT LIABILITIES Trade and other payables 961 4,342 7,176 10,581 15,657 21,513 Dividends payable - - 808 808 808 808 Due to related parties 11 423 167 167 167 167 Deferred revenue 35 105 199 332 524 756 Loans payable 278 1,521 1,098 357 1,819 1,774 Lease liabilities, current portion - - 355 340 326 314 Income tax payable 32 155 358 485 914 1,432 Finance lease obligations - 62 - - - - Provision for contingencies 40 - - - - - Total current liabilities 1,358 6,609 10,160 13,070 20,215 26,764 NON-CURRENT LIABILITIES Deferred revenue, net 11 47 82 137 215 311 Loans payable, net 348 1,203 6,852 9,095 7,276 7,096 Lease liabilities, net - - 1,375 1,316 1,264 1,216 Retirement benefit obligation 55 65 31 31 31 31 Subscribers' deposits, net 36 95 492 820 1,292 1,864 Finance lease obligations, net - 29 - - - - Total non-current liabilities 450 1,439 8,831 11,398 10,077 10,518 TOTAL LIABILITIES 1,808 8,048 18,992 24,468 30,293 37,282 EQUITY Ordinary shares 1,250 1,250 1,250 1,882 1,882 1,882 Convertible preferred shares - - 307 - - - Additional paid-in capital - - 6,541 18,495 18,495 18,495 Retained earnings - appropriated - 2,200 2,200 - - - Retained earnings - unappropriated 1,971 1,028 1,814 6,672 11,683 19,530 Revaluation reserves 2 10 55 36 36 36 Other reserves - 83 - - - - Non-controlling interest 4 37 0 0 0 0 TOTAL EQUITY 3,226 4,609 12,168 27,084 32,095 39,942 TOTAL LIABILITIES and EQUITY 5,034 12,656 31,159 51,552 62,388 77,224
Source: Company, Maybank Kim Eng December 2, 2020 40
Converge ICT Solutions Inc.
8.6 Cashflow statement
Cashflow from operating activities are expected to reach PHP18b by 2022F (Fig.79). We expect operating income to grow by 55% compounded p.a. from 2019-22F. Depreciation and amortization are expected to increase from PHP1.7b to PHP5.7b mostly due to higher investments in PPE related to infrastructure investments. Lastly, we expect these investments to be supported by net additions to short and long- term debt totaling PHP921m from 2020 to 2022F.
Figure 79: Cash flow statement FYE 31 Dec (PHPm) 2017A 2018A 2019A 2020F 2021F 2022F Operating Activity Net income excl int exp and taxes 1,299 1,740 2,772 3,713 6,717 10,340 Add: Depreciation 397 976 1,666 3,307 4,510 5,686 Operating CF before WC changes 1,696 2,716 4,439 7,020 11,228 16,026 Changes in deferred revenue 1 106 129 188 270 327 Changes in subscription deposits 15 58 397 328 472 572 Changes in accounts receivable (164) (447) (1,187) (1,404) (2,022) (2,449) Changes in inventory (242) (802) 129 (98) (98) (98) Changes in accounts payable 569 3,382 2,834 3,405 5,076 5,856 Taxes paid (42) (422) (843) (676) (1,085) (1,855) Changes in other assets and other liabs (20) (526) (1,595) (352) (494) (593) Cash from operating activities 1,813 4,065 4,303 8,411 13,347 17,787 Changes in deferred contract costs (63) (159) (462) (365) 172 (230) Changes in lease obligations - 91 1,639 (74) (66) (60) Cash after deferred contract costs and lease obligations 1,750 3,998 5,480 7,972 13,453 17,498 Changes in short-term investments ------Changes in intangible assets (25) (455) (133) (414) (681) (1,120) Changes in right of use assets - - (1,638) 164 164 164 Changes in PPE (1,987) (5,655) (9,365) (17,491) (15,417) (16,089) Cash after investing activities (263) (2,112) (5,656) (9,768) (2,482) 452 Changes in equity 1 91 6,596 12,259 - - Changes in minority shareholder 4 49 18 75 141 221 Changes in short-term debt 247 1,243 (423) (741) 1,462 (45) Changes in long term debt 127 855 5,648 2,243 (1,819) (179) Interest expense (11) (71) (275) (327) (333) (342) Cash after third party financing 105 56 5,909 3,740 (3,030) 107 Less: Dividends - - (153) - - - Beginning cash balance 316 420 477 6,233 9,973 6,943 Ending cash balance 420 477 6,233 9,973 6,943 7,051
Source: Company, Maybank Kim Eng
8.7 Net debt and gearing
We estimate net debt to increase marginally to PHP1.8b by end-2022F from just PHP1.7b as of end-2019, despite embarking on a rapid expansion of port deployments fueled by capex spending. We estimate capex of PHP48b in 2020-22F (Fig.76) to be partially funded by debt, totaling PHP25b over the same period, with the rest to be funded by internally generated cash and estimated net proceeds from its recent IPO of around PHP7.7b. This would increase net gearing from 14% end-2019 to just 4.6% at end-2022F.
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Converge ICT Solutions Inc.
9. Valuation
9.1 Initiate BUY on DCF-based TP of PHP24.50
We use discounted cashflow (DCF) method to arrive at our equity value estimate for Converge. We believe that DCF is an appropriate method to estimate the value of the firm as it captures the period of rapid growth from 2020 to 2025. Our key assumptions are:
Weighted average cost of capital (WACC). We estimate a WACC of 8.6%, based on cost of equity of 10.0% and after-tax cost of debt of 4.6%, and debt to capital ratio of 25%:75%. We use a five-year forecast of discrete free cash flows from 2021 to 2025, with the terminal value based on 2025 estimates (Fig.80 & 81).
Cost of equity. We estimate a cost of equity of 10.0%, based on 4.0% risk free rate, beta of 1.0x, and 6.0% market risk premium for the Philippines, in line with the assumptions used for companies under coverage.
Cost of debt. We estimate an after-tax cost of debt of 4.6%, based on 6.0% interest rate and 23.7% effective tax rate.
Long term growth (LTG). We utilize 1.0% long term growth rate to compute the terminal value (Fig.82).
Figure 80: WACC assumptions Assumptions WACC 8.6% Cost of equity 10.0% Equity to capital 75.0% Cost of debt (after-tax) 4.6% Debt to capital 25.0%
Cost of equity 10.0% Risk free rate 4.0% Beta 1.00 Equity risk premium 6.0%
Cost of debt (after-tax) 4.6% Long term growth (LTG) 1.0%
Source: Maybank Kim Eng
Figure 81: Discounted cash flow estimates (2021F to 2025F) PHP m 2021F 2022F 2023F 2024F 2025F EBIT 6,717 10,340 14,670 18,857 22,390 Less: Taxes -2,015 -3,102 -4,401 -5,657 -6,717 Add: Depreciation & amortization 4,510 5,686 6,721 7,572 8,507 Add: Other non-cash adjustments 3,423 4,313 5,313 6,020 6,834 Installation cost amortization 1,190 1,306 1,504 1,584 1,731 Lease payment amortization -176 -170 -164 -158 -153 Provision for impairment of receivables 1372 1979 2594 3142 3669 Subscriber acquisition cost amortization 1,038 1,197 1,379 1,452 1,587 Add: (Increase)/Decrease in WC 3,187 3,297 2,803 1,933 2,027 Less: Deferred contract cost -2,056 -2,734 -2,781 -3,026 -3,322 Less: Fixed asset capex -15,084 -15,649 -14,471 -12,121 -11,593 Free cashflow to firm (FCFF) -1,317 2,152 7,853 13,577 18,125 Discounted FCFF -1,212 1,824 6,124 9,745 11,974
Source: Maybank Kim Eng
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Converge ICT Solutions Inc.
Figure 82: Valuation estimates PHP m Annual cash flows 28,455 Terminal cash flows (LTG: 1.0%) 158,216 Enterprise value 186,671 Add: Cash 6,943 Less: Debt 9,095 Net debt 2,152 Equity value (PHP m) 184,519 Equity value (USD m) 3,690 Shares outstanding (m) 7,526 Target price (PHP/sh) 24.50 Implied FY21E EV/EBITDA 14.8x Implied FY22E EV/EBITDA 10.4x
Source: Maybank Kim Eng
Figure 83: Sensitivity analysis – LTG/WACC (PHP) Figure 84: Sensitivity analysis – LTG/WACC (USD) Equity value (PHP m) Equity value (USD m) LTG / LTG / WACC 7.4% 8.0% 8.6% 9.3% 9.9% WACC 7.4% 8.0% 8.6% 9.3% 9.9% 1.0% 229,744 205,012 184,519 167,276 152,577 1.0% 4,595 4,100 3,690 3,346 3,052 2.0% 269,828 236,732 210,134 188,309 170,093 2.0% 5,397 4,735 4,203 3,766 3,402 3.0% 328,317 281,141 244,826 216,033 192,661 3.0% 6,566 5,623 4,897 4,321 3,853 4.0% 421,662 347,754 294,459 254,241 222,839 4.0% 8,433 6,955 5,889 5,085 4,457
Value per share (PHP/sh) Value per share (USD/sh) LTG / LTG / WACC 7.4% 8.0% 8.6% 9.3% 9.9% WACC 7.4% 8.0% 8.6% 9.3% 9.9% 1.0% 30.50 27.20 24.50 22.20 20.30 1.0% 0.61 0.54 0.49 0.44 0.41 2.0% 35.90 31.50 27.90 25.00 22.60 2.0% 0.72 0.63 0.56 0.50 0.45 3.0% 43.60 37.40 32.50 28.70 25.60 3.0% 0.87 0.75 0.65 0.57 0.51 4.0% 56.00 46.20 39.10 33.80 29.60 4.0% 1.12 0.92 0.78 0.68 0.59
Source: Maybank Kim Eng; other sensitivity scenarios in Appendix 3 Source: Maybank Kim Eng, other sensitivity scenarios in Appendix 3
9.2 DCF-based value implies 14.8x EV/EBITDA multiple
We believe that valuation using the DCF methodology is appropriate as this approach captures the period of rapid growth of the company, as opposed to EV/EBITDA multiple valuation method which does not take into account the company’s high medium-term growth prospects. The DCF value of PHP185b implies a 2021F EV/EBITDA multiple of 14.8x (2022F: 10.4x). This range is within its regional broadband peers’ EV/EBITDA multiple range of 9.2-15.4x.
At the implied 2021F EV/EBITDA multiple of 14.8x, it is 3.7% lower than NetLink’s 15.4x (Fig.85). We believe the multiple is justified given Converge’s high growth prospects (56% earnings CAGR from 2019-22E), ahead of the industry and its broadband peers, as well as having the largest equity value among its peers at USD3.7b (PHP50.00:USD1). Its peers’ market capitalisation ranges from USD2.1b to USD2.8b.
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Converge ICT Solutions Inc.
Figure 85: Implied 2021F EV/EBITDA valuation
Source: Maybank Kim Eng
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Converge ICT Solutions Inc.
Figure 86: Telco firms Company Ticker Currency Mkt Cap EV/EBITDA P/E 2019-22E CAGR EBITDA Margin USD m 2020F 2021F 2022F 2020F 2021F 2022F Revenue EBITDA NI 2020F 2021F 2022F Regional broadband - direct comparable HKBN 1310 HK HKD 2,267 9.8x 9.2x 8.9x 36.8x 27.6x 22.1x 4.5% 3.2% 17.0% 27% 27% 26% Time Dotcom TDC MK MYR 2,058 13.1x 11.8x 10.6x 24.7x 22.1x 19.9x 6.9% 7.5% 7.5% 45% 46% 46% NetLink Trust CJLU SP SGD 2,821 15.7x 15.4x 17.1x 42.0x 38.6x 42.0x -2.4% -2.9% 2.6% 73% 72% 72% Mean 12.9x 12.1x 12.2x 34.5x 29.4x 28.0x 3.0% 2.6% 9.0% 48% 48% 48% Philippine telcos Converge ICT (implied) CNVRG PM PHP 3,690 24.0x 14.8x 10.4x 69.4x 36.8x 23.5x 55.9% 56.9% 55.8% 51% 52% 52% PLDT TEL PM PHP 6,201 5.9x 5.5x 5.3x 11.4x 10.8x 11.0x 4.2% 3.2% 1.6% 48% 48% 47% Globe GLO PM PHP 5,467 5.2x 4.9x 4.8x 12.4x 11.6x 11.0x 4.0% 3.1% 2.8% 47% 46% 46% Mean 5.5x 5.2x 5.0x 11.9x 11.2x 11.0x 4.1% 3.1% 2.2% 48% 47% 46% Regional telcos HK Telecom 6823 HK HKD 10,006 9.4x 8.9x 8.8x 15.7x 14.8x 14.5x 2.0% 2.1% 2.6% 38% 38% 38% SmarTone 315 HK HKD 624 2.3x 2.3x 2.3x 13.5x 16.4x 16.4x 1.2% 0.1% -6.4% 32% 32% 31% StarHub CC3 SP SGD 1,693 6.7x 6.6x 6.4x 15.6x 16.0x 15.2x 3.2% 1.5% 1.1% 26% 24% 25% Singtel ST SP SGD 28,639 13.1x 12.6x 12.5x 19.0x 15.0x 12.8x 1.2% 1.5% 13.7% 25% 26% 26% Telekomunikasi Indonesia TLKM IJ IDR 22,624 5.5x 5.2x 4.9x 15.6x 14.6x 13.5x 3.3% 3.7% 5.1% 51% 52% 52% XL Axiata EXCL IJ IDR 1,849 4.4x 4.1x 3.8x 16.2x 20.0x 18.7x 4.1% 4.5% -6.2% 47% 48% 48% Indosat ISAT IJ IDR 854 3.3x 3.1x 2.9x na na na 3.9% 4.7% -27.7% 40% 41% 41% Telekom Malaysia T MK MYR 4,648 6.1x 6.0x 5.9x 19.2x 18.7x 18.2x 1.0% 1.4% 2.2% 36% 36% 36% Axiata Group AXIATA MK MYR 8,504 5.8x 5.6x 5.3x 43.0x 32.3x 27.0x 2.4% 2.9% 17.8% 43% 44% 44% DiGi.com DIGI MK MYR 7,802 11.9x 11.6x 11.4x 24.8x 23.6x 23.0x 0.7% 1.4% 2.2% 50% 51% 51% Maxis Bhd MAXIS MK MYR 9,481 12.8x 12.2x 11.7x 26.6x 24.7x 23.2x 2.0% 3.0% 4.8% 40% 40% 41% Advanced Info Service ADVANC TB THB 17,549 8.1x 7.8x 7.6x 19.0x 18.5x 17.1x 2.4% 2.3% 3.5% 48% 48% 48% Total Access Comm DTAC TB THB 2,897 5.1x 5.1x 5.0x 15.8x 18.8x 19.5x 1.0% 0.6% -5.8% 38% 37% 37% TRUE Corp TRUE TB THB 3,704 9.0x 8.6x 8.2x na na 146.1x 2.4% 3.0% -212.7% 34% 34% 35% Mean 7.4x 7.1x 6.9x 20.3x 19.4x 28.1x 2.2% 2.3% -14.7% 39% 39% 39% Global broadband Charter Comm. CHTR US USD 150,960 12.5x 11.6x 10.6x 46.1x 30.9x 22.3x 3.8% 5.4% 20.3% 38% 39% 40% Altice N.V. ATC NA EUR 6,735 7.1x 6.8x 6.7x na na 30.2x 1.1% 1.5% -157.3% 39% 40% 40% Liberty Global LBTYA US USD 12,790 3.8x 3.7x 4.8x 42.2x 32.5x 41.8x -2.8% -7.1% 43.8% 41% 41% 35% Altice USA ATUS US USD 19,102 9.8x 9.4x 9.0x 62.7x 22.8x 15.6x 1.7% 2.9% 43.5% 44% 45% 46% Telenet TNET BB EUR 5,080 7.1x 7.0x 7.0x 11.9x 10.9x 10.4x 0.7% 0.4% 4.1% 53% 53% 53% Mean 8.0x 7.7x 7.6x 40.7x 24.3x 24.1x 0.9% 0.6% -9.1% 43% 43% 43% Tower Companies Tower Bersama TBIG IJ IDR 2,348 12.9x 11.9x 11.2x 30.5x 25.7x 22.1x 5.2% 5.1% 11.2% 86% 86% 86% Protelindo TOWR IJ IDR 3,794 11.4x 10.5x 9.7x 20.0x 18.2x 16.4x 5.3% 5.4% 7.0% 85% 84% 85% American Tower AMT US USD 102,702 25.0x 22.9x 21.9x 53.7x 41.7x 36.0x 4.0% 4.5% 13.6% 64% 65% 65% Cellnex CLNX SM EUR 30,103 25.6x 20.3x 16.3x na 409.8x 214.3x 14.2% 16.3% -316.1% 72% 74% 77% Mean 18.7x 16.4x 14.8x 34.7x 123.9x 72.2x 7.2% 7.8% -71.1% 77% 77% 78% Total mean 10.1x 9.2x 8.7x 28.3x 37.4x 32.3x 4.7% 4.8% -15.5% 47% 47% 47%
Note: Based on data as of 1 Dec 2020, Converge market cap based on target price and shares post-IPO, EV/ EBITDA and EBITDA margins based on PF Adjusted EBITDA estimates; Source: Bloomberg, Maybank Kim Eng
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9.3 Telco peers
We also compare Converge with the rest of its telco peers on the basis of their implied EV/EBITDA multiple and expectations of EBITDA growth (Fig.87). Plotting these two factors on a scatter graph, we observe that the lower end of EV/EBITDA (x-axis) is where integrated telco names are bunched up, including Globe Telecom and PLDT, its domestic peers. In the middle are broadband service providers such as HKBN, Time dotCom and Link Net, while towards the higher end are the tower companies such as American Tower and Cellnex.
We find Converge’s position is somewhere between the broadband service providers and tower companies along the x-axis, which reflects its dual- nature as a pure play broadband service provider and an infrastructure company which has full control of the design and rollout of its end-to-end network in the Philippines.
From a growth perspective (y-axis), Converge’s key peers have EBITDA CAGR 2019-22F between -7.1% to 16.3%, with broadband and tower companies towards the higher end of the range vs. integrated telco firms who are in a more mature growth phase. We find that Converge is an outlier in terms of growth, at 57% CAGR from 2019-22F, as it continues on rapid expansion in an underserved market, ahead of its peers.
Figure 87: Key peers and Converge compared on expected growth and valuation
Source: Bloomberg, Maybank Kim Eng
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10. Key risks
10.1 Competition risk
Converge is competing against PLDT and Globe Telecom in the Philippines. These two telco firms have a long-standing history in the industry and are considered a duopoly in the wireless space. They also enjoy economies of scale and the backing of their parent companies with large balance sheets. More recently, the government has awarded frequency to a third mobile player, Dito CME, which would allow new competition to enter the mobile segment.
PLDT and Globe Telecom are also incumbents in the fixed internet space, with extensive networks spanning the country. However, they are reliant on legacy copper infrastructure, and more recently, have started to focus on high-speed broadband deployment. Expansion by Converge to new locations will inevitably put the company against the offerings of these two firms. Converge currently has a market share advantage in the high- speed fixed broadband space, due to its relatively newer network and faster overall speed.
However, we re-iterate that these incumbents are focused on their mobile business, and the threat of incoming competition from Dito CME, will likely keep their focus on the mobile business, given the revenue contribution of this segment.
10.2 Technology risk
The telco space is inherently driven by technological advancement and Converge has to be able to upgrade their network in the future, if necessary, to compete effectively. Currently, Converge has the fastest and latest network in the country, though new technologies could emerge as competition for future demand.
Advancements in wireless technologies, particularly 5G Fixed Wireless Access (5G FWA), could be fast-paced and emerge as formidable competition. For now, Converge’s FTTH/FTTP technology delivers significant advantages over 5G FWA in terms of speed, data capacity, connection quality, range, scalability, and costs to deploy.
The two telco incumbents have started to deploy 5G in select areas, particularly those with high tower densities, to ensure connection quality. Mobile units that are able to utilize 5G are still limited in the country, though telco incumbents are trying to accelerate the arrival of 5G-capable mobile phones in the country. The third telco player will also be relying on 5G and VoLTE for their network rollout.
Currently, the market is still far from being able to adopt this technology due to low tower densities, limited 5G sites, and challenges inherent to this technology. Converge estimates that 5G is likely over a decade away from having critical mass in the Philippines, though technology adoption could be much faster if site rollout and 5G-capable units are available extensively in the future.
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10.3 Network risk
The proper functioning of Converge’s network and infrastructure is reliant on their ability to conduct maintenance, upgrades, repairs, and expansion activities. Disruptions caused by physical damage, either caused by natural calamities or human activities, could make the shallower microtrench-deployed fiber network more susceptible. However, this deployment technology also makes repairs and installations more efficient, which should allow the company to maintain reliable connections.
10.4 Regulatory risk
The telco industry is highly regulated by the government through the National Telecommunications Commission (NTC). Converge is required to obtain and maintain a franchise from the Philippine Congress in order to operate telecommunications systems throughout the country.
Converge’s telco franchise was granted in 2009, through Republic Act No. 9707 (R.A. No. 9707), valid for a term of 25 years, or up to 2034. R.A. No. 9707 mandates the company to offer at least 30% of outstanding capital stock to the public, with the NTC confirming that this requirement must be complied within 10 years of commencement of operations beginning 2012. Failure to comply results in revocation.
As a regulated entity, Converge is subject to changes in the regulatory regime and complying with existing or newly-added regulations could have a material impact to the business.
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Appendix 1: Management
Figure 88: Key management Name Position Bio Dennis CEO, Founder & Dennis Anthony H. Uy graduated from the Holy Angels University, Pampanga with a Bachelor of Science Anthony H. Executive Director Degree in Electrical Engineering and eventually in 1996, he founded ComClark Network and Technology Uy Corporation (“ComClark”) which provides customer-focused Information and Communication Technology (ICT) and Broadcast services and Solutions to customers. In 2007, Dennis Uy, together with Maria Grace Y. Uy, co-founded Converge, a majority-owned subsidiary of ComClark. Dennis Uy also serves as a board member of several technology, media, power, and real estate companies. Maria Grace President, Chief Maria Grace Y. Uy graduated from De La Sale University Manila with a Bachelor of Science Degree in Y. Uy Resources Officer, Accountancy and is a Certified Public Accountant (CPA). She held various business management and Founder & Executive financial roles in companies like IBM Philippines and Savers Mall but eventually became the Chief Director Finance Officer of ComClark and the Angeles City Cable Television Network, where she spearheaded process improvement, forecasting, and developing budgets that transformed these companies into the successful organizations they are today. Jesus Chief Operating Jesus Romero graduated from De La Salle University with a Bachelor of Science Degree in Electronics Romero Officer and Communications Engineering. He has held senior leadership roles in Globe Telecom, DTSI group, Comstream Corporation and Hughes Network Systems. With 33 years of experience in the industry, he is the Chief Operating Officer of Converge. Benjamin Chief Strategy Officer Benjamin Rex Emilio Azada graduated from the University of the Philippines Diliman with a Bachelor of Rex Emilio Science Degree in Industrial Engineering and has a Postgraduate Diploma in Business Administration Azada (with Merit) from the University of Durham, UK. He was a partner at Price Waterhouse Coopers’ Southeast Asia Consulting practice where his clients included top enterprises in telecommunications, media, technology, and financial services. With 24 years of work experience, he is now the Chief Strategy Officer of Converge where he oversees key strategic initiatives that drive corporate performance. Matthias Chief Financial Officer Matthias Vukovich graduated with a Masters of Arts Degree in Business Administration from the Vienna Vukovich Adviser University of Economics, and a Bachelor of the Arts Degree in Japanese Studies from Vienna University. He is an employee of Converge Solutions (Global) Limited in Hong Kong and was appointed as consultant and advisor to Converge. Prior to working with Converge, he was the Chief Finance Officer in uCloudlink, Shenzen, and Executive Director in Morgan Stanley. He has experience in financial planning, capital allocation, treasury, and accounting operations. Ronald G. Chief Technology Ronald G. Brusola graduated from the Polytechnic University of the Philippines with a Bachelor of the Brusola Officer Arts Degree in Electronics and Communication Engineering. With 31 years of industry experience, he was previously the R&D and RF Applications Engineer in Signal Consolidated Corp., the Facilities Engineer, Administrator for Transmission and Customer and Engineering, and Telephone Sales Area Manager in Philippine Global Communications, manager of various teams in Bayantel, and the director for Data and Transmission Network Engineering in Globe Telecom. Afterwards, he became a consultant for Strategy and Control in ComClark and was eventually appointed as the Chief Technology Officer of Converge. Miles Tonn President and Chief Miles Tonn C. Chua graduated from the University of San Carlos Cebu with a Bachelor of Science Degree C. Chua Operating Officer, in Electronics and Communications Engineering. He subsequently held various positions in Philcom, MetroWorks ICT Islacom, Globe Telecom, Sun Cellular, PT Smartfren Indonesia, and Huawei. In MetroWorks, as President Construction, Inc. and COO, Miles and his team are responsible for pioneering the microtrenching technology in the Philippines that paved the way for the rapid deployment of fiber in urban areas.
Source: Company
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Appendix 2: Products
Figure 89: Latest Converge product offerings - Residential
Source: Company
Figure 90: Latest Converge product offerings - Enterprise
Source: Company
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Appendix 3: Other sensitivity scenarios
Figure 91: Sensitivity analysis – ARPU Figure 92: Sensitivity analysis – Subs FTTH ARPU FTTH subs Revenue EBITDA Implied Revenue EBITDA Implied CAGR chg NI (2019- Implied Value per CAGR chg NI (2019- Implied Value per (2019-22E (2019-22E 2021F (2019-22E (2019-22E 2021F from base 22E CAGR) 2021F PER share (PHP) from base 22E CAGR) 2021F PER share (PHP) CAGR) CAGR) EV/EBITDA CAGR) CAGR) EV/EBITDA 2.00% 58.4% 60.7% 65.4% 17.3x 41.6x 30.10 2.00% 57.5% 58.0% 60.4% 15.6x 38.4x 26.10 1.00% 57.2% 58.8% 62.1% 16.0x 39.1x 27.20 1.00% 56.7% 57.4% 59.6% 15.2x 37.6x 25.30 0.00% 55.9% 56.9% 58.8% 14.8x 36.8x 24.50 0.00% 55.9% 56.9% 58.8% 14.8x 36.8x 24.50 -1.00% 54.7% 54.9% 55.4% 13.6x 34.4x 21.90 -1.00% 55.1% 56.3% 58.0% 14.5x 36.0x 23.70 -2.00% 53.5% 52.9% 51.9% 12.4x 32.1x 19.50 -2.00% 54.4% 55.7% 57.2% 14.1x 35.2x 23.00
HFC ARPU HFC subs Revenue EBITDA Implied Revenue EBITDA Implied CAGR chg NI (2019- Implied Value per CAGR chg NI (2019- Implied Value per (2019-22E (2019-22E 2021F (2019-22E (2019-22E 2021F from base 22E CAGR) 2021F PER share (PHP) from base 22E CAGR) 2021F PER share (PHP) CAGR) CAGR) EV/EBITDA CAGR) CAGR) EV/EBITDA 2.00% 56.2% 57.3% 59.6% 14.9x 37.0x 25.00 2.00% 56.2% 57.0% 59.0% 14.9x 37.0x 24.70 1.00% 56.1% 57.1% 59.2% 14.9x 36.8x 24.70 1.00% 56.0% 56.9% 58.9% 14.8x 36.9x 24.60 0.00% 55.9% 56.9% 58.8% 14.8x 36.8x 24.50 0.00% 55.9% 56.9% 58.8% 14.8x 36.8x 24.50 -1.00% 55.8% 56.6% 58.4% 14.8x 36.8x 24.30 -1.00% 55.8% 56.8% 58.7% 14.8x 36.7x 24.40 -2.00% 55.6% 56.4% 58.0% 14.7x 36.8x 24.10 -2.00% 55.7% 56.7% 58.5% 14.8x 36.6x 24.30
Enterprise ARPU Enterprise customers Revenue EBITDA Implied Revenue EBITDA Implied CAGR chg NI (2019- Implied Value per CAGR chg NI (2019- Implied Value per (2019-22E (2019-22E 2021F (2019-22E (2019-22E 2021F from base 22E CAGR) 2021F PER share (PHP) from base 22E CAGR) 2021F PER share (PHP) CAGR) CAGR) EV/EBITDA CAGR) CAGR) EV/EBITDA 2.00% 56.0% 57.0% 59.1% 14.8x 36.6x 24.60 2.00% 56.2% 57.3% 59.5% 15.0x 37.1x 25.00 1.00% 56.0% 57.0% 59.0% 14.8x 36.8x 24.60 1.00% 56.1% 57.1% 59.2% 14.9x 37.0x 24.80 0.00% 55.9% 56.9% 58.8% 14.8x 36.8x 24.50 0.00% 55.9% 56.9% 58.8% 14.8x 36.8x 24.50 -1.00% 55.9% 56.8% 58.6% 14.8x 37.0x 24.50 -1.00% 55.8% 56.6% 58.4% 14.7x 36.7x 24.30 -2.00% 55.8% 56.7% 58.5% 14.8x 37.0x 24.40 -2.00% 55.6% 56.4% 58.0% 14.7x 36.7x 24.10 Source: Maybank Kim Eng Source: Maybank Kim Eng
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FYE 31 Dec FY18A FY19A FY20E FY21E FY22E Key Metrics P/E (reported) (x) na na 20.5 24.0 15.3 Core P/E (x) na na 20.5 24.0 15.3 Core FD P/E (x) na na 45.3 24.0 15.3 P/BV (x) na na 4.4 3.8 3.0 P/NTA (x) na na 4.4 3.8 3.0 Net dividend yield (%) na na 0.0 0.0 0.0 FCF yield (%) na na nm nm 1.2 EV/EBITDA (x) 46.0 27.6 7.7 10.9 7.6 EV/EBIT (x) 72.7 44.3 14.5 18.2 11.8
INCOME STATEMENT (PHP m) Revenue 5,054.6 9,139.5 15,233.1 24,009.3 34,640.6 Gross profit 2,726.1 4,698.8 6,922.2 11,622.7 17,882.9 EBITDA 2,664.9 4,420.3 7,020.1 11,227.8 16,026.3 Depreciation (976.4) (1,666.4) (3,307.4) (4,510.3) (5,685.9) Amortisation 0.0 0.0 0.0 0.0 0.0 EBIT 1,688.5 2,754.0 3,712.7 6,717.5 10,340.3 Net interest income /(exp) (70.6) (275.1) (327.0) (332.8) (342.4) Associates & JV 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Other pretax income 51.1 18.3 0.0 0.0 0.0 Pretax profit 1,669.1 2,497.3 3,385.7 6,384.6 9,998.0 Income tax (427.5) (592.5) (803.3) (1,514.9) (2,372.2) Minorities 15.5 55.3 75.0 141.3 221.3 Discontinued operations 0.0 0.0 0.0 0.0 0.0 Reported net profit 1,257.1 1,960.0 2,657.3 5,011.1 7,847.1 Core net profit 1,257.1 1,960.0 2,657.3 5,011.1 7,847.1 Distributable Income 1,257.1 1,960.0 2,657.3 5,011.1 7,847.1
BALANCE SHEET (PHP m) Cash & Short Term Investments 476.7 6,233.0 9,973.2 6,943.1 7,050.5 Accounts receivable 918.4 2,105.5 3,509.2 5,530.9 7,979.9 Inventory 0.0 0.0 0.0 0.0 0.0 Property, Plant & Equip (net) 7,891.0 15,589.4 29,772.8 40,679.5 51,082.9 Intangible assets 0.0 0.0 0.0 0.0 0.0 Investment in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other assets 3,370.1 7,231.6 8,296.6 9,234.1 11,110.6 Total assets 12,656.1 31,159.5 51,551.7 62,387.5 77,223.9 ST interest bearing debt 1,521.5 1,098.3 357.0 1,818.9 1,774.1 Accounts payable 4,342.1 7,175.6 10,581.1 15,657.2 21,513.5 LT interest bearing debt 1,203.2 6,851.6 9,094.6 7,275.7 7,096.5 Other liabilities 981.0 3,866.0 4,435.0 5,541.0 6,898.0 Total Liabilities 8,047.6 18,991.7 24,467.9 30,292.5 37,281.9 Shareholders Equity 4,571.3 12,167.5 27,083.6 32,094.7 39,941.8 Minority Interest 37.2 0.3 0.3 0.3 0.3 Total shareholder equity 4,608.5 12,167.8 27,083.9 32,095.0 39,942.1 Total liabilities and equity 12,656.1 31,159.5 51,551.7 62,387.5 77,223.9
CASH FLOW (PHP m) Pretax profit 1,669.1 2,497.3 3,385.7 6,384.6 9,998.0 Depreciation & amortisation 976.4 1,666.4 3,307.4 4,510.3 5,685.9 Adj net interest (income)/exp 70.6 275.1 327.0 332.8 342.4 Change in working capital 2,133.2 1,775.6 1,903.9 2,956.5 3,309.3 Cash taxes paid (422.0) (843.0) (676.1) (1,085.5) (1,854.8) Other operating cash flow 0.0 0.0 0.0 0.0 0.0 Cash flow from operations 3,997.9 5,479.8 7,972.5 13,452.6 17,497.9 Capex (5,655.2) (9,364.7) (17,490.8) (15,417.0) (16,089.3) Free cash flow (1,657.3) (3,884.9) (9,518.3) (1,964.4) 1,408.6 Dividends paid 0.0 (152.6) 0.0 0.0 0.0 Equity raised / (purchased) 91.5 6,596.4 12,258.7 0.0 0.0 Change in Debt 2,098.3 5,225.2 1,501.8 (357.0) (224.0) Other invest/financing cash flow (476.3) (2,027.7) (501.9) (708.7) (1,077.2) Effect of exch rate changes 0.0 0.0 0.0 0.0 0.0 Net cash flow 56.1 5,756.4 3,740.2 (3,030.1) 107.4
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FYE 31 Dec FY18A FY19A FY20E FY21E FY22E Key Ratios Growth ratios (%) Revenue growth 71.9 80.8 66.7 57.6 44.3 EBITDA growth 50.7 65.9 58.8 59.9 42.7 EBIT growth 23.2 63.1 34.8 80.9 53.9 Pretax growth 29.7 49.6 35.6 88.6 56.6 Reported net profit growth 2.2 55.9 35.6 88.6 56.6 Core net profit growth 2.2 55.9 35.6 88.6 56.6
Profitability ratios (%) EBITDA margin 52.7 48.4 46.1 46.8 46.3 EBIT margin 33.4 30.1 24.4 28.0 29.9 Pretax profit margin 33.0 27.3 22.2 26.6 28.9 Payout ratio 0.0 0.1 0.0 0.0 0.0
DuPont analysis Net profit margin (%) 24.9 21.4 17.4 20.9 22.7 Revenue/Assets (x) 0.4 0.3 0.3 0.4 0.4 Assets/Equity (x) 2.8 2.6 1.9 1.9 1.9 ROAE (%) 32.3 23.4 13.5 16.9 21.8 ROAA (%) 14.2 8.9 6.4 8.8 11.2
Liquidity & Efficiency Cash conversion cycle nm nm nm nm nm Days receivable outstanding 49.5 59.6 66.3 67.8 70.2 Days inventory outstanding nm nm nm nm nm Days payables outstanding 409.9 466.9 384.6 381.3 399.3 Dividend cover (x) nm nm nm nm nm Current ratio (x) 0.5 1.1 1.3 0.8 0.7
Leverage & Expense Analysis Asset/Liability (x) 1.6 1.6 2.1 2.1 2.1 Net gearing (%) (incl perps) 48.8 14.1 net cash 6.7 4.6 Net gearing (%) (excl. perps) 48.8 14.1 net cash 6.7 4.6 Net interest cover (x) 23.9 10.0 11.4 20.2 30.2 Debt/EBITDA (x) 1.0 1.8 1.3 0.8 0.6 Capex/revenue (%) 111.9 102.5 114.8 64.2 46.4 Net debt/ (net cash) 2,248.0 1,716.8 (521.6) 2,151.5 1,820.1 Source: Company; Maybank
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Research Offices
ECONOMICS REGIONAL EQUITIES SINGAPORE THAILAND
Suhaimi ILIAS Anand PATHMAKANTHAN Thilan WICKRAMASINGHE Head of Research Maria LAPIZ Head of Institutional Research Chief Economist Head of Regional Equity Research (65) 6231 5840 [email protected] Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 Malaysia | Philippines | Global (603) 2297 8783 • Banking & Finance - Regional [email protected] (603) 2297 8682 [email protected] • Consumer • Strategy • Consumer • Materials • Services [email protected] WONG Chew Hann, CA CHUA Su Tye Jesada TECHAHUSDIN, CFA CHUA Hak Bin Head of ASEAN Equity Research (65) 6231 5842 [email protected] (66) 2658 6300 ext 1395 Regional Thematic Macroeconomist (603) 2297 8686 • REITs - Regional [email protected] (65) 6231 5830 [email protected] • Banking & Finance [email protected] LAI Gene Lih, CFA ONG Seng Yeow (65) 6231 5832 [email protected] Kaushal LADHA, CFA LEE Ju Ye Research, Technology & Innovation • Technology • Healthcare (66) 2658 6300 ext 1392 Singapore | Thailand | Indonesia (65) 6231 5839 [email protected] (65) 6231 5844 [email protected] Kareen CHAN • Oil & Gas – Regional [email protected] (65) 6231 5926 [email protected] • Petrochemicals - Regional MALAYSIA • Transport • Telcos Linda LIU Vanida GEISLER, CPA Singapore | Vietnam Anand PATHMAKANTHAN Head of Research TAN Chin Poh Head of Retail Research (66) 2658 6300 ext 1394 (65) 6231 5847 (603) 2297 8783 (65) 6231 5928 [email protected] [email protected] [email protected] [email protected] • Property • Strategy Eric ONG Dr Zamros DZULKAFLI (65) 6231 5924 [email protected] Yuwanee PROMMAPORN (603) 2082 6818 Desmond CH’NG, BFP, FCA • Retail Research (66) 2658 6300 ext 1393 [email protected] (603) 2297 8680 Yuwanee.P @maybank-ke.co.th [email protected] Matthew SHIM • Services Ramesh LANKANATHAN • Banking & Finance (65) 6231 5929 (603) 2297 8685 [email protected] Ekachai TARAPORNTIP Head of Retail Research [email protected] LIAW Thong Jung • Retail Research (66) 2658 5000 ext 1530 (603) 2297 8688 [email protected] [email protected] William POH • Oil & Gas Services- Regional INDIA (603) 2297 8683 • Automotive Surachai PRAMUALCHAROENKIT [email protected] Jigar SHAH Head of Research (66) 2658 5000 ext 1470 ONG Chee Ting, CA (91) 22 4223 2632 [email protected] [email protected] FX (603) 2297 8678 [email protected] • Strategy • Oil & Gas • Automobile • Cement • Auto • Conmat • Contractor • Steel • Plantations - Regional Saktiandi SUPAAT Neerav DALAL Suttatip PEERASUB Head of FX Research YIN Shao Yang, CPA (91) 22 4223 2606 [email protected] (66) 2658 5000 ext 1430 (65) 6320 1379 (603) 2297 8916 [email protected] • Software Technology • Telcos [email protected] [email protected] • Gaming – Regional • Food & Beverage • Commerce • Media • Aviation Kshitiz PRASAD Christopher WONG (91) 22 4223 2607 Jaroonpan WATTANAWONG (65) 6320 1347 TAN Chi Wei, CFA [email protected] (66) 2658 5000 ext 1404 [email protected] (603) 2297 8690 [email protected] • Banks [email protected] • Power • Telcos • Transportation • Small cap TAN Yanxi Vikram RAMALINGAM (65) 6320 1378 WONG Wei Sum, CFA (91) 22 4223 2607 Thanatphat SUKSRICHAVALIT [email protected] (603) 2297 8679 [email protected] [email protected] (66) 2658 5000 ext 1401 • Property • Automobile • Media [email protected] Fiona LIM • Media • Electronics (65) 6320 1374 LEE Yen Ling INDONESIA [email protected] (603) 2297 8691 [email protected] Isnaputra ISKANDAR Head of Research Wijit ARAYAPISIT • Glove • Ports • Shipping • Healthcare (62) 21 8066 8680 (66) 2658 5000 ext 1450 STRATEGY • Petrochemicals [email protected] [email protected] • Strategy • Metals & Mining • Cement • Strategist Anand PATHMAKANTHAN Kevin WONG • Autos • Consumer • Utility ASEAN (603) 2082 6824 [email protected] Theerasate PROMPONG (603) 2297 8783 • REITs • Technology Rahmi MARINA (66) 2658 5000 ext 1400 [email protected] (62) 21 8066 8689 [email protected] Jade TAM [email protected] • Equity Portfolio Strategist FIXED INCOME (603) 2297 8687 [email protected] • Banking & Finance • Consumer Staples & Discretionary Apiwat TAVESIRIVATE Winson PHOON, ACA Aurellia SETIABUDI (65) 6812 8807 Fahmi FARID (62) 21 8066 8691 (66) 2658 5000 ext 1310 [email protected] (603) 2297 8676 [email protected] [email protected] • SMIDs • Property [email protected] SE THO Mun Yi (603) 2074 7606 TEE Sze Chiah Head of Retail Research Willy GOUTAMA • Chartist and TFEX [email protected] (603) 2082 6858 [email protected] (62) 21 8066 8500 [email protected] VIETNAM Nik Ihsan RAJA ABDULLAH, MSTA, CFTe • Consumer (603) 2297 8694 Quan Trong Thanh [email protected] (84 28) 44 555 888 ext 8184 • Chartist PHILIPPINES [email protected] Jacqui De JESUS • Banks Amirah AZMI (63) 2 8849 8844 (603) 2082 8769 [email protected] [email protected] Hoang Huy, CFA (84 28) 44 555 888 ext 8181 • Retail Research • Strategy • Conglomerates [email protected] Romel LIBO-ON • Strategy (63) 2 8849 8844 [email protected] Le Nguyen Nhat Chuyen (84 28) 44 555 888 ext 8082 • Property [email protected] Fredrick De GUZMAN • Oil & Gas (63) 2 8849 8847 [email protected] Nguyen Thi Sony Tra Mi • Consumer (84 28) 44 555 888 ext 8084 [email protected] Bernadine B BAUTISTA • Consumer (63) 2 8849 8847 [email protected] Tyler Manh Dung Nguyen • Utilities (84 28) 44 555 888 ext 8180 [email protected] Rachelleen RODRIGUEZ • Utilities • Property (63) 2 8849 8843 Nguyen Thi Ngan Tuyen [email protected] • Banking & Finance Head of Retail Research (84 28) 44 555 888 ext 8081 [email protected] • Food & Beverage • Oil & Gas • Banking
Nguyen Thanh Lam (84 28) 44 555 888 ext 8086 [email protected] • Technical Analysis
December 2, 2020 54
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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES
DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to s ell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ fr om fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment ad vice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives” ) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contai ned herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solic it business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in t his report to the extent permitted by law. This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for t he actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be p ermitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this repor t. Malaysia Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Singapore This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Rese arch Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. Thailand Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of Maybank Kim Eng Securities (Thailand) Public Company Limited. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) accepts no liability whatsoever for t he actions of third parties in this respect. Due to different characteristics, objectives and strategies of institutional and retail investors, the research products of MBKET Institutional and Retail Research departments may differ in either recommendation or target price, or both. MBKET reserves the rights to disseminate MBKET Retail Research reports to institutional investors who have requested to receive it. If you are an authorised recipient, you hereby tacitly acknowledge that the research reports from MBKET Retail Research are first pr oduced in Thai and there is a time lag in the release of the translated English version. The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. MBKET does not confirm nor certify the accuracy of such survey result. The disclosure of the Anti-Corruption Progress Indicators of a listed company on the Stock Exchange of Thailand, which is assessed by Thaipat Institute, is made in order to comply with the policy and sustainable development plan for the listed companies of the Office of the Securities and Exchange Commission. Thaipat Institute made this assessment based on the information received from the listed company, as stipulated in the form for the assessment of Anti-corruption which refers to the Annual Registration Statement (Form 56-1), Annual Report (Form 56-2), or other relevant documents or reports of such listed company. The assessment result is therefore made from the perspective of Thaipat Institute that is a third party. It is not an assessment of operation and is not based on any inside information. Since this assessment is only the assessment result as of the date a ppearing in the assessment result, it may be changed after that date or when there is any change to the relevant information. Nevertheless, MBKET does not confirm, verify, or certify the accuracy and completeness of the assessment result. US This third-party research report is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations. All U.S. persons receiving and/or accessing this re port and wishing to effect transactions in any security mentioned within must do so with: Maybank Kim Eng Securities USA Inc. 400 Park Avenue, 11th Floor, New York, New York 10022, 1-(212) 688-8886 and not with, the issuer of this report.
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UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Finan cial Conduct Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility fo r its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that f or accurate guidance recipients should consult with their own independent tax advisers. DISCLOSURES
Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938- H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This report is distributed in Singapore by Maybank KERPL (Co. Reg No 198700034E) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Maybank Kim Eng Securities (“PTMKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the Financial Services Authority (Indonesia). Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities Limited (License Number: 117/GP-UBCK) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited and the Bombay Stock Exchange and is regulated by Securities and Exchange Board of India (“SEBI”) (Reg. No. INZ000010538). KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) and as Research Analyst (Reg No: INH000000057) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Conduct Authority.
Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to he rein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.
Singapore: As of 2 December 2020, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.
Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time h ave interests and/or underwriting commitments in the securities mentioned in this report.
Hong Kong: As of 2 December 2020, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.
India: As of 2 December 2020, and at the end of the month immediately preceding the date of publication of the research report, KESI, authoring analyst o r their associate / relative does not hold any financial interest or any actual or beneficial ownership in any shares or having any conflict of interest in the subject companies except as otherwise disclosed in the research report. In the past twelve months KESI and authoring analyst or their associate did not receive any compensation or other benefits fr om the subject companies or third party in connection with the research report on any account what so ever except as otherwise disclosed in the research report.
MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.
OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the re port. Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors wh o are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.
Definition of Ratings Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (including dividends) HOLD Return is expected to be between 0% to 10% in the next 12 months (including dividends) SELL Return is expected to be below 0% in the next 12 months (including dividends) Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
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Malaysia Singapore London New York Maybank Investment Bank Berhad Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Securities Maybank Kim Eng Securities USA (A Participating Organisation of Maybank Kim Eng Research Pte Ltd (London) Ltd Inc Bursa Malaysia Securities Berhad) 50 North Canal Road PNB House 400 Park Avenue, 11th Floor 33rd Floor, Menara Maybank, Singapore 059304 77 Queen Victoria Street New York, New York 10022, 100 Jalan Tun Perak, London EC4V 4AY, UK U.S.A. 50050 Kuala Lumpur Tel: (65) 6336 9090 Tel: (603) 2059 1888; Tel: (44) 20 7332 0221 Tel: (212) 688 8886 Fax: (603) 2078 4194 Fax: (44) 20 7332 0302 Fax: (212) 688 3500
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