Indonesian Telecommunications Overweight (Unchanged)

2015 Alpha 2015 Asiamoney's 2014 Institutional Asiamoney’s Southeast Asia Global 2013 Finance Asia's Investors 2013 2014 Best Banking & Finance Best Domestic Best Highest Ranked Best Domestic Research Call Review Sector flash Equity House Equity House Local Research Equity House FMCG Sector Best Research House House 15 February 2016

Leonardo Henry Gavaza, CFA E-mail: [email protected] Phone: +6221 250 5081 Ext. 3608

Pulsating Exhibit 1. Rating & target price summary Code Share price +/- 3M TO Higher smartphone penetration to boost data demand Rating (IDRb/ CP TP (%) USDm) Smartphone usage in Indonesia has been accelerating, boosting data demand. TLKM 3,285 3,750 14.2 BUY 277.3/20.5 We expect this trend to continue and reach the 50% level in 2017 (9M15: EXCL 3,930 4,400 11.9 BUY 18.8/1.4 35.5%; 9M14: 25.0%), backed by the increased availability of cheap 3G ISAT 5,375 6,800 26.5 BUY 1.9/0.1 models, as several leading brands such as Samsung and Nokia continue to ERAA 550 850 54.5 BUY 2.0/0.2 pursue the lower-end 3G-smartphone segment. In our view, this is the only TELE 630 1,180 87.3 BUY 3.0/0.2 TOWR 4,135 5,000 20.9 BUY 0.7/0.1 way to improve the 3G penetration rate, as most Indonesians (around 65%) TBIG 6,100 6,500 6.6 HOLD 11.6/0.9 purchase handsets priced at less than IDR1mn (USD75), while sales at above Source: Bloomberg, Bahana estimates IDR2mn (USD150) per unit represent less than 20% of volume, based on 2015 (Based on closing prices on 12 Feb 2016) data (exhibit 5). Thus, the availability of lower smartphone prices would have a Exhibit 2. Comparative valuations, 2016F Mkt EV/ EPS Code P/E ROAE positive impact on data demand, supporting the sector‟s migration from the cap EBITDA growth legacy business (voice calls and SMS) to the digital era (data-related). In (USDm) (X) (X) (%) (%) 9M15, data usage rose 107% y-y, although both voice and SMS usage fell. TLKM 24.5 18.6 8.3 12.6 22.6 EXCL 2.5 76.2 5.8 na 3.1 Rational competition should allow for higher pricing ISAT 2.2 21.9 3.4 na 10.0 With no serious outside competitors for the three incumbents, we expect Operators 22.9 10.5 34.2 20.0 competition to remain rational, allowing for continued pricing improvements. ERAA 0.1 6.3 5.6 19.8 7.9 TELE 0.3 9.6 7.7 21.0 15.4 As the penetration rate is already at 125%, we expect revenue growth to come Retailers 8.5 9.2 20.6 13.5 from higher ARPU, backed by deeper smartphone penetration. As of 9M15, in TOWR 3.3 26.5 11.5 61.3 25.0 line with higher smartphone penetration, incumbent ARPU reached IDR37k TBIG 2.2 22.7 15.1 22.0 37.3 (USD2.6)/month, +12% y-y. However, this was still far below the ASEAN Towers 24.9 13.0 45.2 30.0 Source: Bloomberg, Bahana estimates (excluding Singapore) ARPU of USD5.9/month. Thus, we expect pricing (Based on closing prices on 12 Feb 2016) improvements to support the sector‟s EBITDA. Exhibit 3. Telecom sector relative to JCI (%) (%) Supportive policy to benefit sector earnings sustainability 30 25 26.1 The sector‟s sustainability should also be supported by several government 25 23.0 20 regulations. The Ministry of Information and Telecommunication (TMIT) has 20 14.6 15 15 stated that Indonesia should have a maximum of four mobile operators by 11.6 10 10 2019, with smaller players merged or exiting the industry. Furthermore, 5 0.7 5 following the rearrangement of the 1,800MHz frequency, TMIT plans to re- 0 (2.0) (5) 0 tender the 2,100MHz and 2,300MHz frequencies in 2016. With new regulations ytd 1M 3M 6M 9M 12M on SIM registration, we expect migration amongst mobile operators to be Telco sector relative to JCI Source: Bloomberg limited, causing the continuation of the current rational operating environment. Exhibit 4. Relative performance to JCI, ytd OVERWEIGHT with TLKM as top pick, followed by ISAT and TELE (%) (%) 10 10 5.0 Our sector OVERWEIGHT is based on expected data and earnings growth, 3.2 1.2 1.0 spurred by consolidation. We expect higher sector revenue supported by 0 0 (1.7) strong data segment growth coupled with improved pricing power. While we (4.9) (10) (10) have BUY ratings on all three telco operators, we favor TLKM, which is trading (15.6) at a 2016F EV/EBITDA of 8.3x, at par with regional peers – our 12M DCF- (20) (20) (20.8) based TP of IDR3,750 reflects 14% upside potential. Our second pick is ISAT (30) (30) on an earnings recovery, backed by network monetization and an improved EXCL TLKM TBIG SECTOR ERAA ISAT TOWR TELE Source: Bloomberg balance sheet as well as one of the cheapest regional valuations at a 2016F EV/EBITDA of 3.4x – our IDR6,800 TP translates into a 35% peer discount. On telecom derivatives, our top pick is TELE, trading at a 2016F PE of 9.6x, with an IDR1,180 TP (87% upside potential), supported by higher market share and solid Telkomsel growth. Sector risks: Intensifying competition and the ministry‟s decision on interconnection policy.

Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision. Please see the important disclaimer information on the back of this report

2015 Alpha 2015 Asiamoney's 2014 Institutional Southeast Asia Global 2013 Finance Asia's Investors 2014 Best Banking & Finance Best Domestic Best Highest Ranked Research Call Review 15 February 2016 Equity House Equity House Local Research FMCG Sector House Best Research House

PT Bahana Securities – Equity Research – Indonesian Telecommunications 2

TABLE OF CONTENTS

. INVESTMENT THESIS ……………………………………………………………………………………………………………………………………5 …………………

. REGULATORY ENVIRONMENT ……………………………………………………………………………………………………………………………………………………19

. COMPETITION RISKS ……………………………………………………………………………………………………………26

. PORTER FIVE FORCES ………………………………………………………………………………………………………………30

. VALUATION ……………………………………………………………………………………………………………………………32

. RECOMMENDATION …………………………………………………………………………………………………………… 34

. COMPANIES, P&L, BALANCE SHEET, RATIO…………………………………………………………………………………………………………36

PT Bahana Securities – Equity Research – Indonesian Telecommunications 3

PT Bahana Securities – Equity Research – Indonesian Telecommunications 4

INVESTMENT THESIS

Higher smartphone penetration to boost data demand The Indonesian telco sector is experiencing an increased proportion of smartphone The availability of cheap subscribers, as several leading brands such as Samsung and Nokia continue to penetrate smartphone continues the cheap smartphone segment. We believe that this is the only way to improve the to increase the smartphone penetration rate, as most Indonesians (around 65%) buy handsets costing smartphone proportion below IDR1mn (USD75), with fewer than 20% purchasing handsets above IDR2mn ... (USD150) (exhibit 5). Currently, the cheap handset market is dominated by Samsung, Nokia, Evercoss/Cross, Advan, Mito, Lenovo and other Chinese-based handsets.

Exhibit 5. Handset sales by price, 2015

... as most Indonesians buy handsets priced at lower than IDR1mn >IDR2mn (USD75) per unit (19.5%)

IDR0-1mn (65.0%) IDR1-2mn (15.5%)

Source: GFK

Currently, 5 out of the 10 most popular handsets are already using the 3G network. We expect the Samsung clearly dominates with four 3G handsets, followed by Asus with one 3G handset smartphone proportion (exhibit 6). With a rising proportion of 3G handsets in monthly sales, we expect the to continue to rise as ... smartphone proportion to continue to increase.

Exhibit 6. 10 most popular handsets, 2015 No Type Network Price

1 Nokia 105 2G IDR242k ... 5 of the 10 most popular handsets are Samsung Galaxy V 4GB G313H 3G IDR1.1mn 2 already using the 3G 3 Samsung Galaxy Grand Prime Duos G530H 3G IDR2.3mn network

4 Samsung Galaxy J 1 j100h 3G IDR1.5mn 5 Samsung E1272 2G IDR336k

Samsung Galaxy Young 2 G130 6 3G IDR734k 7 Samsung E1205 2G IDR231k

8 Asus Zenfonce C 1GB/18GB ZC451CG 3G IDR1.2mn 9 Nokia 220 Dual SIM 2G IDR519k

10 Nokia 108 Dual SIM 2G IDR427k Source: GFK

PT Bahana Securities – Equity Research – Indonesian Telecommunications 5

In this report, we use 3Q15 data from the three incumbents, because so far only EXCL has We use 3Q15 data to announced 4Q15 results. TLKM is due to release results on 4 March and ISAT on 24 March. analyze the sector’s performanceThe number In the past 2 years, the number of smartphone users in Indonesia has increased by 136% of smartphone users in The number of (exhibit 7), currently representing 35.5% of total subscribers. In 3Q15, the trend of Indonesia ... smartphone users in smartphone additions intensified as TLKM gained strong quarterly new smartphone Indonesia has ... subscribers of 7.5mn (2Q15: 4.4mn; 3Q14: 4.2mn), while ISAT only gained 0.1mn (2Q15: 1.9mn; 3Q14: 0.4mn) and EXCL lost 1.0mn (2Q15: -0.6mn; 3Q14: 1.3mn). This resulted in a strong smartphone proportion improvement from 25.0% in 3Q14 to 35.5% in 3Q15 (exhibit 8).

Exhibit 7. Smartphone users, 3Q13-3Q15 (mn subs) (mn subs) ... risen 135% in the 22 60 55.6 past 3 years ... 55 20 20.7 50

18 17.9 45

40 16

14 30

12 25

20 10 15

8 10 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EXCL ISAT (RHS) TLKM Source: Companies

Exhibit 8. Smartphone proportion, 3Q13-3Q15 ... representing 35.5% (%) of total subscribers as of 40 35.5 3Q15 (3Q14: 25.0%) 35 33.0 30.6 30 27.5 25.0 25 21.3 22.4 18.9 20 17.4

0 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Source: Companies

However, despite the strong improvement in the smartphone proportion in the past 3 years, We expect Indonesian the Indonesian smartphone subscriber proportion (35.5%) is still much lower than the smartphone penetration average for regional peers of around 51% (exhibit 9). Thus, on the increased availability of to surpass the 50% cheap smartphones, we expect Indonesia‟s smartphone proportion to surpass the 50% level level in 2017 in 2017, in line with regional peers.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 6

Exhibit 9. Regional smartphone subscriber proportion, 2015 Indonesian smartphone (%) proportion is still below 100 88 that of regional peers 90 80 70 60 53 52 45 Average: 51% 50 40 36 30 30 20 10 0 Singapore Malaysia Thailand China Indonesia Philippines

Source: Companies

The continued increase in smartphone users should have a positive impact on data usage Increases in smartphone as subscribers would use more data and ARPU due to monthly data packages. This should subscribers have support the sector‟s migration from the legacy business (voice calls and SMS) to the digital positively affected ... business (data-related). In the past 2 years, data usage by the three incumbents (TLKM, EXCL and ISAT) has grown 5-8 times. In 9M15, data usage grew 107% y-y while ARPU improved to IDR37/month/sub, +12% y-y. Thus, we also see improved revenue growth in the past few quarters on a maintainable ARPU.

Exhibit 10. Incumbent data usage, 3Q13-3Q15 (Petabytes) (Petabytes) ... data usage, which has 60 134.5 140 risen sharply by at least 55.9

120 5 times in the past 2 50 years 42.9 100 40

20 40

10 20

0 0 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EXCL ISAT TLKM (RHS) Source: Companies

However, we also notice that SMS and voice usage is going down, especially as several On higher data usage applications, such as Whatsapp, Line and BBM, can directly replace SMS and voice caused by several functions. Nowadays, subscribers with smartphones rarely use SMS to communicate, as messenger applications there are many new applications with more communications features where people can also ... send pictures and video. Currently, people can even make a phone call through an application. The most popular messenger application currently is Whatsapp, followed by BBM. At the moment, even popular social media platforms, like Facebook and Path, have messenger services.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 7

Exhibit 11. Incumbent SMS usage, 3Q13-3Q15 (bn units) ... SMS usage has 75 80 declined in the past few quarters 70 70

50 62

55 30

23 50 20 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 TLKM ISAT EXCL (RHS) Source: Companies

Interestingly, Telkomsel and Indosat have managed to improve voice usage and minimize Supported by a stronger the decline in SMS usage, despite the declining industry trend. We suspect this is because presence in outer Java TLKM has more subscribers from the outer Java area, as TLKM‟s Non-Java revenue is and a high-end around 50% of total revenue due to its strong infrastructure presence in the outer Java subscriber base ... area. We believe that TLKM‟s outer Java market share should be higher than its national market share. We believe that subscribers from the outer Java area use voice more than subscribers from the Java area. Furthermore, TLKM has the highest ARPU among operators, indicating more high-end subscribers. We think that high-end subscribers tend to use voice calls more often. For ISAT, we expect this is due to its higher subscriber base and strong marketing initiatives.

Exhibit 12. Incumbent voice usage, 3Q13-3Q15 (bn minutes) (bn minutes) ... TSEL has managed to 60 100 57.8 grow voice usage 95 55

90 50

85 45

40 75

35 70.0 70

30 65 27.7

25 60 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EXCL TLKM ISAT (RHS) Source: Companies

Due to strong data growth coupled with declining voice and SMS contributions in the past Data usage proportion few quarters, the data revenue proportion has increased from 21% in 3Q13 to 30% in should continue to grow 3Q15. At the same time, the SMS revenue proportion declined from 25% in 3Q15 to 22% in ... 3Q15, while the voice revenue proportion declined from 54% in 3Q15 to 48% in 3Q15. This should have negatively affected margins as data tends to have a lower margin than voice and SMS.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 8

Exhibit 13. Incumbent revenue proportion, 3Q13-3Q15

(%) ... in line with the trend 100% of the past few quarters

90% 21 22 23 24 26 28 30 28 30 80%

70% 25 25 24 24 23 24 23 60% 22 22

50%

40%

30% 54 54 52 51 49 50 48 50 48 20%

10%

0% 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Voice SMS Data

Source: Companies, Bahana

We believe this trend will continue as Indonesians typically like to use social media. For the Data usage trend should 3 most popular social media sites – Facebook, Twitter and Whatsapp – Indonesian users continue ... are among the biggest customers (exhibit 14). This is also why Kakao Talk bough Path to gain access to the Indonesian market, as Path‟s largest user base is in Indonesia.

Exhibit 14. World most popular social media applications, 2015 Rank Social Media Type Country Users (mn) Indonesian Users (mn) Percentage (%) ... supported by strong growth of social media 1 Facebook Social Networking Sites US 1,366 33 2% usage in Indonesia 2 Tencent qq Messenger China 829 - - 3 Tencent Qzone Blogs China 629 - - 4 Whatsapp Messenger US 600 29 5% 5 Facebook messenger Messenger US 500 21 4% 6 Wechat Messenger China 468 13 3% 7 Google+ Social Networking Sites US 343 21 6% 8 Instagram Photo sharing, video sharing US 300 17 6% 9 Skype Video Chatting Sweden 300 14 5% 10 Twitter Micro Blogging US 284 26 9% Source: Various sources

Rational competition allows for higher pricing Currently, the Indonesian handset penetration rate is already at 125% (exhibit 15), similar With the handset to other countries in the region, with an average penetration rate of around 127%. We penetration rate already suspect this is due to dual handset ownership by some customers due to brand or operator at 125% ... selections as well as high churn rates. However, we believe that telecommunications needs have become more of a priority for Indonesians, following food and cigarettes. This is also why telco sector revenue is not strongly correlated with GDP, as the characteristic is similar with customer staples companies, which are defensive and non-cyclical. However, it is interesting to see that even at more than 100% penetration, there are several countries that have higher penetration rate than Indonesia, suggesting that improved telecommunication demand is a regional trend.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 9

Exhibit 15. Regional handset penetration rate, 2015 (%) ... in line with regional 160 handset penetration of 140 131% ...

120

100

80 Penetration Average 60

0 Thailand Singapore Malaysia Indonesia Philippines China

Source: Various sources

Indonesia‟s 125% handset penetration means that the sector‟s growth should come from ... growth should come ARPU growth rather than subscriber growth, particularly as the Indonesian ARPU of around from ARPU growth ... USD2.6/month is still far below the neighboring countries‟ average ARPU (excluding Singapore) of USD5.9/month (exhibit 16). We realize that the ARPU level is in line with GDP per capita level in each country. However, the Philippines has a higher ARPU level than Indonesia despite having similar GDP per capita. Thus, we believe improved data usage as well as increased pricing will allow the Indonesian ARPU to catch up with those of its regional peers. Furthermore, we believe that EXCL‟s strategy to move from volume to value will support the pricing environment in the sector.

Exhibit 16. Regional ARPU, 2015 ... as Indonesia’s ARPU (USD/mth) (USD) of USD2.6/month is far 100 40000 below the regional 90 35000 average of 80 30000 USD5.9/month 70 25000 60

50 20000

40 15000 30 10000 20 5000 10

0 0 Singapore China Malaysia Philippines Thailand Indonesia

ARPU GDP per capita

per

GDP ARPU capita Source: Companies

With no serious outside competitors for the three incumbents as well as the incumbents‟ With no serious continued moves to improve pricing, we expect competition to remain rational. In the past competitors for the few quarters, we already have seen the three incumbents continue with pricing three incumbents ... improvements in the legacy business.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 10

Exhibit 17. Incumbent pricing, 3Q13-3Q15

(IDR) (IDR) ... they should continue 110 90 to improve pricing ... 81.2 80 105

70 100

60 95 94.6 50

90 40

85 30 27.6

80 20 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 Revenue/sms Revenue/min (RHS) Revenue/mb (RHS) Source: Companies

This should have a positive impact on telco EBITDA margins that have continued to ... resulting in ... strengthen in the past few quarters, despite migration from the high-margin legacy business to the lower-margin digital business. As the sector is more rational currently, coupled with significant investments still needed for data segment usage, we expect data pricing to continue to improve. The three incumbents raised pricing in 2015, and we expect this trend to continue in 2016F-17.

Exhibit 18. Incumbent EBITDA margins, 3Q13-3Q15 (%) ... improved EBITDA 60 margins

50.4 50

46.0 45

40 37.7

30 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

EXCL TLKM ISAT

Source: Companies

TLKM should remain dominant As of 9M15, there were 319mn Indonesian subscribers, 81% of which (259mn) were with As EXCL has changed its the three incumbents. In 2015, EXCL implemented a strategy to target higher-value strategy to target subscribers rather than focusing on increasing market share. As a result, EXCL lost 18mn higher-value subscribers, with current subscribers of 42mn, -29% y-y and -10% q-q, representing a subscribers, it has lost 17% market share out of the three incumbents. However, EXCL‟s ARPU improved to 18mn subscribers ... IDR34k/month, +31% y-y and +6% q-q, in line with its value strategy. We believe that most subscribers who left EXCL‟s network were low-value subscribers and that EXCL‟s total number of subscribers will stabilize in 2016.

Following its network modernization in 2014, ISAT aggressively penetrated the market with ... while ISAT has gained several initiatives, which resulted in strong subscriber additions. That, coupled with EXCL‟s 15mn subscribers in the strategic move from subscriber volume to subscriber quality, resulted in 15mn new customers past 4 quarters ... in the past four quarters for ISAT, with subscribers of 69mn (27% incumbent market share) in 9M15. At the same time, ISAT maintained its ARPU at IDR28k/month, flat y-y.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 11

In 9M15, Telkomsel, TLKM‟s operator subsidiary, continued to be the dominant force in the ... and TLKM gained sector, as the company gained around 9mn subscribers, reaching total subscribers of 149mn around 9mn subscribers (+3% q-q and +7% y-y) and representing a 57% incumbent market share. Telkomsel also maintained its price leadership, with a 9M15 ARPU of IDR42k/month, +11% y-y.

Exhibit 19. Incumbent subscribers, 3Q12-3Q15 (mn subs) (mn subs) TLKM has the highest 68.9 70 150 subscriber base of 148.6 65 149mn, representing an 145

60 incumbent market share

140 of 57% 55

50 135

45 130 41.5 40

125 35

30 120 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EXCL ISAT TLKM (RHS) Source: Companies

Exhibit 20. Incumbent ARPU, 3Q12-3Q15 (IDRk/mth) (IDRk/mth) TLKM has the highest 32.0 32 43 ARPU of IDR42k/month 31 42.0 42

30 41 29 28.3 40 28

27 39

26 38

25 37 24

36 23

22 35 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EXCL ISAT TLKM (RHS) Source: Companies

In terms of revenue, TLKM continued to dominate with 3Q15 revenue of IDR26.9tn, +7% TLKM’s 3Q15 revenue q-q and 21% y-y, while ISAT came in second with 3Q15 revenue of IDR7tn, +7% q-q and represents 67.8% of +14% y-y, followed by EXCL with 3Q15 revenue of IDR5.8tn, +4% q-q but -3% y-y. In incumbent revenue terms of revenue market share, TLKM‟s dominance improved from 64.8% in 3Q14 to 67.8% in 3Q15 at the expense of EXCL‟s lower position from 17.4% in 3Q14 to 14.7% in 3Q15. ISAT‟s 3Q15 revenue market share of 17.5% is similar to its 3Q14 market share of 17.7%, as ISAT‟s higher subscriber base was supported by solid ARPU. It is worth noting that despite losing a lot of subscribers (down 29% y-y), EXCL still booked 2015 revenue of IDR22.9tn, only down 2.5% y-y, suggesting that its new strategy is succeeding.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 12

Exhibit 21. Incumbent revenue, 3Q14-3Q15

(IDRbn) ISAT’s revenue has 30,000 outgrown EXCL’s in the 26,879 25,224 past few quarters 25,000 23,855 23,616 22,299

20,000

15,000

10,000

6,104 6,368 6,527 6,962 6,093 5,831 5,994 5,919 5,481 5,610 5,000

0 3Q14 4Q14 1Q15 2Q15 3Q15 TLKM EXCL ISAT Source: Companies

In terms of EBITDA, TLKM booked strong 3Q15 EBITDA of IDR13.5tn, +21% q-q and +21% TLKM’s 3Q15 EBITDA y-y, representing 71.5% of incumbent EBITDA market share. Interestingly, TLKM is even represents 71.5% of more dominant in terms of market share, with more than two-thirds of the incumbent total incumbent EBITDA EBITDA. We believe this is due to its huge subscriber base, largest network coverage, ... highest pricing and highest ARPU. TLKM maintained its EBITDA margin at 50.4% in 3Q15 (2Q15: 50.0%; 3Q14: 44.3%).

ISAT came in second with a 3Q15 EBITDA of IDR3.2tn, +16% q-q and +25% y-y, ... while ISAT came in representing a 16.9% EBITDA market share. Higher network utilization from subscriber second at 16.9% ... additions, higher ARPU on improved pricing as well as cost efficiency initiatives helped ISAT to improve its EBITDA margin to 46.0% in 3Q15 (2Q15: 42.3%; 3Q14: 42.0%). ISAT has been in the No.2 position in terms of EBITDA since 1Q12.

EXCL had the lowest EBITDA market share of 11.6%, booking 3Q15 EBITDA of IDR2.2tn, ... and EXCL came in +10% q-q and + 7% y-y. Despite its weak revenue and subscriber base, EXCL booked solid third at 11.6% EBITDA growth on an improved 3Q15 EBITDA margin of 37.7% (3Q14: 34.4%; 2Q15: 35.6%). In 4Q15, EXCL‟s EBITDA margin continued to improve to 39.0%. EXCL successfully implemented its new strategy of targeting higher-value subscribers.

Exhibit 22. Incumbent EBITDA, 3Q14-3Q15

(IDRbn) TLKM’s 3Q15 EBITDA 15,000 represents more than 13,534

12,549 12,362 two-thirds of total 12,000 11,157 11,178 incumbent EBITDA

9,000

6,000

3,205 2,567 2,466 2,604 2,758 3,000 2,196 2,061 2,300 1,877 2,000

0 3Q14 4Q14 1Q15 2Q15 3Q15 TLKM EXCL ISAT Source: Companies

PT Bahana Securities – Equity Research – Indonesian Telecommunications 13

We expect continued improvement in smartphone penetration to result in higher strong We expect the telco data demand as well as higher ARPU. Furthermore, rational competition should help to sector to experience improve the sector‟s pricing and profitability. Thus, we expect the Indonesia solid revenue growth telecommunications sector to experience sustained revenue growth in the next few years. On limited competition threats from outside the three incumbents, we believe that all three incumbents, TLKM, ISAT and EXCL, will experience solid revenue growth.

EXCL plans to continue to focus on its value strategy, monetizing its strong network EXCL plans to continue following the consolidation of Axis Telekom‟s infrastructure. EXCL will try to differentiate its focus on high-value itself as an operator that offers the best digital experience with huge subscribers and high- frequencies/subscribers and a fast rollout to the 4G LTE infrastructure. This would benefit density areas ... the sector‟s pricing and profitability, as we do not expect companies outside the incumbents to experience significant growth on limited networks and capex spending. EXCL plans to continue to focus on high-density areas as well as higher-margin subscribers.

TLKM should remain the most dominant operator with the largest network coverage and a ... while TLKM should stronger presence in outer Java area due to its first-mover advantage. We expect TLKM to remain the most continue positioning itself as the premium operator with the largest coverage. Thus, we dominant telco player expect TLKM‟s leadership in terms of subscribers, pricing, ARPU, revenue and EBITDA to with the largest persist as the company benefits from economies of scale. As TLKM plans to serve all areas, coverage area we believe that it will expand the 2G, 3G and 4G networks.

ISAT, the second-largest operator in terms of subscribers, should continue its strong ISAT plans to cater to momentum, booking stronger data usage and revenue. We expect ISAT to position itself as most segments with an all-around player, catering to most segments with varied purchasing power. Like TLKM, varied purchasing power ISAT is expected to expand its 2G, 3G and 4G networks in many areas.

Capex should remain manageable despite 4G deployment In the past 3 years, the number of incumbent BTS (base transceiver stations) has doubled In the past 3 years, the to cater the rapid increase in data users and usage. TLKM remains the company with the three incumbents grew most BTS with 100k units, followed by EXCL‟s 56k units and ISAT‟s 46k units. At the same BTS ... time, the 3G BTS as proportion of total BTS increased from 31% to 38%, with ISAT having the higher 3G BTS proportion of 49%, followed by TLKM‟s 37% and EXCL‟s 32%. In addition to BTS, telco companies build fiber backbone networks, which could support cellular business as well as corporate clients. Currently, TLKM has 81k km of fiber network, while EXCL has 31k km and ISAT has 20k km. Strong data infrastructure is required to support huge data needs.

Exhibit 23. Incumbent BTS, 3Q12-3Q15

(units) ... by 87%, reaching 120,000 total BTS of 203k units

100,382 100,000

83,346 80,000

65,653

60,000 56,300 51,005 49,682 46,196

40,000 36,101 36,101 37,382

21,642 23,207 20,000

0 3Q12 3Q13 3Q14 3Q15 EXCL TLKM (RHS) ISAT Source: Companies

PT Bahana Securities – Equity Research – Indonesian Telecommunications 14

Currently, the sector is moving into 4G LTE technology. All three incumbents have launched Currently, the sector is 4G networks in several cities. However, in terms of BTS, as of 3Q15 the three incumbents moving into 4G only have a limited number of 4G BTS, representing 1.5% of total BTS. EXCL has the highest 4G BTS proportion at 1.8%, while TLKM‟s 4G BTS proportion is 1.1%. This is in line with limited 4G smartphone population of only 6mn, 1.8% of total subscribers.

Exhibit 24. 4G BTS proportion, 3Q15

The proportion of 4G 4G (1.46%) BTS is only 1.46% as of 3Q15

3G (37.32%)

2G (61.21%)

Source: GFK

In 2016, EXCL is planning an aggressive expansion of its 4G infrastructure, which would EXCL plans to expand represent around 60% of its total 2016 BTS expansion budget. Thus, we expect EXCL‟s 4G aggressively into 4G, BTS proportion to improve significantly from 1.8% in 3Q15 to 11% in 2016. TLKM and ISAT while TLKM and EXCL are taking a different approach, as most of their capex would still be for 3G infrastructure are focusing on 3G as they expect 3G subscribers to continue to grow strongly. However, we still expect expansion TLKM‟s and ISAT‟s 4G BTS proportion to grow substantially from the current level. In the past few months, TLKM has significantly improved its 3G BTS infrastructure due to continued strong improvement in data usage on higher smartphone penetration.

As they move into 4G, ISAT and EXCL plan to collaborate on capex spending to cut ISAT and EXCL plan to expansion costs and network operating expenses. For the pilot project, ISAT and EXCL collaborate on 4G capex have formed a partnership to share the 4G LTE network through a multi-operator radio access network in several cities, including Banyumas (Central Java), Surakarta (Central Java), Batam, and Banjarmasin (South Kalimantan) in January 2016. While cost-savings from the pilot project are not likely to be substantial, the companies expect the project to help them in terms of future synergies. For the longer term, the companies would consider cooperating as far as core network sharing on the 4G LTE network. However, the companies would need government approval for a further network sharing strategy.

Following the rise in capital expenditure to IDR41tn in 2013, we saw lower capital spending Following a significant in 2014 and 2015. In 2016, we expect capex to be at manageable levels, as most of the rise in capex in 2013, huge capex disbursements were spent in the past few years. In 2017, we expect capex to we expect ... reach IDR39tn, +5% y-y on 4G network development. On a company level, we expect TLKM‟s capex to represent 25% of revenue, lower than EXCL‟s at 26% and ISAT‟s at 27%. TLKM‟s capex represented 65.5% of the total incumbent capex, representing TLKM‟s commitment to maintain its technology leadership. We expect this trend to continue, with telco operators spending around 20-30% of revenue on development.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 15

Exhibit 25. Incumbent capex, 2013-2017F (IDRbn) ... telco operators’ capex 45,000 to normalize at around 41,195 39,892 20-30% of revenue 40,000 38,665 36,625 36,750 9,364 7,033 35,000 6,906 6,500 6,500

30,000 6,932 8,192 6,561 6,125 6,250 25,000

20,000

15,000

24,898 24,667 24,000 24,000 25,198 10,000

5,000

0 2013 2014 2015F 2016F 2017F TLKM EXCL ISAT

Source: Companies, Bahana

Fast home Internet connection business on the rise Not only has there been strong digital-demand growth in the cellular segment, there also has As Indonesia is been strong growth in the fast home Internet segment in the past few years, led by Link Net underpenetrated in fixed (LINK). Based on 2015 Media Partner Asia data, Indonesia is under-penetrated in fixed broadband (6.1%) and broadband (6.1%) and pay TV (10.0%). As of 2014, fast Internet home connections pay TV (10.0%) ... represent around 11% of the home broadband market (total connections: 3.8mn) with the rest dominated solely by Telkom Speedy, which uses a slower home Internet connection, ADSL. Media Partner Asia expects Indonesia‟s fast home Internet connection business to experience a solid 2014-19 CAGR of 21.4%, reaching 1.1mn home connections in 2019. We believe the growth will be much stronger than that, as the market already has reached around 910k home connections as of 9M15.

Exhibit 26. Home internet connections, 2011-2019F (000' subs) ... cable Internet is 7000 expected to see a 21% CAGR in 2014-19 6000 1093

5000

4000 414 Cable 3000 ADSL 5280 2000 193 3400

1000 1789

0 2011 2014 2019F Source: Media Partner Asia

PT Bahana Securities – Equity Research – Indonesian Telecommunications 16

Apart from incumbent Link Net (LINK IJ-NR-IDR3,150), there are several players entering the LINK’s market share in fast home Internet market, such as IndiHome (TLKM), CBN (CBN Group), MNC Play Media fast home Internet (MNCN IJ-NR-IDR1,395), MyRepublic (Sinar Mas Group) and Biznet (Biznet Group). Before market declined from 2015, LINK strongly dominated the market, with around a 98% market share. As many 98% in 2014 to 46% in Internet providers entered the race in the beginning of 2015, LINK‟s 9M15 market share 9M15 ... declined to 46%, despite booking solid subscriber growth of 17% y-y. The big winner of 2015 was TLKM‟s newly launched bundling product, IndiHome, which includes high-speed Internet, cable TV and fixed-line access. As of 9M15, there were 678k IndiHome subscribers, 50% of which were already using a fast home connection with fiber optics. Other players also saw substantial connections in 9M15 (exhibit 25). From this data, we believe that the growth potential of fast home Internet connections is still huge as penetration is still at low levels.

Exhibit 27. Fast home Internet subscribers, 9M15 (000' subs) ... due to several 450 421 newcomers, including 400 IndiHome 339 350

300

250

200

150

100 80

50 30 30 10 0 LINK TLKM CBN MNC MyRep Biz Source: Companies

We believe that the reason behind IndiHome‟s rise is strong homes passed as well as huge IndiHome expected to subscribers from its ADSL brand, Speedy. For the past few quarters, TLKM has fiberized the dominate the market on optical network belong to its cellular business (TSEL) and its corporate clients. As of 9M15, … TLKM‟s fiber-based network already passed 6.2mn homes, although most of them were still Node B connections. This is much bigger than its closest competitor (LINK), which had 1.5mn home passed in 9M15. However, it is worth noting that TLKM‟s networks are available in 100 cities, while LINK only has a presence in 3 cities. Furthermore, TLKM has 9.8mn fixed line customers and 3.4mn Speedy users, all of whom will be offered the new Indihome package. Thus, we believe that TLKM‟s IndiHome presence and homes passed are far more superior than those of its competitors.

Exhibit 28. Fast home Internet homes passed, 9M15 ... the huge number of (mn homes) homes passed in several

7,000 cities ... 6,200 6,000 5,000

4,000 3,000

2,000 1,500 1,000 300 205 130 0

TLKM LINK MyRep Biz MNC

Source: Companies

PT Bahana Securities – Equity Research – Indonesian Telecommunications 17

Compared to its competitors, IndiHome‟s pricing is more appealing, as it also offers a fixed ... as well as … telephone line while most of its competitors only provide fast Internet access and cable TV. With attractive pricing and a huge market potential, we expect Indihome to push for additional revenue growth for TLKM over the long run.

Exhibit 29. Broadband package comparison, 2015 ... attractive packages Speed Tv Cable Others Price (USD)

Linknet 6 Mbps 104 channels TV Cable Streaming 37 12 Mbps 128 channels TV Cable Streaming 40 25 Mbps 154 channels TV Cable Streaming 64 Indihome 10 Mbps 85 channels Free call 1000 minutes 22 20 Mbps 85 channels Free call 1000 minutes 46 50 Mbps 85 channels Free call 1000 minutes 114 Biznet 10 Mbps 40 channels Free Wifi 2GB 20 20 Mbps 75 channels Free Wifi 5GB 41 30 Mbps 80 channels Free Wifi 10GB 61 Source: Various sources

In the past few months, CVC (Singapore-based Private Equity) and First Media (KBLV), with CVC and Lippo Group combined ownership in LINK of 67%, had been openly trying to sell LINK to several bidders, have delayed the sale of reportedly including MNC Group, EXCL and ISAT. In our opinion, would be a strategic move their majority ownership by Lippo Group to divest LINK when the company still has a strong network and subscriber in LINK presence, as we believe TLKM‟s move to enter the fast home connection market could disrupt the competitive landscape in the long term. For MNC Group, it would also be a way to accelerate the market penetration of its MNC Play Media business. EXCL and ISAT could enter the fast home connection market using a network they have built for their cellular and corporate customers. Thus, acquiring LINK could help them kick-start their plans to enter the market. CVC and KBLV have decided to delay the sale until economic conditions improve.

Finally, we expect solid growth for the fast home Internet business on the low penetration Solid growth expected rate, growing middle class and strong Internet demand. TLKM will likely dominate the market on low penetration rate in the longer term. However, other players could also experience solid growth in the near to medium term.

Exhibit 30. LINK’s operational data, 9M15 LINK booked solid 9M15 subscriber growth despite a lower market share

Source: Company

PT Bahana Securities – Equity Research – Indonesian Telecommunications 18

REGULATORY ENVIRONMENT

A four player market We believe that the appointment of current Minister of Telecommunications & Information, In line with the Mr. Rudiantara is positive for the sector, given his previous experience on the BoD and BoC Minister’s intention … of several telco companies. From our discussion with the minister, we understand his intention to protect investment in the telco sector as he believes the telco sector still needs significant infrastructure investment. The minister expects industry consolidation to only 4 players from the current 7 players (TLKM, EXCL, ISAT, BTEL, FREN, Hutchinson and Sampoerna).

In order to support his plans, Mr. Rudiantara stated that he could revoke most of the ... we expect industry nation‟s 7 mobile-phone licenses unless carriers merge or create networks that are capable consolidation from… of providing wireless Internet services. He added that Indonesia should have a maximum of four mobile operators by the time his term ends in 2019 and smaller players should either merge or exit the industry. Mr. Rudiantara stated that his office would draft a regulation concerning telco acquisitions, which would enable the acquirer to also obtain target company‟s infrastructure and licenses. We expect this change to support industry profitability.

Exhibit 31. Telco operators, 4Q15 ...7 players to just 4 players over the medium term

Source: Various sources, Bahana

National broadband plan Based on Presidential Decree Number 96/2014, a five year national broadband plan (2014- The government plans 19) was formulated amounting to IDR278tn, of which 10% will be funded by state budget. to increase fixed and This plan proposes to increase urban penetration rate to 30% for fixed broadband and mobile broadband 100% for mobile broadband by 2019. For rural areas, the penetration target is 6% for fixed penetration... broadband and 52% for mobile broadband. This is significantly higher than the current penetration rate of 5% for fixed broadband and 12% for mobile broadband. To support this initiative, the government plans to draft supporting regulations and financing measures in the next few years.

In order to support the national broadband plan, the government has already launched the ... with Palapa Ring tender for phase 2 of the Palapa ring project, a national fiber optic network development Project Phase 2 ... across 57 cities with a total length of 11k km. This USD230mn project is expected to be completed in 2018, with the network expected to start operation in 2019. The government has divided the tender into 3 main areas, West, Central and East. In January, the government announced the winners for the West area and the Central area. The winner of the East area will be announced later this year. Previously EXCL and ISAT had joined the tender process, but withdrew their bids later without citing any reasons. Currently, TLKM is still attending the tender process. However, we believe that TLKM is unlikely to win the tender, as it may not benefit the company‟s profitability. We believe that both EXCL and ISAT withdrew their bid for similar reasons.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 19

Exhibit 32. National broadband plan ... which is divided into 3 main areas

Source: Ministry of Telecommunication and Information

Tender for frequencies On frequencies, following the successful 1,800MHz frequency rearrangement in 2015, the The government plans government plans to re-tender several frequencies, including 2,100Mhz and 2,300Mhz, to to re-tender ... enable improved network technology as well as optimization (exhibit 33). For 2,100Mhz, the government plans to re-tender the 10MHz frequency previously owned by Axis prior to the EXCL acquisition. For 2,300Mhz, the government plans to re-tender around 30MHz frequency. In order to support industry consolidation, the government plans to only re- tender this frequency to existing industry players, potentially benefiting the big three incumbents: TLKM, EXCL and ISAT.

Exhibit 33. Operator frequencies, 3Q15 ... 10MHz in 2,100MHz in Mhz frequency and 30MHz in 2,300MHz frequency

Indosat 2.5 10.0 20.0 10.0

Telkomsel 7.5 7.5 22.5 15.0

Xl Axiata - 7.5 22.5 15.0

Hutchison - - 10.0 10.0

Source: Companies

For 800MHz frequency, the minister has allowed the CDMA network to migrate to the GSM For the 800MHz network. TLKM and ISAT will re-farm their CDMA spectrum to GSM spectrum in Band 8, frequency, CDMA while FREN and BTEL will re-farm their CDMA spectrum to GSM spectrum in Band 5. network is allowed to migrate to GSM Exhibit 34. 800MHz post re-farming, 2015 network... … with FREN and BTEL Band 5 Band 8 in Band 5 and TSEL, ISAT and EXCL in band 8

SMARTFREN BAKRIE TEL TELKOM TELKOM INDOSAT INDOSAT TSEL XL

(BW: 5.5 MHz) (BW: 5.5 MHz) (2.5 MHz) (5 MHz) (2.5 MHz) (10 MHz) (7.5) (7.5)

Source: Ministry of Telecommunication and Information

PT Bahana Securities – Equity Research – Indonesian Telecommunications 20

For 1,800MHz frequency, the plan is to rearrange the four operators‟ frequencies in order to In the 1,800MHz have continuous frequencies for each operator, providing improved network quality. frequency, four operators’ frequencies Exhibit 35. 1,800MHz existing allocation ...

… those for EXCL, ISAT, 7.5 MHz 5 MHz 7.5 MHz 15 MHz 5 MHz 15 MHz 10 MHz 10 MHz TSEL and Hutchinson ... XL ISAT TSEL XL TSEL ISAT TSEL 3

Source: Ministry of Telecommunication and Information

Exhibit 36. 1,800MHz allocation post re-arrangement ... will be rearranged, providing improved 22.5 MHz 10 MHz 20 MHz 22.5 MHz network quality XL 3 ISAT TSEL

Source: Ministry of Telecommunication and Information

The minister has indicated that the tender of 2,100MHz and 2,300MHz frequencies will be We believe that TLKM held together in 2016. We believe that all the operators are interested in joining the tender. would get the most However, we believe TLKM is the one that needs new frequencies the most as currently its frequencies, followed by total number of nationwide frequencies/subscribers is the lowest among the incumbents at ISAT and EXCL 0.3MHz/1mn subscribers, followed by ISAT at 0.6MHz/1mn subscribers and EXCL at 1.1MHz/1mn subscribers. Based on this development, we believe that TLKM could get the most frequencies, followed by ISAT and EXCL.

New interconnection policy Earlier last year, Mr. Rudiantara stated his plans to optimize the interconnection policy. There is a plan to Currently, off-net interconnections (calls to other operators) are 6 times more expensive change the than on-net interconnections (calls to the same operator). The minister wants to cut the interconnection policy off-net tariff to around 3 times, to boost traffic. This could benefit ISAT and EXCL as they are net interconnection payers (exhibit 37). However, we believe direct benefit to operators are limited as interconnection revenue only represent around 15% of total revenue, with low EBITDA margins.

Exhibit 37. Incumbent interconnection income, 2008-2014 (IDRbn) 2009A 2010A 2011A 2012A 2013A 2014A TSEL benefits the most TSEL from current Interconnect revenues 2,528 3,173 3,148 3,651 4,104 3,981 interconnection rates Interconnect expenses (2,366) (2,797) (2,701) (3,244) (3,213) (3,157) compared to others Net revenues 162 376 447 407 891 824 EXCL Interconnect revenues 1,551 1,727 1,762 2,641 3,033 3,007 Interconnect expenses (2,028) (2,304) (2,463) (3,097) (3,726) (3,356) Net revenues (477) (577) (702) (456) (693) (349) ISAT Interconnect revenues 1,492 1,253 1,182 2,175 2,431 2,023 Interconnect expenses (1,449) (1,736) (1,707) (2,558) (2,946) (2,555) Net revenues 43 (483) (524) (383) (516) (532) Source: Companies

PT Bahana Securities – Equity Research – Indonesian Telecommunications 21

Currently, ISAT and EXCL are not competitive in the outer Java area due to the Lower interconnection interconnection rates. As TLKM‟s market share in the outer Java area is substantially rates could slightly higher, subscribers in the outer Java area tend to spend more on interconnection if they benefit ISAT and EXCL use EXCL or ISAT services. Thus, lower interconnection rates would benefit ISAT and EXCL as their subscribers would pay less for the interconnection rate. Furthermore, ISAT and EXCL could undercut prices to gain market share. However, TLKM could retaliate and offer similar low priced products, which could re-escalate the price war. As such, we believe the effect of this new policy could be slightly positive for ISAT and EXCL and slightly negative for TLKM or significantly negative for the sector, on lower margins due to more intense competition. The real impact would depend on how each operator reacts to this development, in our view.

Exhibit 38. Current mobile interconnection rates Interconnection rates IDR per minute Before 2008 2008-2010 2011 have continued to come down in the past few Local to fixed/FWA 361 261 251 years to mobile 449 261 251 to satellite 574 261 251

Long distance to fixed/FWA 471 380 357 to mobile 622 493 461 to satellite 851 501 463 International 510 498 453 Source: Ministry of Telecommunication and Information

Meanwhile, TLKM has proposed another interconnection policy rate that would provide Another policy option incentives for operators to develop infrastructure in rural areas. Based on this, would improve rates in interconnection rates in Java would decline, while interconnection rates in the outer Java outer Java and cut rates area would increase. This should have a positive impact on TLKM as it stands to benefit in Java, benefitting more from higher interconnection rates in the outer Java area. However, the direct benefit TLKM to TLKM should be limited as interconnection revenue only represents around 15% of total revenue with low EBITDA margins.

In the past decade, interconnection rates have been cut twice, in 2Q08 and 1Q11. In both Interconnection rates cases, following the interconnection rate cut, the sector ARPU decreased, resulting in lower have been cut 2 times in EBITDA margins. However, the decline in ARPU typically has bottomed in around 4 to 5 the past decade quarters.

Exhibit 39. Incumbent ARPU, 1Q07-4Q09 (IDRk/mth) (IDRk/mth) In 2008, lower 60 80 interconnection rates

75 55 resulted in lower market ARPU ... 70 50

65 45

40 55

35 50

30 45

25 40 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 EXCL ISAT TLKM (RHS) Source: Companies PT Bahana Securities – Equity Research – Indonesian Telecommunications 22

The new interconnection rates were implemented in 2Q08. In 2Q08-2Q09, the sector ARPU ... from IDR67k/month declined by around 20-29% y-y from IDR67k/month in 2Q07 to as low as IDR39/month in in 1Q07 to as low as 1Q09. However, the ARPU then normalized at around IDR39/month in 1Q10 to 3Q10. In IDR39 in 1Q09 1Q09, TLKM‟s ARPU declined to IDR47/month, -30% y-y, while ISAT‟s ARPU declined to IDR31/month, -28% y-y and EXCL‟s ARPU declined to IDR29/month, -31% y-y.

Exhibit 40. Incumbent EBITDA margin, 1Q07-4Q09

(%) (%) The sector’s EBITDA 55 75 margin also declined

70 from ... 50

45 60

55 40

35 45

30 40 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 EXCL ISAT TLKM Source: Companies

This had a negative impact on EBITDA margins as the sector‟s EBITDA margin declined ... 64.9% in 3Q07 to from 64.9% in 3Q07 to 47.3% in 4Q08. TLKM‟s EBITDA margin went down from 71.3% in 43.3% in 4Q09 3Q07 to 48.7% in 4Q08, while EXCL‟s EBITDA margin fell from 44.6% in 3Q07 to 34.2% in 4Q08. However, ISAT‟s EBITDA margin was relatively stable at around 51%. The declining EBITDA margin continued in 2009, reaching 43.3% in 4Q09. However, EXCL‟s EBITDA margin improved to 49.6% in 4Q09.

Exhibit 41. Incumbent ARPU, 1Q10-4Q12 (IDRk/mth) (IDRk/mth) In 2011, lower 36 45 interconnection rates 35 44 resulted in lower market 34 43 ARPU ... 33 42 32 41 31 40 30 39 29 38 28

37 27

26 36

25 35 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 EXCL ISAT TLKM (RHS) Source: Companies

The new interconnection rates started to be implemented in 1Q11. In 1Q11-4Q11, the ... from IDR39k/month sector‟s ARPU declined by around 9-13% y-y from IDR39k/month in 1Q10 to as low as in 1Q10 to as low as IDR32/month in 1Q12. However, the ARPU then recovered to IDR34/month in 4Q12. In IDR32/month in 1Q12 1Q09, TLKM‟s ARPU declined to IDR47/month, -30% y-y, while ISAT‟s ARPU declined to IDR31/month, -28% y-y and EXCL‟s ARPU declined to IDR29/month, -31% y-y. In 1Q11, TLKM‟s ARPU declined to IDR37/month, -14% y-y, while ISAT‟s ARPU declined to IDR29/month, -15% y-y and EXCL‟s ARPU declined to IDR32/month, -9% y-y.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 23

Exhibit 42. Incumbent EBITDA margin, 1Q10-4Q12

(%) (%) The sector’s EBITDA 55 65 margin also declined from ... 50 60

45 55

40 50

35 45

30 40 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 EXCL ISAT TLKM Source: Companies

The 2011 lower interconnection policy also had negative impact on EBITDA margins as the ... 53.6% in 2Q10 to sector‟s EBITDA margin declined from 53.6% in 2Q10 to 47.9% in 3Q11. TLKM‟s EBITDA 47.9% in 3Q11 margin went down from 55.2% in 2Q10 to 47.8% in 3Q11, while EXCL‟s EBITDA margin fell from 53.5% in 2Q10 to 46.8% in 3Q11. However, ISAT‟s EBITDA margin was relatively stable at around 48-49%.

The interconnection policy has not yet been announced. It is still not clear whether the new It is still not clear at the interconnection policy would benefit TLKM or ISAT and EXCL. We see a higher probability moment for the interconnection policy to stay unchanged.

Joint network policy As we move into 4G, ISAT and EXCL plan to collaborate on capex spending to cut expansion The proposed joint costs and network operating expenses. EXCL and ISAT plan to share the infrastructure, network policy requires including the core network. These companies plan to use the same frequency for the 4G government approval network. However, these companies need government approval for their network-sharing strategy.

Should the government approve this joint network plan, we believe that both EXCL and ISAT and EXCL could ISAT would benefit in terms of lower capex and opex, improving these companies‟ EBITDA benefit from the margins as well as gearing levels. Furthermore, ISAT and EXCL could use this to offer proposed policy of the cheaper products to their customers in order to gain market share from TLKM. However, we joint network do not think that this strategy will be fruitful as TLKM could retaliate and offer similar cheap products, limiting market share gains for ISAT and EXCL.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 24

SIM registration policy In December 2015, the Ministry of Communications and Information Technology tightened The newly applied the country‟s prepaid Subscriber Identity Module (SIM) card registration to combat high tighter SIM card churn rates and abuse, including SMS spam. Under the new policy, all outlets will have to registration policy use the ROID system to identify their owners. In the case of misuse such as the reselling of should ... user data or fraud, it would be easy for the government to track down the outlets responsible. Any retailers or outlets which do not use the ROID system would be automatically blocked from conducting further business.

Despite many people remaining skeptical about the effectiveness of this policy, as ... benefit the pricing Indonesian people tend to find loopholes in the law, we believe this policy will be successful environment for the as telco operators should benefit from more detailed data about their subscribers. With sector more data, telco operators can cross-sell products or even sell targeted ads. We believe that this policy will reduce the number of swinging subscribers who tend to move from one operator to another. As it will be harder for any subscriber to change SIM cards regularly, lower pricing may not result in higher subscriber additions.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 25

COMPETITION RISKS

Minimum competition from smaller players Unlike in 2007 when the 3rd biggest player, EXCL, started charging cheaper prices for voice We do not expect and SMS, currently the 3 biggest players, which represent around 80% of total market cap, competition to intensify continue to improve their pricing strategies. Thus, we do not expect competition to intensify in the near future. Apart from the 3 big incumbents, there are another 3 active telco operators: Hutchinson, Smartfren (FREN) and Esia (BTEL).

Hutchinson started its operations in Indonesia in 2007 with the “3” brand. The company Hutchinson just changed was owned by Hutchinson Whampoa (65%) and a local investor consortium led by Mr. most of its senior Garibaldi Thohir (35%). Despite seeing strong improvements in subscribers (exhibit 43), management despite ... most of its senior management was replaced due to operational inefficiency. We suspect that the company‟s huge subscriber growth was due to its long active period of new sim cards, compared to Telkomsel with around a 60-day active period. Besides, we believe most customers only use Hutchinson for its Internet, as the tariff for its Internet is quite cheap. Some customers also like Hutchinson due to its attractive international programs. With the current strategy, we do not expect Hutchinson to harm the incumbent‟s dominance.

Exhibit 43. Hutchinson subscribers, 2010-2014 (mn subs) … continued 45 improvements in the subscriber base 40

10 2010 2011 2012 2013 2014 Source: Company

Smartfren was previously two different entities, i.e., Smart Telecom (owned By Sinar Mas FREN offers lot of cheap Group) and Mobile 8 Telecom (owned by Global Mediacom). Following Mobile 8 Telecom‟s bundling products to its financial difficulties, Smart Telecom acquired the company in 2010 and changed the name customers, but into Smartfren Telecom (FREN). The company was active in the CDMA frequency in continues to see... Indonesia from 2002 through the “Fren” brand, and changed the name to the “Smartfren” brand later on. In the past 3 years, FREN subscriber growth has been quite slow with declining ARPU (exhibit 44). Furthermore, most customers only use FREN for its cheap bundling handset programs. Based on Ministerial Decree in August 2014, FREN is allowed to use its CDMA spectrum for LTE services in 800MHz (from TLKM‟s and BTEL‟s frequency) and 2,300MHz (conversion from its frequency in 1,900MHz by the end of 2016).

PT Bahana Securities – Equity Research – Indonesian Telecommunications 26

Exhibit 44. FREN subscribers and ARPU, 2010-2014 (mn subs) (IDR'000) ... weak ARPU and 14 30,000 stagnant subscriber

12 growth 25,000

10 20,000

15,000

10,000 4

5,000 2

0 0 2010 2011 2012 2013 2014 ARPU (RHS) Subscribers Source: Company

Owned by Bakrie & Brothers, Bakrie Telecom (BTEL) has been doing business on CDMA BTEL rented some of its frequency in Indonesia since 2003 through the „ESIA‟ brand. BTEL acquired another CDMA network to FREN player Sampoerna Telecommunication Indonesia (“Ceria” brand) in 2012 and supplemented its 5MHz in 800MHz frequency with 7.5MHz in 450MHz. Similar to FREN, BTEL‟s subscriber growth has been quite slow with declining ARPU in the past 3 years (exhibit 45). In 2015, BTEL and FREN started providing services to their customers in 800MHz frequency, moving from CDMA technology to 4G/LTE technology. Although there is a risk that FREN/BTEL coordination could disturb the current rational pricing environment, we believe that the risk is minimal given the track records of both companies and limited scale in terms of infrastructure support.

Exhibit 45. BTEL subscribers and ARPU, 2010-2014 (mn subs) (IDR'000) 14 30,000 BTEL has experienced weaker ARPU and flat 12 25,000 subscriber growth

10 20,000

15,000

10,000 4

5,000 2

- 0 2010 2011 2012 2013 2014 ARPU (RHS) Subscribers Source: Company Apart from operators that we discussed earlier, there is also a popular mobile broadband BOLT does not offer service, BOLT, owned by First Media and Internux. Introduced in late 2013, BOLT has voice services and is already reached 1mn subscribers (2014) on its aggressive marketing strategy. BOLT has only present in Jakarta launched several 4G handsets, including an affordable model with a USD75 selling price. and Banten... However, we do not believe that BOLT will intensify the competitive landscape in the operator space given that the company does not have a licence to offer voice services to its customers. Additionally, the company only has licenses to operate in the Jakarta and Banten areas. Furthermore, in order to penetrate the market, BOLT is selling its devices to its customers at below acquisition cost. We do not think that this business model is sustainable in the longer term.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 27

Exhibit 46. BOLT data package Price Period of … despite attractive Package Data Quota data pricing (USD) Validity

Basic 8GB 7 1 month 13GB 11 1 month 17GB 15 1 month Convenient 55GB 45 3 month 110GB 89 1 year Lite 1.5GB 2 1 month 3GB 4 1 month

Source: Company

Unlikely worst case scenario: ISAT re-initiating the price war We believe the biggest competition risk for the telco sector is if either ISAT or EXCL decide The biggest competition to cut prices to gain more market share and re-initiate the price wars. The main catalyst risk: ISAT re-initiating for this to happen would be the two regulatory decisions by the government, i.e., lower the price war interconnection rates and the approval for the joint network of EXCL and ISAT.

Currently, ISAT and EXCL‟s presence is mostly in big cities. While EXCL will continue to In December 2015, ISAT focus on densely populated cities with huge demand for digital media, ISAT plans to expand started launching low- outside the Java area. This is why we believe lower interconnection rates would help ISAT priced products ... as ISAT could undercut prices to gain more market share in the outer Java area. In December 2015, ISAT expanded its services to some regions with low-priced products only to gain market share. ISAT offers an off-net call for IDR60/minute, despite a call interconnection rate of IDR250/minute. Thus, ISAT basically subsidized its new subscribers through this promo package. Fortunately, until now, TLKM has believed that subscriber additions by ISAT are not big enough for TLKM to retaliate with similar low-priced products. However, TLKM is closely monitoring the situation, and would react accordingly should revenue losses for ISAT‟s low-priced products becomes substantial. In such an event, TLKM could launch similar low-priced products and re-escalate the price war.

Exhibit 47. Indosat IM3 Promo, 2016 … offering Service Tariff IDR60/minute calls, Call to Indosat Ooredoo IDR1/sec despite an IDR250/minute IDR1/sec for the first 5 minutes Call to other operator interconnection rate Afterwards, IDR3/sec (all day) IDR10,000/day Unlimited phone calls to Asia, Australia, USA and Europe IDR10,000/7 days IDR100,000/30 days IDR50,000/7 days Unlimited phone calls to Japan and Middle East IDR120,000/30 days Source: Company

PT Bahana Securities – Equity Research – Indonesian Telecommunications 28

Furthermore, as the market enters the 4G expansion phase, ISAT and EXCL plan to ISAT/EXCL could re- collaborate on capex spending to cut expansion costs and network operating expenses. The escalate the price war regulator‟s approval for this plan should improve EBITDA margins for EXCL and ISAT and tension if they want to their ability to offer cheaper products to customers. Thus, ISAT/EXCL could re-initiate the gain more market share price war to gain more market share.

However, we believe the move to re-escalate the price war has several limitations and SIM card registration to threats. One of the main limitations is the tighter regulation on SIM card registration, which limit price wars is designed to combat high churn rates and abuse, including SMS spam. This move could limit subscribers switching from one operator to another to take advantage of lower prices. Thus, the operator with cheap promotions may not see significant subscriber addition given the high costs associated with promotion and operations.

Should TLKM retaliate If ISAT or EXCL decided to undercut price to gain more market share, TLKM could retaliate with low-priced by issuing similar cheap products to maintain its comfortable market share. As Indonesia‟s products, the entire ARPU and product pricing are already lower than those of its regional peers, we think that industry may experience price undercutting is not a logical solution, particularly given telco operators‟ bad lower margin without experience from the 2007 price wars, where all operators‟ net profit and EBITDA margin any change in market declined substantially. share

As we move into the digital business, we believe telco companies need to increase prices to support EBITDA margins. Thus, we believe it is not in the best interests of the industry as a Low probability of price whole to re-escalate the price war. As we believe the price wars would only make every war given the likely player experience lower margins without a significant change in market share, we see a low consequences probability for any company to re-escalate the price war.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 29

PORTER’S FIVE FORCES FRAMEWORK

Telco sector analysis: Has the right momentum Looking at the current market conditions using Porter‟s five forces framework, we arrived at High barrier to entry the conclusion that the Indonesian telecommunications sector has the right momentum. with substantial First, we looked at the threat of new entrants, which depends on barriers to entry. We financial and intellectual believe that the telco sector‟s barriers to entry are very high as substantial financial and capital required to intellectual capital is required to compete effectively. Furthermore, the Minister for compete Telecommunication and Information already has stated that he wants a more consolidated market and future licenses would only be awarded to existing players. A potential new entrant would need to invest a lot on infrastructure, distribution networks, brand awareness as well as licences from central and regional governments. Thus, we believe that threat of new entrants is quite low, suggesting sustainable economic profit potential.

Second, we looked at the intensity of rivalry in the sector. The industry is currently highly The industry is highly concentrated, with 3 incumbent operators accounting for 80% of the total subscriber base. concentrated, with 3 With the ministry‟s intention to support industry consolidation, we expect competition to incumbents accounting become more rational. On the capacity front, total telco subscribers are currently around for 80% of the total 125% of the total population, suggesting limited subscriber growth. However, we believe subscriber base pricing would have to improve from current conditions. The industry is quite stable, with TLKM continuing to be the most dominant force, followed by ISAT and EXCL with similar market shares. The industry life cycle is already at the mature cycle for voice and SMS. However, due to the technological changes, the telco industry is shifting from a mature phase to a second growth phase with the help of data usage growth. With regard to price competition, we believe that prices still affect customer purchase decisions for the lower-end segment. However, we believe that new regulations on SIM registrations would limit rapid switching by users from one provider to another, limiting price war potential. Thus, we believe that the intensity of rivalry in the sector is quite low.

Third, we looked at the bargaining power of suppliers in the sector. Suppliers of telco The power of suppliers companies are mostly network developers (Nokia Siemens Network, Ericsson, Huawei and is quite low ZTE) and tower companies (TOWR, TBIG, and SUPR). There are several companies that could enter the tendering process to become telco company suppliers. Although the suppliers to telco companies are really important as they affect telco network quality, we believe that product offerings by suppliers are similar. The threat of forward integration from suppliers appears low as newcomers are not encouraged, according to current ministry moves to consolidate the sector. However, we see a threat of backward integration for tower providers should TLKM‟s tower company Mitratel decide to enter the market. All in all, we believe that the power of suppliers in the sector is quite low.

Fourth, we looked at the bargaining power of customers in the sector. Product differentiations Despite low product between telco companies are relatively low. Switching cost is quite low as customers can differentiation, we switch easily. However, the more income one has, the less likely one would switch a phone believe that the power number as the phone number is used to maintain one‟s business networks and friends. Also, of customers is medium the new regulation on SIM registrations should limit rapid switching of users from one due to regulatory provider to another. Nowadays, there is a trend to use more than one phone number to support and industry accommodate two handsets (Android, Apple or Blackberry) as well as to limit phone bills as consolidation voice calls within the same providers are quite cheap. We believe that the power of customers in the sector is medium due to regulatory support and industry consolidation.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 30

Fifth, we looked at the threat of substitute products. The substitutes could come from outside The threat from the big 3 incumbents, which are Hutchinson, FREN and BTEL, who could attack the market substitute products is with cheaper prices to gain market share. However, we believe that the impact would be quite low at the moment limited. The functional substitute of voice and SMS (70% revenue) may not come from other tools such as home telephone as it is not popular anymore. However, several data applications such as Whatsapp and LINE can replicate the function of voice and SMS. Fortunately, telco operators also provide data service to customers, limiting the impact of substitute products, in our view. Should we focus on data usage as a means to find the substitute product, then the substitute products are mobile broadband (such as Bold), home network (such as Fast net and Biz net) and available wifi in several public areas. We believe that huge network of telco operators and high usage of the internet outside home mean that the threat of other means of data usage is quite low at the moment.

Exhibit 48. Porter’s five forces analysis for telco industry Based on Porter’s five Threat of New Entrants (Low) forces analysis, we think the telco industry has the right momentum

Bargaining Bargaining Power of Intensity Power of Suppliers of Rivalry Customers (Low) (Low) (Medium)

Threat of Substitute Products (Low)

Source: Bahana

PT Bahana Securities – Equity Research – Indonesian Telecommunications 31

VALUATION

Looks attractively valued with solid growth prospects In terms of valuation, we divide our telco sector coverage into 3 segments: telco operators, Telco operators deserve tower companies and telco retail companies. For telco operators, regional peers are trading to trade at a premium to at a 2016F EV/EBITDA of 8.3x with only 5.0% y-y estimated EPS growth. However, we their regional peers on believe that Indonesian telco players deserve to trade at a premium to their regional peers the prospects of on stronger EPS growth prospects in the next few years on the sector data migration story, stronger EPS growth, we backed by improvements in the smartphone penetration rate. believe

Exhibit 49. Telco operators: regional valuation, 2016F

M a rk e t C a p 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F

C o m p a n y ( U S D b n ) P E R ( x) EP S gwt. (%) EV/EBITDA (x) P B V ( x) Div.yield (%) R O E ( %) Regional telco operators In d o n e s ia 2 9 .2 2 0 .2 3 4 .2 7 .7 3 .7 3 .1 2 0 .0 are trading at a 2016F Telkom Indonesia 24.5 18.6 12.6 8.3 4.0 3.5 22.6

XL A xiata 2.5 76.2 na 5.8 2.3 0.4 3.1 EV/EBITDA of 8.3x with Indo sat 2.2 21.9 na 3.4 2.1 1.4 10.0 EPS growth of 5.0% y-y M a la ys ia 15 .0 2 2 .9 1.8 10 .5 3 7 .0 4 .1 19 1.3

D igi.co m 9.1 21.0 (3.8) 12.5 59.1 4.5 308.9

T eleko m M alaysia 5.9 26.4 10.4 7.5 3.2 3.6 12.2 P hillippines 15 .0 13 .7 2 .5 7 .1 3 .5 6 .0 2 6 .6

Philippine Long Distance Tel 9.8 13.8 (1.0) 7.7 3.2 6.3 24.5

Globe Telecom 5.2 13.6 9.3 6.0 4.0 5.6 30.7 T h a ila n d 16 .0 15 .1 ( 16 .0 ) 8 .1 9 .4 8 .8 6 4 .4

Advanced info Service 13.9 15.1 (14.2) 8.7 10.4 8.6 71.5

Total Access Communication 2.1 15.6 (27.8) 4.2 2.6 9.6 17.4 S in g a p o re 6 .2 15 .8 ( 0 .5 ) 8 .7 2 5 .9 5 .8 15 6 .4

Starhub 4.5 17.1 (0.5) 9.0 33.6 5.5 199.5

M o bileo ne 1.7 13.1 (0.6) 7.8 5.4 6.6 42.4 Global weighted average 8 1.4 15 .0 5 .0 8 .3 12 .6 5 .1 7 1.9 Source: Companies, Bahana estimates; Based on closing prices on 12 Feb 2016

For tower companies, regional peers are trading at a 2016F EV/EBITDA of 15.3x with solid Indonesian tower expected EPS growth of 27.9% y-y. Indonesian tower companies are trading at a 13% companies are trading discount to their regional peers despite strong earnings visibility. We expect conditions to at a 13% discount to improve. regional peers Exhibit 50. Tower companies: regional valuation, 2016F M a rk e t C a p 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F Regional tower C o m p a n y ( U S D b n ) P E R ( x) EP S gwt. (%) EV/EBITDA (x) P B V ( x) P E G ( x) Div.yield (%) R O E ( %) companies are trading In d o n e s ia 6 .0 2 5 .3 4 0 .9 12 .7 5 .9 0 .6 0 .3 2 7 .7 at a 2016F EV/EBITDA Solusi Tunas Pratama 0.7 29.9 39.7 10.2 1.7 0.0 na 10.3 of 15.3x with EPS

Tower Bersama Infrastructure 2.2 22.7 22.0 15.1 7.3 1.0 0.9 37.3 growth of 27.9% y-y

Sarana M enara Nusantara 3.1 26.5 61.3 11.5 5.9 0.4 na 25.0 USA 6 2 .6 4 2 .5 2 8 .2 17 .2 4 .8 ( 2 .4 ) 2 .9 10 .3

American Tower 35.4 33.4 54.0 16.3 5.3 0.6 2.0 13.8

Crown Castle 27.2 65.6 (10.3) 18.5 4.1 (6.3) 4.1 5.7 In d ia 10 .7 3 1.3 19 .3 12 .9 4 .2 1.6 2 .9 13 .9

B harti Infratel 10.7 31.3 19.3 12.9 4.2 1.6 2.9 13.9 Global weighted average 7 9 .3 3 9 .7 2 7 .9 15 .3 4 .4 ( 1.7 ) 2 .7 10 .0 ERAA is trading at a significant discount Source: Companies, Bahana estimates; Based on closing prices on 12 Feb 2016 while TELE is trading at For telco retail companies, regional peers are trading at a 2016F PE of 9.1x with expected a premium to regional EPS growth of 16.6% y-y. ERAA is trading slightly higher than the regional average. peers Furthermore, despite trading above the regional average, TELE still looks attractive on strong growth prospects.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 32

Exhibit 51. Telco retail companies: regional valuation, 2016F M a rk e t C a p 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F 2 0 16 F Regional telco retail C o m p a n y ( U S D b n ) P E R ( x) EP S gwt. (%) EV/EBITDA (x) P B V ( x) Div.yield (%) R O E ( %) companies are trading INDONESIA 0 .5 8 .5 2 0 .6 7 .2 1.2 3 .6 13 .5 at a 2016F PE of 9.1x with EPS growth of Erajaya Swasem bada 0.1 6.3 19.8 5.6 0.5 6.3 7.9 16.6% y-y Tiphone M obile Indonesia 0.3 9.6 21.0 7.7 1.4 2.6 15.4 ASIA 7 .3 9 .3 16 .3 9 .2 1.0 2 .5 10 .9

Synnex T echno lo gy 1.5 8.6 21.4 15.4 1.0 9.5 12.3

Digital China 1.2 20.6 na 17.7 1.1 1.7 6.0

Redington India 0.6 9.8 8.9 7.9 1.5 1.9 16.2

Ingram M icro 4.1 8.1 19.3 4.7 0.9 0.4 11.0 Global weighted average 7 .8 9 .2 16 .6 9 .1 1.0 2 .6 11.0 Source: Companies, Bahana estimates; Based on closing prices on 12 Feb 2016

PT Bahana Securities – Equity Research – Indonesian Telecommunications 33

RECOMMENDATION

Solid growth expected on higher data demand and rational competition We expect solid sector revenue growth, supported by strong data demand due to higher Solid revenue growth on smartphone penetration. Furthermore, rational competition should help to improve the strong data demand and sector‟s ARPU and protect EBITDA margins. Although the data segment has lower EBITDA improved pricing power margins than voice and SMS, improved data pricing should help mitigate margin erosion. We expect capex to remain manageable in the mid-term as most huge capex spending has already been disbursed in the past few years.

On individual companies, we believe that the three incumbents, TLKM, ISAT and EXCL, will TLKM should remain experience solid revenue growth on limited outside competition threats. TLKM should dominant; ISAT will remain dominant with a stronger presence in the outer Java area due to its first-mover likely cater to a broad advantage. TLKM should maintain the highest margins on its strong network and economies spectrum of purchasers; of scale due to its huge subscriber base. ISAT, the second-largest operator in terms of EXCL plans to subscribers, should continue its strong momentum, booking stronger data usage and aggressively go into the revenue. ISAT should position itself as an all-around player, catering to most income 4G LTE network segments. EXCL should continue to focus on its value strategy, monetizing its strong network following the consolidation of Axis Telekom‟s infrastructure. EXCL is planning to differentiate itself as an operator that offers the best digital experience with huge frequencies/subscribers and a fast rollout of the 4G LTE infrastructure. We do not expect companies outside incumbents to experience significant growth, due to limited network capacity and capex spending.

On telco derivatives, we believe that solid revenue growth in the cellular business will Solid revenue growth benefit voucher distributors, as pre-paid subscribers should still represent more than 95% should benefit voucher of total subscribers in the next few years. These conditions should bode well for TELE, with business; higher a stronger market share in Telkomsel‟s voucher sales. On handset distributors, we believe smartphone penetration that the higher smartphone trend will support handset sales growth. ERAA should benefit expected to support from these conditions as the company should also experience higher market share on handset sales weaker performance from main competitor TRIO.

On tower companies, we do not like their growth prospects which should be lower than in Unexciting tower growth the past few years as operators have expanded their BTSs in the past few years. on limited expansion Additionally, the joint infrastructure trend should also limit tower growth in the future. We needs from operators expect TBIG and TOWR to experience unexciting growth on stabilized annual BTS growth as well as the sharing network trend among operators.

TLKM is top pick, followed by ISAT and TELE At this stage, we remain sector OVERWEIGHT on expected data and earnings growth TLKM and ISAT our top spurred by industry consolidation. While we have BUY ratings on all three telco operators, operator picks we favor TLKM, which is trading at a 2016F EV/EBITDA of 8.3x, at par with regional peers – our 12M DCF-based TP of IDR3,750 reflects 14% upside potential. Our second pick is ISAT on an earnings recovery, backed by network monetization and an improved balance sheet as well as one of the cheapest regional valuations at a 2016F EV/EBITDA of 3.4x – our IDR6,800 TP translates into a 35% peer discount. We believe that TLKM, as the biggest company, will benefit most in this strong revenue growth environment. We also have a BUY rating on EXCL with a DCF-based TP of IDR4,400 (2016F EV/EBITDA of 6.2x) on a higher ARPU and lower net gearing prospects.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 34

On telecom derivatives, our top pick is TELE, with a DCF-based TP of IDR1,180 (2016F PE TELE is our top telecom of 18x), supported by higher revenue growth due to solid TLKM revenue growth and higher derivative pick market share. We also have a BUY rating on ERAA with a DCF-based TP of IDR850 (2016F PE of 9.8x) due to bottoming margins and solid handset sales growth. On tower companies, we prefer TOWR with a DCF-based TP of IDR5,000 (2016F EV/EBITDA of 13.7x) on higher growth potential due to its lower net gearing. TBIG is a HOLD with DCF-based TP of IDR6,500 (2016F EV/EBITDA of 15.7x) on limited growth prospects.

PT Bahana Securities – Equity Research – Indonesian Telecommunications 35

Telekomunikasi Indonesia BUY Sector: Telecommunication (Underweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR3,285–TP:IDR3,750 (Unchanged) E-mail: [email protected] TP/consensus: 1104%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

Conference call notes: Strong momentum in 3Q15 Exhibit 1. Company information Market cap (IDRtn/USDbn) : 331.1/19.9 . Strong smartphone additions continue to support data growth: In 3M avg.daily t.o.(IDRbn/USDmn) : 277.3/20.5 3Q15, TLKM‟s smartphone subscribers rose to 2.5mn/month (2Q15: 1.5mn; Bloomberg code : TLKM IJ 3Q14: 1.4mn), reaching a 9M15 level of 55.6mn, +16% q-q and +57% y-y, Source: Bloomberg representing 37% of total subscribers (2Q15: 33%; 3Q14: 25%). This should Exhibit 2. Shareholder information Government (%) : 51.2 continue to improve TLKM‟s ARPU and data usage, particularly as we expect Est. free float (%) : 48.8 TLKM‟s smartphone subscriber proportion to reach 50% in 2017. Source: Bloomberg

. Beneficiary of easing competition and cluster-based pricing: The three Exhibit 3. Key forecasts and valuations biggest operators have improved pricing for several products, due to the Per 31 Dec 2014 2015F 2016F 2017F easing competitive landscape. TLKM, using its cluster-based pricing system, Revenue (IDRbn) 89,696 102,143 113,031 124,788 EBIT (IDRbn) also improved pricing in 3Q15, especially for SMS. On the cost front, TLKM 28,713 32,141 36,256 41,388 Net profit (IDRbn) improved its EBITDA margin in 3Q15 to 50.4% (2Q15: 44.3%; 3Q14: 50.0%). 14,638 15,778 17,773 20,468 Bahana/cons.(%) We expect this strong momentum to persist on limited competition threats. - 96 98 102 EPS (IDR) . IndiHome on track for 3mn subscribers in 2016: TLKM‟s triple-play 145 157 176 203 EPS growth (%) product, IndiHome, added 251k additional subscribers during the quarter, 2.4 7.8 12.6 15.2 EPS momentum* - raising 9M15 subscribers to 678k, the highest in the fast-home broadband EV/EBITDA (x) business. TLKM plans to increase its subscriber base to 1mn in 2015 and 3mn 10.3 9.3 8.3 7.4 PER (x) in 2016, representing additional revenue of IDR10tn (10% of TLKM‟s current 22.6 21.0 18.6 16.2 FCFPS (IDR) annual revenue). To support this plan, TLKM plans to expand its fiber home- 65 91 120 145 FCF yield (%) passed subscriber base (9M15: 6.3mn). 2.0 2.8 3.7 4.4 BVPS (IDR) 673 742 817 905 . Cost pressure to ease in 4Q15: In 3Q15, several costs increased PBV (x) 4.9 4.4 4.0 3.6 significantly, including G&A, depreciation and personnel expenses. However, DPS (IDR) 87 102 115 132 management expects cost pressure from G&A, which resulted from higher Yield (%) 2.7 3.1 3.5 4.0 provisioning, to ease in 4Q15. Furthermore, 3Q15 performance-related ROAA (%) 10.8 10.4 10.7 11.5 personnel costs should see a limited rise in 4Q15, according to the company. ROAE (%) 22.9 22.1 22.6 23.6 However, management has also guided for a slightly lower EBITDA margin as EBIT margin (%) 32.0 31.5 32.1 33.2 TLKM continues its infrastructure expansion. Net Gearing (%) 8.5 8.4 3.4 nc Source: Company, Bloomberg, Bahana estimates Outlook: Possible higher pricing on light competition Note: Pricing as of close on 12 Feb 2016; n.m. = not meaningful At this stage, we expect continued significant improvement in data usage Exhibit 4. Relative share price performance resulting from increased smartphone subscribers. Furthermore, a rational pricing (%) (%) environment should support TLKM to continue monetizing its huge infrastructure 40 40 34.4 34.6 investment by improving pricing policy. Thus, we expect solid revenue growth 35 35 30 30 coupled with well-supported margins for TLKM. We expect TLKM to book 2016- 25 25 20 20 17F EBITDA growth of 11% y-y, with an EBITDA margin of around 49%. On 15.3 15 12.1 15 Indihome, attractive pricing and a still-low home broadband penetration rate 10 10 should lead to additional revenue growth for TLKM in the long term. 5 3.2 5 0 0 (0.0) (5) (5) Recommendation: Maintain BUY and TP of IDR3,750 ytd 1M 3M 6M 9M 12M TLKM IJ relative to JCI Easing competition and solid data performance have us maintaining our positive Source: Bloomberg, Bahana view on TLKM, with a 12-month DCF-based (WACC: 11%) target price of IDR3,750, reflecting a 2016F EV/EBITDA of 8.5x, a 14% premium to regional peers, we think justified by sustainable growth, allowing for continued market outperformance (exhibit 4). With 14% upside potential to our TP, TLKM is a BUY. Risks include weaker-than-expected IDR, tougher-than-expected competition and higher-than-expected network costs.

Telekomunikasi Indonesia Year to 31 December 2013 2014 2015F 2016F 2017F PROFIT & LOSS (IDRb) Sales 82,967 89,696 102,143 113,031 124,788 2015-17F revenue expected to Gross profit - - - - - increase 10-13% y-y, higher than EBITDA 41,776 45,844 50,442 55,794 62,051 industry growth Depreciation 15,780 17,131 18,302 19,537 20,663 EBIT 25,996 28,713 32,141 36,256 41,388

Net interest inc./(expense) (668) (576) (983) (632) (276) Forex gain/ (losses) (249) (14) 37 12 25 Other income/ (expense) 2,070 661 361 361 361 Pre-tax profit 27,149 28,784 31,556 35,997 41,499 Taxes (6,859) (7,338) (7,889) (8,999) (10,375) Minority interest (6,085) (6,808) (7,889) (8,999) (10,375)

Extraordinary gain/(losses) - - - - -

Net profit 14,205 14,638 15,778 17,998 20,749

BALANCE SHEET (IDRb) Cash and equivalents 14,696 17,672 27,169 28,981 33,240 S-T investments 6,872 2,797 3,207 3,549 3,918 Trade receivables 6,623 6,997 8,512 9,419 10,399 Inventories 509 474 583 640 695 Fixed assets 86,761 94,809 101,507 106,970 112,505 Other assets 13,094 19,073 19,962 22,090 24,388

Total assets 128,555 141,822 160,941 171,649 185,145 Interest bearing liabilities 20,256 23,452 33,452 31,452 30,452 Well-maintained debt levels Trade payables 12,197 12,362 13,593 14,350 15,027 expected ... Other liabilities 19,286 19,873 21,659 23,968 26,461 Total liabilities 51,739 55,687 68,704 69,771 71,940 Minority interest 16,932 18,323 17,429 19,328 21,603 Shareholders' equity 59,884 67,812 74,808 82,551 91,601

CASH FLOW (IDRb) EBIT 25,996 28,713 32,141 36,256 41,388 Depreciation 15,780 17,131 18,302 19,537 20,663 Working capital 3,587 (174) (394) (206) (358) Other operating items (30,656) (14,441) (16,907) (19,234) (21,613) Operating cash flow 14,707 31,229 33,142 36,354 40,080 Net capital expenditure (24,898) (24,667) (24,000) (24,000) (25,198) ... despite capex remaining above Free cash flow (10,191) 6,562 9,142 12,354 14,882 IDR24tn in 2015-17F Equity raised/(bought) 1,250 576 - - - Net borrowings 981 3,196 10,000 (2,000) (1,000) Other financing 9,538 (7,358) (9,646) (8,541) (9,623) Net cash flow 1,578 2,976 9,497 1,812 4,259 Cash flow at beginning 13,118 14,696 17,672 27,169 28,981 Cash flow at end 14,696 17,672 27,169 28,981 33,240

RATIOS ROAE (%) 25.5 22.9 22.1 22.9 23.8 Improved 2016-17F ROAE on cost ROAA (%) 11.8 10.8 10.4 10.8 11.6 efficiencies and normalization of EBITDA margin (%) 50.4 51.1 49.4 49.4 49.7 expenses EBIT margin (%) 31.3 32.0 31.5 32.1 33.2 Net margin (%) 17.1 16.3 15.4 15.9 16.6 Payout ratio (%) 70.0 60.0 65.0 65.0 65.0 Interest coverage (x) 38.9 49.8 32.7 57.3 150.2 Net gearing (%) 9.3 8.5 8.4 3.0 nc Debts to assets (%) 15.8 16.5 20.8 18.3 16.4 Debtor turnover (days) 27 29 29 31 31 Creditor turnover (days) 64 75 68 67 65 Inventory turnover (days) 3 3 3 3 3

MAJOR ASSUMPTIONS Subscribers ('000) 131,512 140,585 149,020 150,510 152,015 Net adds ('000) 6,366 9,073 8,435 1,490 1,505 We expect improvements in ARPU ARPU (IDR 000) 37 39 42 45 49 to continue Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 37

XL Axiata BUY Sector: Telecommunication (Overweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR3,930–TP:IDR4,400 (Unchanged) E-mail: [email protected] TP/consensus: 99%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

4Q15 results: Operating in line, bottom line above Exhibit 1. Company information . Earnings rise to IDR481bn on FX gain: In 4Q15, on the strong forex gain Market cap (IDRtn/USDbn) : 33.6/2.5 3M avg.daily t.o.(IDRbn/USDmn) : 18.8/1.4 and improved EBITDA margin, EXCL‟s net profit accelerated to IDR481bn Bloomberg code : EXCL IJ (127% of our 4Q15F), +40% q-q and +666% y-y, translating into a 2015 net Source: Bloomberg loss of only IDR25bn. Exhibit 2. Shareholder information Axiata Group (%) : 66.43 . Improved top-line performance on solid double-digit data growth: Est. free float (%) : 33.57 EXCL‟s 4Q15 revenue improved to IDR5.95tn (102% of our 4Q15F), +2% q-q Source: Bloomberg

and +1% y-y, on solid data (+12% q-q and +13% y-y) revenue. However, Exhibit 3. Key forecasts and valuations EXCL also saw declining SMS revenue (-9% q-q and -21% y-y), in line with 2014 2015 2016F 2017F Revenue (IDRbn) 23,460 22,876 24,242 25,852 the industry trend. The 4Q15 voice revenue declined slightly by 1% q-q but EBITDA (IDRbn) 8,623 8,393 9,064 9,882 increased 10% y-y on pricing. It is worth noting that EXCL prevented a loss of Net profit (IDRbn) (775) (25) 440 1,183 subscribers in 4Q15, gaining 0.5mn, for a 2015 total of 42mn. Bahana/cons. (%) - - 40.6 109.2

EPS (IDR) (91) (3) 52 139 . Higher EBITDA margin on robust data revenue: EXCL booked 4Q15 EPS growth (%) na na na 168.9 EBITDA of IDR2.3tn, +6% q-q and +1% y-y, on solid revenue due to strong EPS momentum* - EV/EBITDA (x) data usage growth (+35% q-q and +59% y-y) coupled with higher pricing 6.5 6.8 5.8 5.2 PER (x) (43.3) (1,323. 76.2 28.3 resulting in improved ARPU of IDR34k in 2015, +31% y-y. On the margin FCFPS (IDR) (667) (121)7) 546 201 front, EXCL booked higher 4Q15 EBITDA margin of 39.0% (3Q15: 37.7%) as it FCF yield (%) (17.0) (3.1) 13.9 5.1 continued focusing on its new value-driven strategy. BVPS (IDR) 1,646 1,651 1,687 1,784 PBV (x) 2.4 2.4 2.3 2.2 Outlook: Monetization of solid network quality DPS (IDR) - - 15 42 At this stage, we expect sustainable long-term growth for EXCL, helped by its Yield (%) - - 0.4 1.1 ROAA (%) (1.5) (0.0) 0.8 2.0 focus on developing its digital business with several products such as ROAE (%) (5.3) (0.2) 3.1 8.0 Elevenia.com and XL-Tunai. Based on EXCL‟s target of increased up-market EBIT margin (%) 7.6 5.5 6.4 8.0 customers, we expect improved performance in 2016-17, backed by the Net Gearing (%) 161.4 167.8 132.7 116.6 Source: Company, Bloomberg, Bahana estimates continued rational competitive landscape allowing EXCL to raise prices and Note: Pricing as of close on 12 Feb 2016; n.m. = not meaningful supported by its strong network quality. Our earnings include EXCL‟s tower sale, Exhibit 4. Relative share price performance but exclude the upcoming rights issue. (%) (%) 70 70 61.3 60 60 Tower sale and USD500mn rights for debt repayment 50 50 EXCL plans to conduct a USD500mn rights issue to repay its debt to Axiata. 40 40 30 30 Rights terms include a minimum of IDR2,500/share with a maximum of 2.75bn 20 15.7 20 4.7 shares, representing 24% of total shares post the rights issuance. Furthermore, 10 5.0 6.6 10 0 0

(10) (10) EXCL announced its intention to sell part of its remaining tower portfolio of (8.8) (20) (20) around 6.5k to pay down its non-Axiata debt. In line with its previous ytd 1M 3M 6M 9M 12M EXCL IJ relative to JCI transaction, we expect EXCL to sell 2,500 towers with a valuation of IDR1.6bn/ Source: Bloomberg, Bahana tower, paving the way for IDR4tn of cash inflow and allowing for lower interest charges, debt and net gearing as well as a one-time gain. However, this would decrease tower rental revenues and concurrently increase EXCL‟s network cost.

Recommendation: Maintain BUY and TP of IDR4,400 Given the improved pricing and contained expenses coupled with solid data growth we maintain our BUY rating and 12M DCF-based (WACC: 11%) target price of IDR4,400, translating into a 2016F EV/EBITDA of 6.2x, around a 20% discount to regional peers. While EXCL has outperformed the market in the past 6 months (exhibit 4), we reiterate our BUY call based on the stock‟s undemanding valuation. Risks: Tougher-than-expected competition and higher- than-expected network costs.

XL Axiata Year to 31 December 2013 2014 2015 2016F 2017F PROFIT & LOSS (IDRb) Sales 21,265 23,460 22,876 24,242 25,852 Gross profit - - - - - EBITDA 8,659 8,623 8,393 9,064 9,882 Depreciation 5,759 6,841 7,135 7,501 7,820 EBIT 2,901 1,782 1,258 1,563 2,062 Net interest inc./(expense) (293) (1,397) (1,080) (1,371) (1,275) Forex gain/ (losses) (1,037) (1,295) (2,521) (231) 164 Other income/ (expense) (181) (44) 1,713 626 626 Pre-tax profit 1,390 (953) (631) 587 1,578 EXCL expected to experience a Taxes (357) 179 605 (147) (394) Minority interest - - - - - reversal from a net loss in 2015

Extraordinary gain/(losses) - - - - - to a net profit in 2016 on its Net profit 1,033 (775) (25) 440 1,183 value-driven strategy

BALANCE SHEET (IDRb) Cash and equivalents 1,318 6,951 3,312 3,343 3,200 S-T investments - - - - - Trade receivables 1,332 1,188 921 990 1,056 Inventories 49 77 79 82 87 Fixed assets 30,928 35,207 33,427 32,022 31,009 Other assets 3,505 15,114 15,266 15,772 16,043

Total assets 40,278 63,631 58,844 58,496 57,944 Interest bearing liabilities 17,822 29,628 26,953 22,453 20,953 EXCL should reduce its debt Trade payables 3,226 4,444 5,283 5,670 5,947 levels on tower sale and … Other liabilities 3,930 15,510 12,516 15,973 15,815 Total liabilities 24,977 49,583 44,753 44,096 42,716 Minority interest - - - - - Shareholders' equity 15,300 14,048 14,092 14,400 15,228

CASH FLOW (IDRb) EBIT 2,901 1,782 1,258 1,563 2,062 Depreciation 5,759 6,841 7,135 7,501 7,820 Working capital (2,216) (1,617) (2,636) (571) (124) Other operating items (2,184) (4,511) (666) 2,420 (1,485) Operating cash flow 4,260 2,496 5,091 10,913 8,273 Net capital expenditure (6,932) (8,192) (6,125) (6,250) (6,561) … capex that is likely to remain Free cash flow (2,673) (5,696) (1,033) 4,663 1,712 below IDR7tn in 2016-17F Equity raised/(bought) - - - - - Net borrowings 4,302 11,807 (2,675) (4,500) (1,500) Other financing (1,103) (478) 69 (132) (355) Net cash flow 526 5,633 (3,639) 31 (143) Cash flow at beginning 792 1,318 6,951 3,312 3,343 Cash flow at end 1,318 6,951 3,312 3,343 3,200

RATIOS ROAE (%) 6.7 (5.3) (0.2) 3.1 8.0 ROAA (%) 2.7 (1.5) (0.0) 0.8 2.0 EBITDA margin (%) 40.7 36.8 36.7 37.4 38.2 Higher margins on cost EBIT margin (%) 13.6 7.6 5.5 6.4 8.0 efficiencies and … Net margin (%) 4.9 (3.3) (0.1) 1.8 4.6 Payout ratio (%) 52.3 - - 30 30.0 Interest coverage (x) 9.9 1.3 1.2 1.1 1.6 Net gearing (%) 107.9 161.4 167.8 132.7 116.6 Debts to assets (%) 44.2 46.6 45.8 38.4 36.2 Debtor turnover (days) 16 19 16 15 15 Creditor turnover (days) 58 65 82 91 91 Inventory turnover (days) 1 1 1 1 1

MAJOR ASSUMPTIONS Subscribers ('000) 60,577 59,623 42,037 43,298 44,467 Net adds ('000) 14,822 (954) (17,586) 1,261 1,169 … ARPU improvements in 2016- ARPU (IDR 000) 27 26 34 41 43 17F Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 39

Indosat BUY Sector: Telecommunication (Underweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR5,375–TP:IDR6,800 (Unchanged) E-mail: [email protected] TP/consensus: 112%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

Limited re-branding impact Exhibit 1. Company information Market cap (IDRb/USDm) : 29,207/2,170 . Re-branding to “Indosat Ooredoo”: In November 2015, Indosat officially 3M avg.daily t.o.(IDRb/USDm) : 1.9/0.1.3 changed its brand name to “Indosat Ooredoo,” with all of its products also Bloomberg code : ISAT IJ including “Ooredoo” in their names. The company believes that the Source: Bloomberg

rebranding was needed, in line with its current network modernization and Exhibit 2. Shareholder information rearranged frequency. The company expects customers to value ISAT as the OOREDOO ASIA (%) : 65.0 leading operator in the digital era, with its “Indonesia Digital Nation” tagline, Government of Indonesia : 14.3 focusing on data business. Free float (%) : 20.7 Source: Bloomberg . Expanding 4G network to 35 cities: In line with its rebranding move, ISAT plans to expand its 4G network to 35 cities (2015F), covering almost Exhibit 3. Key forecasts and valuations 2014 2015 2016F 2017F 40mn subscribers. Currently, ISAT customers with 4G handsets amount to Revenue (IDRbn) 24,085 26,249 28,395 30,758 2mn subscribers, of which 900k are already using its 4G packages. ISAT EBIT (IDRbn) 1,833 2,95 3,79 4,637 also aggressively offers 4G-bundling products in several shopping centers. Net profit (IDRbn) (1,987) (1,187)3 1,3349 2,545 Bahana/cons. (%) - (223) 114 145

To strengthen its network, ISAT plans to join a frequency tender for

EPS (IDR) (366) (218) 245 468 2,100MHz and the Palapa ring network tender along with EXCL in 2016. EPS growth (%) na na na 90.8 EPS momentum* - . Minimal negative 2016-17F impact on royalties paid to Ooredoo: On EV/EBITDA (x) 4.9 4.1 3.4 2.8 a negative note, the use of the Ooredoo brand comes with a royalty cost for PER (x) na na 21.9 11.5 ISAT. The annual royalty is due to start in 2016 at a rate of 0.3% of cellular FCFPS (IDR) 424 388 705 780 FCF yield (%) revenue, gradually increasing to 1.3% in 2021 and beyond (exhibit 6). We 7.9 7.2 13.1 14.5 BVPS (IDR) 2,506 2,288 2,607 3,214 estimate that this will translate into royalty costs of IDR80bn in 2016 and PBV (x) 2.1 2.3 2.1 1.7 IDR202bn in 2017. This is a negative as we see limited benefits from the DPS (IDR) - - 74 139 use of the Ooredoo brand. However, we think that the impact is minimal, at Yield (%) - - 1.4 2.6 ROAA (%) (3.7) (2.2) 2.5 4.9 only around 0.6-1.5% of ISAT‟s 2016F-17F EBITDA. ROAE (%) (13.3) (9.1) 10.0 16.1 Outlook: Earnings recovery expected from 2016 EBIT margin (%) 7.6 11.3 13.4 15.1 Net Gearing (%) 144.4 138.9 90.0 42.8 At this stage of the market cycle, we expect competition in the telco sector to Source: Company, Bloomberg, Bahana estimates remain rational, allowing for continued higher data pricing, which is key in Note: Pricing as of close on 12 Feb 2016; n.m. = not meaningful developing data infrastructure. That said, we expect data usage as well as Exhibit 4. Relative share price performance (%) (%) higher ARPUs to support ISAT‟s growth. Due to the new royalty scheme, we 70 70 60 56.9 60 recently lowered ISAT‟s 2016-17F net profit by 3-5%. However, we expect 53.5 50 50

ISAT‟s earnings to recover to IDR1.3tn in 2016, helped by higher revenues due 40 40

30 30 to higher data demand, well-supported EBITDA margin on improved pricing 20.9 20 20 and limited FX losses on milder IDR depreciation. In 2017, we expect these 10 7.6 10 trends to persist, paving the way for ISAT‟s net earnings to rise by 90% y-y to 0 0 (4.9) (10) (5.4) (10) IDR2.5tn. ytd 1M 3M 6M 9M 12M ISAT IJ relative to JCI Ratings: BUY on strong earnings momentum and valuation Source: Bloomberg, Bahana

ISAT is currently trading at a 2016F EV/EBITDA of 3.4x, reflecting around a 60% discount to its regional peers. At this stage, we retain our 12-month DCF- based target price of IDR6,800 (2016F EV/EBITDA of 4.1x, a 52% discount to the sector). We reaffirm our BUY call and expect ISAT‟s ytd market outperformance (exhibit 4) to persist on an accelerating earnings recovery and a 27% upside potential to our TP. Risks to our call include weaker-than- expected purchasing power and a weaker IDR as well as greater-than-expected competition.

Indosat Year to 31 December 2013 2014 2015F 2016F 2017F PROFIT & LOSS (IDRb) Sales 23,855 24,085 26,249 28,395 30,758 2016-17F revenue likely to grow Gross profit - - - - - by 8% y-y, in line with industry EBITDA 10,332 10,059 11,340 12,272 13,270 growth Depreciation 8,958 8,226 8,386 8,473 8,633 EBIT 1,373 1,833 2,953 3,799 4,637 Net interest inc./(expense) (2,105) (2,264) (2,672) (2,018) (1,433) Forex gain/ (losses) (3,011) (243) (1,989) (74) 34 Other income/ (expense) 365 (1,262) 400 150 150 Pre-tax profit (3,378) (1,936) (1,307) 1,858 3,387 Taxes 667 78 261 (372) (677) Minority interest (116) (129) (141) (152) (165)

Extraordinary gain/(losses) - - - - - Net profit (2,826) (1,987) (1,187) 1,334 2,545

BALANCE SHEET (IDRb) Cash and equivalents 2,234 3,486 4,875 6,891 7,174 Cash levels should be at around S-T investments - - - - - IDR7tn in the next two years Trade receivables 2,285 2,101 2,838 3,070 3,325 Inventories 36 49 42 45 47 Fixed assets 42,190 40,776 38,687 36,512 34,582 Other assets 7,822 6,858 5,936 6,391 6,893 Total assets 54,566 53,270 52,378 52,908 52,021 Interest bearing liabilities 23,931 23,146 22,146 19,646 14,646 Trade payables 339 691 863 911 967 Other liabilities 13,525 15,134 16,180 17,344 18,012 Total liabilities 37,795 38,971 39,189 37,901 33,625 Minority interest 598 681 758 842 933 Shareholders' equity 16,174 13,618 12,431 14,165 17,463

CASH FLOW (IDRb) EBIT 1,373 1,833 2,953 3,799 4,637 Depreciation 8,958 8,226 8,386 8,473 8,633 Working capital (99) 521 (557) (186) (202) Other operating items (4,877) (1,246) (2,173) (1,756) (1,926)

Operating cash flow 5,355 9,335 8,610 10,329 11,142 Net capital expenditure (9,364) (7,033) (6,500) (6,500) (6,906) Capex likely to remain around Free cash flow (4,009) 2,302 2,110 3,829 4,237 IDR6.5tn-IDR6.9tn in 2015-17F Equity raised/(bought) - - - - - Net borrowings 2,644 4,878 (2,378) (1,500) (4,000) Other financing (319) (5,928) 1,657 (314) 46 Net cash flow (1,684) 1,252 1,389 2,016 283 Cash flow at beginning 3,917 2,234 3,486 4,875 6,891 Cash flow at end 2,234 3,486 4,875 6,891 7,174

RATIOS ROAE (%) (16.1) (13.3) (9.1) 10.0 16.1 ROAA (%) (5.1) (3.7) (2.2) 2.5 4.9 EBITDA margin (%) 43.3 41.8 43.2 43.2 43.1 EBITDA margin expected to EBIT margin (%) 5.8 7.6 11.3 13.4 15.1 remain at 43% Net margin (%) (11.8) (8.3) (4.5) 4.7 8.3 Payout ratio (%) 101.3 - - 30.0 30.0 Interest coverage (x) 0.7 0.8 1.1 1.9 3.2 Net gearing (%) 134.2 144.4 138.9 90.0 42.8 Debts to assets (%) 43.9 43.5 42.3 37.1 28.2 Debtor turnover (days) 33 33 39 39 39 Creditor turnover (days) 5 8 14 14 14 Inventory turnover (days) 1 1 1 1 1

MAJOR ASSUMPTIONS Subscribers ('000) 59,712 63,200 69,520 70,215 70,917 Net adds ('000) 1,200 3,600 6,320 695 702 We expect continued ARPU (IDR 000) 28 27 25 27 30 improvement in ARPU Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 41

Erajaya Swasembada BUY Sector: Property (Underweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR550–TP:IDR850 (Unchanged) E-mail: [email protected] TP/consensus: 1234%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

Cellular chief Exhibit 1. Company information Market cap (IDRb/USDt) : 1,595/0.1.1 1,444/0.1 . Higher market share to improve bargaining position: Based on our 3M avg.daily t.o.(IDRb/USDm) : 2.0/0.2.3 4.7/0.3 analysis, ERAA, the country‟s largest mobile phone distributor with licenses Bloomberg code : ERAA IJ ERAA IJ to distribute almost all of the well-known brands, including Samsung and Source: Bloomberg Apple, booked strong 3Q15 quarterly revenue growth of 11% q-q and 46% Exhibit 2. Shareholder information y-y, much stronger than its closest competitors, TRIO and TELE. Thus, ERAA Eralink International (%) : 59.97

improved its market share from 36.5% in 8M14 to 39.8% in 8M15. We Dimensional Fund Adv. (%) : 2.32 Est. free float (%) : 37.71 believe that this trend will continue, especially as TRIO has reportedly faced Source: Bloomberg difficulties in fulfilling its debt obligations. Higher market share should raise Exhibit 3. Key forecasts and valuations ERAA‟s bargaining position to its brand partners, supporting its margins. 2014 2015 2016F 2017F . Increased retail presence with brand-building for margin support: Revenue (IDRbn) 14,451 18,569 19,777 21,403 EBIT (IDRbn) 409 375 412 466 ERAA currently has 76 distribution centers with third-party billed outlets of Net profit (IDRbn) 212 210 252 299 21k. On the retail front, ERAA, with 519 own retail outlets, targets to Bahana/cons. (%) - 94 104 109

increase the retail revenue contribution from 36% in 2014 to 45% in 2015F. EPS (IDR) 73 72 87 103 EPS growth (%) (39.3) (0.6) 19.8 18.7 ERAA plans to focus on opening more megastores, with sales and total area EPS momentum* - equivalent to ERAA‟s 10 standard outlets. ERAA also aims to continue to EV/EBITDA (x) 6.3 6.2 5.6 4.8 build branded stores (i.e., iBox and Samsung) and innovative stores (i.e., PER (x) 7.5 7.6 6.3 5.3 Eraplus and Android Nation). ERAA believes that the move towards brand- FCFPS (IDR) (125) 146 29 60 FCF yield (%) (22.7) 26.5 5.2 10.8 building and increasing its retail presence will bode well for margin BVPS (IDR) 1,021 1,064 1,122 1,190 improvement. PBV (x) 0.5 0.5 0.5 0.5 DPS (IDR) 29 29 35 41 . E-commerce expansion to improve distribution and cost structure: In Yield (%) 5.3 5.3 6.3 7.5 line with the current digital business trend, ERAA is entering the e-commerce ROAA (%) 3.8 3.3 3.8 4.3 business through its own website (erafone.com). This is also a move to help ROAE (%) 7.4 7.0 7.9 8.9 EBIT margin (%) 2.8 2.0 2.1 2.2 distribute Xiaomi‟s products in Indonesia. ERAA has already launched several Net Gearing (%) 41.9 33.4 31.2 26.8 products through its online platform, improving its cost structure. Source: Company, Bloomberg, Bahana estimates Note: Pricing as of close on 12 Feb 2016; n.m. = not meaningful Outlook: Gradual margin improvement Exhibit 4. Relative share price performance Following 2 years of depressed margins, we expect gradual margin (%) (%) 20 15.9 20 improvement for ERAA in 2016-17 on the consolidating handset distribution 10 10 market and a higher retail presence. Furthermore, we expect ERAA to maintain 0 0 (1.7) its No.1 position in terms of market share, supported by its partnership with (3.6) (10) (10) (10.0)

the most popular handsets, such as Samsung, Apple, Asus and Sony. Thus, we (20) (16.5) (20)

expect ERAA‟s 2016 net profit to grow 20% y-y to IDR87bn, before continuing (30) (30)

to improve to IDR103bn, +19% y-y in 2017. (40) (35.3) (40) ytd 1M 3M 6M 9M 12M Recommendation: Retain BUY and TP of IDR850 ERAA IJ relative to JCI Source: Bloomberg, Bahana In terms of valuation, ERAA is currently trading at what we view as an attractive 2016F PE of 6.3x, a huge 32% discount to regional peers. At this stage, we retain our 12-month DCF-based target price of IDR850 (2016F PE of 9.8x, 11.7% discount to regional peers). With substantial 55% upside potential to our TP, we reaffirm our BUY call on ERAA, the leader in the handset distribution sector, and expect ERAA‟s 3M market outperformance (exhibit 4) to persist on a continued solid revenue growth and improving margins. Risks to our call include slower-than-expected purchasing power and weaker-than- expected operating margins on higher working capital requirements.

Erajaya Swasembada Year to 31 December 2013 2014 2015F 2016F 2017F PROFIT & LOSS (IDRb) Sales 12,727 14,451 18,569 19,777 21,403 2017F revenue likely to grow by Gross profit 1,169 1,289 1,448 1,582 1,734 8% y-y, in line with industry EBITDA 522 449 422 464 524 growth Depreciation 32 40 46 52 57 EBIT 490 409 375 412 466 Net interest inc./(expense) (89) (181) (162) (147) (142) Forex gain/ (losses) 4 (1) (5) (1) 2 Other income/ (expense) 51 69 76 76 76 Pre-tax profit 457 296 284 339 402 Taxes (108) (82) (71) (85) (101) Minority interest (0) (3) (3) (3) (3)

Extraordinary gain/(losses) - - - - - Net profit 349 212 210 252 299

BALANCE SHEET (IDRb) Cash and equivalents 80 170 69 84 99 S-T investments - - - - - Trade receivables 901 1,255 1,613 1,681 1,782 Inventories 1,842 2,000 1,883 1,956 2,065 Fixed assets 216 402 456 509 560 Other assets 1,963 2,293 2,424 2,533 2,581 Total assets 5,002 6,120 6,446 6,763 7,087 Interest bearing liabilities 1,173 1,563 1,100 1,100 1,025 Debt level to hover around Trade payables 826 1,183 1,802 1,915 2,070 IDR1tn in 2016-17F Other liabilities 249 361 393 424 462 Total liabilities 2,248 3,107 3,296 3,439 3,558 Minority interest 6 53 64 70 77 Shareholders' equity 2,747 2,961 3,086 3,254 3,452

CASH FLOW (IDRb) EBIT 490 409 375 412 466 Depreciation 32 40 46 52 57 Working capital (48) (147) 381 (26) (52) Other operating items (967) (496) (281) (250) (192) Operating cash flow (492) (194) 522 188 280 Net capital expenditure (68) (168) (100) (105) (108) Capex to remain around IDR100- Free cash flow (560) (362) 422 83 173 108bn level in 2016-17F Equity raised/(bought) - - - - - Net borrowings 543 390 (463) - (75) Other financing (162) 76 (60) (68) (83) Net cash flow (171) 89 (101) 15 15 Cash flow at beginning 251 80 170 69 84 Cash flow at end 80 170 69 84 99

RATIOS ROAE (%) 13.1 7.4 7.0 7.9 8.9 Improved ROAE ROAA (%) 7.8 3.8 3.3 3.8 4.3 EBITDA margin (%) 4.1 3.1 2.3 2.3 2.4 EBIT margin (%) 3.9 2.8 2.0 2.1 2.2 Net margin (%) 2.7 1.5 1.1 1.3 1.4 Payout ratio (%) - 40.0 40.0 40.0 40.0 Interest coverage (x) 5.5 2.3 2.3 2.8 3.3 Net gearing (%) 39.8 41.9 33.4 31.2 26.8 Debts to assets (%) 23.4 25.5 17.1 16.3 14.5 Debtor turnover (days) 26 32 32 31 30 Creditor turnover (days) 33 38 38 38 38 Inventory turnover (days) 58 55 40 39 38

MAJOR ASSUMPTIONS ASP (IDRk) 1,168 1,250 1,287 1,339 1,392 We expect handset sales volume Sales volume (k units) 10,308 10,528 12,528 12,904 13,420 to grow 4% y-y in 2017 Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 43

Tiphone Mobile Indonesia BUY Sector: Telecommunication (Underweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR630–TP:IDR1,180 (Unchanged) E-mail: [email protected] TP/consensus: 110%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

New era, new growth areas Exhibit 1. Company information . TLKM ownership should create synergies: TELE, Telkomsel‟s largest Market cap (IDRbn/USDmn) : 4,488/332.6 5,091/347.6 3M avg.daily t.o.(IDRbn/USDmn) : 3.0/0.2 2.4/0.2 voucher distributor with a 12% market share, will likely experience greater Bloomberg code : TELE IJ TELE IJ synergies (e.g., handset bundling and faster growth) following the Source: Bloomberg acquisition of a 25% stake in TELE by PINS, TLKM‟s subsidiary. Post the Exhibit 2. Shareholder information acquisition, we expect TELE to terminate its voucher distribution business Tiphone Mobile Group (%) : 77.0 Est. free float (%) : 23.0 (9% market share) with EXCL. However, this should be compensated by its Source: Bloomberg pending acquisition of Simpatindo, one of Telkomsel‟s voucher distributors, Exhibit 3. Key forecasts and valuations with an 8% market share. We expect TELE‟s voucher distribution market Per 31 Dec 2014 2015F 2016F 2017F share to improve to 22% in 2015 and then nearly double to 40% in 2017. Revenue (IDRbn) 14,590 20,524 29,578 34,851

. Samsung’s dominance likely to support growth: Given Samsung‟s EBIT (IDRbn) 507 758 905 1,074

strong position in the smartphone market, TELE‟s 20% market share of Net profit (IDRbn) 305 382 462 592

Samsung‟s distribution should position it to benefit from Samsung‟s Bahana/cons. (%) - 100 101 129

increased handset business. Samsung currently accounts for 80% of TELE‟s EPS (IDR) 43 54 66 84

total handset sales. Additional growth will likely stem from Telkomsel‟s EPS growth (%) 3.4 25.2 21.0 28.3

handset bundling program, in line with Telkomsel‟s strategy to fast-track EPS momentum* -

smartphone penetration, not only among its existing subscribers but also EV/EBITDA (x) 10.5 8.4 7.7 6.5

due to the conversion of around 5mn Telkom Flexi subscribers. PER (x) 14.5 11.6 9.6 7.5

. Capitalizing on extensive network to develop new business: Given its FCFPS (IDR) (136) (89) (67) 21

strong customer base of 36mn and 180k distribution points, we expect TELE FCF yield (%) (21.5) (14.1) (10.7) 3.3

to benefit from the cross-selling of products. TELE plans to launch its BVPS (IDR) 355 400 452 519

electronic cash product (smartphone-based), Tele-pay, in 2016, and start a PBV (x) 1.8 1.6 1.4 1.2

prepaid life insurance business at a later date. DPS (IDR) 10 14 16 21

Yield (%) 1.6 2.2 2.6 3.3 Outlook: Partnerships expected to result in strong growth ROAA (%) 7.2 6.5 6.5 7.6 We see TELE entering a new growth phase as it grows its voucher and handset ROAE (%) 15.7 14.4 15.4 17.3 businesses. On its Telkomsel focus and Simpatindo acquisition, we expect EBIT margin (%) 3.5 3.7 3.1 3.1 TELE‟s voucher revenue to reach IDR11.7tn in 2015, up 29% y-y. On the Net Gearing (%) 44.4 64.1 74.4 63.6 handset business, we expect 2015 revenue to grow 14% y-y to IDR6.4tn, Source: Company, Bloomberg, Bahana estimates Note: Pricing as of close on 5 Feb 2016; n.m. = not meaningful helped by strong growth from Samsung and additional demand from the partnership with Telkomsel. Overall, we expect TELE‟s 2015 bottom line to Exhibit 4. Relative share price performance (%) (%) reach IDR382bn, up 25% y-y, before rising 21% y-y to IDR462bn in 2016. 0 0 (5) (5) Recommendation: A telco-consumer hybrid; BUY with IDR1,180 TP (10) (10) (15) (15) (15.1) In line with our OVERWEIGHT rating in the telco sector, we expect sentiment (20) (20) (20.8) (21.1) (21.1) (20.6) on TELE, supported by its defensive nature, to remain positive at this stage of (25) (25) the market cycle. We maintain our DCF-based TP of IDR1,180, representing a (30) (30) (35) (35)

2016F PE of 18x. We believe our target price is justified as we now see TELE as (40) (37.1) (40) ytd 1M 3M 6M 9M 12M

a both a telco and a consumer play, and expect its market underperformance TELE IJ relative to JCI

(20.8% ytd, exhibit 4) to reverse. BUY on 87% upside potential. Risks to our Source: Bloomberg, Bahana

call include tougher-than-expected competition and a higher-than-expected purchase price for Simpatindo.

Tiphone Indonesia Year to 31 December 2013 2014 2015F 2016F 2017F PROFIT & LOSS (IDRb) Sales 10,485 14,590 20,524 29,578 34,851 Gross profit 628 819 1,215 1,565 1,852 EBITDA 452 528 738 880 1,042 Depreciation 15 20 20 25 32 EBIT 437 507 758 905 1,074 Net interest inc./(expense) (55) (121) (292) (341) (345) Forex gain/ (losses) - - - - - Other income/ (expense) 11 25 43 51 62 Pre-tax profit 393 412 510 616 791 Taxes (99) (107) (127) (154) (198) Minority interest (0) 0 (1) (1) (1) 2016-17F net profit to increase Extraordinary gain/(losses) - - - - - by 25% y-y Net profit 295 305 382 462 592

BALANCE SHEET (IDRb) Cash and equivalents 493 638 1,148 585 622 Cash levels expected to remain S-T investments - - - - - stable at around IDR600bn in the Trade receivables 1,301 1,642 2,160 2,958 3,319 next two years Inventories 661 949 1,485 1,868 1,941 Fixed assets 156 145 187 227 263 Other assets 844 1,644 1,724 1,845 1,892 Total assets 3,455 5,018 6,705 7,482 8,038 Interest bearing liabilities 1,476 1,753 2,953 2,953 2,953 Trade payables 533 673 772 1,167 1,320 Other liabilities 59 93 169 186 111 Total liabilities 2,069 2,518 3,895 4,306 4,384 Minority interest 0 1 1 1 1 Shareholders' equity 1,387 2,498 2,809 3,175 3,652

CASH FLOW (IDRb) EBIT 437 507 758 905 1,074 Depreciation 15 20 20 25 32 Working capital (731) (489) (943) (778) (268) Other operating items (856) (977) (392) (554) (615) Operating cash flow (1,135) (938) (556) (401) 222 Net capital expenditure (59) (17) (68) (71) (75) Free cash flow (1,194) (955) (624) (472) 148 Turning free cash flow positive by Equity raised/(bought) 33 807 - - - next year Net borrowings 1,299 277 1,200 - - Other financing (40) 16 (66) (91) (110) Net cash flow 98 145 510 (563) 38 Cash flow at beginning 395 493 638 1,148 585 Cash flow at end 493 638 1,148 585 622

RATIOS ROAE (%) 23.6 15.7 14.4 15.4 17.3 ROAA (%) 12.3 7.2 6.5 6.5 7.6 EBITDA margin (%) 4.3 3.6 3.6 3.0 3.0 EBIT margin (%) 4.2 3.5 3.7 3.1 3.1 Net margin (%) 2.8 2.1 1.9 1.6 1.7 Payout ratio (%) - 23.4 25.0 25.0 25.0 Lower margin in 2016F on higher Interest coverage (x) 7.9 4.2 2.6 2.7 3.1 revenue from M2M business Net gearing (%) 69.9 44.4 64.1 74.4 63.6 Debts to assets (%) 42.7 34.9 44.0 39.5 36.7 Debtor turnover (days) 45 41 38 37 35 Creditor turnover (days) 20 18 15 15 15 Inventory turnover (days) 15 15 13 15 17

MAJOR ASSUMPTIONS Vouchers and starter kit 8,116 8,799 12,947 21,153 25,469 Voucher market share to reach Cellphones 2,171 5,426 7,067 7,788 8,585 30% in 2016F Telkomsel market share 13% 13% 21% 30% 33% Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 45

Sarana Menara Nusantara BUY Sector: Telecommunication (Underweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR4,135–TP:IDR5,000 (Unchanged) E-mail: [email protected] TP/consensus: 106%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

Infrastructure play Exhibit 1. Company information . More BTS required to support significant increase in data usage: In Market cap (IDRbn/USDmn) : 42,189/3,313 3M avg.daily t.o.(IDRbn/USDmn) : 0.7/0.1 line with our investment thesis for the telco sector, we expect data usage to Bloomberg code : TOWR IJ continue to rise significantly, backed by strong increases in the number of Source: Bloomberg smartphone users. These conditions should lead to improved demand for Exhibit 2. Shareholder information BTS. Despite losing several tenants from BTEL due to cash issues, we are Sapta Adhikari Investama (%) : 32.7 Est. free float (%) : 67.3 still optimistic that TOWR can book 5% y-y 2015 growth in tenants to 21k, Source: Bloomberg rising by 6% y-y to 22k in 2016, as most of TOWR‟s revenue contributors Exhibit 3. Key forecasts and valuations are big telco operators, such as TLKM, EXCL and Hutchinson. Per 31 Dec 2014 2015F 2016F 2017F

. iForte acquisition to support growth: To better serve the telco industry‟s Revenue (IDRbn) 4,106 4,415 4,845 5,315

3G and 4G technology demand in dense urban areas, TOWR plans to acquire EBIT (IDRbn) 2,335 2,493 2,866 3,274

iForte, a tower company with a microcell license, for around IDR1tn EV Net profit (IDRbn) 841 986 1,591 2,133

(equity: IDR864bn). iForte could offer BTS to be placed in 12 TransJakarta Bahana/cons. (%) - 73 119 159

busways (exclusive rights) and 7 hotels. iForte currently has around 450 EPS (IDR) 82 97 156 209

towers, which the company expects to have grown to 600 towers with 750 EPS growth (%) 398.9 17.3 61.3 34.1

tenants, representing a 1.25x collocation ratio, by the end of 2015. To EPS momentum* -

supplement this, iForte has a 700km fiber-based network. Apart from the EV/EBITDA (x) 14.4 13.1 11.5 10.0

tower business, iForte offers VSAT service, a satellite signal receiver device. PER (x) 50.2 42.8 26.5 19.8

. Well-protected EBITDA margin: Despite a lower collocation rate on FCFPS (IDR) 45 152 177 226

several built-to-suit orders, we expect TOWR‟s EBITDA margin to be well FCF yield (%) 1.1 3.7 4.3 5.5

supported at around 83% in 2015-16F, due to efficient cost structure. BVPS (IDR) 458 548 698 900

Furthermore, TOWR lowered its average cost of debt from 7.0% (3Q14) to PBV (x) 9.0 7.5 5.9 4.6

5.4% (3Q15), as its ratings were upgraded by several rating agencies due to DPS (IDR) na na na na

improved solvency ratios. Yield (%) na na na na

ROAA (%) 5.1 5.4 8.4 11.2 Outlook: Solid prospects on operator expansion to outer Java ROAE (%) 20.2 19.2 25.0 26.2 As telco operators should continue to expand to outer Java and implement EBIT margin (%) 56.9 56.5 59.2 61.6 asset-light strategies (e.g., tower leasing from tower providers), we expect Net Gearing (%) 152.1 112.9 64.3 25.4 TOWR to continue to experience strong earnings growth, reaching a 2015-16F Source: Company, Bloomberg, Bahana estimates Note: Pricing as of close on 12 Feb 2016; n.m. = not meaningful earnings CAGR of 22%. In line with 4G network deployment by Hutchinson as well as continued network expansion from EXCL and TLKM, we expect TOWR‟s Exhibit 4. Relative share price performance (%) (%) 30 30 2015 tenants to reach 21k, up 5% y-y, before continuing to improve to 22k 23.3 25 21.1 25 tenants, up 5% y-y in 2016. We expect the collocation ratio to remain around 20 20 15 15 1.7x in 2015-16. 10 10 5 5 0 0 Recommendation: Reaffirm BUY and TP of IDR5,000 (5) (1.6) (5) (10) (7.2) (10) In line with our OVERWEIGHT rating on the telco sector, we are positive on the (15) (15) (20) (15.6) (20) tower sector as we expect telco operators to disburse escalated capex levels for (25) (19.2) (25) ytd 1M 3M 6M 9M 12M

infrastructure development. On expectations of continued growth in towers and TOWR IJ relative to JCI

collocations, we look for TOWR to reverse its market underperformance (16% Source: Bloomberg, Bahana

ytd). We are positive on the stock and maintain our DCF based 12-month target price of IDR5,000, reflecting a 2016F EV/EBITDA of 13.7x, a 13% discount to regional peers. Risks include greater-than-expected competition and operating costs as well as a stronger-than-expected USD.

Sarana Menara Nusantara Year to 31 December 2013 2014 2015F 2016F 2017F PROFIT & LOSS (IDRb) Sales 3,197 4,106 4,415 4,845 5,315 2016-17F revenue to increase by Gross profit 2,062 2,784 3,020 3,444 3,908 9% y-y EBITDA 2,651 3,418 3,701 4,061 4,455 Depreciation 928 1,084 1,208 1,194 1,181 EBIT 1,724 2,335 2,493 2,866 3,274 Net interest inc./(expense) (547) (849) (522) (455) (360) Forex gain/ (losses) (888) (5) (497) (94) 40 Other income/ (expense) (60) (270) (100) (100) (100) Pre-tax profit 228 1,211 1,374 2,217 2,854 Taxes (63) (371) (385) (621) (713) Minority interest 4 1 (4) (6) (7)

Extraordinary gain/(losses) - - - - - Net profit 169 841 986 1,591 2,133

BALANCE SHEET (IDRb) Cash and equivalents 1,506 2,010 3,350 3,160 3,854 Cash levels stable at around S-T investments - - - - - IDR3tn in the next two years, on Trade receivables 674 572 535 587 644 our forecasts Inventories 1 - 0 1 1 Fixed assets 11,152 12,392 12,467 12,292 12,164 Other assets 2,202 2,262 2,630 2,653 2,679 Total assets 15,534 17,235 18,982 18,692 19,342 Interest bearing liabilities 9,308 9,354 9,669 7,735 6,188 Trade payables 485 472 268 280 293 Other liabilities 2,098 2,740 3,458 3,566 3,681 Total liabilities 11,891 12,566 13,395 11,581 10,162 Minority interest (5) (8) (8) (8) (8) Shareholders' equity 3,648 4,677 5,595 7,119 9,187

CASH FLOW (IDRb) EBIT 1,724 2,335 2,493 2,866 3,274 Depreciation 927 1,084 1,208 1,194 1,181 Working capital (334) 147 (143) (25) (28) Other operating items (1,799) (1,372) (1,492) (1,553) (1,411) Operating cash flow 517 2,193 2,066 2,483 3,016 Net capital expenditure (1,365) (1,730) (510) (673) (710) Capex to remain around Free cash flow (848) 464 1,556 1,810 2,306 IDR700bn in 2016-17F Equity raised/(bought) - - - - - Net borrowings 1,261 46 315 (1,934) (1,547) Other financing (36) (6) (531) (67) (65) Net cash flow 376 504 1,340 (190) 694 Cash flow at beginning 1,130 1,506 2,010 3,350 3,160 Cash flow at end 1,506 2,010 3,350 3,160 3,854

RATIOS ROAE (%) 4.8 20.2 19.2 25.0 26.2 ROAA (%) 1.2 5.1 5.4 8.4 11.2 EBITDA margin (%) 82.9 83.3 83.8 83.8 83.8 EBITDA margin to remain around EBIT margin (%) 53.9 56.9 56.5 59.2 61.6 84% in 2016-17F Net margin (%) 5.3 20.5 22.3 32.8 40.1 Payout ratio (%) - - - - - Interest coverage (x) 3.1 2.8 4.8 6.3 9.1 Net gearing (%) 213.8 152.1 112.9 64.3 25.4 Debts to assets (%) 60 54 51 41 32 Debtor turnover (days) 77 51 44 44 44 Creditor turnover (days) 854 723 521 497 473 Inventory turnover (days) 408 - 410 410 410

MAJOR ASSUMPTIONS ASP (IDRmn) 174 204 210 218 227 Tower sites (units) 9,746 11,595 12,233 12,906 13,615 Tower sites to grow 9% y-y in Collocation (x) 1.88 1.74 1.72 1.72 1.72 2016-17F Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 47

Tower Bersama Infrastructure HOLD Sector: Telecommunication (Overweight) (Unchanged) Rating momentum*:

Leonardo Henry Gavaza, CFA Price:IDR6,100–TP:IDR6,500 (Unchanged) E-mail: [email protected] TP/consensus: 100%; TP momentum*: Phone: +6221 250 5081 ext. 3608 JCI: 4,714

Limited organic growth Exhibit 1. Company information . One of the largest tower providers with a stable revenue source: Market cap (IDRbn/USDmn) : 29,259/2,168 3M avg.daily t.o.(IDRbn/USDmn) : 11.6/0.9 Tower Bersama Infrastructure (TBIG), one of Indonesia‟s largest tower Bloomberg code : TBIG IJ providers, with 11,291 towers and 18,642 tenants (as of 9M15) and a Source: Bloomberg tenancy ratio of 1.65x, is owned by Saratoga Group (Edwn Soeryadjaya and Exhibit 2. Shareholder information Sandiaga Uno) and Provident Capital (Winoto Kartono and Hardi Wijaya Wahana Anugerah Sejahtera (%) : 27.5

Liong). TBIG has a stable revenue stream as 83% of its tenants are the big Provident Capital (%) : 24.7 Free float (%) : 47.8 three telco operators, TLKM, ISAT and EXCL. Source: Bloomberg

. Limited organic growth expected: Following strong tenants and tower Exhibit 3. Key forecasts and valuations growth of 15-96% y-y in the past few years, we expect TBIG to book Per 31 Dec 2014 2015 2016F 2017F

unexciting organic growth of 4-6% y-y in the next few years as telco Revenue (IDRbn) 3,307 3,437 3,801 4,229

providers are not expected to build towers aggressively. With demand from EBIT (IDRbn) 2,505 2,637 2,915 3,243

incumbent operators, we expect TBIG‟s total tenants to reach 20.7k in 2016, Net profit (IDRbn) 1,301 1,056 1,289 1,593

+4% y-y, before reaching 21.7k tenants in 2017, +5% y-y. We look for the Bahana/cons. (%) - 79 84 88

collocation ratio to remain around 1.6x in 2015-17. EPS (IDR) 271 220 269 332

. Inorganic growth opportunity despite huge gearing: On inorganic EPS growth (%) 1.5 (18.0) 22.0 23.2

growth prospects, we expect around 7.5k towers to be tendered in 2016. We EPS momentum* -

look for EXCL to tender its 2.5k towers in 1H16, while ISAT should tender its EV/EBITDA (x) 16.3 16.5 15.1 13.7

5k towers in 2H16. We expect TBIG to enter both tenders. However, TBIG‟s PER (x) 22.5 27.7 22.7 18.4

current net gearing level of 647% is much higher than TOWR‟s level of FCFPS (IDR) (223) (503) (303) (307)

112%. We believe that this will limit TBIG‟s ability to win the tendered FCF yield (%) (3.7) (8.2) (5.0) (5.0)

towers. BVPS (IDR) 830 605 837 1,123

PBV (x) 7.4 10.1 7.3 5.4 Outlook: Limited organic growth prospects DPS (IDR) 60 44 54 66 TBIG may see limited growth due to its higher-than-peers 2015F net gearing of Yield (%) 1.0 0.7 0.9 1.1 648%. We are concerned about TBIG‟s policy of not depreciating its tower ROAA (%) 6.4 4.5 5.1 5.8 portfolio annually, which could result in overstated net profit. However, we like ROAE (%) 32.7 30.7 37.3 33.9 TBIG‟s steady dividend policy. In 2016, we expect TBIG to book revenue of EBIT margin (%) 75.8 76.7 76.7 76.7 IDR3.8tn, +11% y-y, before reaching IDR4.2tn, +11% y-y, in 2017. With a Net Gearing (%) 380.9 647.2 481.2 365.6 stable EBITDA margin of 85%, we expect TBIG to book 2016 EBITDA of 3.2tn, Source: Company, Bloomberg, Bahana estimates Note: Pricing as of close on 12 February 2016; n.m. = not +11% y-y, before improving to IDR3.6tn in 2017, +11% y-y. meaningful

Recommendation: HOLD with TP of IDR6,500 Exhibit 4. Relative share price performance (%) (%) We maintain our DCF-based TP of IDR6,500, reflecting a 2016F EV/EBITDA of 5 3.5 5 1.2 15.7x, already a 15% premium to TOWR‟s valuation at its TP. With limited 0 0 upside potential, TBIG is a HOLD. In the tower sector, we prefer TOWR to TBIG (5) (5)

(10) (10) on cheaper valuation and higher expansion capacity. However, we do not (10.3) expect the tower sector to experience strong growth in the near future due to (15) (15) (20) (17.7) (20) limited BTS expansion from the operators. Risks include revisions to the TLKM (20.4) (22.0) (25) (25) deal, higher- or lower-than-expected revenue growth and stronger- or weaker- ytd 1M 3M 6M 9M 12M than-expected competition. TBIG IJ relative to JCI Source: Bloomberg, Bahana

Tower Bersama Infrastructure Year to 31 December 2013 2014 2015F 2016F 2017F PROFIT & LOSS (IDRb) Sales 2,691 3,307 3,437 3,801 4,229 2016-2017F revenue to increase Gross profit 2,295 2,797 2,956 3,269 3,637 by 11% y-y EBITDA 2,205 2,717 2,907 3,214 3,576 Depreciation 153 212 270 299 332 EBIT 2,052 2,505 2,637 2,915 3,243 Net interest inc./(expense) (703) (972) (1,417) (1,472) (1,499) Forex gain/ (losses) (799) (192) (52) (16) 17 Other income/ (expense) 628 89 10 10 10 Pre-tax profit 1,177 1,431 1,178 1,438 1,771 Taxes 174 (58) (53) (65) (80) Minority interest (104) (71) (69) (84) (98)

Extraordinary gain/(losses) - - - - - Net profit 1,248 1,301 1,056 1,289 1,593

BALANCE SHEET (IDRb) Cash and equivalents 647 901 792 538 564 S-T investments 1 2 2 2 2 Trade receivables 603 491 687 760 846 Inventories 328 404 426 471 524 High fixed asset levels as TBIG Fixed assets 13,184 15,515 16,613 17,793 18,976 revalue its assets annually Other assets 3,955 4,722 6,185 6,772 7,464 Total assets 18,719 22,034 24,705 26,336 28,376 Interest bearing liabilities 12,437 16,062 19,562 19,862 20,262 Trade payables 126 178 278 307 342 Other liabilities 2,043 1,663 1,843 2,038 2,268 Total liabilities 14,605 17,903 21,684 22,208 22,872 Minority interest 126 150 121 112 116 Shareholders' equity 3,988 3,981 2,900 4,016 5,388

CASH FLOW (IDRb) EBIT 2,052 2,505 2,637 2,915 3,243 Depreciation 153 212 270 299 332 Working capital (695) 69 (130) (93) (110) Other operating items (1,469) (2,142) (4,178) (3,560) (3,918) Operating cash flow 42 644 (1,402) (438) (452) Net capital expenditure (1,978) (1,714) (1,010) (1,016) (1,022) Capex to remain around IDR1tn Free cash flow (1,936) (1,070) (2,412) (1,455) (1,475) in 2016-17F Equity raised/(bought) (577) (555) (122) - - Net borrowings 4,252 3,081 3,500 300 400 Other financing (1,598) (1,202) (1,075) 901 1,101 Net cash flow 140 253 (109) (254) 27 Cash flow at beginning 507 647 901 792 538 Cash flow at end 647 901 792 538 564

RATIOS ROAE (%) 31.3 32.7 30.7 37.3 33.9 ROAA (%) 7.6 6.4 4.5 5.1 5.8 EBITDA margin (%) 82.0 82.2 84.6 84.6 84.6 EBITDA margin to remain around EBIT margin (%) 76.3 75.8 76.7 76.7 76.7 85% in 2016-17F Net margin (%) 46.4 39.4 30.7 33.9 37.7 Payout ratio (%) 23.1 22.1 20.0 20.0 20.0 Interest coverage (x) 2.9 2.6 1.9 2.0 2.2 Net gearing (%) 309.3 380.9 647.2 481.2 365.6 Debts to assets (%) 66.4 72.9 79.2 75.4 71.4 Debtor turnover (days) 55 66 71 79 79 Creditor turnover (days) 86 62 85 99 98 Inventory turnover (days) 494 506 487 487 487

MAJOR ASSUMPTIONS ASP (IDRmn) 162 173 173 184 195 Tower sites (units) 10,134 11,820 12,399 13,143 13,932 Sites to grow 5-6% y-y in 2016- Collocation (x) 1.6 1.6 1.6 1.6 1.6 17F Source: Company, Bahana estimates

PT Bahana Securities – Equity Research – Indonesian Telecommunications 49

Research: +62 21 250 5081

Harry Su [email protected] Teguh Hartanto Leonardo Henry Gavaza, CFA Arandi Ariantara Senior Associate Director [email protected] [email protected] [email protected] Head of Corporate Strategy & Research Associate Director Senior Research Manager Research Analyst Consumer, Strategy Deputy Head of Research Auto, Heavy equipment, Telco Coal, Metals, Oil & Gas ext 3619 ext 3600 Banks, Cement, Aviation ext 3608 direct: +62 21 250 5735 ext 3610

Bagus Adi Yoga Prawira Agustinus Reza Kirana Fakhrul Fulvian Bob Setiadi [email protected] [email protected] [email protected] [email protected] Research Analyst Economist Research Analyst Research Analyst Consumer, Media ext 3602 Cement, Infratructure,Toll roads Plantations, Shipping, Transportation ext 3604 ext 3605 ext 3616

Sanni Satrio Dwi Utomo Jozabad Jonathan Melvin Mikha Reminov Renaldy Effendy [email protected] [email protected] [email protected] Research Analyst [email protected] Research Analyst Research Associate Industrial Estate, Property Research Analyst Poultry ext 3621 ext 3611 Consumer, Healthcare ext 3620 ext 3606

Gilang Purnama Muhammad Wafi Nyoman Widita Prabawa Sarah Jessica Hutapea [email protected] [email protected] [email protected] [email protected] Technical Analyst Research Associate Research Associate Research Associate ext 3601 ext 3609 ext 3623 ext 3693

Made Ayu Wijayati Zefanya Halim Novianty Permata Sari [email protected] [email protected] [email protected] Research Executive CA Manager CA ext 3607 ext 3612 ext 3618

Dealing Room: +62 21 527 0808 (Foreign Institutional) +62 21 250 5508 (Domestic Institutional) +62 31 535 2788 (Surabaya Branch)

Inca Aditya Natalia Surjadiputra Ashish Agrawal Yohanes Adhi Handoko [email protected] [email protected] Senior Equity Institutional Sales [email protected] [email protected] Director of Sales & Vice President Client Relationship Management ext 2545 Manager, Surabaya Branch Institutional Equity Sales ext 7250 ext 2500 ext 2550 / 2553

Amelia Husada Suwardi Widjaja John M. Dasaad Reynard Poernawan [email protected] [email protected] [email protected] Vice President [email protected] Institutional Equity Sales Institutional Equity Sales Institutional Equity Sales Institutional Equity Sales ext 2549 ext 2548 ext 2552 ext 2528

Bram Taarea Nurul Farida Ari Santosa Hanna Marionda [email protected] [email protected] [email protected] [email protected] Institutional Equity Sales Institutional Equity Sales Sales Trader Sales Trader ext 2524 ext 2547 ext 2554 ext 2525

Adriana Kosasih [email protected] Sales Executive ext 2541

Head Office Surabaya Branch Graha Niaga, 19th Floor Wisma BII, Ground Floor Jl. Jend. Sudirman Kav. 58 Jl. Pemuda 60-70 Jakarta 12190 Surabaya 60271 Indonesia Indonesia Tel. 62 21 250 5081 Tel. 62 31 535 2788 Fax. 62 21 522 6049 http://www.bahana.co.id Fax. 62 31 546 1157

Important Disclosures and Disclaimer This publication is prepared by PT.Bahana Securities and reviewed by Daiwa Securities Group Inc. and/or its affiliates, and distributed outside Indonesia by Daiwa Securities Group Inc. and/or its affiliates, except to the extent expressly provided herein. Certain copies of this publication may be distributed inside and outside of Indonesia by PT. Bahana Securities in accordance with relevant laws and regulations. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Any review does not constitute a full verification of the publication and merely provides a minimum check. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Neither Daiwa Securities Group Inc. nor any of its affiliates is licensed to undertake any business within the Republic of Indonesia. Any display of any trade name or logo of the Daiwa Securities Group Inc. on this publication shall not be deemed to be an undertaking of any business within the Republic of Indonesia. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time may have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: • Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) • Daiwa Capital Markets Singapore Limited • Daiwa Capital Markets Australia Limited • Daiwa Capital Markets India Private Limited • Daiwa-Cathay Capital Markets Co., Ltd. • Daiwa Securities Capital Markets Korea Co., Ltd Disclosure of Interest of Bahana Securities Investment Banking Relationship Within the preceding 12 months, Bahana Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Waskita Karya Persero Tbk PT (WSKT IJ); Adhi Karya Persero Tbk PT (ADHI IJ); PP Properti Tbk PT (PPRO IJ); Merdeka Copper Gold Tbk PT (MDKA IJ); Anabatic Technologies Tbk PT (ATIC IJ); Aneka Tambang Persero Tbk PT (ANTM IJ).

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited‟s interest and/or its representative‟s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe‟s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer‟s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect PT.Bahana Securities‟ or DCMA‟s views at any time. Neither PT.Bahana Securities, DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of PT.Bahana Securities‟ or DCMA‟s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

For stocks and sectors in Indonesia covered by Bahana Securities, the following rating system is in effect: Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. "Buy": the price of the security is expected to increase by 10% or more. "Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%. "Reduce": the price of the security is expected to decline by 5% or more. Sector ratings are based on fundamentals for the sector as a whole. Hence, a sector may be rated “Overweight” even though its constituent stocks are all rated “Reduce”; and a sector may be rated “Underweight” even though its constituent stocks are all rated “Buy”. “Overweight”: positive fundamentals for the sector. “Neutral”: neither positive nor negative fundamentals for the sector. “Underweight”: negative fundamentals for the sector. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action .

Relevant Relationships (Bahana Securities) Bahana Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Bahana Securities market making Bahana Securities may from time to time make a market in securities covered by this research.

Explanatory Document of Unregistered Credit Ratings (Moody’s Investors Service, Inc.)

In order to ensure the fairness and transparency in the markets, Credit Rating Agencies became subject to the Credit Rating Agencies‟ registration system based on the Financial Instruments and Exchange Act.

In accordance with this Act, in soliciting customers, Financial Instruments Business Operators, etc. shall not use the credit ratings provided by unregistered Credit Rating Agencies without informing customers of the fact that those Credit Rating Agencies are not registered, and shall also inform customers of the significance and limitations of credit ratings, etc.

The Significance of Registration Registered Credit Rating Agencies are subject to the following regulations:

1) Duty of good faith. 2) Establishment of control systems (fairness of the rating process, and prevention of conflict of interest, etc.). 3) Prohibition of the ratings in cases where Credit Rating Agencies have a close relationship with the issuers of the financial instruments to be rated, etc. 4) Duty to disclose information (preparation and publication of rating policies, etc. and public disclosure of explanatory documents).

In addition to the above, Registered Credit Rating Agencies are subject to the supervision of the Financial Services Agency (“FSA”), and as such may be ordered to produce reports, be subject to on-site inspection, and be ordered to improve business operations, whereas unregistered Credit Rating Agencies are free from such regulations and supervision.

The Name of the Credit Rating Agency Group, etc The name of the Credit Rating Agency group: Moody‟s Investors Service, Inc. ("MIS") The name and registration number of the Registered Credit Rating Agency in the group: Moody‟s Japan K.K. (FSA commissioner (Rating) No.2)

How to acquire information related to an outline of the rating policies and methods adopted by the person who determines Credit Ratings The information is posted under “Unregistered Rating explanation” in the section on “The use of Ratings of Unregistered Agencies” on the website of Moody‟s Japan K.K. (The website can be viewed after clicking on “Credit Rating Business” on the Japanese version of Moody‟s website (http://www.moodys.co.jp)

Assumptions, Significance and Limitations of Credit Ratings Credit ratings are Moody‟s Investors Service, Inc.‟s ("MIS") current opinions of the relative future credit risk of entities, credit commitments, or debt or debt- like securities. MIS defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by MIS in any form or manner whatsoever.

Based on the information received from issuers or from public sources, the credit risks of the issuers or obligations are assessed. MIS adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MIS considers to be reliable. However, MIS is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association