Equity Research

Telco

Tuesday,15 December 2020 Telco OVERWEIGHT Maintain Telcos skipping the 2300MHz spectrum opportunity?

TLKM relative to JCI Index The heralded 5G spectrum in 2300MHz is not an attractive investment for two xxxx operators. XL and skipped the 2300MHz auction despite prior indications. We understand that the two telcos deem investment for regional 10MHz spectrum in 2300MHz is not economically viable as the cost to build infrastructure in the new frequency outweigh the benefits of owning more

spectrum. The current auction setup is not attractive enough for some. Secondly, the auction setup of 3x10MHz new spectrum regional allocations in 2300MHz puts any new

buyer in a potentially uneven situation as they would be in spectrum deficit relative to and (which have been allocated 30MHz on a nationwide basis). By default, any investments XL and Indosat make would be relatively smaller.

Partnerships/JVs as per Omnibus, just not at any cost. The carrot in this auction is the potential formation of a partnership or JV with preexisting spectrum holders to share and monetize collectively the 2300MHz in the spirit of the new Omnibus Law.

That too, however, is deemed not worthwhile by XL & Indosat. As per our EXCL relative to JCI Index xxxx information, the 2300MHz spectrum can only be shared and traded if the newly licensed operator decides to use it for 5G. Interpreting the current development shows that both operators are not willing yet to commit to a 5G license, and the ability to use standalone, additional 10MHz initially for for a foreseeable period

is not enough of an incentive. The current situation should lead XL and Indosat to explore forthcoming spectrum options, approx. at the end of 2022, when Indonesian media companies release use of the 700MHz spectrum. Meantime, there are still savings from spectrum optimization to be made within the existing

allocations between 2G--4G technologies, we believe. Thank you next! type of situation. The priorities remain intact for XL and Indosat, while avoiding engagement in uncertain new investment cycles related to

spectrum, which helps to preserve their high cash positions earned from tower Source : Bloomberg sales. Instead, they seek to prioritize their core capex plans for 4G, whose

expansion cycle is signaled to end in 2021, with enough coverage ex-.

Operators will potentially conclude in early 2021, and possibly only the Indosat

rollout will remain strong throughout 2021 (with regards to Online media, telcos

have not fulfilled provisions of existing licenses in terms of rural area coverage, and

we understand that both private and public sectors are currently negotiating their

positions). Moreover, Indosat (ISAT IJ, BUY, TP: Rp3,500) states that it is

comfortable with the current spectrum position and will stay committed to its 3yr

network rollout plans to keep improving customer experience. For XL Axiata (EXCL

IJ, BUY, TP: Rp3,500), we expect the company to be empowered with renewed

ambition transcended by its Malaysian parent. The Axiata group expects to reduce

the cost/GB fivefold within 5 years, and get the group EBIT margin up by 560bps,

and achieve ROIC>WACC.

Overweight the sector. The expected auction outcome will have 3 winners

Telkomsel, Smartfren (FREN IJ, non-rated) & Hutch3 expecting to incur regional

license costs no more than 1/3 + inflation of what Telkomsel bid at end 2017 for

30MHz. It is a clear win for Telkomsel (TLKM IJ, BUY TP:Rp3,800) whose subs

jumped in 3Q20, and is given the ability to improve spectrum allocation/sub and

x Niko Margaronis spectrum holdings. Moreover, Telkomsel has also signaled that the 4G coverage expansion cycle is nearing an end. Furthermore, any associated impact from school (62-21) 5091 4100 ext. 3512 subsidies can vary among operators albeit temporarily as schools are set to reopen [email protected] in January with safety protocols, despite news of a possible new lockdown.

Target Market Exhibit 2. Spectrum allocationsPrice prior to Cap.2300MHz auction P/E (x) P/BV (x) ROE (%) Company Ticker Rec (Rp) (RpBn) 2020F 2021F 2020F 2021F 2021F Telkomwww.danareksa.com TLKM IJ BUY 4,600 328,886.6 14.3 14.0 3.2 3.1 22.6 XL Axiata EXCL IJ BUY 3,500 28,002.5 See important27.2 disclosure19.3 at the back1.4 of this report1.3 7.0

Indosat Ooredoo ISAT IJ BUY 3,500 18,095.0 n/m n/m 1.5 1.5 (0.3)

Operator / 2300 Mhz Total 800 Mhz 900 Mhz 1800 Mhz 2100 Mhz frequency (TDD LTE) frequency Telkomsel 2 x 7.5 2 x 7.5 2 x 22.5 2 x 15.0 30.0 82.5 Indosat 2 x 2.5 2 x 10.0 2 x 20.0 2 x 15.0 - 47.5 XL Axiata - 2 x 7.5 2 x 22.5 2 x 15.0 - 45.0 Hutchison 3 - - 2 x 10.0 2 x 15.0 - 25.0 Smartfren 2 x 11.0 - - - 30.0 41.0

Exhibit 3. Expected spectrum allocations prior to 2300MHz auction

Operator / 2300 Mhz Total 800 Mhz 900 Mhz 1800 Mhz 2100 Mhz frequency (TDD LTE) frequency

Telkomsel 2 x 7.5 2 x 7.5 2 x 22.5 2 x 15.0 40* 92.5 Indosat 2 x 2.5 2 x 10.0 2 x 20.0 2 x 15.0 - 47.5 XL Axiata - 2 x 7.5 2 x 22.5 2 x 15.0 - 45.0 Hutchison 3 - - 2 x 10.0 2 x 15.0 10* 35.0 Smartfren 2 x 11.0 - - - 40* 51.0 * 10MHz will be regional license

Exhibit 4. Spectrum allocations per Subscriber prior and post 2300MHz auction

See important disclosure at the back of this report 2 www.danareksa.com