Industry Focus ASEAN Telecom Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 2 Jan 2019
Revisiting EVA for future direction STI : 3,053.43 KLCI: 1692.07 JCI : 6194.50 SET : 1563.88 • Economic Valued Added (EVA) has been more potent than earnings in predicting the share price; our EVA- Analysts based predictions in 2014 have largely materialised Sachin MITTAL+65 66823699 [email protected] • Our top picks are companies where capex has TOH Woo Kim+60 32604 3917 peaked,and sharp EVA improvements are not priced in [email protected] • Netlink NBN, Singtel and Axiata Group are our top picks in the region Thailand Research Team EVA is more potent than earnings in predicting share price changes over five years.Earnings growth in the short term is STOCKS often achievedby deploying more capital with diminishing 12-mth returns. However, this does not improve EVA due to higher Price Mkt Cap Target Price Performance (%) capital charge and might lead to a drop inearnings in the LCY US$m LCY 3 mth 12 mth Rating NetLink NBN Trust 0.76 2,168 0.87 (2.6) (8.4) BUY medium term due to rising deprecation. Barring the impact of Singtel 2.94 35,147 3.59 (9.3) (18.1) BUY tail-end events, our EVA-based predictions in 2014 have largely Axiata Group 3.97 8,670 5.05 (12.9) (26.2) BUY materialised. We prefer companies whose (i) capex has peaked, and (ii) big EVA improvements are not priced in. Source: DBS Bank, Bloomberg Finance L.P. Closing price as of 28 Dec 2018 Rising revenue and declining capex are idealbut we see either one missing across the countries. Singapore is likely to witness Regional FY19F Dividend Yield ~5% contraction in mobile revenue in 2019, driven by rising adoption of SIM-only plans, although capex has peaked FY19F Dividend Yield
already. TPG’s potentially weak launch in 2Q19F might lead to 7% 7% revenue stabilisation in Singapore from 2020 onwards, leading 6% 6% to street upgrades perhaps. In Indonesia, 7-8% top-line 4% 4% 4% 4% 4% 4% growthlooks promising in 2019,but capex is likely to rise with 3% 3% 4G rollout outside Java. Malaysia is set to see flattish growth in 3% the mobile sector due to a milder competitive environment, while broadband is likely to see pricing edging downwards. Thailand mobile sector might see 2-3% revenue growth in 2019 with ARPU being pressured by unlimited data plans.
Netlink NBN, Singtel and Axiata are our top picks in the region. 12 months of FY19F for Singtel and Net Link NBN (Mar YE) Source: Bloomberg Finance L.P., DBS Bank Netlink NBN is trading below its book value despite generating positive EVA with 7% regulatory return on its assets vs 6% WACC. Netlink offers 6.6% yield with 4% distribution CAGR over FY19F-21F. Singtel’s capex is on a downward trend led by lower capex in Australia and the share price implies only 2% EVA CAGR over next-10 years. Singtel offers 10% earnings CAGR over FY19F-21F and fixed annual dividend of 17.5Scts (~6% yield). Axiata’s capex is also on a downward trend,led by lower capex at Celcom and its share price implies only slightly positive EVA from 2020 onwards. Axiata offers over 30% earnings CAGR over FY18F-20F led by Celcom and XL Axiata– and offers 4% yield. Potential catalysts are monetisation of stakes in edotco and Idea-Vodafone.
ed: CK / sa: JC, CW, CS Industry Focus
ASEAN Telecom Sector
The concept of Economic Value Added There is a formula to value a firm based on EVA
Economic Value Added (EVA) is a measure of whether a The difference between the market value and book value of a company is earning better than its cost of capital. A positive firm is called Market Value Added or MVA. EVA indicates that a firm has added value on top of the opportunity cost of capital. MVA = Market Value - Book Value of Equity
EVA = Net Operating after Tax (NOPAT) – Capital charge The link between MVA and EVA is as follows: Or EVA = (ROIC – WACC) x Invested Capital MVA = Present Value of Annual EVAs
Where Invested Capital = Book Value of Equity plus Net Debt This relationship is reproduced from G. Bennett Stewart III, ROIC = (EBIT – Tax)/(Book Value of Equity + Net Debt) The Quest for Value (HarperCollins, 1991).
WACC is the weighted average cost of capital. ROIC is the If ROIC
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ASEAN Telecom Sector
Counters with high MVA/EVA valuations have dissappointed the market
Sources: DBS Bank, Reuters, Companies Benchmark indices – Reuters Thailand wireless telecom index, Reuters Indonesia telecom services index, Reuters Malaysia telecom services index (all indices are on total return basis)
We revisit this exercise in 2018, to understand market future. However, for Indonesia, we use 2019 as the base year, expectations of growth in EVA for regional counters and have a as operators were negatively impacted in 1H18 due to the pre- re-look at the market valuations of counters under our paid SIM registration period and we think that 2019 would be coverage. We use a two-stage growth model to understand the better reflective of future market conditions. market expectations of growth in EVA. Key risks to our view For the first stage, we assume that companies can grow their EVA at a constant rate over the next 10 years. After 10 years, Tail-end events could distort predictions based on EVA. we assume terminal EVA growth rates of 0% in Singapore, Predictions based on EVA ignore potential structural changes in 1.5% in Malaysia and 2% in both Thailand and Indonesia. the marketplace, regulatory issues and other tail-end events, Based on the existing market cap of companies, we figure out which could result in severe disparities between predictions the implied EVA CAGR over the next 10 years using the based on EVA and actual performance. For instance, the relationship between MVA and EVA.We then compare the potential entry of a new player in Singapore and the resultant implied EVA CAGR with historical growth rates to see if price competition led to severe declines in the profitability and expectations are too high or low from a historical perspective. EVAs of Singapore operators, thus distorting previous We also use the MVA/EVAas a metric to assess the sensibility of predictions based on EVA. High spectrum prices weighed on the the current market valuations of counters under our coverage. ROIC of Thai operators, thereby distorting predictions made based on EVA. Tail-end events could impact the long-term ROIC We use 2018 as the base year for this computation for generation ability of operators, thereby distorting predictions Singapore, Thailand and Malaysia, as market conditions in 2018 made based on EVA. were largely reflective of the likely market conditions in the
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ASEAN Telecom Sector
EVA CAGR over next 10-year as implied by the market value
Share WACC 2018F Avg. Book Market Value EVA (2018F) Implied EVA CAGR price ROIC Value 2018 over next 10-years
StarHub 1.76 7.0% 25% 317 3,126 181 1.9% Singtel 2.90 6.7% 9% 29,503 47,779 989 2.2% Net Link NBN 0.76 6.0% 7% 3,102 2,974 35 nm Advanced Info 171 8.2% 23% 54,885 502,902 22,234 4.7% Total Access Com 43.00 9.0% 4% 30,853 100,158 1,741 16.0% Digital Telecommunications 14.50 7.2% 6% 117,009 136,955 (2,322) nm Infrastructure Fund Indosat 1,695 9.4% nm 13,475,628 9,607,194 (3,774,158) nm PT Telkom 3,720 9.2% 23% 114,917,817 350,085,873 18,247,709 0.8% XL Axiata 2,010 9.4% 4% 21,557,162 19,960,835 (1,829,755) nm Link Net 4,810 10.2% 28% 4,832,323 15,365,379 722,296 4.1% Digi.Com 4.32 7.0% 62% 519 33,474 1,415 4.2% Maxis Bhd 5.27 6.8% 16% 7,159 40,944 1,309 5.4% Telekom Malaysia 2.25 8.2% 2% 7,447 8,681 (872) nm Time Dotcom 8.00 7.6% 10% 2,368 4,670 46 15.7%
Axiata Group 3.99 7.1% 5% 30,828 36,065 (805) nm PT Sarana Menara 620 9.6% 21% 7,659,407 31,445,414 1,603,138 2.4% Nusantara Tower Bersama 3,490 9.4% 10% 3,215,652 15,779,694 169,362 23.3% Infrastructure
Source: Companies, DBS Bank
Page 4 Industry Focus
ASEAN Telecom Sector
Singapore - EVA vs share price
Singtel’s EVA improved in 2014 largely from growth in associate StarHub’s share price has been on a downward spiral, reflecting contributions offsetting declines in Singapore and Australia and the continued fall in StarHub’s EVA. StarHub suffered mild increases in capex. EVA took a hit from 2016, largely continuous declines in EVA owing to higher capex infusions into owing to higher capital expenditure on Optus’s accelerating its 4G network rollout and spectrum payments. Operating network rollout and spectrum payments in Singapore. Declines profits also took a dip, especially after 2016, with continued in associate contributions from 2017 onwards amplified the dip subscriber losses in the Pay-TV segment and exacerbating in EVA, which is reflected in the downward movement of competitive conditions in the mobile market amid the Singtel’s share price from January 2018. anticipated entry of the fourth operator.
EVA history and Outlook - Singapore
EVA history and Outlook ‐ Singapore S$m 3,000
2,500 2,391 2,373 2,200 2,177 2,000 1,690 1,500 1,498 1,206 1,000 989
360 349 329 298 500 208 181 177 187
‐ 2013 2014 2015 2016 2017 2018F 2019F 2020F
5.0 (S$) Share price movement 4.5
4.0
3.5 3.0 2.5
2.0
1.5 1.0
0.5
0.0 Jan‐14 Jul‐14 Jan‐15 Jul‐15 Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18 Jul‐18
Singtel Starhub
Source: Companies, Reuters, DBS Bank
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Industry Focus
ASEAN Telecom Sector
Singapore - Next 10-year EVA CAGR implied by the current market cap Share WACC FY18F Avg. Book Market EVA (2018F) Implied EVA Past 5-year price ROIC Value 2018 Value CAGR over next EVA CAGR 10-years StarHub 1.77 7.0% 25% 317 3,066 181 1.0% -13% Singtel* 2.90 6.7% 9% 29,503 47,025 989 2.2% -15% Net Link* 0.76 6.0% 7% 3,102 2,974 35 nm nm NBN
*FY19F due to March YE Source: Companies, DBS Bank
EVA prospects and key risks
Netlink NBN is trading below its book value despite a positive StarHub likely to see EVA growth due to massive cost-cutting EVA. Positive EVA is based on ROIC of 7% (regulatory WACC) despite revenue under pressure. StarHub is likely to see vs our WACC of 6.0%. Reported earnings are lower than the S$30m in annual cost savings from FY19 onwards due to staff distributions due to accounting depreciation being much reduction and another S$30m in savings from FY20 onwards higher than the regulatory depreciation. Netlink will benefit due to the shutdown of co-axial cable network. TPG has from 100% migration to fibre over the next two-years. As of invested very little so far and may not gain subscribers in 30 Sep 2018, NLT’s network had passed 1.36m residential 2Q19 launch leading to stabilisation of revenue for StarHub. homes out of 1.50m estimated residential homes in Singapore, implying 90% rate. There were 1.24m residential Key risk will be TPG having a significant impact.Our bear-case end-user connections, representing c.91% of homes-passed. valuation is S$1.75 if TPG causes severe disruption. StarHub could see a 6% drop in FY19 EBITDA under Key risk for Netlink’s share price will be sharp rise in interest thisscenario vs 2.5% under our base case. rates. NLT could trade at S$0.68 or 7.5% yield if Singapore’s 10-year bond yield in the last quarter of 2019 rises to 3.4% vs Our investment thesis our expectations of 2.9% (2.45% currently) and yield-spread stays at 4.1% vs our expectations of 3.0% (4.1% currently). Netlink faces negligible earnings risk and offers over 6.6% Our bear-case valuation implies ~5% downside risk yield with FY19-21 distribution CAGR of 4%. NLT’s yield is similar to industrial S-REITS despite its much longer asset life Singtel is likely to see EVA grow in the future vs declining EVA as Netlink incurs annual capex to replenish its depreciated in the past due to three key factors. (i) Improvement in asset base. Plus Netlink has ample room to raise its debt at associates contribution led by Telkomsel in FY20 (Mar YE) and ~3% and invest in regulated return of 7%. Bharti entering positive earnings territory in FY21. (ii) Potentially lower annual capex than S$2.2bn in FY19 as Singtel offers assured annual DPS of 17.5 Scts (6.0% yield) Australia capex is trending downwards. (iii) Potentially with FY19-21F EPS CAGR of 7%. Associates’ profit spinningoff the digital businesses in FY21 which are seeing contribution has been a critical factor for Singtel’s share price narrower losses but still loss-making. historically. A potential rebound in associate contributions in FY20F led by Telkomsel, AIS and Globe despite a weak Bharti, We see two key risks to Singtel’s share price. (i) Potential could prompt the market to re-rate the counter. Singtel is sharp increase in losses from Bharti in FY20 could more than attractive, trading at a 12-month forward PE of 15x, -2SD of offset the growth from Telkomsel in FY20. (ii) Digital its historical average of 17x and offers 7% EPS CAGR over businesses may see further widening of losses instead of being FY19F-21F and 6.0% yield. narrowed down. Our bear-case valuation for Singtel is S$2.65, implying only 3% downside potential including the dividend Stronger-than-expected earnings rebound in FY20F. The yield. street’s FY19F earnings are edging up and we expect to see more upward revisions going forward. StarHub’s valuation is attractive, trading close to -2SD of its historical EV/EBITDA and PE average, and offers sustainable yield exceeding ~5.7%
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ASEAN Telecom Sector
Indonesia EVA vs share price
PT Telkom’s EVA has been rising with growing operating profits Link Net’s share price, on the other hand, exhibits a weak in the mobile segment. High double-digit growth in EVA over correlation with EVA, largely due to corporate governance 2015-16, is clearly reflected in the steady growth of the share issues and Link Net’s slow rollout approach that allows the entry price over 2016, while the decline in the share price over late of new competitors. 2017 and over 2018 is explained by the dip in EVA over 2018, which was a result of tight competitive conditions in Indonesia.
EVA history and Outlook - Indonesia
High-double digit y-o-y Decline in EVA due to growth in EVA over 2016 subscriber losses in 1H18 sent the price higher sent the share price lower
Source: Companies, DBS Bank
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ASEAN Telecom Sector
Steady improvement in Indosat’s EVA was rewarded by the The sharp fall in XL Axiata’s EVA, over 2014-2016, driven by market as seen from the improvement in Indosat’s share price declines in operating profit owing to subscriber losses and over late 2015-mid 2017. However, with EVA tapering off higher capital infusions on network expansions during XL’s towards mid-2017, the counter experienced sharp declines in transformation phase, explains the dip in share price over late the share price from mid-2017, which continued through 2018, 2014-2015. The improvement in EVA over 2017 is also reflected reflecting the steep tumble in Indosat’s EVA owing to heavy in XL’s share price over 2017. subscriber losses and tight competition in 1H18 due to the prepaid SIM registration era in Indonesia.
EVA history and Outlook - Indonesia
Rp b EVA history and Outlook ‐ Indonesia
0‐640 ‐500 ‐526 ‐1,000 ‐1,489 ‐1,500 ‐1,689 ‐2,104 ‐1,830 ‐2,000 ‐2,500‐2,863 ‐2,425 ‐3,000 ‐3,500 ‐3,347 ‐3,279 ‐4,000 ‐3,774 ‐4,500 ‐4,252 ‐5,000 2013 2014 2015 2016 2017 2018F 2019F 2020F XL Axiata Indosat (IDR) Share Price movement 8,000
7,000 Lower operating profits due to subscriber losses and tight 6,000 competition causes a sharp fall in EVA 5,000
4,000
3,000
2,000 High capital infusions and lower operating profits during XL’s Steady improvement in XL’s EVA 1,000 transformation period, sent both EVA over 2017 and share price down 0 Jan‐14 Jul‐14 Jan‐15 Jul‐15 Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18 Jul‐18
XL Axiata Indosat
Source: Companies, Reuters, DBS Bank
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ASEAN Telecom Sector
EVA history and Outlook – Indonesian Tower
Rp m EVA History and Outlook ‐ Indonesian Tower 2,000,000 1,819,317 1,694,260 1,800,000 1,603,138 1,498,716 1,600,000 1,400,000 1,181,925 1,249,052 1,083,051 1,200,000 1,000,000 800,000 600,000 322,235 400,000 304,316 264,170 223,896 257,404 125,748 169,362 196,640 200,000 188,334 ‐ 2013 2014 2015 2016 2017 2018 2019F 2020F PT Sarana Menara Nusantara Tower Bersama Infrastructure
Share price Share Price ‐ Indonesian Tower (IDR) 12,000
10,000
8,000
6,000
4,000
2,000
0
Sarana Menara Tower Bersama Source: Companies, DBS Bank
Implied EVA CAGR for Indonesian operators Indonesia (Rp) Share WACC FY18F Avg. Book Value Market Value EVA (2018F) Implied EVA Past 5-yrs price ROIC 2018 CAGR over next EVA 10-yrs CAGR PT Telkom 3,720 9.2% 23% 114,917,817 350,085,873 18,247,709 0.8% 7% XL Axiata 2,010 9.4% 4% 21,557,162 19,960,835 (1,829,755) nm nm Link Net 4,810 10.2% 28% 4,832,323 15,365,379 722,296 4.1% 31% Indosat 1,695 9.4% nm 13,475,628 9,607,194 (3,774,158) nm nm Sarana Menara 620 9.6% 20.7% 7,659,407 31,445,414 1,603,138 2.0% 38% Tower Bersama 3,490 9.4% 10.1% 3,215,652 15,779,694 169,362 23.0% -2% Source: Companies, DBS Bank
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ASEAN Telecom Sector
EVA prospects and key risks
PT Telkom’s ~1% EVA CAGR is justified as competitors may Indosat EVA likely to remain in negative territory. Indosat is steal most profitable ex-Java business. PT Telkom is reasonably likely to keep generating negative EVA over the near term due valued, with an implied 10-year EVA CAGR of ~1% vs. 7% to mounting pressures on the topline. Indosat is also planning recorded over the last five years. PT Telkom is likely to see the to pump over Rp30tr over the next three years to expand its pace of EVA growth shrinking as i) Telkomselis likely to shed presence in regions outside Java. ROIC generation on these market share outside Java, which is the most profitable part of investments is likely to be low as competition in ex-Java regions the business, to XL Axiata, which could weigh on Telkom’s already remains intense and gaining enough market share to ROIC, and ii) the growing proportion of non-Telkomsel generate double-digit ROICs could prove to be difficult within businesses (~32% of Telkom’s topline) have lower ROIC vs. the first few years. Telkomsel given their capital-intensive nature and lower margins. Our investment thesis
Link Net is attractive with an implied EVA CAGR of 4% vs 31% XL Axiatato gain revenue share in 2019. The market is overly CAGR over the past five years. Link Net has recorded high concerned over XL Axiata further lowering its data pricing 8% double-digit growth in EVA over the past five years, supported q-o-q in 3Q18, which we think, has bottomed out in 3Q18. XL by the company’s strategy of conducting network rollouts to intends to double its revenue market share in the ex-Java region maximise ROIC. While Link Net is likely to see lower ROICs to 30% in 4-5 years largely at the expense of Telkomsel that going forward, as the company has now taken a more derives over 60% of its revenue from ex-Java vs 20% for XL. aggressive stance on network rollouts, we believe Link Net is This coupled with below average exposure to legacy services still likely to beat mid-single-digit EVA growth implied by the (~20% of XL Axiata’s top line vs 42% for Telkomsel in 3Q18) current valuation. should allow XL Axiata to record 10% revenue growth in 2019 vs 8% growth for Telkomsel. Key risk for Link Net is potential decline in broadband penetration in existing areas. If broadband penetration in areas PT Telkom (TLKM) is not cheap as we expect capex to rise and with home-passed drops by 20bps each vs our base-case consensus EPS to be cut. Firstly, ~60% of Telkomsel’s (TLKM’s assumption of stable penetration, this may lead to our bear- cellular arm) revenue comes from outside the Java (ex-Java) case valuation of Rp4100. region wherecompetition is ramping up and may erode Telkomsel’s market share. Secondly, Telkomsel has ~42% XL Axiata’s negative EVA likely to narrow down. XL Axiata has exposure to declining voice and SMS services, much higher than recorded narrowing down of its negative EVA since 2016 and its competitors. Thirdly, non-Telkomsel businesses (~32% of the we believe this would continue to be the norm going forward, group’s revenue) not only have lower EBITDA margins but also supported by above-average industry growth in topline and suffer from high operation expenditure and depreciation costs. continued streamlining of XL’s cost structure. However, XL In conclusion, consensus FY19F EPS is likely to be cut 8%. TLKM Axiata is unlikely to turn in a positive EVA in the near term, is not cheap either at 17x 12-month forward PE around its owing to another year of peak capex of ~Rp7tr in 2019. historic 5-year average.
Key risk for XL Axiata will be Telkomsel disrupting benign Indosat’s negatives are largely priced in with 60% YTD competition. If Telkomsel instigates price wars both within and contraction. We expect ISAT to post ~6% growth in cellular outside Java, it will result in only 3% growth in cellular revenues revenue over FY19F, supported by benign competition in Java. for FY19 vs +10.2% growth under our base-case scenario and We expect ~7% EBITDA growth in FY19F, supported by cost- lead to our bear-case valuation of Rp1,900. cutting initiatives and lower churn rates. While ISAT has improved its network over the last six months, it may take another 12 months to change the perception and Indosat is likely to lag behind the industry growth rate of 7-8%.
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ASEAN Telecom Sector
Sarana Menara Nusantara (TOWR) is trading near replacement Link Net to benefit from accelerating subscriber growth amid cost despite solid return on invested capital (ROIC). TOWR is benign competition. Link Net has upgraded its guidance on trading at an attractive 12-month forward EV/EBITDA of 6.0x, homes passed to 250k for FY19F from 180k in FY18 indicating ~2SDs below its historical mean of 11.0x while offering 6.7% a potential pick-up in subscriber growth. We think the timing is FY18F-20F EBITDA CAGR and ~5.5% yield. It is now trading quite opportune as its key competitor Telkom has been raising near the replacement cost of towers despite generating an ROIC pricing for its premium subscribers. We project revenue and over its average cost of capital. Being the largest operator in the EBITDA CAGRs of 11% and 10%, respectively, over FY18-21F Indonesian tower sector, TOWR will benefit from 4G at Link Net and we think the counter is attractive trading at an capacitygrowth in Java and coverage expansion outside Java FY19F EV/EBITDA of 5.1x vs. ~7x peer average. (ex-Java).
Tower Bersama’s (TBIG) over 60% valuation premium to its peers may narrow. TBIG is trading at a 12-month forward EV/EBITDA of ~10.5x, at 65% premium to Sarana Menara Nusantara (TOWR) vs its 3-year historical average premium of 35%. We think that the premium may narrow as TBIG is likely to face similar pressure on tower leasing price from top-3 customers. TBIG offers 5.5% FY18F-20F EBITDA CAGR while its 5.3x net debt to EBITDA limits the potential for big acquisitions.
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ASEAN Telecom Sector
Malaysia EVA vs share price
Digi’s EVA has suffered declines ever since 2014, due to 4G Time Dotcom has seen steady improvements in EVA, owing to rollout capex and worsening competitive dynamics with the growth in operating profit. This is clearly reflected in Time’s entry of Telekom Malaysia into the mobile space, coupled with share price, which showed steady improvement over 2014- aggressive pricing behaviour of smaller operators after the 2017, mirroring the improvement in EVA. Maxis’s EVA, on the spectrum re-farming exercise. Digi’s share price dipped in 2015, other hand, exhibits a relatively weak correlation with the share price, as reflected by the limited upward movement in the share reflecting the fall in EVA and has remained fairly stable since price, despite marginal improvements in EVA over 2014-17. then, despite seeing declines in EVA.
EVA history and Outlook –Malaysia
Steady rise in Time’s share price mirrors the improvement in EVA Growth in EVA over 2014
4G network roll-out and tightening competition weighed on EVA
Source: Companies, Reuters, DBS Bank
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ASEAN Telecom Sector
Axiata group’s EVA witnessed a sharp decline over 2016, largely Telekom Malaysia (TM) has recorded steady declines in EVA owing to subscriber losses and pricing pressures experienced by since 2015, owing to the contraction of operating profit with Celcom, lower associate contributionsand currency woes further Telekom Malaysia’s entry into the mobile sector, coupled with exacerbating the decline in operating profit of the Axiata group, high capital infusions on mobile and fixed network rollouts. driving EVA deep into negative territory over 2016/17. Axiata’s Despite the fall in EVA, TM’s share price declined only share price corrected over 2016 with EVA decline marginally over 2015-18, before contracting sharply over 2018 on news of the regulatory changes to lower fixed broadband prices. This mirrors the sharp fall in EVA that TM is likely to witness over 2018.
EVA history and Outlook –Malaysia
Share price remained stable despite sharp fall in EVA Share price correction on news of regulatory changes to broadband pricing and resultant decline in EVA
Sharp fall in EVA led to only a marginal decline in the share price
Source: Companies, Reuters, DBS Bank
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ASEAN Telecom Sector
Implied EVA CAGR for Malaysian operators Implied EVA Past 5- FY18F Avg. Book Value CAGR over next Year EVA Malaysia Share price WACC ROIC 2018 Market Value EVA (2018F) 10-years CAGR Digi.Com 4.3 7.0% 62% 519 33,474 1,415 4.2% -3% Maxis Bhd 5.3 6.8% 16% 7,159 40,944 1,309 5.4% -1%
Time Dotcom 8.0 7.6% 10% 2,368 4,670 46 15.7% nm Telekom Malaysia 2.3 8.2% 2% 7,447 8,681 (872) nm nm Axiata Group 4.0 7.1% 5% 30,828 36,065 (805) nm nm Source: DBS Bank
Axiata Group to return to positive EVA territory by FY20F. We High expectations for Digi and Maxis.The market is pricing in expect the Axiata group to record narrowing negative EVA EVA CAGRs of~4% and 6% for Digi and Maxis respectively, over 2018/19 with a potentially positive EVA over FY20F. This which are at the higher end of our expectations. While we would be primarily driven by i) Improving operating conditions believe the duo would be able to record low-mid single-digit in Malaysia, with limited disruptive pricing practices by smaller growth in EVA given flattish growth in the mobile sector, we operators, potential margin improvements through digitisation believe at current valuations, the counters have little room for and lower capex, improving ROIC by Celcom, ii) above- disappointment. industry growth and cost controls of XL Axiata, improving operating profit contribution, and iii) lower associate losses Telekom Malaysia unlikely to see positive EVA in the near from Idea-Cellular after the divesture following the merger of term. TM’s EVA dipped into negative territory in 2016, with its Idea and Vodafone and potential monetisation of Axiata’s entry into the mobile sector, thus weighing on the operator’s remaining stake in Idea-Cellular, allowing capital to be better high single-digit ROIC for its fixed line and enterprise deployed elsewhere. Deployment of capital to more profitable businesses. Negative EVA has since persisted with growing ventures could further buttress growth in EVA for the Axiata competitive pressures in both broadband and segments and Group. rising regulatory pricing revisions. With regulatory uncertainties and pricing pressure expected to remain Key risk for Axiata will be potential disappointment from XL recurring issues for TM, we believe TM’s negative EVA would Axiata and forex. Earnings contribution could be lower than continue to be the norm over the near term expected if XL Axiata is not able to win revenue share despite seeing a rise in capex. Our investment thesis
Time DotCom likely to see near 17% growth in EVA over the Top pick is Axiata for recovery play in 2019. Axiata’s share next two years. Market share gains in the fixed broadband price is down by 30% YTD, and we believe this has largely segment and growth in the wholesale (domestic & priced in the near-term weak performance by its operating international) and retail segments should allow Time DotCom subsidiaries. We expect to see gradual improvement in to improve ROIC over the near term, with potential EVA Celcom and XL Axiata’s results over the next 12 months, CAGR of ~17% EVA over the next two years, marginally which will be the key catalyst to drive a recovery in its share above market expectations. EVA generation over and above price. Asset monetisation of its stake in edotco and Idea- market expectations could prompt a re-rating of the counter, Vodafone will be a bonus, if they materialise. as the market re-adjusts its expectations of future growth in EVA.
Key risk for Time Dotcom will be steeper decline in bandwidth prices. Steeper-than-expected decline in bandwidth prices and/or slowdown in data demand will be an earnings risk for TIME's bandwidth business.
Page 14 Industry Focus
ASEAN Telecom Sector
BUY on TIME due to its strong growth in data. We like TIME pressures, exclusion from FBM KLCI, dividend cut, etc.). for its strong growth profile, contributed by both its wholesale However, it remains hard for us to be constructive on the (domestic & international) and retail segments. While the stock, given that regulatory uncertainties and pressures would reduction in fixed broadband prices might have short-term be key recurring issues for TM in the medium term. impact on margins, we believe this is beneficial for TIME in the medium to long term as it gains meaningful market share. The Maxis and Digi – supported by domestic liquidity. Domestic- stock trades at an attractive valuation of 16x FY19 PE (-1SD) focused operators such as Digi and Maxis are trading at and has a strong balance sheet to support its network around 11.5-12.4x CY19 EV/EBITDA, a premium relative to expansion. the regional average of 7.7x. Given the ample domestic liquidity, we believe the premium valuations can be sustained TM - still facing regulatory pressures. We believe the sharp fall as long as dividend yields remain decent and are backed by in TM’s share price has priced in most of the negatives for the strong free cashflow generation. company (i.e. declining broadband prices, regulatory
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ASEAN Telecom Sector
Thailand EVA vs share price
Advanced Info Service’s (ADVANC) EVA remained stable over Total AccessCommunications’ (DTAC) EVA entered negative 2013-15 before sharply declining over 2016, due to heavy territory in 2016, owing to continued pressure on operating capital infusions on spectrum assets acquired at high prices and profit, as Truemove, equipped with a strong network, ADVANC’s expansions into fixed broadband. The impact of aggressively poached DTAC’s subscribers. The decline in DTAC’s capital infusions was further exacerbated by tight competitive EVA explains the steady correction of DTAC’s share price from conditions in the mobile segment, weighing down ADVAC’s 2014-2016. EVA has only marginally improved since then, while operating profit. The decline in EVA is captured by the sharp fall DTAC’s share price has also remained largely stable since 2016. in ADVANC’s share price in late 2015. EVA has largely remained Digital Telecommunications infrastructure Fund’s share price, on stable since then, as reflected in ADVANC’s share price. the other hand, exhibits a weak correlation with EVA.
EVA history and Outlook – Thailand
THB m EVA history and Outlook ‐ Thailand 32,594 32,986 35,000 31,504
30,000 25,631 23,952 25,019 25,000 22,346 22,234 20,000 15,000 10,0006,765 6,081 1,741 5,000 0 1,329 ‐1,844 0 ‐2,453 ‐2,692 ‐1,875 ‐1,593 ‐2,970 ‐5,000 ‐1,078 ‐2,429 ‐2,322 ‐3,051 2013 2014 2015 2016 2017 2018F 2019F 2020F Total Access Com. Advanced Info. Digital telecom Infra.
AIS, DTAC THB Share Price movement ‐ Thailand DIFU THB 300 16 14 250 12 200 Sharp fall in EVA on 10 higher capital infusions 150 and lower operating 8 profits 6 100 4 50 Steady decline in EVA due to tight 2 competition in the mobile segment 0 0 Jan-14 Jul-14 Jan-15 Jul‐15 Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18 Jul‐18 Total Access Comm. Advanced info. Digital Telecom. Infra
Source: Companies, Reuters, DBS Bank
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ASEAN Telecom Sector
Implied EVA CAGR for Thailand operators Thailand (THB m) Share WACC FY18F Avg. Book Market EVA Implied EVA CAGR Past 5-Year price ROIC Value 2018 Value (2018F) over next 10-years EVA CAGR
Advanced Info. 171.0 8.2% 23% 54,885 502,902 22,234 4.7% -7% Total Access Com* 43.0 9.0% 4% 30,853 100,158 1,741 16.0% nm Digital Telecommunications 14.5 7.2% 6% 117,009 136,955 (2,322) nm nm Infrastructure Fund *2019F EVA for Total Access Communications. Source: Companies, DBS Bank
EVA prospects and key risks
ADVAC likely to see high single-digit growth in EVA over the Failure to maintain market share will be a key risk for DTAC. If next two years. ADVANC’s EVA declined in 2016, no thanks to DTAC’s market share is threatened by other operators, the its move into the fixedbroadband segment and intensifying telco’s fixed costs might be affected. competitive pressures on the mobile front that was driven by an aggressive TRUE. Intense competitive conditions on the mobile Digital telecommunications Infrastructure Fund (DIF) EVA likely front, however, have now subsided, allowing ADVANC to to remain in negative territory in the near term. DIF’s improve its temporarily depressed ROIC in the mobile segment. infrastructure driven business model and the existence of an Furthermore, ADVANC’s fixed broadband segment should also anchor-tenant, TRUE, offers limited room for major see an upliftment in ROIC going forward, with ADVANC improvements in DIF’s ROIC, which hovers around 6% currently, penetrating deeper within regions with existing coverage 2-3 below its WACC of 7%. However, possible improvements in years back. This should allow ADVANC to record high single- tenancy ratio, with potential rentals secured from DTAC and digit growth in EVA over the next two years vs. market ADVANC or inorganic growth driven by DIF’s healthy balance expectations of ~5% growth, potentially prompting a re-rating sheet, may help DIF improve current ROIC over the medium of the counter. term, with potential to yield positive EVA.
Key risk for ADVANC will be high handset subsidies. With TRUE We see three key risks of DIF’s share price. i) New technological looking to gain market share, it may give out high levels of risks such as Single radio access network (RAN) and carrier handset subsidies in the postpaid segment. To retain its aggregation could lead to more efficient use of tower slots in customers, ADVANC too may have to continue maintaining its the long run. ii) A weak macroeconomic environment could handset subsidies for a longer period. result in lower investments by telcos and iii) If DIF fails to be seen as an independent player, other telcos might not lease DTAC likely to fall short on market’s expectations of EVA towers from DIF for strategic reasons. growth. DTAC’s EVA is likely to enter positive territory in FY19F, supported by regulatory cost savings and lower depreciation Our investment thesis and amortisation charges. Whilst, DTAC is likely to see low-mid single-digit growth in EVA over the next few years, the high Our top pick for the sector is Digital Telecommunications double-digit growth as projected by the market is highly unlikely Infrastructure Fund (DIF). Thanks to its c.7% yield in FY19F and to materialise, given the current competitive conditions in the 11% upside to our DCF-based TP of Bt16.20. DIF is an mobile segment. Lower than expected growth in EVA over the infrastructure fund that invests in telecom towers and fibre next two years, could prompt the market de-rate the counter. optics. It has long-term visibility on cashflow, thanks to its lease agreements made with TRUE group which is an anchor tenant of its assets. In addition, DIF is also expected to benefit from DTAC’s network improvement strategy in the coming years.
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ASEAN Telecom Sector
In terms of mobile services operators, we prefer ADVANC to of 24.6%, we prefer ADVANC to DTAC. DTAC may seem to be DTAC. ADVANC’s share price has been depressed by its weak attractive for its almost -2SD valuation, but this can be mainly 3Q18 results and it is currently trading at c.-1SD. Though the attributed to its huge FY19F earnings growth which is mainly driver for its top line may be pressured by ARPU in FY19F, driven by regulatory costsavings as DTAC will be operating fully ADVANC has recorded a YTD net gain of 0.59m total under a licence model, and also the decrease in depreciation subscribers with a clear uptrend for its post-paid subscriber base and amortisation of the deferred right to use equipment from of 0.63m, representing c.1.5% of its total mobile subscriber the concessionary assets. Given that our TP is based on DCF base. In addition, ADVANC also has a more diversified portfolio model where cash capital expenditure is considered, this leaves with its fixedbroadband business which should yield higher only 3.1% upside to our TP of Bt49.50. growth compared to the legacy mobile business in the coming year. Given our DCF-based TP of Bt223 and the potential upside
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ASEAN Telecom Sector
SingaporeOutlook We project annual contraction of 5% for the mobile sector in adoption of SIM-only plans (12-13% of postpaid user base FY19F. We estimate that mobile service revenues declined currently vs 25% in 2-3 years) and commercial launch of TPG’s ~4.5% over 9M18 vs our projection of a 4% decline over services in 2Q19F. However, if TPG faces serious network quality FY18F. Declines were largely driven by postpaid ARPU due to issues, incumbents may not hesitate to raise their pricing in our SIM-only plans and contractions in legacy usage. We expect the view, implying room for positive surprises. mobile industry to contract ~5% over FY19F, driven by the
Industry to contract ~5% over FY18/19F
Mobile Service Revenue Growth 0.0% 2016 2017 2018F 2019F ‐1.0%
‐2.0% ‐2.1% ‐2.0% ‐3.0%
‐4.0%
‐5.0% ‐4.8% ‐4.8% ‐6.0%
Source: Company data, DBS Bank
Pay-TV business model needs to change to stem the shrinking cybersecurity are expected to bear fruit over the next few years. of the Pay-TV market. The pay-TV market in Singapore has Singtel is set to benefit from the resumption of Smart Nation shrunk by ~8.5% y-o-y YTD with ~65k subscriber losses over projects, and might benefit from a rebound in ICT revenue with 9M18, as subscribers continued to opt for cheaper OTT ~S$300m of additional ICT revenue over 2H19F (March YE) vs. alternatives. We believe that pay-TV subscriber losses will 1H19 largely stemming from Smart Nation contracts. However, continue through FY19 with the industry topline contracting with the entry of StarHub and other mobile operators into the ~5-6% over FY19. The management of StarHub believes that, enterprise services segment, Singtel’s pricing premiums in the given the structural decay in the industry's Pay-TV revenues, the enterprise segment have come under pressure. StarHub’s joint current business model needs to evolve. Under the proposed venture partner Certis Cisco has strong ties with the Singapore Pay-TV business model, subscribers will be able to choose the government, with its executive team comprising several former content they wish to view. This would also translate to content government officials from the Ministry of Home Affairs and costs becoming more variable in nature as Pay-TV providers re- Singapore Armed Forces. The company has also managed the negotiate industry contracts to make payments based on the Cyber-Watch Centre of the Singapore government since 2007, number of subscribers subscribing to a specific channel. providing round-the-clock monitoring of the government's IT StarHub’s management is re-negotiating contracts to make systems and networks. This should make StarHub’s payments based on the number of subscribers as and when cybersecurity division a likely candidate for clinching future they come up for renewal. Content-providers are reaching government cybersecurity contracts pertaining to Smart Nation subscribers directly and are more open to variable-cost contracts projects. than in the past. Hot issues Resumption of Smart Nation contracts to benefit telcos amid intensifying competition in the enterprise segment. As the TPG’s low capex spend and launch delays bring reprieve to telco government has lifted its moratorium on new Smart Nations incumbents. TPG has so far spent A$66.7m (S$65.7m) in projects, Singtel and StarHub’s investments in fields such as cumulative capex on its Singapore rollout, or ~22-32% of its
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ASEAN Telecom Sector
planned S$200-300 of capex. The telco revealed that its ramp up or negotiating access to the incumbents’ network production network covers ~90% of outdoor areas during its could lead to TPG failing to meet the coverage deadlines set by FY18 results briefing and mentioned that is on track to meet the IMDA. While this is likely to result in only a fine (S$5,000- nationwide coverage requirement by December 2018, as set S$50,000) in the first few instances, continued failure to meet forth by IMDA. TPG has delayed the commercial launch of its coverage requirements, particularly owing to issues in securing services to 2Q19 from late-2018, citing delays in negotiating funding for capex, could prompt the regulator to mediate a access to the jointly built common antenna systems of the forced consolidation of the industry or push TPG to dispose of incumbents and network testing. TPG is slated to launch 4G its spectrum assets to an incumbent. trials in 4Q18, followed by a commercial launch of services in 2Q19. Mobile Virtual Network Operators (MVNOs) march on with their aggressive expansion plans. Against a backdrop where TPG was At the current level of capex spend, TPG’s network at expected to enter Singapore in 2H18, each incumbent operator commercial launch is unlikely to pose a major threat to the partnered with MVNOs takes the total number of mobile service incumbents, in our view. We estimate that StarHub, the second providers in the country to seven from three players at the end largest operator in Singapore, is likely to have spent over of 2015. By partnering with MVNOs, the incumbents are 1) S$600m on its 4G network since 2013, almost 10x of the making it difficult for TPG to succeed by stirring up competition current capex spend of TPG on its 4G network. We are of the in the SIM-only segments, which TPG is likely to target first, and view that to become a disruptive market player in Singapore, 2) generating wholesale mobile revenues, offsetting any TPG would need to significantly ramp up its capex rollout to potential revenue impact in the low-end segments that is likely provide ubiquitous coverage. While TPG is likely to meet the to be caused by TPG. outdoor coverage requirements by 2018, the quality of the outdoor network is likely to be poor with patchy and MVNOs such as MyRepublic and Circles.Life, with their low-cost inadequate coverage inside buildings and MRTs given its current model, superior network quality (as they leverage on the capex spend. This would make it difficult for TPG to lure low- network assets of established players) and convenient customer end subscribers, who already enjoy much better network quality service (100% app-based), may attract a substantial number of and coverage through Mobile Virtual Network operators customers, especially the low-income segments, in shifting to (MVNOs) that ride on the incumbents’ mobile networks. cheaper SIM-only plans. As the majority of MVNOs’ revenues will flow back to their telco partners, telcos are better off losing TPG not meeting coverage requirements could lead to penalties revenue share to MVNOs than TPG by offering flexible or forced industry consolidation. We believe TPG would need to wholesale pricing to their MVNOs. TPG is likely to compete on significantly boost its capex spend and network rollout over cheaper pricing but will be challenged by MVNOs that offer 2019, in order to meet IMDA’s road tunnel and in-building superior network quality and differentiated services. As MVNOs coverage requirements by December 2019. TPG would also are already disrupting the Singapore telco market, we do not need to negotiate access to common antenna systems of the expect a major disruption from TPG in 2H19 when it launches incumbents, given the limited availability of space for deploying its services in Singapore. antennas in key sites. Any potential delays in TPG’s network
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ASEAN Telecom Sector
3.5% and 4% revenue share grab by MVNOs and TPG respectively by 2022 under our base case scenario
0.4% 1.2% 2.0% 2.7% 3.5% 100.0% 1.0% 2.0% 3.0% 4.0% 90.0% 19.1% 18.8% 18.6% 18.4% 18.2% 17.9% 80.0% 70.0% 27.5% 27.0% 26.6% 26.1% 25.6% 60.0% 25.1% 50.0% 40.0% 30.0% 53.4% 53.7% 52.7% 51.6% 50.5% 49.5% 20.0% 10.0% 0.0% 2017 2018 2019 2020 2021 2022 Singtel StarHub Other TPG MVNOs* We have assumed that 65% of MVNO revenue will flow back to their telco partners Source: Company data, DBS Bank
SIM-only plans to continue weighing on ARPU. Both Singtel and Regulations and Risks StarHub witnessed y-o-y declines of 10% and 8% in postpaid ARPUs over 3Q18, respectively, largely owing to the growing Significant capex outlay by TPG in 1H19. The telco revealed that adoption of SIM-only plans. We believe SIM-only plans will rise its production network covers ~90% of outdoor areas during its in popularity over the medium term, with lengthening FY18 results briefing and mentioned that is on track to meet the smartphone replacement cycles, which could further incentivise nationwide coverage requirement by December 2018, as set subscribers to move away from bundled plans. The growing forth by IMDA. We believe that, whilst, TPG is likely to meet the adoption of SIM-only plans presents a challenge to operators, outdoor coverage requirements by 2018, quality of the outdoor with potential declines in mobile service revenues, dilution of network is likely to be poor with patchy and inadequate ARPU and profitability. Customer spend over the life of SIM-only coverage inside buildings and MRTs given its current capex contracts tends to be substantially lower than handset plans, spend. However, there is a risk of TPG incurring high capex in and SIM-only plans remain less profitable than handset plans, 1H19 to create a formidable network to compete with the even after taking handset subsidies into consideration. incumbents. This could potentially disrupt pricing and mobile services revenue. Our industry checks indicate that SIM-only plan adoption among Singapore postpaid customers grew from 8-9% in 1Q18 Cost-cutting initiatives may be less impactful than expected. to 12-13% by 3Q18. Judging from Australia’s experience, Singtel has spoken of plans for a ~S$70m cost savings initiative where SIM-only plans constitute ~25% of the total postpaid while StarHub has announced plans to save ~S$210m in plans, Singapore is likely to see a leap in these plans. Customer operating expenses over a period of three years, largely through spend on SIM-only plans vis-à-vis handset plans tends to be reductions in staff expenses, procurement, leasing, maintenance substantially lower and growing uptake would negatively and sales and distribution expenses. StarHub is expected to impact mobile service revenues and dilute industry ARPU going terminate ~300 full-time employees, leading to annual cost forward. savings of ~S$30-35m along with digitisation and rationalisation of expenses in other categories that support savings. Even though telcos have announced ambitious cost- cutting plans, the actual savings may be materially less than those announced due to their investments in new businesses such as cybersecurity.
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ASEAN Telecom Sector
Indonesia Outlook
Mobile sector to witness 7-8% revenue growth in 2019. We High-speed fixed broadband penetration in Indonesia on a assume benign competition in Java over FY19, despite intensive growth trajectory. We estimate that high-speed fixed competition outside Java under our base case. XL Axiata is likely broadband penetration (connections over 5Mbps) in Indonesia to grab ~2-3% revenue market share outside Java through doubled over the past year from 4% household penetration aggressive pricing strategies as the telco plans to double its in1H17 to 8% household penetration as of 3Q18. This was market share in ex-java regions to 30% in 4-5 years. This should largely driven by aggressive expansions by Telkom Indonesia allow XL Axiata to grow its ex-Java base by high double digits, (TLKM), which added nearly 2.7m subscribers over the same which coupled with benign competition in Java (~80% of XL period. All major fixed broadband players are aggressively Axiata’s topline) should allow XL Axiata to grow at ~10% in expanding their coverage regions to capitalise on the growing FY19. The bulk of the market share gains forXL Axiata would appetite for high-speed data among the expanding middle- likely stem from Telkomsel (~80% market share in regions income class in Indonesia. Extrapolating the growth in high- outside Java) which, coupled with declines in legacy services speed broadband penetration over the past year coupled with (~42% of Telkomsel’s top line in 3Q18) would lead to ~8% the growing interest in the segment by incumbents and new growth in Telkomsel’s revenue base over FY19. Supported by operators like XL Axiata and ISAT, we expect to see penetration benign competitive conditions in Java, which accounts for of high-speed broadband services rising to at least 20% over ~90% of Indosat’s (ISAT) topline, ISAT should be able to record the next three years, adding ~9m new households to the high- mid-single-digit growth, in our view. speedbroadband segment.
Accelerating coverage and high-speed fixed broadband coverage in Indonesia
High Speed Fixed Broadband Total high speed broadband 25% Penetration - Indonesia Coverage (Homes Passed in 000's) 4Q17 3Q18 Growth 20% 20% Telkom Indonesia* 18,700 27,925 49% Link Net 2,000 2,146 7% 15% MNC Play Media** 1,209 1,399 16% BizNet N/A 448 10% 8% MyRepublic* 500 575 15% 4% * - Estimated based on 17% penetration rate 5% ** - Estimated based on 20% growth in homes passed over 2017 *** - Estimated based on 15% growth in broadband subscribers and 28% 0% penetration 1H17 3Q18 FY21F
Sources: Telkom Indonesia, Link Net, MNC Play Media, MyRepublic, Department of Statistics Indonesia, World Bank estimates, DBS Bank
Hot issues
Mobile Sector 40% penetration 3-4 years ago. XL Axiata is now the second operator in many second and third tier cities outside Java and Ex-Java to be the key focus in FY19. XL Axiata’s management continues to push hard with a focus on commodity related reiterated its commitment to keep expanding coverage markets, such as Sumatra, Kalimantan and Sulawesi. outside Java with ~50% of capex allocated to expanding coverage in the region. XL Axiata hopes to achieve ~80% 4G Based on our checks with tower operators, ISAT is currently population coverage outside Java by the end of the year vs upgrading the equipment of its network in existing coverage
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ASEAN Telecom Sector
regions, but order flows for ex-Java coverage has been slow. Data pricing may have bottomed out. XL Axiata lowered the The new management has pledged to invest ~Rp30tr(US$2bn) data pricing 8% q-o-q in 3Q18 as its data-pricing discount to over the next three years to close the existing network gaps of Telkomsel had narrowed to 15%-20% in 1Q18-2Q18 vs an ISAT with other operators. ISAT currently covers only ~27% of average discount of 34% in 2017 when XL Axiata had gained the population outside Java via 4G and plans to improve this significant market share. Witha 32% discount to Telkomsel in to 60% over the next few years. Hence, we expect to see 3Q18, we think that XL Axiata should be looking to sustain more ex-Java action from ISAT in 2019 once the ongoing 32% discount to optimiseits subscriber and revenue share. network upgrade is complete. Data-pricing outside Java (ex-Java) is higher than the pricing in Java, so overall data-pricing is likely to trend upwards for XL Telkomsel is also expanding 4G coverage and quality in the Axiata from gains in the ex-Java region. region aggressively with the recently acquired 2.3GHz spectrum. With all three operators racing to expand coverage, to leverage on the rising adoption of smartphones in the region, we believe the market’s focus should shift to operations outside Java in FY19, as ex-Java would likely account for the lion’s share of incremental growth in the mobile industry.
Data-pricing differential had narrowed too much in 1H18
Rp per MB Revenue per MB - Indonesia 25 21 19 20 15 14 15 15 15 12 13 10 11 12 9 10 10 11 10 98 7 76 5 6
0 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Telkomsel XL Axiata Indosat Source: Companies, DBS Bank
Telkomsel likely to cede revenue market share to XL Axiata in bridging its network gaps with Telkomsel, we may see price- 2019. We estimate that XL Axiata shed ~0.6% revenue sensitive customers switching to XL Axiata, and 2) with XL market share in 3Q18, largely due to the re-pricing of data Axiata becoming the second operator in most second- and services by Telkomsel. However, we believe the service third-tier cities, any market share gains for XL Axiata would revenue growth of Telkomsel would normalise in 4Q18, with have to stem from Telkomsel. the impact of the re-pricing largely baked into its 3Q18 numbers. XL Axiata is also at an advantage with the lack of exposure to legacy revenues, the declines of which are accelerating in ex- Telkomsel controls ~80% of market share outside Java with Java regions as seen in Telkomsel’s recent quarterly results. XL Axiata accounted for ~15% of the remainder. XL Axiata is Telkomsel, which generates ~60% of its top line from regions planning to double its market share over the course of the outside Java (vs. ~20% for XL Axiata), has seen legacy next five years. We believe that the bulk of these gains would revenues contracting in the recent past, primarily due to rising stem from Telkomsel as, 1) with XL Axiata aggressively smartphone adoption in ex-Java regions that is supported by the proliferation of cheap Chinese handsets. This could further exacerbate potential revenue share losses for Telkomsel in the region.
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Revenue market share in Indonesia- Telkomsel benefited from re-pricing in 3Q18 despite subscriber losses
Revenue market share
80% 70.7% 67.5% 68.1% 67.7% 67.2% 67.3% 68.1% 70.3% 69.8% 70% 60% 50% 40% 30% 18.9% 18.3% 18.4% 18.5% 17.6% 16.6% 20% 14.2% 14.2% 13.9% 10% 13.6% 13.5% 14.0% 14.3% 15.1% 15.4% 15.5% 16.0% 15.4% 0% 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18
Telkomsel XL Axiata Indosat
Sources: Companies, DBS Bank
Fixed broadband industry concentrated in the greater Jakarta region. MyRepublic, BizNet and Media Nusantara Citra (MNC) operate smaller TLKM dominates the market but smaller players are creeping regional networks concentrated on residential areas and up. TLKM continued its dominance in the high-speed fixed central business districts in Jakarta. broadband market, accounting for ~82% of subscriber market share as of 3Q18. TLKM’s early entry to fixed Competition in the fixed broadband segment remains benign, broadband and extensive legacy network infrastructure is as indicated by TLKM’s decision to raise pricing by 5-10% on driving the telco’s dominance in the fixed broadband space, a selected set of its subscribers. Link Net followed TLKM’s lead but smaller operators are aggressively expanding their and instituted similar price changes in its package offerings. coverage regions, with the hope of claiming dominance in Given the low penetration of fixed broadband services, selected regional clusters that are yet to be occupied by two providing enough room for several operators, and the heavy or more players. Link Net is the second biggest operator by investments required to provide regional coverage, we do not subscriber market share, with its network predominantly expect major price wars between operators.
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ASEAN Telecom Sector
TLKM dominates the fixed broadband market in Indonesia
High Speed Fixed Broadband Market Share - Indonesia
Link Net 83% 600,000 Households TLKM 11% 4.7m Households 3% MyRepublic 160,000 Households 4%
MNC Play Media 216,000 Households Assuming 8.4% High speed fixed broadband penetration in Indonesia. Estimated subscribers for MyRepublic and MNC Play Media. Ignoring subscribers of other operators such as BizNet, Indosat and XL Axiata Sources: Company Data, DBS Bank
Fixed broadband market getting crowded with the entry of XL Regulations and risks Axiata and ISAT. In 1H18, XL Axiata announced plans to invest US$ 500m to introduce triple-play service packages covering Regulator pushes hard for M&A in the industry. The Indonesian mobile/fixed broadband and Pay TV services. The telco also mobile market is dominated by five licensed network operators launched ‘XL Home POW!’ home internet broadband services accounting for ~99% of the market share: Telkomsel, ISAT, XL targeting areas with difficult internet access. Although the Axiata, Tri and Smartfren. BOLT! and Hinet are also present in service is still in pilot stages, XL Axiata’s management indicated the country, accounting for ~1% of the market between them. its ambition to target not only tier 1 but also tier 2 and tier 3 With many operators in competition, smaller players have cities. The service, with packages starting at Rp300,000 is attempted to scale up, sparking price wars and eroding ARPUs. currently online in selected regional clusters of tier 1 cities Besides the allocation of limited spectrum resources among a surrounding Jakarta such as Bogor, Depok and Bekasi. larger number of players has raised quality issues and restricted Assuming that XL Axiata sets aside ~US$100m for preliminary the ability of large scale incumbents to expand. Kemkominfo, network set-ups and bandwidth purchases, and spends the regulatory body of the telecom industry, has called on the ~US$400m on rolling out its broadband network, we estimate country’s mobile phone operators to consolidate through that XL Axiata could provide coverage to over 1.1m households, mergers and acquisitions. Kemkominfo has renewed the public based on our estimate of ~US$350 roll-out capex per home campaign to encourage M&A among the operators passed. ISAT also made its entry to the fixed broadband space encouraging the smaller operators without sufficient resources with the launch of GIG early this year, offering triple play for network investments to merge with one another or with services via fixed fibre networks. In relation to this, ISAT larger operators. Going forward, in the absence of any launched GIG 2 Go in April 2018, a prepaid Wi-Fi home fibre voluntary M&A among operators, Kemkominfo may seek to service available in main cities like Jakarta, Tengah, Yogyakarta, force smaller operators to consolidate with large-scale operators Timur and Banten and plans to expand to cities such as or re-allocate the spectrum assets of the smaller operators to Jabodetabek, Bandung, Surabaya and Semarang. ISAT’s large-scale incumbents. broadband-only packages start at Rp280,000 for 20Mbps speed.
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Thailand Outlook To record a mild topline growth in FY19F.Despite healthy Thailand’s mobile subscribers market share growth in data consumption, the sector is expected to see only a mild topline growth of c.2-3% in 2019, no thanks to the 50% 45.9% impact of the popular fixed-speed, unlimited-data plans offered 45.7% 45.6% 44.8% 44.8% 44.7% 44.6% 44.8% 44.7% 44.8% by operators in FY18, especially during the DTAC transition 45% period from concessionary model to licence model. The 40% migration of subscribers wasprompted by ADVANC and TRUE’s 35% 30.9% 31.3% 31.7% 27.2% 29.7% 30.3% 29.1% 28.4% 28.4% 29.0% attractive packages including low-priced, fixed-speed, unlimited 30% data plans. Nonetheless, we expect the value-driven offering for 23.5% 25% 27.2% 26.8% 26.2% 25.9% 25.7% 25.1% service quality upgrade in both mobile and fixed broadband 25.0% 24.4% 24.1% 20% services to be the key driver for FY19F. 15% 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Shifting from aggressive handset subsidies to value-for-money package offerings. The Thai telecommunication industry has DTAC ADVANC TRUE experienced less intense competition in FY18 in terms of Source: Companies, DBSVTH handset subsidies.However, the operators competed in terms of mobile data packages instead. The notable strategy adopted in Mobile/fixed broadband outlook for FY19 FY18 is the fixed-speed, unlimited data plan which was first launched by DTAC in its attempt to defend its market share Pressure on APRU uplift mainly due to the popularity of low-price during the transition period from concessionary model to a full unlimited-data plans. A stable to a slight downward trend in licence model in mid-September 2018. Other operators like average mobile ARPU is expected, as witnessed in the downward ADVANC and TRUE have caught up with DTAC’s strategy and movement of 3Q18 weighted average ARPU by subscriber base.As started to offer the same packagesat a lowprice starting from Thailand has a mobile penetration rate of over 130%, we expect Bt299 per month. In addition, ADVANC and TRUE also to see minimal increments in the number of subscribers over the competed head-to-head in selected areas in northeast Thailand next few years. Hence, the major revenue driver for the mobile with a more localised campaign, thus minimising the acquisition sector will be price increments rather than volume-driven factors. cost per subscriber. ADVANC had recorded a net gain in subscriber number in 2Q18, for the first time after five consecutive quarters of net losses. The Thailand mobile subscriber revenue market share (9M18) net addition momentum also carried into 3Q18, thanks to concerns over DTAC’s long-term service quality during the transition period from concessionary model in September 2018. For the first ninemonths of FY18, ADVANC and TRUE had recorded net subscriber gains of 0.6m and 1.5m respectively.
DTAC Though both operators’ subscriber base has expanded in 3Q18, TRUE 23% both had experienced a decline in an ARPU. ADVANC has suffered 29% from the impact of the low-priced fixed-speed, unlimited data plan. TRUE also offers a low-priced unlimited data plan and is at the same time gaining more pre-paid subscribers which generally yield lower-than-average ARPU per subscriber per month.
ADVANC 48%
Source: Companies, DBSVTH
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Weighted average mobile ARPU by no. of subscribers also ink a similar deal, we see potential downside risks to the forecast in terms of higher network costs.
250 Spectrum roadmap for 5G technology is unclear. According to the latest statement released by the National Broadcasting and 245 Telecommunications Commission (NBTC), a committee will be 240 set up in December 2018 to carry out the review and revision of auction guideline for spectrums that can be supported by 5G 235 technology. Given the upcoming general election expected in Bt/Sub/month 230 February 2019, we also expect to see some changes in NBTC
225 committee that may impact the spectrum roadmap for 5G technology. 220 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Companies, DBSVTH Fixed broadband market also facing downward pressure on APRU uplift. Given the intense competition, the fixed broadband DTAC to heat up competition in FY19F. Thanks to DTAC’s industry also faceddownward ARPU trend in 3Q18 as witnessed decision to acquire the 900MHz spectrum and incur a huge by TRUE and ADVANC. TRUE has introduced the plan for capital expenditure of Bt38bn, we expect DTAC to put customers to upgrade their subscriptions to asuperior package, togethera marketing campaign to regain market share lost while also offering a discount on the upfront entrance fee, during the concession’s expiry in last September. We expect therebypressuring TRUE’s ARPU. JAS, which is the second largest DTAC to aggressively leverage its expanding 2.3GHz network to fixed broadband service provider, also launched new FTTx package attract higher-ARPU subscribers. Nonetheless, we expect with 50/20 Mbps at a monthly subscription fee of Bt590 on par ADVANC and TRUE to take cautious steps in reacting to with its xDSL service (30/10Mbps). As JAS previously offered promotional campaigns rolled out by DTACas the deadline for smaller or larger packages for its FTTx service, therefore we expect the huge 900MHz licence payments is approaching in FY20F. the competition in this segment to be more intense in FY19F. Though DTAC may have more room to play in FY19F, as the timeline for huge cash outflow is further away, we expect DTAC Fixed broadband ARPU trend to be aggressive in its targeted segment of postpaid subscribers, as DTAC also needs to preserve cash for a huge 900MHz licence 665 payment in FY23F. 650
635 Settlement on telecom tower ownership. Post DTAC settlement on the dispute over the ownership of telecommunication towers 620 TRUE procured during the concession period with CAT Telecom in late 605 AIS September, TRUE had also announced during its 3Q18 results 590 JAS briefing that it is likely to reach an amicable agreement with Bt/user/month 575
CAT Telecom on the tower ownership issue. Therefore, we also 560 expect ADVANC to follow suit. As a result of DTAC’s settlement 545 plan with CAT Telecom, the former has also entered into an 530 agreement to lease telecom towers and other related equipment 1Q17anies, DBSVTH 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 from CAT Telecom. Under the scenario that TRUE and ADVANC
Source: Company, DBSVTH
Page 27 Industry Focus
ASEAN Telecom Sector
Malaysia Outlook Flattish mobile revenue growth in 2019. Amid the already high Hot issues penetration rate in Malaysia, we expect competition and data pricing to remain stable for the mobile segment in 2019. We Mobile Sector assume relatively stable market share for the incumbents, with Digi slightly ahead as it catches up against peers in the Mobile penetration rate in Malaysia postpaid segment. Meanwhile, service revenue for Maxis could Postpaid Prepaid Penetration rate (%) be tepid as its RAN sharing agreement with U Mobile will be 148.3 60.0 143.8 143.8 150 142.5 141.3 gradually terminated by 1H19. We think competitive pressures 135.5
(m) 140 50.0 131.2 from smaller players should lessen in 2019 due to company- 127.7 130 40.0 36.8 35.4 34.3 32.8 specific internal issues. For U Mobile, this refers to its network 34.0 35.2 32.1 29.6 120 30.0 subscriptions quality issues post the termination of network sharing with 110 Maxis, while TM will need to focus on its fixed broadband 20.0
mobile 100 10.2
of 9.6 11.2 business. 8.1 8.7 10.0 7.1 7.4 7.8 90 No. 0.0 80 Overall, data now contribute approximately 55-60% of mobile 2011 2012 2013 2014 2015 2016 2017 3Q18 operators’ revenue, which means diminishing impact from Sources: MCMC declining legacy voice and SMS over the next few years. We Prepaid to postpaid migration to continue. Amid the fall in believe it is possible for the mobile industry to return to a low- data pricing and introduction of affordable plans, we saw a growth period, as long as data pricing stays rational. general shift in subscriber preference towards postpaid, which now makes up about 26% of the market (compared to just Re-pricing in the fixed broadband segment. The fixed 18% a few years ago). In our view, subscribers have fewer broadband market is dominated by TM with close to 80% incentives to hold multiple SIMs now – this explains the market share. Despite relatively flattish fixed broadband declining mobile penetration rate as well as prepaid subscriber penetration rate at 35-37% of household over the last few base over the past few years. After three years of decline, years, TM was still able to grow its Internet segment revenue mobile penetration rate seems to have stabilised in 2018 based by 8-15% annually as more subscribers took up or switched to on the latest statistics from MCMC. high-speed fibre broadband plans (Unifi) with ahigher ARPU. However, we expect TM’s broadband revenue to decline by In prepaid, Digi still have the highest subscriber base (9.1m 5% in 2019, as the full-year impact from the recent reduction subs vs. 6.3-6.6m of peers), partly due to its larger market in fixed broadband prices starting 4Q18 is felt. This was share in the migrant workers segment. On revenue basis, the regulatory-driven by the implementation of MSAP (Mandatory gap is not that huge as Digi has a relatively lower prepaid Standard on Access Pricing), generally a short-term negative for ARPU. incumbent (i.e. TM), but could be potential gains for other players that can be competitive (i.e. TIME and Maxis). For postpaid, subscriber market share is finally converging close Fixed line broadband subscriptions in Malaysia (in ‘000) to equilibrium with the three incumbents having about 2.7m to 3.0m subs. However, there are still clear segmentations in subscriber profile between Maxis (high-end/corporate), Celcom (mid-end) and Digi (value-for-money).
A year-long of truce in data pricing. Based on our observation, baseline pricings and data quota for most popular plans have largely remained unchanged since 2017. There were only a few limited promotions during the August-September period, where free data was given in conjunction with National Day. On competition, incumbents have been disciplined and did not respond to some aggressive plans by the smaller players. Particularly, U Mobile introduced two unlimited plans at very Source: TM, Maxis
Page 28 Industry Focus
ASEAN Telecom Sector
low price points of RM30 (prepaid) and RM50 (postpaid), Market share gain for TIME and Maxis In the long term, we respectively, albeit with a speed limit of 5Mbps. expect TM’s retail market share for fixed broadband to gradually fall from the current dominant >80% to 50-60%, as Growth in data usage remains strong with 50-80% increase y- new and smaller players gain more market share with the aid o-y as at 3Q18. However, this did not help to lift ARPU for of regulations. Apart from lower wholesale prices, we believe mobile operators. Beside higher base quota, mobile operators the implementation of MSAP has also given more assurance to have also been giving data freebies (i.e. free or extra data for access seekers, as government policy is seen to be shifting social media, Youtube, video streaming, etc.) to subscribers, towards promoting more competition in the fixed broadband which remain prevalent till now. market. Maxis and TIME are key potential beneficiaries given that they already have existing fixed broadband offerings, while new players might take some time to come out with new Data usage per subscriber (GB/month) products. DiGi Maxis Celcom 14.0 Regulations and risks
12.0
10.0 Further liberalisation in fixed broadband. To drive growth in the digital economy, the Government is allocating RM1bn for 8.0 the National Fiberisation and Connectivity Plan (NFCP) under 6.0 Budget 2019. Compared to previous broadband projects such 4.0 as the HSBB and SUBB which were awarded solely to TM, the 2.0 NFCP will adopt an “open access” concept where new and
0.0 existing providers can participate in providing backhaul and 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 retail broadband services. For example, utilities provider TNB is Sources: Companies currently running a pilot project in rural Melaka to provide high-speed broadband services using its existing fibre-optics Fixed Broadband Industry network. Depending on the outcome, TNB might embark on a possible larger-scale NFCP participation nationwide, if it is TM – ARPU to decline in FY19-20 but could be compensated commercially viable to do so. by higher take-up rates. To meet the government’s agenda of cheaper broadband prices, TM has started to upgrade its Unifi For its longer-term target, the government hopes to achieve subscribers to faster speeds (8-10x) since Aug 2018 for free. broadband speed of 30Mbps in rural areas within five years. This is in line with our view that the MCMC’s next focus will Indirectly, this has led to a re-pricing in the fixed broadband likely be on improving service quality and expanding market, where Unifi plans are now among the cheapest in the broadband coverage. market. This has also forced Maxis and TIME to adjust their broadband packages as well. As a reseller of HSBB fibre Spectrum risks for mobile operators. MCMC has been quite broadband, Maxis is likely to have signed a new access hands off with regard to its policy on the mobile segment. This agreement with TM recently at a lower wholesale price, is mainly due to healthy competition in the mobile space, following the implementation of MSAP. where data pricing had declined quite sharply over the past few years. All in, we expect Unifi ARPU to fall by 10%/6% in FY19-20 as: 1) some of the low-tier subscribers would take-up the cheapest Nevertheless, mobile players are still relatively cautious given basic entry-level plan, and 2) mot all of the subscribers are the lack of updates on the delayed 700MHz spectrum auction. We view this as an important development for the industry, as technically able to upgrade to >100Mbps speed, while some this would set the tone and expectations for any future subscribers might downgrade. spectrum policy under the Pakatan Harapan-led (PH) government. To recap, past government policy on spectrum Overall, we think lower pricing coupled with more variety of had been very accommodative for the mobile sector (no broadband packages offered by TM and access seekers should auction, fixed allocation and fees). It remains to be seen accelerate the take-up rate for HSBB services, which is only at whether this will still be the case, in view of the current about 55% of premises passed, and only about 20% of government’s need to raise more revenue. household penetration as at 3Q18.
Page 29 Industry Focus
ASEAN Telecom Sector
Regional Trends
Regional data yields on a downward trajectory
Data pricing trends in Asia (USD per GB) 5.6
4.2 3.5 2.7 2.2 1.5 1.6 1.2 0.9 0.9 0.9 0.6 0.4 0.2 * 0.5
Singapore Malaysia India Indonesia Thailand*** 3Q16 3Q17 3Q18 All figures are in USD. Denotes the cost per GB *2Q18 figures for India, ***AIS
All figures are at constant US$ rates of Singapore Dollar – 1.37, Malaysian Ringgit – 4.14, Indian Rupee – 72.33, Indonesian Rupiah – 14,900, Thai Baht – 32.18 Source: Companies, DBS Bank
Data yields likely to remain under pressure over FY19.Singapore only marginally in Indonesia over FY19, in our view. Benign is likely to see yields edging down with the anticipated entry of competition in Malaysia should also only lead to marginal the fourth mobile operator, TPG, into the market in 2Q19. declines in data yields in our view. While any major pricing disruption from TPG is likely to be confined in the low-end segments, some pricing pressure is Growing data consumption on cheap data and accelerating likely to trickle down to the high-end segments, where smartphone adoption. Consumption of data in the region has incumbents largely focus on. Yields in Thailand are likely to accelerated, fuelled by cheap data, emergence of Over-the-Top edge down too, with the growing uptake of fixed speed, (OTT) video and music services and growing smartphone unlimited data plans popularised by DTAC and now offered by adoption. India and Indonesia recorded the highest growth in all three operators. We believe DTAC is likely to maintain an data consumption, driven by the proliferation of cheap Chinese aggressive pricing stance in FY19, as the operator looks to rake handsets and growing network expansions of operators. back the market share it has lost since 2016. India is also likely Thailand and Malaysia also witnessed steep improvements, torecord declines in yields albeit at a slower pace than 2018, as backed by the emergence of unlimited data plans and growing Reliance Jio’s continues to maintain an aggressive stance to popularity of OTT services. Singapore, however, recorded only reach its goal of ~50% market share. marginal improvements in data consumption as wireless data remains pricey and the ubiquity of fixed broadband, coupled However, we do not expect to see major disruptions to data with unlimited data, provides users with alternative wireless yields in Indonesia over FY19, as we believe yields may have connectivity such as Wi-Fi. We believe there is ample room for bottomed out in 1H18. Telkomsel and Indosat have already data consumption to grow by high double digits in the ASEAN raised data pricing in the country and we believe XL Axiata may region whosesmartphone adoption remains well below that of also do so over 4Q18/1Q19 in selected regions within and an average developed market. outside Java. Hence, yields are likely to remain stable or decline
Page 30 Industry Focus
ASEAN Telecom Sector
Accelerating data usage in the region
Data consumption trends in Asia - Average MB per User 11,100 10,100 9,221
6,395 5,500 5,900 4,200 3,946 3,400 3,020 2,786 2,960 1,456 847 730
Singapore Malaysia India Indonesia Thailand** 3Q16 3Q17 3Q18 **AIS, Data consumption in MBs Source: Companies, DBS Bank
Stable ARPU in the region despite competitive pressures. Singapore is likely to continue on a downward trajectory, with Average Revenue per User (ARPU) of regional operators have the anticipated entry of TPG in 2Q19. Though data largely remained stable over the past six years, despite growing consumption is growing healthily in Thailand, we expect to see competitive pressures and declines in the usage of legacy a stable to slight downward trend in average ARPU in FY19F, no services. ARPU of operators in Singapore and Indonesia have thanks to the competitive package launched during FY18F to been on a downward trajectory over the past 2-3 years, owing take market share from DTAC during the transition period out to growing competitive pressures in each market, while from the concessionary operating model. Malaysia is likely to Thailand and Malaysia have witnessed an upliftment of ARPU see stable or only marginal decline in ARPU over FY19, backed by more stable competitive dynamics. Going forward, supported by stable competition as internal pressures on smaller we expect the ARPU of Indonesian operators to trend upwards, operators discourage them from adhering to disruptive pricing driven by improvements in data yields and growing data usage, measures. offsetting any potential declines in legacy services. ARPU in
ARPU of regional operators have remained stable ARPU trends in the ASEAN US$ 33.2 33.3 35.0 31.7 31.7 31.9 30.7 30.0 25.0 20.0 15.0 12.0 11.3 11.4 11.2 11.1 11.6 11.8 10.0 7.9 7.7 6.9 7.2 7.5 7.5 7.8 5.0 2.2 2.1 2.1 2.4 2.4 2.2 2.0 - 2012 2013 2014 2015 2016 2017 9M 2018 Indonesia Malaysia Singapore Thailand
9M18 figures for Singapore cannot be used for comparative purposes due to changes in the classification of revenue under SFRS. All figures are at constant US$ rates of Indonesian Rupiah – 14,490, Malaysian Ringgit – 4.17, Singapore Dollar – 1.37, Thai Baht – 32.26 Source: Companies, DBS Bank
Page 31 Industry Focus
ASEAN Telecom Sector
Data revenues to comprise >60% service revenues for Malaysia enough to offset the impact of declining legacy revenues. and Indonesia by end0FY19. Contribution of data services to Contribution of data services to the topline in Malaysia and the industry topline in the region continue to edge up, backed Indonesia is likely to exceed this inflection point of 60% over by declining usage of legacy services and growing consumption FY19 in our view, as growing consumption of data services and of data. We estimate that Singapore and Thailand already derive stable or marginal declines in data yields continue to support over 60% of service revenue from data services, at which point data revenues. the contribution of growing data services becomes substantial
Data revenues to account for >60% of topline in Indonesia and Malaysia Data revenue as a % of service revenue
80% 70% 70% 70% 64% 66% 60% 59% 56% 50% 49% 50% 53% 40% 41% 44% 30% 36% 20% 10% 0% 9M16 9M17 9M18 Indonesia Malaysia Singapore Thailand Total data revenue as a percentage of service revenue of the operators mentioned below has been used to arrive at the country average. Indonesia – Telkomsel, XL Axiata and Indosat, Malaysia – Digi.com and Celcom, Singapore – Singtel , Thailand – DTAC and AIS, Indonesia Source: Companies, DBS Bank
Regional 4G capex cycle nearing the end. Singaporean Indonesia as at end-2017. Having reached the population operators have achieved almost 100% population coverage on coverage goals on 4G, Thai telcos are likely to trim their capex 4G networks, followed by Thailand, which boasts >90% 4G allocations going forward and shift their focus to improving population coverage although 4G speeds lag behind those of capacity in existing coverage regions in a bid to uplift the regional peers. The 4G deployments of Malaysian operators country’s poor download speeds. Capex spend by Indonesian have slowed down amid intense competition, resulting in operators on the other hand is likely to remain elevated as population coverage of only 77% as at end-2017. Delays in 4G Telkomsel and XL Axiata are aggressively expanding coverage in spectrum auctions and inherent difficulties in providing ex-Java regions, with Indosat planning to join the duo in 2019. coverage have resulted in only ~55% of population coverage in
Page 32 Industry Focus
ASEAN Telecom Sector
Regional 4G coverage to peak over 2019/20 Regional 4G population coverage
120%
100%
80%
60% 99% 90% 40% 77% 55% 20%
0% Singapore Thailand Malaysia* Indonesia * ‐ End 2017 Sources: Info-communications Media Development Authority of Singapore, Malaysian Communications and Multimedia Commission, Kemkominfo Indonesia, DTAC, AIS and TrueMove
Indonesian operators to see elevated capex ratios in the near term Regional Capex to Service Revenues
40% 36% 35% 30% 28% 30% 26% 25% 24% 19% 19% 20% 20% 16% 14% 15% 14% 15% 13% 12% 12% 12% 10% 5% 0% 2015 2016 2017 2018F
Singapore Malaysia Indonesia Thailand
Total capex spend by operators has been taken as a percentage of total service revenue to arrive at the country average. Singapore – Singtel, and StarHub, Indonesia – Telkomsel, XL Axiata and Indosat, Malaysia – Celcom, Maxis and Digi.com, Thailand – DTAC and AIS. Source: Companies, DBS Bank
Growing interest in network sharing among regional operators. network sharing. Estimates indicate that, the simplest form of StarHub rekindled its interest in network sharing in 3Q18 as the network sharing – Radio Access Network sharing, where operator looks for avenues to cut costs. StarHub hopes to reach operators share towers and base stations responsible for a commercial agreement on network sharing with an connecting individual devices to the network – could save as undisclosed MNO in Singapore by the end of 2018 with much as 30-40% in opex and ~20% in cash flow for operators. implementation taking place over 2019. Indosat and XL Axiata With growing competitive pressures across the region weighing also expressed an interest in network sharing in early 2016, but on operators’ cash flow and interests among regional operators the plans were put on hold, pending regulatory clarity on to deploy 5G(that would resultin a need for operators to closely
Page 33 Industry Focus ASEAN Telecom Sector
share network infrastructure, according to our research expected to be set up in Cyberjaya and Putrajaya over 2018/19. findings), we believe more operators in the region would look In Thailand, AIS and TrueMove are competing to be the first for network-sharing arrangements over the next 2-3 years. mover in 5G readiness, and are conducting preliminary testing using the 26GHz spectrum range allocated by the regulator for Singapore and Malaysia trailing 5G but deployment could be 2- 5G testing. Indonesian operators have also shown a keen 3 years away. Singaporean operators are leading the 5G charge interest in jumping on the 5G bandwagon, with Telkomsel in the region, with Singtel and StarHub partnering with Ericsson conducting limited 5G trials during the Asian Games held in the and Nokia, respectively, to conduct trials. Nokia and StarHub country in 2018. However, despite the ongoing hype, the completed their first outdoor pilot of 5G New Radio on the commercial launch of 5G networks is likely to be 2-3 years 3.5GHz frequency band in Singapore in November 2018, while away, given the limited use-cases for 5G at present and the Singtel plans to deploy a pilot 5G network by the end of 2018 very-high capex involved in deploying 5G networks. in one-north, the country’s business and IT hub. Malaysian operators have also commenced 5G trials and trial networks are
Regional Peers Valuation Mkt Price CAGR Company Cap S$ 18-20 PE (x) Dividend Yield (%) P/BV EV /EBITDA (US$m) 28-Dec (%) 18E 19F 20F 18E 19F 20F 18E 19F 18E 19F 20F
China / Hong Kong SHCOMP Index 2,494 China Mobile 193,234 73.90 2 11.8 11.5 11.3 4.1% 4.2% 4.3% 1.3x 1.2x 2.8x 2.6x 2.4x China Telecom 7,053 3.98 10 14.4 13.1 11.9 2.9% 3.2% 3.5% 0.8x 0.8x 3.2x 2.9x 2.6x China Unicom 31,768 8.13 51 24.8 16.5 10.9 1.4% 2.1% 3.2% 0.7x 0.7x 2.3x 1.7x 1.1x Smartone Telecom 1,250 8.73 10 15.8 14.8 12.9 4.7% 5.0% 5.7% 2.0x 2.0x 4.9x 4.4x 4.0x Hutchison Telecom 1,785 2.90 -2 37.0 39.1 38.2 2.0% 1.9% 2.0% 0.9x 0.9x 3.2x 3.1x 2.9x HKT Trust 10,888 11.26 3 17.3 16.9 16.3 6.0% 6.1% 6.2% 2.2x 2.2x 9.3x 9.0x 8.7x
Malay sia KLCI Index 1,692 Digi.Com 8,386 4.48 2 23.2 23.0 22.1 4.3% 4.3% 4.5% 67.2x 67.2x 12.6x 12.4x 12.1x Maxis Bhd 10,275 5.46 6 21.4 20.8 19.2 3.7% 4.0% 4.0% 5.8x 5.5x 12.0x 11.7x 11.1x Telekom 2,398 2.65 1 14.9 17.5 14.5 3.3% 2.9% 3.4% 1.3x 1.2x 3.8x 4.3x 4.0x
Singapore STI Index 3,053 NetLink NBN Trust 2,168 0.760 16 38.3 33.5 28.4 6.5% 6.7% 7.0% 1.0x 1.0x 13.5x 12.6x nm Singtel 35,147 2.940 8 15.9 15.2 13.6 6.0% 6.0% 6.0% 1.6x 1.6x 8.6x 8.3x nm Starhub 2,230 1.760 3 13.8 14.1 12.8 9.1% 6.0% 6.2% 35.7x 25.9x 6.7x 7.1x 6.7x
Thailand SET Index 1,564 Advanced Info Service 15,754 172.50 8 17.1 15.7 14.6 4.1% 4.5% 4.8% 8.7x 7.3x 8.2x 7.4x 7.3x Digital Telecommunications 4,263 14.40 -2 13.2 13.9 13.8 7.1% 7.2% 7.3% 0.6x 0.6x 13.9x 14.4x 14.3x Total Access Comm. 3,146 43.25 75 49.0 15.6 16.0 1.2% 3.2% 3.1% 3.2x 2.6x 4.5x 5.2x 4.8x
Indonesia J CI Index 6,194 Indosat 631 1,685 nm nm nm nm 0.0% 0.0% 0.0% 0.8x 1.0x 4.6x 4.4x 4.2x PT Link Net Tbk 1,027 4,900 12 12.9 11.3 10.2 3.9% 4.4% 4.9% 2.8x 2.4x 6.1x 5.3x 4.7x PT Telekom 25,588 3,750 6 18.4 17.0 16.4 4.1% 4.4% 4.6% 4.1x 4.1x 6.6x 6.2x 5.9x XL Axiata 1,458 1,980 43 34.0 23.0 16.8 1.8% 2.6% 3.6% 1.0x 0.9x 4.6x 4.0x 3.5x PT Sarana Menara 2,425 690 5 14.2 13.7 13.0 3.4% 4.0% 4.2% 4.3x 3.8x 8.6x 7.7x 7.4x Tower Bersama 1,124 3,600 9 21.6 20.2 18.2 4.6% 4.8% 4.8% 5.1x 5.1x 9.9x 9.7x 9.3x
21.9 18.6 17.1 7.1 6.9 6.3 Singtel & NetLink 19&20 forecast; Source: DBS Bank; DBS Vickers; AllianceDBS
Page 34 Industry Focus ASEAN Telecom Sector
DBS Bank, DBSVTH, AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 2 Jan 2019 08:20:37(SGT) Dissemination Date: 2 Jan 2019 08:38:07(SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Page 35 Industry Focus ASEAN Telecom Sector
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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or 2 his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or their subsidiaries and/or other affiliates have proprietary positions in China Mobile, China Telecom, China Unicom, Hutchison Telecom, NetLink NBN Trust, Singtel, StarHub, Advanced Info Service, Total Access Communication, recommended in this report as of 30 Nov 2018. 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in NetLink NBN Trust, recommended in this report as of 30 Nov 2018. 4. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common securities of NetLink NBN Trust, as of 30 Nov 2018.
Compensation for investment banking services: 5. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Singtel, Indosat, XL Axiata, Tower Bersama Infrastructure, as of 30 Nov 2018. 6. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from XL Axiata, as of 30 Nov 2018. 7. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Indosat, XL Axiata, in the past 12 months, as of 30 Nov 2018.
1An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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8. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Directorship/trustee interests: 9. Nihal Vijaya Devadas Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of StarHub as of 30 Sep 2018.
Disclosure of previous investment recommendation produced: 10. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946.
DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
This report has been prepared by an entity(ies) which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
For any query regarding the materials herein, please contact Carol Wu (Reg No. AH8283) at [email protected]
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
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Industry Focus ASEAN Telecom Sector
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, International Gate Precinct Building 5, PO Box 506538, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated Financial by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the Centre DFSA rulebook) and no other person may act upon it.
United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as Emirates defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
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United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 11th Floor The Center 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 99 Queen’s Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E
THAILAND INDONESIA DBS Vickers Securities (Thailand) Co Ltd PT DBS Vickers Sekuritas (Indonesia) Contact: Chanpen Sirithanarattanakul Contact: Maynard Priajaya Arif 989 Siam Piwat Tower Building, DBS Bank Tower 9th, 14th-15th Floor Ciputra World 1, 32/F Rama 1 Road, Pathumwan, Jl. Prof. Dr. Satrio Kav. 3-5 Bangkok Thailand 10330 Jakarta 12940, Indonesia Tel. 66 2 857 7831 Tel: 62 21 3003 4900 Fax: 66 2 658 1269 Fax: 6221 3003 4943 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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