Indonesia Industry Focus Indonesia Telecom Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 7 Oct 2019 JCI : 6,061.30 Exciting pair trade opportunity Analyst • XL Axiata has a 18-24-month window of opportunity Sachin MITTAL +65 66823699 to gain revenue share before Indosat catches up [email protected] • Expect rational competition with focus on profitability in Java; network expansion outside Java will come with higher losses for Indosat, Hutch and Smartfren STOCKS 12-mth Performance • BUY XL Axiata – SELL Telkom Indonesia has generated Price Mkt Cap Target (%) ~17% returns since 12 July 2019 and presents an Rp US$m Price (Rp) 3 mth 12 mth Rating opportunity for another ~40% returns potentially Telekomunikasi 18-24 months window of opportunity for XL Axiata Indonesia 4,190 29,367 3,610 (2.1) 16.4 FULLY VALUED (EXCL) to gain revenue share from Telkomsel. Network Indosat 2,810 1,080 2,640 3.7 0.4 HOLD charts from nPerf shows a big improvement in Indosat’s (ISAT) XL Axiata 3,350 2,533 4,180 15.5 17.1 BUY Source: DBS Bank, Bloomberg Finance L.P. 4G network in Java over the last 12 months. ISAT is in the first Closing price as of 4 Oct 2019 year of the 3-year high-capex cycle and will take another 18-24 months to catch up with EXCL in network coverage and TLKM’s 35% premium to EXCL’s valuation is unsustainable quality. This presents a window of opportunity for EXCL to gain revenue share outside Java from Telkomsel. 12-month Forward EV/EBITDA Expect rational competition in Java to continue as FY19F-21F 5.7% 8.0% 6.2% operators expand ex-Java network. ISAT’s improved 4G EBITDA CAGR network, coupled with lower-priced unlimited social media plans, is seeing some success. However, ISAT is likely to up-sell 9.0 higher-end price plans in Java going forward to avoid competitive reaction from others as it needs to be wary of its 5.9 5.5 rising losses from ex-Java region over the next three years. EXCL, on the other hand, will see narrower losses from the ex- Java region due to its early mover advantage. TLKM* EXCL ISAT TLKM* - EV/EBITDA adjusted for Singtel's 35% stake in Telkomsel Potential merger between EXCL-Hutch faces many hurdles. Axiata Group is unlikely to relinquish the majority control of EXCL (~66% stake currently) as EXCL is expected to EXCL should trade near +1SD given buoyant outlook reap the rewards of its high-capex over the last 3-years. EXCL may not be keen to acquire Hutch either after its bitter EXCL - 12 Month Forward EV/ EBITDA (X) experience with Axis a few years back. On top of this, there are 8.1 regulatory challenges regarding spectrum acquisition. 7.6 +2sd: 7.5x 7.1 +1sd: 6.8x BUY EXCL – Sell Telkom Indonesia (TLKM) has generated 6.6 17% returns since we initiated the idea on 12 July 2019. 6.1 Avg: 6x EXCL is likely to trade near +1SD 12-month forward EV/EBITDA 5.6 -1sd: 5.3x of 6.8x vs. 5.9x currently, backed by continued ex-Java revenue 5.1 share gains from Telkomsel and an improving margin profile in 4.6 -2sd: 4.6x ex-Java region. TLKM’s 35% premium to EXCL at 9x forward 4.1 EV/EBITDA vs. its own 8.6x historical average is hard to justify Oct-15 Oct-16 Oct-17 Oct-18 given its slower growth prospects. We resume coverage of Source: DBS Bank ISAT with HOLD rating ed: CK/ sa: MA , PY, CS Industry Focus Indonesia Telecom Sector ISAT catching up on 4G network coverage years, with Rp10tr expected to be spent annually. Our channel checks with the tower operators also indicate an improvement ISAT’s network shows a marked improvement from 2018. in order flows from ISAT for ex-Java coverage, with ISAT Network data collected from the network data aggregator, accounting for ~60% of the tower lease order book of PT “nPerf” shows a marked improvement in ISAT’s 4G network Sarana Menara Nusantara, the largest tower operator in in Java from 2018, with a large part of the island now Indonesia. However, we trust the data from OpenSignal more enjoying 4G+ coverage. Data collected from another provider due to its higher credibility, which shows that EXCL is still “OpenSignal”, shows that while coverage is expanding, ISAT’s ahead of ISAT in its network coverage and quality in both Java network still remains weaker than EXCL’s. ISAT has set aside and outside Java. US$2bn (~Rp30tr) for network expansion over the next three Network coverage of ISAT shows the biggest improvement over 2019 (2G in blue, 3G in green, 4G in orange, 4G+ in red) ISAT – Network coverage in Java (October 2018) ISAT – Network coverage in Java (October 2019) EXCL – Network coverage in Java (October 2019) Source: nPerf for all three charts Page 2 Industry Focus Indonesia Telecom Sector At the current phase of expansion and capex, we estimate that and EXCL. However, we do point out that ISAT remains highly it may take ~18-24 months for ISAT to match the coverage levered with a net debt to 1H19 annualised EBITDA of 2.4x (vs. and quality of EXCL in ex-Java territories, along with 1.2x at EXCL and a debt covenant of 4x) and has a relatively establishment of adequate sales and marketing channels. This short average debt tenor of three years. As investments outside presents a window of opportunity for EXCL to keep gaining Java are likely to show higher losses over the next 2-3 years, market share from Telkomsel in ex-Java territories before the ISAT needs to show profits from the Java region. entry of ISAT in to cities amid the presence of both Telkomsel OpenSignal charts shows that EXCL’s 4G network is superior to EXCL in Java and outside Java Source: OpenSignal ISAT maintains an aggressive stance in Java after recent network poor network quality and download speeds of ISAT’s 4G upgrades. The comparison of prepaid packages between ISAT network. However, with the recent network upgrades, ISAT’s and EXCL indicates that ISAT is maintaining an aggressive stance plans seem to be gaining good traction given its cheaper pricing in Java, promoting its packages that entitle users to unlimited and very attractive offering of unlimited data for popular social data on social media and video streaming applications. The plans media applications. launched in 2018 failed to gain traction immediately owing to Page 3 Industry Focus Indonesia Telecom Sector ISAT’s pricing remains aggressive vs. EXCL on the data front Indosat Unlimited data plans Price Rp25k* Rp40k Rp50k Rp75k Rp100k Validity 30 days 30 days 30 days 30 days 30 days 1GB with data 2GB with data 3GB with data 7GB with data 10GB with rollover rollover rollover rollover data rollover Unrestricted Data A range of social media (Whatsapp, Facebook and Instagram) and streaming apps (YouTube Restricted Data and Spotify) have unlimited data quota Rp25K package is not entitled to unlimited quota on YouTube and Instagram EXCL New XTRA Combo Plans Price Rp59k Rp89k Rp129k Rp179k Validity 30 days Unrestricted Data 5GB 10GB 15GB 20GB Restricted Data (YouTube) 5GB 10GB 15GB 20GB Any Operator Talk Time (Mins) 20 30 40 60 * Unlimited YouTube from 1AM to 6AM Source: Companies, DBS Bank EXCL likely to respond to ISAT if ISAT continues to rake in EXCL’s subscriber additions in Java, which may prompt EXCL market share in 2Q-3Q19F. ISAT has recovered from the pre- to respond to ISAT’s unlimited offerings. paid SIM registration exercise, posting its first quarterly gain of subscribers since 4Q17 over 2Q19. ISAT has also managed to However, we do not expect to see a major escalation in gain ~0.7% market share since 4Q18 – the bulk of which we competition between the operators as ISAT wants to expand its believe stemmed from Telkomsel as the carrier lost ~1.9% coverage in ex-Java regions which will come with higher losses revenue market share over the same period. Aggressive over the next 2-3 years. Hence, ISAT would look for higher pricing and an improving network for ISAT pose threats to profits in the more established Java territory to fend off losses from ex-Java region. Page 4 Industry Focus Indonesia Telecom Sector EXCL & ISAT have gained revenue share over the last three quarters – raised by 1.4% & 1.2% respectively Revenue market share 80% 68.1% 70.3% 69.8% 70.7% 69.9% 68.4% 68.0% 60% 40% 15.4% 15.5% 16.0% 15.4% 15.7% 16.6% 16.8% 20% 0% 16.6% 14.2% 14.2% 13.9% 14.4% 15.0% 15.1% 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 Telkomsel XL Axiata Indosat Source: Companies, DBS Bank Indosat’s capex to revenue ratio will remain elevated over 2019-21F while others are likely to see much lower ratio Indonesia - Capex to Revenue 37% 34% 30% 30% 27% 27% 28% 25% 25% 24% 23% 22% Indosat Telekomunikasi Indonesia XL Axiata FY18 FY19F FY20F FY21F Source: Companies, DBS Bank Data revenue growth to remain stellar in Indonesia in 2019/20. data for their data needs, and 2) improving penetration of data Indonesia is likely to witness double-digit expansion in data subscribers, particularly from ex-Java territories. With competition revenues over 2020, driven by rapid growth in the usage of data set to remain intense, we believe there would be more room for services with stabilising data yields.