27 May 2015 Asia Pacific/Indonesia Equity Research Distributors
Tiphone Mobile Indonesia
(TELE.JK) Rating OUTPERFORM* Price (25 May 15, Rp) 970.00 INITIATION
Target price (Rp) 1,250.00¹ Upside/downside (%) 28.9 Mkt cap (Rp bn) 6,905.86 (US$0.52 bn) Pre-paid growth Enterprise value (Rp bn) 8,709 Number of shares (mn) 7,119.45 ■ Focus will remain on the voucher business. We initiate coverage on Tiphone Free float (%) 22.1 Mobile Indonesia (TELE) with an OUTPERFORM rating and Rp1,250 target 52-week price range 1,040.0-775.0 ADTO - 6M (US$ mn) 0.33 price, implying 29% potential upside. TELE is the largest prepaid mobile phone
*Stock ratings are relative to the coverage universe in each voucher distributor in Indonesia. Vouchers contribute 60% to its revenue, with analyst's or each team's respective sector. ¹Target price is for 12 months. mobile phone distribution being its complementary business. Given the more resilient nature of the voucher business, going forward the company aims at Research Analyst increasing the contribution from vouchers to 80% of revenue. Priscilla Tjitra 62 21 2553 7906 ■ Exciting potential synergies with Telkom. TELE primarily distributes [email protected] Telkomsel's SIM pack and prepaid cards. Since Sep-14, PT Telkom (parent company of Telkomsel) has been a shareholder of TELE, owning a 25% stake in the company. Following the acquisition, we believe Telkomsel will assign more distribution clusters to TELE. We also expect other favourable synergies for TELE, such as higher mobile phone sales from Telkomsel bundling. ■ It is a market share gain story. We expect TELE's revenue to witness a 25% CAGR over 2014-17, largely coming from a gradual increase in Telkomsel's distribution market share. We assume its market share would increase from 12% in 2014 to 30% in the next three years. The market share gain will boost its net profit too. ■ End-2016 target price of Rp1,250. Our target price of Rp1,250 is derived based on DCF, implying 19x FY16E P/E, which is at a 12% discount to the weighted-average of Indonesian consumer and telco names, and a 38% discount based on PEG. Key risks to our call include (1) delay of TELE's Telkomsel market share gain, (2) high churn rates of Indonesian mobile subscribers, (3) reliance on third-party principals, (4) rising salaries, (5) intense competition, (6) industry regulation, and (7) macro environment.
Share price performance Financial and valuation metrics
Year 12/14A 12/15E 12/16E 12/17E Price (LHS) Rebased Rel (RHS) Revenue (Rp bn) 14,589.7 19,332.7 23,581.8 28,437.2 1200 160 1000 EBITDA (Rp bn) 547.5 745.4 885.0 1,056.1 800 110 EBIT (Rp bn) 532.5 718.3 855.1 1,024.3 600 400 60 Net profit (Rp bn) 304.5 390.0 477.0 600.7 EPS (CS adj.) (Rp) 43.28 53.96 66.00 83.11 Change from previous EPS (%) n.a. Consensus EPS (Rp) n.a. 52.0 61.5 72.0 The price relative chart measures performance against the JSX EPS growth (%) -19.7 24.7 22.3 25.9 COMPOSITE INDEX which closed at 5288.36 on 25/05/15 P/E (x) 22.4 18.0 14.7 11.7 On 25/05/15 the spot exchange rate was Rp13183./US$1 Dividend yield (%) 0 1.0 1.4 1.7 EV/EBITDA (x) 14.6 11.7 9.7 8.1 Performance over 1M 3M 12M P/B (x) 2.7 2.5 2.2 1.9 Absolute (%) 0.5 -0.5 16.9 ROE (%) 15.7 14.7 15.9 17.5
Relative (%) 3.2 1.9 10.5
Net debt/equity (%) 44.6 64.0 53.9 44.3 Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
27 May 2015 Focus charts and table
Figure 1: Voucher distribution is TELE's main focus and Figure 2: TELE distributes Telkomsel prepaid vouchers mobile phone is a complementary business Telkom owns a 25% stake in TELE 30,000
25,000 PT Telkom Indonesia (TLKM) 20,000 75%
15,000 71%
Rp bn Rp PT Telekomunikasi PT PINS Indonesia 66% Selular (Telkomsel) (PINS) Other subsidiaries 10,000 60% 65.00% 100%
77% 5,000 90% 95% 93% TELE distributes PT Tiphone Mobile Indonesia (TELE) - Telkomsel vouchers 2010 2011 2012 2013 2014 2015E 2016E 2017E 24.94%
Mobile phone Voucher Others
Source: Company data, Credit Suisse estimates Source: Company data
Figure 3: Potentially Telkomsel will award more cluster Figure 4: We assume TELE's market share would gradually distribution to TELE from its non-performing dealers rise from 12% last year to 30% in the next three years 40% assuming TELE gets awarded more cluster 35% Tiphone Mobile TELE acquired by Telkomsel... 30% 12% Simpatindo in Jan-15 30% 28% CV Akar Daya Telkom became TELE's shareholder 24% 10% 25% in Sep-14 20% Simpatindo Other players 20% 53% 8% 15% Koperasi 11% 12% 12% Telkomsel 9% 10% 10% Potential to 6% shift to TELE Selular Shop Global 6% distribution Telkomselin share market TELE's 5% Teleshop 5% 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 5: Market share gain should boost its net profit Figure 6: We have an end-2016 TP of Rp1,250 on TELE 700 50%
45% Weighted Target Value/share 44% Discount 600 average multiple (Rp) 25% CAGR 40% 14-17E 500 35% 33% 34% 30% P/E 15% 16.7 14.2 937 400 28% 26%25% PEG 15% 0.9 0.8 1,340 Rp bn Rp 300 22% 20% DCF 1,250
200 15% 10% 100 5% 3% - 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates
Tiphone Mobile Indonesia (TELE.JK) 2 27 May 2015 Pre-paid growth We initiate coverage on Tiphone Mobile Indonesia (TELE) with an OUTPERFORM rating Initiating coverage on TELE and a Rp1,250 TP, implying 19x FY16E P/E and 29% potential upside. On a PEG basis, with an OUTPERFORM the stock is trading at a 40% discount to the weighted-average of Indonesian consumer rating and a Rp1,250 target staples, discretionary and telco names. price Voucher business as its main focus TELE is Indonesia’s largest prepaid mobile phone voucher distributor. The company primarily distributes Telkomsel's SIM packs and prepaid cards. Prepaid mobile voucher is the main focus of TELE's business (60% of revenue), and mobile phone distribution is a TELE is the largest prepaid complementary business. Due to the more stable growth and margins from the voucher mobile phone voucher business, TELE plans to focus on increasing the contribution of its voucher business to distributor in Indonesia 80% of revenue in the coming years. Following Telkom's 25% stake acquisition in TELE in Sep-14, we see favourable synergies emerging for both the companies. We believe TELE will be assigned more distribution clusters from Telkomsel. It is a market share gain story… We estimate that TELE's revenues will witness a 25% CAGR over 2014-17 on the back of Following it joining force Telkomsel voucher distribution market share increase. We assume a gradual increase in with Telkom, we expect TELE's market share from 12% in 2014 to 30% in the next three years, as Telkomsel shifts TELE's market share in the distribution from its non-performing dealers to TELE. We also expect stable gross Telkomsel's voucher margins from voucher distribution, and a slight improvement in margins for the handset distribution to increase and business compared to 2014, which was dragged down by Samsung's oversupply be its growth driver problems. We expect its total debt to remain stable (at Rp2.3 tn); thus we assume stable interest costs. TELE's core earnings should post a 25% CAGR over 2014-17. Initiating with OUTPERFORM rating and Rp1,250 TP We evaluate three valuation methodologies—DCF, P/E, and PEG—to value TELE. Our DCF- derived target price of Rp1,250 falls in the middle of the range between our P/E- and PEG- Our target price of Rp1,250 based fair values. Using P/E, which does not consider the future growth from the company's is derived based on DCF expansion, we arrive at a value of Rp937/share, while based on PEG, we get Rp1,340/share. methodology We assume a 10% WACC, applying an 8% risk-free rate, 0.8 beta and a 5.0% risk premium. We assume a 12% cost of debt, and 5% terminal value growth, on our DCF. Investment risks We assume TELE would gain market share in the next few years, with Telkomsel likely shifting its distribution business from non-performing dealers to TELE—we see a risk to The key risk to our view is a our forecasts, if this is delayed or cancelled. Other risks associated with TELE's business: delay in Telkomsel's market (1) changes in mobile phone technologies, (2) high churn rates of Indonesian mobile share gain compared to our phone subscribers, (3) reliance on third-party principals for products, (4) rise in wages and forecast salaries, (5) new players entering the market and intense competition, (6) unfavourable industry regulation, and (7) Indonesia's macroeconomic environment.
Tiphone Mobile Indonesia (TELE.JK) 3 27 May 2015
Tiphone Mobile Indonesia TELE.JK / TELE IJ Price (25 May 15): Rp970.00, Rating: OUTPERFORM, Target Price: Rp1,250.00, Analyst: Priscilla Tjitra Target price scenario Key earnings drivers 12/14A 12/15E 12/16E 12/17E Scenario TP %Up/Dwn Assumptions Telkomsel dist. mkt share (%) 11.9 20.0 24.0 28.0 Assume market share at 30% in 2016, and a 5% Telkomsel sales growth (%) 10.1 10.0 8.5 8.5 Upside 1,490.00 53.61 increase p.a. Inflation (%) 7.20 5.20 5.00 5.00 GDP growth (%) 5.00 5.10 5.70 6.00 Assume Telkomsel market share is up from 20% to Central case 1,250.00 28.87 30% in 2018. Downside 880.00 (9.28) Assume Telkomsel market share stays at 20%.
Income statement (Rp bn) 12/14A 12/15E 12/16E 12/17E Per share data 12/14A 12/15E 12/16E 12/17E Sales revenue 14,590 19,333 23,582 28,437 Shares (wtd avg.) (mn) 7,036 7,227 7,227 7,227 Cost of goods sold 13,771 18,227 22,243 26,826 EPS (Credit Suisse) (Rp) 43.3 54.0 66.0 83.1 SG&A 311.9 418.3 505.0 607.8 DPS (Rp) — 10.0 13.5 16.5 Other operating exp./(inc.) (40.2) (58.3) (51.3) (53.2) BVPS (Rp) 355 390 442 509 EBITDA 548 745 885 1,056 Operating CFPS (Rp) (138) (36) 29 33 Depreciation & amortisation 15.0 27.1 29.9 31.8 Key ratios and valuation 12/14A 12/15E 12/16E 12/17E EBIT 533 718 855 1,024 Growth(%) Net interest expense/(inc.) 120.7 191.0 210.2 212.3 Sales revenue 39.2 32.5 22.0 20.6 Non-operating inc./(exp.) — — — — EBIT 18.7 34.9 19.1 19.8 Associates/JV — — — — Net profit 3.3 28.1 22.3 25.9 Recurring PBT 411.8 527.3 644.9 812.1 EPS (19.7) 24.7 22.3 25.9 Exceptionals/extraordinaries — — — — Margins (%) Taxes 107.1 137.2 167.8 211.3 EBITDA 3.75 3.86 3.75 3.71 Profit after tax 304.6 390.1 477.1 600.8 EBIT 3.65 3.72 3.63 3.60 Other after tax income — — — — Pre-tax profit 2.82 2.73 2.73 2.86 Minority interests 0.11 0.11 0.11 0.11 Net profit 2.09 2.02 2.02 2.11 Preferred dividends — — — — Valuation metrics (x) Reported net profit 304.5 390.0 477.0 600.7 P/E 22.4 18.0 14.7 11.7 Analyst adjustments — — — — P/B 2.73 2.49 2.19 1.91 Net profit (Credit Suisse) 304.5 390.0 477.0 600.7 Dividend yield (%) — 1.03 1.39 1.70 Cash flow (Rp bn) 12/14A 12/15E 12/16E 12/17E P/CF (7.0) (27.3) 33.5 29.4 EBIT 533 718 855 1,024 EV/sales 0.55 0.45 0.37 0.30 Net interest (120.7) (191.0) (210.2) (212.3) EV/EBITDA 14.6 11.7 9.7 8.1 Tax paid (107.1) (137.2) (167.8) (211.3) EV/EBIT 15.1 12.1 10.1 8.3 Working capital (1,302) (674) (298) (394) ROE analysis (%) Other cash & non-cash items 29.0 27.1 29.9 31.8 ROE 15.7 14.7 15.9 17.5 Operating cash flow (968.7) (256.6) 209.1 238.5 ROIC 13.2 12.9 13.3 14.8 Capex (5.8) (80.0) (20.0) (20.0) Asset turnover (x) 2.91 3.21 3.58 3.80 Free cash flow to the firm (974.5) (336.6) 189.1 218.5 Interest burden (x) 0.77 0.73 0.75 0.79 Disposals of fixed assets — — — — Tax burden (x) 0.74 0.74 0.74 0.74 Acquisitions — (400.0) — — Financial leverage (x) 2.01 2.14 2.06 2.03 Divestments — — — — Credit ratios Associate investments — — — — Net debt/equity (%) 44.6 64.0 53.9 44.3 Other investment/(outflows) 35.8 109.4 (21.5) (18.2) Net debt/EBITDA (x) 2.04 2.42 1.95 1.54 Investing cash flow 30.0 (370.6) (41.5) (38.2) Interest cover (x) 4.41 3.76 4.07 4.83 Equity raised 807.0 — — — Source: Company data, Thomson Reuters, Credit Suisse estimates Dividends paid — (72.3) (97.5) (119.3) Net borrowings 276.5 575.6 — 184.2 12MF P/E multiple Other financing cash flow 0.2 11.8 10.5 12.0 20 Financing cash flow 1,084 515 (87) 77 18 Total cash flow 145.0 (112.1) 80.7 277.3 16 Adjustments — — — — 14 Net change in cash 145.0 (112.1) 80.7 277.3 12 Balance sheet (Rp bn) 12/14A 12/15E 12/16E 12/17E 10 8 Cash & cash equivalents 637.7 525.6 606.2 883.4 6 Current receivables 2,026 2,563 2,862 3,296 4 Inventories 949 1,199 1,341 1,470 2 Other current assets 828.9 820.6 855.3 889.6 0 Current assets 4,441 5,108 5,664 6,538 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Property, plant & equip. 144.7 197.6 187.7 175.9 Investments — — — — Intangibles 202.9 515.9 515.9 515.9 12MF P/B multiple Other non-current assets 227.4 205.0 226.5 244.7 Total assets 5,016 6,027 6,594 7,475 4.0 Accounts payable 673 749 914 1,102 3.5 Short-term debt 1,736 2,312 2,312 2,312 3.0 Current provisions 28.5 58.0 70.7 85.3 2.5 Other current liabilities 27.8 27.8 27.8 27.8 2.0 Current liabilities 2,466 3,147 3,324 3,527 Long-term debt 16.6 16.6 16.6 200.8 1.5 Non-current provisions — — — — 1.0 Other non-current liab. 36.2 48.0 58.5 70.5 0.5 Total liabilities 2,518 3,211 3,400 3,799 0.0 Shareholders' equity 2,498 2,816 3,196 3,677 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Minority interests 0.76 0.76 0.76 0.76 Source: IBES Total liabilities & equity 5,018 6,028 6,596 7,477
Tiphone Mobile Indonesia (TELE.JK) 4 27 May 2015 Voucher business as its main focus Tiphone Mobile Indonesia (TELE) is the country's largest prepaid mobile phone voucher TELE's business involves distributor. The company distributes Telkomsel's SIM packs and prepaid cards. Telkomsel the distribution of Telkomsel is a subsidiary of PT Telkom Indonesia (TLKM). Since Sep-14, Telkom has been a prepaid vouchers shareholder of TELE, owning a 25% stake in the company.
Figure 7: Telkom owns TELE through PINS
PT Telkom Indonesia (TLKM)
PT Telekomunikasi PT PINS Indonesia Selular (Telkomsel) (PINS) Other subsidiaries 65.00% 100%
TELE distributes PT Tiphone Mobile Telkomsel vouchers Indonesia (TELE) 24.94%
Source: Company data Apart from its voucher distribution business, Tiphone is also a mobile phone distributor TELE also has mobile and retailer through its ‘Telesindo Shop’. As of Dec-2014, TELE had 94 distribution phone distributorship as a branches with over 180,000 active resellers, and was operating 436 retail stores in 15 complementary business provinces in Indonesia. TELE distributes handsets of global brands such as Samsung, LG, Blackberry, Sony, iPhone, Huawei and HTC, in addition to its own brand, Tiphone. The voucher business contributed 60% to TELE’s net sales in 2014, with the remainder coming from the mobile handset distribution business (37%) and others. The company perceives voucher as a more stable business than handset distribution, and thus aims at increasing the contribution of its voucher business to 80% of revenue in the coming years.
Figure 8: Vouchers contributed 60% to TELE's revenue in 2014 Figure 9: …but it targets to increase this to 80% 100% Commission Repairment 3% 90% 0% 80% 70% 59% 67% 60% 77% 75% 79% 93% 90% 50% 95% Mobile phone 37% 40% 30% Voucher 60% 20% 41% 33% 10% 23% 25% 21% 7% 10% 0% 5% 2010 2011 2012 2013 2014 2015E 2016E 2017E
Mobile phone Voucher
Source: Company data, 2014 Source: Company data, Credit Suisse estimates
Tiphone Mobile Indonesia (TELE.JK) 5 27 May 2015
Young demographic becoming more tech-savvy With its large consumer base of over 240 mn population, young demographic and a Indonesia mobile phone growing middle class, Indonesia is a growing market for mobile phones. Over the years, market will see growth penetration of mobile phones has been rising—it has now reached 130% as Indonesians coming from: (1) young tend to own more than one phone. Handset replacement cycles have also been very short demographic and a growing in the country (on average eight months), given that over 98% are prepaid users. In terms middle class, (2) a short of smartphone penetration, Indonesia still lags other countries (~14% penetration). We handset replacement cycle, believe that the young population becoming more tech-savvy is a huge opportunity for and (3) low smartphone smartphone sales going forward. This, in turn, should also lead to growth of mobile phone penetration subscribers, especially on 3G and 4G networks. We believe that TELE will benefit from this trend. Its voucher distribution business should see steady growth from rising mobile phone usage, especially due to internet data services which have higher ARPU (average revenue per user). Given the synergy with Telkom, TELE will launch more smartphone bundling offers to eventually convert more and more 2G customers into 3G and 4G users—this means a higher ARPU for TELE.
Figure 10: Indonesia’s mobile phone penetration has been Figure 11: …leading to increasing mobile phone increasing over the years, now at ~130%... subscribers, over 98% on prepaid 150% 400 98.4% 134% 350 98.3%
120% 300 98.2% 98.1% 250 90% 98.0% 200 97.9% 150 97.8% 60%
100 97.7% Mobile phone subscribers (mn) subscribers phoneMobile Mobile phone penetration (%) penetrationphone Mobile 50 97.6% 30% - 97.5%
0% Normal SIM 3G SIM Prepaid as % of subscribers
Source: Business Monitor International Source: Business Monitor International
Figure 12: Indonesians are moving towards smartphones Figure 13: …although penetration is yet to catch up to Mobile phones sales volumes ('000 units) levels in other countries… 70,000 100.0
90.0 85.8 60,000 80.0 75.0 50,000 70.0 62.5 40,000 60.0 47.5 30,000 50.0
40.0 35.8 Sales volumes (th units) (th volumes Sales 20,000 31.2
30.0 Smartphone penetration (%)penetrationSmartphone 10,000 20.0 14.4
- 10.0 5.1 2008 2009 2010 2011 2012 2013 2014E2015E2016E2017E2018E - Feature phones Smartphones IN ID TH MY TW AU SG KR
Source: Euromonitor Source: Euromonitor
Tiphone Mobile Indonesia (TELE.JK) 6 27 May 2015
Likely to continue enlarging its voucher business In general, Indonesian consumers buy mobile phone vouchers from three channels: (1) Voucher business, which conventional, (2) modern retail outlets, and (3) machine to machine (bank). Majority of accounted for 60% of the customers (87%) buy the small denomination vouchers (
Figure 14: Voucher distribution is mostly done through conventional (offline) channels…
Source: Company data
Figure 15: ...as credit card penetration is still very low…
3,000
2,500
2,000
1,500
1,000 No. of cards per 1,000 people1,000per cards of No.
500
- India Indonesia Philippines Thailand Malaysia China USA Singapore South Japan Korea
Source: Euromonitor
Tiphone Mobile Indonesia (TELE.JK) 7 27 May 2015
TELE's voucher sales consist of 78% smaller nominal vouchers, which generate higher margins. The Rp5,000, Rp10,000 and Rp20,000 value vouchers are the most commonly sold to end consumers and generate higher margins for TELE. Given most consumers are coming from a lower income bracket, we believe that any increase in the minimum wage benefits TELE.
Figure 16: 78% of TELE's voucher sales comprise higher-margin low nominal vouchers for the low-end consumers
Voucher Type Authorised Sub Dealer Reseller End User Rp 100,000 (in Rp) Dealer Price price Price Price 7% Rp 5,000 4,900 5,100 5,200 6,000-7,000 50,000 15% Rp 5,000 10,000 9,800 10,100 10,250 12,000 Higher margins 23% 20,000 19,600 19,850 19,950 22,000 Rp Rp 20,000 10,000 25% 50,000 48,750 48,800 48,900 51,000 Lower margins 30%
100,000 96,500 96,800 96,800 100,000 Source: Company data Mobile phone as a complementary business TELE started its business in the cellular telecommunications industry by launching its own brand mobile products called 'Tiphone'. This is a low-end handset brand with an ASP of Mobile phone will remain its ~US$20 and contributes up to 5% of TELE's mobile phone sales. The company is also a complementary business… distributor for a number of well-known brands of mobile phones, such as Samsung, Blackberry, LG, HTC and Apple. In 2013, TELE acquired PT Mitra Telekomunikasi Selular (distributor for Apple), PT Poin Multimedia Nusantara (Samsung), PT Perdana Mulia Makmur (Samsung) in 2013 and gained Blackberry 'Jakarta' distributorship in Apr-14. As of now, more than 80% of TELE's mobile phone revenue comes from distribution, with the remaining from retail (i.e., Telesindo Shop). In our view, the company has chosen to continue focusing on distribution rather than growing its retail side, which incurs higher opex, and has lower overall margins. Mobile phone distribution will continue to be a complementary business and not be TELE's main business focus, in our view. There is a major risk associated with this business model—for instance, since 2014, Samsung's handset global oversupply situation has resulted in price wars and unfavourable margins to Indonesian distributors.
Figure 17: TELE's mobile handset brand portfolio
Note: Trademarked icons used. Source: Company data
Tiphone Mobile Indonesia (TELE.JK) 8 27 May 2015
Figure 18: Tiphone's handset sales breakdown Figure 19: Popularity across handset brands in Indonesia FY14 sales breakdown by value
Others HTC 5% 5% Tiphone Mito Others 5% 1% 15% Advan Blackberry 3% 5% Oppo 4% Samsung 42% LG Lenovo 10% 5% Evercoss Samsung 6% 70% Sony Nokia Ericsson Blackberry 9% 6% 9%
Source: Company estimates, 2014 Source: GFK
Figure 20: TELE's mobile phone distribution channel Post Telkom acquiring a 25% stake in TELE, we believe there could be exciting potential synergies with Telkom…
Source: Company data Exciting potential synergies with Telkom On 18 September 2014, Telkom bought a 24.94% stake in TELE, through PT PINS Indonesia (PINS). PINS bought a 10% stake from the recent issuance of TELE's non-pre- emptive rights issue and another 15% from the founder’s existing shares. The company obtained around Rp518 bn additional funding from this 10% non-pre-emptive shares issuance. Since Oct-14, Telkom has put one director, one commissioner and one independent commissioner on TELE's board. Given TELE's position as the best Telkomsel distributor for nine years in a row, we believe that Telkom’s entry will create favourable synergies for both the companies.
Tiphone Mobile Indonesia (TELE.JK) 9 27 May 2015
Figure 21: TELE—corporate structure as of Dec-14
Telkom through its subsidiary, PT PINS, acquired 24.94% stakes in Tiphone in Sep-14
PT Upaya Cipta Sejahtera PT Esa Utama Inti Persada PT PINS Public 38.79% 14.21% 24.94% 22.06%
PT Tiphone Mobile Indonesia Tbk (Tiphone)
PT Excel Utama PT Setia Utama Services PT Setia Utama Media PT Poin Multi Media PT Perdana Mulia PT Telesindo Shop (TS) PT Mitra Telekomunikasi Indonesia (EUI) (SUS) Aplikasi (SUMA) Selular (MTS) Nusantara (PMMN) Makmur (PMM) 99.95% 99.90% 99.00% 99.90% 99.99% 99.99% 99.99% Distribution and Retail Distribution Service Center Content Provider iPhone Importer and Samsung Distributor for Samsung Distributor for Distributor Bandung Area Greater Jakarta Area
acquired MTS in Jul-13, PMMN in Aug-13 and PMM in Sep-13
Source: Company data The entry of Telkom into TELE's business is expected to result in synergies that benefit both the parties. Their plans in the future include: Potential for more Telkomsel cluster distribution Most importantly, we believe there is potential upside of Other key players in Telkomsel's voucher distribution market include CV Akar Daya TELE's market share in (~10%), Koperasi Telkomsel (~6%), Selular Shop (~6%), Global Teleshop (~5%) out of a Telkomsel's distribution total of 90 dealers. With the entry of Telkom's representative into TELE's board of directors and commissioners, we believe TELE has the potential to be assigned more distribution clusters for Telkomsel's voucher distribution. Telkomsel is currently re-mapping its distribution area, cutting down from 270 to 130 clusters, and from 90 to 50 dealers. TELE now has around 30 clusters. Management expects that by Aug-15, Telkomsel will evaluate the performance of all dealers and may shift some distribution clusters from non- performing dealers to TELE. We see potential market share increase in the coming years.
Figure 22: Telkomsel prepaid users make up 40% of total Figure 23: TELE may get more distribution clusters from subscribers smaller non-performing Telkomsel dealers
Total industry Tiphone Mobile subscribers: 12% >325 mn Others Top three: 23% CV Akar Daya 252 mn 10% Telkomsel 40% Other players Simpatindo 53% 8%
Koperasi Indosat Telkomsel 18% Potential to 6% shift to TELE Selular Shop 6% XL Axiata Global 19% Teleshop 5%
Source: Company data Source: Company data, Credit Suisse estimates
Tiphone Mobile Indonesia (TELE.JK) 10 27 May 2015
Higher mobile phone sales from Telkomsel bundling Telkomsel aims to maintain double-digit growth from its voucher sales. So it puts pressure Another synergy could come on distributors to achieve this target. Especially with TELE, Telkomsel is looking to from selling vouchers and increase its ARPU rate by leveraging on feature phone conversion into smartphones in mobile phone bundles Indonesia. Based on Telkomsel data, around 75% of Indonesia's mobile phone users are still using 2G handsets with an average Rp30,000 monthly ARPU. Converting into smartphones means a higher ARPU through the use of data services. On an average, the monthly ARPU of 3G handset users has reached Rp50,000 (~70% higher). To do this, Telkomsel is looking to do more smartphone prepaid voucher bundling programmes with TELE. For instance, customers will get a free Telkomsel SIM card upon buying a smartphone at a Telesindo Shop. Not only the handsets are sold at an attractive price, customers also obtain bonus credit from Telkomsel every time they top up. In return, customers are locked in to use the Telkomsel card for the handset for 12 months. We view this strategy as positive for both parties. With more smartphone sales, Telkomsel benefits from higher ARPU, in addition to potentially grabbing new customers and locking them in for 12 months. The attractive bundling packages incentivise customers to buy handsets from Telesindo Shop, benefitting TELE from higher mobile phone sales. Telkomsel has just rolled out its 4G LTE network. More Telkomsel 4G smartphone bundling offers will likely be launched soon.
Figure 24: Example of Telkomsel bundling offers at Telesindo Shop Trade in old cell phone plus Rp300,000, get new a Samsung Galaxy Young 2 and a Telkomsel SIM card (free 100 minutes, 100 SMSes, 600 MB data per month)
Source: Telkomsel website Conversion of Flexi CDMA into Telkomsel GSM TELE has been appointed an agent to assist on a customer compensation programme in relation to Telkom winding down its Flexi business by end-2015. With Flexi's current 6 mn subscribers, we see a potential for subscribers shifting to other Telkomsel products. For the existing Flexi customers, Telkom will give them cash compensation or in the form of vouchers. These vouchers can then be used at a Telesindo shop, for voucher or handset purchases. TELE will obtain a Rp15 bn fee from Telkom for assisting the conversion. In addition, the realisation of these vouchers is a potential additional revenue for TELE. Distributing other Telkom products Given its wide distribution network across Indonesia, there is potential for TELE to assist Telkom in distributing its other products, such as the Speedy Broadband or Speedy Instan Card (SPIN Card). For example, Telesindo Shop has been offering LG smartphone bundling package with SPIN Card since last year. Going forward, we expect similar partnerships to take place and benefit both the parties.
Tiphone Mobile Indonesia (TELE.JK) 11 27 May 2015
Figure 25: TELE has one of the largest nationwide coverage networks in Indonesia
Source: Company data, Sep-14 Leveraging on Telkom's retail chain network As of Dec-14, TELE had grown its Telesindo Shop to 436 retail outlets across Indonesia, from just 64 outlets in 2012. Now management has decided not to open more outlets but instead is looking to leverage on Telkom's retail chain. Currently, Telkom has over 500 Plasa Telkom service centres in Indonesia, which serve customers in relation to any Telkom products. There is potential to utilise the 500 outlets for TELE's mobile phone and vouchers distribution. Other consumer-based concepts TELE's management has a long-term vision of becoming a consumer-centric company, with a focus on the prepaid-related business. Leveraging on Telkom's strong customer database, the company is looking at a few projects. To name a few, TELE is considering becoming a distributor of prepaid life insurance products called 'Tele Protection', and develop an electronic cash payment gateway (for online shopping), called 'Tele-Pay', targeting the low-end mass market of Indonesia. We believe that the future concepts are great, although the actual roll out of the programmes may take a while.
Tiphone Mobile Indonesia (TELE.JK) 12 27 May 2015 It is a market share gain story… We forecast TELE's earnings will see a 25% CAGR over 2014-17, on the back of a 25% revenue CAGR. We believe TELE's growth driver would come from the increasing market share of Telkomsel voucher distribution, following it joining forces with Telkom. In addition to organic growth (+10% p.a.) of Telkomsel's voucher business, growth should come inorganically from more clusters being shifted from non-performing dealers to TELE. Potential upside in Telkomsel's voucher distribution TELE saw higher revenue growth in 2014 (+39%) boosted by the acquisition of three mobile phone distributors that took place throughout 2013. In 2015, higher revenue growth should come from the acquisition of Simpatindo (completed in Jan-15) which should drive up TELE's market share in Telkomsel distribution from 12% in 2014 to 20% in 2015. TELE is also expecting additional voucher distribution business from banks, and the re-mapping of Telkomsel's cluster distributorship which is likely to take place this year. We expect TELE's market share to gradually increase to 30% in the next three years. Faster increase in market share will bring upside to our numbers. We do not assume any new handset brand acquisition into its portfolio, given it plans to increase focus on the voucher business in the future.
Figure 26: Revenue to post a 25% CAGR over 2014-17 Figure 27: Market share gain likely to be the growth driver 40% 30,000 assuming TELE gets 39% 38% awarded more cluster 35% TELE acquired by Telkomsel... 25,000 30% 34% Simpatindo in Jan-15 30% 28% 25% CAGR Telkom became 20,000 14-17E 30% TELE's shareholder 24% 30% 25% 28% in Sep-14 26% 19% 15,000 20%
25% Rp bn Rp 22% 15% 12% 12% 10,000 21% 11% 9% 10% 18% 17% 10% 5,000
14% distribution Telkomselin share market TELE's 5% 13%
- 10% 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates More stable margins from the voucher business We expect its blended gross margins to be stable, and estimate TELE will obtain around 5% gross margin from Telkomsel distribution, around the same as the historical level. On the mobile phone business, we have seen gross margins trend lower from 14.3% in 2012 to 9.1% in 2013 because of the higher distribution proportion versus retail (now 80:20). The lower handset gross margin (6.2%) in 2014 was because of Samsung's over- inventory situation that led to a price war. We forecast TELE's profit from operations will post a 24% CAGR over 2014-17. In addition to higher operating expenses coming from rising minimum wages, rentals and utilities, we expect a higher depreciation expense from the acquisition of Simpatindo. We expect its total debt to stay at the current level, leading to stable interest costs. Core earnings are likely to post a 26% CAGR.
Tiphone Mobile Indonesia (TELE.JK) 13 27 May 2015
At TELE's listing date, as much as 1.35 mn shares (25.23%) were floated plus 1.323 mn warrants (Series 1). The ratio of shares held to warrants is 50:49. Until Dec-2014, most of the warrants had been converted into shares. In our EPS calculation, we assume full conversion to be completed in 2015. Thus, the total shares outstanding will reach 7.23 mn shares, versus 5.35 mn during the IPO.
Figure 28: Salaries account for about half of opex Figure 29: Profit from operations to post a 24% CAGR 700 1,200 60%
600 52% 1,000 50% 152 500 24% CAGR 14-17E 126 400 49 800 40% 32 100 41 36% Rp bn Rp 300 30 33% 74 33 27 600 30% 25 285 bnRp 200 20 26% 39 32 236 30 158 189 86 117 400 23% 21%20% 100 32 60 146 56 91 106 39 16% - 200 10% 2010 2011 2012 2013 2014 2015E 2016E 2017E
Promotion & Adv. Distribution Salaries Depreciation - 0% Rental Utilities Others Opex % of sales 2010 2011 2012 2013 2014 2015E 2016E 2017E
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 30: Earnings to grow at 26% CAGR over 2014-16 Figure 31: EPS decline in 2014 due to warrant conversion 700 50% 75 7.5
44% 45% 70 600 7.0 26% CAGR 40% 65 decline in EPS due 14-17E to warrant 6.5 500 35% 60 conversion dilution 33% 34% 6.0 30% 55 400 27% Rp 26% 25% 50 25% 5.5 shares bn Rp bn Rp 300 20% 45 5.0 40 200 15% 4.5 10% 35 100 5% 30 4.0 3% 2012 2013 2014 2015E 2016E 2017E - 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E No. of shares EPS
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Working capital and balance sheet TELE had a working capital cycle of 48 days as of end-2014, stemming from 41 days of receivables period, an average inventory turnover of 25 days and an average payable period of 18 days. The higher working capital cycle since 2013 was driven by increasing contribution of mobile phone sales. The average inventory days for handsets hover around 40-60 days, compared to 3-10 days for vouchers. Receivable days for handsets are also higher because of longer term of payments to handset sub-dealers compared to vouchers. In the coming years, as we expect the voucher business' contribution to sales to increase, we expect the cash conversion cycle to reduce.
Tiphone Mobile Indonesia (TELE.JK) 14 27 May 2015
Figure 32: Expecting WC to improve as vouchers' Figure 33: Higher receivable and inventory days on contribution to sales is increasing… handset compared to the voucher business 60 45% 50 45 50 40% 48 49 41 50 40 40 44 35% 37 35 40 40 36 30% 30 32 24 25 24 25% 22
30 20 21 20 20 days days 25 18 19 18 20% 15 15 15 15 13 20 15% 10 9 10% 10 - 1 0 0 5%
- 0% (10) 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
Cash conversion cycle Mobile phone % of sales Receivable Inventory Payable
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates As of end Mar-15, TELE had total debt of Rp2.3 tn, or a 0.7x net gearing level. This was mostly short-term debt to finance working capital requirement. The company is looking to refinance to longer-term debt. Hence, it plans to issue sub-ordinated bonds worth Rp2 tn. The first stage of Rp500 bn will be offered in Jun-15. TELE incurs minimal capex per year (~Rp20 bn) outside of any acquisitions. Its 2015 capex will be higher due to the acquisition of Simpatindo. There will not be significant capex channelled for store expansion as TELE does not plan to add more Telesindo Shops in the near future. The company's dividend policy is to distribute cash dividends up to 25% of the after-tax net profit of the related year.
Figure 34: Total debt and net gearing forecasts Figure 35: Expected to pay out around 25% dividend 2,600 2,513 80% 130 125 30.0%
2,400 2,328 2,328 70% 71% 25.0% 25.0% 25.0% 110 23.8% 23.7% 2,200 60% 99 20.0% 2,000 50% 90 1,753 45% 40%
1,800 40% 72 15.0% Rp bn Rp 45% bn Rp 32% 1,600 30% 70 1,476 10.0% 1,400 20% 49 50 5.0% 1,200 10%
1,000 0% 30 0.0% 0.0% 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E
Total debt Net gearing (RHS) Dividend paid Payout (%)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Tiphone Mobile Indonesia (TELE.JK) 15 27 May 2015 Initiate with OUTPERFORM rating and Rp1,250 TP We initiate coverage on Tiphone with an OUTPERFORM rating and an end-2016 target price of Rp1,250, implying 19x FY16E P/E and 29% potential upside. We evaluate three methods of valuation—DCF, P/E, and PEG—to value TELE. Our DCF-derived target price of Rp1,250 falls in the middle of the range between our P/E- and PEG-based fair values.
Figure 36: Different valuation methods to value the stock Discount Weighted average Target multiple Value/share (Rp) P/E 15% 16.7 14.2 937 PEG 15% 0.9 0.8 1,340 DCF 1,250 Source: Credit Suisse estimates DCF Our DCF assumes a 10% WACC, derived from an 8% risk-free rate, 0.8 beta and a 5.0% risk premium. We assume a 12% cost of debt and 5% terminal value growth. Based on DCF model, we arrive at our end-2016 target price of Rp1,250.
Figure 37: DCF analysis 2016E 2017E 2018E 2019E 2020E 2021E TV Year 0 1 2 3 4 5 5 Revenue 23,582 28,437 32,017 36,047 40,486 46,440 Net income 477 601 689 848 985 1,190 Add: Depr. 30 32 34 35 37 38 Chg in WC (298) (394) (317) (285) (332) (227) Capex (20) (20) (20) (15) (15) (15) FCF 189 218 385 583 675 985 13,799 Discount factor 1.0 0.9 0.8 0.7 0.7 0.6 0.6 PV 189 198 316 433 454 599 8,395 NPV 10,584 Add: Cash (Rpbn) 606 Minus: Debt (Rpbn) (2,328) Shareholder value (Rpbn) 8,862 Target price (Rp/share) 1,250 Current share price 970 Upside/downside to TP 29%
Assumptions: Risk-free rate 8.0% Beta 0.8 Risk premium 5% Ke 12% Kd 12% Tax 26% Debt/Capital 45% Equty/Capital 55% WACC 10% Grow th 5% Source: Credit Suisse estimates P/E Based on FY16 P/E comparison, TELE is trading at a 12% discount to the weighted average of Indonesian consumer staples, discretionary and telco names. Assuming a 15% discount for the stock's smaller market cap versus peers, we get an end-2016 fair value of Rp937/share (Figure 36).
Tiphone Mobile Indonesia (TELE.JK) 16 27 May 2015
PEG Using PEG comparison, which takes into account TELE's higher earnings growth compared to peers, valuation appears less demanding. The stock is currently trading at a 38% discount to the weighted average of Indonesian consumer staples, discretionary and telco names' FY16E PEG. Assuming a 15% discount for the stock's smaller market cap versus peers, we get an end-2016 fair value of Rp1,340/share (Figure 36).
Figure 38: P/E vs EPS growth 45.0
40.0 Link Net
35.0 Tower Bersama
30.0 Protelindo
Tiphone Mobile Matahari Department 17 - Store 25.0 Indofood Sukses 20.0 Indofood CBP Gudang GaramMakmur Kalbe Farma
EPS CAGR 14 CAGREPS Matahari Putra Prima 15.0 Erajaya Swasembada Ace Hardware Indonesia 10.0 Telkom Unilever Indonesia 5.0
- - 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 2016 P/E Source: Credit Suisse estimates
Figure 39: TELE's P/E is at a 12% discount to the average Figure 40: …and at a 38% discount based on FY16E PEG of FY16 Indonesian consumer and telco names 35.0 1.8 30.0 1.6 1.4 25.0 Weighted average 16.7x 1.2 20.0 1.0 Weighted average 0.9x
15.0 0.8 2016 P/E 2016 2016 PEG 2016 0.6 10.0 0.4 5.0 0.2
- -
Telkom
Indosat
Indosat Telkom
Link Net Link
Link Net Link
XL Axiata XL
Protelindo
Protelindo
Kalbe Farma Kalbe
Kalbe Farma Kalbe
Indofood CBP Indofood
Indofood CBP Indofood
Electronic City Electronic
Gudang Garam Gudang
Tower Bersama Tower
Tower Bersama Tower
Tiphone Mobile Tiphone
Tiphone Mobile Tiphone
Mitra Adiperkasa Mitra
Mitra Adiperkasa Mitra
Ramayana Lestari Ramayana
Ramayana Lestari Ramayana
Matahari Putra Prima Putra Matahari
Matahari Putra Prima Putra Matahari
Erajaya Swasembada Erajaya
Ace Hardware Indonesia Hardware Ace
Ace Hardware Indonesia Hardware Ace
Indofood Sukses Makmur Sukses Indofood
Indofood Sukses Makmur Sukses Indofood Matahari Department Store Department Matahari Matahari Department Store Department Matahari Source: Credit Suisse estimates Source: Credit Suisse estimates
Tiphone Mobile Indonesia (TELE.JK) 17
(TELE. TiphoneMobile Indonesia Figure 41: Valuation comparison
JK) Comparison with other handset and electronic distributors
Ticker Company name Mcap Price P/E (x) EPS CAGR EPS growth (%) PEG (x) P/B (x) EV/EBITDA ROE (%) 3M ADTV US$ m (l.c) 15E 16E 14-17E (%) 15E 16E 15E 16E 15E 16E 15E 16E 15E 16E US$mn Indonesia handset distributors TELE IJ Equity Tiphone Mobile Indonesia ID 526 970 18.0 14.7 24.3 24.7 22.3 0.7 0.6 2.5 2.2 11.6 9.9 13.8 14.9 0.2 ERAA IJ Equity Erajaya Sw asembada ID 178 810 9.4 8.5 15.6 18.2 11.2 0.6 0.5 0.8 0.7 4.5 4.2 8.0 8.4 1.1 Weighted average 15.8 13.1 22.1 23.0 19.5 0.7 0.6 2.0 1.8 9.8 8.4 12.4 13.3 Regional comparables
493 HK Equity Gome Electrical CH 4,769 2 21.3 19.0 10.8 9.3 12.2 2.0 1.8 1.7 1.6 11.5 10.1 8.2 8.9 105.0 861 HK Equity Digital China CH 1,970 14 16.5 14.4 16.8 19.0 14.6 1.0 0.9 1.6 1.5 15.0 13.1 9.7 10.3 16.1 9831 JT Equity Yamada Denki JP 4,224 532 27.5 19.9 27.8 32.6 37.9 1.0 0.7 0.8 0.8 17.0 15.6 3.1 4.2 30.2 2347 TT Equity Synnex Technology TW 2,295 44 12.5 11.2 8.3 7.5 11.3 1.5 1.4 1.5 1.5 17.3 16.3 12.4 13.4 4.6 REDI IN Equity Redington India IN 785 125 13.0 11.1 15.6 16.2 16.7 0.8 0.7 2.1 1.8 9.6 8.3 17.6 17.8 1.3 DRTY LN Equity Darty PLC UK 605 74 19.3 13.6 23.0 5.9 42.6 0.8 0.6 n.a n.a 7.0 6.1 (9.3) (13.4) 0.2 BBY US Equity Best Buy Co US 12,096 34 14.0 13.7 15.5 33.2 2.0 0.9 0.9 2.5 2.3 4.7 4.7 20.7 18.4 183.8 IM US Equity Ingram Micro US 4,152 27 9.6 8.4 9.9 7.4 15.3 1.0 0.8 0.9 0.8 6.1 5.4 9.0 8.1 34.2 Weighted average 16.5 14.4 15.4 22.2 12.9 1.1 1.0 1.7 1.6 9.4 8.6 12.8 12.1 Weighted average 16.5 14.4 15.6 22.2 13.1 1.1 1.0 1.7 1.6 9.4 8.6 12.8 12.1 Comparison with Indonesian consumers names Ticker Company name Mcap Price P/E (x) EPS CAGR EPS growth (%) PEG (x) P/B (x) EV/EBITDA ROE (%) 3M ADTV US$ m (l.c) 15E 16E 14-17E (%) 15E 16E 15E 16E 15E 16E 15E 16E 15E 16E US$mn Staples UNVR IJ Equity Unilever Indonesia ID 25,698 44,400 56.0 49.2 8.9 5.1 14.0 6.3 5.5 67.6 57.8 38.8 34.4 120.6 117.6 5.7 GGRM IJ Equity Gudang Garam ID 6,758 46,300 13.9 12.0 17.9 19.6 15.2 0.8 0.7 2.4 2.1 8.5 7.6 17.1 17.4 5.0 KLBF IJ Equity Kalbe Farma ID 6,507 1,830 34.3 28.5 18.1 17.2 20.1 1.9 1.6 7.9 6.8 24.1 20.6 23.1 23.9 6.2 ICBP IJ Equity Indofood CBP ID 6,181 13,975 24.7 20.3 19.6 26.8 21.7 1.3 1.0 5.1 4.4 18.0 15.5 20.5 21.8 3.9 INDF IJ Equity Indofood Sukses Makmur ID 4,579 6,875 15.1 13.8 20.0 3.0 9.4 0.8 0.7 2.2 1.2 5.7 5.1 14.6 36.1 5.9 Weighted average 39.8 34.6 13.7 11.1 15.5 3.8 3.3 37.1 31.7 27.1 23.9 71.6 72.3 Weighted average (ex-Unilever) 22.4 19.0 18.8 17.6 17.1 1.2 1.0 4.5 3.8 14.6 12.7 19.1 23.9 Discretionary LPPF IJ Equity Matahari Department Store ID 3,835 17,325 26.4 20.4 27.7 35.1 29.0 1.0 0.7 10.2 7.8 18.8 16.0 38.7 38.2 5.6 MPPA IJ Equity Matahari Putra Prima ID 1,550 3,800 34.9 28.3 17.0 5.7 23.5 2.1 1.7 6.3 5.4 19.8 16.3 17.9 19.0 6.3 ACES IJ Equity Ace Hardw are Indonesia ID 898 690 20.3 17.5 13.0 4.9 15.9 1.6 1.4 4.4 3.8 15.1 13.3 21.9 21.7 1.0 MAPI IJ Equity Mitra Adiperkasa ID 686 5,450 40.6 18.6 109.5 200.8 118.8 0.4 0.2 3.4 2.9 7.0 5.7 8.3 15.4 0.9 TELE IJ Equity Tiphone Mobile ID 524 970 18.0 14.7 24.3 24.7 22.3 0.7 0.6 2.5 2.2 11.6 9.9 13.8 14.9 0.2 RALS IJ Equity Ramayana Lestari ID 406 755 40.1 20.0 (7.9) (62.4) 100.4 (5.1) (2.5) 1.6 1.5 9.4 8.2 4.0 7.6 0.8 ECII IJ Equity Electronic City ID 113 1,120 10.0 6.5 31.0 15.7 54.2 0.3 0.2 0.8 0.7 4.8 6.8 7.9 11.1 0.1 ERAA IJ Equity Erajaya Sw asembada ID 178 810 9.4 8.5 15.6 18.2 11.2 0.6 0.5 0.8 0.7 4.5 4.2 8.0 8.4 1.1 Weighted average 28.1 20.6 28.7 34.0 37.1 0.8 0.8 7.0 5.6 16.1 13.7 26.0 26.8 Telco TLKM IJ Equity Telkom ID 21,639 2,830 14.9 12.3 10.0 26.8 20.8 1.5 1.2 3.8 3.4 5.8 5.4 25.3 27.5 19.7 TBIG IJ Equity Tow er Bersama ID 3,265 8,975 19.9 16.0 34.7 66.0 24.4 0.6 0.5 5.8 3.8 n.a n.a 29.1 23.6 1.8 TOWR IJ Equity Protelindo ID 3,096 4,000 29.5 23.7 30.4 64.6 24.5 1.0 0.8 7.4 6.2 10.4 9.2 25.2 26.4 0.1 EXCL IJ Equity XL Axiata ID 2,551 3,940 27.2 15.5 (244) (237.5) 76.0 (0.1) (0.1) 2.3 2.2 3.9 3.5 8.5 14.5 1.4 ISAT IJ Equity Indosat ID 1,517 3,680 38.5 15.1 (188) (126.1) 154.4 n.a n.a 1.4 1.4 1.8 1.7 3.7 9.0 0.2 LINK IJ Equity Link Net ID 1,269 5,500 20.7 13.8 39.5 44.8 49.6 0.5 0.3 4.4 3.5 10.4 8.5 21.1 25.2 4.4 Weighted average 19.0 14.2 (13.0) 7.6 32.9 1.1 0.9 4.1 3.5 6.1 6.9 23.2 25.1 Weighted average staples, discretionary and telco 31.0 25.8 5.1 11.8 23.7 2.6 2.2 22.3 19.1 18.8 17.8 49.7 50.9 Weighted average staples, discretionary and telco (ex-Unilever) 21.2 16.6 3.7 14.4 27.5 1.1 0.9 4.6 3.9 10.6 10.2 22.0 24.7
Source: Credit Suisse estimates, IBES May27 2015
18
27 May 2015 Investment risks In our forecasts, we assume TELE would see market share gain in the next few years with Telkomsel potentially shifting the voucher distribution from non-performing dealers to TELE—there is a risk in our forecasts, if this is delayed or cancelled. Other than that, TELE's business involves a number of risks, some of which are listed below. Changes in Indonesia's mobile phone industry The company's voucher sales depends on key factors such as the number of mobile phone users, consumer purchasing power and the changes in new mobile phone technology. New technology creates opportunity for mobile phone replacement by customers. As mobile communication devices are considered lifestyle products, and with Indonesia's low replacement period for products, the failure to recognise the market trend as well as a delay in product delivery could jeopardise the company's earnings. The shift of customer brand preferences is also a risk factor for the company, if a new popular handset brand is not within its distribution portfolio. Reliance on third-party principals As a distributor, TELE is dependent on the principal, primarily Telkomsel for programme promotions and product availability. If the principal cuts back on promotions or if products are not available, consumers may shift to other products. The Indonesian market has long suffered from very high churn rates (up to 12-15% per month) as there are customers who are so price sensitive that they are prepared to change their phone numbers every month. In the mobile phone business, the principal controls the product supply, which may impact the company's sales and margins. Further, the company's arrangements with the principals are non-exclusive, for fixed terms, and are subject to renewal at the option of both parties. TELE also sells its own brand handsets, Tiphone; however, its contribution is minimal. Foreign exchange risks The company's mobile phones are imported, including its own brand, Tiphone. Rupiah exchange rate fluctuations to the USD will impact the costs of goods on mobile phones. TELE generally transfers any price changes to customers. However, given the company's own brand, Tiphone, is a low-end brand, consumers may be sensitive to price changes, and therefore any rupiah weakness would impact its sales and margins. Rise in wages and salaries Salaries account for the largest component of opex, or around 1.7% of gross sales. Over the years, with its outlet expansions, the company needs to continue to add employees. Any rise in the minimum wage, which is regulated by the government, will affect costs. Competition Other than competing with other authorised distributors for mobile communications devices, the company also faces competition from illegal importers. Regulatory risk Any changes to government regulation, such as import duty, Indonesian Competition Law, should impact the company's business. Indonesia macroeconomic environment Erajaya's products depend on consumers' purchasing power. We expect the company to benefit from the rising middle income group, as well as rising GDP/capita. The country's political stability might also impact the company's performance.
Tiphone Mobile Indonesia (TELE.JK) 19 27 May 2015 Appendix I: The Indonesia domestic consumption story
Figure 42: Indonesia has a young population Figure 43: …and growing proportion of middle-class* Population age 15-64 (%) 250 80 +40% 7 Population age 0-14 (%) (3%) 70 Population age 65+ (%) 5 200 (2%) 60 +43% 92 132 50 150 (42%) (54%) 40 100 30 121 -12% 20 50 106 (56%) (43%) 10 0 0 2009 population (million) 2012 population (million) 1950 1965 1980 1995 2010 2025 High income Middle income Low income
Source: United Nations, Credit Suisse estimates *Expenditure per month: high income (>US$475), middle income (US$74-475), and low income ( 8 10.9 months 10 6 4 Handset replacement period (months) period replacementHandset 5 2 0 0 Total 2013 Urban Rural Java Non-Java Mexico Indonesia China Brazil SaudiSouth AfricaIndia Russia Turkey Source: Credit Suisse Indonesia Consumer Survey 2014 Source: Credit Suisse Indonesia Consumer Survey 2014 Figure 46: Growing proportion of smartphone sales… Figure 47: …in line with global trend… Proportion by sales value (%) 100% 10,000 90% 17% 26% 9,000 80% 43% 8,000 55% 70% 64% 7,000 70% 75% 60% 80% 84% 6,000 88% 92% 50% 5,000 40% 83% 74% 4,000 30% 57% (US$mn)) vlaue Sales 3,000 45% 20% 36% 30% 2,000 10% 25% 20% 16% 1,000 12% 8% 0% 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 0 2008 2009 2010 2011 2012 2013 2014E2015E2016E2017E2018E Feature phones Smartphones Feature phones Smartphones Source: Frost and Sullivan, 2013 Source: Euromonitor Tiphone Mobile Indonesia (TELE.JK) 20 27 May 2015 Appendix II: History and milestones PT Tiphone Mobile Indonesia Tbk (TELE) was established in 2008 to meet the needs of the cellular telecommunications industry in Indonesia. The company carries the concept of business principle as a one-stop solution. TELE’s business is trading of telecommunication devices, namely mobile phones and their parts, accessories, prepaid vouchers and service centres for mobile phones (reparation). The company started its business in the cellular telecommunication industry by launching its own brand mobile products called Tiphone. Tiphone mobile phones were introduced with a modern and attractive design, and equipped with the latest features offered at an affordable price when compared with products in its class. In 2010, the company expanded its business unit to cellular services centre (reparation) and provider of cellular phone applications and content by establishing two subsidiaries, namely PT SetiaUtama Service (SUS) and PT SetiaUtama Media Aplikasi (SUMA). In early 2011, it continued to acquire two companies, namely PT Telesindo Shop (TS) that operated in the field of retail and outlets, and PT Excel Utama Indonesia (EUI), dealer and distributor for XL Axiata. As a leading company that continues to grow, TELE focuses not only on its core business line, but also develops additional services to meet consumers’ satisfaction. Therefore, the company complements its services by providing cellular phone products with international brands, besides Tiphone brand, as well as its accessories. It also offers repair services for hardware and software, sales of spare parts, as well as a gallery of products that are supported by the latest retail store concept. Until November 2013, the company has been a distributor for a number of well-known brands of mobile phones, such as Samsung, LG, HTC and Apple. The determination of the company to become the leading distributor in Indonesia is shown by the number of strategic moves it made, such as establishing a distribution channel with LG Mobile by providing national coverage as well as acquiring a number of major distributors. Examples of major distributors that were acquired are PT Mitra Telekomunikasi Selular, an importer and distributor of Apple products, and PT Poin Multimedia Nusantara, a distributor of Samsung Mobile in Bandung, West Java. The company operates its business activities through two business lines: distribution and retail. Since Indonesia has large areas, it has to provide a strong distribution and service infrastructure that sustains the growth of cellular telecommunication device manufacturers and operators. Until now the company has the most extensive coverage in Indonesia including North Sumatra, Central Sumatra, South Sumatra, Batam, Kalimantan, Jakarta, Central Java, West Java, East Java, Bali, West Nusa Tenggara, East Nusa Tenggara, Sulawesi, Ambon, and also as far as Papua. Figure 48: Voucher distribution business Figure 49: Mobile phone retail/distribution business Telesindo Shop Tiphone Sub Dealer Master Branch Dealers Offices Tiphone's Reseller/Retailer Dealers Retail Stores Consumers Consumers Consumers Telesindo Shop sells through sub dealers, resellers and directly to Tiphone distribute the mobile phones through master dealers and its consumers. Source: Company data owned retail stores. Source: Company data Tiphone Mobile Indonesia (TELE.JK) 21 27 May 2015 Figure 50: Company’s milestones over the years Year Milestone 1992 Founder, Hengky Setiawan started in the cellular phone business, established first shop 1997 First Telesindo Shop was established in collaboration with Telkomsel 2001 Singtel acquired a stake in Telkomsel, and sparked an aggressive expansion into the cellular phone market. PT Telesindo shop was incorporated. 2006 PT Excel Utama Indonesia was incorporated 2008 Tiphone brand was first introduced into the Indonesian market 2010 PT Setia Utama Service dan PT Setia Utama Media Aplikasi was established 2011 Acquired 99,90% PT Excel Utama Indonesia and 99,95% PT Telesindo Shop 2012 Listed on Indonesia Stock Exchange 2013 Acquired PT Mitra Telekomunikasi Seluler Indonesia, PT Poin Multi Media Nusantara, PT Perdana Mulia Makmur Source: Company data PT Tiphone Mobile Indonesia went public in the Indonesia Stock Exchange on 12 January 2012. As much as 1.35 mn shares (25.23%) were floated at Rp310/share IPO price. The company also issued 1.323 mn warrants (Series 1). For every 50 shares held, shareholders were entitled to 49 warrants. Each warrant allows the holder to buy 1 share at Rp310/share within a five-year period (up to 12 January 2017). Figure 51: Tiphone’s IPO structure in 2012 Description Shares offered 1.35 mn Warrants issued 1.323 mn Ratio of shares to warrant 50:49:00 IPO stake 25.23% Nominal price Rp100 IPO price Rp310 IPO proceeds Rp418.5bn Warrant exercise price Rp310 Warrant proceeds Rp410.1bn Source: IPO Prospectus Tiphone Mobile Indonesia (TELE.JK) 22 27 May 2015 Appendix III: Management profile Figure 52: Board of Commissioners and Board of Directors Name Position Name Position Board of Commissioners Board of Directors Hengky Setiawan President Commissioner Tan Lie Pin President Director Ferry Setiawan Commissioner Andry Ryanto Vice President Director Mustapa Wangsaatmadja Commissioner Rukmono Cahyadi Director Lukman Hadikusumo Independent Commissioner Meijaty Jawidjaja Non-Affiliated Director Achmad Herlanto Anggono Independent Commissioner Source: Company data In 2014, there was a change in the composition of the Board of Commissioners after the entry of PT PINS Indonesia as one of the shareholders. Based on the results of the Extraordinary General Meeting of Shareholders on 23 October 2014, the composition of the Board of Commissioners has been increased to five people from previously three. Board of Commissioners Hengky Setiawan, President Commissioner Mr Setiawan is an Indonesian citizen, 45, and has been appointed as the president commissioner since August 2011. Currently, he is also the Director of PT Telesindo Shop (2001-current), Director of PT Setia Utama Investama (2008-current), Director of PT Setia Utama Towerindo (2008-current), and Director of PT Akses Makmur Bersama (2010- current). Previously, he has also been the President Director of the company between August 2010 and June 2011. Mr Setiawan graduated from Universitas Tarumanagara with a Bachelor of Economics majoring in accounting. Ferry Setiawan, Commissioner Mr Setiawan is an Indonesian citizen, 40, and was appointed the company's commissioner in August 2011. He has previously been the company’s director in 2009. Currently, he is also the Director of PT Setia Utama Telecom (2002-current), Commissioner of PT Setia Utama Telestar (2002-current), President Director of PT Excel Utama Indonesia (2006- current), Commissioner of PT Solusi Marketing Advertising (2008-current), Director of PT Esa Utama Inti Persada (2008-current), Director of PT Pulsa Inti Nasional (2008-current), Director of PT Universal Service Center (2010-current), Director of PT Multi Pulsa Nusantara (2010-current), and Director of PT Setia Utama Media Aplikasi (2011-current). Mr Setiawan graduated from Universitas Tarumanagara with a Bachelor of Economics majoring in management. Mustapa Wangsaatmadja, Commissioner (from Telkom) Mustapa Wangsaatmadja, 55, was appointed commissioner since October 2014 and is a representative from Telkom in the company. He has served as CEO, PT PINS Indonesia since 1 April 2014. He joined the PT Telkom in 1990 as an engineer data processing in Semarang and was previously head of R&D centre Telkom from July 2007 to July 2012 and VP Innovation Strategy & Synergy Telkom Indonesia from July 2012 to March 2014. Mustapa Wangsaatmadja served on the Board of Commissaries PT Gratika from 2010– 2012 and the Board of Commissaries PT. Admedika from 2012-March 2014, was head of department of technology recitation, Mastel in 2010-2012, and head of the engineering programme, IAE ITB from 2009-2013. He graduated from Bandung Institute of Technology and earned a Master of Engineering & Science from ATRI-Curtin University of Technology, Perth, Western Australia, in 1996. Tiphone Mobile Indonesia (TELE.JK) 23 27 May 2015 Lukman Hadikusumo, Independent Commissioner Mr Hadikusumo is an Indonesian citizen, 67, and joined the company as Commissioner in 2011. He started his career as a money market officer in Bank Dagang Negara (1968- 1978) and was director and president director when he joined Bank Bumiputera (1989- 1994). He was also previously the president director of PT Perkasa Finance (1994-2000), financial consultant in PT Global Teleshop (2000-2006), as well as advisor in Telesindo Shop (2006-2011). Mr Hadikusumo has vast experience and has joined several seminars and courses to enhance his capabilities. He graduated from Universitas Indonesia with a Bachelor of Business Administration . Achmad Herlanto Anggono, Independent Commissioner (from Telkom) Achmad Herlanto Anggono, 58, was appointed Independent Commissioner in October 2014. Currently, he also serves as a member of the Audit and Risk Management Committee at ANZ Bank, Bank Mizuo and PT Energi Mega Persada Tbk. Previously he built a career in the oil and automotive industry from 1985 to 1988. Later, in 1988- 2007 he worked in banking and served as director of compliance and risk management at Bank Maybank Indocorp. He has held various positions in Bank Bapindo. He was heavily involved in research on business risk and venture capital, risk management and corporate finance. Board of Directors Tan Lie Pin, President Director Ms. Pin is an Indonesian citizen, 50, and was appointed President Director since August 2011. Currently, she is also the Director Deputy of Business Development of PT Telesindo Shop (2008-current). She was also the director deputy of business development of the company (2009-2011), country manager of PT Telechoice Indonesia (2005-2008), sales director of PT Teletama Artha Mandiri (2004-2005), marketing director of Selular Group (2000-2004). Ms. Pin graduated from Universitas Jayabaya with a Diploma of Accounting. Andry Ryanto, Vice President Director Mr Ryanto is an Indonesian citizen, 45, and joined the company as Vice President Director in 2012. He started his career as marketing staff of PT Bank Dagang Nasional Indonesia Surakarta (1993-1994). He then continued his career as sales executive until he became a sales coordinator in PT Auto Cipta Karya Isuzu (1995-2000). He has also been Sales Manager in PT Cahaya Hyundai (2001-2002), Branch Manager of Telesindo Shop Bandung (2002-2003) up until General Manager in Kalimantan (2004-2012). Mr Ryanto graduated from STIE Malangkucecwara Malang with a Bachelor of Economics degree. Meijaty Jawidjaja, Non-Affiliated Director Ms. Jawidjaja is an Indonesian citizen, 43, and was appointed Finance Director of the company in June 2011. She is also the Senior Finance Manager of PT Telesindo Shop Group since January 2008. Previously, she had been the head of division of PT Maju Persada Triguna and Bina Karya Trijasa (1993-1996), accounting manager of PT Gapura Kriya Lestari (1996), finance director of PT Rasa Indoselera (1997), head of internal audit of PT Primaswadana Perkasa Finance (1997-2000), audit manager of PT Paragon (2000- 2001) and PT Naramitra Tarra. Ms. Jawidjaja is a graduate of Universitas Tarumanagara with a Bachelor of Economics. Rukmono Cahyadi, Director (from Telkom) Indonesian citizen, 48 years. Mr Cahyadi has served as a Director of the company since October 2014. Prior to joining the company, he served as GM regional sales Telkomsel Central Java Region since 2012. He started his career at PT Telkom as a staff of Kandatel Telkom Lahat, South Sumatra from 1992-1994. His career then progressed to a subsidiary of Telkom, PT Telkomsel, having served as GM device management from 2009-2011. Subsequently he served as GM product pricing Telkomsel in 2011. He graduated from Gajah Mada University in 1991. Tiphone Mobile Indonesia (TELE.JK) 24 27 May 2015 Appendix IV: TELE vs ERAA Investors have generally been comparing TELE's business to Erajaya's (ERAA). While they both operate in mobile handset distribution, we do not think both businesses are the same. The majority of TELE's business (60%) is contributed from voucher distribution, compared to ERAA which focuses more on handset distribution and retailing (85%). Figure 53: Comparison between TELE vs ERAA TELE ERAA Revenue breakdown Voucher 60% 11% Mobile phone 37% 85% Others 3% 4% Business operation Focus on prepaid voucher distribution Focus on mobile phone distribution and business (Telkomsel). Mobile phone growing its retail business (Erafone, iBox, distribution and retail is only a multi-brand stores). 32% market share in complementary business. Indonesia based on revenue. Voucher principals Telkomsel Telkomsel Indosat XL Handset principals Samsung, LG, Blackberry, Sony, iPhone, Acer, Apple, Asus, Blackberry, Dell, HTC, Huawei and HTC Huawei, Lenovo, LG, Motorola, Nokia, Samsung, Sony Mobile, Xiaomi, Venera Network 94 distribution centres 79 distribution centres 436 retail outlets 509 owned retail outlets ~180,000 active resellers ~21,000 third party outlets Source: Company data, Credit Suisse In terms of margins, TELE earns lower blended gross margins (6%) than ERAA (~9%). TELE's voucher distribution typically provides 5-6% gross margin. ERAA obtains a higher gross margin especially from its handset retail business (40% of sales) that typically earn 10-15% margins. However, the retail side incurs higher opex, i.e. from rental and employee costs. Thus, overall operating margins for both companies are similar at 3-4%. Figure 54: ERAA generates higher gross margin, pushed Figure 55: However, retail incurs higher opex, thus up by its handset retail business operating margins are comparable to TELE 10 5 9.2 9.0 9.0 8.8 4.3 9 5 4.2 8 4 3.5 3.6 3.5 7 4 3.3 3.3 3.3 6.0 5.7 6 5.6 5.7 3 5 3 4 2 Gross margin (%) margin Gross 3 (%)margin Operating 2 2 1 1 1 0 0 2013 2014 2015 2016 2013 2014 2015 2016 ERAA TELE ERAA TELE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Tiphone Mobile Indonesia (TELE.JK) 25 27 May 2015 Figure 56: Net margins comparison Figure 57: Receivable days comparison 3 2.8 50 2.7 45.3 45 41.1 3 40.0 40 37.0 2.1 2.0 2.0 35 2 28.3 27.8 27.5 1.6 1.6 30 27.2 1.5 2 25 20 Net margin (%)marginNet 1 days Recievable 15 10 1 5 0 0 2013 2014 2015 2016 2013 2014 2015 2016 ERAA TELE ERAA TELE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 58: TELE generally has lower inventory days due Figure 59: Payable days comparison to fast moving prepaid voucher products 60 30 27.9 53.3 52.1 52.1 25.9 48.7 50 25 24.0 20.1 19.7 40 20 17.8 15.0 15.0 30 15 24.5 25.1 24.0 22.0 Payable days Payable Inventory days Inventory 20 10 10 5 0 0 2013 2014 2015 2016 2013 2014 2015 2016 ERAA TELE ERAA TELE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 60: Working capital days comparison Figure 61: Net gearing comparison 60 57.0 55.9 0.8 52.6 53.7 0.7 50.0 48.4 49.0 0.7 50 0.6 44.0 0.6 0.5 40 0.5 0.5 0.4 0.4 0.4 0.4 30 0.4 WC days WC Net gearing (x) gearingNet 0.3 20 0.2 10 0.1 0 0.0 2013 2014 2015 2016 2013 2014 2015 2016 ERAA TELE ERAA TELE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Tiphone Mobile Indonesia (TELE.JK) 26 27 May 2015 Figure 62: TELE generates higher ROE… Figure 63: … and ROIC than ERAA… 25.0 12.0 21.3 10.3 10.0 20.0 8.9 8.6 7.6 14.9 8.0 7.2 15.0 13.8 12.7 12.2 5.7 6.0 5.3 ROE (%)ROE 4.6 10.0 (%) ROIC 7.9 8.3 7.0 4.0 5.0 2.0 0.0 0.0 2013 2014 2015 2016 2013 2014 2015 2016 ERAA TELE ERAA TELE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 64: TELE quarterly analysis (Rp bn) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 QoQ YoY 2013 2014 2015E Revenue 1,978 2,513 2,489 3,504 3,000 3,313 3,871 4,405 4,058 -8% 35% 10,485 14,590 18,458 Gross profit 115 162 161 190 150 207 227 235 241 2% 61% 628 819 1,054 Income from op. 65 114 146 123 77 173 144 139 163 17% 112% 448 533 678 Pre-tax profit 60 95 116 123 68 137 116 91 115 26% 69% 393 412 542 Net profit 43 69 87 97 47 106 88 64 85 33% 80% 295 305 401 Margins: Gross 5.8% 6.5% 6.5% 5.4% 5.0% 6.2% 5.9% 5.3% 5.9% 6.0% 5.6% 5.7% Operating 3.3% 4.5% 5.9% 3.5% 2.6% 5.2% 3.7% 3.2% 4.0% 4.3% 3.6% 3.7% Pre-tax 3.0% 3.8% 4.7% 3.5% 2.3% 4.1% 3.0% 2.1% 2.8% 3.8% 2.8% 2.9% Net 2.1% 2.7% 3.5% 2.8% 1.6% 3.2% 2.3% 1.5% 2.1% 2.8% 2.1% 2.2% % of FY: Revenue 19% 24% 24% 33% 21% 23% 27% 30% 22% Gross profit 18% 26% 26% 30% 18% 25% 28% 29% 23% Operating profit 15% 25% 33% 27% 14% 32% 27% 26% 24% Pre-tax profit 15% 24% 30% 31% 16% 33% 28% 22% 21% Net profit 14% 23% 29% 33% 16% 35% 29% 21% 21% Source: Company data, Credit Suisse estimates Figure 65: ERAA quarterly analysis (Rp bn) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 YoY QoQ 2013 2014 2015E Revenue 2,935 3,042 3,583 3,168 3,096 3,638 3,611 4,107 3,952 28% -4% 12,727 14,451 15,873 Gross profit 272 284 335 279 289 315 356 329 359 24% 9% 1,169 1,289 1,429 Operating profit 120 95 174 158 145 96 137 99 142 -2% 43% 546 477 530 Pre-tax profit 102 78 149 128 109 46 94 48 105 -4% 118% 457 296 338 Net profit 75 54 108 111 80 33 68 30 71 -12% 133% 349 212 250 Margins: Gross 9.3% 9.3% 9.3% 8.8% 9.3% 8.7% 9.8% 8.0% 9.1% 9.2% 8.9% 9.0% Operating 4.1% 3.1% 4.8% 5.0% 4.7% 2.6% 3.8% 2.4% 3.6% 4.3% 3.3% 3.3% Pre-tax 3.5% 2.6% 4.1% 4.0% 3.5% 1.3% 2.6% 1.2% 2.6% 3.6% 2.0% 2.1% Net 2.6% 1.8% 3.0% 3.5% 2.6% 0.9% 1.9% 0.7% 1.8% 2.7% 1.5% 1.6% % to FY: Revenue 23% 24% 28% 25% 21% 25% 25% 28% 25% Gross profit 23% 24% 29% 24% 22% 24% 28% 26% 25% Operating profit 22% 17% 32% 29% 30% 20% 29% 21% 27% Pre-tax profit 22% 17% 33% 28% 37% 15% 32% 16% 31% Net profit 22% 16% 31% 32% 38% 15% 32% 14% 28% Source: Company data, Credit Suisse estimates Tiphone Mobile Indonesia (TELE.JK) 27 27 May 2015 Appendix V: HOLT® analysis (Tiphone Mobile Indonesia through the HOLT framework using Credit Suisse forecasts for 2015-18.) We have incorporated our forecasts through the HOLT independent valuation framework. Figure 66 reflects our forecasts for sales, margins and returns. Based on our assumptions, ® HOLT calculates an average CFROI of 11.8% for 2015-18. The returns (CFROIs) for Tiphone have been declining since 2012 and reached a low of 8.5% in 2014 vs 14.0% in 2012; the decline was mainly driven by deteriorating asset turns and asset efficiencies. We now see the benefits from the recent acquisitions and increased asset base being reaped. We expect returns to trend up from 2015 and move close to the five-year historical average levels of c.12.8%. This should mainly be driven by strong revenue growth and stable margins. Asset efficiencies are also expected to improve with asset turns moving to 4.7 in 2018 vs. 3.8 in 2015. HOLT incorporates a real discount rate of 5.05% for the explicit forecast period. Based on our forecasts, HOLT calculates a real asset growth rate of 8.6% in 2015, which is expected to decline to 3.6% by 2018. Beyond the explicit forecast window, HOLT assumes the CFROI fades to 6%, while asset growth fades to 2.5%—incorporating the economic reality of competition which causes the CFROI and growth rate to regress to the mean. HOLT yields a warranted price of Rp1,073.64 per share as compared to our target price of Rp1,250, suggesting 11% potential upside to Tiphone’s current price of Rp970. Tiphone Mobile Indonesia (TELE.JK) 28 27 May 2015 Figure 66: HOLT analysis TIPHONE MOBILE INDONESIA TBK PT (TELE) Current Price: IDR 970.00 Warranted Price: IDR 1073.64 Valuation date: 26-May-15 Sales Growth (parallel % point change to forecasts) Dec 13A Dec 14A Dec 15E Dec 16E Dec 17E IDR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 27.9 39.2 32.5 22.0 20.6 EBITDA Mgn, % 4.4 3.7 3.9 3.8 3.7 -2.0% -88% -86% -84% -82% -79% Asset Turns, x 4.22 3.3 3.8 4.3 4.5 -1.0% -47% -42% -37% -31% -25% CFROI®, % 12.7 8.5 10.9 11.6 12.2 Disc Rate, % 6.2 5.0 5.0 5.0 5.0 0.0% -5% 2% 11% 20% 30% Asset Grth, % 92.4 46.2 8.6 3.1 8.9 to to forecasts) 1.0% 36% 47% 58% 70% 84% Value/Cost, x 1.8 2.0 1.9 1.8 1.6 Economic PE, x 13.9 23.3 17.9 15.4 13.2 2.0% 77% 91% 105% 120% 138% EBITDA MarginEBITDA (parallel % point change Leverage, % 32.8 24.7 26.3 26.7 28.5 More than Sales Growth (%) More than 10% Within 10% 45 10% upside downside 40 35 30 CFROI & Discount Rate (in %) 25 20 16 15 14 10 12 5 0 10 2010 2012 2014 2016 2018 8 6 EBITDA Margin 5 4 5 2 4 4 0 3 2010 2012 2014 2016 2018 Historical CFROI Historical Transaction CFROI 3 Forecast CFROI Forecast CFROI 2 CFROI Discount Rate HOLT HOLT - Credit Analyst Data Suisse Scenario 2 1 Asset Growth (in %) 1 0 100 2010 2012 2014 2016 2018 90 80 70 Asset Turns (x) 8.0 60 50 7.0 40 6.0 30 5.0 20 4.0 10 0 3.0 2010 2012 2014 2016 2018 2.0 Historical Asset Growth Rate Forecast Growth 1.0 Forecast Growth RAGR Normalised Growth Rate 0.0 2010 2012 2014 2016 2018 Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. Source: Credit Suisse HOLT Tiphone Mobile Indonesia (TELE.JK) 29 27 May 2015 Companies Mentioned (Price as of 25-May-2015) Ace Hardware Indonesia (ACES.JK, Rp690) Apple Inc (AAPL.OQ, $132.54) Best Buy (BBY.N, $34.33) BlackBerry (BBRY.OQ, $10.48) Darty (DRTY.L, 74.0p) Digital China Holdings Limited (0861.HK, HK$13.38) Electronic City (ECII.JK, Rp1,120) Erajaya Swasembada (ERAA.JK, Rp810) GOME Electrical Appliances Holding Limited (0493.HK, HK$2.18) Global Teleshop (GLOB.JK, Rp1,140) Gudang Garam (GGRM.JK, Rp46,300) HTC Corp (2498.TW, NT$102.5) Huawei (002502.SZ, Rmb19.65) Indofood CBP (ICBP.JK, Rp13,975) Indofood Sukses Makmur (INDF.JK, Rp6,875) Ingram Micro (IM.N, $26.57) Kalbe Farma (KLBF.JK, Rp1,830) LG Electronics Inc (066570.KS, W56,900) Matahari Department Store (LPPF.JK, Rp17,325) Matahari Putra Prima (MPPA.JK, Rp3,800) Mitra Adiperkasa (MAPI.JK, Rp5,450) PT Indosat Tbk (ISAT.JK, Rp3,680) PT Sarana Menara Nusantara (TOWR.JK, Rp4,000) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp2,830) Pt Link Net Tbk (LINK.JK, Rp5,500) Ramayana Lestari Sentosa (RALS.JK, Rp755) Redington India (REDI.BO, Rs124.85) Samsung Electronics (005930.KS, W1,350,000) Sony (6758.T, ¥3,930) Synnex Technology International Corp (2347.TW, NT$44.0) Tiphone Mobile Indonesia (TELE.JK, Rp970, OUTPERFORM, TP Rp1,250) Tower Bersama (TBIG.JK, Rp8,975) Unilever Indonesia (UNVR.JK, Rp44,400) XL Axiata Tbk (EXCL.JK, Rp3,940) Yamada Denki (9831.T, ¥534) Disclosure Appendix Important Global Disclosures I, Priscilla Tjitra, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for HTC Corp (2498.TW) 2498.TW Closing Price Target Price Date (NT$) (NT$) Rating 06-Jun-12 406.00 400.00 N 08-Jul-12 322.00 290.00 03-Aug-12 277.50 220.00 U 20-Sep-12 306.00 230.00 26-Oct-12 236.00 190.00 28-Nov-12 256.00 210.00 07-Jan-13 288.00 220.00 09-Apr-13 244.50 210.00 02-May-13 295.00 290.00 N 04-Jul-13 201.00 180.00 NEUTRAL UNDERPERFORM 30-Jul-13 171.00 120.00 U 04-Sep-13 137.50 97.00 06-May-14 175.00 110.00 06-Feb-15 158.50 150.00 N 29-Apr-15 124.00 140.00 * Asterisk signifies initiation or assumption of coverage. Tiphone Mobile Indonesia (TELE.JK) 30 27 May 2015 3-Year Price and Rating History for PT Telkom (Telekomunikasi Indo.) (TLKM.JK) TLKM.JK Closing Price Target Price Date (Rp) (Rp) Rating 27-Jun-12 1,604 2,065 O 03-Sep-12 1,915 2,185 07-Mar-13 2,125 2,526 12-Apr-13 2,236 2,606 30-Jul-13 2,356 R 01-Aug-13 2,406 2,606 O 28-Aug-13 2,150 2,600 24-Sep-13 2,200 2,400 04-Oct-13 2,250 2,400 N 16-Dec-13 2,075 2,550 O OUTPERFORM 13-Mar-14 2,190 2,500 REST RICT ED NEUTRAL 05-Jun-14 2,520 2,750 25-Aug-14 2,685 2,950 25-Nov-14 2,785 3,100 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional bench mark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Tiphone Mobile Indonesia (TELE.JK) 31 27 May 2015 Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 39% (50% banking clients) Underperform/Sell* 16% (44% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform , Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Tiphone Mobile Indonesia (TELE.JK) Method: Our end 2016 target price of Rp1,250 for TELE is based on a DCF (discounted cash flow) valuation. We assume 10% WACC (weighted average cost of capital; 8% risk-free rate, 0.8 beta, and 5% risk premium). Our DCF valuation falls in the middle of the range between our P/E and PEG-based target prices. Risk: Key risks to our Rp1,250 target price include: (1) delay/cancellation of Telkomsel awarding more cluster distribution to TELE, (2) high churn rate of Indonesia mobile subscribers, (3) its reliant on third party principal for products, (4) competition, (5) regulatory risk, and (6) Indonesia macro stability risk Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (TLKM.JK, 2498.TW) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (TLKM.JK) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (TLKM.JK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (TLKM.JK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (TLKM.JK, 2498.TW) within the next 3 months. Credit Suisse may have interest in (TELE.JK, TLKM.JK) Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (REDI.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2498.TW). Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (TELE.JK, TLKM.JK, 2498.TW) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. 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