Equity Research Telco Friday,07 February 2020 Telco OVERWEIGHT Maintain Telco price tracker Jan 2020 TLKM relative to JCI Index Telkomsel’s (TSEL) recent products suggest potential change in market dynamics. In response, XL remains defensive, while we are seeing some xxxx positive indications further at the lower end, and thus maintain our overweight sector call. We introduce our telco scorecard to track price effects and network changes, with TLKM and EXCL having the most network leverage. A different ballgame with By.U. Growth in traffic vols continue to be sizeable as TSEL and XL Axiata reported traffic growth of ~+39%/38%yoy respectively, and Indosat at about +61%yoy during the festive period in Dec-Jan according to news reports. TSEL’s core data offerings have not been altered since 4Q19 as TSEL would want to evaluate the traction effects from “OMG!” and the new product line “By.U”. While OMG! does enrich TSEL’s portfolio with SoSMed and content, By.U by contrast seeks to get more traffic with effective GB yields to levels below Rp4,300. By.U is designed to be set apart from TSEL’s branding to pursue millennials and student groups. While there is time to tweak prices further before the next Lebaran season in 2020, By.U is potentially disruptive EXCL relative to JCI Index putting pressure on contenders’ value chains. xxxx XL rewards existing users with discounts. Our channel check reveals that XL itself offered discounts in the 8-13% range on flagship products for existing users, while a new XL prepaid user can choose a service only based on nominal prices. We reckon XL is rewarding existing subs improving their loyalty, which indicates a defensive mode without much inkling to go after new users. Despite the potential pressure from By.U, Indosat and smaller players in price sensitive segments, XL is still a top-pick of ours being clearly capable of protecting its nd traffic share having the 2 best network as per Opensignal with a score of 3.3/5 on our scorecard, and comprehensive and affordable packs in both XL and Axis. Indosat continues price list overhauling. Indosat has already caught XL in traffic vols on the back of strong network improvements with a score of 3.8/5 based Source : Bloomberg nd on Opensignal data. Our analysis suggests that Indosat is 2 best for most affordable packs after Smartfren and we understand it’s the reason why Indosat’s ARPU is still below Rp30k. This is where the challenge lies right now for ISAT, because Hutch 3 has a score of 2.8/5 vs. ISAT’s 1.8/5 in terms of level of differentiation specially in terms of content and combos. Nonetheless, Indosat continued to adjust its price list, specifically its Freedom Internet offering the same prices as before but adjusting quotas by location. Although FREN’s network looks weaker, Hutch might be gaining steam with more emphasis on differentiation at 2.8/5 vs. 1.8/5 in our affordability scoring. Another positive development is suggested by Smartfren raising its flagship product price to Rp75k (+7%). Maintain Overweight. Our data collection allows us to analyze data packs based on their relative differentiation and affordability offered to users. We identify key differentiation levers such as combo packs (data+voice), SoSMed, Content, Gaming and Music and grade them based on their pricing differential from their mean value. TSEL maintains sizeable score differentials including network while EXCL, our 2nd pick has balanced measurements in all levers with Niko Margaronis enough network leverage. We maintain our overweight position as Indosat and (62-21) 5091 4100 ext. 3512 Hutch have room to take a constructive view which essentially serves in [email protected] improving their own profitability and contributes to sector health. Target Market Price Cap. P/E (x) P/BV (x) ROE (%) Company Ticker Rec (Rp) (RpBn) 2019F 2020F 2019F 2020F 2020F Telkom TLKM IJ BUY 5,100 420,023.8 19.4 17.8 3.9 3.5 20.8 XL Axiata EXCL IJ BUY 4,100 31,208.8 44.8 26.9 1.6 1.5 5.9 Indosat Ooredoo ISAT IJ BUY 4,200 17,714.6 n/m n/m 1.7 1.8 (7.9) www.danareksa.com See important disclosure at the back of this report Exhibit 1 . Operators Scorecard in relation to network and pricing XL Operators Scorecard Telkomsel Axiata Indosat Smartfren Hutchison 3 Download speed 5.0 4.0 3.0 1.0 2.0 Upload speed 5.0 4.0 2.0 1.0 3.0 Data latency 4G 5.0 3.0 1.0 2.0 4.0 Video experience 5.0 4.0 2.0 1.0 3.0 Voice experience 5.0 3.0 2.0 1.0 4.0 4G Availability 2.0 3.0 1.0 5.0 4.0 Network score (Opensignal) 4.5 3.5 1.8 1.8 3.3 Download improvement 5.0 2.0 4.0 1.0 3.0 Upload improvement 5.0 3.0 3.0 1.0 2.0 Latency 4G improvement 1.0 2.0 4.0 5.0 3.0 Video improvement 3.0 2.0 5.0 1.0 4.0 Voice improvement n.a. n.a. n.a. n.a. n.a. 4G Availability improvement 5.0 4.0 3.0 1.0 2.0 Most improved network score (Opensignal) 3.8 2.6 3.8 1.8 2.8 Differentiation SoSMed 5.0 4.0 3.0 2.0 1.0 Music 4.0 3.0 2.0 5.0 1.0 Gaming 4.0 2.0 1.0 5.0 3.0 Content 4.0 1.0 2.0 3.0 5.0 Combos 5.0 2.5 1.0 2.5 4.0 Average Differentiation Score 4.4 2.5 1.8 3.5 2.8 Affordability Short Duration Quotas 1.0 3.0 4.0 5.0 2.0 30day Data packs <Rp50k 2.0 3.0 5.0 4.0 1.0 30day Data packs Rp50-75k 1.0 3.0 4.0 5.0 2.0 Unlimiteds 1.0 5.0 3.0 4.0 2.0 Average Affordability Score 1.3 3.5 4.0 4.5 1.8 Full Score 3.5 3.0 2.9 2.9 2.7 Source : Operators price lists See important disclosure at the back of this report 2 www.danareksa.com Exhibit 2. Operators data vols & actual yield/GB Traffic Rp ('000) Petabytes 45 2,000 40 40.5 1,800 35 35.3 1,600 31.4 1,400 30 1,200 25 25.9 23.0 21.6 1,000 20 20.9 800 16.2 16.9 15 14.9 15.2 13.5 600 11.5 11.7 10 10.1 10.4 10.2 10.3 10.9 10.5 8.9 9.7 8.9 8.6 400 6.3 6.3 6.5 6.5 6.1 6.2 5 200 0 0 1Q16 2Q 3Q 4Q 1Q17 2Q 3Q 4Q 1Q18 2Q 3Q 4Q 1Q19 2Q 3Q19 TSEL yield LHS EXCL yield LHS ISAT yield LHS TSEL traffic RHS EXCL traffic RHS ISAT traffic RHS Source : Operators quarterly disclosures Exhibit 3. Operators quarterly blender ARPU Source : Operators quarterly disclosures See important disclosure at the back of this report 3 www.danareksa.com Exhibit 4. Data combos Data Combos & yield/GB Unlimited Jumbo (FUP: 38GB/month) Rp150000 Freedom Combo 70GB 30day Rp150000 Indosat Freedom Combo 40GB 30day Rp100000 XL Axiata Freedom Combo 30GB 30day Rp70000 Hutch 3 Freedom Combo 20GB 30day Rp50000 Freedom Combo 10GB 30day Rp35000 Smartfren Freedom Combo 6GB 30day Rp25000 Telkomsel Freedom Combo 50GB 30day Rp150000 Freedom Combo 30GB 30day Rp100000 Freedom Combo 20GB 30day Rp70000 Freedom Combo 14GB 30day Rp50000 Freedom Combo 8GB 30day Rp35000 Freedom Combo 4GB 30day Rp25000 XTRA COMBO Lite 15-21GB Rp75000 XTRA COMBO Lite 8-11GB Rp55000 XTRA COMBO VIP 70GB Rp216000 XTRA COMBO VIP 40GB Rp164000 XTRA COMBO VIP 30GB Rp120000 XTRA COMBO VIP 20GB Rp89000 XTRA COMBO VIP 10GB Rp62000 XTRA COMBO 70GB Rp212000 XTRA COMBO 40GB Rp159000 XTRA COMBO 30GB Rp114000 XTRA COMBO 20GB Rp81000 XTRA COMBO 10GB Rp54000 Keep ON 5GB 30-day - Promo Rp75000 Keep ON 18GB 30-day Rp99000 Keep ON 8GB 30-day Rp59000 Combo 38GB 30day Rp85000 Combo 35GB 30day Rp80000 Combo 8GB 30day Rp100000 Combo 3GB 30day Rp35000 Combo 2GB 30day Rp30000 Unlimited 7day FUP:1GB Rp28000 Unlimited 5day FUP:1GB Rp20000 Unlimited 1day FUP:1GB Rp9000 Unlimited 30day FUP:1.5GB Rp100000 Unlimited 28day FUP:1GB Rp75000 Unlimited Lite 28day FUP:0.5GB Rp50000 Simp. Combo 30GB Rp149000 Simp. Combo 25GB Rp152000 Simp. Combo 19GB Rp115000 Simp. Combo 6.5GB Rp63000 K. AS Combo 4GB Rp58000 Loop Combo 2GB Rp39000 Rp0k Rp5k Rp10k Rp15k Rp20k Source : Operators price list See important disclosure at the back of this report 4 www.danareksa.com Exhibit 5. Unlimited packs Unlimited data packs & Yield/GB Unlimited Jumbo (FUP: 38GB/month) Rp150000 Unlimited 10GB (FUP: 25GB/month) Rp100000 Unlimited 7GB (FUP: 20GB/month) Rp80000 Unlimited 3GB (FUP: 15GB/month) Rp60000 Unlimited 2GB (FUP: 7.5GB/month) Rp40000 Unlimited 1GB (FUP: 4.5GB/month) Rp25000 Bronet Owsem 80GB Rp90000 Bronet Owsem 48GB Rp70900 Bronet Owsem 32GB Rp57000 Bronet Owsem 24GB Rp51900 Bronet Owsem 16GB Rp39900 UNLIMITED + AON 16GB Rp110000 UNLIMITED + AON 10GB Rp80000 UNLIMITED + AON 6GB Rp55000 Unlimited 30day FUP:1.5GB Rp100000 Unlimited 28day FUP:1GB Rp75000 Unlimited Lite 28day FUP:0.5GB Rp50000 Rp0k Rp2k Rp4k Rp6k Rp8k Rp10k Source : Operators price list Exhibit 6.