Refer to important disclosures at the end of this report
HWANGDBS
KLCIKLCIKLCIKLCI : : : : 1,685.001,685.001,685.001,685.00
Analyst CHIN Jin Han +603 2711 2222 [email protected]
Malaysia Research Team 603 2711 2222 [email protected]
WONG Ming Tek 603 2711 0956 [email protected] STOCKS
Source: DBS Vickers Maxis & Celcom have been losing subscriber share to MVNOs since 1Q2011
Source: DBS Vickers
High postpaid ARPU enjoyed by Maxis & Celcom presents
opportunity for DiGi
Source: DBS Vickers
Malaysia Equity ResearchMalaysia Equity ResearchMalaysia Equity ResearchMalaysia Equity Research PP 17582/11/2012 (031102)
3 Apr 2013
Sector Focus Malaysian Telecoms
Refer to important disclosures at the end of this report
A rough road ahead • Revision to DiGi’s postpaid plans puts pressure on
subscription growth for Maxis and Celcom
• Incumbents also losing prepaid market share to competitive mobile virtual network operators (MVNOs)
• Risk to margins from lower voice and SMS revenues, subsidies and accelerated depreciation
• Sector is still expensive and telcos will only see stronger earnings growth over the medium-to-long-term; TM and Maxis most exposed
Competition is back on. DiGi revised its postpaid data plans
in Mar 2013 by including free minutes and SMS at just 21%
higher monthly commitment for entry level bundles. The
revised bundled plans may have slight dilutive impact on DiGi’s
ARPU, more than offset by subscriber growth. Celcom and
Maxis have yet to react and risk losing subscriber traction due
to the perceived higher value in new DiGi plans.
Incumbents losing market share. We expect market share
for Maxis and Celcom to decline (prepaid and postpaid),
though DiGi should still be able to grow its subscriptions
through its revised plans for entry-level subscribers. Our current
subscription growth assumptions on DiGi, Maxis and Celcom
are 9%, 2% and 4% respectively. Smaller MVNOs and
operators have grabbed market share from incumbents (lost
c.10ppt) from 1Q09-4Q12 by offering competitive tariffs and
bundling (Tune Talk and U Mobile are most aggressive).
Margin pressure. We expect FY13F industry EBITDA margin to
slide 0.5ppt to 41.4% on lower voice and SMS revenues and
competitive pressures (specifically on Telekom Malaysia).
Margins could see further pressure as operators push handset
sales to clear inventory and lock in subscribers on flagship
phones. Subsidies could eat into earnings, with Celcom and
DiGi being more aggressive in tablets and handsets
respectively. We note that a 1% change in EBITDA margin
would change FY13F industry earnings by 4%. Unexpected
accelerated depreciation could also impact margins.
Dominant players may be hardest hit. Industry earnings
growth is average (4-5% y-o-y) and valuations remain
expensive (+1.5SD of 5-year mean PE). Maxis and Telekom
Malaysia are most exposed to the risks due to their dominance,
and lack of value offerings would allow competitors to eat into
their respective market shares. Our FY13-15F industry earnings
forecast remains 4-7% below consensus.
Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)
RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating
Axiata Group 6.64 18,299 5.30 0.5 27.3 FV Maxis Bhd 6.54 15,880 5.45 (2.0) 7.1 FV Digi.Com 4.57 11,503 4.85 (13.4) 12.8 HOLD Telekom Malaysia 5.42 6,277 4.65 (10.8) 1.3 FV
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
DiGi Maxis Celcom Others
75
80
85
90
95
100
105
110
1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012
DIGI CELCOM MAXIS
RM
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 2
EBITDA MarginEBITDA MarginEBITDA MarginEBITDA Margin BaseBaseBaseBase -0.5ppt-0.5ppt-0.5ppt-0.5ppt -1.0ppt-1.0ppt-1.0ppt-1.0ppt -1.5ppt-1.5ppt-1.5ppt-1.5ppt
Maxis 48.1% -1.6% -3.3% -4.9%
DiGi.Com 46.1% -1.6% -3.2% -4.8%
Celcom Axiata 43.9% -1.5% -3.0% -4.5%
Telekom Malaysia 30.6% -5.3% -10.6% -16.0%
Subscriber GrowthSubscriber GrowthSubscriber GrowthSubscriber Growth -1.0ppt-1.0ppt-1.0ppt-1.0ppt -2.0ppt-2.0ppt-2.0ppt-2.0ppt -3.0ppt-3.0ppt-3.0ppt-3.0ppt
Maxis 2.4% -0.7% -1.5% -2.2%
DiGi.Com 8.9% -0.8% -1.7% -2.4%
Celcom Axiata 4.1% -0.5% -1.0% -1.6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
DiGi Maxis Celcom Others
Downside risks in market share loss, lower voice and SMS revenues, aggressive subsidies and accelerated depreciation
Expect further market share lossExpect further market share lossExpect further market share lossExpect further market share losseseseses. . . . Competition for
subscribers have continued to eat into the incumbent
players’ market share (fell 10ppt between 1Q09 and 4Q12).
They have been losing out to smaller operators and MVNOs
like U Mobile and Tune Talk, especially in the prepaid
segment (see Fig. 1: Maxis and Celcom are slowly losing
market share while DiGi has been roughly stable). We
attribute this to competitive rates in the prepaid segment,
with U Mobile and Tune Talk offering the lowest pay-as-you-
use (PAYU) data and voice rates (see Fig. 6). Moreover,
prepaid plans by U Mobile which incorporate data, voice and
SMS as well as a rewards-based system (free SMS and
minutes) appeal more to entry-level prepaid users compared
to the incumbents’ plans.
Among the three large operators, DiGi is still gaining market
share in the postpaid segment mainly due to its lower priced
plans and higher subsidies for popular handsets (see Fig. 4).
Puncak Semangat, the newest player in the Malaysian
telecoms space, has not revealed its business plan for 4G LTE
network rollout. U Mobile, known for its low-cost data
packages, have also yet to market and monetise its share of
the 2.6GHz spectrum. We expect 4G LTE to be met with
similar challenges given the intense pricing competition in
3G data bundles.
MarginMarginMarginMargin pressure from all frontspressure from all frontspressure from all frontspressure from all fronts.... Offering better value in
bundled pricing through more free SMS and voice minutes
(if maintained at the same price point) could affect
operators’ EBITDA margins directly via lower voice and SMS
revenues, compounded by the need to lock in contract
subscribers via low-margin handset bundles. This is especially
evident in the small postpaid market (18% of total market),
exacerbated by low 3G penetration (35% of total market).
We estimate that a 1ppt change in industry EBITDA margin
would change industry earnings by 4%.
Could disCould disCould disCould disappointing factors in 2012 spill into 2013? appointing factors in 2012 spill into 2013? appointing factors in 2012 spill into 2013? appointing factors in 2012 spill into 2013? We
expect industry EBITDA margin to come in at 41.4% in 2013
with slightly weaker margins for cellular operators after
factoring in slower voice and SMS revenues, but do not
expect large downswings given cost optimisations. The main
driver of lower FY13F industry EBITDA margins would be
Telekom Malaysia, because of a larger proportion of lower-
margin contracts, slowing Unifi net adds amid strong
competition, and higher manpower expenses after it
extended employee retirement age to 60. Industry EBITDA
margins fell 110bps in 2012 led by Telekom Malaysia and
Maxis. Both DiGi and Maxis saw weaker EBITDA margins
due to a larger mix of low-margin revenues (handset sales
for DiGi; handset and hubbing revenues for Maxis). Telekom
Malaysia saw EBITDA margin slide 190bp y-o-y due to higher
direct, labour and maintenance costs. Meanwhile, there are
downside risks from aggressive handset/tablet subsidies and
further plan/rate cuts. In terms of subsidies, Celcom is the
most exposed in tablets such as the iPad and iPad Mini (See
Fig. 7), while DiGi and U-Mobile (see Fig. 4) offer the highest
subsidies/plan rebates for handset plans.
Fig. 1: Subscriptions – incumbents losing market share to
smaller operators and MVNOs, especially in prepaid
segment
Source: SKMM Pocket Book of Statistics, Celcom Axiata, DiGi.Com,
Maxis
Fig.2: Sensitivity Analysis - Earnings vs EBITDA margin &
subscriber growth
Source: DBS Vickers Research
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 3
30%
35%
40%
45%
50%
55%
2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013F
Maxis Celcom
DiGi Telekom Malaysia
Industry
DiGi.ComDiGi.ComDiGi.ComDiGi.Com U-MobileU-MobileU-MobileU-Mobile MaxisMaxisMaxisMaxis Ce lcomCelcomCelcomCelcom
Samsung Galaxy Note II 20%-59.2%20%-59.2%20%-59.2%20%-59.2% 13.0%-60.9%13.0%-60.9%13.0%-60.9%13.0%-60.9% 26.1%-39.1% 20.1%-34.8%
Samsung Galaxy SIII 27.0%-65.0%27.0%-65.0%27.0%-65.0%27.0%-65.0% 30.0%-70.6%30.0%-70.6%30.0%-70.6%30.0%-70.6% 35.0%-50.0% 30.6%-45.6%
Samsung Galaxy SIII Mini 37.0%-61.1%37.0%-61.1%37.0%-61.1%37.0%-61.1% 10.0%-50.1% 45.0%-60.1%45.0%-60.1%45.0%-60.1%45.0%-60.1% 11.1%-41.1%
Sony Xperia Z 18.6%-93.1%18.6%-93.1%18.6%-93.1%18.6%-93.1% -23.2-54.6% X 18.7%-32.3%
HTC Butterfly 23.5%-47.8%23.5%-47.8%23.5%-47.8%23.5%-47.8% 17.9%-35.3% 21.7%-34.8% 23.1%-26.1%
Nokia Lumia 920 23.0%-51.0%23.0%-51.0%23.0%-51.0%23.0%-51.0% X 11.9%-23.7% X
iPhone 5 16.0GB 19.9%-25.7%19.9%-25.7%19.9%-25.7%19.9%-25.7% X 3.5%-21.3% 19.1%-24.3%
iPhone 4S 16.0GB 43.5%-100.0%43.5%-100.0%43.5%-100.0%43.5%-100.0% X 22.2%-41.7% 36.7%-86.8%
LG Nexus 4 29.1%-63.1%29.1%-63.1%29.1%-63.1%29.1%-63.1% X X X
Samsung Galaxy Note 10.1 -39.8% -34.9% X -27.8%-46.0%-27.8%-46.0%-27.8%-46.0%-27.8%-46.0%
Samsung Galaxy Tab 2 10.1 -58.4%-58.4%-58.4%-58.4% X X -27.4%-40.8%
DiGi could see more postpaid adds DiGi could see more postpaid adds DiGi could see more postpaid adds DiGi could see more postpaid adds from plan revisfrom plan revisfrom plan revisfrom plan revisionionionion. . . . DiGi
recently revamped its Smart Data Plan offerings to include
free minutes and SMSes, and split data quotas into social
media application and conventional data usage, while
increasing the monthly commitment fee for entry-level
subscriptions by 21% to RM58/mth. This is an interesting
concept: it effectively halves the quota for high-consumption
users, especially for those who do not actively use social
media applications. Moreover, social media applications like
Twitter, Whatsapp and Facebook do not use inordinate data
packets, as video streaming would take up its normal mobile
internet quota, which saves DiGi valuable data-related costs.
Effectively, the revised plans will benefit low usage, entry-
level data bundle users as they gain more value (on-net calls
and SMSes, and additional 1.0GB for social media), but caps
data quota usage on higher-end subscribers. The higher
commitment fee still yields more value than Maxis and
Celcom’s offerings, and could result in lower traction in
postpaid subscription growth for the latter two. It is also
clear that DiGi is attempting to optimise data-related
expenses to preserve margins (refer to Fig. 5 for plan
comparison). Reinforcing this point is a disclaimer by DiGi
that the current 2GB, 5GB and 7GB plans would revert to
1GB, 3GB and 5GB, respectively, after Apr 2013 (apparently
the higher quotas were promotional and valid between Dec
2012 and Apr 2013). However, the new bundling could see
dilution in ARPU, though this would be compensated by
stronger subscription growth.
Fig. 3: Expect slightly lower EBITDA margins
Source: Celcom Axiata, DiGi.Com, Maxis, DBS Vickers
Depreciation could be a problem.Depreciation could be a problem.Depreciation could be a problem.Depreciation could be a problem. DiGi and Maxis saw
disappointing earnings in FY12 partly due to higher-than-
expected accelerated depreciation as a result of network
modernisation initiatives. They were RM575m and RM125m
for DiGi and Maxis, respectively, representing 36% and 5%
of their FY12 pre-tax earnings. For FY13F, DiGi expects
RM150m in accelerated depreciation while Maxis expects
RM100m, which would be 7% and 5% of our FY13F pre-tax
earnings, respectively. Further hiccups in the network
rollouts would result in higher accelerated depreciation
charges, especially since Maxis’ network has not been fully
converted to a single RAN architecture (upgraded based on
a periodically evaluated process).
Fig. 4: DiGi offers attractive discounts on most flagship phones
Source: DiGi.Com, Maxis, Celcom Axiata, U-Mobile, DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 4
Tune TalkTune TalkTune TalkTune Talk DiGiDiGiDiGiDiGi MaxisMaxisMaxisMaxis Maxis Max is Max is Max is CelcomCelcomCelcomCelcom U-MobileU-MobileU-MobileU-Mobile
Easy PrepaidEasy PrepaidEasy PrepaidEasy Prepaid Best PrepaidBest PrepaidBest PrepaidBest Prepaid StandardStandardStandardStandard 5555
Calls (Sen Per Min)
On-net 16 30 26 20 12 28 18
Off-net 16 30 26 30 18 28 18
SMS (Sen per Msg)
On-net 5 8 8 5 1 1 3
Off-net 5 8 8 10 5 5 8
PAYU Data Rate (Sen per MB) 5 100 100 100 100 100 5
Charging Block (Secs) 60 30 10/120* 60 30 300-600^ 30
*Charge for first 10secs: 6sen; Charge for subsequent 120secs: 20sen
^On-net Charging Block: 600secs: Off-net Charging Block: 300secs
NEWNEWNEWNEW
DG Smart Plan 58DG Smart Plan 58DG Smart Plan 58DG Smart Plan 58 DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88 DG Smart Plan 148DG Smart Plan 148DG Smart Plan 148DG Smart Plan 148
Monthly Commitment 58 88 148
Bundled Minutes 200* 300 600
Bundled SMS 200* 300 600
Bundled IDD Minutes 30^
Total Internet Quota 2.0GB 4.0GB 6.0GB
Normal Usage 1.0GB 2.0GB 3.0GB
F acebook , Tw it ter, What sapp usageF acebook , Tw it ter, What sapp usageF acebook , Tw it ter, What sapp usageF acebook , Tw it ter, What sapp usage 1.0GB1.0GB1.0GB1.0GB 2.0GB2.0GB2.0GB2.0GB 3.0GB3.0GB3.0GB3.0GB
Voice Rates 0.15 0.15 0.10
SMS Rates 0.10 0.10 0.10
MMS Rates 0.20 0.20 0.20
*On-net calls and SMSes only
OLDOLDOLDOLD
DG Smart Plan 48DG Smart Plan 48DG Smart Plan 48DG Smart Plan 48 DG Smart Plan 68DG Smart Plan 68DG Smart Plan 68DG Smart Plan 68 DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88
Monthly Commitment 48 68 88
Bundled Minutes - - -
Bundled SMS - - -
Internet Quota 1.0GB 3.0GB 5.0GB
Voice Rates 0.15 0.15 0.15
SMS Rates 0.10 0.10 0.10
MMS Rates 0.20 0.20 0.20
Fig. 5: New DG Smart Plan benefits entry-level subscribers but restricts high-usage data consumers
*On-net Calls and SMSes only
^Only applicable for calls to China, Hong Kong, Thailand, Singapore, USA and Canada
Source: DiGi.Com, DBS Vickers Research
Fig. 6: Tune Talk and U-Mobile offer competitive Voice and PAYU data rates
Source: DiGi.Com, Tune Talk, Maxis, Celcom Axiata, U-Mobile, DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 5
Fig. 7: Celcom most aggressive in tablet subsidies
Source: Celcom Axiata, Maxis, DiGi.Com, DBS Vickers
Maxis
SurfMore 50 SurfMore 75
Quota 2.0GB 5.0GB
Monthly Commitment 50 75
iPad Versions
16GB 1009 899
32GB 1299 1199
64GB 1599 1449
Discount to RRP
16GB -27.9% -35.7%
32GB -23.5% -29.4%
64GB -20.0% -27.5%
Celcom
iPad Light iPad Basic iPad Advance
Quota 2.5GB 4.5GB 10.0GB
Monthly Commitment 50 70 100
iPad Versions
16GB 958 858 608
32GB 1248 1148 898
64GB 1528 1428 1178
Discount to RRP
16GB -31.5% -38.7% -56.5%
32GB -26.5% -32.4% -47.1%
64GB -23.6% -28.6% -41.1%
DiGi
iPad Pro Tablet SuperSim 2GB
Quota 6.0GB 2.0GB
Monthly Commitment 83 39
iPad Versions
16GB 1159 1399
32GB 1459 1699
64GB 1759 1999
Discount to RRP
16GB -17.2% 0.0%
32GB -14.1% 0.0%
64GB -12.0% 0.0%
RRP
16GB 1,399
32GB 1,699
64GB 1,999
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 6
Fig. 7 (cont’d): Celcom most aggressive in tablet subsidies
Source: Celcom Axiata, Maxis, DiGi.Com, DBS Vickers
RRP
16GB 1,899
32GB 2,199
64GB 2,499
Maxis
SurfMore 50 SurfMore 75
Quota 2.0GB 5.0GB
Monthly Commitment 50 75
iPad Versions
16GB 1499 1349
32GB 1749 1599
64GB 2049 1899
Discount to RRP
16GB -21.1% -29.0%
32GB -20.5% -27.3%
64GB -18.0% -24.0%
Celcom
iPad Light iPad Basic iPad Advance
Quota 2.5GB 4.5GB 10.0GB
Monthly Commitment 50 70 100
iPad Versions
16GB 1408 1308 1058
32GB 1648 1548 1298
64GB 1928 1828 1578
Discount to RRP
16GB -25.9% -31.1% -44.3%
32GB -25.1% -29.6% -41.0%
64GB -22.8% -26.9% -36.9%
DiGi
iPad Pro Tablet SuperSim 2GB
Quota 6.0GB 2.0GB
Monthly Commitment 83 39
iPad Versions
16GB 1659 1899
32GB 1959 2199
64GB 2259 2499
Discount to RRP
16GB -12.6% 0.0%
32GB -10.9% 0.0%
64GB -9.6% 0.0%
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 7
75
80
85
90
95
100
105
110
1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012
DIGI CELCOM MAXIS
RM
30
32
34
36
38
40
42
44
1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012
DIGI CELCOM MAXIS
RM
1,200
1,220
1,240
1,260
1,280
1,300
1,320
1,340
1,360
1,380
1,400
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
1,700
1,720
1,740
1,760
1,780
1,800
1,820
1,840
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
2,680
2,690
2,700
2,710
2,720
2,730
2,740
2,750
2,760
2,770
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
-3%
-1%
1%
3%
5%
7%
9%
1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012
DiGi Celcom Maxis
DiGi shows strong postpaid traction on lower plan prices
Postpaid ARPU trend Prepaid ARPU trend
DiGi Postpaid Subscriber Trend Celcom Postpaid Subscriber trend
Maxis Postpaid Subscriber Trend Postpaid YoY Subscriber Growth
Source: Companies, DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 8
7,200
7,400
7,600
7,800
8,000
8,200
8,400
8,600
8,800
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
8,500
8,700
8,900
9,100
9,300
9,500
9,700
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
10,300
10,400
10,500
10,600
10,700
10,800
10,900
1Q2011
2Q2011
3Q2011
4Q2011
1Q2012
2Q2012
3Q2012
4Q2012
-5%
0%
5%
10%
15%
20%
1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012
DiGi Celcom Maxis
Prepaid remains a competitive battleground
DiGi Prepaid Subscriber Trend Celcom Prepaid Subscriber trend
Maxis Prepaid Subscriber Trend Prepaid YoY Subscriber Growth
Source: Companies, DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 9
Earnings upsides over the longer term
CostCostCostCost----savings from collaborations not factoredsavings from collaborations not factoredsavings from collaborations not factoredsavings from collaborations not factored inininin. . . . We have
not accounted for DiGi’s and Celcom’s collaboration efforts
– sharing BTS and joint fiberisation of trunk infrastructure -
in our forecasts. To recap, these two operators had entered
into an agreement to build 1000km of fiber lines to fiberise
the trunk and core infrastructure in the Northern and
Southern areas of Peninsular Malaysia. This will improve
bandwidth/network costs via both lower wholesale prices
(improved bargaining power) and requiring less wholesale
bandwidth from Telekom Malaysia. Newspaper reports
cited RM150-250m in annual cost-savings from sharing BTS
and joint fiberisation, but this will only kick in in 2015 or
later.
Accelerated depreciation Accelerated depreciation Accelerated depreciation Accelerated depreciation charge charge charge charge will will will will dropdropdropdrop in 2014 or later. in 2014 or later. in 2014 or later. in 2014 or later.
DiGi is expected to complete its network modernisation
exercise by mid-2013. It has upgraded 3,754 sites and is
left to complete another 1,847 sites. We anticipate more
normalised depreciation in FY14F, at 10% of revenue
compared to 12% in FY13F. However, this has largely been
priced in by the market.
LTE onLTE onLTE onLTE on1800MHz?1800MHz?1800MHz?1800MHz? An online telecom news site reported
that Maxis had received SKMM approval to utilise the
1800MHz spectrum for its LTE network. This is positive in
terms of improving cost efficiency for the 4G rollout, but it
would be hindered by a shortage of compatible handsets.
Apple has yet to release firmware to enable LTE on iPhone5
models sold in Malaysia, and Samsung has also not released
LTE-compatible models of the Galaxy S3, Note II and Galaxy
S4 in Malaysia. Based on the article, Celcom and DiGi have
yet to receive SKMM approval for conversion of 1800MHz
spectrum usage.
Valuation and Recommendation
Expensive Expensive Expensive Expensive valuations for average growthvaluations for average growthvaluations for average growthvaluations for average growth. . . . We remain
generally cautious of the sector given only average industry
earnings growth (+4-5% y-o-y) and expensive valuations
(+1.5SD of 5-year sector mean PE; +2SD of 5-year sector
mean EV/EBITDA). Maxis and Telekom Malaysia are
currently the most expensive at 22.9x and 25.4x FY13F EPS,
respectively, while Axiata and DiGi.Com are cheaper at
20.9x and 21.5x. Aggressive handset subsidies and spillover
of price pressure to data and postpaid bundles will
continue to drive competition for subscribers. These will be
reflected in ARPU pressure and subsequent EBITDA margin
compression if subscription growth does not improve in
line. There is a risk of further earnings downside in the near
term, while we may only see more material growth in the
medium-to-long term.
Dominant players may suffer. Dominant players may suffer. Dominant players may suffer. Dominant players may suffer. Maxis and Telekom Malaysia
are the most exposed to the risks because they are the
dominant players in the industry. Maxis still enjoys wider 3G
coverage than DiGi, but the gap will narrow by end 2013.
DiGi’s value offerings and higher subsidies for lower-end
handsets will likely attract more entry-level subscribers and
all things considered, DiGi has been playing the low-end
price game longer than Maxis, implying it has greater cost-
efficiency. Telekom Malaysia will see greater competition
this year as Maxis will soon offer its new triple-play
broadband package following its collaboration with Astro
Malaysia. The company has also not rejigged its broadband
plan pricing since it debuted in 2010. Telekom Malaysia
could benefit from offering value to customers via higher
speeds at the same price point, given Astro’s content edge
in its exclusive partnership with popular PayTV channels.
Moreover, the completion of the 1,000km joint fiber plan
between DiGi and Celcom could reduce wholesale revenues
for TM.
Most preferred: DiGi.ComMost preferred: DiGi.ComMost preferred: DiGi.ComMost preferred: DiGi.Com (Hold, RM4.85)(Hold, RM4.85)(Hold, RM4.85)(Hold, RM4.85) offers the
strongest potential for earnings growth, driven by: (i) rising
number of subscribers as it expands coverage (expected to
reach 80% by end-2013) to match Maxis and Celcom, and
(ii) potential re-rating as it transitions into a business trust.
Its perceived value-for-money plans are appealing given
that the market still places pricing ahead of speed.
However, the latest revised plans may sacrifice some high-
consumption data users for entry-level subscribers. It is also
trading lower data-related expenses for less voice and SMS
revenues, though time will tell if the higher commitment
fees can compensate for this.
Least preferred: MaxisLeast preferred: MaxisLeast preferred: MaxisLeast preferred: Maxis (Fully Valued, RM5.45(Fully Valued, RM5.45(Fully Valued, RM5.45(Fully Valued, RM5.45)))). . . . The factors
currently holding Maxis back include: (i) lack of scale in its
Home Fibre Internet packages, which is dragging earnings,
and (ii) premium-priced postpaid packages which could
result in greater churn in favour of DiGi which had recently
rejigged its Postpaid Smart Plans to include free minutes
and SMSes, and which will be able to offer almost similar
network coverage by end-2013.
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 10
-
5
10
15
20
25
30
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
PE Mean +1SD -1SD +2SD -2SD
5
10
15
20
25
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
PE Mean +1SD +2SD -1SD -2SD
10
12
14
16
18
20
22
24
26
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
PE Mean +1SD +2SD -1SD -2SD
10
12
14
16
18
20
22
24
26
28
30
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
PE Mean +1SD +2SD -1SD -2SD
10
12
14
16
18
20
22
24
26
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
PE Mean +1SD +2SD -1SD -2SD
Axiata 5-year PE Band DiGi.Com 6-year PE Band
Maxis 3-Year PE Band Telekom Malaysia 5-Year PE Band
Malaysian telecoms 5-year PE Band
Source: Companies, Bloomberg Finance L.P, DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 11
4
5
6
7
8
9
10
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
EV/EBITDA Mean +1SD
-1SD +2SD -2SD
4
6
8
10
12
14
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
EV/EBITDA Mean +1SD
-1SD +2SD -2SD
8
9
10
11
12
13
14
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
EV/EBITDA Mean +1SD
-1SD +2SD -2SD
4
4
5
5
6
6
7
7
8
8
9
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
EV/EBITDA Mean +1SD
-1SD +2SD -2SD
5
6
7
8
9
10
11
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
EV/EBITDA Mean +1SD
+2SD -1SD -2SD
Axiata 5-year EV/EBITDA Band DiGi.Com 6-year EV/EBITDA Band
Maxis 3-Year EV/EBITDA Band Telekom Malaysia 5-Year EV/EBITDA Band
Malaysian telecoms 5-year EV/EBITDA Band
Source: Companies, Bloomberg Finance L.P, DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 12
Regional Peer Comparison
MktMktMktMkt PricePricePricePrice TargetTargetTargetTarget
CAGRCAGRCAGRCAGR
Dividend Yield Dividend Yield Dividend Yield Dividend Yield
(%)(%)(%)(%) CompanyCompanyCompanyCompany CapCapCapCap LCLLCLLCLLCL PricePricePricePrice %%%%
12121212----14141414 PE (x)PE (x)PE (x)PE (x) P/BVP/BVP/BVP/BV EV/EBITDAEV/EBITDAEV/EBITDAEV/EBITDA
(US$m)(US$m)(US$m)(US$m)
LCLLCLLCLLCL UpsideUpsideUpsideUpside RcmdRcmdRcmdRcmd (%)(%)(%)(%) 13F13F13F13F 14F14F14F14F 12F12F12F12F 13F13F13F13F 12121212AAAA 13F13F13F13F 14F14F14F14F
China / Hong KongChina / Hong KongChina / Hong KongChina / Hong Kong
China Mobile 214,262 82.75 84.00 2% Hold -3 10.5 11.0 4.2% 4.2% 1.8x 3.7x 3.7x
China Telecom 6,972 3.90 5.40 38% Buy 24 13.6 11.0 2.2% 2.2% 1.0x 3.1x 2.7x
China Unicom 30,963 10.20 14.00 37% Buy 45 17.3 12.9 1.5% 1.5% 0.9x 3.7x 3.2x
2222 10.010.010.010.0 9.99.99.99.9
MalaysiaMalaysiaMalaysiaMalaysia
Digi.Com 11,503 4.57 4.85 6% Hold 23 22.3 19.4 5.8% 4.5% 136.0x 11.3x 10.4x
Maxis Bhd 15,880 6.54 5.45 -17% Fully Valued 2 22.9 23.0 6.1% 6.1% 7.0x 12.1x 12.1x
Telekom Malaysia 6,277 5.42 4.65 -14% Fully Valued -2 26.4 22.9 9.6% 3.6% 2.8x 7.3x 6.8x
Axiata Group 18,299 6.64 5.30 -20% Fully Valued 1 21.2 20.1 5.3% 3.5% 2.8x 8.2x 7.7x
5555 22.522.522.522.5 21.021.021.021.0
SingaporeSingaporeSingaporeSingapore
SingTel 45,513 3.54 3.40 -4% Hold 3 14.7 14.4 4.6% 4.8% 2.3x 8.4x 8.1x
Starhub 6,008 4.34 4.30 -1% Hold 5 19.7 19.0 4.6% 4.6% 237.4x 10.2x 9.9x
3333 15.215.215.215.2 14.914.914.914.9
ThailandThailandThailandThailand
Advanced Info Service 24,243 239.00 300.00 26% Buy 19 18.2 14.4 4.6% 5.5% 16.4x 10.6x 8.9x
Shin Corp 8,724 79.75 106.00 33% Buy 22 18.5 14.4 4.7% 5.5% 18.0x 18.4x 14.3x
Total Access Comm. 7,836 97.00 112.00 15% Buy 10 19.1 17.1 5.2% 5.2% 6.6x 8.4x 7.6x
True Corp 3,959 8.00 4.50 -44% Fully Valued nm -31.5 387.2 0.0% 0.0% 8.3x 9.3x 7.3x
18181818 20.220.220.220.2 16.316.316.316.3
IndonesiaIndonesiaIndonesiaIndonesia
Indosat 3,634 6,500 5,600 -14% Sell nm 24.0 22.7 3.0% 2.1% 1.8x 3.8x 5.3x
PT Telekom 22,607 10,900 10,000 -8% Hold 9 15.6 14.4 3.8% 4.5% 4.7x 6.4x 5.3x
XL Axiata 4,649 5,300 5,600 6% Hold 6 15.5 13.8 2.5% 2.9% 2.9x 5.8x 5.3x
15151515 17.717.717.717.7 15.915.915.915.9
Source: DBS Vickers
Sector Focus
Malaysian Telecoms
HWANGDBS
Page 13
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