Telecom Sector. Regional Industry Focus. Stocks with 25-40% upside potential. DBS Group Research. Equity 11 Jul 2017 JCI : 5,814.

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1 Regional Industry Focus Telecom Sector Refer to important disclosures at the end of this report DBS Group Research. Equity 11 Jul 2017 Stocks with 25-40% upside potential Mobile revenue share is a critical factor for stock performance in the sector XL Axiata (EXCL) is likely to gain revenue share from Telkomsel with 2Q17F as near term catalyst; offers 25% upside potential Anticipate re-rating for Indosat (ISAT) from switch to PE metrics in 2H17F; offers 40% upside potential Market has not priced-in EXCL wining revenue share from Telkomsel in 2017F/18F. According to our estimates, EXCL did gain some revenue share from Telkomsel in 1Q17 after incurring big capex outside Java in 2H16 (see side chart). The fact that Telkomsel has been growing its voice revenue over the last three years by charging upfront price for the usage, is going to hurt Telkomsel in the face of rising competition outside Java. Even XL s off-net voice offerings are cheaper than Telkomsel now eroding Telkomsel s advantage. Declining voice and SMS revenue comprise only 37% of EXCL s revenue vs 48% & 66% for ISAT & Telkomsel respectively. JCI : 5, Analyst Sachin MITTAL sachinmittal@dbs.com STOCKS 12-mth Price Mkt Cap Target Price Performance (%) Rp US$m Rp 3 mth 12 mth Rating Telekomunikasi Indonesia 4,630 34,78 4, HOLD Indosat 6,000 2,430 8,500 (11.8 (5.9) BUY XL Axiata 3,200 2,549 4, (11.4) BUY Closing price as of 7 Jul 2017 Source: DBS Bank, Bloomberg Finance L.P. Telkomsel s revenue share gains were reversed in 1Q17 Market has priced-in slower-than-industry growth for ISAT as the stock is trading at our bear-case valuation of Rp6000. While there are some concerns over ISAT s network quality in the wake of its lower capex guidance, ISAT should be able to address the issue due to benign competition in Java. After ISAT raised data pricing towards the end of 2016, EXCL also raised data pricing towards end-1q17. ISAT is likely to defend its mobile revenue share in 2017 as Java region accounts for ~90% of ISAT s revenue vs 75-80% for EXCL and only 30-40% for Telkomsel. ISAT has also raised its capex outside Java and is yet to see any meaningful reaction from Telkomsel. ISAT Near -2 SD of its 12-mth forward EV/EBITDA average Non-consensus HOLD call on TLKM as the stock has priced in 10% EBITDA CAGR over FY16-19F. TLKM s valuation premium is not justified as we project FY16-19F EBITDA CAGR of 8% for TLKM versus 10% consensus CAGR. We estimate that Non-Telkomsel business needs to show an aggressive 20% EBITDA CAGR to meet consensus expectations. EXCL - Near -1 SD of its 12-mth forward EV/EBITDA average Market may be overlooking consistent earnings growth of ISAT and a switch to PE metrics in 2H17F. ISAT & EXCL are cheap at 3.5x & 5.4x 12-month EV/EBITDA respectively vs TLKM s 9.5x (adjusted) and 7x average for Asian telcos. We expect ISAT to re-rate significantly as it is trading at only 16x 12-month forward PE while offering 25% earnings CAGR over FY17F-19F amid declining debt and slower rise in depreciation. Source: DBS Bank ed: CK / sa:ma, PY

2 Industry Focus Telecom Sector In our critical factor analysis, we have identified revenue share as a major trigger for share price movements. Telkomsel has been growing much faster than peers over the last two years. Telkomsel showed revenue growth of 14% in FY16 (ISAT 9%, EXCL -7%) on top of 15% in FY15 (ISAT 11%, EXCL -3%). Telkomsel s above market growth compared to XL s contraction indicate Telkomsel singlehandedly gained the revenue share lost by XL outside Java. However, the trend was reversed in 1Q17. Since end-fy16, with EXCL s 3G expansion into non-java region, we are seeing some clawback of revenue share by EXCL, especially from TLKM. ISAT has also indicated plans to pursue opportunities outside Java, thus pointing to increasing competition in the non-java region. Ms Novi 3721 Telkomsel s revenue (y-o-y) has been growing much faster than peers in the past Competition heated up outside Java towards the end of Revenue share growth of EXCL at the expense of TLKM suggests that EXCL is gaining traction outside Java, as it is investing in heavily its 3G/4G networks in the region. Since 1Q16 EXCL has added nearly 30k (+132%) 3G/4G base stations, reducing its network quality deficit with TLKM outside Java. Management also expects to increase in its non- Java capex going forward, indicating the likelihood of heightened completion in the region. XL Axiata 3G/4G base stations have increased by 132% in the last four quarters 46,935 50,073 41,143 28,724 16,611 17,478 18,936 21,373 21,610 36,331 37,072 37,364 37,506 37,430 37,629 37,582 37,549 37,575 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Source: XL Axiata, DBS Bank 2G 3G/4G Source: DBS Bank Telkomsel s revenue share gains were reversed in 1Q17 by EXCL In addition, EXCL s prices its services at a discount to Telkomsel which will become more attractive as the former s footprint grows. Telkomsel charges a very high upfront charge for the first 2-3 minutes for prepaid, making short calls on the network very expensive. Comparatively EXCL s voice bundles tend to be much cheaper even in the case for off-net calls, implying competition in the segment could result in significant changes in voice monetisation for Telkomsel. Selected EXCL prepaid voice plans cheaper than Telkomsel even for off-net calls Source: DBS Bank XL prepaid voice plans Price (Rp) Minutes Price per minute Validity On net days On net days Off net days Off net days Off net days Off net days Source: XL Axiata, DBS Bank Page 2

3 Industry Focus Telecom Sector Telkomsel SIMPATI s prepaid voice rates in selected non-java regions Time 00:00 to 11:59 12:00 to 17:59 18:00 to 23:59 Fare Rp200/12 seconds for the first 48 seconds then Rp6/12 seconds for 3600 seconds. Repetitive scheme. Rp180/12 seconds for 108 seconds then Rp6/12 seconds for 3600 seconds. Repetitive scheme. Rp180/12 seconds for 156 seconds then Rp6/12 seconds for 1800 seconds. Repetitive scheme. Industry growth likely to be lower in FY17. Legacy revenues account for 59% of total cellular service revenues (1Q17) in Indonesia. SMS volumes for telcos started declining in mid- FY15 and are on a steady downward trajectory. And currently we are seeing an industry-wide contraction of SMS revenue. Data as a percentage of revenue Telkomsel lags behind due to higher non-java contribution (60-70% versus 25-30% for EXCL and 10% for ISAT) Off-Net Rp900/30 seconds for 120 seconds then Rp15/30 seconds for 300 seconds. Repetitive scheme Source: cellphone-companies.com, DBS Bank Benign competition in Java. In contrast, we do not expect competition in Java to see significant changes in the near term as telcos are looking to increase data prices to monetise the high penetration of data in Java. However, legacy revenue cannibalisation is a concern for the Java region due to high smartphone penetration rate of ~50%. ISAT was the first telco to raise data pricing towards the end of XL followed ISAT with higher data pricing towards the end of 1Q17. Packages for Xtra Combo (XL Axiata) suggest benign competition in Java Package Price Feb 17 Jul 17 3G data 4G data 3G data 4G data IDR 59,000/month 2 GB 10 GB 2 GB 4 GB IDR 89,000/month 4 GB 15 GB 4 GB 8 GB IDR 129,000/month 6 GB 20 GB 6 GB 12 GB IDR 179,000/month 10 GB 30 GB 10 GB 20 GB Note: July 2017 packages includes extra bandwidth allocation for Youtube, Source: XL Axiata, DBS Bank Data pricing decline halted for ISAT and slowed for EXCL in 1Q17 Source: Companies, DBS Bank SMS revenue is already trending downward 4,000 Rp Bn 3,500 3,629 3,518 3,201 3,318 3,353 3,276 3,365 3,215 2,843 3,000 2,500 2,000 1,500 1,078 1,175 1,332 1,333 1,222 1,178 1,273 1,231 1,089 1, , Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Telkomsel XL Indosat Source: Companies, DBS Bank Voice revenues held up so far but likely to drop in FY17. Voice volumes are in steady decline though we are seeing players such as Telkomsel growing voice revenues over the past few quarters by moving pay-as-you-use users to bundled products. Source: Companies, DBS Bank Page 3

4 Industry Focus Telecom Sector As subscribers increase their data usage, they are more likely to switch to data bundles that provide data at a cheaper rate. hence, telcos are bundling voice minutes with relatively cheap data bundles, thus boosting voice revenues. In addition, telcos are selling voice bundles at a cheaper rate to induce subscribers to pay lump sum upfront regardless of the overall usage. Telkomsel s pricing plans New Halo Fit My Plan Price Data Minutes SMS Rp100000/month 2GB Rp200000/month 5GB Rp350000/month 10GB Package details Price 50 minutes to fellow TELKOMSEL Rp25,000 / month 50 minutes to Other Operators Rp35,000 / month 50 minutes to PSTN / CDMA Rp30,000 / month 200 SMS to fellow TELKOMSEL Rp50,000 / month 100 minutes & 100 SMS packages to All Rp100,000 / month Domestic Operators 200 minutes & 200 SMS packages to All Rp200,000 / month Domestic Operators Source: Telkomsel, DBS Bank Voice pricing has been rising at Telkomsel amid lower usage Voice usage is declining for all the telcos MOU Bn Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Source: Companies, DBS Bank Telkomsel XL Indosat As a result, we believe the downward pressure and the voice contraction will result in overall industry growth to reduce to ~7% in FY17 compared to ~11% in the previous year. In our view, Telkomsel is likely to register slower growth than its peers as voice and SMS comprised 66% of its revenue vs 48% for ISAT and 37% for EXCL. In our opinion, market expectations from TLKM are quite high as non-telkomsel revenue needs to grow 20% in FY17F (vs 12% last year) to meet market expectations. TLKM is trading at an adjusted 12- month forward EV/EBITDA of 9.5x which is significantly above the regional average of 7x. Source: Companies, DBS Bank Though this is likely to delay voice revenue contraction, we believe it will be short lived, similar to SMS revenues. Bundled voice and data products will put downward pressure on data pricing, thereby hurting efforts to improve data monetisation while subscribers are likely to downgrade to increasingly smaller and cheaper voice bundles as the voice usage decline picks up steam. With data coverage and competition increasing in ex-java, we expect voice usage decline to steepen triggering a decline in voice revenues by mid-fy17. Telkomsel s voice usage has already declined over 20% over the past seven quarters. Page 4

5 Industry Focus Telecom Sector Critical factor analysis Market share a critical factor in share price movements for Indonesian telcos. In our critical factor analysis we have over the past ~10 years, we have seen share price movements to follow the mobile revenue share changes of telcos. This has held true for all telcos, including TLKM that derives a majority of its revenues through Telkomsel. EXCL s share price movement with revenue share changes Dec 06 Dec 07 Dec 08 Dec 09 Source: Reuters, DBS Bank Dec 10 Dec 11 Dec 12 Dec 13 XL Axiata Reuters Indo. Telecom Index Dec 14 25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15% TLKM s share price movement with Telkomsel revenue share changes Source: Reuters, DBS Bank ISAT s share price movement with revenue share changes % 58% 57% 56% 55% 54% 53% 52% 51% 50% 29% 28% 27% 26% 25% 24% 23% 40 22% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 PT Telkom Reuters Indo. Telecom Index Dec 14 Indosat Reuters Indo. Telecom Index ISAT Mkt Share Source: Reuters, DBS Bank Page 5

6 Industry Focus Telecom Sector Key risks to our valuation Bear-case valuation for TLKM is Rp4100. If TLKM were to see FY16-19F EBITDA grow at 5% versus our base case projection of 8% CAGR due to slower fixed line growth coupled with only 5% EBITDA CAGR at Telkomsel, our TP will drop to Rp4100. This scenario could materialize if EXCL and ISAT embark on network sharing outside Java. Bull-case valuation for TLKM is Rp5500. If TLKM were to see FY16-19F EBITDA grow at 11% versus our base case projection of 8% CAGR due to faster fixed line growth coupled with 7% EBITDA CAGR at Telkomsel, our TP will rise to Rp5500. Bear case valuation for EXCL is Rp3050. If EXCL were to register just 5% EBITDA CAGR over FY16-19F versus our base case EBITDA CAGR of 8%, due to lower than expected industry growth rate coupled with slight loss of revenue share, our TP will be Rp3050. This scenario could materialize if EXCL is unable to execute its strategy outside Java. Bull case valuation for EXCL is Rp4600. If EXCL were to register 11% EBITDA CAGR over FY16-19F versus our base case EBITDA CAGR of 8%, due to successful network sharing with ISAT, our TP will rise to Rp4600. Bear case valuation for ISAT is Rp6000. If ISAT were to show FY16-19F EBITDA CAGR of 2% instead of base case projections of 6% CAGR due to loss of revenue share, our TP will drop to Rp6000. This scenario could materialize if ISAT faces network quality issues due to capex squeeze or excessive voice revenue erosion. Bull case valuation for ISAT is Rp9200. If ISAT were to show FY16-19F EBITDA CAGR of 8% instead of base case projections of 6% CAGR due to network sharing with EXCL and revenue share gains, our TP will rise to Rp9200. Peers Valuation Source: DBS Bank, DBSVT, DBSVI, AllianceDBS, DBSHK, Bloomberg Finance L.P. Page 6

7 Indonesia Company Guide Telekomunikasi Indonesia Version 5 Bloomberg: TLKM IJ Reuters: TLKM.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 11 Jul 2017 HOLD Last Traded Price ( 10 Jul 2017): Rp4,570 (JCI : 5,771.50) Price Target 12-mth: Rp4,800 (5% upside) (Prev Rp4,100) Analyst Sachin MITTAL sachinmittal@dbs.com What s New Telkomsel s growth to slow sharply in FY17F; Corporate and Fibre broadband to support fixed segment revenue Ex-Java competition from EXCL a concern Maintain HOLD with revised TP of Rp4,800 Price Relative Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 116, , , ,442 EBITDA 59,498 66,266 71,560 76,066 Pre-tax Profit 38,189 45,069 48,729 51,284 Net Profit 19,352 23,634 26,816 28,868 Net Pft (Pre Ex.) 19,352 23,634 26,816 28,868 Net Pft Gth (Pre-ex) (%) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH ROAE (%) Earnings Rev (%): 5 1 N/A Consensus EPS (Rp): Other Broker Recs: B: 28 S: 0 H: 7 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Premium valuation suggests high expectations Premium valuation warrants high growth from Non-Telkomsel business. The legacy revenue of Telkomsel has been growing so far but is likely to decline in FY17 due to rising competition outside Java and higher smartphone penetration. We project Telkomsel revenue to grow below 7% (versus 14% last year) implying that Non-Telkomsel revenue needs to grow 20% in FY17F (versus 12% last year) to meet market expectations. TLKM s premium valuation of 9.7x adjusted FY17F EV/EBITDA at 85% & 140% premium to EXCL & ISAT respectively do not leave much on the table in our view. Where we differ? While 1Q17 Non-Telkomsel revenue jumped c.20% y-o-y to Rp8.7tr, we are not sure about the sustainability of such growth. The growth mainly came from sale of customer premises equipment for ICT solutions. We see some room for disappointment to our and consensus FY17F EBITDA forecasts. Potential catalyst. We see a potentially sharp slowdown in the Telkomsel business in 2H17F with rising competition and smartphone penetration approaching 30% plus in the non-java region. As Telkomsel generates 66% of its revenues from legacy voice and SMS services (vs 37% for EXCL and 48% for ISAT), it is likely to be impacted more over the next 2-3 years. Valuation: Maintain HOLD. Due to the bullish outlook for fixed-line segment growth, we have bumped up our estimates for FY17F/18F topline growth for TLKM by 4%/5%. The counter is trading at a relatively high adjusted EV/EBITDA of 9.7x, with EBITDA CAGR of 7% over FY Our DCF-based (WACC 9.1%, terminal growth 1%) TP is Rp4,800. Key Risks to Our View: Disruption of its strong presence outside Java. We have not factored any network sharing between EXCL and ISAT in our model. Any network sharing arrangement could hurt TLKM quite badly outside the Java region where people do not have much choice other than Telkomsel currently. At A Glance Issued Capital (m shrs) 100,800 Mkt. Cap (Rpbn/US$m) 460,656 / 34,385 Major Shareholders (%) Govt. of Indonesia (%) 51.0 Free Float (%) m Avg. Daily Val (US$m) 32.5 ICB Industry : Telecommunications / Telecommunications ed: CK / sa:ma, PY

8 Telekomunikasi Indonesia CRITICAL DATA POINTS TO WATCH Critical Factors Telkomsel growth hampered by legacy decline. Telkomsel was the key growth driver over the past few years with 14% top line growth in FY16. Telkomsel has been able to avoid decreases in its legacy services due to its presence outside Java. However, we believe the industry dynamics are at a tipping point which would drastically reduce Telkomsel s growth in the immediate future. The company is already witnessing steep drops in SMS revenues while voice usage levels are also in steady decline. Voice revenues, which have been sustained through bundling and cluster base pricing, are unlikely to sustain at these levels in our view, due to increasing competition outside Java and overall drop in voice demand. As a result, we expect the Indonesian mobile segment to expand at 7%, despite the strong mobile data growth, down from 11% last year. Telkomsel generates 66% of its revenues from legacy services, compared to 37% for EXCL and 48% for ISAT. Hence, we do not expect Telkomsel to outperform the market like it did in previous years, despite its strong market position. Corporate segment to offset Telkomsel slowdown. We expect TLKM s corporate segment growth to remain strong in FY17 with higher revenues being booked through ICT solutions and managed services. The corporate segment saw its external revenues increase by 15% in FY16 while the segment s higher ICT solution due to increases due to a revenue jump from Customer Premise Equipment revenue was the key contributor to the 23% q-o-q bump in 1Q17 TLKM fixed segment revenues. IndiHome will support overall growth, but still early days. IndiHome added ~150k subscribers in 1Q17 though a majority of the subscribers were upgrading from their existing fixed broadband packages. Management expects the IndiHome uptake to accelerate as the year progresses which should support fixed home segment (voice, broadband, pay TV) growth. With voice services contracting, we expect the segment s growth to add ~Rp1.5tr to the topline, or around ~1% to the overall TLKM s revenue in FY17. Due to our bullish outlook for fixed-line segment growth, we have revised up our estimates for FY17F/18F topline growth for TLKM by 4%/5%. GSM Subscribers (m) Data revenue EBITDA Margin % Net Capex (Rp tr) EBITDA (Rptn) Source: Company, DBS Bank Page 8

9 Telekomunikasi Indonesia Appendix 1: A look at company's listed history what drives its share price? Market share a critical factor in share price movements for Indonesian telcos. In our critical factor analysis we have over the past ~10 years, we have seen share price movements to follow mobile revenue share changes of telcos. This has held true for all telcos including TLKM, which derives a majority of its revenues from Telkomsel. TLKM share price movement with Telkomsel revenue share changes % % 57% % % 54% 80 53% 60 52% 51% 40 50% Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Source: Reuters, DBS Bank PT Telkom Reuters Indo. Telecom Index TLKM Mkt Share Page 9

10 Telekomunikasi Indonesia Balance Sheet: No exposure to foreign debt. TLKM has the strongest balance sheet among peers because of zero exposure to foreign debt, and the lowest gross debt to equity ratio of 0.25x. The low leverage also means TLKM has better flexibility to acquire digital or other businesses. TLKM's capex will be sustainable at 23-25% of revenue, at Rp31tr in FY17. Capex will be focused on mobile and fixed broadband investments. Share Price Drivers: Limited upside despite fixed line growth. Telkomsel which accounts for ~75% of topline is under threat from voice and SMS cannibalisation and an aggressive EXCL. The counter is trading at a relatively high adjusted EV/EBITDA of 9.7x with an average EBITDA CAGR of 8% over FY16-FY19. Our DCF-based (WACC 9.15%, Terminal growth 1%) TP of Rp4,800 indicates 3% potential upside with c.3% yield. Bear-case valuation. TLKM were to see FY16-19F EBITDA grow at 5% versus our base case CAGR of 8% due to slower fixed line growth coupled with 5% EBITDA CAGR at Telkomsel, our TP will drop to Rp4100. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Bull-case valuation. If TLKM were to see FY16-19F EBITDA grow at 11% versus our base case CAGR of 8% due to faster fixed line growth coupled with 7% EBITDA CAGR at Telkomsel, our TP will rise to Rp5500. Key Risks: EXCL s cannot gain traction outside Java. If EXCL is not able to gain traction outside Java, Telkomsel could potentially maintain its voice revenue growth. Slowdown in corporate revenues. Despite strong growth in corporate revenues, the segment relies on new contracts in the areas of ICT solutions and manage services. A slowdown in new orders could potentially slow down TLKM Company Background TLKM Indonesia is the largest telecommunication and network provider in Indonesia. The company offers a wide range of network and telecommunication services, including fixed-line connection services, cellular services, network and interconnection services, as well as Internet and data communication services. TLKM also operates multimedia businesses such as content and applications, completing its business portfolio that spans Telecommunication, Information, Media, Edutainment and Services (TIMES). Forward PE Band (x) PB Band (x) Source: Company, DBS Bank Page 10

11 Telekomunikasi Indonesia Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F GSM Subscribers (m) Data revenue EBITDA Margin % Net Capex (Rp tr) EBITDA (Rptn) Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (Rpbn) Fixed Line 7,833 7,542 7,240 6,951 6,673 Wireless Voice 37,285 38,497 37,727 36,973 36,233 Interconnection 4,290 4,151 4,027 3,906 3,789 Data/Internet & SMS 47,820 58,971 69,644 79,098 87,562 Others 5,242 7,172 8,679 10,071 11,186 Total 102, , , , ,442 (Rpbn) Voice starting to decline from FY17 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 102, , , , ,442 Cost of Goods Sold (51,055) (56,835) (61,050) (65,437) (69,376) Gross Profit 51,415 59,498 66,266 71,560 76,066 Other Opng (Exp)/Inc (18,534) (18,532) (20,257) (21,980) (23,971) Operating Profit 32,881 40,966 46,009 49,580 52,094 Other Non Opg (Exp)/Inc (463) (1,771) Associates & JV Inc (2.0) Net Interest (Exp)/Inc (1,074) (1,094) (1,037) (953) (915) Exceptional Gain/(Loss) Pre-tax Profit 31,342 38,189 45,069 48,729 51,284 Tax (8,025) (9,017) (10,817) (11,695) (12,308) Minority Interest (7,828) (9,820) (10,618) (10,218) (10,108) Preference Dividend Net Profit 15,489 19,352 23,634 26,816 28,868 Net Profit before Except. 15,489 19,352 23,634 26,816 28,868 EBITDA 51,415 59,498 66,266 71,560 76,066 Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Topline revised upward due to fixed-line business Source: Company, DBS Bank Page 11

12 Telekomunikasi Indonesia Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 27,542 28,912 29,734 30,145 31,022 Cost of Goods Sold (12,887) (14,772) (14,151) (15,025) (14,213) Gross Profit 14,655 14,140 15,583 15,120 16,809 Other Oper. (Exp)/Inc (4,405) (4,334) (4,618) (5,175) (4,773) Operating Profit 10,250 9,806 10,965 9,945 12,036 Other Non Opg (Exp)/Inc (663) 520 (557) (983) 472 Associates & JV Inc Net Interest (Exp)/Inc (271) (144) (289) (390) (184) Exceptional Gain/(Loss) Pre-tax Profit 9,316 10,182 10,119 8,572 12,324 Tax (2,423) (2,412) (2,613) (1,569) (2,948) Minority Interest (2,307) (2,430) (2,700) (2,383) (2,688) Net Profit 4,586 5,340 4,806 4,620 6,688 Net profit bef Except. 4,586 5,340 4,806 4,620 6,688 EBITDA 14,655 14,140 15,583 15,120 16,809 Growth Revenue Gth (%) EBITDA Gth (%) 2.2 (3.5) 10.2 (3.0) 11.2 Opg Profit Gth (%) 10.1 (4.3) 11.8 (9.3) 21.0 Net Profit Gth (Pre-ex) (%) (10.0) (3.9) 44.8 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Q17 revenue boosted by ICT solutions revenue Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 103, , , , ,147 Invts in Associates & JVs Other LT Assets 14,561 17,412 17,469 17,570 17,674 Cash & ST Invts 30,935 31,238 30,195 35,871 47,181 Inventory Debtors 7,517 7,363 9,247 9,950 7,272 Other Current Assets 8,932 8,516 12,282 12,748 13,164 Total Assets 166, , , , ,295 ST Debt 4,444 5,432 5,877 5,877 5,877 Creditor 13,994 13,518 17,193 18,428 20,813 Other Current Liab 16,975 20,812 17,277 18,445 19,542 LT Debt 30,168 26,367 25,922 25,477 25,032 Other LT Liabilities 7,164 7,938 7,938 7,938 7,938 Shareholder s Equity 75,136 84,384 88,845 93,198 96,989 Minority Interests 18,292 21,160 31,778 41,996 52,104 Total Cap. & Liab. 166, , , , ,295 Non-Cash Wkg. Capital (13,992) (17,867) (12,186) (13,366) (19,061) Net Cash/(Debt) (3,677) (561) (1,604) 4,517 16,271 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH Net Debt/Equity ex MI (X) CASH CASH Capex to Debt (%) Z-Score (X) TLKM is very liquid with limited debt Source: Company, DBS Bank Page 12

13 Telekomunikasi Indonesia Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 31,342 38,189 45,069 48,729 51,284 Dep. & Amort. 18,534 18,532 20,257 21,980 23,971 Tax Paid (9,509) (14,000) (11,067) (11,475) (12,155) Assoc. & JV Inc/(loss) 2.00 (88.0) (96.8) (101) (105) Chg in Wkg.Cap. 3,811 7,297 (5,432) 961 5,541 Other Operating CF (511) (2,699) Net Operating CF 43,669 47,231 48,731 60,094 68,537 Capital Exp.(net) (27,425) (29,330) (30,641) (31,509) (31,706) Other Invts.(net) (61.0) 1,307 (1,307) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (27,421) (27,557) (31,948) (31,509) (31,706) Div Paid (10,427) (10,555) (19,173) (22,463) (25,077) Chg in Gross Debt 11,778 (3,734) 0.0 (445) (445) Capital Issues , Other Financing CF (7,222) (6,994) Net Financing CF (5,803) (18,024) (19,173) (22,908) (25,522) Currency Adjustments Chg in Cash 10,445 1,650 (2,390) 5,676 11,309 Opg CFPS (Rp) Free CFPS (Rp) Dividend payout at 70% Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Sachin MITTAL Page 13

14 Indonesia Company Guide Indosat Version 5 Bloomberg: ISAT IJ Reuters: ISAT.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 11 Jul 2017 BUY Last Traded Price ( 10 Jul 2017): Rp6,175 (JCI : 5,771.50) Price Target 12-mth: Rp8,500 (38% upside) Analyst Sachin MITTAL sachinmittal@dbs.com What s New Biggest beneficiary of benign competition in Java Potential to move to PE-based valuation by end- FY17, 20% premium to current EV/EBITDA expected Maintain BUY with unchanged TP of Rp8,500 Price Relative Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 29,185 31,307 33,127 35,184 EBITDA 12,778 13,651 14,435 15,356 Pre-tax Profit 1,795 2,823 3,697 4,446 Net Profit 1,105 1,788 2,381 2,885 Net Pft (Pre Ex.) 1,105 1,788 2,381 2,885 Net Pft Gth (Pre-ex) (%) nm EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) (184) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) 2,457 2,786 3,224 3,755 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): 17 8 N/A Consensus EPS (Rp): Other Broker Recs: B: 25 S: 0 H: 4 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Switch to PE valuation to boost share price Biggest beneficiary of benign competition in Java. ISAT was the first telco to increase data pricing in Java, followed by EXCL towards the end of 1Q17. ISAT has the highest revenue exposure to Java (~90% versus 75-80% for EXCL and 30-40% for Telkomsel), and is also investing a larger portion of capex to grow its non-java revenue in ISAT is trading at ~40% & ~60% discount to EXCL & TLKM in terms of EV/EBITDA respectively and should re-rate from switching to PE as the primary metric. Where we differ? The market is concerned about ISAT s network quality amid lower capex and ISAT potentially missing growth opportunities outside Java. However, given, ISAT s much smaller presence outside Java, ISAT can manage with lower capex to defend its share. On the other hand, in Java, network quality can be managed easily amid rising data pricing. We project ISAT s FY17F revenue growth of 7.3% (in line with industry) versus 8.6% for XL. Consistent earnings growth amid declining debt is more important for ISAT, in our view. Potential catalyst. We expect ISAT to show 7-8% annual revenue growth in 2Q17 addressing market concerns about its growth potential. ISAT is too cheap at 16x 12-month forward PE despite offering an earnings CAGR of 25% over FY17F-19F. Valuation: Maintain BUY rating on ISAT with an unchanged target price of Rp8,500. Our DCF-based TP assumes 9% WACC and 1% terminal growth rate. ISAT is trading near our bear-case TP of Rp6000. Key Risks to Our View: Disruption to benign competition. If any player tries to be aggressive in gaining market share, the whole sector could be impacted. At A Glance Issued Capital (m shrs) 5,434 Mkt. Cap (Rpbn/US$m) 33,555 / 2,505 Major Shareholders (%) Ooredoo Asia (%) 65.0 Govt of Indonesia (%) 14.3 Oredoo Asia Pte Ltd 65.00% Free Float (%) m Avg. Daily Val (US$m) 0.18 ICB Industry : Telecommunications / Telecommunications ed: CK / sa:ma, PY

15 Indosat CRITICAL DATA POINTS TO WATCH Critical Factors ISAT the biggest beneficiary of benign competition in Java. We expect the competition in Java to remain benign in the near term as telcos are looking to improve data monetisation in the region. ISAT was among the first telcos increase data pricing, which was followed by EXCL. As the telco with the highest exposure to Java, ISAT is likely to be the biggest beneficiary of lower competition in the region. However, 2,100MHz and 2,300MHz spectrum auctions could make smaller telcos more competitive. But given delays in the spectrum auction schedule, the competitive environment is expected to remain benign at least till FY18, in our view. Data usage key revenue growth driver. ISAT is likely to see significant growth in data usage as smartphone subscribers and per subscriber data usage increase. This is likely to be the key topline growth driver, which will offset any contractions in legacy revenues. Data-monetisation initiatives should translate the data usage increases into strong revenue gains. We expect SMS and voice usage to decline, which would temper the gains in data. Hence, we expect ISAT to record a topline growth of 7.3% in FY17 to reach ~Rp31.3tr. Subscribers (m) Blended ARPU (Rp k) EBITDA Margin % ISAT revenue share to remain stable in the near term. In our critical factor analysis, we have identified market share as a major trigger for share price movements in Indonesia, With ~7% industry-wide revenue growth, we expect ISAT to maintain its current revenue share. This should support ISAT s share price in the near term, in our view. Move to a PE-based stock. With a lower topline growth, we have revised down our EBITDA forecast for FY17/FY18 by 1%/2%. We expect ISAT s EBITDA margin to sustain at 43%- 44% going forward on the back of its stable operational costs. ISAT's earnings also will be more predictable as it now has lesser exposure to foreign currency debt. ISAT s USD debt outstanding is only 12% (1Q17) of the total outstanding debt, lower than its historical level of ~50%. We estimated that 81% of the outstanding USD debt is expected to mature within the next 12 months, which should minimise forex impact on profitability further. This should allow the counter to post predictable stable net profit in the short to medium term which could convert the counter to a PE-valued stock from the current EBITDA-based valuation in the market. Capex (Rp tn) EBITDA (Rpbn) Source: Company, DBS Bank Page 15

16 Indosat Appendix 1: A look at company's listed history what drives its share price? Revenue share a critical factor in share price movements for Indonesian telcos. In our critical factor analysis we have over the past ~10 years, we have seen share price movements to follow mobile revenue share changes of telcos. For example, when ISAT saw a significant loss in market share in FY13, the counter had underperformed its peers significantly. ISAT share price movement with revenue share changes % 28% 27% 26% 25% 24% 23% 40 22% Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Source: Reuters, DBS Bank Indosat Reuters Indo. Telecom Index ISAT Mkt Share Page 16

17 Indosat Balance Sheet: Lower gearing on lower capex outlook. ISAT's balance sheet restructuring via replacing its expensive US$ loan with a series of IDR bond issuances has been positive for its balance sheet and cash flows. ISAT's USD loan portion dropped to 12% in 1Q17 and should dip below 5% by end-fy17. In addition, ISAT s gearing level has also improved following better cash flow generation and payment of debt. Going forward, ISAT s lower sustainable capex rate should support a strong balance sheet and potential dividend payouts. Share Price Drivers: Market waiting for consistent earnings trend. ISAT is likely to post less volatile earnings going forward, following the lower USD debt and rationalised capex plans. As a result, we could potentially see ISAT transition to being valued on a PE basis from EV/EBITDA currently, which should result in a 20% premium to its EV/EBITDA multiple. The counter is trading at 12- month forward PE of 16x at present and is likely to show further improvements and bottomline increases post FY18F. Bear case valuation. If ISAT were to show FY16-19F EBITDA CAGR of 2% instead of projected 6% due to loss of revenue share, our TP will drop to Rp6000. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Bull case valuation. If ISAT were to show FY16-19F EBITDA CAGR of 8% instead of projected 6% due to revenue share gains, our TP will rise to Rp9200. Key Risks: Spectrum auction could disrupt benign competition. With smaller players remaining largely uncompetitive partly due to lack of spectrum resources, the spectrum auction expected in FY17 could potentially stir up the competitive environment in Indonesia which could impact pricing and earnings for the telcos. Forward PE Band (x) Faster-than-expected legacy contraction. ISAT is in the early stages of legacy revenue contraction, which could potentially hurt the topline growth and earnings of the company if revenues contract faster than expected. Company Background Telecommunication and information service provider in Indonesia that provides cellular services (both prepaid and postpaid), fixed data services or MIDI (Multimedia, Internet & Data Communication) and fixed voice including fixed wireless access services. PB Band (x) Source: Company, DBS Bank Page 17

18 Indosat Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Subscribers (m) Blended ARPU (Rp k) EBITDA Margin % Capex (Rp tn) EBITDA (Rpbn) 11,297 12,778 13,651 14,435 15,356 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (Rpbn) FWA & IDD 1, Cellular 21,896 24,095 26,154 27,909 29,898 MIDI 3,754 4,131 4,213 4,297 4,383 Others Total 26,769 29,185 31,307 33,127 35,184 Cellular revenue driven by data Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 26,769 29,185 31,307 33,127 35,184 Cost of Goods Sold (24,100) (25,238) (26,472) (27,687) (28,994) Gross Profit 2,669 3,946 4,835 5,440 6,190 Other Opng (Exp)/Inc Operating Profit 2,669 3,946 4,835 5,440 6,190 Other Non Opg (Exp)/Inc (1,844) (6.3) Associates & JV Inc Net Interest (Exp)/Inc (2,611) (2,145) (2,012) (1,744) (1,744) Exceptional Gain/(Loss) Pre-tax Profit (1,786) 1,795 2,823 3,697 4,446 Tax 622 (520) (847) (1,109) (1,334) Minority Interest (147) (171) (188) (206) (227) Preference Dividend Net Profit (1,310) 1,105 1,788 2,381 2,885 Net Profit before Except. (1,310) 1,105 1,788 2,381 2,885 EBITDA 11,297 12,778 13,651 14,435 15,356 Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) 34.9 nm Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) (4.9) ROAE (%) (10.1) ROA (%) (2.4) ROCE (%) Div Payout Ratio (%) N/A Net Interest Cover (x) Source: Company, DBS Bank Page 18

19 Indosat Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 6,813 7,129 7,583 7,660 7,290 Cost of Goods Sold (5,965) (6,271) (6,552) (6,449) (6,458) Gross Profit ,030 1, Other Oper. (Exp)/Inc Operating Profit ,030 1, Other Non Opg (Exp)/Inc (239) 5.80 Associates & JV Inc Net Interest (Exp)/Inc (565) (519) (545) (516) (528) Exceptional Gain/(Loss) Pre-tax Profit Tax (115) (104) (170) (130) (97.9) Minority Interest (38.1) (35.0) (32.1) (65.4) (37.3) Net Profit Net profit bef Except EBITDA 2,961 3,080 3,425 3,398 3,100 Seasonal dip in revenue Growth Revenue Gth (%) (5.2) (4.8) EBITDA Gth (%) (0.8) (8.8) Opg Profit Gth (%) (31.3) Net Profit Gth (Pre-ex) (%) (215.7) (2.9) 97.9 (37.7) (33.2) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 41,822 39,078 36,383 33,872 31,426 Invts in Associates & JVs Other LT Assets 3,648 3,687 3,546 3,405 3,264 Cash & ST Invts 3,623 1,850 1,565 7,007 12,779 Inventory Debtors 2,730 2,707 2,904 3,073 3,264 Other Current Assets 3,526 3,437 3,667 3,857 4,066 Total Assets 55,389 50,839 48,144 51,298 54,887 ST Debt 7,586 8,366 3,000 3,000 3,000 Creditor ,041 Other Current Liab 11,703 9,875 10,489 11,001 11,418 LT Debt 16,607 15,309 15,309 15,309 15,309 Other LT Liabilities 5,465 2,266 2,266 2,266 2,266 Shareholder s Equity 12,483 13,350 15,139 17,520 20,405 Minority Interests ,015 1,221 1,448 Total Cap. & Liab. 55,389 50,839 48,144 51,298 54,887 Non-Cash Wkg. Capital (6,171) (4,497) (4,766) (4,968) (5,040) Net Cash/(Debt) (20,569) (21,824) (16,743) (11,302) (5,530) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Decreasing gearing levels due to cash generation Source: Company, DBS Bank Page 19

20 Indosat Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit (1,786) 1,795 2,823 3,697 4,446 Dep. & Amort. 8,910 9,137 9,098 9,277 9,448 Tax Paid (209) (236) (423) (978) (1,221) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. 485 (1,959) (155) 71.4 (40.7) Other Operating CF 1,307 1, Net Operating CF 8,707 9,752 11,342 12,067 12,633 Capital Exp.(net) (7,345) (7,208) (6,261) (6,625) (6,861) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 200 (83.9) Net Investing CF (7,145) (7,291) (6,261) (6,625) (6,861) Div Paid Chg in Gross Debt (1,479) (4,126) (5,366) Capital Issues Other Financing CF 61.1 (107) Net Financing CF (1,418) (4,233) (5,366) Currency Adjustments Chg in Cash 143 (1,773) (285) 5,442 5,772 Opg CFPS (Rp) 1,513 2,155 2,116 2,208 2,332 Free CFPS (Rp) ,001 1,062 Rationalised capex with annual free cash flow generation above Rp5tn Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Sachin MITTAL Page 20

21 Indonesia Company Guide XL Axiata Version 5 Bloomberg: EXCL IJ Reuters: EXCL.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 11 Jul 2017 BUY Last Traded Price ( 10 Jul 2017): Rp3,130 (JCI : 5,771.50) Price Target 12-mth: Rp4,000 (28% upside) (Prev Rp3,600) Analyst Sachin MITTAL sachinmittal@dbs.com What s New Above market revenue growth with share gains outside Java and data-monetisation in Java FY18F/19F EBITDA revised up 4%/10% on higher revenue BUY with higher TP of Rp4,000 Price Relative Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 21,341 23,166 24,752 26,618 EBITDA 8,058 8,710 9,439 10,248 Pre-tax Profit ,194 Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) nm (73.2) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) (1,581) (73) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) 1,984 1,973 2,010 2,068 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (91) (72) N/A Consensus EPS (Rp): Other Broker Recs: B: 20 S: 0 H: 11 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P. Seeking to re-gain revenue share Above market revenue growth. Mobile revenue share has been a critical factor for EXCL s performance in the past and we expect EXCL to regain its lost revenue share in FY17 due to two reasons: (i) Higher data pricing in Java is likely to help XL more as data comprises 63% of its mobile revenue versus ~50% for its peers. (ii) XL is targeting Telkomsel with significant capex outside Java, coupled with discounted plans. We raise our FY18F/19F EBITDA by 4%/10% on higher revenue growth projections. Where we differ? The market is concerned about (i) slowing mobile industry growth due to drop in SMS & voice revenue, and (ii) excessive capex and opex requirement for network expansion outside Java. We like to clarify that SMS & voice contribution is least for EXCL among the three telcos. Secondly, by deploying 900MHz spectrum for 3G in selective non-java areas where it lost significant revenue share over the last two years, XL should be able to manage capex. As far as margin is concerned, tower rental renewals, lower expenses from the managed services contract and stable interconnection costs are expected to improve EBITDA margins over FY17F/18F/19F. Potential catalyst. 2Q17F results are likely to show improved revenue share for EXCL as the company is aggressively expanding 3G network outside Java while also leasing towers to support the expansion. We project XL s revenue to grow at 8.6% in FY17F versus mobile sector growth of 7%. Valuation: BUY with revised TP of Rp4,000. Our DCF based (WACC 9.4%, Terminal growth 1%) TP rises to Rp4,000. EXCL is trading near our bear-case valuation of Rp3050. Key Risks to Our View: Not gaining traction outside Java. If EXCL does not gain traction outside Java, the counter is likely to underperform our expectations. At A Glance Issued Capital (m shrs) 10,688 Mkt. Cap (Rpbn/US$m) 33,453 / 2,497 Major Shareholders (%) Axiata Group 66.6 Elisalat Intl 13.3 Parkmix Ltd 13.3 Free Float (%) m Avg. Daily Val (US$m) 1.5 ICB Industry : Telecommunications / Mobile Telecommunications ed: CK / sa:ma, PY

22 XL Axiata CRITICAL DATA POINTS TO WATCH Critical Factors Subscribers (m) EXCL: 3G/4G base stations have increased by 132% in the last four quarters 16,611 17,478 18,936 21,373 21,610 28,724 41,143 46,935 50,073 ARPU (Rp K) 36,331 37,072 37,364 37,506 37,430 37,629 37,582 37,549 37,575 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2G 3G/4G Source: EXCL, DBS Bank XL is incurring more capex outside Java to re-gain its revenue share. EXCL is looking to improve its presence outside Java with significant investments in network expansion, especially outside Java. Since 1Q16 EXCL has added nearly 30k (+132%) 3G/4G base stations, reducing its network quality deficit with TLKM outside Java. Management also expects to increase in its non- Java capex going forward. EXCL was able to grow its revenue share at the expense of TLKM, thus suggesting that EXCL is gaining traction outside Java. With EXCL s plans to continue investments outside Java, we expect the competition in the region to remain high. EBITDA margins (%) EXCL regained revenue share from Telkomsel in 1Q17 Capex (Rp tn) Source: EXCL, DBS Bank Above market revenue growth. EXCL is ahead of the curve in terms of data penetration with 63% of cellular revenue coming from data. As a result, the data-monetisation efforts should help the counter improve its topline performance in the near term. As Telkomsel and ISAT have higher exposure to the shrinking legacy revenues, the legacy contraction should affect EXCL to a lesser extent. With revenue share gains outside Java, we expect EXCL to realise an above market revenue growth of ~8.6% in FY17F. Source: Company, DBS Bank EBITDA (Rpbn) Page 22

23 XL Axiata Appendix 1: A look at the company's listed history what drives its share price? changes of telcos. This was clearly observable during the revenue share drop in FY15. Revenue share is a critical factor in share price movements for XL. In our critical factor analysis over the past ~10 years, we have seen share price movements to follow mobile market share EXCL share price movement with revenue share changes % % 23% % 21% % % 18% 80 17% 16% 30 15% Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Source: Reuters, DBS Bank XL Axiata Reuters Indo. Telecom Index XL Mkt Share Page 23

24 XL Axiata Balance Sheet: Cash flow generation to support capex levels. EXCL s capex is expected to average ~Rp7tr over the next three years, implying ~30% capex to revenue. But with a ~1.5X net debt to EBITDA and operating cash flow of >Rp7bn over FY17-FY19, EXCL should be able support its current expansion plans, in our view. Share Price Drivers: Improving EBITDA margins in FY17/FY18. Tower rental renewals, lower expenses from the managed services contract and stable interconnection costs are expected to improve EBITDA margins through FY17/FY18. EXCL is expecting up to 50% savings on each tower lease renewal, with a large chunk of towers being renewed over the next three years. Managed service contract expenses are also expected to come down due to lower revenue-sharing going forward. In addition, interconnection costs are expected to remain stable despite expansion outside Java due to higher VoIP use and management of any-net voice plans. Reducing exposure to foreign debt. EXCL has reduced its foreign debt exposure from ~Rp12.9tr (~48% of total debt) in end-fy15 to ~Rp4.6tr (~32% of total debt). This should provide EXCL with a more stable bottomline over the next few years due to lower forex volatility. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Bear case valuation. Instead of EBITDA CAGR of 8.4% over FY16-19F, if EXCL were to register just 5% EBITDA CAGR due to lower than expected industry growth rate coupled with slight loss of revenue share, our TP will be Rp3050. Bull case valuation. Instead of EBITDA CAGR of 8.4% over FY16-19F, if EXCL were to register 11% EBITDA CAGR due to network sharing with ISAT, our TP will be Rp4600. Key Risks: Disruption to benign competition. If any player becomes aggressive in gaining market share and triggers a new wave of price wars, the whole sector could be hurt. Forward PE Band (x) Not gaining traction outside Java. If EXCL does not gain traction outside Java, the counter is likely to underperform our expectations indicating downside risk to the stock price. Company Background EXCL provides a wide range of mobile telecommunication services in Indonesia. EXCL is owned by Axiata Group Berhad through Axiata Investments (Indonesia) Sdn Bhd (66.5%) and the public (33.5%). PB Band (x) Source: Company, DBS Bank Page 24