Malaysia Telecom. Malaysia Industry Focus. Cautious tone. DBS Group Research. Equity 12 Mar 2018 KLCI : 1,843.92

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1 Malaysia Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 12 Mar 2018 Cautious tone Industry service revenue fell by 1% in 2017 mainly due to weakness in prepaid segment Expect service revenue to either be flat or decline by a a low single digit in 2018 Mobile operators are embarking on digitalisation and experimenting with digital MVNOs Prefer fixed-line operators; TM is our only BUY call Ending 2017 on a good note. Total service revenue for the mobile incumbents fell by 1.0% in This was solely attributed to DiGi (-5%) due to the sharp decline in its prepaid segment, while Maxis and Celcom were less affected and managed to record marginal growth of 0.8% and 0.5% respectively. Continued SIM consolidation and prepaid-topostpaid migration remain the key underlying trend for the industry in 2017, leading to falling mobile penetration rate. Flattish outlook for We expect industry service revenue to either be flat or decline by a low single digit in 2018 as voice and SMS continue to be cannibalised by rising adoption of data (~49% of revenue). The prepaid market should still be challenging for DiGi given the headwinds in migrant workers segment, while Maxis will suffer some revenue loss from the termination of network-sharing agreement with U Mobile. Celcom will focus more on cost-optimisation initiatives in 2018 to improve its EBITDA margins which are below peers'. Lastly, we expect the award of the 700MHz spectrum to be finalised in 2H18, with the three players getting equal share (2x10 MHz). Incumbents are experimenting with digital MVNOs. All the three mobile incumbents have launched their respective digital mobile services recently, but all these are operating separately as MVNOs under different brands. This is perhaps to avoid cannibalising their existing subscriber bases and also to serve as testing platforms to implement new innovative ideas. TM has also introduced a digital-driven prepaid mobile offering (called Unifi Mobile) where everything from SIM registration process to account management is done online via its mobile@unifi app. Domestic liquidity to support share price. Given the relatively stable outlook and lower risks on spectrum in 2018, we believe the share prices of Malaysian telcos will continue to be well supported by ample domestic liquidity, even though valuations are at a premium relative to regional peers. We prefer fixed-line operators due to their better growth prospects, with TM being our only BUY call. The current weakness in TM's share price, which could be due to uncertainties over GE14, offers a good opportunity to accumulate. KLCI : 1, Analyst TOH Woo Kim wookim@alliancedbs.com STOCKS Axiata Group : Regional cellular operator Digi.Com : A Malaysia-focused cellular operator Maxis Bhd : Largest Malaysian cellular operator by subscribers Telekom Malaysia : Dominant fixed line operator in Malaysia TIME dotcom Bhd : A data-centric, fixed-line telecommunication provider based in Malaysia serving enterprises and operators with small presence in the retail broadband segment Estimated subscriber market share in 2017 Others/MVNOs 14% U Mobile 12% DiGi 28% Sources: MCMC, Companies, AllianceDBS 12-mth Price Mkt Cap Target Price Performance (%) RM US$m RM 3 mth 12 mth Rating Axiata Group , HOLD Digi.Com , (6.5) FULLY Maxis Bhd , (0.3) (7.5) HOLD Telekom Malaysia , (6.3) (9.9) BUY TIME dotcom Bhd , (8.8) (3.5) HOLD Sources: AllianceDBS, Bloomberg Finance L.P. Closing price as of 9 Mar 2018 Maxis 24% Celcom 22% ed: TH / sa:bc, PY, CS

2 4Q17 results round-up EXHIBIT: Quarterly prepaid subscribers trend (in 000) 4Q17 results ending FY17 on a good footing. 4Q17 results of the Big 3 mobile incumbents were decent and in line with expectations. Overall, continued SIM consolidation and prepaidto-postpaid migration remained the key underlying trend for the mobile industry in 2017, leading to falling mobile penetration rate, a sluggish prepaid segment but offset by the growth in postpaid segment. 11,000 10,000 9,000 8,000 DiGi Maxis Celcom 9,287 For fixed-line players, TIME reported stronger numbers due to a strong recovery in its 4Q17 sales and lower taxation, while TM results were inline. Subscribers net add for both players remains robust given pent-up demand for high-speed fibre broadband. 7,000 6,000 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 6,997 6,724 DiGi suffered the most in Total service revenue for the mobile incumbents contracted by 1.0% in 2017, and this was solely attributed to DiGi (-5% y-o-y) due to the sharp decline in its prepaid segment. Maxis outperformed both of its peers (+0.8% y-o-y) as it managed to grow its premium postpaid subscriber base to offset a weaker prepaid segment. After two years of decline, Celcom finally recorded a slight growth of 0.5% y-o-y in 2017 as it focused on attracting and retaining high-arpu subscribers. Mobile players' service revenue, 2017 vs (in RM m) Sources: Companies Relying on postpaid growth. Overall, trends for the postpaid segment were healthy with growing subscriber base (for Maxis and DiGi) and/or higher ARPU (Celcom). Competition in postpaid had been rational in 2017, and a lot of the growth can be attributed to the strong surge in data usage. DiGi was the key beneficiary of the prepaid-to-postpaid migration wave as it offers entry-level plans at the sub RM50-60 range. On the other hand, although their subscriber bases were rather flattish, Maxis and Celcom still managed to increase their ARPU respectively, thanks to their strong franchise in the business/enterprise segment as well as better network quality. 10,000 9, % 8,455 8, EXHIBIT: Quarterly postpaid subscriber trend (in 000) 8,000 7,000 6,000 (5.0%) 0.5% 6,226 5,914 6,026 6,056 3,500 3,000 DiGi Maxis Celcom 2,853 5,000 2,500 2,822 4,000 3,000 Sources: Companies Maxis DiGi Celcom Incumbent lost market share in prepaid. Collectively, the three mobile incumbents lost about 2.7m prepaid subs in m subs from the overall decline in prepaid market size and 0.8m subscriber share lost to UMobile and MVNOs. DiGi remains the No.1 player for prepaid segment, far above peers in terms of number of subscribers. However, given the lower ARPU of its subscribers, DiGi's prepaid revenue base (RM933m) was just slightly above that of Maxis (RM904m) in 4Q17. 2,000 1,500 1,000 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Sources: Companies 2,480 Page 2

3 Baseline pricing and data quota relatively stable Minor tweaks only. Baseline pricing and data quota for both prepaid and postpaid plans stayed relatively unchanged in But, from time to time, mobile operators did introduce new promotions or made minor adjustment to their plans, especially for free data allocation and add-ons. In postpaid, recent changes made by Celcom and DiGi were aimed at driving incremental ARPU increase with upgradeable options (AnydayGB and GBoost). Celcom takes it a notch higher by bundling the upgrade option for free (RM10/month) if subscribers commit to a 12-month contract. In prepaid, tweaks were mainly done by Maxis to align its plans with peers. It slightly raised the base data quota for its RM35 internet passes (from 5GB to 6GB) and replaced the previous vanilla free data allocation (8GB Weekend and 1GB/1 hour everyday) to a new one that centres around social media and messaging apps data usage. The new Hotlink FLEX Postpaid. Maxis also introduced a new entry-level postpaid plan using its Hotlink brand (see Exhibit below). We think this is primarily targeted at customers who have low data usage but want unlimited call and SMS. As a matter of fact, at RM55 for 6GB data, there are better options out there (with unlimited calls) such as the Digi's RM58 postpaid plan (5+5 GB data) or Maxis Hotlink's own prepaid internet passes (RM60 for 8GB data and free data for social media or messaging apps). EXHIBIT: Comparison of postpaid plans by mobile operators (as at 9 March 2018) Ma xis Ce lcom DiGi U Mobile OnePlan 98/128/158 First Gold / Gold + Postpaid 80/110/150 P48/68 & Unlimited P99 Monthly commitme nt (RM) 98/128/158 80/98 80/110/150 48/68/99 Ba se da ta quota (GB) 15/40/50GB 10/20GB 10/25/Unlimited 5/15/Unlimited Fre e da ta (GB) Weekend (4G) - 15GB for OnePlan 98 Weekend - 10/20GB Video Walla TM - 30/100GB (free 12 months) Weekend 4G - 10/25 Music streaming - Unlimited Video streaming - 5/7/Unlimited Ca ll & SMS Unlimited calls & SMS Unlimited calls Unlimited calls Unlimited calls Re ma rks / Othe rs OnePlan 98 - upgradeable to 30GB all-day data for RM10/month Free Yonder Music AnydayGB - RM10/month to combine weekend & weekday data (free with 12-month contract) Postpaid 80/110 - upgradeable to All-day Internet + Extra 10GB for RM10/month Unlimited P99 - Free data roaming of 3GB in 12 countries. 30GB limit for Hotspot Sources: Companies, AllianceDBS EXHIBIT: Comparison of monthly internet passes and prepaid plans by mobile operators (as at 9 March 2018) Maxis Celcom DiGi U Mobile Hotlink RED All-New Xpax Prepaid LiVE Unlimited Power Prepaid Monthly internet passes (RM) 35/45 30/50 30/38/48 20/30/50 Base data quota (GB) 6/8GB 5/10GB 5/8/10GB 1.5/7.5*/12*GB Free data (GB) FREE Data for messaging apps OR social media FREE 10GB of Instagram & Facebook Xpax 50 - FREE Unlimited Music Walla tm Promo till 30 Apr - Bonus 10/20 GB data for first 3 days 500MB daily quota for Facebook, Twitter, & Instagram Music streaming - Unlimited Video streaming - 0.5/2.5/10GB Prepaid plan unique features FREE 10GB of Facebook and 500MB Basic Internet FREE 10GB of Basic Internet & Facebook LiVE - FREE monthly 10GB of Video + Music streaming quota. FREE 1000 mins of Call and SMS to 6 DiGi numbers FREE unlimited data for Facebook, Instagram, & Twitter FREE 1GB basic Internet every month Sources: Companies, AllianceDBS Page 3

4 EXHIBIT: Maxis Hotlink Postpaid FLEX Source: Hotlink Embracing digitalisation TM introduces Unifi Mobile. TM recently launched its rebranded mobile business at the start of the year. Called Unifi Mobile, it is a digital-driven prepaid mobile offering where everything from SIM registration process to account management is done online via TM mobile@unifi app (See Appendix for further details). The key proposition for Unifi Mobile is that there is no expiry for the prepaid credit, data quota, call mins and SMS as long as the line remains active (90-day grace period of inactivity). This is in contrast with existing prepaid plans in the market, where unutilised data quota, call mins and SMS will expire after a period of time and are not carried forward. Validity is also longer for Unifi Mobile (90 days from last reload or addon purchase, regardless of amount) compared to the typical 1 day of validity per RM1 reload practiced by the other mobile operators. Incumbents are experimenting via MVNOs. All the three mobile incumbents had also launched their respective digital mobile services recently, but all these are under different brands and operate separately as mobile virtual network operators (MVNOs). This is perhaps to avoid cannibalising their existing subscriber bases and also to serve as testing platforms to implement innovative ideas. We summarise the key unique features of each of the digital MVNOs, with further details appended in the Appendix. Yoodo by Celcom Axiata fully customisable plan. Yoodo offers a fully customisable mobile plan where subscribers can determine the amount of data, call mins and SMS that they need. Account management and changes to the plan can be made conveniently via a simple app. Subscribers are charged upfront and payment is made through a registered credit or debit card. At first glance, we think Yoodo's rates are not competitive enough to match the generous free data allocation by most existing prepaid plans. Ookyo by Maxis unlimited data for apps. Ookyo plan shares a lot of similarities and we think it could have inspired the recent changes to Hotlink Prepaid and Hotlink Postpaid FLEX. For RM30/month, Ookyo offers 4GB of base data, free data for chatting apps, and a choice of unlimited internet for apps in either the Social Pack (Facebook, Instagram, etc.) or Entertainment Pack (Spotify, Joox, etc.). Subscribers can also purchase individual add-ons which provide unlimited internet access for other apps such as YouTube and various popular mobile games. tapp by DiGi unused data and call mins are sold back in exchange for credit. tapp is also a fully customisable digital prepaid service by DiGi that is more flexible and has an interesting sell-back feature. Users determine the price they want to pay and validity period (up to 30 days), and the system will allocate the maximum amount of data or call mins, which can be mixed and modified at any point of time. Any unused data and call mins are automatically sold back and exchanged for tapp credit at 65% of the original value. Page 4

5 Stock Recommendations 2018 outlook. Based on the guidance by mobile operators, we expect industry service revenue to either be flat or decline by a low single digit in 2018 as voice and SMS continued to be cannibalised by rising adoption of data (~49% of revenue in 4Q17). The prepaid market should still be challenging for DiGi given the headwinds in migrant workers segment, while Maxis will suffer some revenue loss from the complete termination of network-sharing agreement with U Mobile by the end of the year. Celcom will focus more on cost-optimisation initiatives in 2018 in order to improve its EBITDA margin which is below peers'. Lastly, we expect the award of the 700MHz spectrum to be announced in 2H18, with the three mobile incumbents getting equal share (2x10 MHz). Domestic liquidity to support share price. Given the stable outlook and lower risks on spectrum in 2018, we believe the share prices of Malaysian telcos will continue to be well supported by ample domestic liquidity, even though valuations are at a premium relative to regional peers. We prefer fixedline operators due to their better growth prospects, with TM being our only BUY call. The current weakness in TM's share price, which could be due to uncertainties over GE14, offers a good opportunity to accumulate. Decent dividend yield. Domestic-focused operators such as DiGi and Maxis are trading at around x CY18 EV/EBITDA, a premium relative to the regional average of 7.8x. Given the ample domestic liquidity, we believe the premium valuations can be sustained as long as dividend yields remain decent and backed by strong free cashflow generation. TM (BUY, TP: RM7.10). We remain optimistic that the rollout of the High-Speed Broadband Phase 2 (HSBB2) project, Sub Urban Broadband (SUBB) project, and Unifi Mobile services (previously webe) would drive the long-term growth for TM, as the company expands the coverage of its high-speed broadband network to more areas. Our TP implies 7.7x FY18 EV/EBITDA and 26.7x FY18 PE.. EXHIBIT: Peer comparison table Call LC Target Price Current Price Market Cap P/E Divd yield Price/ BVPS EV/EBITDA Net Debt/EBITDA LC USD CY18 CY19 CY18 CY19 CY18 CY19 CY18 CY19 CY18 CY19 Axiata HOLD MYR , x 29.7x 2.0% 2.5% 1.9x 1.9x 7.1x 6.6x 1.3x 1.0x Maxis HOLD MYR , x 20.8x 3.4% 4.1% 6.1x 5.8x 11.6x 11.6x 1.5x 1.4x DiGi FULLY VALUED MYR , x 24.3x 4.1% 4.1% 70.7x 70.7x 13.3x 13.1x 0.7x 0.7x TM BUY MYR , x 18.4x 4.1% 4.9% 2.7x 2.6x 6.5x 6.2x 1.3x 1.2x TIME HOLD MYR , x 18.4x 1.2% 1.4% 1.9x 1.8x 12.3x 10.8x nm nm Singtel BUY SGD , x 0.0x 5.9% 0.0% 1.8x 0.0x 7.8x 0.0x 1.2x #DIV/0! Starhub FULLY VALUED SGD , x 19.9x 6.5% 5.7% 42.9x 60.3x 9.0x 8.9x 1.6x 1.6x M1 FULLY VALUED SGD , x 16.7x 5.5% 4.8% 3.8x 3.7x 7.4x 7.6x 1.9x 1.8x PT Telekom HOLD IDR , x 15.5x 4.3% 4.5% 4.5x 4.4x 6.5x 6.3x nm nm XL Axiata BUY IDR , x 21.4x 2.8% 2.8% 1.3x 1.2x 4.2x 3.6x 1.1x 0.9x Indosat HOLD IDR , x 30.5x 0.0% 3.3% 1.9x 1.9x 3.5x 3.3x 1.1x 0.9x Advance Info Service BUY THB , x 16.6x 4.0% 4.2% 9.7x 8.1x 9.2x 8.3x 1.5x 1.3x Total Access Comm FULLY VALUED THB , x 24.8x 0.0% 2.0% 3.5x 3.2x 5.7x 5.9x 1.4x 1.5x Average 19.2x 13.6x 4.1% 2.7% 8.9x 8.5x 7.8x 5.4x 1.0x 0.5x Source: AllianceDBS Page 5

6 Appendix EXHIBIT: TM Unifi digital mobile prepaid plan Source: Unifi mobile EXHIBIT: Yoodo by Celcom Axiata Source: Yoodo Page 6

7 EXHIBIT: Ookyo by Maxis Source: Ookyo EXHIBIT: tapp by DiGi Source: tapp Page 7

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