UBS Indonesia Mobile Sector

Balancing quality and quantity [EXTRACT]

Rational competition part II: quality or quantity?
Following the 2007-08 price war, when operators focused solely on market share (quantity), and the global credit crunch forced capex cuts, we believe the most important issue for mobile operators in 2009 is balancing profitability (quality) and market share (quantity).

We expect tariff increases and changing market share dynamics in 2009-10
We expect tariff increases in Q109 to continue until H110, and increase our revenue per minute forecast for Telkomsel 11% in 2009 and 38% in 2010, and 21% in 2009 and 46% in 2010 for Indosat. We also believe there will be a reversalin market share over the next two years, and raise Telkomsel’s market shareestimate from 39% to 44% and lower Indosat’s from 23% to 20% for 2010.

Raise earnings estimates; expect newsflow to turn positive
Based on our higher revenue per minute assumptions, we raise our 2009/10 EPS estimates for Telkom Indonesia (Telkom) from Rp590/631 to Rp622/751. We alsoraise our 2009/10/11 EPS estimates for Indosat from Rp295/309/335 to Rp302/403/511. We expect newsflow to turn positive in Q2, and improving quarterly earnings, market share gains, and tariff-increase announcements to be catalysts.

Reiterate Telkom as our top pick, turning positive on Indosat
We are more bullish on the Indonesia mobile sector as we believe it will outperform the Asia telco sector in 2009. We maintain Telkom as our top pick and raise our price target from Rp8,000 to Rp9,100 (23% above the current share price). We are turning positive on Indosat, and we upgrade our rating from Neutral to Buy and raise our price target from Rp5,100 to Rp6,500 (23% above the current share price). We downgrade Bakrie Telecom from Buy to Sell on valuation and lower our price target from Rp110 to Rp80.