DBS Telecommunications

Be careful with country selection!
• Be mindful of rising competition in Singapore, India, China
and high valuations in Malaysia.
• We prefer Indonesia and Thailand for eased competition
and regulatory benefits respectively.
• PT Telkom is our top pick for 23% potential upside. We
also like AIS and DTAC although the stocks may not
outperform in the near term due to negative news flow.
• Avoid Axiata and StarHub as street estimates could be
revised down.

PT Telkom benefiting from “too rational” competitors.
Recent 3Q09 Indosat results indicate that cellular tariffs are not declining in Indonesia. Rather Indosat’s focus on raising tariffs led to 0.5% qoq decline in its subscriber base in 3Q09 on top of 13% qoq decline in 2Q09. PT Telkom should be a key
beneficiary of Indosat’s loss, as the other competitor Excelcomindo is also moving away from price-based competition. Excelcomindo is using “Fun & Excitement” rather
than “lower pricing” as its key branding strategy now. Weaker balance sheets of Excelcomindo and Indosat imply limited capex, forcing them to rationalize their tariff structure. Overall, we see upside rather than downside risk to PT
Telkom’s consensus FY09F/10F estimates. Currently, PT Telkom is trading at similar EV/EBITDA as Indosat despite higher growth prospects and better cash flow generation.

Thai telco stocks may not outperform in the near term but offer compelling upside over the medium term. While the regulator NTC has set Dec 09 as the time frame for 3G-licence auction, it could be postponed by another 2 months, in our view. In order to address the Ministry’s concerns, NTC may have to re-engage in public consultation and draft a new 3G plan. In the near term, performance of Thai stocks could remain subdue due to negative news flow about postponement of 3G award. DTAC should be a bigger beneficiary of 3G due to its higher regulatory fee and higher gearing than AIS. However, AIS is more appealing to investors, who want to ride on 3G award but have lower risk appetites.

Rising competition may lower next year street estimates for StarHub and Axiata. StarHub faces challenges in its pay TV and broadband businesses from SingTel and M1. Our FY10F earnings estimates for StarHub are 5% below the consensus.