DBS TLKM Exit opportunity on good results TP IDR8500

• 2Q10 net profit of Rp3.2 trn (+16% qoq, -2% yoy) is in line with our expectation.
• Non-cellular surprised with earnings up 29% qoq, mainly on account of one-off lower costs.
• Cellular earnings improved 8% qoq, led by healthy 6.4m new subscribers, along the expected lines.
• Maintain HOLD, Rp8,500 TP as we believe that Telkomsel’s revenue share may decline.

Non-cellular earnings growth may not be sustainable.
Non-cellular earnings stood at Rp1240bn (+29% qoq, +54% yoy), thanks to (i) huge decline (-86% qoq, -66% yoy) in G&A costs from lower provision of doubtful accounts and inventory obsolescence; and (ii) significant decline (-15% qoq, -10% yoy) in personnel costs due to higher discount rate for actuarial pension benefits. We doubt if G&A costs can stay at these levels for rest of the year.

Cellular business improved in line with expectations.
Cellular earnings contribution stood at Rp1987bn (8% qoq, - 15% yoy). Subscriber growth was healthy at 8% qoq as Telkomsel gave away free talk time and SMS, after certain threshold amount was spent. However, network congestion took a toll on the call success rate, which deteriorated to 94.7% in 2Q10 from 96.6% in 1Q10, a serious issue for Telkomsel, known for its voice-quality. Telkomsel’s revenue and operating expenses grew 6% qoq each while blended ARPU was stable sequentially at Rp43000.
Telkomsel’s revenue share may decline in our view. In our view, Telkomsel’s 60% revenue share (2009 end) is too high to sustain in the face of two strong competitors. The growing popularity of mobile Internet plans is the key catalyst, helped further by cheap Chinese handsets. We expect Telkomsel’s revenue share to decline below 55% by 2012F with XL Axiata as the key gainer.