Deutsche EXCL - KTAs from meeting with XL CEO - Reiterate BUY rating

KTAs are
1. Pricing needs to go up. Learning from India market; XL doesnt expect a 2nd round of price war. With a 20% market shares, their pricing policy is aimed at towards tweaking up prices. We argue that XL has the advantages of having "more evenly distributed" traffic profile.
2. 3G spectrum is necessary to build data capability. However, XL felt to not have
found the right biz model, which is consistent with our view. Intense VAS offering has driven down prices - Eg Blackberry monthly services (incl unlimited web browsing) now can be as cheap as Rp69,000 which is down from Rp150-200,000 in early 2009.
3. Lower borrowing cost could be a catalyst for telcos earnings driver. Latest 5-yr debt deal with Mandiri has XL only paying 1-mth JIBOR + 140bps - down from last year's average of +150bps. CEO feels there is still room for lower borrowing costs. Eg, from BCA, the company has obtained 3-mth JIBOR + 125bps. Compared to syndicated
loans from BNI/CIMB Niaga that XL has entered in prior years, it paid JIBOR +375bps. This implies over 200bps reduction. Overall now for new loans the average borrowing cost for Rp (either for 3-yr or 5-yr tenor) would be below 8%. Amongst major telcos, XL and Indosat have high net int expense to operating profit ratios of 17% and 63%.
4. Management contract to expire in April 2012. Part of the retention strategy would be to offer 2-3% new shares as ESOP which will be given to 250 people (manager and
upwards). The new ESOP would have a 2-yr and 3-yr lock up period (abt 50/50 split). We strongly feel that management of XL has been a key driver behind the company's turn around.
5. Heatlhy 3Q results trends. We think Indosat may see higher revenue growth (as indicated voice traffic growth during peak Lebaran days is approx 34% above daily average vs Tsel -6%).