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Singapore Industry Focus

Singapore Telecom Companies


DBS Group Research . Equity 12 Jul 2011

2Q11F Preview and key sector issues


2Q11F earnings of StarHub & M1 are likely to reinforce sectors appeal as bastion of stability. Potential decline in smartphone sales in 2H11F to benefit StarHub more; Downgrade M1 to HOLD after its recent run-up. Cross-carriage to start from Aug 1, but may not have sharp teeth to make a difference. 2Q11F earnings should reaffirm sectors defensive appeal. M1 is likely to report 2Q11 earnings of S$42.5m th (0% QoQ, +4% YoY) on 14 July, as its fair value accounting may not leave much scope for improvement. StarHub is likely to report 2Q11 earnings of S$74m (+7% th QoQ, +27% YoY) on 4 August in a seasonally strong 2Q as it recovers from the impact of dunning in 1Q11. Potential decline in smartphone sales in 2H11F & FY12F may benefit StarHub. High penetration of smart phones (60-65%) in Singapore may imply lower smartphone sales in 2H11F, implying lower subsidy burden at StarHub & SingTel. Lower smartphone sales, on the other hand, may adversely impact M1s earnings due to its unique practice of fair value accounting. While M1 is a key beneficiary of National Broadband Network, it may take another 2-3 years to show significant profit contribution from the new business. StarHub is our new top pick after M1s recent outperformance. YTD total returns are 15% for M1 (our previous top pick) versus 11% for StarHub and 1% for STI. At current price, M1 offers 6-7% dividend yield based on 80-100% payout ratio vs assured 7% for StarHub. MI offers flat earnings in FY12F versus mid-single digit growth at StarHub. Cross-carriage to start from Aug 1, but impact may be muted. Cross-carriage applies only to the exclusive content signed after Mar 12, 2010. Firstly, StarHub has locked-in most of the popular content on exclusive basis before Mar 12 for 3-5 years. Secondly, content can still be signed on non-exclusive basis where pay TV operators negotiate the price as opposed to bidding earlier. As long as other pay TV operators do not buy non-exclusive content rights, they would not be able to cross-carry those contents.

STI :

3,117.37

Analyst Sachin MITTAL +65 6398 7950 sachin@dbsvickers.com TOP PICKS


Price S$ Mkt Cap US$m Target Price S$ Rating

SingTel StarHub M1

3.17 2.79 2.59

41,171 3,900 1,923

3.20 3.05 2.60

HOLD BUY HOLD

Source: DBS Vickers

StarHub - Our new top pick offers (i) over 7% yield based on annual 20 Scts DPS and (ii) mid-single digit growth in FY12F from lower handset subsidy costs. SingTel HOLD for (i) 5.5% yield based on 70% payout ratio and (ii) mid-single digit growth prospects in FY13F (March YE). M1 Downgrade to HOLD after its recent outperformance. (i) 6-7% yield is the key attraction based on 80%-100% payout ratio. (ii) Expect flat earnings in FY12F due to fair value accounting.

Handset revenue minus handset costs (S$m). Fair value accounting at M1 led to lower subsidy costs
70 60 50 40 30 20 10 0 64 51 31 17 14 15 12 12 11 9 57 43 55 56

3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

M1

StarHub

Source: DBS Vickers, quarterly results of companies

www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: YM

Industry Focus Singapore Telecom Companies

Analyst
Sachin MITTAL +65 6398 7950 sachin@dbsvickers.com

Table of Contents
M1s 2Q11F earnings preview StarHubs 2Q11 earnings preview Three Key Industry Issues (i) Smartphones & Tablets (ii) National Broadband Network (iii) Cross-carriage of content Concerns for M1 in the mobile segment Why we like StarHub? Sector Valuation Peers Valuation Stock Profiles M1 5 7 7 8 9 3 3 4

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Industry Focus Singapore Telecom Companies

M1s 2Q11F earnings preview


M1 is likely to report 2Q11 earnings of S$42.5m, flat sequentially. While 2Q is a seasonally strong quarter, fair value accounting may offset the actual sequential increase in service revenue as a significant portion is already recognized as handset revenue at the start of the two-year contract.

StarHubs 2Q11F Earnings Estimates


FYE Dec S$'m

2Q10 1Q11

2Q11F

y-o-y

q-o-q

Comments

Opg Rev.

569

559

567

0%

M1s 2Q11F Earnings Estimates


FYE Dec S$m 2Q10 1Q11 2Q11F y-o-y q-o-q Comments
Opg Exp -492 -471 -476 -3%

Lower revenue on annual basis due to lower pay TV 2% revenue subsequent to loss of EPL rights. iPhone subsidy 1% may continue to be high To account for cash payment received from Govt for OpCo

Operating Rev

223

258

255

14%

Operating Expense (173) Other revenue Operating Profit Finance Costs PBT Tax Net Profit
Source: DBS Vickers

(205) 0 53 (1) 52 (9) 43

(202) 0 53 (2) 52 (9) 43

17% -80% 4% 0% 4% 5% 4%

1 51 (2) 50 (9) 41

Likley to be higher on annual basis due -1% to higher handset sales. Service Revenue should be stable Supported by lower -1% depreciation and leased circuit costs 0% 0% 7% 0% 1% 0%

Other income Opg Profit/ (loss) Interest Income Interest exp PBT Tax PAT

78 1 -7 72 -14 58

91 0 -5 86 -17 69

95 0 -5 90 -16 74

22% -75% -29% 26% 20% 27%

5% 0% 0% 5% -3% 7%

Source: DBS Vickers

StarHubs 2Q11 earnings preview


StarHub is likely to report 2Q11 earnings of S$74m, up 8% qoq on 4th Aug, thanks to sequential improvement in mobile revenue. 2Q results should be in line with consensus. StarHub lost 5K postpaid subscribers in 1Q11 due to Dunning. Dunning refers to churn initiated by StarHub for non-paying customers subsequent to the implementation of business support system in 4Q10. Management expects postpaid mobile subscriber to resume growing in 2Q11F, as the impact of dunning should be over in 1Q11. Recovery from seasonally weak 1Q. This is due to the impact of lesser number of days (Feb month of 28 days only) and the impact of Chinese New Year holidays in 1Q. In the past, mobile revenue improved sequentially in 2Q from higher usage. The only exception was 2008, which was impacted by intense price competition ahead of mobile number portability.

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Industry Focus Singapore Telecom Companies

Three Key Industry Issues


(i) Smartphones & Tablets
High smartphone penetration implies slower sales ahead. Smartphone penetration is estimated to reach over 60% of postpaid subscriber base and may rise gradually from here due to high ARPU commitment required for smartphone plans. Most handset users made the transition in 2010 and are now locked in two-year contracts. Moreover, smartphone adoption is unlikely to breach 80% as there is still a large pool of users, such as the elderly, who are resistant to the switch. Telcos require four to eight months to recoup subsidies for each smartphone, and this should happen in 2011F & 2012F. iPad & Tablet is a small incremental opportunity. Singapore telcos have started to offer tablets at upfront subsidy of S$400-500 per iPad in lieu of subscription fee of S$40/month. We believe that while breakeven time is over 10 months for tablets, it is still an incremental opportunity. However, the initial impact on earnings would be negative on all the three telcos (including M1 as tablets are not covered under fair value accounting). We believe the market for tablets is much smaller than phones as (i) there can only be one or two tablets per household versus multiple phones per household, (ii) many households may not buy tablets as they have iPhones already (iii) each tablet subscription would contribute much lower profit than phone, due to lower monthly subscription fee.

Home Passed hit 60% at the end of 2010

Source: OpenNet

(ii) National Broadband Network


Home Reached is significantly lower than Home Passed. Around 60% of the residential and commercial properties achieved Home Passed status at the end of 2010. However, Home Reached percentage is much lower and is behind its 60% target. M1 revealed that there are only around 16k fiber customers in Singapore in total with M1 having one-third share of this new segment. With 1.2m broadband customers, there are mere 1.3% fiber customers despite 60% coverage. This can be attributed to (i) high incremental cost of upgrading to fibre from existing broadband players and (ii) external trunking requirement may be undesirable for many homeowners.

New broadband earnings may constitute ~10% of existing earnings base for M1 in the long term. M1 targets 20%-30% market share in the broadband market by 2015. With current broadband customer base of 1.2m, which is likely to grow further, it implies an approximate target of over 250-300K broadband subscribers by 2015. Based on an estimated broadband ARPU of S$50 per month, annual revenue should be S$150m. Due to the presence of multiple retailers, we assume 10% net profit margin in the broadband business (versus 20% in the mobile), translating to annual earnings potential of S$15m from broadband segment. This does not include any contribution from enterprise segment, as it may be harder to penetrate for a new entrant. Overall, new broadband earnings may constitute c.10% of existing base in our view, however, we believe that M1 would need 2-3 years to be profitable in broadband business. In addition to its lack of scale, there is also the need to offer aggressive price discounts for its lack of pay TV offerings and additional cost of international bandwidth.

M1 is the most aggressive player in terms of pricing as anticipated. M1 offers 100 Mbps connection at S$59/month versus S$87/month at StarHub. We need to keep in mind that S$21/mth is the regulated fee to be paid to OpCo and then there are other costs such as billing, installation and international bandwidth costs, which could amount to another

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Industry Focus Singapore Telecom Companies

S$25-30 in our view. During some of its promotions in 2Q11, M1 offered S$29/mth 100Mbps plans, well below the offerings from both StarHub and SingTel. Most of the players are promoting 50 Mbps connections at monthly subscription fee of S$49, S$65 and S$67 by M1, SingTel and StarHub respectively. StarHub expects SME & enterprise gains to more than offset consumer losses. Management believes that small and medium enterprises (SMEs) are the low hanging fruits with relatively shorter decision cycle than enterprise customers. In the enterprise segment, StarHub sees an opportunity as a backup service provider to SingTel as more organizations are looking for redundancy plans. We believe that it may take StarHub a couple of years to position itself as an alternative to SingTel as track record is very important for enterprise customers.

Concerns for M1 in the mobile segment


iPhone has helped M1 to raise market share and postpaid mobile ARPU. However, high handset subsidies are not reflected in its past earnings due to its use of fair value accounting. This may have an adverse impact on FY11F & FY12F earnings. Postpaid mobile market share has improved for SingTel and M1. SingTel & M1 have aggressively promoted iPhones while StarHub has focused more on the cheaper Android phones due to high subsidy required on iPhones. This resulted in SingTel and M1 gaining market shares in the post-paid mobile segment as iPhone continues to be the most popular phone in Singapore to-date. SingTel & M1 have gained postpaid mobile market share over the last one-year
50.0 46.5

(iii) Cross-carriage of content for pay TV


From Aug 1, cross-carriage kicks in, but can be bypassed for non-exclusive content. The Media Development Authority's (MDA) mandate, announced in March last year, will apply to any exclusive content that operators have acquired on or after March 12, 2010. The regulation asserts that pay-TV operators must be able to make available this content within five days of request from the consumer, even if they belong to competitors. However, the catch is that cross-carriage applies only to the exclusive content. We are afraid that most of the content in the future can be signed on non-exclusive basis where pay TV operators negotiate the price with content provider on a bilateral basis. Recently, StarHub signed a deal to screen the ongoing European Under-21 championship on a non-exclusive basis bypassing the much-publicised cross-carriage measure. Currently, English Premier League (EPL) rights are awarded on an exclusive basis, so next round of rights would be covered under the cross-carriage regulation unless they are awarded on non-exclusive basis. In either case, the cost of content should not rise too much while content ownership may continue to be a competitive advantage for existing pay-TV operators.

45.0 40.0 35.0 30.0 25.0 20.0

46.3

46.0

45.8

45.7

45.8

27.3 26.4 4Q09

27.5 26.5

27.7 26.5

27.9 26.4

27.6 26.6

26.8 26.7 1Q11

1Q10

2Q10 SingTel

3Q10 StarHub

4Q10 M1

Source: DBS Vickers, Quarterly results of companies


M1 has seen most improvement in post paid mobile ARPU (non adjusted)
90 89 85 80 75 72 70 65 60 61 55 4Q09 86 71 89 88 92 87 72

72

71

73

62 1Q10

63 2Q10 SingTel

64 3Q10 StarHub M1

65 4Q10

64 1Q11

Source: DBS Vickers, quarterly results of companies

M1 has benefited from low ARPU base. Most of M1s


existing subscribers were not eligible to get iPhone subsidy on their existing plans and had to upgrade to higher-end plans, resulting in higher ARPU. As for SingTel and StarHub, most of their subscribers (already high-end) were eligible to get iPhone subsidies on their existing plans and merely

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Industry Focus Singapore Telecom Companies

substituted voice with data. As such, ARPU uplift has been insignificant at SingTel and StarHub. The use of fair value accounting at M1 may have an adverse impact on FY11F/12F earnings. Under fair value accounting, M1 recognizes handset revenue at the cost of future service revenue, leading to lower handset subsidy costs. Basically, the additional service revenue over the contract period, attributed to the handset, is recognized upfront as handset revenue a practice unique to M1. This practice boosted M1s past earnings at the cost of future earnings. Investors should keep in mind that FY11F benefit from (i) reduction of S$15-18m in operating costs due to lower depreciation and leased circuit costs and (ii) significant handsets revenue due to high demand for smartphones. With smartphone penetration exceeding 60% in Singapore, smartphone sale is likely to slowdown in FY12F, resulting in an adverse impact on M1s handset revenue while cost savings may not be significant either.

Fair value accounting at M1 led to lower subsidy costs (Handset revenue minus handset costs, S$m)
70 60 50 40 30 20 10 0 64 51 31 17 14 15 12 12 11 9 57 43 55 56

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

M1

StarHub

Source: DBS Vickers, quarterly results of companies

Fair value accounting at M1 has an adverse impact on postpaid mobile service revenue (S$m)
240 200 160 120 80 4Q09 1Q10 2Q10
M1
125 124 123 124 128 126 216 220 229 231 237 231

3Q10
St arHub

4Q10

1Q11

Source: DBS Vickers, quarterly results of companies

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Industry Focus Singapore Telecom Companies

Why we like StarHub?


Cash payment from regulator to support dividends Management does not rule out further capital management over the next 18 months in addition to 20 Scts DPS. Besides, healthy free cash flow generation of S$300m-S$350 from operations in FY11F-12F, StarHub may receive total cash payment of S$40-60m from the regulator over the next three years on achieving certain milestones as OpCo for National Broadband Network. StarHub had received its first payment of S$60m from the regulator last year. Significant mobile traffic cost savings to drive FY11F earnings. Since 4Q10, traffic costs have declined by S$5m each quarter as StarHub negotiated lower costs per minute for certain international destinations with its carrier partners. The tactic, we believe, here is to barter IDD minutes with another carrier who has substantial incoming calls (to Singapore in this case). As a result, traffic cost is incurred only for certain IDD minutes above those bartered by the two carriers. This move could result in significant savings of S$1520m in traffic costs in FY11F, more than 5% of expected earnings for FY11F. Lower handset subsidy costs to drive FY12F earnings. While Android phone adoption has been slow in Singapore till now, we expect Android phones to emerge as popular alternatives to iPhones in 2012F and beyond. This should lower subsidy burden on StarHub in FY12F in our view. Higher pay TV fee to benefit FY11F & FY12F. Pay TV revenue has stabilized in 1Q11 and annual decline in pay TV revenue is estimated to be less than S$40m, still lower than the cost savings of S$60-70m from not owning the EPL rights. In fact, Pay TV subscriber base increased by 4K to 542K in 1Q11 reflecting StarHubs ability to manage its pay TV business. Besides, StarHub has managed to raise its pay TV

monthly subscription rate by S$2/month from Aug onwards, which should result in additional revenue of S$6m and S$13m in FY11F and FY12F respectively, most of which should flow to the bottom line.

Sector Valuation
Downgrade M1 to HOLD. YTD total returns of 15% for M1 (our previous top pick) versus 11% for StarHub & 1% for STI. Based on 80-100% payout ratio, dividend yield of 6-7% is decent but not the best among the three telcos. The lack of earnings growth in FY12F due to fair value accounting is our biggest concern. No change to our DCF-based target price of S$2.60 (WACC: 8.4%, terminal growth 0%). Maintain BUY on StarHub. StarHub offers assured dividend yield of 7% based on annual DPS of 20 Scts DPS, which is sustainable over the next three years, in the managements view. In addition, StarHub may grow by 4-5% in 2012F on top pf 17% earnings growth in FY11F, on declining handset subsidy costs. No change to our DCFbased target price of S$3.05 (WACC: 8.4%, terminal growth 0%) Maintain HOLD for SingTel. Based on 70% payout ratio, dividend yield of 5.5% is decent but not attractive given mid-single digit earnings growth prospects in FY13F (March YE). We believe, SingTel needs to raise payout ratio over 80% in order to offer over 6% yield, in the face of low growth prospects. Next capital management may be three years away after special DPS of 10 Scts with FY11 results. No change to SOTP based TP of S$3.20.

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Industry Focus Singapore Telecom Companies

Peers Valuation
Company FYE Mkt Cap (US$m) China / Hong Kong China Mobile China Telecom China Unicom Malaysia Digi.Com Maxis Bhd Telekom Axiata Group Singapore M1 SingTel Starhub Mkt Cap LC Price (S$) 08-Jul 23,668 73.80 4.95 15.92 1,595 30.00 5.50 4.01 5.05 3,151 2.59 3.19 2.80 925 110.00 56.50 3.80 4,004 5,150 7,200 6,200 11,000 2,450 Target Price (S$) % Upside Rcmd Avg 6-mth Vol (m) CAGR 10-12 (%) PE (x) 11F 12F Dividend Yield (%) 11F 12F P/BV 10A 10A EV/EBITDA 11F 12F

Dec Dec Dec

190,290 8,827 48,199

1,480,934 68,693 375,110 1,924,737

74.00 5.20 18.00

0% 5% 13%

Hold Buy Buy

21.7 70.3 42.0

3 20 66 7

9.9 19.6 58.1 10.9 23.1 17.0 25.5 14.3 17.4 13.8 12.8 15.5 13.1 14.2 11.5 90.5 38.7 22.9 11.4 13.8 68.7 26.3

9.7 15.0 31.0 10.1 22.2 16.0 23.7 12.6 15.9 14.0 12.0 14.9 12.3 13.6 12.6 65.3 30.5 16.1 10.8 12.0 28.3 19.2

4.3% 1.7% 0.6%

4.4% 1.7% 0.6%

2.1x 1.4x 1.5x

4.0x 5.0x 6.3x

3.7x 4.7x 5.6x

3.3x 4.0x 4.7x

Dec Dec Dec Dec

7,796 13,788 4,795 14,275

23,325 41,250 14,345 42,709 121,629

30.40 5.10 3.90 5.60

1% -7% -3% 11%

Hold Hold Hold Buy

0.6 2.8 7.1 15.2

-5 6 4 15 8

5.4% 5.9% 4.9% 2.5%

5.4% 6.2% 4.9% 2.8%

17.3x 4.8x 1.9x 2.3x

9.8x 10.4x 5.7x 6.4x

9.0x 9.8x 6.2x 5.6x

8.2x 9.5x 6.2x 4.9x

Dec Mar Dec

1,923 41,642 3,933

2,348 50,837 4,801 57,986

2.60 3.20 3.05

0% 0% 9%

Hold Hold Buy

1.0 19.7 1.9

3 5 10 5

7.2% 5.9% 7.1%

7.2% 5.8% 7.4%

8.0x 2.1x 88.5x

8.5x 7.7x 9.0x

8.5x 7.4x 8.1x

8.5x 7.1x 7.8x

Thailand Advanced Info Service Dec Total Access Communica Dec True Corporation Dec Indonesia Indosat PT Telekom XL Axiata PT Sarana Menara Tower Bersama

10,822 4,427 1,824

327,040 133,781 55,112 515,934

121.71 62.49 4.51

11% 11% 19%

Buy Buy Valued

5.1 6.4 113.3

4 1 nm 3

6.8% 8.7% 0.0%

7.1% 7.9% 0.0%

7.9x 1.9x 3.6x

6.6x 5.2x 5.5x

6.3x 4.8x 5.4x

5.9x 4.8x 5.5x

Dec Dec Dec Dec Dec

3,285 17,039 6,200 1,317 1,310

27,984,760 145,152,000 52,815,109 11,223,212 11,163,915

7,000 7,700 7,100 15,000 2,700

36% 7% 15% 36% 10%

Buy Hold Buy Buy Buy

2.5 18.4 4.5 0.0 3.4

28 7 20 na 89

2.2% 4.8% 3.6% 0.0% 0.0%

3.1% 5.1% 4.2% 0.0% 0.0%

1.6x 3.5x 4.5x 8.7x 5.2x

5.3x 4.4x 6.7x 14.0x 24.2x

4.9x 4.4x 5.8x 11.6x 16.8x

4.4x 4.2x 5.1x 9.5x 13.3x

* PT Telkom is adjusted for SingTel's 35% stake in Telkomsel

Singapore Telecom 11 & 12 earnings respectively Source: DBS Vickers

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Singapore Company Focus

M1
Bloomberg: M1 SP

Reuters: MONE.SI

HOLD S$2.59 STI : 3,117.37


(Downgrade from BUY) Price Target : 12-Month S$ 2.60 Reason for Report : Change in recommendation Potential Catalyst: Half yearly dividends DBSV vs Consensus : Street is too optimistic on FY12F earnings, disregrading the impact of fair value accounting perhaps Analyst Sachin MITTAL +65 6398 7950 sachin@dbsvickers.com

Fair value accounting versus NBN


YTD total returns of 15% for M1 vs 11% for StarHub & 1% for STI. FY12F mobile earnings at risk due to fair value accounting while non-mobile contribution may not be significant. Downgrade to HOLD at unchanged DCF based (WACC 8.4%, terminal growth 0%) TP of S$2.60

Price Relative
S$ 2 .7 0 2 .5 0 2 .3 0 2 .1 0 1 .9 0 1 .7 0 1 .5 0 1 .3 0 1 .1 0 2007 2008 2009 2010 R e la t iv e In d e x 218 198 178 158 138 118 98 78 2011

M 1 (L H S )

R e la t iv e S T I IN D E X ( R H S )

Forecasts and Valuation


FY Dec (S$ m) 2009A 2010A 2011F 2012F

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

781 302 181 150 145 16.9 16.3 (3) 16.8 13.5 27.5 15.3 15.9 10.4 8.4 5.2 9.4 1.0 65.6

980 309 190 158 158 17.5 17.5 7 17.5 17.5 32.2 14.8 14.8 12.5 8.5 6.7 8.0 1.0 58.9

970 313 204 170 170 18.8 18.8 8 18.7 18.8 33.5 13.8 13.8 9.5 8.5 7.2 7.7 1.0 57.2 (0.1) 18.7 S: 3

980 313 203 167 167 18.5 18.5 (1) 18.5 18.5 33.3 14.0 14.0 9.0 8.5 7.2 7.8 1.1 55.6 (2.7) 20.0 H: 6

FY12F mobile earnings at risk. Under fair value accounting (FVA), additional service revenue over the contract period attributed to the smartphone is recognized upfront as handset revenue a practice unique to M1. This practice boosted M1s past earnings at the cost of future earnings. Investors should keep in mind that FY11F benefits from (i) reduction of S$15-18m in operating costs due to lower depreciation and leased circuit costs and (ii) significant handsets revenue due to high demand for smartphones. With smartphone penetration exceeding 60% in Singapore, smartphone sale is likely to slowdown in FY12F. This may have an adverse impact on M1s handset revenue and no major cost savings are expected either. Non-mobile contribution may be insignificant in FY12F. Overall, broadband may contribute S$15-16m of earnings by FY15F. However, it may take over 2 years to reap significant profit from the broadband business. M1 needs to offer higher price discounts for its broadband service due to the lack of pay TV offering. Margins would also be affected by additional cost of leasing international bandwidth and the lack of scale. Potential half yearly DPS of 6.5 Scts priced in. Although official dividend policy is minimum 80% payout ratio, we project M1 to maintain 100% payout in 2011F despite lower free cash flow than earnings due to FVA.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Axiata Group (%) Keppel T&T Ltd (%) Singapore Press Holdings (%) Free Float (%) Avg. Daily Vol.(000)

B: 11

906 2,348 / 1,913 29.3 19.7 13.7 37.3 805

ICB Industry : Telecommunications ICB Sector: Mobile Telecommunications Principal Business: MobileOne is one of the main telecommunication operators in Singapore.

Source of all data: Company, DBS Vickers, Bloomberg

Page 9
www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: YM

Company Focus M1

Segmental Breakdown
FY Dec 2009A 2010A 2011F 2012F 2013F

Revenues (S$ m) Post Paid Cellular Pre Paid Cellular IDD Revenue Equipment Sales Total Income Statement (S$ m)
FY Dec

495 70 131 86 781

502 77 129 271 980

524 86 128 233 970

523 95 126 236 980

519 117 124 239 999 Margins Trend


2 .0 5% 2 .0 4% 2 .0 3% 2 .0 2% 2 .0 1% 2 .0 0% 1 .0 9% 1 .0 8% 1 .0 7% 1 .0 6% 1 .0 5% 20A 09

Surged because M1 started to apply fair value accounting from FY10 onwards

2009A

2010A

2011F

2012F

2013F

Revenue Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

781 (119) 183 0 0 (8) 6 181 (31) 0 0 150 145 302 (2.3) (3.5) (4.7) 0.6 23.5 19.2 65.6 18.4 25.8 80.0 24.2

980 (114) 194 0 0 (4) 0 190 (32) 0 0 158 158 309 25.4 2.1 6.0 4.8 19.8 16.1 58.9 17.6 25.0 100.0 44.9

970 (105) 209 0 0 (4) 0 204 (35) 0 0 170 170 313 (1.0) 1.5 7.3 7.5 21.5 17.5 57.2 17.2 24.3 100.0 48.1

980 (105) 208 0 0 (5) 0 203 (36) 0 0 167 167 313 1.0 0.0 (0.3) (1.2) 21.2 17.1 55.6 16.4 23.1 100.0 43.0

999 (106) 207 0 0 (5) 0 202 (35) 0 0 167 167 313 2.0 0.1 (0.3) (0.3) 20.7 16.7 55.6 16.4 23.1 100.0 42.9

21A 00

21F 01

21F 02

O e tin Mrg % p ra g a in

N tIn m Mrg % e co e a in

Source: Company, DBS Vickers


Our own estimate, although official policy is minimum 80% payout

Page 10

Company Focus M1
Balance Sheet (S$ m)
FY Dec 2009A 2010A 2011F 2012F 2013F

Asset Breakdown (2010) 612 0 83 7 8 120 3 834 0 224 250 115 245 0 834 (92) (243) 46.9 197.5 8.4 1.0 0.6 0.6 1.0 1.0 48.0 3.3 598 0 83 9 10 253 3 956 0 274 297 94 291 0 956 (8) (288) 69.5 142.2 6.0 1.1 1.0 1.0 1.0 1.0 33.7 4.0 609 0 83 31 10 281 3 1,018 0 274 347 94 302 0 1,018 20 (316) 100.5 158.8 6.7 1.0 1.2 1.1 1.0 1.0 33.5 4.0 617 0 83 9 10 297 3 1,019 0 278 347 94 300 0 1,019 33 (338) 107.7 156.2 6.6 1.0 1.2 1.1 1.1 1.1 32.5 4.0 620 0 83 3 10 303 3 1,023 0 282 347 94 300 0 1,023 34 (344) 109.5 153.6 6.5 1.0 1.1 1.1 1.1 1.1 31.7 NA Capital Expenditure
2009A 2010A 2011F 2012F 2013F
140

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Debtors 29.1%

Inventory 1.2% Bank, Cash and Liquid Assets 1.0% Associates'/J Vs 0.0%

Net Fixed Assets 68.7%

Cash Flow Statement (S$ m)


FY Dec

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

181 119 (35) 0 (44) 0 221 (120) (14) 0 0 0 (134) (120) 0 0 22 (97) 0 (10) 29.8 11.4

190 114 (31) 0 (86) 0 188 (100) (20) 0 0 0 (120) (120) 47 9 (1) (66) 0 2 30.3 9.7

204 105 (32) 0 (31) 0 246 (116) 0 0 0 0 (116) (158) 50 0 0 (108) 0 22 30.6 14.3

203 105 (35) 0 (13) 0 260 (113) 0 0 0 0 (113) (170) 0 0 0 (170) 0 (22) 30.3 16.3

202 106 (36) 0 (1) 0 272 (110) 0 0 0 0 (110) (167) 0 0 0 (167) 0 (6) 30.2 17.9

120 100 80 60 40 20 0 2009A 2010A 2011F 2012F

Capital Expenditure (-)

Assuming S$95m capex and S$22m paid for spectrum.

Source: Company, DBS Vickers

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Company Focus M1
Quarterly / Interim Income Statement (S$ m)
FY Dec 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011

Margins Trend
3% 0 2% 5 2% 0 1% 5 1% 0 5 % 0 % 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Revenue Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Opg Profit Margins (%) Net Profit Margins (%)

249 (27) 49 0 0 (2) 0 48 (9) 0 39 39 80

223 (28) 51 0 0 (2) 0 50 (9) 0 41 41 80

246 (30) 49 0 0 (1) 0 48 (8) 0 39 39 79

262 (29) 48 0 0 (1) 0 46 (8) 0 39 39 48

258 (25) 53 0 0 (1) 0 52 (9) 0 43 43 53

O e tin Mrg % p ra g a in

N tIn m Mrg % e co e a in

15.2 3.0 6.9 6.2 19.8 15.8

(10.4) 4.5 3.2 3.6 22.9 18.3

10.1 (0.8) (3.5) (3.4) 20.0 16.0

6.8 (39.6) (2.8) (2.0) 18.2 14.7

(1.8) 10.7 10.7 10.1 20.5 16.5

Benefited from lower depreciation charges as some assets were fully depreciated

Source: Company, DBS Vickers

Page 12

Industry Focus Singapore Telecom Companies


DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends


DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (DBSVUSA) directly and not its affiliate. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 12 Jul 2011, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

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Industry Focus Singapore Telecom Companies

COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as of 1. 08-Jul-2011 PT. DBS Vickers Securities Indonesia ("DBSVI") has a proprietary position in Indosat, XL Axiata and Telekomunikasi Indonesia recommended in this report as of 12 July 2011. 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 11 Jul 2011. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the company mentioned. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

3.

ii.

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