PP 7767/09/2010(025354)

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Se ctor Up dat e
3 September 2010
MARKET DATELINE

Telecommunications Recom : Overweight

(Maintained)
2QFY10 Report Card

Table 1: Telecommunications Sector Valuations

EV/
EPS EPS GWTH PER EBITDA P/NTA P/CF GDY
FYE Price (sen) (%) (x) (x) (x) (x) (%) Rec
(RM) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10 FY10
Digi Dec 24.64 139.0 152.4 8.0 9.7 17.7 16.2 8.7 26.8 10.6 6.0 OP
TM Dec 3.57 12.5 13.5 -6.1 8.2 28.6 26.5 5.9 2.0 4.3 7.4 MP
Axiata Dec 4.54 30.3 35.0 64.3 15.6 15.0 13.0 6.8 3.1 6.7 0.0 OP
Maxis Dec 5.37 31.3 34.0 0.6 8.5 17.1 15.8 9.5 -27.5 11.0 8.7 OP

Sector Avg 23.2 11.5 17.2 15.4

♦ 2QFY10 results review. Among the four telecommunication stocks that are
under coverage, two came in within our expectation, one came in above and Relative Performance To FBM KLCI
one came in below our expectation.
♦ Quarterly revenue growth and EBITDA margin trend. All three mobile
players continued to register positive qoq revenue growth in 2QFY10 Axiata
(Celcom: +1.1%; Digi: +3.5%; Maxis: +1.8%) mainly due to: 1) higher
mobile revenue (which in turn rose qoq on the back of rising non-voice TM Digi
revenue); and 2) higher handset sales. However (with the exception of
FBM KLCI
Celcom), EBITDA margin for both Digi and Maxis in 2QFY10 declined by
Maxis
1.3%-pts and 3.4%-pts to 43.3% and 46.9% respectively. We believe the
qoq decline in EBITDA margin for both Digi and Maxis was mainly due to
higher handset and dongle subsidies.
♦ Balance sheet remains healthy. Qoq, net debt and net debt/ EBITDA for
the mobile players generally improved in 2QFY10 on the back of stable free
cash flow (with still-healthy revenue growth and EBITDA margins). Going
forward, while we expect ARPU to remain under pressure, we believe the
financial standing of the mobile players would remain firm and this is mainly
on the back of: 1) mid-high single-digit revenue growth; 2) stable EBITDA
margins; and 3) declining capex requirement. With these coupled with the
mobile players’ well-articulated dividend policy, we are keeping our view that
most of the telcos (with the exception of Axiata, which we think is still very
much a growth story) will continue to offer generous yields to investors.
♦ Market share. Within the postpaid mobile segment, Celcom appeared to
have done relatively well, with market share in 2QFY10 increased by 0.6%-pt
qoq, at the expense of both Digi and Maxis, which market share in 2QFY10
declined by 0.5%-pt and 0.9%-pt respectively. On the other hand, we note
that market share of all three players in the prepaid segment in 2QFY10
declined qoq and we suspect this could be due to increased competition from
U-mobile and other mobile virtual network operators (MVNOs). For the
mobile broadband segment, we note that all three mobile players have been PER = 12x
able to maintain their market share (with Celcom remaining as the market
leader) and we believe this is mainly due to the absence of intense price war PER = 11x
admist the still growing market size.
♦ Non-voice revenue contribution continues to rise. As expected, non- PER = 10x
voice revenue/ mobile revenue for both Digi and Maxis hae continued to rise Chye Wen Fei
for the past four quarters. We also understand that Celcom’s non-voice (603) 9280 2172
revenue/ mobile revenue in 2QFY10 rose to ~32% from ~26% ago. chye.wen.fei@rhb.com.my
♦ Risks. These include: 1) weaker-than-expected subscriber additions; 2)
execution (such as network upgrades and expansion); and 3) all-out price
David Chong, CFA
war. abc 9280 2186
(603)
♦ Forecasts. No change to our forecasts for now. david.chong@rhb.com.my
♦ Investment case. No change to our Overweight stance on the sector. KLCI

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 3 September 2010

2QFY10 RESULTS REVIEW

♦ 2QFY10 results review. Among the four telecommunication stocks that are under coverage, two came in
within our expectation, one came in above and one came in below our expectation (see Table 2).

Table 2: Results Review

Recommendation Vs. RHBRI’s Vs. Concensus RHBRI’s Results Comments

Forecasts
Axiata Group Outperform Above Above • 1HFY10 net profit beat expectations, and key variance
was lower-than-expected effective tax rate;
• Celcom’s total subscriptions (ex-broadband subscribers)
increased by 143k qoq, mainly driven by strong growth
at the prepaid segment that more than offset the
weaker postpaid segment. Mobile broadband net adds,
on the other hand, declined to 72K from 124k in 1QFY10
due to increased competition from the major players.
• FY10-12 net profit forecasts raised by 13.9-14.6%
largely to reflect: 1) lower operating cost at Celcom; 2)
a lower effective tax rate assumption of 25% (vs. 32%
previously);
• No change to our SOP-derived fair value of RM4.75.

Digi.Com Outperform In line In line • 1HFY10 result – in line;

• Declared 2nd interim DPS of 35 sen;
• Postpaid net adds increased to 56k from 35k in 1QFY10
mainly due to continued reduction in churn. Prepaid net
adds declined to 102k from 192k in 1QFY10 due to
higher rotational churn.
• Maintained DCF-derived fair value of RM25.70.
Maxis Outperform Below Below • 1HFY10 net profit came in below our and concensus
estimates due to: 1) lower-than-expected revenue; and
2) higher-than-expected administrative and network
operation expenses;
• Declared 2nd interim DPS of 8 sen;
• On a qoq basis, total postpaid subscribers declined by
0.98%, while both prepaid and broadband subscribers
rose 1.7% and 43.1% respectively on the back of: 1)
continued efforts in penetrating the underserved areas;
and 2) broadband promotional package that appeared to
have been well received.
• FY10-12 net profit forecasts cut by 5.6-6.3% to reflect:
1) lower ARPU assumptions; and 2) higher
administrative expenses;
• DCF-derived fair value cut by 7.3% from RM6.20 to
RM5.75.
TM Market Perform In line Below • 1HFY10 result – in line;
• Declared interim DPS of 13 sen;
• On a qoq basis, both fixed line subscribers and blended
ARPU increased by 0.4% and 3.7% respectively, on the
back of the introduction of bundled packages.
Broadband net adds increased by 3.8% qoq to 56k due
to its attractive bundled packages.
• Maintained fair value at RM3.55 based on required net
yield assumption of 5.5% on the minimum RM700m
dividends.
Source: RHBRI

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 3 September 2010

REVENUE & EBITDA MARGIN

♦ Quarterly revenue growth and EBITDA margin trend. All three mobile players continued to register positive
qoq revenue growth in 2QFY10 (Celcom: +1.1%; Digi: +3.5%; Maxis: +1.8%) mainly due to: 1) higher mobile
revenue (which in turn rose qoq on the back of rising non-voice revenue); and 2) higher handset sales. However
(with the exception of Celcom, where 2QFY10 EBITDA expanded by 2.5%-pts qoq to 47.9% on lower operating
costs due to continuous cost-saving initiatives, lower outpayment charges, and effective credit control
management), EBITDA margin for both Digi and Maxis in 2QFY10 declined by 1.3%-pts and 3.4%-pts to 43.3%
and 46.9% respectively (see Chart 2). Stripping off an additional RM45m sales and marketing expenses incurred
in 2QFY10, we note that Maxis’s EBITDA margin in 2QFY10 would have declined by a smaller quantum (1.3%-
pts to 49%). We believe the qoq decline in EBITDA margin for both Digi and Maxis was mainly due to higher
handset and dongle subsidies. For TM, 2QFY10 revenue rose 1.2% qoq, driven mainly by higher voice revenue
(+0.5% qoq), data and leased revenue (+6.8% qoq) and internet revenue (+1.9% qoq). EBITDA margin, on the
other hand, declined by 1.6%-pts to 32.1% in 2QFY10 on the back of higher: 1) direct cost (+4.4% qoq) and;
2) marketing expenses (+19.6% qoq).

Chart 1: Quarterly Revenue Growth Chart 2: EBITDA Margin Trend

G ro wt h EB IT D A M argin
7% 56%

6%
54%
5%
52%
4%
3% 50%

2% 48%

1%
46%
0%
1Q 0 9 2Q 09 3Q 09 4Q 09 1Q 10 2 Q 10 44%
-1%
-2 % 42%

-3 % 40%

-4 % 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

C e lc o m D ig i M a xis Celcom Digi M axis

Source: MCMC; Company data Source: MCMC; Company data

BALANCE SHEET

♦ Balance sheet remains healthy. Qoq, net debt and net debt/ EBITDA for the mobile players generally
improved in 2QFY10 on the back of stable free cash flow (with still-healthy revenue growth and EBITDA
margins). Going forward, while we expect ARPU to remain under pressure, we believe the financial standing of
the mobile players would remain firm and this is mainly on the back of: 1) mid-high single-digit revenue growth;
2) stable EBITDA margins (on the back of greater economies of scale from higher revenue that will help mitigate
pricing pressures and higher subscriber acquisition/retention costs); and 3) declining capex requirement. With
these coupled with the mobile players’ well-articulated dividend policy, we are keeping our view that most of the
telcos (with the exception of Axiata, which we think is still very much a growth story) will continue to offer
generous yields to investors. As for TM, although management has yet to provide any firm commitment to pay
shareholders in excess of its minimum dividend of RM700m p.a. (and a firm commitment is likely to be made
only after a decision is made on the US$250m due end-2010), we believe TM has the capacity to return cash
above its dividend policy, given: 1) Its healthy cash pile and gross debt/EBITDA of RM3.9bn and 2.3x as at 30
Jun 10 (vs. gross debt/EBITDA comfort zone of 2-2.5x); 2) Its 200m Axiata shares, which will immediately raise
its cash pile by RM912m or 25.7 sen/share upon monetisation; and 3) Its 60m shares in Measat, which will
immediately raise its cash pile by RM250m or 7.1 sen/share upon the privatisation.

Table 2: Financial Standing of Players

Net Debt (RMm) QoQ Gross Debt (RMm) QoQ Net Debt/ EBITDA Gross Debt/ EBITDA
Change Change (x) (x)
1QFY10 2QFY10 (%) 1QFY10 2QFY10 (%) 1QFY10 2QFY10 1QFY10 2QFY10
Axiata 9,137 6,117 -33.1 11,986 10,879 -9.2 1.36 0.88 1.79 1.56
Digi 439.7 342.1 -22.2 1,122.2 1,022.5 -8.9 0.19 0.15 0.49 0.44
Maxis 4,120 4,015 -2.5 4,937 4,992 +1.1 1.00 0.98 1.14 1.21
TM 2,652.4 2,926.5 +10.3 6,548.0 6,528.7 -0.3 0.93 1.06 2.3 2.3
Source: Company data

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PENETRATION RATE

♦ Mobile penetration rate continued to trend up. Despite having breached the 100% mark in 1Q09, mobile
penetration rate continued to trend up to 108.1% in 2Q10 (see Chart 3). While this figure is likely to be
overstated due to several factors (such as multiple sim holders, and foreign worker segment, we believe there is
still room for mobile penetration rate to expand further, underpinned by: 1) trends in countries that have
continued to witnessed subscriber growth even after passing the 100% rate; 2) Malaysia’s favourable
demographic structure; and 3) underserved areas (which means untapped opportunities for mobile operators).
Fixed line penetration rate, on the other hand, rebounded marginally to 44% in 2Q10 (after falling for four
consecutive quarters since 2Q09, see Chart 4), and we believe this was mainly driven by more aggressive
marketing activities, coupled with the introduction of attractive bundled packages by TM.

Chart 3: Quarterly Mobile Penetration Rate Chart 4: Quarterly Fixed Line Penetration Rate

'000 % '000 %

32,000 110 4,400 44.8

4,380
31,000 108 44.6
4,360
106 4,340 44.4
30,000
4,320
104 44.2
29,000 4,300
102 44.0
4,280
28,000
100 4,260 43.8
4,240
27,000 98 43.6
4,220

26,000 96 4,200 43.4

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

Source: MCMC; Company data Source: MCMC; Company data

MARKET SHARE

♦ Market share of mobile players maintained. Since 1QFY09, all three major players appeared to have
defended their respective market share in the mobile market relatively well (see Chart 5), with Maxis remaining
as the market leader (with market share of close to 40% in terms of total mobile subscribers as at end-Jun 10).
Within the postpaid mobile segment, Celcom appeared to have done relatively well, with market share in
2QFY10 increasing by 0.6%-pt qoq to 20.4%, at the expense of both Celcom and Maxis, which market share in
2QFY10 declined by 0.5%-pt and 0.9%-pt respectively (see Chart 7). On the other hand, we note that market
share of all three players in the prepaid segment in 2QFY10 declined qoq (see Chart 8) and we suspect this
could be due to increased competition from U-mobile and other mobile virtual network operators (MVNOs). For
the mobile broadband segment, we note that all three mobile players have been able to maintain their market
share (with Celcom remaining as the market leader) and we believe this is mainly due to the absence of intense
price war admist the still growing market size.

Chart 5: Total Mobile Subscriber Market Share Trend Chart 6: Mobile Players’ Market Share (as at Jun 10)

45.0% 45.0%
41.4%
39.4%
40.0%
40.2% 39.8%
39.4% 39.4% 39.9%
39.0%
40.0% 35.0% 32.6%

30.0% 27.1% 27.2%

35.0%
32.5% 32.6% 32.0% 25.0%
31.5% 31.6% 31.4% 20.4%
20.0%
30.0%
15.0%
25.4% 25.3% 25.6% 25.8% 25.8%
25.0% 10.0%
25.0%
5.0%

0.0%
20.0%
1Q0 9 2 Q0 9 3 Q0 9 4 Q0 9 1Q10 2 Q10
P o s tpaid P repaid

C elc o m D igi M axis C elc o m D igi M axis

Source: MCMC; Company data Source: MCMC; Company data

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Chart 7: Postpaid Market Share Trend Chart 8: Prepaid Market Share Trend

50% 41.0% 39.6% 39.4%

45.3% 44.8% 39.0%
43.6% 43.3% 39.0% 37.9% 38.0% 37.7%
45% 42.3%
41.4%
37.0%
40%
35.0% 33.6% 33.6%
35% 32.9% 32.7% 32.6%
32.4%
33.0%
28.4% 29.0% 28.5%
30% 28.0% 27.6% 27.1%
31.0%
25% 29.0%
20.4% 27.2% 27.4% 27.2%
19.9% 19.3% 19.3% 19.7% 19.8% 26.8% 27.0%
26.5%
20% 27.0%

15% 25.0%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Celcom Digi Maxis Celcom Digi Maxis

Source: MCMC; Company data Source: MCMC; Company data

Chart 7: Mobile Broadband Subscriber Trend Chart 8: Wired Broadband Subscriber Trend

'000 '000
1,400 1,800

1,600
1,200
1,400
1,000
1,200

800 1,000

800
600
600
400
400

200 200

0
0
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
Green Packet TM Others
Celcom Digi Maxis

Source: MCMC; Company data Source: MCMC; Company data

ARPU

♦ Postpaid ARPU for all three mobile players rose qoq in 2QFY10 and this was mainly driven by higher MOU. We
also note that Celcom has the biggest qoq ARPU increment in 2QFY10 (which ARPU rose RM4 qoq, relative to
Digi and Maxis’ qoq ARPU increment of RM1). Prepaid ARPU, on the other hand, declined qoq and we believe this
was mainly due to increased pricing pressure, which has in turn resulted in a qoq drop in ARPM.

Chart 9: Postpaid ARPU Trend Chart 10: Prepaid ARPU Trend

RM RM
110 55

107 53
106
105
104 51
102 103 103 50
102
101 49 49 49
100 100
100 48 48
47 47

95 96 96 45

43 43
42 42 42 42
90 41 41 41 41
40 40
86 39
85
84 37 37 37
83 83
82 82
80 35
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10

Celcom Digi Maxis C elc o m D igi M axis

Source: MCMC; Company data Source: MCMC; Company data

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Chart 11: Postpaid MOU Trend Chart 12: Postpaid ARPM Trend

mins RM
550 0.31
0 .2 8 0 .2 8
0.29 0 .2 8 0 .2 8 0 .2 8
0 .2 8
500
0.27 0 .2 6
0 .2 5
0.25 0 .2 4 0 .2 4
450

0.23 0 .2 2
400 0 .2 1
0.21

0.19 0 .18
350
0 .17 0 .17 0 .17 0 .16
0.17 0 .16

300 0.15
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 1Q0 9 2 Q0 9 3 Q0 9 4 Q0 9 1Q10 2 Q10

Celcom Digi Maxis C elc o m D igi M axis

Source: MCMC; Company data Source: MCMC; Company data

Chart 13: Prepaid MOU Trend Chart 14: Prepaid ARPM Trend

mins RM
200 0.40

190 0.38 0.38

180 0.36
0.34 0.34
170
0.34 0.32
160 0.31
0.32 0.31
0.30 0.30
150
0.30 0.29 0.29
140 0.29
0.29 0.29 0.28
0.28
130 0.28
0.26 0.27
120 0.27
0.24
110 0.24

100 0.22
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
Celcom Digi Maxis C elc o m D igi M axis

Source: MCMC; Company data Source: MCMC; Company data

NON-VOICE REVENUE

♦ Non-voice revenue contribution continues to rise. As expected, non-voice revenue/ mobile revenue for
both Digi and Maxis continued to rise for the past four quarters (see Chart 16). While Celcom does not dieclose
its non-voice revenue proportion on a quarterly basis, we understand that its non-voice revenue/ mobile revenue
in 2QFY10 rose to ~32% from ~26% ago.

Chart 15: Non-voice Revenue Trend Chart 16: Non-voice Revenue/Mobile Revenue Trend

RM m 40.0%
36.6%
34.4% 34.8%
800 32.9%
35.0%
31.4%
700
30.0%
600
25.0% 22.6%
20.4% 19.7% 20.2% 20.6% 20.7%
500 19.7%
20.0%
400
15.0%
300
10.0%
200
5.0%
100
0.0%
0 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10
1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10

D igi M axis D igi M axis

Source: MCMC; Company data Source: MCMC; Company data

RISKS

♦ Risks to our view. These include: 1) weaker-than-expected subscriber additions; 2) execution (such as
network upgrades and expansion); and 3) all-out price war.

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VALUATIONS & RECOMMENDATION

♦ Maintain Overweight. No change to our Overweight stance on the sector.

Chart 17: Maxis Technical View Point

♦ The share price of Maxis hit a high of RM5.53 in Feb
2010, but a powerful profit-taking pressure had
pressed it lower to below the RM5.40 level in Mar.

♦ After consolidating near the RM5.27 – RM5.33

region for a while, the stock plunged on renewed
selling pressure to a fresh low of RM5.10 in mid
May.

♦ However, the stock staged a V-shape recovery to

the support region of RM5.27 - RM5.33 from Jun
onwards and relaunched a fresh rally to above the
RM5.40 level in mid-Aug.

♦ It hit a fresh high of RM5.54, before giving in to

another round of profit-taking leg.

♦ Yesterday, the stock registered its third negative

candle in a row, and a hook-down on the 10-day
SMA, indicating a possible retreat in the near term.

♦ Coupled with the weakened momentum readings

and a failure to sustain at above the RM5.40 level,
the stock could ease back to the RM5.27 – RM5.33
lower support region soon, in our view.

♦ For it to stay in the positive zone, the stock must

be able to sustain at above the 40-day SMA of
RM5.333, and the RM5.33 level to induce a decent
technical rebound.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for
the actions of third parties in this respect.

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