Industry Outlook

Indonesia Tower Sector

Refer to important disclaimers at the end of this report

DBS Group Research . Asian Insights Office 21 April 2020

Macro Outlook
We maintain our FY20F/21F tower industry revenue growth at 8.5%/8.3%, respectively. Over the last couple of years, organic tower
growth has picked up in Indonesia with the increase in data demand, a competitive mobile network operator (MNO) landscape, and
4G rollout plans of the incumbent telecommunication companies (telcos) and Hutchison (Hutch) driving the demand for new sites
and co-locations in the country. Considering Sarana Menara Nusantara (TOWR) as an example, the tower company (towerco) added
2,916 net tenancies during 4Q19 including 1,869 tenants from Indosat (ISAT). With this, TOWR recorded 5,027 total net tenancy
additions (organic tenancy additions of 3,158) during FY19. Tower additions during the quarter at TOWR rose to 1,086, largely due
to the 1,000 towers acquired from ISAT which drove TOWR’s tenancy ratio to 1.73x. The bulk of the tenancy additions over FY19
stemmed from ISAT for ex-Java co-location orders as ISAT moved aggressively to improve coverage in ex-Java territories. Most of the
tenancy additions for TOWR during the year came in the form of co-location orders. Hutch has also joined the network expansion
bandwagon from 1H19 onwards, post its debt-to-equity swap. Indonesia still lags the region in 4G coverage with only ~80% of the
population covered. This bodes well for the growth of the tower industry.

We maintain our projected growth of ~8.5/8.3% for the tower sector over FY20F/21F driven by healthy order flows from major telco
operators, offsetting any weaknesses from Telkomsel and anticipated delays in obtaining new site approvals and co-location orders
due to COVID-19. As such, for TOWR alone, we project ~2,200 and ~2,750 organic net tenancy additions in FY20F and FY21F,
respectively.

Indonesia still has ample room to expand 4G coverage Remarks

4G population coverage in Asia

1. Indonesia’s 4G population
120% coverage still hovers well
98% 99% 99% below regional peers,
100% 93%
implying ample room for
80% growth in tenancies.
80% 74%

60%

40%

20%

0%
India Malaysia Indonesia Thailand Singapore China

Sources: Info-communications Media Development Authority of Singapore, Malaysian Communications and

Multimedia Commission, Kemkominfo Indonesia, DTAC, AIS and TrueMove for Thailand, Optus for Australia,
China Mobile and China Telecom for China

Lease rentals under pressure. Tightening competitive pressures among towercos with TOWR expanding aggressively outside Java
and declining margin profiles of telecom operators are likely to put downward pressure on the lease renewal rates over the next 2-3
years. We estimate that the average per tenant lease rentals of the tower sector dipped 2-3% over 2018/19, due to the impact of
consolidating smaller operators, and renewals and new leases being negotiated at lower lease rentals than before. TOWR, for
example, renewed its leases with Hutch at Rp12-14m per month vs. average lease rentals of Rp17k-18k a decade ago. With bulk of
the leases coming up for renewal over the next 3-5 years, we believe towercos would see lower blended lease rates going forward.
.
Page 1
 Industry Outlook
Indonesia Tower

The growing proportion of tenancy additions on micro-cell infrastructure, which carry lower lease rentals of ~Rp7m per month vs.
Rp12-14m per month for macro towers, could further weigh on the blended lease rentals in the future. We project per tenant lease
rentals to contract at an annual rate of ~2.5% over FY19-23F.

Data usage surges amid work from home (WFH) initiatives to prevent the spread of COVID-19. Amid the prevailing COVID-19
pandemic, the Ministry of Communication and Information Technology (Kominfo) has requested all telco operators to provide
uninterrupted services and maintain the quality of networks since learning and work processes are taking place over home networks.
Increased recreational, telecommuting and online learning usage are expected to result in a significant surge in data traffic. For
example, telcos from Italy and Spain are reporting data usage of ~70% and ~40% higher than average, respectively, driven by
recreational and telecommuting usage.

Based on reports from Indonesian telcos, traffic spikes in residential areas averaged ~10% when compared with normal conditions
as many organisations tell their staff to WFH. If traffic spikes continue to occur, telcos are expected to add capacity in each base
transceiver station (BTS) and if needed, mobile operators will deploy Mobile BTS to serve areas that are already over capacity.

For example, Telkomsel reported that it experienced a 5% increase in network traffic compared to normal days as many Indonesians
transit to e-learning and WFH arrangements. The telco expects internet usage to surge further as WFH initiatives widen to contain
the pandemic.

Break down of demand surge by purpose and area Remarks

Purpose %
1. Telkomsel reported that it
Online learning 236% experienced a 5% increase
in network traffic
Instant messaging communication 19% compared to normal days
as many Indonesians
Online gaming 13% transit to e-learning and
WFH arrangements.
Cloud based digital storage (for WFH) 10.4%

Content provider services 8.2%

Digital advertising 7.5%

Video streaming 7.3%

Browsing 5.2%

Area %

West Java regional 7.9%

Central Java 6.9%

East Java 5.0%

Central Sumatra 4.7%

Southern Sumatra 4.2%

Sources: Telkomsel

.
Page 2
Industry Outlook
Indonesia Tower

Key Industry Trends

Order growth remains strong with ISAT, Hutch and XL Axiata (EXCL) expanding. Organic tower growth has picked up over the last
couple of years in Indonesia with the increase in data demand, a competitive MNO landscape and the 4G rollout plans from ISAT
and Hutch, who are expanding outside Java and driving the demand for new sites and co-locations in the country. ISAT has set aside
US$2bn (~Rp30tr) for network expansion over three years. Out of this amount, ~Rp10.1tr was utilised in FY19 to expand ISAT’s
nationwide 4G network coverage from 81% to 90% of the population. ISAT has already completed the overlay of its existing 3G
base stations with 4G equipment. The telco is setting aside ~Rp9.5tr in capital expenditure (capex) for FY20F. ISAT intends to
concentrate on improving indoor coverage and lowering latency during the year. Network data collected from the network data
aggregator, “nPerf” shows a marked improvement in ISAT’s 4G network in Java from 2018, with a large part of the island now
under 4G+ coverage. With the 4G upgrade completed in Java, ISAT is now giving out orders to expand its cell-sites outside Java.
TOWR mentioned that ~60% of its outstanding tower co-location order book comes from ISAT.

ISAT’s network coverage shows a major improvement over Oct 2018 – Apr 2020 Remarks
Indosat – Network coverage in Java (October 2018)
1. Network
coverage of
ISAT shows
the biggest
improvement
since Oct
2018 in Java.

Indosat – Network coverage in Java (October 2019)

Indosat – Network coverage in Java (April 2020)

Legend: 2G in Blue, 3G in Green, 4G in Orange, 4G+ in Red

Source: nPerf

.
Page 3
 Industry Outlook
Indonesia Tower

Meanwhile, EXCL continues to expand its coverage outside Java to bridge its network deficits with Telkomsel. EXCL is driving
investments with the aim of increasing ex-Java market share by two-fold to ~30% over the next 4-5 years. Management has
indicated that it views the current level of capex as the right level of investment. We believe EXCL may maintain capex at an elevated
level in the near term, ~Rp8tr capex in FY20F, as the telco focuses on improving coverage in ex-Java territories.

Growth from Telkomsel could falter as it focuses on developing PT Dayamitra Telekomunikasi (Mitratel). Telkomsel, had slowed its
expansions over the past year. With the recent spree of acquisitions, Telkomsel appears to be focusing more on the development of
its own towerco, Mitratel, as opposed to handing out orders to independent towercos. As per TowerXchange, Mitratel receives ~50%
of Telkomsel’s BTS orders.

a) In March 2019, Telkomsel acquired a 95% stake in PT Persada Sokka Tama (PST) through its subsidiary Mitratel. PST owned
~1,000 towers across the archipelago. Mitratel plans to purchase the remaining 5% stake in PST and own 100% of PST's
shares within 24 months after the completion of the sale.
b) In October 2019, Mitratel won the bid to acquire 2,100 towers from Indosat (ISAT) while TOWR bagged 1,000 towers.
Telkomsel was awarded 2,100 towers, for a total consideration of Rp4.43tr (~US$314m).

With Telkomsel increasingly focusing on the development of Mitratel, we believe order growth from Telkomsel may slow even
further going forward, hurting operators with high exposure to Telkomsel.

TOWR inks deal with EXCL to acquire 1,728 towers, translates to ~8x EV/EBITDA. On 7 February 2020, TOWR entered into a 10 -
year sale and leaseback agreement for 1,728 towers from EXCL, gaining ~2,600 tenancies with a tenancy ratio of ~1.54x. Over 50%
of the towers are in Java. TOWR is expected to dish out Rp2.25tr for the tower purchase in an all-cash transaction. The purchase will
be funded through TOWR’s cash on hand and additional debt raisings. The addition of 2,600 tenancies, with EXCL acting as the
anchor tenant, is expected to yield ~Rp340bn to TOWR’s total annualised run-rate revenue. Assuming EBITDA as 85% of Rp340bn
additional revenue, the towers are valued at a forward EV/EBITDA ratio of ~8x, in line with other transactions TOWR has previously
entered. The transaction is expected to be completed by June 2020. The purchase of these 1,728 towers is expected to add
~Rp2.9tr in contracted revenue, further cementing EXCL’s position as TOWR’s largest client.

TOWR’s transaction with EXCL was preceded by the completion of the acquisition of 1,000 towers with ~1,900 new tenancies from
ISAT in November 2019. The addition of ~1,900 tenancies from the transaction with ISAT is expected to add ~Rp280bn to TOWR’s
total annualised run-rate revenue and ~Rp2.0tr in contracted revenues.

TOWR’s acquisition of ISAT and EXCL towers Remarks

Rp ISAT EXCL
Transaction completion November 2019 June 2020 1. On 7 February 2020,
TOWR entered into a
Towers acquired ~1,000 1,728
10 -year sale and
Tenancies acquired 1,900 2,600 leaseback agreement
Tenancy rate on new towers ~1.9x ~1.5x for 1,728 towers
Tenancy rate ex. acquisitions (3Q19) 1.67x from EXCL, gaining
~2,600 tenancies
with a tenancy ratio
Cost of transaction (bn) 1,950 2,250 of ~1.54x.
Per tower (m) 1,950 1,302
2. TOWR’s transaction
with EXCL was
Addition to annualised run-rate revenue (bn) 280 340 preceded by the
Per tower (m) 280 197 completion of the
Addition to contracted revenue (bn) 2,000 2,900 acquisition of 1,000
towers with ~1,900
Per tower (m) 2,000 1,678
new tenancies from
ISAT in November
Estimated EV/EBITDA of transaction 8.0x 8.0x 2019 at a tenancy
Sources: Company, DBS Bank ratio of 1.9x.

.
Page 4
Industry Outlook
Indonesia Tower

Non-tower revenue of TOWR set for double-digit growth, ~14% of topline over the next 4-5 years. Currently, ~13.5% of TOWR’s
top line is derived from non-tower-related operations, including the provision of very small aperture terminal (VSAT) solutions and
laying of Metropolitan Wireless Fibre Optic networks (MWIFO). VSAT solutions involve the provision of Satellite Transponders to
support communication needs of banks and government projects while MWIFO solutions mainly involve fiberising telecom operator
networks. TOWR has already laid ~27,600km of revenue-generating fibre and expects to reach 40,000-km by FY20F, mostly via
orders originating from EXCL and other telecom operators. The non-tower segment is expanding fast in the double digits and TOWR
expects to expand the contribution of this segment to ~14% of its top line over the next 4-5 years, boosting revenue and EBITDA
growth profile. We expect TOWR’s non-tower segment to expand at a compounded annual growth rate (CAGR) of ~17% over
FY19-22F.

TOWR’s non-tower segment is expanding in double digits and contributes ~13.5% to total revenues
2017 2018 2019 2020F

Non-tower
Fiber optic (km) 4,499 9,400 27,600 40,000*

VSAT leases 2,500 3,200 3,600

Non tower revenue (IDRbn) 338.8*** 529.2*** 871.5

**
y-o-y growth % 56% 65%
MWIFO rentals** 128.4 236.2 469.0

y-o-y growth % 84% 99%

As a % of total non-tower 38% 45% 54%
revenue
As a % of total revenue 2% 4% 7%
VSAT rentals** 210.1 292.9 402.5

y-o-y growth % 39% 37%

As a % of total non-tower 62% 55% 46%
revenue
As a % of total revenue 4% 5% 6%

Total revenue (IDRbn) ** 5,337.90 5,867.90 6,454.3

Non tower revenue as a % 6.30% 9.00%

of total revenue

* Management has indicated that they expect total fibre optic network of 40,000 km by 2020.
**Includes related party revenues
***Includes repeater rentals revenue (insignificant)
Sources: Company, DBS Bank

.
Page 5
Industry Outlook
Indonesia Tower

Risks and Regulations

Consolidation fears looming in the sector. Fears of consolidation within the telecom sector continues to cast a shadow over the
tower sector as rumours of a potential merger between Hutch and EXCL have emerged. While we believe there is a strong case for a
merger between the two telecom operators, given the lack of profitability and spectrum assets, regulatory barriers – especially ones
involving the transfer of spectrum resources in the event of a merger – continue to be a major overhang. While amendments to
these regulations were proposed in February 2019, there is no clarity if or when the proposed amendments would be implemented.

Smaller telcos such as Smartfren and Sampoerna may pose counterparty risk to the tower sector to some degree. The Indonesian
tower sector generates ~5-6% of revenues from smaller telcos, with PT Smartfren Telecom (Smarfren) and PT Sampoerna
Telekomunikasi Indonesia (STI) accounting for the bulk of this segment. Smartfren remains highly levered with a net debt to 1H19
annualised EBITDA of ~13x. However, we believe the counterparty risk from Smartfren is somewhat mitigated since the holding
company of the telco has a healthy balance sheet despite Smartfren being highly geared. Smartfren is owned by Indonesian
conglomerate Sinar Mas, one of the largest conglomerates in the archipelago with publicly listed businesses in a multitude of sectors,
such as real estate, financial services, agribusiness, telecommunications, and mining.

Our In-House Expert

Sachin Mittal
sachinmittal@dbs.com
+65 6682 3699

Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been
produced prior to or subsequent to its publication. Please refer to the links below for the latest specific equity research reports
published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS’ interest in the companies mentioned
in the respective reports

GENERAL DISCLOSURE/DISCLAIMER

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to
be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness,
timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation
contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any
specific addressee. The information herein is published 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 legal or financial advice. The Company, or any of its
related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential,
incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error,
omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other
person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an
offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The
Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect
transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other
banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or
entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

.
Page 6
Industry Outlook
Indonesia Tower

.
Page 7