UOB Kay Hian SECTOR UPDATE
- Constructive forces at work. Competition has eased with Hutchison Three Indonesia no longer disruptive and XL Axiata revamping its strategy. We believe the benign competitive environment should prove to be sustainable. Industry consolidation and SIM card registration could reduce the churn rate and competitive intensity in Indonesia.
- ARPM for voice were largely stable, with the exception of XL Axiata who narrowed the discount relative to Telkomsel after discontinuing its unprofitable and margin-dilutive packages. Telkomsel and XL Axiata jacked up ARPSMS to maximise SMS revenue. Inadvertently, their pricing actions would nudge 2G customers to migrate to 3G/4G and promote the usage of smartphones and data over the longer term.
- Benign competition even extends to data where traditionally erosion of pricing was cutthroat. The effective pricing for data recovered 5% qoq for Telkomsel and XL Axiata in 3Q15. Revenue growth was powered by data with Telkomsel, Indosat and XL Axiata achieving growth in data revenue of 50%, 65% and 9% yoy respectively.
- Coopetition between Indosat and XL Axiata. Indosat and XL Axiata have launched network cooperation for 4G LTE using the MORAN architecture. Both companies are already running shared 4G LTE networks in several cities, including Banyumas, Surakarta, Batam and Banjarmasin. The sharing is restricted to radio access network (RAN), but both companies intend to further expand the collaboration, which could involve more intensified sharing of core networks and even pooling of spectrum in future.
- Network sharing generates savings in capex and opex. We assumed that Indosat and XL Axiata have embarked on comprehensive sharing of networks outside of Java, where they lacked scale, by consolidating existing 2G and 3G networks and jointly deploying a new 4G LTE network. Based on our base case of a 20% reduction in capex and network-related opex, XL Axiata would generate a higher 2.8% increase in EBITDA, 2.8% decrease in capex and 24.6% gain in free cash flow. Similarly, Indosat would achieve a 2.1% increase in EBITDA, 2.4% decrease in capex and 16.7% gain in free cash flow.
- Fastest-growing yet cheapest within ASEAN. Indonesia is the fastest-growing telecommunications market within ASEAN with the lowest penetration rate for mobile and fixed broadband. Yet, they are the cheapest with 2016F EV/EBITDA at an average of 5.1x, compared with 7.9x for Singapore, 10.1x for Malaysia and 8.1x for Thailand.
- Maintain OVERWEIGHT. We prefer Indosat and XL Axiata who are beneficiaries of the evolving industry landscape and are trading near the lower end of their historical band for EV/EBITDA. We also like Telkom for its attractive dividend yield of 3.8% for 2016.