Growth and yield appeal intact despite more newcomers · EQUITY RESEARCH Growth and yield, double...

Rating: See report end for details of Nomura’s rating system.

Malaysia Telecoms

Telecoms

EQUITY RESEARCH

Growth and yield, double the appeal?

Growth and yield appeal intact despite more newcomers

May 27, 2011

Action: Maintain our preference for Malaysia in a regional context Within Asia, the Malaysian telcos fare relatively well. Competition is broadly stable, as are regulations, and data potential is still significant, in our view. The average FY10-13F revenue/EBITDA CAGR of 4-7% is ahead of many developed market telcos, and up to 9% FY11F FCF yields should bring positive dividend surprises. This coupled with strong capital inflows from domestic investors should also limit downside.

We upgrade Telekom Malaysia to a BUY with a TP of RM4.8. We are bullish on its fibre potential. Its acceleration of customer migration and reduction in labour/network costs bode well for margins and FCF.

We revise our Axiata TP to RM5.80 and maintain BUY. Axiata remains one of our preferred regional picks given its reasonable valuation (13x FY12F P/E), diversified business mix and upside dividend potential.

We raise our DiGi TP to RM34 and maintain BUY. We remain positive on its ability to win revenue share as it has done in the past 4-5 quarters.

We pare our Maxis TP to RM5.30 and maintain NEUTRAL. We remain cautious on the margin outlook and note the stock is not inexpensive.

Three key themes for Malaysian telecoms On paper, Malaysia appears competitive with 2-4 players in each of

fixed, GSM, WiMax and MVNO segments. However, the market is far more segmented and low pricing is not a differentiated or sustainable strategy; the focus is on network quality, branding, distribution and share shift is likely to largely occur between incumbents. Data is the key revenue growth driver and we expect it to rise to 34% of revenue in the next 12 months, from 30% now. But defending margins could prove harder than in the past – our analysis of smartphone (iPhone) plans suggests telcos need to generate 30-40% ARPU upside to offset the impact of handset subsidies.

Convergence of fixed and wireless is widely talked about in Malaysia – but more as a headline threat, we believe. Wireless and fixed carriers are unlikely to venture onto each other’s turf (different profitability and challenges). Wholesaling is a possibility, but is low-margin and hence, we believe TM has the potential to re-entrench its network advantage.

Capex will likely remain volatile, but should pose little risk to ordinary dividends. HSBB, LTE and spectrum are other variables.

Fig. 1: Malaysia telecoms coverage summary

Source: Nomura Research, Price as on 24 May 2011

Anchor themes

Data growth from both smartphones and WBB is likely to be a focus, with low penetration of both providing growth opportunities. We are bullish on fibre potential and greater adoption should also drive margin and cash recovery.

Nomura vs consensus

Our BUY on Telekom Malaysia is different from consensus.

Research analysts

ASEAN Telecoms

Neeraja Natarajan - NSL [email protected] +65 6433 6961

Sachin Gupta, CFA - NSL [email protected] +65 6433 6968

Pankaj Suri - NFASL [email protected] +91 22 4053 3724

Gopakumar Pullaikodi [email protected] +91 22 4053 3733

Stock Rating Price (RM) Target Price (RM)

Axiata (AXIATA MK) BUY 5.0 5.8

DiGI (DIGI MK) BUY 28.5 34

Telekom Malaysia (T MK) BUY 3.8 4.8

Maxis (MAXIS MK) NEUTRAL 5.4 5.3

See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.

Nomura | AEJ Malaysia Telecoms May 27, 2011

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Contents

3 Maintain preference for Malaysia in AEJ telcos

6 Key themes for Malaysian telcos

9 A closer look into data trends

18 Axiata Group Berhad

27 DiGi.Com

33 Maxis Communications

39 Telekom Malaysia

47 Appendix A-1


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Maintain preference for Malaysia in AEJ telcos Within Asia, the Malaysian telcos fare relatively well. Competition is broadly stable, as are regulations, and data potential is still significant, in our view. The average FY10-13F revenue/EBITDA CAGR of 4-7% is ahead of many developed market telcos, and up to 9% FY11F FCF yields should bring positive dividend surprises. This coupled with strong capital inflows from domestic investors should also limit downside.

The sector has had a solid run since 2010, with three of the four telcos outperforming the local index by 10-40%. Malaysia appears to be a competitive market on paper, with 2-4 players in each of fixed, GSM, WiMax and MVNO segments. However, the market is far more segmented and low pricing is not a different or sustainable strategy – the focus is on network quality, branding and distribution. However, we also expect competition may now shift to smartphones/data as the customer is spoilt for choice, and telcos will also have to work harder to differentiate themselves, which will likely have implications for costs and capex.

We continue to like franchises with a superior growth outlook as well as increasing focus on costs and improving infrastructure advantages.

• We upgrade Telekom Malaysia to BUY with a TP of RM4.8. We are bullish on its fibre potential. Its acceleration of customer migration and reduction in labour/network costs also bode well for margins and FCF.

• We revise our Axiata TP to RM5.80 and maintain BUY. Axiata is still one of our preferred regional picks given its reasonable valuation (13x FY12F P/E), diversified business mix and upside dividend potential.

• We raise our DiGi TP to RM34 and maintain BUY. We remain positive on DiGi’s ability to win revenue share as it has done in the past 4-5 quarters.

• We pare our Maxis TP to RM5.30 and maintain NEUTRAL. We remain cautious on the margin outlook and note the stock is not inexpensive.

Fig. 2: Malaysian telcos – performance since 2010

Source: Bloomberg

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Malaysian telcos fare relatively well in a regional context, with stable competition and regulations, plus strong data potential


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Fig. 3: EPS revisions for the Malaysian telcos (2011)

Source: Bloomberg, Nomura research

Fig. 4: EPS revisions for the Malaysian telcos (2012)


Fig. 5: Relative valuation for Malaysian telcos

Note: pricing as of 24th May, 2011

Source: Company data, Nomura estimates

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Year End (Dec) Axiata Maxis Digi TM

Current Price (RM) 4.96 5.40 28.50 3.80

Rating BUY NEUTRAL BUY BUY

Price Target 5.80 5.30 34.00 4.80

Upside/Downside 17% -2% 19% 26%

Valuation

FY11F PER 13.6x 16.8x 16.9x 28.3x

FY12F PER 12.5x 17.1x 15.5x 25.2x

FY11F EV/EBITDA 6.3x 10.0x 8.4x 6.0x

FY12F EV/EBITDA 5.7x 9.9x 7.8x 5.9x

Growth Rates (FY10-13F)

Revenues 7.5% 3.7% 5.6% 3.3%

EBITDA 7.0% 1.8% 5.5% 4.6%

NPAT 25.9% 1.1% 6.0% -18.6%

Normalized NPAT 14.8% 1.1% 7.8% 7.2%

Normalized EPS 14.8% 1.1% 7.8% 7.2%

Profitability

EBITDA Margin FY11F 45% 50% 45% 32%

EBITDA Margin FY13F 45% 47% 44% 35%

Change in Margins -74bps -244bps -64bps 230bps

Shareholder Returns

F11F Ordinary Dividend 0.2 0.3 1.6 0.2

F11F Dividend Yield 3.3% 5.9% 5.7% 5.2%

F11F FCF Yield 9% 5% 7% 2%

Dividend Payout Ratio 45% 100% 130% 146%

% FCF Paid Out 38% 125% 77% 242%

Balance Sheet FY11F

Gearing (ND/ND+E) 12% 40% -33% 15%

EBITDA Interest Cover 65.0x 19.5x 142.7x 14.5x

Net Debt/ EBITDA 0.4x 1.2x -0.1x 1.2x

F11F Capex/Sales 20% 15% 11% 33%


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Fig. 6: Regional valuation comparison

Note: pricing as of 24h May, 2011

Source: AIS, Total Access (DTAC) and True are covered by Capital Nomura Securities; Capital Nomura Securities estimates, Nomura estimates

Bloomberg Local Mkt Capticker price (US$ mn) 10 11E 12E 10 11E 12E 10 11E 12E 10 11E 12E

WirelessAIS ADVANC TB Buy THB 95 9,272 12.8 12.3 11.9 5.8 5.6 5.5 13.6% 10.5% 8.3% 13.9% 9.8% 10.6%Axiata Group AXIATA MK Buy MYR 5.0 13,731 18.0 13.6 12.5 7.2 6.3 5.7 2.0% 3.3% 4.8% 12.6% 8.8% 10.4%Bharti Airtel BHARTI IN Buy INR 371 31,102 21.4 18.9 14.3 10.1 8.4 6.9 0.4% 0.8% 1.8% -38.3% 1.5% 7.2%China Mobile 941 HK Buy HK$ 69 188,238 10.4 9.7 9.1 4.1 3.7 3.3 4.1% 4.6% 5.0% 8.5% 12.4% 16.5%Digi.com Digi MK Buy MYR 29 7,264 18.8 16.9 15.5 9.3 8.4 7.8 5.7% 5.7% 6.2% 7.2% 7.5% 7.8%Far EasTone 4904 TT Neutral NT$ 45 5,013 16.5 16.7 16.3 6.3 6.4 6.3 5.5% 5.4% 5.5% 6.5% 8.3% 8.4%Globe Telecom GLO PM Buy PHP 860 2,626 11.2 11.7 11.3 4.6 4.6 4.4 8.9% 7.2% 7.3% 7.1% 6.8% 7.4%Idea Cellular IDEA IN Reduce INR 65.0 4,740 28.0 21.4 15.2 9.0 7.5 6.6 0.0% 0.0% 0.0% -25.1% 1.0% 3.6%Maxis Maxis MK Neutral MYR 5.4 13,276 17.6 16.8 17.1 10.1 10.0 9.9 7.4% 5.9% 5.9% 6.1% 4.7% 5.8%MobileOne M1 SP Buy S$ 2.5 1,764 14.0 13.8 13.0 7.9 7.6 7.3 5.7% 5.8% 6.1% 3.1% 8.4% 8.6%PT XL Axiata EXCL IJ Neutral IDR 6,350 6,306 19.0 15.5 13.5 7.6 7.0 6.5 0.0% 1.6% 2.3% 6.5% 7.1% 9.0%Reliance Com RCOM IN Reduce INR 82.7 3,773 9.9 9.5 7.1 6.2 5.4 4.6 1.2% 2.8% 7.3% -54.9% 4.0% 17.4%SK Telecom 017670 KS Buy KRW 164,000 12,108 9.5 7.8 6.6 4.3 3.9 3.6 5.7% 5.7% 5.7% 16.3% 23.8% 24.1%Taiwan Mobile 3045 TT Buy NT$ 76 9,933 16.0 15.6 15.4 10.0 10.1 10.0 5.6% 5.8% 5.8% 6.7% 5.9% 5.9%Total Access DTAC TB Neutral THB 58 4,520 13.2 14.6 17.3 5.7 5.8 6.3 6.5% 6.9% 7.4% 14.2% 8.6% 7.7%Average 15.8 14.3 13.1 7.2 6.7 6.3 4.8% 4.8% 5.3% 3.2% 7.9% 10.0%Median 16.0 14.6 13.5 7.2 6.4 6.3 5.6% 5.7% 5.8% 6.7% 7.5% 8.4%

IntegratedChina Telecom 728 HK Neutral HK$ 4.5 48,773 20.8 18.2 14.6 4.9 4.6 4.0 1.9% 1.9% 1.9% 8.1% 7.9% 13.3%China Unicom 762 HK Buy HK$ 16.02 51,116 59.1 37.2 26.7 6.5 5.7 5.1 1.1% 0.8% 1.1% -2.9% -3.0% 1.2%Chunghwa 2412 TT Buy NT$ 93 34,218 19.6 19.8 19.8 10.2 10.4 10.4 7.8% 5.6% 5.6% 5.8% 5.3% 5.3%KT Corp 030200 KS Buy KRW 37,900 9,049 7.9 7.2 6.2 3.7 3.7 3.6 5.3% 5.3% 5.3% 5.5% 8.2% 9.4%LG Uplus 032640 KS Neutral KRW 5,610 2,641 6.0 5.4 5.0 3.5 2.9 2.7 6.2% 6.2% 6.2% 8.0% 2.1% 8.3%PLDT TEL PM Neutral PHP 2,392 10,317 10.8 11.0 11.1 6.0 6.1 5.9 9.4% 6.5% 6.4% 10.8% 7.8% 8.7%PT Indosat ISAT IJ Buy IDR 5,300 3,362 23.1 18.7 13.6 5.3 4.9 4.8 1.1% 2.4% 3.8% 1.2% 2.6% 3.4%PT Telkom TLKM IJ Buy IDR 7,650 17,634 13.1 12.5 11.4 4.4 4.2 4.0 3.8% 4.0% 4.8% 8.5% 10.5% 11.9%SingTel ST SP Neutral S$ 3.1 40,190 13.4 13.3 12.8 7.7 7.4 7.0 4.8% 5.4% 5.4% 6.3% 5.7% 6.1%SK Broadband 033630 KS Reduce KRW 4,115 1,114 n/m 29.3 n/m 5.5 4.3 n/m n/m n/m n/m -4.2% 3.6% n/mStarHub STH SP Neutral S$ 2.8 3,779 17.9 15.5 14.9 8.7 7.7 7.4 7.3% 7.3% 7.3% 7.9% 7.9% 6.5%TM T MK BUY MYR 3.8 4,430 25.5 28.3 25.2 5.4 6.0 5.9 12.9% 5.2% 5.2% 5.5% 2.1% -0.4%Telstra TLS AU Neutral A$ 3.0 39,682 9.7 10.6 11.7 4.8 5.0 5.3 9.3% 8.6% 7.5% 12.5% 10.9% 10.0%True TRUE TB Reduce THB 4.7 1,099 n/m n/m n/m 5.6 5.4 5.5 n/m n/m n/m 2.2% 4.8% 9.4%Average 15.3 14.6 14.4 5.9 5.6 5.5 5.9% 4.9% 5.0% 5.4% 5.5% 7.2%Median 15.7 14.4 13.2 5.5 5.2 5.3 5.8% 5.3% 5.3% 6.0% 5.5% 8.3%

EV/EBITDA (x) Div Yield (%) FCF Yield (%) CurrencyRating

PE (x)


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Key themes for Malaysian telcos Stable competition – On paper, Malaysia appears to be one of the most competitive markets, with 2-4 players in each of fixed, GSM, WiMax and MVNO (mobile virtual network operator) segments. However, the market is far more segmented and low pricing is not a different or sustainable strategy – the focus is on network quality, branding and distribution. Hence, we expect the market share shift to largely occur amongst the incumbents.

Data is the key growth driver, although margins may prove harder to defend. Data is the key revenue growth driver and we expect it to rise to 34% of revenue in the next 12 months, from the current 30%. But defending margins could prove harder than in the past. Our analysis of iPhone subsidies suggests telcos need to generate 30-40% ARPU upside to offset the impact of handset subsidies. We think telcos will need to come up with innovative ways to extract efficiencies, in the same vein as the tower-sharing agreement between DiGi and Celcom.

A lot of rhetoric on convergence between fixed and wireless. Convergence between fixed and wireless is widely talked about in Malaysia – but more as headline threats, we believe. Wireless and fixed carriers are unlikely to venture into each other’s businesses (different profitability and challenges). While we see possible wholesaling, this is a very low-margin business. We believe TM’s has the potential to re-entrench its network advantage.

What is the HSBB opportunity in Malaysia? We remain bullish on HSBB fibre that TM is currently building. Given expected growth in content and data, we believe fibre can offer significant infrastructure advantage over the medium term. It is a superior/ faster network with higher margin potential along with lower maintenance capex. The opportunity now is to drive applications and customer migration – the keys to margin and cash recovery. Key drivers include: 1) headcount reduction for TM –26k employees with US$110k in revenue per employee is comparatively weak as seen in fig 8; 2) network costs – elimination of nodes (fig 7 shows the NBN fibre architecture in Australia which is comparable to HSBB and highlights elimination of nodes); and 3) decommissioning of legacy exchanges (683 now).

Fig. 7: NBN structure in Australia – elimination of nodes likely on fibre

Source: Telstra

Fig. 8: Revenue and cost per employee comparison (2010)

Source: Nomura research

Capex could be volatile, but cash outlook remains strong with potential for yields to rise. We believe the free cash outlook remains strong, with capex trends likely to come down over the medium term. No doubt capex risks remain, and we could even see some volatility between years as wireless players continue to build out capacity for data and TM invests in fibre. Still, the average FCF yield of 6% is appealing, in our view, combined with average gearing of 0.8x, suggesting potential for dividend yields to surprise on the upside.

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Fig. 9: Capex outlook for the 4 telcos


Fig. 10: Operating FCF (EBITDA – capex) outlook


Some events to keep in mind

• Spectrum auctions in 900 MHz a risk in the horizon; 700 MHz band allocation also in the horizon. In its recent 1Q11 call, DiGi highlighted that an auction for the 900 MHz band is increasingly likely. It is hard to gauge at this stage where auction prices could go, but recent auctions in the region where final prices have gone in multiples of reserve price do not offer much comfort. On a positive note, new players will not be allowed to bid and this could to some extent maintain rationality.

• Could subsidies rise? Rising subsidies are no doubt a risk as competition rises in the smartphone space. Celcom recently launched its iPhone plans, and though subsidies do appear to be slightly higher, it is also bundling in free on-net minutes (6,000 per plan). Thus, further promotions cannot be ruled out.

• M&A scenarios hard to call, but likely to hear more on infrastructure sharing. The recent M&A in the three-player market in the Philippines has to some extent surprised us and raises the question of whether something similar could occur in Malaysia. While it is hard to call for M&A, we could hear more on operator cooperation to harness cost benefits. Agreements on network sharing and even cooperation amongst operators on procurement to save costs are happening in many countries.

• A recent example is the Deutsche Telekom - France Telecom JV for procurement, where the parties expect EUR1.3bn in combined annual cost savings to kick in three years. Digi and Celcom’s recent tower-sharing agreement in Malaysia is the first of its kind, with a potential RM150-250mn pa in combined savings after 2015F or roughly 2-4% of current opex as savings for each operator.

• Could data roaming prices be next on the line?

• In April 2011, the governments of Singapore and Malaysia announced plans to slash the international roaming rates between the two countries. As a result, starting 1 May, rates were cut by 30% for voice and 50% for SMS. The rate reduction has an impact on both wholesale inter-operator and retail charges. As per the plans, the price reductions will be implemented by mobile operators over two phases. The next phase has been scheduled after a gap of one year. At this stage, operators expect some limited impact which may be offset by elasticity. The bigger risk could, however, be in data roaming, especially for MMS and video calls, which is under scrutiny at the moment. However, this may not be a near-term event.

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Fig. 11: Roaming rate cuts for Singapore-Malaysia (2011-2012F)

Source: IDA Singapore

Fig. 12: International roaming rates – 3G video calling

Source: Company websites

Fig. 13: International roaming rates – MMS

Source: Company websites

Initial pospaid rates /min From 1 May 2011 From 1 May 2012

Incoming call $0.70 - $1.00 $0.56 - $0.80 $0.49 - $0.70

Outgoing call to Malaysian number $0.50 $0.40 $0.35

Outgoing call to Singapore number $0.59 $0.52 $0.46

SMS $0.60 - $0.61 $0.42 - $0.43 $0.30 - $0.31

Call To Malaysia Call To International

Maxis RM 2 (setup charge) + voice charges

RM 2 (setup charge) + voicecharges

Celcom : Exec (RM) 2.25 4.5

Celcom : Blue (RM) 4.5 9

Recipient of outgoing SMS DiGi.com Maxis

Subscriber of same operator RM0.25 / MMS + GPRS roaming charges + 10% surcharge

RM0.25 / MMS + 1 country 1 rate charge

Subscriber of other local operator RM0.50 / MMS + GPRS roaming charges + 10% surcharge


Subscriber of international operator RM1.5 / MMS + GPRS roaming charges + 10% surcharge



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A closer look into data trends As seen with many other markets, we believe data is now carrying the growth baton in Malaysia and we believe data/smartphone trends will become more important heading into 2011. We estimate non-voice services grew at an average 20-25% y-y through 2010 and on average now contribute to 30% of total revenues. With only 15-20% smartphone penetration and 5% WBB (wireless broadband) penetration, this is likely to be the next growth opportunity to tap into for telcos, albeit with the need to manage margins/capex. We estimate non-voice revenue will continue to grow at a mid-teen rate in FY11F, with the non-voice contribution rising to 34%, from 30% in 2010.

Voice growth (for the industry) has struggled a bit in the past last 2 quarters, with elasticity falling below 1x (see next figure). We believe this segment could continue to be competitive and not just on the pre-paid side, as seen by Celcom’s latest free minutes offer on its iPhone plans (6,000 on-net minutes bundled).

Fig. 14: Decomposing revenue growth

Source: Company data, Nomura research

Fig. 15: FY11F outlook for voice and data


Fig. 16: Voice elasticity and growth


Fig. 17: Voice growth comparison over past few quarters


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Fig. 18: Malaysia: smartphone market share (2010)


Fig. 19: Malaysia: WBB market share (2010)


ARPU – can it stabilise?

Despite all the excitement over data growth for operators, it is difficult to find many markets that have seen total ARPU stay flat or reverse. Most often than not, data growth has failed to fully compensate for the structural decline in voice. A look at the ARPU trends in some of the markets in the AEJ region does find some examples of ARPU rising in periods, including for Optus, SingTel and KT, plus in some markets such as Singapore and to some extent in Australia. SingTel is one example where ARPU has actually risen in the past few quarters – but even then, the recent ARPU of S$56 is flat compared to where ARPU was in 2007.

We do not rule out the potential for data ARPU to expand and overall ARPU to stay flat or rise. Considering the competition and pricing pressure on voice, however, we think this is unlikely to occur in the medium-term, as it hasn’t occurred in many other markets.

Fig. 20: Malaysia telcos: ARPU change (% y-y)


Fig. 21: Malaysia telcos: data vs voice ARPU


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Fig. 22: ARPU change (% y-y) in different markets


Fig. 23: Can ARPU rise?


Are telcos net positive or net neutral on smartphone (iPhone) subsidies?

One question that we are faced with is whether or not smartphones are profitable propositions. Given that we don’t have much visibility into the actual usage/spend of the underlying subscriber who opts for a smartphone (iPhone for our analysis), we try to understand the following: 1) what is the ARPU uplift needed to offset the discount on these devices; 2) adjusted for this discount, is the net ARPU accretive or dilutive to the average post-paid/pre-paid ARPU?

What is the discount on the device (on a monthly basis) in comparison to the minimum monthly commitment?

For our analysis, we consider iPhone plans that are: 1) priced similar to the post-paid ARPU for that operator; and 2) priced 40-50% higher than the average post-paid ARPU. We note that the discount or subsidy offered on the device is roughly 30-40% of the minimum monthly commitment from the user. This suggests the ARPU uplift needs to be in the similar range for operators to even be net neutral on these offerings.

Adjusted for discounts, is the net ARPU accretive or dilutive?

Another way to think of subsidies would be to consider if these are dilutive or accretive to the average post-paid ARPU. For example, on a plan that is priced similar to the post-paid ARPU, adjusting for subsidies, the proposition appears to be dilutive. Moreover, even on a plan that is 40-50% higher than the average post-paid ARPU, the higher monthly commitment only appears to recover the discount/subsidy, ie, the operator is net neutral to slightly dilutive on this plan. In other words, a subscriber who currently spends around RM90-100 per month (which is the average post-paid ARPU) goes for a similar iPhone plan, the operator appears to be worse off given the impact of the subsidy. If the subscriber upgrades to a higher plan (RM140-155), the operator is likely to be neutral on its smartphone offerings.

Of course, if a pre-paid user were to migrate to even the lowest available post-paid iPhone plan, the net ARPU uplift is positive – and potentially, this could present opportunities for the telcos, especially as mid-range smartphones rise in the mix.

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Fig. 24: How to think of iPhone subsidies?

Source: Company websites, Nomura research

Capex considerations

One of the challenges facing telcos has been growth in traffic outpacing growth in revenues. This is well captured by the following chart from a paper on Traffic Management and ‘Net Neutrality’ published by the European regulator in June 2010 for European telcos. The chart shows that in a period where traffic rose by 100x, revenues rose by only 2x. We believe this remains a key consideration for the Malaysian telcos as well.

Fig. 25: Data – traffic vs revenue trajectory

Source: Traffic Management and ‘Net Neutrality’, Ofcom, June 2010

Plan rate similar to postpaid ARPU Plan rates 40-50% higher than postpaid ARPU

Digi Maxis Celcom Digi Maxis Celcom

RRP (RM) 2,690 2,590 2,590 2,690 2,590 2,590

Price of phone with a contract as per operator (RM) 2,090 1,590 1,568 1,410 1,290 1,148

Discount on handset 800 1,000 1,022 1,280 1,300 1,442

Contract period 24 24 24 24 24 24

Minimum monthly commitment as mandated by the plan 88 100 98 138 155 148

ARPU adjusted for phone discount 55 58 55 85 101 88

Subsidies/discount as a % of min. ARPU 38% 42% 43% 39% 35% 41%

Current Postpaid ARPU's 83 104 105 83 104 105

Accretion/dilution to postpaid ARPU -34% -44% -47% 2% -3% -16%

Current Prepaid ARPU's 45 36 40

Accretion/dilution to prepaid ARPU 21% 62% 39%


13

Fig. 26: Traffic management options

Source: Traffic Management and ‘Net Neutrality’, Ofcom, June 2010

Where is Malaysia in the smartphone data usage curve?

Decoding data usage from smartphones is not easy. Market research indicates that in the US the average monthly data usage on a smartphone is around 150-250MB, versus 300-400MB for iPhone or Android users. According to AT&T, 65% of its subscriber base uses less than 200MB. We believe that the average usage in Malaysia could be lower or similar, given that iPhone and Android users appear to make up a significant share of the smartphone market.

Fig. 27: Comments from operators on data usage by subscribers


Fig. 28: Average monthly usage for US smartphone users

Source: cnnmoney,com - You're using more smartphone data than you think, Feb 8, 2011, Cisco

Fig. 29: Data consumption deciphered

Source: AT&T wireless website

Operator Comments

AT&T 98% of its smartphone customers use less than 2 gigabytes per month of data, and 65% use less than 200 megabytes

Verizon

O2 97% of O2 smartphone customers would not need to buy additional data as 500MB provides at least 2.5x the average customers use


14

WBB is also ramping up, which will likely be the bigger risk over time for capex

However, in the medium term, broadband access through dongles is likely to be the bigger concern. Vodafone recently stated that 85% of data traffic is attributable to mobile broadband and only 15% to smartphone usage. For Malaysia, dongle penetration is relatively nascent at 23% of total post-paid subscribers and only 5-6% of the cellular subscriber base.

Fig. 30: WBB subscriber trends


Competition – a concern for data pricing

Following a slew of unlimited data plans in the race for customers in developed markets such as in the US and Europe, operators have moved back to usage-driven pricing to better manage the economics of data. For example, AT&T discontinued its USD30/month unlimited plan in mid-2010 and replaced it with plans offering usage of 200MB, 2GB and 4GB.

But what is interesting is that the average usage is still around only 200-300MB and network challenges, where faced, were driven by the small percentage of people with high usage (over 2GB or so). Therefore, with many low-usage plans catering to the “average user”, we believe this has more likely served to curb or rather price excessive users at this stage. However, over the medium term as average usage rises (Fig 28), there is potential from upgrading subscribers to higher plans, but network management and capacity will become even more critical.

In Malaysia, we don’t believe operators are offering unlimited plans at this stage. DiGi also notes that it has a throttle on speed in cases to keep data usage in check, and users need to pay more to enjoy better speeds, which may also be implemented by other operators in time. However, competition may likely pick up in this space. The new WiMAX operators still lack the scale that the incumbents have, but this is not likely to stop them from creating near-term disruptions in the market. YTL’s data plan, for example, appears to be at a premium to the incumbents. Although, adjusting for bundled voice and SMS (which are also at a discounted rates), there is roughly a 30-40% discount on the data.

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Fig. 31: Data tariffs from the 3 Malaysian telcos

Source: Company websites, Nomura research

Fig. 32: A comparison of data prices for 500MB (RM)


Rollout of LTE could help; on the other hand 2600 Mhz not ideal

Even as data is just beginning to take-off as a growth driver, Malaysia has begun to discuss network upgrade to LTE. In our report, 4G- little excitement for big potential? , dated 7 December 2010, we noted that LTE is being widely looked at to address spectrum/network bottlenecks, improve efficiencies and at the same time provide an enhanced user experience. Although Malaysia may be a laggard relative to some markets in rolling it out, the broader availability of LTE in the country should coincide largely with growth in more data-intensive applications and mitigate the risk of a sharp spike in capex. However, one of the drawbacks is that the telcos are being allocated spectrum in the 2.6Mhz band which is not the most efficient for LTE. As can be seen in the following figure, capex and consequently opex for the 2.5GHz band can be 4x the investment needed in the 700Mhz band, and hence may not provide the efficiency needed for data.

Fig. 33: Rise in capex / opex as frequency band rises


Wi-Fi/macro offload for capacity management – TM’s HSBB makes this more compelling We think Wi-Fi offload emerging as an option for network management may be relevant in the Malaysian context. MCMC data show that hotspots have expanded from over 2k spots to over 9K spots as of 2010 (largely from TM’s rollout). Anecdotal evidence from the US suggests Wi-Fi offload has been successful in markets such as the US and Europe where about 50% of smartphone traffic is now carried over Wi-Fi, and this has eased the burden on mobile networks.

Company Data Limit Price US$

Digi 300 MB 33 11

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We note TM has been expanding its WiFi hotspots, and believes it may be able to gain a share of the mobile data traffic and potentially some data revenues as well. We believe that even for wireless operators, offloading traffic, potentially in cooperation with TM, may prove beneficial, given TM’s extensive fixed-line infrastructure including fibre.

Even with LTE coming on board, we believe Wi-Fi could emerge as a network management tool – with LTE being rolled out in 2.6GHz, in-building coverage could likely be a challenge which may need to be separately addressed and Wi-Fi would be one of the alternatives for the same. For example, in Japan last year, both KDDI and Softback were offering free bundled femtos and Wi-Fi hotspots to subscribers to address network bottlenecks. With HSBB/fibre offering significant capacity, we believe the macro offload theme could see more debate.

Fig. 34: Growth in Wi-Fi hotspots

Source: MCMC

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Fig. 35: Quarterly summary for Malaysian telcos

Source: Company reports, Nomura research

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10Revenue (RM mn)Celcom 1,476 1,544 1,606 1,699 1,703 1,710 1,716 1,721

DiGi 1,218 1,205 1,239 1,248 1,290 1,335 1,351 1,430 Maxis 2,128 2,116 2,156 2,211 2,152 2,191 2,216 2,310 TM 2,105 2,129 2,101 2,273 2,125 2,150 2,195 2,321

Revenue shares Celcom 21% 22% 23% 23% 23% 23% 23% 22%

DiGi 18% 17% 17% 17% 18% 18% 18% 18%Maxis 31% 30% 30% 30% 30% 30% 30% 30%TM 30% 30% 30% 31% 29% 29% 29% 30%

Revenue growth Celcom 0% 5% 4% 6% 0% 0% 0% 0%DiGi -1% -1% 3% 1% 3% 3% 1% 6%

Maxis -6% -1% 2% 3% -3% 2% 1% 4%TM -16% 1% -1% 8% -7% 1% 2% 6%

Mobile subs ('000)Celcom 9,176 9,176 9,176 9,176 9,176 9,176 9,176 9,176 DiGi 7,155 7,230 7,393 7,720 7,947 8,105 8,247 8,765

Maxis 11,234 11,266 11,423 11,735 12,291 12,691 12,971 13,525

Subscriber shares Celcom 33% 33% 33% 32% 31% 31% 30% 29%

DiGi 26% 26% 26% 27% 27% 27% 27% 28%Maxis 41% 41% 41% 41% 42% 42% 43% 43%

Wirelessrevenue shares

Celcom 32% 33% 33% 34% 34% 34% 33% 32%

DiGi 26% 26% 26% 25% 26% 26% 26% 27%

Maxis 42% 42% 41% 41% 40% 40% 40% 41%

Blended ARPUCelcom 53 53 53 55 53 52 51 50 DiGi 56 54 55 54 53 53 52 51

Maxis 54 54 54 55 52 51 49 49

MOUCelcom 201 213 216 209 202 200 197 228

DiGi 212 210 229 229 229 242 248 258 Maxis 168 175 178 181 173 173 172 171

RPMCelcom 0.27 0.25 0.25 0.26 0.26 0.26 0.26 0.22 DiGi 0.26 0.26 0.24 0.24 0.23 0.22 0.21 0.20

Maxis 0.32 0.31 0.30 0.30 0.30 0.29 0.28 0.29

Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomura’s rating system.

Axiata Group Berhad AXIA.KL AXIATA MK

TELECOMS

EQUITY RESEARCH

Inexpensive valuation for high growth

Cash and earnings diversity intact for our key regional pick

May 27, 2011

Rating Remains

Buy

Target price Reduced from 5.90

MYR 5.80

Closing price May 24, 2011

MYR 4.97

Potential upside +16.7%

Action: Reiterate BUY with revised RM5.8 TP Following a transfer of coverage, we remain positive on Axiata’s earnings and cash outlook, which coupled with its inexpensive FY11F P/E of 13.6x makes it our key Malaysian and regional telco pick. Stripping out its subsidiaries and associate values, the core Celcom business is also trading at a significant discount to local peers at 12x FY11F. Over the past three years, Axiata’s KPIs have evolved from winning revenue share, to improving ROIC, to now shareholder returns. We see its dividends rising gradually going forward, and this year it is also looking for up to 10% share buyback, which will provide further support. Its consistent/superior execution is evident in ROIC improvement to 12% in 2010 from 4% in 2008. With rising competition in key markets such as Malaysia and Indonesia, the element of positive surprises will be limited, but nevertheless, its revenue and EBITDA growth outlook of 10% p.a. each for 2011 is still one of the highest in the region. Axiata has also been actively divesting/ monetizing non-core investments, which provides more fire-power to its already strong 9-11% FCF yield.

Catalysts & Valuation Catalysts include operating trends at various subsidiaries/associates and regulatory clarity in Bangladesh/India. Axiata’s share price has been rangebound recently due to overhangs from 1) Robi license renewal (we factor in US$200mn) and 2) regulatory uncertainties in India. We estimate worst-case impact of less than 5% on our valuation from both. Our revised target price is RM5.8, and implies a FY11F P/E of 16x.

Catalysts: operating trends at various subsidiaries/associates, clarity on regulatory issues in Bangladesh/India

31 Dec FY10 FY11F FY12F FY13F

Currency (MYR) Actual Old New Old New Old New

Revenue (mn) 15,621 17,266 17,130 18,644 18,323 19,426

Reported net profit (mn) 1,770 3,044 3,087 3,315 3,346 3,531

Normalised net profit (mn) 2,333 3,044 3,087 3,315 3,346 3,531

Normalised EPS 0.3 0.4 0.4 0.4 0.4 0.4

Norm. EPS growth (%) 41.1 16.8 32.3 8.9 8.4 5.5

Norm. P/E (x) 18.0 N/A 13.6 N/A 12.5 N/A 11.9

EV/EBITDA 7.2 N/A 6.3 N/A 5.7 N/A 5.2

Price/book (x) 2.2 N/A 2.0 N/A 1.8 N/A 1.7

Dividend yield (%) 2.0 N/A 3.3 N/A 4.8 N/A 5.9

ROE (%) 9.6 13.9 15.6 14.1 15.2 14.9

Net debt/equity (%) 27.3 14.0 13.6 3.9 net cash net cash

Source: Nomura estimates

Anchor themes

The company's growth profile is still one of the best in the region. Strong cashflows bode well for dividend upsides.

Nomura vs consensus

We are 4% ahead of consensus on our target price as we remain optimistic on operations at key subsidiaries.

Research analysts

ASEAN Telecoms




Gopakumar Pullaikodi - [email protected] +91 22 4053 3733


Nomura | ASIA Axiata Group Berhad May 27, 2011

19

Key data on Axiata Group Berhad Income statement (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 13,312 15,621 17,130 18,323 19,426Cost of goods sold -3,538 -3,866 -4,275 -4,607 -4,910Gross profit 9,774 11,754 12,855 13,716 14,516SG&A -7,273 -8,642 -8,063 -8,670 -9,257Employee share expense 713 339 200 300 300Operating profit 3,214 3,451 4,992 5,346 5,559

EBITDA 5,420 7,054 7,751 8,215 8,646Depreciation -2,919 -3,942 -2,959 -3,169 -3,387Amortisation 713 339 200 300 300EBIT 3,214 3,451 4,992 5,346 5,559Net interest expense -649 -409 -119 -40 80Associates & JCEs 101 -10 223 262 300Other income 0 173 0 0 0Earnings before tax 2,666 3,206 5,096 5,568 5,938Income tax -910 -1,089 -1,529 -1,670 -1,781Net profit after tax 1,756 2,117 3,567 3,897 4,157Minority interests -103 -346 -480 -551 -626Other items 0 562 0 0 0Preferred dividends

Normalised NPAT 1,653 2,333 3,087 3,346 3,531Extraordinary items 0 -562 0 0 0Reported NPAT 1,653 1,770 3,087 3,346 3,531Dividends 0 -845 -1,389 -2,008 -2,472Transfer to reserves 1,653 926 1,698 1,339 1,059

Valuation and ratio analysis

FD normalised P/E (x) 25.3 18.0 13.6 12.5 11.9FD normalised P/E at price target (x) 29.6 21.0 15.9 14.6 13.9Reported P/E (x) 25.3 23.7 13.6 12.5 11.9Dividend yield (%) na 2.0 3.3 4.8 5.9Price/cashflow (x) 8.8 6.9 6.0 5.6 5.3Price/book (x) 2.3 2.2 2.0 1.8 1.7EV/EBITDA (x) 9.9 7.2 6.3 5.7 5.2EV/EBIT (x) 16.6 14.6 9.8 8.7 8.0Gross margin (%) 73.4 75.2 75.0 74.9 74.7EBITDA margin (%) 40.7 45.2 45.2 44.8 44.5EBIT margin (%) 24.1 22.1 29.1 29.2 28.6Net margin (%) 12.4 11.3 18.0 18.3 18.2Effective tax rate (%) 34.1 34.0 30.0 30.0 30.0Dividend payout (%) 0.0 47.7 45.0 60.0 70.0Capex to sales (%) 24.7 18.9 19.5 17.6 16.7Capex to depreciation (x) 1.1 0.7 1.1 1.0 1.0ROE (%) 11.2 9.6 15.6 15.2 14.9ROA (pretax %) 9.6 10.3 16.1 16.8 17.5

Growth (%)

Revenue 17.3 17.3 9.7 7.0 6.0EBITDA 24.4 30.2 9.9 6.0 5.2EBIT

Normalised EPS 226.3 41.1 32.3 8.4 5.5Normalised FDEPS 226.3 41.1 32.3 8.4 5.5

Per share

Reported EPS (MYR) 0.20 0.21 0.37 0.40 0.42Norm EPS (MYR) 0.20 0.28 0.37 0.40 0.42Fully diluted norm EPS (MYR) 0.20 0.28 0.37 0.40 0.42Book value per share (MYR) 2.15 2.22 2.48 2.71 2.89DPS (MYR) 0.00 0.10 0.16 0.24 0.29Source: Nomura estimates

Notes

Revenue growth of 10% for FY11

Price and price relative chart (one year)

(%) 1M 3M 12M

Absolute (MYR) 5.8 2.3 36.3

Absolute (USD) 4.2 2.6 48.3

Relative to index 5.4 -1.2 14.5

Market cap (USDmn) 13,733.8

Estimated free float (%)

31.7

52-week range (MYR)

5.19/3.52

3-mth avg daily turnover (USDmn)

22.43

Major shareholders (%) Khazanah Nasional Berhad

44.5

Employees Provident Fund Board

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Cashflow (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 5,420 7,054 7,751 8,215 8,646Change in working capital -195 -94 269 258 238Other operating cashflow -479 -883 -1,066 -993 -956Cashflow from operations 4,746 6,077 6,954 7,481 7,927Capital expenditure -3,290 -2,946 -3,340 -3,225 -3,244Free cashflow 1,457 3,131 3,613 4,256 4,683Reduction in investments 5,734 180 0 0 0Net acquisitions -1 -2 0 0

Reduction in other LT assets 0 2,052 0 0 0Addition in other LT liabilities 559 127 382 418 445Adjustments -6,304 -180 -600 0 0Cashflow after investing acts 1,444 5,308 3,396 4,673 5,129Cash dividends 90 89 -755 -1,300 -1,918Equity issue

Debt issue -8,118 -944 -750 -750 -750Convertible debt issue

Others 5,260 -182 -382 -418 -445Cashflow from financial acts -2,768 -1,037 -1,887 -2,467 -3,114Net cashflow -1,325 4,271 1,508 2,206 2,015Beginning cash 3,331 2,006 6,277 7,786 9,992Ending cash 2,006 6,277 7,786 9,992 12,007Ending net debt 10,317 5,120 2,862 -94 -2,859Source: Nomura estimates

Balance sheet (MYRmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 2,006 6,277 7,786 9,992 12,007Marketable securities 0 0 0 0 0Accounts receivable 1,559 1,704 1,868 1,998 2,119Inventories 35 85 85 85 85Other current assets 97 354 354 354 354Total current assets 3,698 8,420 10,093 12,429 14,565LT investments 181 1 1 1 1Fixed assets 15,815 15,130 15,512 15,568 15,425Goodwill

Other intangible assets 8,563 7,605 8,205 8,205 8,205Other LT assets 8,887 6,944 7,077 7,250 7,460Total assets 37,144 38,101 40,889 43,453 45,656Short-term debt 2,149 1,222 972 722 472Accounts payable 4,263 4,567 5,001 5,389 5,748Other current liabilities 221 274 274 274 274Total current liabilities 6,634 6,064 6,247 6,385 6,494Long-term debt 10,173 10,176 9,676 9,176 8,676Convertible debt

Other LT liabilities 1,457 1,583 1,965 2,383 2,828Total liabilities 18,264 17,822 17,888 17,944 17,997Minority interest 696 1,553 2,033 2,584 3,210Preferred stock 0 0 0 0 0Common stock 8,445 8,445 8,445 8,445 8,445Retained earnings 9,739 10,280 12,523 14,480 16,003Proposed dividends

Other equity and reserves

Total shareholders' equity 18,184 18,725 20,968 22,925 24,448Total equity & liabilities 37,144 38,101 40,889 43,453 45,656

Liquidity (x)

Current ratio 0.56 1.39 1.62 1.95 2.24Interest cover 5.0 8.4 41.9 133.5 na

Leverage

Net debt/EBITDA (x) 1.90 0.73 0.37 net cash net cashNet debt/equity (%) 56.73 27.34 13.65 net cash net cash

Activity (days)

Days receivable 42.5 38.1 38.1 38.6 38.7Days inventory 5.8 5.7 7.3 6.8 6.3Days payable 454.0 416.8 408.5 412.7 413.9Cash cycle -405.7 -373.0 -363.1 -367.4 -368.9Source: Nomura estimates

Notes

Strong cash outlook implies potential or dividend upside

Notes

Strong balance sheet


21

Key appeals for Axiata • We remain positive on Axiata’s earnings and cash outlook, which coupled with its

inexpensive FY11F P/E of 13.6x (compared with peers) makes it our key Malaysian and regional telco picks. Stripping out its subsidiaries and Associate values, the core Celcom business is also trading at a significant discount to local peers at 12x FY11F.

• Over the past three years, Axiata’s KPIs have evolved from winning revenue share, to improving ROIC, to now shareholder returns. Its consistent/superior execution is evident in ROIC improvement to 11.7% in 2010 from 4% in 2008.

• With rising competition in key markets like Malaysia and Indonesia, the element of positive surprises will likely be limited, but nevertheless, its revenue and EBITDA growth outlook of 10% p.a. each for 2011 is still one of the highest in the region. Axiata has also been actively divesting non-core investments and monetizing other assets appropriately, which bodes well for shareholder returns. Cash outlook remains strong, with FCF yields of around 9-11% for the next three years, and dividends could likely to rise from current 2% yield.

Axiata’s share price has been rangebound recently due to overhangs from 1) Robi license renewal (we factor in US$200mn already in our valuations for Robi) and 2) regulatory uncertainties in India. Robi accounts for 6% of EBITDA contribution, but only 3% of our current valuation for Axiata. Another US$200mn in license payment could impact Axiata’s valuation by 1%.

IDEA contributes to 6% of Axiata’s valuation. A potential impact of one-time spectrum charges and license renewal of US$2bn would impact IDEA’s price by INR20 per share, or Axiata’s valuation by 2%.

We estimate a worst-case impact of less than 5% on our valuation from both. We believe the company’s 10% buyback program should also keep a floor under the share price.

Fig. 36: Revenue trends for Axiata


Fig. 37: EBITDA and margin trends


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Key considerations in major operating markets

Fig. 38: Revenue contribution by subsidiary

Source: Company report, Nomura research

Celcom – Celcom’s growth tapered off slightly in 2H as voice revenues came under pressure, although Celcom’s recent launch of its iPhone offering should allow it to compete equally with other players in the smartphone segment and also revitalize growth. The company is targeting smartphone penetration of around 30% from 20% within its subscriber base. Although data is likely to be dilutive by 1-2%, the company is looking for ways to offset this and expects to defend margins at these levels. Celcom’s recent tower sharing agreement with DiGi is a positive in this direction, with cost benefits expected to come through from FY12F.

Fig. 39: Revenue market share trends for Malaysia


XL Axiata (Indonesia) – We continue to like XL’s consistent execution and solid cost focus, although we believe incremental revenue share gains will likely be more challenging as both Indosat and Telkomsel look to defend their positions more closely and CDMA operators also remain aggressive. At the same time, data growth is a key revenue driver, but comes with a lower margin. Its FCF remains strong with annual yield of 7% this year.

Management reaffirmed its FY11F guidance during its recent earnings call, but subdued commentary on its ability to continue to differentiate and exploit inefficiencies suggests limited revenue surprises ahead. It stated, “as the major growth for voice/SMS services is behind us, and market pricing has become largely comparable, XL sees no benefit in a continued focus on aggressive price initiatives for these services”.

Fig. 40: Revenue market share - Indonesia


Celcom, 42%

XL, 46%

Robi, 6%

Dialog, 6%

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

Celcom 32% 33% 33% 34% 34% 34% 33% 32%

Digi 26% 26% 26% 25% 26% 26% 26% 27%

Maxis 46% 45% 44% 44% 43% 43% 43% 44%

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

Telkomsel 61% 62% 62% 60% 58% 58% 58% 57%

Indosat 21% 19% 19% 20% 20% 20% 21% 20%

XL Axiata 18% 19% 19% 20% 22% 22% 22% 23%


23

Dialog – for Dialog, Axiata believes growth could be in the mid-single-digit range for the year, although growth in 1Q of 10% y-y well exceeded this. Mobile data – small and large screen are viewed as growth drivers as well as prepaid voice as well. In 2010, Dialog saw solid margin improvements last year from 22% to 36% as the company restructured itself and also margins from broadband and Pay-TV improved. In the medium term, margins are likely to be maintained at current levels. Dialog has been free cash positive over the past couple of years (FCF margin in 2010 was 18%), and we believe this continues to bode well for Axiata’s cash outlook.

Robi – In Bangladesh, Axiata believes there is still growth to be tapped from this market with real penetration pegged at mid-30%; therefore, driving revenue growth and share gains will be the near-term focus in this market. Axiata does not believe Robi will be free cash generating in the near term, although management plans to continue a disciplined investment approach for this business. The recent regulatory review in Bangladesh including review of license fees has been a concern, with the implied outflow of US$400mn for Robi. We understand that that Robi has in place arrangements to meet this payment, if necessary. We currently factor in RM600mn (or US$200mn) in Robi’s valuation to account for this payment.

Fig. 41: License fee renewal impact for Robi

Source: Bangladesh Telecom Regulatory Commission

Solid cash outlook with potential for dividends to rise

Axiata’s cash outlook remains solid at 9-10% yield over the next 3 years with RM3.7bn in FCF for FY11F. Axiata declared a maiden dividend of 10sen per share in 2010, which represents only 25% of its free cash flow. Combined with low gearing of 0.7x at the end of FY11F, we believe there is potential for dividends to rise over time.

Fig. 42: Capex trends


Fig. 43: FCF Outlook

Note: Yield is at price of RM 4.97


Amount (in BDT) Amount (in US$)Application Fee 100,000 1,408 License Renewal fee 100,000,000 1,408,451 Annual License Fee 50,000,000 704,225 Revenue Sharing (5.5% of annual gross revenue) 1,550,450,000 21,837,324 Social Obligation Fund (1.5% of annual gross revenue) 422,850,000 5,955,634

Application fee for spectrum 50,000 704 Spectrum Assigment fee : 1800 MHz (Tk. 150 crore /MHz) 7,695,000,000 108,380,282 Spectrum Assigment fee : 900 MHz (Tk. 300 crore /MHz) 21,090,000,000 297,042,254 Annual spectrum fees : price for access frequency 206,391,402 2,906,921

Total 31,114,841,402 438,237,203

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24

What is the implied valuation for Celcom?

Stripping out the value of various associates, we note that Celcom is currently trading at an implied multiple of 12x, well below its Malaysian peers and also regional peers. We believe Axiata’s proposal for a buyback program should help maintain a floor on the share price. As catalysts in terms of continued operational performance and potentially higher dividend payout emerge, we believe the stock could re-rate and bridge the valuation gap with peers.

Fig. 44: Celcom vs other associates – stub value

Source: Bloomberg, Nomura estimates

Fig. 45: Implied P/E multiple for Celcom – currently at 12x


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Fig. 46: Valuation breakdown from subsidiaries/associates


REVISION AND VALUATIONS

We revise our revenues /EBITDA/EPS by -1 to -3% to incorporate 2011 guidance. We also factor in ~US$200mn for Robi license renewal in our valuations. We have revised our target price to RM5.8 from RM 5.9, driven by our earnings revisions and also factoring in payments for Robi. Our TP of RM5.8 implies a FY11F multiple of 16x.

Fig. 47: Earnings revision

Source: Bloomberg

Fig. 48: P/E Valuation band


Celcom, 55.8%

XL Axiata, 26.1%

Robi, 3.1%

Dialog, 5.3%

Hello, 0.2%

IDEA, 5.5%

M1, 3.5%

MTCE, 0.0%

Samart i-mobile, 0.4%

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26

Fig. 49: Earnings revision

Source: Company report, Nomura estimates

Fig. 50: Nomura v/s consensus


Valuation Methodology and risks Our target price of MYR 5.8 is based on DCF. We use DCF methodology for valuing the four key subsidiaries: Celcom, XL, Robi, and Dialog using WACCs of 7.7%, 12.6%, 7.7%, and 8.0%, respectively; our terminal growth rates are 2.5%, 3%, 1.5%, and 1.5%, respectively. The cash flows are discounted back to 2017

Risks that may impede the achievement of the target price Key downside risks to our rating are: 1) aggressive price competition; 2) weaker-than-expected takeup of wireless broadband in Malaysia; 3) tariff wars and regulatory risks in Indonesia, India, Sri Lanka and Bangladesh.

New Forecasts FY10 FY11F FY12F

Revenue 15,621 17,130 18,323

EBITDA 7,054 7,751 8,215

Margin 45.2% 45.2% 44.8%

NPAT 1,770 3,087 3,346

Normalized NPA 2,333 3,087 3,346

Old Forecasts FY11F FY12F

Revenue 17,266 18,644

EBITDA 7,841 8,419

Margin 45.4% 45.2%

NPAT 3,044 3,315

Normalized NPAT 3,044 3,315

Change % FY11F FY12F

Revenue -0.8% -1.7%

EBITDA -1.2% -2.4%

NPAT 1.4% 0.9%

Normalized NPAT 1.4% 0.9%

Consensus FY11F FY12F

Revenue 17,063 18,466

EBITDA 7,783 8,405

NPAT 2,970 3,333

Normalized NPAT 2,970 3,333

Nom vs. cons FY11F FY12F

Revenue 0.4% -0.8%

EBITDA -0.4% -2.3%

NPAT 3.9% 0.4%


DiGi.Com DSOM.KL DIGI MK

TELECOMS

EQUITY RESEARCH

On top of its game

Winning revenues, losing costs – good for dividends

May 27, 2011

Rating Remains

Buy

Target price Increased from 31.00

MYR 34.00


MYR 28.50


Action: Maintain BUY with new TP of MYR34.00 Following a transfer of coverage, we maintain our BUY on DiGi and lift our TP to MYR34.00, reflecting three reasons: 1) Despite a late start in 3G/data, DiGi is now executing well to regain lost revenue share, and we expect this trend to continue. Through 2010, its revenue share increased by 210bps y-y to 27%. 2) DiGi also remains cost focused; following its 110bp EBITDA margin improvement last year, we expect another 60bp gain this year to 45%. Longer term, DiGi is looking to extract further capex and opex efficiencies. We expect the recent network collaboration deal with Celcom will likely yield cost benefits from FY12F. 3) DiGi maintains its strong cash position, with low gearing under 0.1x net debt/EBITDA as of 1Q11 and FY11F FCF of MYR1.6bn even suggesting potential upside to dividends this year.

Near-term earnings depressed due to accelerated depreciation Accelerated D&A from network management will likely keep earnings depressed in FY11-12F, which makes the stock look relatively expensive in reported earnings. Normalised for this, the stock is trading at 16-17x. Operationally, 1Q was a solid quarter with 11-14% y-y growth in revenue and EBITDA. DiGi is confident of delivering on its growth and profitability targets despite the probability of competition rising.

Valuation and catalysts Our revised DCF-based TP is MYR34.00. Despite valuations being at a premium to regional peers, but on a par with domestic peers, we believe smartphone-driven net-adds/ARPU and capital management will serve as key catalysts for the stock. Spectrum re-farming/auctions are potential downside risks.



Revenue (mn) 5,406 5,864 5,823 6,082 6,125 6,294 6,365

Reported net profit (mn) 1,178 1,258 996 1,276 1,039 1,297 1,402

Normalised net profit (mn) 1,178 1,258 1,311 1,276 1,427 1,297 1,476

Normalised EPS 1.5 1.6 1.7 1.6 1.8 1.7 1.9

Norm. EPS growth (%) 17.8 6.9 11.3 1.4 8.9 1.6 3.4

Norm. P/E (x) 18.8 N/A 16.9 N/A 15.5 N/A 15.0

EV/EBITDA 9.3 N/A 8.4 N/A 7.8 N/A 7.5



ROE (%) 82.1 93.4 82.3 94.8 114.2 96.3 188.7

Net debt/equity (%) 12.8 net cash net cash net cash net cash net cash net cash


Anchor themes

Data growth from smartphones and WBB is likely to be a focus, with low penetration of both presenting solid growth potential, in our view.

Nomura vs consensus

Our TP is 15% higher than consensus, as we see limited capex risks ahead.

Research analysts

ASEAN Telecoms





See Appendix A-1 for analyst

certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.

Nomura | ASIA DiGi.Com May 27, 2011

28

Key data on DiGi.Com Income statement (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 4,910 5,406 5,823 6,125 6,365Cost of goods sold -1,454 -1,678 -1,768 -1,849 -1,914Gross profit 3,455 3,728 4,055 4,275 4,451SG&A -2,062 -2,100 -2,691 -2,880 -2,578Employee share expense 0 0 0 0 0Operating profit 1,393 1,628 1,365 1,395 1,873

EBITDA 2,125 2,401 2,621 2,747 2,824Depreciation -731 -773 -1,256 -1,352 -950Amortisation 0 0 0 0 0EBIT 1,393 1,628 1,365 1,395 1,873Net interest expense -27 -31 -18 8 22Associates & JCEs 0 0 0 0 0Other income 0 0 0 0 0Earnings before tax 1,366 1,597 1,346 1,404 1,895Income tax -366 -419 -350 -365 -493Net profit after tax 1,000 1,178 996 1,039 1,402Minority interests 0 0 0 0 0Other items 0 0 315 389 74Preferred dividends 0 0 0 0 0Normalised NPAT 1,000 1,178 1,311 1,427 1,476Extraordinary items 0 0 -315 -389 -74Reported NPAT 1,000 1,178 996 1,039 1,402Dividends -1,384 -1,267 -1,267 -1,371 -1,402Transfer to reserves -384 -89 -271 -332 0


FD normalised P/E (x) 22.1 18.8 16.9 15.5 15.0FD normalised P/E at price target (x) 26.4 22.4 20.2 18.5 17.9Reported P/E (x) 22.1 18.8 22.2 21.3 15.8Dividend yield (%) 6.2 5.7 5.7 6.2 6.3Price/cashflow (x) 13.4 9.6 9.6 9.1 9.3Price/book (x) 14.6 16.5 20.6 29.8 29.8EV/EBITDA (x) 10.7 9.3 8.4 7.8 7.5EV/EBIT (x) 16.3 13.7 16.0 15.4 11.3Gross margin (%) 70.4 69.0 69.6 69.8 69.9EBITDA margin (%) 43.3 44.4 45.0 44.9 44.4EBIT margin (%) 28.4 30.1 23.4 22.8 29.4Net margin (%) 20.4 21.8 17.1 17.0 22.0Effective tax rate (%) 26.8 26.2 26.0 26.0 26.0Dividend payout (%) 138.3 107.6 127.2 132.0 100.0Capex to sales (%) 14.6 13.3 11.4 11.8 11.8Capex to depreciation (x) 1.0 0.9 0.5 0.5 0.8ROE (%) 58.5 82.1 82.3 114.2 188.7ROA (pretax %) 32.3 37.9 34.2 41.0 62.2

Growth (%)

Revenue 1.7 10.1 7.7 5.2 3.9EBITDA -2.2 13.0 9.1 4.8 2.8EBIT

Normalised EPS -13.5 17.8 11.3 8.9 3.4Normalised FDEPS -13.5 17.8 11.3 8.9 3.4

Per share


Notes

High single-digit growth outlook with margin improvement for FY11F


(%) 1M 3M 12M

Absolute (MYR) -1.1 9.6 24.5

Absolute (USD) -2.6 10.0 35.5

Relative to index -1.5 6.1 2.7



32.2

52-week range (MYR)

30.66/21


5.58

Major shareholders (%) TELENOR SA 49.0

EPF 17.2

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29

Cashflow (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 2,125 2,401 2,621 2,747 2,824Change in working capital -89 349 59 72 65Other operating cashflow -381 -441 -369 -375 -507Cashflow from operations 1,655 2,309 2,311 2,444 2,382Capital expenditure -718 -720 -663 -724 -754Free cashflow 937 1,589 1,648 1,720 1,628Reduction in investments 0 11 0 0 0Net acquisitions

Reduction in other LT assets

Addition in other LT liabilities

Adjustments 15 109 36 55 60Cashflow after investing acts 951 1,708 1,684 1,774 1,689Cash dividends -1,376 -1,353 -1,267 -1,371 -1,402Equity issue 0 0 0 0 0Debt issue 523 100 0 -300 0Convertible debt issue 0 0 0 0 0Others 0 -36 25 0 0Cashflow from financial acts -853 -1,288 -1,243 -1,671 -1,402Net cashflow 99 420 441 103 286Beginning cash 331 430 851 1,292 1,395Ending cash 430 850 1,291 1,395 1,681Ending net debt 492 172 -269 -672 -958Source: Nomura estimates

Balance sheet (MYRmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 430 851 1,292 1,395 1,681Marketable securities 11 0 0 0 0Accounts receivable 420 437 471 495 515Inventories 13 43 43 43 43Other current assets 0 0 0 0 0Total current assets 874 1,331 1,806 1,933 2,239LT investments 0 0 0 0 0Fixed assets 2,896 2,960 2,412 1,854 1,727Goodwill 0 0 0 0 0Other intangible assets 950 846 776 707 637Other LT assets 12 0 0 0 0Total assets 4,732 5,137 4,994 4,494 4,603Short-term debt 150 0 0 0 0Accounts payable 1,429 1,840 1,933 2,029 2,114Other current liabilities 447 432 432 432 432Total current liabilities 2,026 2,272 2,365 2,461 2,545Long-term debt 772 1,023 1,023 723 723Convertible debt 0 0 0 0 0Other LT liabilities 413 495 530 567 592Total liabilities 3,211 3,790 3,918 3,751 3,860Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 78 78 78 78 78Retained earnings 1,444 1,269 998 665 665Proposed dividends 0 0 0 0 0Other equity and reserves 0 0 0 0 0Total shareholders' equity 1,521 1,347 1,075 743 743Total equity & liabilities 4,732 5,137 4,994 4,494 4,603

Liquidity (x)

Current ratio 0.43 0.59 0.76 0.79 0.88Interest cover 51.6 52.7 74.3 na na

Leverage

Net debt/EBITDA (x) 0.23 0.07 net cash net cash net cashNet debt/equity (%) 32.31 12.80 net cash net cash net cash

Activity (days)


Notes

Strong cash outlook bodes well for dividends

Notes

Strong balance sheet with low gearing


30

Three key appeals of DiGi 1) Despite a late start in 3G/data relative to its peers, DiGi is now executing well to

regain lost revenue share, and we expect these trends to continue. Since 4Q09 (when its revenue share bottomed out), the company has gained 210bps in revenue market share. DiGi outperformed its peers on revenue growth in 2010, helped in part by the iPhone launch as well as relatively better management of growth in voice. For 2011F, our high single-digit y-y revenue growth outlook for DiGi (vs mid single-digit growth for peers in the Malaysian market) suggests it could continue to outpace peers, although share gains of a similar magnitude as seen last year may be harder to achieve.

DiGi remains optimistic on the potential for mobile Internet and data. According to management, some 50% of its subscriber base uses mobile Internet, although a majority of this usage is on a pay-per-use model. The company’s smartphone penetration is currently around 15% of its subscriber base, and management believes this should rise as more affordable smartphones are rolled out. Voice also remains an area of growth potential, we think, although recent 1Q11 results suggest rising competition in the prepaid segment.

Fig. 51: Revenue share trends – DiGi’s share gain since December 2009


Fig. 52: DiGi: revenue growth outlook (MYRmn)


Fig. 53: DiGi: non-voice as as % of revenues (MYRmn)


2) Even as it pursues revenue growth, the company also remains cost focused. Following a 110bp improvement in its EBITDA margin last year, we expect another 60bps margin gain this year. Even longer term, DiGi is looking to extract further capex and opex efficiencies. A recent network collaboration deal with Celcom is an example of such efforts and in our view will yield cost benefits from FY12F onward.

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10Celcom 32% 33% 33% 34% 34% 34% 33% 32%

Digi 26% 26% 26% 25% 26% 26% 26% 27%

Maxis 46% 45% 44% 44% 43% 43% 43% 44%

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Fig. 54: DiGi: EBITDA and margin outlook (MYRmn)


Fig. 55: DiGi: cost as a % of sales trends


3) DiGi remains in a very strong cash position with low gearing of under 0.1x net debt to EBITDA (adjusting for potential drawdown of USP-related payments) as of 1Q11 and MYR1.6bn in FCF for FY11F. In our view, these levels suggest potential upside risk to dividends this year.

Fig. 56: DiGi: capex trends (MYRmn)


Fig. 57: DiGi: FCF outlook (MYRmn)

Note: based on price of MYR28.50 as on 24 May 2011


Earnings revisions

Our revenue and EBITDA forecasts move by -1 to 3% for FY11-12F, but NPAT is revised lower by 19-21% on accelerated D&A. For FY13F, we raise our forecasts for revenue and EBITDA by 1-3% and for NPAT by 8%.

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32

Fig. 58: Consensus earnings revisions – recent downward revisions led by accelerated D&A

Source: Bloomberg

Fig. 59: DiGi: P/E valuation band

Note: adjusted for accelerated D&A


Fig. 60: DiGi: earnings revision led by accelerated D&A in FY11F-13F (MYRmn)


Fig. 61: DiGi: Nomura vs consensus (MYRmn)


Valuation methodology and risks We revise our TP to MYR34, from MYR31, reflecting our forecast revisions and lower capex estimates. We continue to derive our TP using DCF valuation, assuming a WACC of 7.8% and terminal growth of 1%, with cashflow discounted back to FY17F.

Key risks include a macro slowdown, competition picking up by more than anticipated and potential spectrum auctions.

1.0

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New Forecasts FY11F FY12F FY13FRevenue 5,823 6,125 6,365 EBITDA 2,621 2,747 2,824 Margin 45.0% 44.9% 44.4%NPAT 996 1,039 1,402

Old Forecasts FY11F FY12F FY13FRevenue 5,864 6,082 6,294 EBITDA 2,585 2,670 2,751 Margin 44.1% 43.9% 43.7%NPAT 1,258 1,276 1,297

Change % FY11F FY12F FY13FRevenue -1% 1% 1%EBITDA 1% 3% 3%NPAT -21% -19% 8%

Consensus FY11F FY12F FY13FRevenue 5,808 6,153 6,362 EBITDA 2,594 2,765 2,867 NPAT 1,126 1,202 1,478

Nomura vs. consensus FY11F FY12F FY13FRevenue 0% 0% 0%EBITDA 1% -1% -2%NPAT -12% -14% -5%


Maxis Communications MXSC.KL MAXIS MK

TELECOMS

EQUITY RESEARCH

A defensive pick

With operational catalysts lacking, Maxis remains a defensive pick

May 27, 2011

Rating Remains

Neutral

Target price Reduced from 5.45

MYR 5.30


MYR 5.40

Potential downside

-1.9%

Action: Maintain NEUTRAL; a defensive pick Following a transfer of coverage, we maintain NEUTRAL on Maxis and lower our TP to MYR5.30. We believe Maxis will remain a defensive pick in the absence of strong operational catalysts. Operational trends for Maxis lagged behind peers in 2010, with it ceding 70bps in revenue share to 41% and 90bps in post-paid subscriber share to 45% currently. While we don’t dismiss the improvements that started to come through in 2H, competition isn’t likely to ease either. We note Maxis’s growth outlook for 2011 is weaker than that of its peers. It also seems to be more cautious on medium-term margins, indicating a decline in margins to 47-48% and then a rise as it rolls out fixed services on its network and wholesale HSBB. We remain sceptical on the wholesale fixed opportunity for wireless carriers; especially given the retail-minus model where most costs are variable and scaling back without affecting customer adds can prove harder to achieve.

However, the cash outlook remains reasonable with yield of around 5%, and we believe the company is working to maintain its dividend payout from last year, implying an ordinary yield of around 6% with potential for a total yield of 7.5%.

Valuation: not inexpensive We revise down our revenue/earnings by 2-4% and cut our DCF-based TP to MYR5.3 (from MYR5.45). On our revised forecasts, Maxis trades at FY11F P/E of 17x, which is not inexpensive in a regional or local context.

Catalysts: capital management, operational trends



Revenue (mn) 8,869 9,633 9,289 10,021 9,580 9,879

Reported net profit (mn) 2,295 2,368 2,409 2,410 2,367 2,368

Normalised net profit (mn) 2,295 2,368 2,409 2,410 2,367 2,368

Normalised EPS 0.3 0.3 0.3 0.3 0.3 0.3

Norm. EPS growth (%) -0.6 3.1 5.0 1.8 -1.7 0.1

Norm. P/E (x) 17.6 N/A 16.8 N/A 17.1 N/A 17.1

EV/EBITDA 10.1 N/A 10.0 N/A 9.9 N/A 9.9



ROE (%) 26.1 26.8 28.8 27.3 29.4 29.5

Net debt/equity (%) 49.1 56.1 66.1 56.3 66.9 67.5


Anchor themes

Data growth from smartphones and WBB is likely to be a focus, with low penetration of both presenting solid growth potential. Maxis is also exploring wholesale services through HSBB, and we remain sceptical of this opportunity.

Nomura vs consensus

Our TP is 3% below consensus as we remain cautious on margins.

Research analysts

ASEAN Telecoms





See Appendix A-1 for analyst

certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.

Nomura | ASIA Maxis Communications May 27, 2011

34

Key data on Maxis Communications Income statement (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 8,611 8,869 9,289 9,580 9,879Cost of goods sold -2,797 -2,957 -3,055 -3,201 -3,398Gross profit 5,814 5,912 6,234 6,379 6,481SG&A -2,640 -2,550 -2,743 -2,920 -3,032Employee share expense

Operating profit 3,174 3,362 3,491 3,460 3,449

EBITDA 4,339 4,413 4,604 4,654 4,656Depreciation -1,165 -1,051 -1,113 -1,194 -1,207Amortisation 0 0 0 0 0EBIT 3,174 3,362 3,491 3,460 3,449Net interest expense -48 -211 -236 -261 -248Associates & JCEs 0 0 0 0 0Other income -119 -19 0 0 0Earnings before tax 3,007 3,132 3,255 3,199 3,200Income tax -775 -837 -846 -832 -832Net profit after tax 2,232 2,295 2,409 2,367 2,368Minority interests 0 0 0 0 0Other items 77 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 2,309 2,295 2,409 2,367 2,368Extraordinary items -77 0 0 0

Reported NPAT 2,232 2,295 2,409 2,367 2,368Dividends -1,125 -3,000 -2,400 -2,400 -2,400Transfer to reserves 1,107 -705 9 -33 -32



Growth (%)

Revenue 1.9 3.0 4.7 3.1 3.1EBITDA -1.4 1.7 4.3 1.1 0.0EBIT

Normalised EPS -3.9 -0.6 5.0 -1.7 0.1Normalised FDEPS -3.9 -0.6 5.0 -1.7 0.1

Per share


Notes

Margins expected to decline as fixed services are rolled out over the next couple of years


(%) 1M 3M 12M

Absolute (MYR) 0.7 0.2 4.4

Absolute (USD) -0.8 0.5 13.7

Relative to index 0.4 -3.3 -17.3



30.0

52-week range (MYR)

5.69/5.1


5.42

Major shareholders (%) MCB 70.0

Vanguard 0.6

5.15

5.2

5.25

5.3

5.35

5.4

5.45

5.5

5.55

75

80

85

90

95

100

105

Jun

10

Jul 1

0

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11



35

Cashflow (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 4,339 4,413 4,604 4,654 4,656Change in working capital 1,690 -244 -256 17 50Other operating cashflow -2,904 -333 -1,040 -1,051 -1,081Cashflow from operations 3,125 3,836 3,309 3,620 3,625Capital expenditure -1,222 -1,380 -1,396 -1,263 -1,251Free cashflow 1,903 2,456 1,913 2,357 2,374Reduction in investments 0 0 0 0 0Net acquisitions 0 0 0 0 0Reduction in other LT assets 1,023 0 0 0 0Addition in other LT liabilities -13 -75 0 0 0Adjustments 0 0 0 0 0Cashflow after investing acts 2,913 2,381 1,913 2,357 2,374Cash dividends -2,555 -2,925 -3,000 -2,400 -2,400Equity issue -1 0 0 0 0Debt issue 704 93 393 0 0Convertible debt issue 0 0 0 0 0Others -1,066 157 0 0 0Cashflow from financial acts -2,918 -2,675 -2,607 -2,400 -2,400Net cashflow -5 -294 -694 -43 -26Beginning cash 1,197 1,192 898 204 161Ending cash 1,192 898 204 161 135Ending net debt 3,932 4,253 5,340 5,383 5,409Source: Nomura estimates

Balance sheet (MYRmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 1,192 898 204 161 135Marketable securities 0 0 0 0 0Accounts receivable 796 977 804 828 853Inventories 134 214 214 214 214Other current assets 10 14 14 14 14Total current assets 2,132 2,103 1,236 1,217 1,216LT investments 0 0 0 0 0Fixed assets 4,561 5,007 5,290 5,358 5,402Goodwill 11,019 11,019 11,019 11,019 11,019Other intangible assets 0 0 0 0 0Other LT assets 86 96 96 96 96Total assets 17,798 18,225 17,641 17,690 17,733Short-term debt 111 57 57 57 57Accounts payable 3,144 3,206 2,778 2,818 2,893Other current liabilities 56 60 60 60 60Total current liabilities 3,311 3,323 2,895 2,935 3,010Long-term debt 5,013 5,094 5,487 5,487 5,487Convertible debt 0 0 0 0 0Other LT liabilities 529 1,142 1,184 1,226 1,226Total liabilities 8,853 9,559 9,566 9,648 9,723Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 750 750 750 750 750Retained earnings 0 0 0 0 0Proposed dividends 0 0 0 0 0Other equity and reserves 8,195 7,916 7,325 7,292 7,260Total shareholders' equity 8,945 8,666 8,075 8,042 8,010Total equity & liabilities 17,798 18,225 17,641 17,690 17,733

Liquidity (x)

Current ratio 0.64 0.63 0.43 0.41 0.40Interest cover 66.1 15.9 14.8 13.2 13.9

Leverage

Net debt/EBITDA (x) 0.91 0.96 1.16 1.16 1.16Net debt/equity (%) 43.96 49.08 66.13 66.94 67.53

Activity (days)


Notes

FY11F capex to stay flat y-y

Notes

Reasonable net debt to EBITDA of 1x in 2010


36

Maintain NEUTRAL on Maxis We maintain our NEUTRAL stance on Maxis but cut our TP to MYR5.3. We believe Maxis will remain a defensive pick in the absence of strong operational catalysts. Operational trends for Maxis lagged behind peers in 2010, with it ceding 70bps in revenue share to 41% and 90bps in post-paid subscriber share to 45% currently. While we don’t dismiss the improvements that began to come through in 2H, competition isn’t likely to ease either. We note Maxis’s growth outlook for 2011 is below that of its peers. It also seems to be more cautious on medium-term margins, and has indicated margins could decline to 47-48% and then a rise as it rolls out fixed services.

Maixs is also focusing increasingly on home services and is trying to drive the concept of bundling. In line with this strategy, the company signed an agreement with TM for wholesaling HSBB services (in addition to providing services on its own infrastructure). We don’t question the rationale behind bundling. However, we remain sceptical on the wholesale HSBB opportunity. Wholesaling for HSBB is on a retail-minus model and given that most costs are likely to be variable, it may prove harder to scale back on the same without affecting subscriber acquisition or in other words, it may be hard to generate a similar profitability profile as TM would.

We revise our revenue/earnings lower by 2-4% and revise our TP to MYR5.30 (from MYR5.45). On our revised forecasts, Maxis shares trade at FY11F P/E of 17x, which is not inexpensive in a regional or local context. The cash outlook remains reasonable, in our view, with yield of around 5%, and we believe the company is working to maintain its dividend payout from last year, implying an ordinary yield of around 6% with potential for a total yield of 7.5%.

Fig. 62: Maxis: integrated service strategy

Source: Company presentation


37

Fig. 63: Maxis: revenue outlook


Fig. 64: Maxis: EBITDA outlook


Fig. 65: Maxis: capex and capex/sales


Fig. 66: Maxis: FCF outlook


Fig. 67: Maxis: consensus EPS revisions

Source: Bloomberg

Fig. 68: Maxis: historical P/E

Source: Bloomberg, Nomura estimates, company data

0%

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% chg y-y (RHS)

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FCF Yield

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ov-

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-11

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-11

(RM) 2011 2012

5.0

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5.9

Jan

-10

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r-10

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(RM)

19x

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17x


38

Fig. 69: Maxis: earnings revisions (MYRmn)


Fig. 70: Maxis: Nomura vs consensus (MYRmn)


Valuation methodology and risks Our cut in PT to MYR5.3 is largely driven by earnings revisions and our cautious stance on margins over the medium term. We continue to use DCF valuation, assuming a WACC of 7.4% and terminal growth of 1.5%, with cash flow discounted back to FY15F.

Key upside risks include Maxis becoming more aggressive on growth and market share, a strong pick-up in broadband growth and active capital management. Key downside risks include aggressive price competition, weaker-than-expected take-up of wireless broadband and further sell-off by Binariang GSM (BGSM).

P&L revisions

New Forecasts 2010 2011F 2012F

Revenue 8,869 9,289 9,580

EBITDA 4,413 4,604 4,654

Margin 49.8% 49.6% 48.6%

NPAT 2,295 2,409 2,367

Old Forecasts 2011F 2012F

Revenue 9,633 10,021

EBITDA 4,671 4,793

Margin 48.5% 47.8%

NPAT 2,368 2,410

Change % 2011F 2012F

Revenue -4% -4%

EBITDA -1% -3%

NPAT 2% -2%

Consensus 2011F 2012F

Revenue 9,360 9,808

EBITDA 4,663 4,850

NPAT 2,437 2,546

Nomura vs consensus

Revenue -1% -2%

EBITDA -1% -4%

NPAT -1% -7%


Telekom Malaysia TLMM.KL T MK

TELECOMS

EQUITY RESEARCH

As it builds, can it reap?

Don't hold your breath, but hold your nerve – Fibre potential is significant

May 27, 2011

Rating Up from Neutral

Buy

Target price Increased from 4.10

MYR 4.80


MYR 3.80


Action: Upgrade to BUY HSBB – a tremendous potential Following a transfer of coverage, we upgrade TM to BUY with a DCF-based TP of MYR4.80. We remain bullish on HSBB fibre rollout potential – it is a superior/ faster network with higher margin potential along with lower maintenance capex. TM now has scale – almost a million premises have access to fibre. The opportunity now is to drive applications and customer migration – the key to margin and cash recovery. TM’s near-100% market share in fixed broadband provides gradual migration opportunity. Longer term, a 50% broadband penetration rate offers untapped market potential. Our thesis on TM is based on a structural shift story, and we don't necessarily expect it to play out in the next 3-6 months. In fact, given the complexities of the rollout, earnings, capex and share price will likely be volatile. TM’s 5% ordinary dividend yield along with another 3-4% in potential special yield this year (it still owns 101mn Axiata shares) should provide downside support.

Opportunity from margin expansion In the initial phase, a majority of subs will likely be Streamyx upgrades (1.7mn subs now), which bodes well for ARPUs. Beyond that, we also see margin uplift potential from scale. We forecast EBITDA margins to rise from 32% this year to 35% in FY13F and then 36% in FY15F. Key drivers include: 1) headcount reduction –26k employees with US$110k in revenue per employee is comparatively weak; 2) network costs – elimination of nodes; and 3) decommissioning of legacy exchanges (683 now).

Catalyst/Valuation: TM is currently trading at EV/EBITDA of 5-6x. Capital management and customer migration to HSBB are potential catalysts.



Revenue (mn) 8,791 8,994 8,984 9,277 9,332 9,688

Reported net profit (mn) 1,207 615 478 665 535 652

Normalised net profit (mn) 530 615 478 665 535 652

Normalised EPS 0.1 0.2 0.1 0.2 0.2 0.2

Norm. EPS growth (%) 12.7 60.0 -9.7 8.1 12.0 21.8

Norm. P/E (x) 25.5 N/A 28.3 N/A 25.2 N/A 20.7

EV/EBITDA 5.4 N/A 6.0 N/A 5.9 N/A 5.6



ROE (%) 16.4 8.4 6.4 9.2 7.4 9.0

Net debt/equity (%) 26.5 39.1 48.1 35.7 58.4 64.8


Anchor themes

We are bullish on fibre which, is a far superior network, and see potential for margin expansion and cash recovery for TM as fibre adoption continues to rise.

Nomura vs consensus

Our target price is above consensus by 26%, as we expect TM’s margins to benefit from higher takeup and capex to decline over the medium term.

Research analysts

ASEAN Telecoms






Nomura | ASIA Telekom Malaysia May 27, 2011

40

Key data on Telekom Malaysia Income statement (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 8,608 8,791 8,984 9,332 9,688Cost of goods sold -3,806 -4,047 -4,203 -4,291 -4,291Gross profit 4,802 4,744 4,781 5,041 5,398SG&A -3,738 -3,442 -3,892 -4,040 -4,201Employee share expense

Operating profit 1,064 1,302 888 1,000 1,197

EBITDA 2,984 2,924 2,894 3,076 3,344Depreciation -1,919 -1,623 -2,006 -2,076 -2,147Amortisation

EBIT 1,064 1,302 888 1,000 1,197Net interest expense -184 -245 -199 -235 -277Associates & JCEs 1 0 0 0 0Other income 41 304 0 0 0Earnings before tax 921 1,360 689 765 920Income tax -248 -115 -172 -191 -230Net profit after tax 673 1,245 517 574 690Minority interests -30 -39 -39 -39 -39Other items -175 -677 0 0 0Preferred dividends

Normalised NPAT 468 530 478 535 652Extraordinary items 175 677 0 0 0Reported NPAT 643 1,207 478 535 652Dividends -707 -1,737 -700 -700 -700Transfer to reserves -64 -531 -222 -165 -48



Growth (%)

Revenue -0.8 2.1 2.2 3.9 3.8EBITDA 2.3 -2.0 -1.0 6.3 8.7EBIT

Normalised EPS -64.2 12.7 -9.7 12.0 21.8Normalised FDEPS -64.2 12.7 -9.7 12.0 21.8

Per share


Notes

Modest growth outlook, opportunity from margins to rise


(%) 1M 3M 12M

Absolute (MYR) -5.5 -1.3 21.4

Absolute (USD) -6.9 -1.0 32.1

Relative to index -5.9 -4.8 -0.4



36.8

52-week range (MYR)

4.22/3.09


8.39

Major shareholders (%) Khazanah Nasional Berhad

41.8

Employees Provident Fund Board

11.1

3.2

3.4

3.6

3.8

4

4.2

80

85

90

95

100

105

Jun

10

Jul 1

0

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11



41

Cashflow (MYRmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 2,984 2,924 2,894 3,076 3,344Change in working capital 5,459 1,105 -30 -5 -9Other operating cashflow -5,219 -940 -372 -427 -507Cashflow from operations 3,224 3,088 2,492 2,644 2,827Capital expenditure -2,516 -2,864 -3,002 -2,863 -2,566Free cashflow 707 224 -510 -219 261Reduction in investments 0 0 0 0 0Net acquisitions

Reduction in other LT assets 0 0 0 0 0Addition in other LT liabilities 0 0 0 0 0Adjustments 4,895 1,307 800 174 0Cashflow after investing acts 5,602 1,532 290 -45 261Cash dividends -731 -724 -1,737 -700 -700Equity issue

Debt issue -272 -861 0 0 500Convertible debt issue

Others -3,203 51 0 0 0Cashflow from financial acts -4,207 -1,534 -1,737 -700 -200Net cashflow 1,396 -3 -1,447 -745 61Beginning cash 2,095 3,491 3,489 2,041 1,296Ending cash 3,491 3,488 2,041 1,296 1,357Ending net debt 3,223 2,044 3,491 4,236 4,675Source: Nomura estimates

Balance sheet (MYRmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 3,491 3,489 2,041 1,296 1,357Marketable securities 0 0 0 0 0Accounts receivable 2,284 2,329 2,338 2,429 2,522Inventories 111 174 174 174 174Other current assets 295 947 947 947 947Total current assets 6,180 6,939 5,500 4,845 4,999LT investments 0 0 0 0 0Fixed assets 12,330 13,112 14,109 14,896 15,316Goodwill

Other intangible assets 313 312 312 312 312Other LT assets 1,119 417 417 417 417Total assets 19,943 20,780 20,338 20,471 21,045Short-term debt 917 26 26 26 26Accounts payable 2,949 3,683 3,595 3,621 3,740Other current liabilities 576 581 581 581 581Total current liabilities 4,441 4,290 4,201 4,227 4,347Long-term debt 5,797 5,506 5,506 5,506 6,006Convertible debt

Other LT liabilities 2,575 3,124 3,191 3,251 3,214Total liabilities 12,813 12,920 12,899 12,984 13,567Minority interest 143 151 189 228 266Preferred stock 0 0 0 0 0Common stock 4,555 4,623 4,623 4,623 4,623Retained earnings 2,432 3,086 2,627 2,636 2,588Proposed dividends

Other equity and reserves

Total shareholders' equity 6,988 7,709 7,250 7,260 7,212Total equity & liabilities 19,943 20,780 20,338 20,471 21,045

Liquidity (x)

Current ratio 1.39 1.62 1.31 1.15 1.15Interest cover 5.8 5.3 4.5 4.2 4.3

Leverage

Net debt/EBITDA (x) 1.08 0.70 1.21 1.38 1.40Net debt/equity (%) 46.12 26.51 48.15 58.35 64.83

Activity (days)


Notes

Capex likely to peak this year

Notes

Strong balance sheet with 0.7x net debt to EBITDA at end of 2010


42

Upgrade to BUY --> HSBB, a tremendous potential We upgrade TM to BUY with a MYR4.8 target price. We remain bullish on fibre rollout potential from TM’s HSBB (High Speed Broadband). It is a superior/ faster network with higher margin potential along with lower maintenance capex. TM now has scale – almost a million premises have access to fibre. The opportunity now is to drive applications and customer migration – the key to margin and cash recovery. TM’s near-100% market share in fixed broadband provides gradual migration opportunity. Longer-term, a 50% broadband penetration offers an untapped market potential.

Our thesis on TM is a structural shift story, and don't necessarily expect it to play out in the next 3-6 months. In fact, given the complexities of the rollout, earnings, capex and share price will likely be volatile. TM’s 5% ordinary dividend yield along with another 3-4% in potential special payout this year (it still owns 101mn Axiata shares) should provide downside support.

Opportunity from driving margin expansion

• In the initial phase, a majority of subs will likely upgrade from Streamyx (TM’s ADSL broadband product) – and growth is likely to be driven by ARPU uplift. As seen in the recent 1Q11 result, UniFi ARPU was RM199 vs. Streamyx’s blended ARPU of RM77. Although it is still early to draw conclusions on ARPU trends, we believe there could be ARPU upside from this migration. We also believe recent agreements with Maxis, for example, could help drive take-up of HSBB over the medium term, while at the same time, the retail minus model implies that TM’s margins can likely be protected.

• As of now, TM has 86K subscribers from covering 855K premises, or a 10% conversion rate. 31K net additions in 1Q also reflect an annualized adoption rate of 14% (of premises covered). TM had targeted adoption of 8-10%, and we believe it is tracking ahead on its targets. HSBB is the next-generation fibre network rollout initiative in Malaysia led by TM. Coverage of this network is expected to rise to 1.1mn premises in 2011.

• We believe the traditional Streamyx will continue to address broadband penetration in areas not covered by fibre given its wider presence.

• More importantly, we see margin uplift potential as more customers move to fibre. We currently forecast EBITDA margins to rise from 32% this year to 35% in FY13F and then 36% in FY15F. Key drivers: 1) headcount reduction – its 26k employees with US$110K in revenues is one of the weakest comparable metrics in Asia; 2) network costs – elimination of nodes; and 3) decommissioning of legacy exchanges (683 now).

Labor costs – how much can it add? • Comparing TM with some of the regional players on employee cost efficiency, this

metric is one of the weakest. For example, TM generates US$3bn in revenues with 26k FTE (i.e., revenue per employee of around US$110k), while Telstra generates US$26bn with 42k FTE (US$620k per employee). Even within the Malaysian telcos, TM’s staff cost is one of the highest at 19% of sales in 2010 versus 5-6% for its cellular peers.

• We note that a potential 15% headcount reduction could lead to 3% improvement in margins.


43

Fig. 71: A comparison of labor cost efficiency


Fig. 72: 15% headcount reduction could lead to 3%


Network costs – how much can it add? • The other opportunity lies in network costs as TM transitions more to fibre infrastructure

and decommissions legacy infrastructures in tile. TM currently operates 683 legacy exchanges, which ought to become redundant in time. We agree that not all costs may be variable and this may be a simplistic approach to the exercise, but our prime motive is to present a scenario of potential savings on this front. Even assuming cost per exchange will be 15% higher than current levels, decommissioning 12% of exchanges could lead to margin improvement of around 5%.

Fig. 73: Decommissioning 12% exchanges could help margins by 5%


0%

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TM SingTel Telstra

Rev per emplyee (LHS)

Cost per emplyee (LHS)

Employee cost as % of revenue (RHS)

(US$'000)

Current 5% 10% 15%Employees 26,700 25,365 24,030 22,695

headcount reduced 1,335 2,670 4,005 Employee costs 1,820 1,729 1,638 1,547 Cost per employee 68.16 68.16 68.16 68.16

Revenues for FY11F 8,984

as a % of FY11F revenues 20% 19% 18% 17%

Potential margin uplift 1.0% 2.0% 3.0%

Current 5% 8% 12%Legacy exchanges 683 649 594 512 Fibre exchanges 50 50 50 50Exchanges decommissioned 34 55 82

Opex (excl. man power, SG&A, bad debt) 3,928 3,745 3,624 3,465 Opex per exchange 5.36 5.36 5.63 6.16

Revenues for FY11F 8,984

as a % of FY11F revenues 44% 42% 40% 39%

Potential margin uplift 2% 3% 5%


44

FY11 – a year for earnings to bottom, capex to peak

For FY11, TM’s guidance of a margin decline to ~32% and higher capex of MYR3bn was disappointing, but we believe this year could be the year for earnings to bottom out and capex to peak. We factor in MYR3bn in capex for FY11, or 33% of sales (not adjusting refund from government on HSBB), moderating to 20-25% longer term. Notwithstanding high capex in FY11, we believe TM will deliver on its 5% regular dividend yield, with the potential for an additional, 3-4% special yield (TM still owns 101mn in Axiata shares).

Fig. 74: TM: margin outlook


Fig. 75: TM: free cash outlook, yield


Fig. 76: TM: consensus EPS revisions


Fig. 77: TM: EV/EBITDA range


Earnings revision and valuation

We revise our earnings by 20-22% for FY11-12F driven by margin decline in FY11F, but revise earnings for FY13F by 6%. Our medium-term margins rise from 33% in FY11F to 36% by FY15F. Our capex assumptions trend lower from 33% on sales in FY11F to 20% of sales in the medium term. On these revisions, our DCF-based TP rises to MYR4.8, from MYR4.10, assuming a WACC of 7.7% and terminal growth of 1% (methodology unchanged).

31%

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45

Fig. 78: Earnings revisions (MYRmn)


Fig. 79: Where are we vs consensus (MYRmn)


Valuation methodology and investment risks Our target price of MYR4.8 is based on DCF valuation, assuming a WACC of 7.7% and terminal growth of 1%, with cashflow discounted back to FY17F.

Downside risks include competition from cellular operators and a weaker-than-expected pickup of HSBB.

New Forecasts FY11F FY12F FY13FRevenue 8,984 9,332 9,688 EBITDA 2,894 3,076 3,344 Margin 32.2% 33.0% 34.5%NPAT 478 535 652 Norm. NPAT 478 535 652

Old Forecasts FY11F FY12F FY13FRevenue 8,994 9,277 9,522 EBITDA 2,928 3,016 3,102 Margin 32.6% 32.5% 32.6%NPAT 615 665 615 Norm. NPAT 615 665 615

Change % FY11F FY12F FY13FRevenue -0.1% 0.6% 1.7%EBITDA -1.2% 2.0% 7.8%NPAT -22% -20% 6%

Consensus FY11F FY12FRevenue 9010 9823EBITDA 2,986 3,151

Nomura vs consensusRevenue 0% -5%EBITDA -3% -2%


46


47

Appendix A-1

Analyst Certification

We, Neeraja Natarajan and Sachin Gupta, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures Mentioned companies Issuer name Ticker Price Price date Stock rating Sector rating Disclosures Axiata Group Berhad AXIATA MK 4.97 MYR 25-May-2011 Buy Not rated DiGi.Com DIGI MK 28.48 MYR 25-May-2011 Buy Not rated Maxis Communications MAXIS MK 5.41 MYR 25-May-2011 Neutral Not rated Telekom Malaysia T MK 3.90 MYR 25-May-2011 Buy Not rated 3,47

Disclosures required in the U.S.

47 Manager/Co-Manager in the past 12 months Nomura Securities International Inc. and /or its affiliates has managed or co-managed a public or Rule 144A offering of the company's securities in the past 12 months.

Disclosures required in the European Union

3 Lead manager/co-lead manager of securities/related derivatives offering Nomura International plc or an affiliate in the global Nomura group has been lead manager or co-lead manager over the previous 12 months of a publicly disclosed offer of the issuer's securities or related derivatives

Previous Rating Issuer name Previous Rating Date of change Axiata Group Berhad Not rated 26-May-2011 DiGi.Com Not rated 26-May-2011 Maxis Communications Not rated 26-May-2011 Telekom Malaysia Not rated 26-May-2011

Rating and target price changes

Ticker Old stock rating New stock rating Old target price New target price

Axiata Group Berhad AXIATA MK Not rated Buy 5.90 5.80

DiGi.Com DIGI MK Not rated Buy 31.00 34.00

Maxis Communications MAXIS MK Not rated Neutral 5.45 5.30

Telekom Malaysia T MK Not rated Buy 4.10 4.80


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Axiata Group Berhad (AXIATA MK) 4.97 (25-May-2011)

Rating and target price chart (N/A)

Buy (Sector rating: Not rated)

Date Rating Target price Closing price 15-Nov-2010 5.90 4.46 20-Aug-2010 5.60 4.35 04-Jun-2010 4.50 3.75 06-May-2010 4.60 3.82 16-Mar-2010 4.45 3.85 02-Mar-2010 4.40 3.83 23-Feb-2010 4.30 3.45 23-Feb-2010 Buy 3.45

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of MYR 5.8 is based on DCF. We use DCF methodology for valuing the four key subsidiaries: Celcom, XL, Robi, and Dialog using WACCs of 7.7%, 12.6%, 7.7%, and 8.0%, respectively; our terminal growth rates are 2.5%, 3%, 1.5%, and 1.5%, respectively. The cash flows are discounted back to 2017 Risks that may impede the achievement of the target price Key downside risks to our rating are: 1) aggressive price competition; 2) weaker-than-expected takeup of wireless broadband in Malaysia; 3) tariff wars and regulatory risks in Indonesia, India, Sri Lanka and Bangladesh.

DiGi.Com (DIGI MK) 28.48 (25-May-2011)



Date Rating Target price Closing price 28-Jan-2011 31.00 25.30 26-Oct-2010 30.00 24.66 04-Oct-2010 28.50 21.00 20-Jul-2010 27.60 23.66 27-Jan-2010 25.60 21.84 30-Jun-2009 25.90 22.20 30-Jun-2009 Buy 22.20 24-Oct-2008 18.70 22.20 24-Oct-2008 Reduce 22.20 23-Jul-2008 28.00 23.80


Valuation Methodology Our target price of MYR 34.0 is based on DCF valuation and uses a WACC of 7.8% and terminal growth of 1%. The cash flows are discounted back to 2017. Risks that may impede the achievement of the target price Key risks to our rating and price target for DiGi include a macro slowdown, greater than anticipated competition and potential spectrum auctions.


49

Maxis Communications (MAXIS MK) 5.41 (25-May-2011)


Neutral (Sector rating: Not rated)

Date Rating Target price Closing price 25-Aug-2010 5.45 5.45 14-Jan-2010 5.50 5.35 14-Jan-2010 Neutral 5.35


Valuation Methodology Our target price of MYR5.3 is based on DCF valuation, assuming a WACC of 7.4% and terminal growth of 1.5%, with cashflow discounted back to FY15F. Risks that may impede the achievement of the target price Key upside risks include Maxis becoming more aggressive on growth and market share, a strong pick-up in broadband growth and active capital management. Key downside risks include aggressive price competition, weaker-than-expected take-up of wireless broadband and further sell-off by Binariang GSM (BGSM).

Telekom Malaysia (T MK) 3.90 (25-May-2011)



Date Rating Target price Closing price 25-Jan-2011 4.10 3.70 25-Jan-2011 Neutral 3.70 02-Aug-2010 4.00 3.38 02-Aug-2010 Buy 3.38 27-Jul-2010 Suspended 3.36 28-Apr-2010 4.00 3.45 28-Apr-2010 Buy 3.45 17-Nov-2008 2.50 2.83 20-Aug-2008 3.00 3.48 20-Aug-2008 Reduce 3.48 19-Aug-2008 3.88 3.50 15-Jul-2008 4.26 3.22 03-Jul-2008 3.88 3.22 18-Jun-2008 4.26 3.14 26-May-2008 3.88 3.22


Valuation Methodology Our target price of MYR4.8 is based on DCF valuation, assuming a WACC of 7.7% and terminal growth of 1%, with cashflow discounted back to FY17F. Risks that may impede the achievement of the target price Downside risks include competition from cellular operators and weaker-than- expected pick up of HSBB.


50

Important Disclosures Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (US) The distribution of all ratings published by Nomura US Equity Research is as follows: 38% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 4% of companies with this rating are investment banking clients of the Nomura Group*. 55% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 1% of companies with this rating are investment banking clients of the Nomura Group*. 7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.


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Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.


52

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