Refer to important disclosures at the end of this report

HWANGDBS

KLCIKLCIKLCIKLCI : : : : 1,685.001,685.001,685.001,685.00

Analyst CHIN Jin Han +603 2711 2222 jinhan@hwangdbsvickers.com.my

Malaysia Research Team 603 2711 2222 general@hwangdbsvickers.com.my

WONG Ming Tek 603 2711 0956 mingtek@hwangdbsvickers.com.my STOCKS

Source: DBS Vickers Maxis & Celcom have been losing subscriber share to MVNOs since 1Q2011

Source: DBS Vickers

High postpaid ARPU enjoyed by Maxis & Celcom presents

opportunity for DiGi

Source: DBS Vickers

Malaysia Equity ResearchMalaysia Equity ResearchMalaysia Equity ResearchMalaysia Equity Research PP 17582/11/2012 (031102)

3 Apr 2013

Sector Focus Malaysian Telecoms

Refer to important disclosures at the end of this report

A rough road ahead • Revision to DiGi’s postpaid plans puts pressure on

subscription growth for Maxis and Celcom

• Incumbents also losing prepaid market share to competitive mobile virtual network operators (MVNOs)

• Risk to margins from lower voice and SMS revenues, subsidies and accelerated depreciation

• Sector is still expensive and telcos will only see stronger earnings growth over the medium-to-long-term; TM and Maxis most exposed

Competition is back on. DiGi revised its postpaid data plans

in Mar 2013 by including free minutes and SMS at just 21%

higher monthly commitment for entry level bundles. The

revised bundled plans may have slight dilutive impact on DiGi’s

ARPU, more than offset by subscriber growth. Celcom and

Maxis have yet to react and risk losing subscriber traction due

to the perceived higher value in new DiGi plans.

Incumbents losing market share. We expect market share

for Maxis and Celcom to decline (prepaid and postpaid),

though DiGi should still be able to grow its subscriptions

through its revised plans for entry-level subscribers. Our current

subscription growth assumptions on DiGi, Maxis and Celcom

are 9%, 2% and 4% respectively. Smaller MVNOs and

operators have grabbed market share from incumbents (lost

c.10ppt) from 1Q09-4Q12 by offering competitive tariffs and

bundling (Tune Talk and U Mobile are most aggressive).

Margin pressure. We expect FY13F industry EBITDA margin to

slide 0.5ppt to 41.4% on lower voice and SMS revenues and

competitive pressures (specifically on Telekom Malaysia).

Margins could see further pressure as operators push handset

sales to clear inventory and lock in subscribers on flagship

phones. Subsidies could eat into earnings, with Celcom and

DiGi being more aggressive in tablets and handsets

respectively. We note that a 1% change in EBITDA margin

would change FY13F industry earnings by 4%. Unexpected

accelerated depreciation could also impact margins.

Dominant players may be hardest hit. Industry earnings

growth is average (4-5% y-o-y) and valuations remain

expensive (+1.5SD of 5-year mean PE). Maxis and Telekom

Malaysia are most exposed to the risks due to their dominance,

and lack of value offerings would allow competitors to eat into

their respective market shares. Our FY13-15F industry earnings

forecast remains 4-7% below consensus.

Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)

RMRMRMRM US$mUS$mUS$mUS$m RMRMRMRM 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating

Axiata Group 6.64 18,299 5.30 0.5 27.3 FV Maxis Bhd 6.54 15,880 5.45 (2.0) 7.1 FV Digi.Com 4.57 11,503 4.85 (13.4) 12.8 HOLD Telekom Malaysia 5.42 6,277 4.65 (10.8) 1.3 FV

0%

5%

10%

15%

20%

25%

30%

35%

40%

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

DiGi Maxis Celcom Others

75

80

85

90

95

100

105

110

1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012

DIGI CELCOM MAXIS

RM

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 2

EBITDA MarginEBITDA MarginEBITDA MarginEBITDA Margin BaseBaseBaseBase -0.5ppt-0.5ppt-0.5ppt-0.5ppt -1.0ppt-1.0ppt-1.0ppt-1.0ppt -1.5ppt-1.5ppt-1.5ppt-1.5ppt

Maxis 48.1% -1.6% -3.3% -4.9%

DiGi.Com 46.1% -1.6% -3.2% -4.8%

Celcom Axiata 43.9% -1.5% -3.0% -4.5%

Telekom Malaysia 30.6% -5.3% -10.6% -16.0%

Subscriber GrowthSubscriber GrowthSubscriber GrowthSubscriber Growth -1.0ppt-1.0ppt-1.0ppt-1.0ppt -2.0ppt-2.0ppt-2.0ppt-2.0ppt -3.0ppt-3.0ppt-3.0ppt-3.0ppt

Maxis 2.4% -0.7% -1.5% -2.2%

DiGi.Com 8.9% -0.8% -1.7% -2.4%

Celcom Axiata 4.1% -0.5% -1.0% -1.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

DiGi Maxis Celcom Others

Downside risks in market share loss, lower voice and SMS revenues, aggressive subsidies and accelerated depreciation

Expect further market share lossExpect further market share lossExpect further market share lossExpect further market share losseseseses. . . . Competition for

subscribers have continued to eat into the incumbent

players’ market share (fell 10ppt between 1Q09 and 4Q12).

They have been losing out to smaller operators and MVNOs

like U Mobile and Tune Talk, especially in the prepaid

segment (see Fig. 1: Maxis and Celcom are slowly losing

market share while DiGi has been roughly stable). We

attribute this to competitive rates in the prepaid segment,

with U Mobile and Tune Talk offering the lowest pay-as-you-

use (PAYU) data and voice rates (see Fig. 6). Moreover,

prepaid plans by U Mobile which incorporate data, voice and

SMS as well as a rewards-based system (free SMS and

minutes) appeal more to entry-level prepaid users compared

to the incumbents’ plans.

Among the three large operators, DiGi is still gaining market

share in the postpaid segment mainly due to its lower priced

plans and higher subsidies for popular handsets (see Fig. 4).

Puncak Semangat, the newest player in the Malaysian

telecoms space, has not revealed its business plan for 4G LTE

network rollout. U Mobile, known for its low-cost data

packages, have also yet to market and monetise its share of

the 2.6GHz spectrum. We expect 4G LTE to be met with

similar challenges given the intense pricing competition in

3G data bundles.

MarginMarginMarginMargin pressure from all frontspressure from all frontspressure from all frontspressure from all fronts.... Offering better value in

bundled pricing through more free SMS and voice minutes

(if maintained at the same price point) could affect

operators’ EBITDA margins directly via lower voice and SMS

revenues, compounded by the need to lock in contract

subscribers via low-margin handset bundles. This is especially

evident in the small postpaid market (18% of total market),

exacerbated by low 3G penetration (35% of total market).

We estimate that a 1ppt change in industry EBITDA margin

would change industry earnings by 4%.

Could disCould disCould disCould disappointing factors in 2012 spill into 2013? appointing factors in 2012 spill into 2013? appointing factors in 2012 spill into 2013? appointing factors in 2012 spill into 2013? We

expect industry EBITDA margin to come in at 41.4% in 2013

with slightly weaker margins for cellular operators after

factoring in slower voice and SMS revenues, but do not

expect large downswings given cost optimisations. The main

driver of lower FY13F industry EBITDA margins would be

Telekom Malaysia, because of a larger proportion of lower-

margin contracts, slowing Unifi net adds amid strong

competition, and higher manpower expenses after it

extended employee retirement age to 60. Industry EBITDA

margins fell 110bps in 2012 led by Telekom Malaysia and

Maxis. Both DiGi and Maxis saw weaker EBITDA margins

due to a larger mix of low-margin revenues (handset sales

for DiGi; handset and hubbing revenues for Maxis). Telekom

Malaysia saw EBITDA margin slide 190bp y-o-y due to higher

direct, labour and maintenance costs. Meanwhile, there are

downside risks from aggressive handset/tablet subsidies and

further plan/rate cuts. In terms of subsidies, Celcom is the

most exposed in tablets such as the iPad and iPad Mini (See

Fig. 7), while DiGi and U-Mobile (see Fig. 4) offer the highest

subsidies/plan rebates for handset plans.

Fig. 1: Subscriptions – incumbents losing market share to

smaller operators and MVNOs, especially in prepaid

segment

Source: SKMM Pocket Book of Statistics, Celcom Axiata, DiGi.Com,

Maxis

Fig.2: Sensitivity Analysis - Earnings vs EBITDA margin &

subscriber growth

Source: DBS Vickers Research

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 3

30%

35%

40%

45%

50%

55%

2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013F

Maxis Celcom

DiGi Telekom Malaysia

Industry

DiGi.ComDiGi.ComDiGi.ComDiGi.Com U-MobileU-MobileU-MobileU-Mobile MaxisMaxisMaxisMaxis Ce lcomCelcomCelcomCelcom

Samsung Galaxy Note II 20%-59.2%20%-59.2%20%-59.2%20%-59.2% 13.0%-60.9%13.0%-60.9%13.0%-60.9%13.0%-60.9% 26.1%-39.1% 20.1%-34.8%

Samsung Galaxy SIII 27.0%-65.0%27.0%-65.0%27.0%-65.0%27.0%-65.0% 30.0%-70.6%30.0%-70.6%30.0%-70.6%30.0%-70.6% 35.0%-50.0% 30.6%-45.6%

Samsung Galaxy SIII Mini 37.0%-61.1%37.0%-61.1%37.0%-61.1%37.0%-61.1% 10.0%-50.1% 45.0%-60.1%45.0%-60.1%45.0%-60.1%45.0%-60.1% 11.1%-41.1%

Sony Xperia Z 18.6%-93.1%18.6%-93.1%18.6%-93.1%18.6%-93.1% -23.2-54.6% X 18.7%-32.3%

HTC Butterfly 23.5%-47.8%23.5%-47.8%23.5%-47.8%23.5%-47.8% 17.9%-35.3% 21.7%-34.8% 23.1%-26.1%

Nokia Lumia 920 23.0%-51.0%23.0%-51.0%23.0%-51.0%23.0%-51.0% X 11.9%-23.7% X

iPhone 5 16.0GB 19.9%-25.7%19.9%-25.7%19.9%-25.7%19.9%-25.7% X 3.5%-21.3% 19.1%-24.3%

iPhone 4S 16.0GB 43.5%-100.0%43.5%-100.0%43.5%-100.0%43.5%-100.0% X 22.2%-41.7% 36.7%-86.8%

LG Nexus 4 29.1%-63.1%29.1%-63.1%29.1%-63.1%29.1%-63.1% X X X

Samsung Galaxy Note 10.1 -39.8% -34.9% X -27.8%-46.0%-27.8%-46.0%-27.8%-46.0%-27.8%-46.0%

Samsung Galaxy Tab 2 10.1 -58.4%-58.4%-58.4%-58.4% X X -27.4%-40.8%

DiGi could see more postpaid adds DiGi could see more postpaid adds DiGi could see more postpaid adds DiGi could see more postpaid adds from plan revisfrom plan revisfrom plan revisfrom plan revisionionionion. . . . DiGi

recently revamped its Smart Data Plan offerings to include

free minutes and SMSes, and split data quotas into social

media application and conventional data usage, while

increasing the monthly commitment fee for entry-level

subscriptions by 21% to RM58/mth. This is an interesting

concept: it effectively halves the quota for high-consumption

users, especially for those who do not actively use social

media applications. Moreover, social media applications like

Twitter, Whatsapp and Facebook do not use inordinate data

packets, as video streaming would take up its normal mobile

internet quota, which saves DiGi valuable data-related costs.

Effectively, the revised plans will benefit low usage, entry-

level data bundle users as they gain more value (on-net calls

and SMSes, and additional 1.0GB for social media), but caps

data quota usage on higher-end subscribers. The higher

commitment fee still yields more value than Maxis and

Celcom’s offerings, and could result in lower traction in

postpaid subscription growth for the latter two. It is also

clear that DiGi is attempting to optimise data-related

expenses to preserve margins (refer to Fig. 5 for plan

comparison). Reinforcing this point is a disclaimer by DiGi

that the current 2GB, 5GB and 7GB plans would revert to

1GB, 3GB and 5GB, respectively, after Apr 2013 (apparently

the higher quotas were promotional and valid between Dec

2012 and Apr 2013). However, the new bundling could see

dilution in ARPU, though this would be compensated by

stronger subscription growth.

Fig. 3: Expect slightly lower EBITDA margins

Source: Celcom Axiata, DiGi.Com, Maxis, DBS Vickers

Depreciation could be a problem.Depreciation could be a problem.Depreciation could be a problem.Depreciation could be a problem. DiGi and Maxis saw

disappointing earnings in FY12 partly due to higher-than-

expected accelerated depreciation as a result of network

modernisation initiatives. They were RM575m and RM125m

for DiGi and Maxis, respectively, representing 36% and 5%

of their FY12 pre-tax earnings. For FY13F, DiGi expects

RM150m in accelerated depreciation while Maxis expects

RM100m, which would be 7% and 5% of our FY13F pre-tax

earnings, respectively. Further hiccups in the network

rollouts would result in higher accelerated depreciation

charges, especially since Maxis’ network has not been fully

converted to a single RAN architecture (upgraded based on

a periodically evaluated process).

Fig. 4: DiGi offers attractive discounts on most flagship phones

Source: DiGi.Com, Maxis, Celcom Axiata, U-Mobile, DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 4

Tune TalkTune TalkTune TalkTune Talk DiGiDiGiDiGiDiGi MaxisMaxisMaxisMaxis Maxis Max is Max is Max is CelcomCelcomCelcomCelcom U-MobileU-MobileU-MobileU-Mobile

Easy PrepaidEasy PrepaidEasy PrepaidEasy Prepaid Best PrepaidBest PrepaidBest PrepaidBest Prepaid StandardStandardStandardStandard 5555

Calls (Sen Per Min)

On-net 16 30 26 20 12 28 18

Off-net 16 30 26 30 18 28 18

SMS (Sen per Msg)

On-net 5 8 8 5 1 1 3

Off-net 5 8 8 10 5 5 8

PAYU Data Rate (Sen per MB) 5 100 100 100 100 100 5

Charging Block (Secs) 60 30 10/120* 60 30 300-600^ 30

*Charge for first 10secs: 6sen; Charge for subsequent 120secs: 20sen

^On-net Charging Block: 600secs: Off-net Charging Block: 300secs

NEWNEWNEWNEW

DG Smart Plan 58DG Smart Plan 58DG Smart Plan 58DG Smart Plan 58 DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88 DG Smart Plan 148DG Smart Plan 148DG Smart Plan 148DG Smart Plan 148

Monthly Commitment 58 88 148

Bundled Minutes 200* 300 600

Bundled SMS 200* 300 600

Bundled IDD Minutes 30^

Total Internet Quota 2.0GB 4.0GB 6.0GB

Normal Usage 1.0GB 2.0GB 3.0GB

F acebook , Tw it ter, What sapp usageF acebook , Tw it ter, What sapp usageF acebook , Tw it ter, What sapp usageF acebook , Tw it ter, What sapp usage 1.0GB1.0GB1.0GB1.0GB 2.0GB2.0GB2.0GB2.0GB 3.0GB3.0GB3.0GB3.0GB

Voice Rates 0.15 0.15 0.10

SMS Rates 0.10 0.10 0.10

MMS Rates 0.20 0.20 0.20

*On-net calls and SMSes only

OLDOLDOLDOLD

DG Smart Plan 48DG Smart Plan 48DG Smart Plan 48DG Smart Plan 48 DG Smart Plan 68DG Smart Plan 68DG Smart Plan 68DG Smart Plan 68 DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88DG Smart Plan 88

Monthly Commitment 48 68 88

Bundled Minutes - - -

Bundled SMS - - -

Internet Quota 1.0GB 3.0GB 5.0GB

Voice Rates 0.15 0.15 0.15

SMS Rates 0.10 0.10 0.10

MMS Rates 0.20 0.20 0.20

Fig. 5: New DG Smart Plan benefits entry-level subscribers but restricts high-usage data consumers

*On-net Calls and SMSes only

^Only applicable for calls to China, Hong Kong, Thailand, Singapore, USA and Canada

Source: DiGi.Com, DBS Vickers Research

Fig. 6: Tune Talk and U-Mobile offer competitive Voice and PAYU data rates

Source: DiGi.Com, Tune Talk, Maxis, Celcom Axiata, U-Mobile, DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 5

Fig. 7: Celcom most aggressive in tablet subsidies

Source: Celcom Axiata, Maxis, DiGi.Com, DBS Vickers

Maxis

SurfMore 50 SurfMore 75

Quota 2.0GB 5.0GB

Monthly Commitment 50 75

iPad Versions

16GB 1009 899

32GB 1299 1199

64GB 1599 1449

Discount to RRP

16GB -27.9% -35.7%

32GB -23.5% -29.4%

64GB -20.0% -27.5%

Celcom

iPad Light iPad Basic iPad Advance

Quota 2.5GB 4.5GB 10.0GB

Monthly Commitment 50 70 100

iPad Versions

16GB 958 858 608

32GB 1248 1148 898

64GB 1528 1428 1178

Discount to RRP

16GB -31.5% -38.7% -56.5%

32GB -26.5% -32.4% -47.1%

64GB -23.6% -28.6% -41.1%

DiGi

iPad Pro Tablet SuperSim 2GB

Quota 6.0GB 2.0GB

Monthly Commitment 83 39

iPad Versions

16GB 1159 1399

32GB 1459 1699

64GB 1759 1999

Discount to RRP

16GB -17.2% 0.0%

32GB -14.1% 0.0%

64GB -12.0% 0.0%

RRP

16GB 1,399

32GB 1,699

64GB 1,999

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 6

Fig. 7 (cont’d): Celcom most aggressive in tablet subsidies

Source: Celcom Axiata, Maxis, DiGi.Com, DBS Vickers

RRP

16GB 1,899

32GB 2,199

64GB 2,499

Maxis

SurfMore 50 SurfMore 75

Quota 2.0GB 5.0GB

Monthly Commitment 50 75

iPad Versions

16GB 1499 1349

32GB 1749 1599

64GB 2049 1899

Discount to RRP

16GB -21.1% -29.0%

32GB -20.5% -27.3%

64GB -18.0% -24.0%

Celcom

iPad Light iPad Basic iPad Advance

Quota 2.5GB 4.5GB 10.0GB

Monthly Commitment 50 70 100

iPad Versions

16GB 1408 1308 1058

32GB 1648 1548 1298

64GB 1928 1828 1578

Discount to RRP

16GB -25.9% -31.1% -44.3%

32GB -25.1% -29.6% -41.0%

64GB -22.8% -26.9% -36.9%

DiGi

iPad Pro Tablet SuperSim 2GB

Quota 6.0GB 2.0GB

Monthly Commitment 83 39

iPad Versions

16GB 1659 1899

32GB 1959 2199

64GB 2259 2499

Discount to RRP

16GB -12.6% 0.0%

32GB -10.9% 0.0%

64GB -9.6% 0.0%

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 7

75

80

85

90

95

100

105

110

1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012

DIGI CELCOM MAXIS

RM

30

32

34

36

38

40

42

44

1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012

DIGI CELCOM MAXIS

RM

1,200

1,220

1,240

1,260

1,280

1,300

1,320

1,340

1,360

1,380

1,400

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

1,700

1,720

1,740

1,760

1,780

1,800

1,820

1,840

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

2,680

2,690

2,700

2,710

2,720

2,730

2,740

2,750

2,760

2,770

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

-3%

-1%

1%

3%

5%

7%

9%

1Q20112Q20113Q20114Q20111Q20122Q20123Q20124Q2012

DiGi Celcom Maxis

DiGi shows strong postpaid traction on lower plan prices

Postpaid ARPU trend Prepaid ARPU trend

DiGi Postpaid Subscriber Trend Celcom Postpaid Subscriber trend

Maxis Postpaid Subscriber Trend Postpaid YoY Subscriber Growth

Source: Companies, DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 8

7,200

7,400

7,600

7,800

8,000

8,200

8,400

8,600

8,800

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

8,500

8,700

8,900

9,100

9,300

9,500

9,700

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

10,300

10,400

10,500

10,600

10,700

10,800

10,900

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

-5%

0%

5%

10%

15%

20%

1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012

DiGi Celcom Maxis

Prepaid remains a competitive battleground

DiGi Prepaid Subscriber Trend Celcom Prepaid Subscriber trend

Maxis Prepaid Subscriber Trend Prepaid YoY Subscriber Growth

Source: Companies, DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 9

Earnings upsides over the longer term

CostCostCostCost----savings from collaborations not factoredsavings from collaborations not factoredsavings from collaborations not factoredsavings from collaborations not factored inininin. . . . We have

not accounted for DiGi’s and Celcom’s collaboration efforts

– sharing BTS and joint fiberisation of trunk infrastructure -

in our forecasts. To recap, these two operators had entered

into an agreement to build 1000km of fiber lines to fiberise

the trunk and core infrastructure in the Northern and

Southern areas of Peninsular Malaysia. This will improve

bandwidth/network costs via both lower wholesale prices

(improved bargaining power) and requiring less wholesale

bandwidth from Telekom Malaysia. Newspaper reports

cited RM150-250m in annual cost-savings from sharing BTS

and joint fiberisation, but this will only kick in in 2015 or

later.

Accelerated depreciation Accelerated depreciation Accelerated depreciation Accelerated depreciation charge charge charge charge will will will will dropdropdropdrop in 2014 or later. in 2014 or later. in 2014 or later. in 2014 or later.

DiGi is expected to complete its network modernisation

exercise by mid-2013. It has upgraded 3,754 sites and is

left to complete another 1,847 sites. We anticipate more

normalised depreciation in FY14F, at 10% of revenue

compared to 12% in FY13F. However, this has largely been

priced in by the market.

LTE onLTE onLTE onLTE on1800MHz?1800MHz?1800MHz?1800MHz? An online telecom news site reported

that Maxis had received SKMM approval to utilise the

1800MHz spectrum for its LTE network. This is positive in

terms of improving cost efficiency for the 4G rollout, but it

would be hindered by a shortage of compatible handsets.

Apple has yet to release firmware to enable LTE on iPhone5

models sold in Malaysia, and Samsung has also not released

LTE-compatible models of the Galaxy S3, Note II and Galaxy

S4 in Malaysia. Based on the article, Celcom and DiGi have

yet to receive SKMM approval for conversion of 1800MHz

spectrum usage.

Valuation and Recommendation

Expensive Expensive Expensive Expensive valuations for average growthvaluations for average growthvaluations for average growthvaluations for average growth. . . . We remain

generally cautious of the sector given only average industry

earnings growth (+4-5% y-o-y) and expensive valuations

(+1.5SD of 5-year sector mean PE; +2SD of 5-year sector

mean EV/EBITDA). Maxis and Telekom Malaysia are

currently the most expensive at 22.9x and 25.4x FY13F EPS,

respectively, while Axiata and DiGi.Com are cheaper at

20.9x and 21.5x. Aggressive handset subsidies and spillover

of price pressure to data and postpaid bundles will

continue to drive competition for subscribers. These will be

reflected in ARPU pressure and subsequent EBITDA margin

compression if subscription growth does not improve in

line. There is a risk of further earnings downside in the near

term, while we may only see more material growth in the

medium-to-long term.

Dominant players may suffer. Dominant players may suffer. Dominant players may suffer. Dominant players may suffer. Maxis and Telekom Malaysia

are the most exposed to the risks because they are the

dominant players in the industry. Maxis still enjoys wider 3G

coverage than DiGi, but the gap will narrow by end 2013.

DiGi’s value offerings and higher subsidies for lower-end

handsets will likely attract more entry-level subscribers and

all things considered, DiGi has been playing the low-end

price game longer than Maxis, implying it has greater cost-

efficiency. Telekom Malaysia will see greater competition

this year as Maxis will soon offer its new triple-play

broadband package following its collaboration with Astro

Malaysia. The company has also not rejigged its broadband

plan pricing since it debuted in 2010. Telekom Malaysia

could benefit from offering value to customers via higher

speeds at the same price point, given Astro’s content edge

in its exclusive partnership with popular PayTV channels.

Moreover, the completion of the 1,000km joint fiber plan

between DiGi and Celcom could reduce wholesale revenues

for TM.

Most preferred: DiGi.ComMost preferred: DiGi.ComMost preferred: DiGi.ComMost preferred: DiGi.Com (Hold, RM4.85)(Hold, RM4.85)(Hold, RM4.85)(Hold, RM4.85) offers the

strongest potential for earnings growth, driven by: (i) rising

number of subscribers as it expands coverage (expected to

reach 80% by end-2013) to match Maxis and Celcom, and

(ii) potential re-rating as it transitions into a business trust.

Its perceived value-for-money plans are appealing given

that the market still places pricing ahead of speed.

However, the latest revised plans may sacrifice some high-

consumption data users for entry-level subscribers. It is also

trading lower data-related expenses for less voice and SMS

revenues, though time will tell if the higher commitment

fees can compensate for this.

Least preferred: MaxisLeast preferred: MaxisLeast preferred: MaxisLeast preferred: Maxis (Fully Valued, RM5.45(Fully Valued, RM5.45(Fully Valued, RM5.45(Fully Valued, RM5.45)))). . . . The factors

currently holding Maxis back include: (i) lack of scale in its

Home Fibre Internet packages, which is dragging earnings,

and (ii) premium-priced postpaid packages which could

result in greater churn in favour of DiGi which had recently

rejigged its Postpaid Smart Plans to include free minutes

and SMSes, and which will be able to offer almost similar

network coverage by end-2013.

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 10

-

5

10

15

20

25

30

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

PE Mean +1SD -1SD +2SD -2SD

5

10

15

20

25

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Nov-11

Mar-12

Jul-12

Nov-12

Mar-13

PE Mean +1SD +2SD -1SD -2SD

10

12

14

16

18

20

22

24

26

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

PE Mean +1SD +2SD -1SD -2SD

10

12

14

16

18

20

22

24

26

28

30

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

PE Mean +1SD +2SD -1SD -2SD

10

12

14

16

18

20

22

24

26

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

PE Mean +1SD +2SD -1SD -2SD

Axiata 5-year PE Band DiGi.Com 6-year PE Band

Maxis 3-Year PE Band Telekom Malaysia 5-Year PE Band

Malaysian telecoms 5-year PE Band

Source: Companies, Bloomberg Finance L.P, DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 11

4

5

6

7

8

9

10

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

EV/EBITDA Mean +1SD

-1SD +2SD -2SD

4

6

8

10

12

14

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Nov-11

Mar-12

Jul-12

Nov-12

Mar-13

EV/EBITDA Mean +1SD

-1SD +2SD -2SD

8

9

10

11

12

13

14

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

EV/EBITDA Mean +1SD

-1SD +2SD -2SD

4

4

5

5

6

6

7

7

8

8

9

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

EV/EBITDA Mean +1SD

-1SD +2SD -2SD

5

6

7

8

9

10

11

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

EV/EBITDA Mean +1SD

+2SD -1SD -2SD

Axiata 5-year EV/EBITDA Band DiGi.Com 6-year EV/EBITDA Band

Maxis 3-Year EV/EBITDA Band Telekom Malaysia 5-Year EV/EBITDA Band

Malaysian telecoms 5-year EV/EBITDA Band

Source: Companies, Bloomberg Finance L.P, DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 12

Regional Peer Comparison

MktMktMktMkt PricePricePricePrice TargetTargetTargetTarget

CAGRCAGRCAGRCAGR

Dividend Yield Dividend Yield Dividend Yield Dividend Yield

(%)(%)(%)(%) CompanyCompanyCompanyCompany CapCapCapCap LCLLCLLCLLCL PricePricePricePrice %%%%

12121212----14141414 PE (x)PE (x)PE (x)PE (x) P/BVP/BVP/BVP/BV EV/EBITDAEV/EBITDAEV/EBITDAEV/EBITDA

(US$m)(US$m)(US$m)(US$m)

LCLLCLLCLLCL UpsideUpsideUpsideUpside RcmdRcmdRcmdRcmd (%)(%)(%)(%) 13F13F13F13F 14F14F14F14F 12F12F12F12F 13F13F13F13F 12121212AAAA 13F13F13F13F 14F14F14F14F

China / Hong KongChina / Hong KongChina / Hong KongChina / Hong Kong

China Mobile 214,262 82.75 84.00 2% Hold -3 10.5 11.0 4.2% 4.2% 1.8x 3.7x 3.7x

China Telecom 6,972 3.90 5.40 38% Buy 24 13.6 11.0 2.2% 2.2% 1.0x 3.1x 2.7x

China Unicom 30,963 10.20 14.00 37% Buy 45 17.3 12.9 1.5% 1.5% 0.9x 3.7x 3.2x

2222 10.010.010.010.0 9.99.99.99.9

MalaysiaMalaysiaMalaysiaMalaysia

Digi.Com 11,503 4.57 4.85 6% Hold 23 22.3 19.4 5.8% 4.5% 136.0x 11.3x 10.4x

Maxis Bhd 15,880 6.54 5.45 -17% Fully Valued 2 22.9 23.0 6.1% 6.1% 7.0x 12.1x 12.1x

Telekom Malaysia 6,277 5.42 4.65 -14% Fully Valued -2 26.4 22.9 9.6% 3.6% 2.8x 7.3x 6.8x

Axiata Group 18,299 6.64 5.30 -20% Fully Valued 1 21.2 20.1 5.3% 3.5% 2.8x 8.2x 7.7x

5555 22.522.522.522.5 21.021.021.021.0

SingaporeSingaporeSingaporeSingapore

SingTel 45,513 3.54 3.40 -4% Hold 3 14.7 14.4 4.6% 4.8% 2.3x 8.4x 8.1x

Starhub 6,008 4.34 4.30 -1% Hold 5 19.7 19.0 4.6% 4.6% 237.4x 10.2x 9.9x

3333 15.215.215.215.2 14.914.914.914.9

ThailandThailandThailandThailand

Advanced Info Service 24,243 239.00 300.00 26% Buy 19 18.2 14.4 4.6% 5.5% 16.4x 10.6x 8.9x

Shin Corp 8,724 79.75 106.00 33% Buy 22 18.5 14.4 4.7% 5.5% 18.0x 18.4x 14.3x

Total Access Comm. 7,836 97.00 112.00 15% Buy 10 19.1 17.1 5.2% 5.2% 6.6x 8.4x 7.6x

True Corp 3,959 8.00 4.50 -44% Fully Valued nm -31.5 387.2 0.0% 0.0% 8.3x 9.3x 7.3x

18181818 20.220.220.220.2 16.316.316.316.3

IndonesiaIndonesiaIndonesiaIndonesia

Indosat 3,634 6,500 5,600 -14% Sell nm 24.0 22.7 3.0% 2.1% 1.8x 3.8x 5.3x

PT Telekom 22,607 10,900 10,000 -8% Hold 9 15.6 14.4 3.8% 4.5% 4.7x 6.4x 5.3x

XL Axiata 4,649 5,300 5,600 6% Hold 6 15.5 13.8 2.5% 2.9% 2.9x 5.8x 5.3x

15151515 17.717.717.717.7 15.915.915.915.9

Source: DBS Vickers

Sector Focus

Malaysian Telecoms

HWANGDBS

Page 13

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