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Asia Pacific Equity Research15 February 2011
Fishing Poles for Telcos
What to buy during the correction....and the rally
Alternative Carriers/EmergingWireline, Broadband, Internet,Wireless Services, WirelineServices/Incumbents
James R. Sullivan, CFAAC
(65) 6882-2374
james.r.sullivan@jpmorgan.com
J.P. Morgan Securities Singapore PrivateLimited
Malvika GuptaAC
(91-22) 6157 3595
malvika.x.gupta@jpmorgan.com
J.P. Morgan India Private Limited
Lucy LiuAC
(852) 2800-8566
lucy.y.liu@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limite
Vishesh Gupta
(65) 6882 2367
vishesh.x.gupta@jpmorgan.com
J.P. Morgan Securities Singapore PrivateLimited
See page 24 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm m
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making th
investment decision.
EM-benchmarked investors should increase weightings in Telcos asmarkets roll over, and as Asia ex-Japan Telcos have traced only 66% ofthe worst 10 EM market corrections. Key stock calls for this phase areChina Telecom and Axiata.
The next phase will require different stocks to outperform EMindices as Asia Telcos only produce 65% of the ensuing median EMmarket rally. We believe stock selection will be critical. Beaten-downopportunity stocks include Tulip Telecom, Indosat, AIS and DTAC,and Unicom. The strongest earnings revisions stories include ISAT andDTAC.
DM vs. EM: Japan, the US, and Developed Europe are the clearoutperforming regions within global Telcos (all close to their highs),with EMEA having he worst hit (-12% peak to trough, driven by eventsin Egypt), followed closely by Asia ex-Japan (-5%) and Latin America(-4%). Wed note that EMEA has also seen the largest earningsdowngrades (so therefore little P/E compression), but it has seen themost EV/EBITDA and P/BV compression within Global Telcos.
For more detail on our thoughts regarding Telecom factor exposures,please see our recent report Whats Working in Asian Telcos. For moredetails regarding Asia vs. EM corrections, please see Adrian Mowatsrecent report The Fastest Fall 3rd Encore.
Asia Telecom: Peak to trough pr ice moves, earnings multiple compr ession, and EPS revision tr ends.
P PE EV/EBITDA P/B EPS revisi ons YTD JPM Rat
RELIANCE COMMUNICATIONS LTD -43% (6.2) (2.6) (0.4) 1% NGLOBE TELECOM INC -26% (1.1) (0.8) (0.8) 3% UWTULIP TELECOM LTD -25% (1.9) (3.3) (2.0) -6% OWTELEKOMUNIKASI INDONESIA TBK -23% (2.8) (1.2) (1.4) 1% NINDOSAT TBK PT -23% (2.8) (1.5) (0.4) -52% OWCHINA UNITED NETWORK-A -21% (5.1) NA (0.5) 5% OWKT CORP -19% (1.8) (0.8) (0.1) 7% NTOTAL ACCESS COMMUNICATION -17% (4.0) (1.4) (0.4) -2% OWTELSTRA CORP LTD -15% - (0.6) (0.4) 5% OWPHILIPPINE LONG DISTANCE TEL -14% (1.5) (0.8) (0.9) 1% NSK TELECOM -14% (0.8) (0.5) (0.1) 1% OWCHINA MOBILE LTD -13% (2.0) (1.1) (0.5) 0% NADVANCED INFO SERVICE PCL -12% (2.7) (1.2) (0.5) -2% OW
BHARTI AIRTEL LTD -11% (0.6) (0.9) (1.2) 5% NIDEA CELLULAR LTD -10% (8.4) (0.7) (0.2) -15% UWXL AXIATA TBK PT -9% (3.9) (1.5) (1.0) -3% OW
Source: Bloomberg and J.P. Morgan estimates.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Table of ContentsInvestment Summary ...............................................................3
Increase weightings in Telcos during the market correction, stock picking during therebound ........................................................................................................................3
Tulip Telecom Malvika Gupta ...............................................6
Indosat - James Sullivan.........................................................7
DTAC James Sullivan............................................................8
Advanced Info Services James Sullivan ................................9
China Unicom Lucy Liu.......................................................10
State of Global Telcos DM vs. EM story ............................13
Global Telco P/E Peak to Current.......................................15
Global Telco EV/EBITDA Peak to Current .........................17
Global Telco Price to Book Peak to Current .....................18
Asia Telecom Investment Summary .....................................19
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Investment SummaryIncrease weightings in Telcos during the market correction,stock picking during the rebound
Per our recent report Whats Working in Asian Telcos, investors generally appear to
be underweight the Asian Telecom sector, happily holding 1-3 names that are
performing, with little interest in bottom ticking underperforming stocks. We
suggest an increase in Telcos weighting during the current market correction, with a
move to a more aggressive stock picking stance required to outperform once markets
turn.
Not surprisingly, Asian Telcos have generally outperformed Emerging Market
corrections over the past 20 years. Below we list the 10 worst EM corrections aswell as statistics for the current correction to show Asian Telco performance relative
to MSCI EM. In general, Asia ex Japan Telecoms have avoided around 1/3 of the
retrenchment suffered by the broader EM index.
Table 1: EM Market corrections/rallys vs. Asia Telco correcti ons/rallys
Correction 12M forward returnHigh Date Low Date EM AxJpn
TelcosAXJ Telcos / EM EM AxJpn Telcos AXJ Telcos / EM
10-Jul-97 5-Oct-98 -58% -38% 66% 63% 32% 50%18-Apr-02 10-Oct-02 -30% -20% 66% 60% 27% 45%12-Apr-04 17-May-04 -20% -14% 70% 35% 24% 68%11-Mar-05 28-Apr-05 -9% -5% 50% 58% 21% 36%
4-Oct-05 28-Oct-05 -9% -7% 85% 34% 30% 89%10-May-06 13-Jun-06 -24% -15% 62% 53% 50% 94%26-Feb-07 5-Mar-07 -10% -8% 79% 36% 39% 110%31-Oct-07 27-Oct-08 -66% -57% 86% 113% 37% 33%12-Jan-10 8-Feb-10 -12% -5% 41% 26% 11% 42%15-Apr-10 25-May-10 -18% -12% 66% 27% 15% 56%4-Jan-11 10-Feb-11 -7% -2% 36%
Average -24% -17% 70% 50% 29% 57%Median -18% -12% 66% 44% 28% 65%
Source: Bloomberg.
We have profiled in recent reports the fact that nvestors appear to be riding their
winners in the Telco space YTD, with price momentum the only meaningful positive
factor exposure in January, per the chart below.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Figure 1: January 2011 Factor Drivers: Asia TelcosPrice Momentum (12mth) 7.90%
Price Momentum (1mth) 5.00%
JPMQ Price 3.90%Market Cap 3.30%
Earnings Momentum (Risk Adjusted) 2.80%
ROE (1 year change) -2.20%
EPS Growth -2.30%
P/E Relative to Sector -3.00%
Dividend Yield (12mth forward) -3.10%
Dividend Yield -3.10%
P/E (12mth forward) -3.50%
JPMQ Value -3.50%
P/E -3.80%
Source: MSCI, Factset, Reuters Thomson, Bloomberg, J.P. Morgan
Figure 2: January 2011 Factor Drivers: Asia ex-JapanEPSFY2REVS 6.4%
Earnings Momentum (1 & 3mth average) 5.1%
Risk Adjusted Earnings Momentum 4.5%3mth Earnings Momentum 4.4%
JPM GROWTH (forecast upgrades) 4.4%
1mth Earnings Momentum 4.3%
Beta 4.1%
Market Cap 2.9%
1mth Change in Consensus Recommendation 2.7%
12mth Price Momentum 2.4%
Source: MSCI, Factset, Reuters Thomson, Bloomberg, J.P. Morgan
These facts taken together argue for an increase in weighting in Asia ex Japan Telcos
for investors following EM benchmarks. The current trading environment (riding the
winners with little incremental new exposure, no bottom ticking at all) suggests that
PCCW, China Telecom, and Axiata are the stocks best positioned to allow
outperformance for EM-based investors during the current market correction.
Table 2: Stocks most aligned with cur rent Factor dri vers within As ia Telcos
Month End Company CTY Pmom12 Size EPS Certainty Compos ite
31-Jan-11 PCCW HK 2.49 (0.93) (0.53) 0.7031-Jan-11 CHINA TELECOM CORP H CN 0.85 0.60 (0.08) 0.5131-Jan-11 AXIATA GROUP MY 0.86 0.56 (0.09) 0.5131-Jan-11 SINGAPORE TELECOM SG (0.47) 1.15 (0.63) 0.4431-Jan-11 PHIL LONG DISTANCE TEL PH (0.74) 1.14 (0.83) 0.41
31-Jan-11 CHINA MOBILE CN (0.48) 0.86 (0.77) 0.3831-Jan-11 TAIWAN MOBILE TW (0.07) 0.92 (0.29) 0.3831-Jan-11 MAXIS BHD MY (0.56) 0.55 (0.83) 0.2831-Jan-11 FAR EASTONE TELECOM. CO TW (0.07) 0.30 (0.59) 0.2731-Jan-11 ADVANCED INFO SERVICE TH (0.15) 0.20 (0.69) 0.2531-Jan-11 CHUNGHWA TELECOM CO TW 0.08 0.97 0.38 0.2231-Jan-11 DIGI.COM MY 0.15 0.00 (0.48) 0.2131-Jan-11 CHINA UNICOM CN 0.95 0.43 0.82 0.1931-Jan-11 TELEKOMUNIKASI INDONESIA ID (1.31) 0.66 (0.55) (0.03)31-Jan-11 STARHUB SG 0.21 (0.74) (0.30) (0.08)31-Jan-11 CHINA COMM SERVI H CN 0.11 (1.22) (0.82) (0.10)31-Jan-11 SK TELECOM CO KR (0.92) 0.27 0.14 (0.26)31-Jan-11 GLOBE TELECOM PH (1.01) (0.50) (0.44) (0.36)31-Jan-11 KT CORP KR (1.18) 0.17 0.48 (0.50)31-Jan-11 TELEKOM MALAYSIA MY 0.14 (0.31) 1.42 31-Jan-11 LG UPLUS KR (1.58) (0.65) 0.46 (0.90)31-Jan-11 INDOSAT ID (1.11) (0.66) 1.62 (1.13)
31-Jan-11 SK BROADBAND CO KR (0.85) (1.22) 2.67 (1.58)31-Jan-11 RELIANCE COMMUNICATION IN (1.69) (0.37) 2.92 (1.66)
Source: J.P. Morgan estimates.
A very different strategy will be required once markets begin to turn, however, in our
view. Per the chart below, Asia ex Japan Telcos have only delivered 65% of the
ensuing market rebound post the worst 10 previous EM corrections. Investors will
likely need to move away from Correction Winners and take a more active stock
picking approach in order for their Telecom exposure to add to overall
outperformance of EM mandates.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Table 3: EM Market corrections/rallys vs. Asia Telco correcti ons/rallys
Correction 12M forward return
High Date Low Date EM AxJpnTelcos AXJ Telcos / EM EM AxJpn Telcos AXJ Telcos / EM
10-Jul-97 5-Oct-98 -58% -38% 66% 63% 32% 50%18-Apr-02 10-Oct-02 -30% -20% 66% 60% 27% 45%12-Apr-04 17-May-04 -20% -14% 70% 35% 24% 68%11-Mar-05 28-Apr-05 -9% -5% 50% 58% 21% 36%
4-Oct-05 28-Oct-05 -9% -7% 85% 34% 30% 89%10-May-06 13-Jun-06 -24% -15% 62% 53% 50% 94%26-Feb-07 5-Mar-07 -10% -8% 79% 36% 39% 110%31-Oct-07 27-Oct-08 -66% -57% 86% 113% 37% 33%12-Jan-10 8-Feb-10 -12% -5% 41% 26% 11% 42%15-Apr-10 25-May-10 -18% -12% 66% 27% 15% 56%4-Jan-11 10-Feb-11 -7% -2% 36%
Average -24% -17% 70% 50% 29% 57%Median -18% -12% 66% 44% 28% 65%
Source: Bloomberg.
We suggest a two prong approach. First, take advantage of opportunities created by
the recent market drawdown. The figure below lists stocks that have a) fallen
significantly, b) also seen earnings multiple compression (i.e. the drawdown was not
negative EPS revision related), where c) we are fundamentally positive on the
companies in question. Our top picks in this category are Tulip Telecom, Indosat,
Unicom, and DTAC.
Figure 3: Asian Telco Fishing - Stocks for the next stageP PE EV/EBITDA P/B EPS revis ions YTD JPM Rating
RELIANCE COMMUNICATIONS LTD -43% (6.2) (2.6) (0.4) 1% NGLOBE TELECOM INC -26% (1.1) (0.8) (0.8) 3% UWTULIP TELECOM LTD -25% (1.9) (3.3) (2.0) -6% OWTELEKOMUNIKASI INDONESIA TBK -23% (2.8) (1.2) (1.4) 1% NINDOSAT TBK PT -23% (2.8) (1.5) (0.4) -52% OWCHINA UNITED NETWORK-A -21% (5.1) NA (0.5) 5% OWKT CORP -19% (1.8) (0.8) (0.1) 7% NTOTAL ACCESS COMMUNICATION -17% (4.0) (1.4) (0.4) -2% OWTELSTRA CORP LTD -15% - (0.6) (0.4) 5% OWPHILIPPINE LONG DISTANCE TEL -14% (1.5) (0.8) (0.9) 1% NSK TELECOM -14% (0.8) (0.5) (0.1) 1% OWCHINA MOBILE LTD -13% (2.0) (1.1) (0.5) 0% NADVANCED INFO SERVICE PCL -12% (2.7) (1.2) (0.5) -2% OWBHARTI AIRTEL LTD -11% (0.6) (0.9) (1.2) 5% NIDEA CELLULAR LTD -10% (8.4) (0.7) (0.2) -15% UWXL AXIATA TBK PT -9% (3.9) (1.5) (1.0) -3% OW
Source: J.P. Morgan estimates.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Tulip Telecom Malvika Gupta
Latest published research:- Tulip Telecom: Improving revenue and margin trends
- Tulip Telecom: Data centre acquisition positive for diversification
Description of recent share price action - what has happened, whyThe share price has outperformed a weak Indian market over the past 3 months by
~6%. We believe improved international visibility and expansion of addressable
markets to services is helping here but misplaced concerns about competition from
BWA wireless players like Reliance Industries have gated further outperformance.
At 4.5 FY12E EV/EBITDA, a 15% discount to its one-year history and ~35% to the
rest of our coverage universe, we believe TTSL is attractive at current levels.
Catalyst for performance in the next 6-12 months, either events, earnings,
valuations, etc.We believe the below would act as positive catalysts for the stock:
Announcement of a strategic investor in Tulip's new data centre business
FY12 guidance from the management being ahead of estimates
An exit from the broadband wireless access JV at a profit
More aggressive business mix shift toward EDS and within that fibre
Table 4: Margin uplift from potential busin ess mix shif ts
5% 6% 7%
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Indosat James Sullivan
Latest published research:- Indonesian Telecom: 4Q10/Fy11 Preview: All about execution
- Indonesian Telecom Equity Strategy: Sifting through for opportunities
Description of recent share price action - what has happened, whyYTD the stock is down 9% while the JCI has declined by 8%. Over last three months
ISAT declined by 14%, underperforming the JCI index by 7%. Expected weakness in
4Q10 results, due to a combination of holiday timing and pricing issues, was the key
driver behind the underperformance. The market is well aware of weakness in ISAT's
4Q10 and we believe 2011 expectations to be the price driver from here on.
Catalyst for performance in the next 6-12 months, either events, earnings,valuations, etc1.Margin revisions in 2011: We forecast 189 bps margin upside to Street driving
6%/10% upside to EBITDA and EPS. ISAT's cost efficiency measures enabled it
to drastically reduce n/w OpEx/min in 2010 (down 35% in 3Q10), and we
forecast a 27% decline in 2011.
2.Potential Tower deal.Figure 5: ISAT EBITDA Margins vs. OpEx per Minute
Source: J.P. Morgan estimates, Company data.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
DTAC James Sullivan
Latest published research- Total Access Communication: 4Q10 net 42% ahead of street, expect 16%
upside to 2011 consensus
- Thai Telcos: 4Q10 Preview: Strong 4Q10, concession conversion claimsremain key overhang
Description of recent share price action - what has happened, whyYTD the stock is down 2.3% while the SET declined by 8.2%%. Over last three
months DTAC declined by 6%, performing largely in line with the SET. DTAC had
strong results in 2010 with a recurring income growth of 60%. But 3G delays and
news flow regarding concession damage claims remained to be an overhang on the
stock price.
Catalyst for performance in the next 6-12 months, either events, earnings,valuations, etc1.Continued improvement in the bottom line; we expect 16% upside to Streets
2011 EPS.
2.Special dividend: DTAC's debt covenants currently limit its payout ratio to 70%,
and with strong cash flows there is a possibility of a special dividend if the
company manages to increase its payout ratio.
3.3G clarity, MVNO with CAT: Clarity regarding 3G timeline would be a keystock price driver; positive news flow on MVNO with CAT's 3G would also be
key.
Figure 6: DTAC one year forward consensus P/ERatio
Source: Bloomberg.
Figure 7: DTAC one year fo rward consensusEPS
Source: Bloomberg.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
Advanced Info Services James SullivanLatest published research
- Advanced Info Services: 4Q10 net 6% ahead of street, multiple re-rating tobe driver
- Thai Telcos: 4Q10 Preview: Strong 4Q10, concession conversion claims
remain key overhang
Description of recent share price action - what has happened, whyYTD the stock is down 4.7% while the SET declined by 8.2%. Over last three
months AIS declined by 11%, underperforming the SET by 6%. Concession damage
claims and investor neglect for the sector on the back of 3G delays have been the key
overhangs on stock price performance. AIS's recurring income grew by 24% in 2010;strong results are already in Street expectations and we see multiple re-rating to be
the stock price driver from here on. News flow regarding concession damage claims
should remain to be an overhang on the stock price.
Catalyst for performance in the next 6-12 months, either events, earnings,valuations, etc1.3G clarity, MVNO with TOT: Clarity regarding 3G timeline would be a key
stock price driver; positive news flow on MVNO with TOT's 3G would also be
key.2.Special dividend: AIS paid out Bt13/share in 2010 at a yield of 13%, and we
expect the company to continue to pay special dividends in case 3G is delayed
further.Figure 8: AIS one year for ward consensus P/ERatio
Source: Bloomberg.
Figure 9: AIS one year forward c onsensus EPSrevisions
Source: Bloomberg.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
China Unicom Lucy LiuLatest published research
- Asia Telecom/Internet Strategy: The iPhone impact: not what you think...
- China Unicom: Contract customer growth bolded well the LT revenueoutlook
Description of recent share price action - what has happened, whyChina Unicoms (CU) share price has risen by 20% YTD and outperformed HSI and
MSCI China by 23% and 26%, respectively. In our view, the recent share price rally
was mainly driven by (1) investors' improving sentiment on the growth prospect of
CU's 3G business in 2011 on the back of recent upbeat numbers of 3G monthly net
adds; (2) the speculated upbeat outlook for 2011; (3) fund inflows into defensiveplays amid growing concerns on macro uncertainty.
Catalyst for performance in the next 6-12 months, either events, earnings,valuations, etcDespite the recent outperformance, Unicom remains our top pick in the space in the
next 6-12 months, and we believe further upside would come from:
a) Expedited take-up of 3G with ARPU support.
We argue that one unique issue for the Chinese telcos which we will continue to
observe in 2011 is the high correlation of share price with the topline trend. We
believe the market has yet to fully factor in the 3G subs growth potential of CU while
the company is likely to give upbeat 3G subs guidance (likely to be 25-30mn netadds in 2011) during their March results, which should be positive for the share
price. As CU has the highest contribution from 3G handset users and CU's 3G ARPU
is 2-3x higher than 2G ARPU, we believe the stability of blended ARPU will be
further underpinned by the mix change towards 3G handset users. In 2011, we expect
CU to turn more aggressive in gaining 3G handset subs and 3G revenue market
share. Although this should inevitably come at the expense of higher opex cost and
thus erode EBITDA and net profit, the market will perceive any upside surprise for
3G subs growth as positive despite its resulting downward revision on earnings, in
our view. Moreover, we see high likelihood for CU to change the accounting policy
to match the revenue and handset subsidies better, and therefore ease the near-term
pressure on bottom line.
b) Data revenue should grow faster helped by better mass market smartphone sales
and content improvement in China. We believe CU's value chain advantage in terms
of both 'thousand RMB' smartphones and high-end smartphones (iPhone) positions
the company well to leverage on the trend of growing its VAS revenue.
c) Free cash flow (FCF) position of CU should improve thanks to more upfront cash
deposits paid on bucket plans. According to CU, contract customers made up almost
40% of 3G net adds in December, up from 5% in 1H2010, 19% in 3Q10 and 30% in
October. As we expect up to 50% of 3G net adds will be contract users in 2011, the
FCF position should be further strengthened.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
d) CU now trades at around 5x 2011E EV/EBITDA and 4.6x 2012E EV/EBITDA,
which we believe is reasonable vs. the regional telcos. Key positive catalysts in our
view include upbeat 2011 guidance in March and the improvement of monthly subs.
Figure 10: Chinese Telecom Sector 3G Net additions
Source: Company reports and J.P. Morgan estimates.
Figure 11: Chinese Telecom Sector 3G ARPU trends
Source: Company reports and J.P. Morgan estimates.
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Figure 12: Unicom gaining share of 3Gsubscribers
Source: Company reports and J.P. Morgan estimates.
Figure 13: Unicom g aining market share of 3Grevenue
Source: Company reports and J.P. Morgan estimates.
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State of Global Telcos DM vs. EM story
Figure 14: Performance of global Telecom indices 1st Jan 2010 - Present
80%
85%
90%
95%
100%
105%
110%
115%
120%
1/1/2
010
1/15/2010
1/29/2010
2/12/2010
2/26/2010
3/12/2010
3/26/2010
4/9/2
010
4/23/2010
5/7/2
010
5/21/2010
6/4/2
010
6/18/2010
7/2/2
010
7/16/2010
7/30/2010
8/13/2010
8/27/2010
9/10/2010
9/24/2010
10/8/2010
10/22/2010
11/5/2010
11/19/2010
12/3/2010
12/17/2010
12/31/2010
1/14/2011
1/28/2011
2/11/2011
World US Europe EMEA LatAm APxJ Japan
Source: Bloomberg.
Figure 15: Peak to Trough change, global Telco indices Jan 2010 - Present
0%
-3%
-1%
-12%
-4%-5%
0%
-14%
-12%-10%
-8%
-6%
-4%
-2%
0%
World US Europe EMEA LatAm APxJ Japan
Source: Bloomberg.
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Table 5: Peak to tr ough moves, Global Telco Indices
World US Europe EMEA LatAm APxJ Japan
Index 0% -3% -1% -12% -4% -5% 0%P/E (2.57) (1.08) (5.17) -
EV/EBITDA (0.13) (0.32) (0.14) (0.93)
P/BV (0.01) (0.11) (0.17) (0.46)
Source: Bloomberg.
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Global Telco P/E Peak to Current
Figure 16: Global Telco Index P/E Ratios
8.00
10.00
12.00
14.00
16.00
18.00
20.00
1/1/2010
1/15/2010
1/29/2010
2/12/2010
2/26/2010
3/12/2010
3/26/2010
4/9/2010
4/23/2010
5/7/2010
5/21/2010
6/4/2010
6/18/2010
7/2/2010
7/16/2010
7/30/2010
8/13/2010
8/27/2010
9/10/2010
9/24/2010
10/8/2010
10/22/2010
11/5/2010
11/19/2010
12/3/2010
12/17/2010
12/31/2010
1/14/2011
1/28/2011
2/11/2011
World US Europe EMEA LatAm APxJ Japan
USA
Japan
World
Asia x Jpn
LatAm
EMEA
Europe
Source: Bloomberg.
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Figure 17: Global Telco index EPS estimates Change YTD
94%
95%
96%
97%
98%
99%
100%
101%
102%
103%
1/3/2011
1/5/2011
1/7/2011
1/9/2011
1/11/2011
1/13/2011
1/15/2011
1/17/2011
1/19/2011
1/21/2011
1/23/2011
1/25/2011
1/27/2011
1/29/2011
1/31/2011
2/2/2011
2/4/2011
2/6/2011
2/8/2011
2/10/2011
2/12/2011
2/14/2011
World US Europe EMEA LatAm APxJ Japan
Japan
Europe
LatAm
Asia x Jpn
World
USA
EMEA
Source: Bloomberg.
Figure 18: P/E Compression peak to current - Global Telco indices
(2.57)
(1.08)
(5.17)
-
(5.92)
(0.87)(1.39)
(7.00)
(6.00)
(5.00)
(4.00)
(3.00)
(2.00)
(1.00)
-
World US Europe EMEA LatAm APxJ Japan
Source: Bloomberg.
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Global Telco EV/EBITDA Peak to
CurrentFigure 19: Global Telco EV/EBITDA ratios
3.50
4.00
4.50
5.00
5.50
6.00
6.50
1/1/2
010
1/15/20
10
1/29/2010
2/12/2010
2/26/2010
3/12/2010
3/26/2010
4/9/2010
4/23/2010
5/7/2010
5/21/2010
6/4/2010
6/18/2010
7/2/2010
7/16/20
10
7/30/20
10
8/13/20
10
8/27/20
10
9/10/2010
9/24/2010
10/8/2010
10/22/2010
11/5/2010
11/19/2010
12/3/2010
12/17/2
010
12/31/2
010
1/14/2011
1/28/20
11
2/11/20
11
World US Europe EMEA LatAm APxJ Japan
Europe
World
USA
LatAm
EMEA
Asia x Jpn
Japan
Source: Bloomberg.
Figure 20: EV/EBITDA ratio compression - Global Telco Indices
(0.13)
(0.32)
(0.14)
(0.93)
(0.53)(0.44)
(0.11)
(1.00)
(0.80)
(0.60)
(0.40)
(0.20)
-
World US Europe EMEA LatAm APxJ Japan
Source: Bloomberg
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Global Telco Price to Book Peak to
CurrentFigure 21: Price to Book - Global Telco Indices
1.00
1.50
2.00
2.50
3.00
3.50
1/1/2
010
1/15/2
010
1/29/2
010
2/12/2
010
2/26/2
010
3/12/2
010
3/26/2
010
4/9/2
010
4/23/2
010
5/7/2
010
5/21/2
010
6/4/2
010
6/18/2
010
7/2/2
010
7/16/2
010
7/30/2
010
8/13/2
010
8/27/2
010
9/10/2
010
9/24/2
010
10/8/2
010
10/22/2
010
11/5/2
010
11/19/2
010
12/3/2
010
12/17/2
010
12/31/2
010
1/14/2
011
1/28/2
011
2/11/2
011
World US Europe EMEA LatAm APxJ Japan
LatAm
EMEA
Asia x Jpn
USA
World
Europe
Japan
Source: Bloomberg.
Figure 22: Price to Book Compression
(0.01)
(0.11)
(0.17)
(0.46)
(0.10) (0.12)
(0.03)
(0.50)
(0.40)
(0.30)
(0.20)
(0.10)
-
World US Europe EMEA LatAm APxJ Japan
Source: Bloomberg.
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Asia Telecom Investment Summary
Figure 23: Peak to trough mo ves-Price
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
RELIANCECOMMUNICATIONSLTD
GLOBETELECOMINC
TULIPTELECOMLTD
TELEKOMUNIKASIINDONESIATBK
INDOSATTBKPT
CHINAUNITEDNETWORK-A
KTCORP
TOTALACCESSCOMMUNICATION
TELSTRACORPLTD
PHILIPPINELONGDISTANCETEL
SKTELECOM
CHINAMOBILELTD
ADVANCEDINFOSERVICEPCL
BHARTIAIRTELLTD
IDEACELLULARLTD
XLAXIATATBKPT
SINGAPORETELECOMLTD
CHUNGHWATELECOMCOLTD
STARHUBLTD
CHINATELECOMCORPLTD-H
TAIWANMOBILECOLTD
KDDICORP
NIPPONTELEGRAPH&TELEPHONE
AXIATAGROUPBERHAD
MAXISBHD
NTTDOCOMOINC
CHINAUNICOMHONGKONGLTD
SOFTBANKCORP
TELEKOMMALAYSIABHD
DIGI.COMBHD
Source: Bloomberg.
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Figure 24: Peak to trough moves-P/E
(9.0)
(8.0)
(7.0)
(6.0)
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
-
IDEACELLULARLTD
RELIANCECOMMUNICATIONSLTD
CHINAUNITEDNETWORK-A
TOTALACCESSCOMMUNICAT
ION
XLAXIATATBKPT
INDOSATTBKPT
TELEKOMUNIKASIINDONESIATBK
ADVANCEDINFOSERVICEPCL
CHUNGHWATELECOMCOLTD
CHINAMOBILELTD
TULIPTELECOMLTD
KTCORP
AXIATAGROUPBERHAD
PHILIPPINELONGDISTANCET
EL
STARHUBLTD
TELEKOMMALAYSIABHD
GLOBETELECOMINC
CHINATELECOMCORPLTD-H
SOFTBANKCORP
SKTELECOM
NIPPONTELEGRAPH&TELEPH
ONE
DIGI.COMBHD
BHARTIAIRTELLTD
SINGAPORETELECOMLTD
TAIWANMOBILECOLTD
NTTDOCOMOINC
MAXISBHD
TELSTRACORPLTD
KDDICORP
CHINAUNICOMHONGKONGL
TD
Source: Bloomberg.
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Figure 25: Peak to trough moves-EV/EBITDA
(3.5)
(3.0)
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
-
TULIPTELECOMLTD
RELIANCECOMMUNICATIONSLTD
SINGAPORETELECOMLTD
XLAXIATATBKPT
INDOSATTBKPT
AXIATAGROUPBERHAD
TOTALACCESSCOMMUNICAT
ION
TELEKOMUNIKASIINDONESIATBK
ADVANCEDINFOSERVICEPCL
CHINAMOBILELTD
BHARTIAIRTELLTD
GLOBETELECOMINC
PHILIPPINELONGDISTANCET
EL
STARHUBLTD
SOFTBANKCORP
KTCORP
CHUNGHWATELECOMCOLTD
IDEACELLULARLTD
TELSTRACORPLTD
DIGI.COMBHD
SKTELECOM
TAIWANMOBILECOLTD
NIPPONTELEGRAPH&TELEPH
ONE
MAXISBHD
CHINATELECOMCORPLTD-H
NTTDOCOMOINC
TELEKOMMALAYSIABHD
KDDICORP
CHINAUNICOMHONGKONGL
TD
CHINAUNITEDNETWORK-A
Source: Bloomberg.
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Figure 26: Peak to trough moves-P/B
(7.0)
(6.0)
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
-
STARHUBLTD
TULIPTELECOMLTD
TELEKOMUNIKASIINDONESIATBK
BHARTIAIRTELLTD
XLAXIATATBKPT
PHILIPPINELONGDISTANCET
EL
GLOBETELECOMINC
ADVANCEDINFOSERVICEPCL
CHINAMOBILELTD
CHINAUNITEDNETWORK-A
INDOSATTBKPT
RELIANCECOMMUNICATIONSLTD
TOTALACCESSCOMMUNICAT
ION
TELSTRACORPLTD
SINGAPORETELECOMLTD
IDEACELLULARLTD
TAIWANMOBILECOLTD
KDDICORP
SKTELECOM
KTCORP
CHINATELECOMCORPLTD-H
AXIATAGROUPBERHAD
NIPPONTELEGRAPH&TELEPH
ONE
CHUNGHWATELECOMCOLTD
MAXISBHD
NTTDOCOMOINC
SOFTBANKCORP
DIGI.COMBHD
TELEKOMMALAYSIABHD
CHINAUNICOMHONGKONGL
TD
Source: Bloomberg.
Figure 27: EPS revisions 2011 YTD
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
KTCORP
CHINAUNITEDNETWORK-A
TAIWANMOBILECOLTD
CHINAUNICOMHONGKONGLTD
TELSTRACORPLTD
BHARTIAIRTELLTD
GLOBETELECOMINC
RELIANCECOMMUNICATIONSLTD
SINGAPORETELECOMLTD
PHILIPPINELONGDISTANCETEL
TELEKOMUNIKASIINDONESIATBK
SKTELECOM
NIPPONTELEGRAPH&TELEPHONE
STARHUBLTD
CHINAMOBILELTD
CHINATELECOMCORPLTD-H
TELEKOMMALAYSIABHD
NTTDOCOMOINC
AXIATAGROUPBERHAD
MAXISBHD
KDDICORP
ADVANCEDINFOSERVICEPCL
TOTALACCESSCOMMUNICATION
XLAXIATATBKPT
SOFTBANKCORP
DIGI.COMBHD
TULIPTELECOMLTD
CHUNGHWATELECOMCOLTD
IDEACELLULARLTD
INDOSATTBKPT
Source: Bloomberg.
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Companies Recommended in This Report (all prices in this report as of market close on 14 February 2011)Advanced Info Services (ADVA.BK/Bt82.00/Overweight), AXIATA Group Berhad (AXIA.KL/M$4.95/Overweight),
China Unicom (Hong Kong) Limited (0762.HK/HK$13.50/Overweight), China United Network Communications(600050.SS/Rmb6.17/Neutral), PT Indosat Tbk (ISAT.JK/Rp4,900/Overweight), PT Indosat Tbk (IIT/$27.54/Overweight),Total Access Communication (DTAC.BK/Bt41.75/Overweight), Tulip Telecom Limited (TULP.BO/Rs175.20/Overweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarilyresponsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, withrespect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this reportaccurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the researchanalysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by theresearch analyst(s) in this report.
Important Disclosures
Market Maker: JPMS makes a market in the stock of PT Indosat Tbk.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for AXIATAGroup Berhad within the past 12 months.
Client of the Firm: AXIATA Group Berhad is or was in the past 12 months a client of JPM; during the past 12 months, JPMprovided to the company investment banking services, non-investment banking securities-related service and non-securities-relatedservices. China Unicom (Hong Kong) Limited is or was in the past 12 months a client of JPM. China United NetworkCommunications is or was in the past 12 months a client of JPM. PT Indosat Tbk is or was in the past 12 months a client of JPM.Total Access Communication is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to thecompany non-investment banking securities-related service.
Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking servicesfrom AXIATA Group Berhad.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment bankingservices in the next three months from AXIATA Group Berhad.
Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services otherthan investment banking from AXIATA Group Berhad, Total Access Communication. An affiliate of JPMS has receivedcompensation in the past 12 months for products or services other than investment banking from China United Network
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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return ofthe stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated researchanalysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSEAll Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teamscoverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifyinganalyst(s) coverage universe.
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Coverage Universe: James R. Sullivan, CFA: AXIATA Group Berhad (AXIA.KL), Advanced Info Services (ADVA.BK),Digi (DSOM.KL), Globe Telecom (GLO.PS), Maxis Berhad (MXSC.KL), PT Indosat Tbk (ISAT.JK), PT Telekomunikasi
Indonesia Tbk (TLKM.JK), PT XL Axiata Tbk (EXCL.JK), Philippine Long Distance Telephone Company (TEL.PS),Singapore Telecom (STEL.SI), Telekom Malaysia (TLMM.KL), Total Access Communication (DTAC.BK)
J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010
Overweight(buy)
Neutral(hold)
Underweight(sell)
J.P. Morgan Global Equity Research Coverage 46% 42% 12%IB clients* 53% 50% 38%
JPMS Equity Research Coverage 43% 49% 8%IB clients* 71% 63% 59%
*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating fal ls into a holdrating category; and our Underweight rating falls into a sell rating category.
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Asia Pacific Equity Research15 February 2011
James R. Sullivan, CFA(65) 6882-2374james.r.sullivan@jpmorgan.com
updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any otherpublicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their homejurisdiction unless governing law permits otherwise.
Other Disclosures last revised January 8, 2011.
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