Telecommunications Sector Update : Sizing Up The Pure Mobile Domestic Players – Maxis vs. DiGi - 22/10/2010

8/8/2019 Telecommunications Sector Update : Sizing Up The Pure Mobile Domestic Players Maxis vs. DiGi - 22/10/2010

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Table 1: Telecommunications Sector Valuations

PriceFair

ValueEPS(sen)

EPS GWTH(% )

PER(x )

EV/EBITDA

(x )P/NTA

(x )P/CF(x )

GDY(%) Rec

(RM) (RM) FY11 FY12 FY11 FY12 FY11 FY12 FY 11 FY11 FY11 FY11DiGi 24.60 26.35 152.4 160.9 9.7 5.6 16.1 15.3 8.1 26.9 9.8 8.2 OP

Axiata 4.41 4.75 35.0 38.4 15.6 9.6 12.6 11.5 5.8 2.6 6.0 3.2 MP

Maxis 5.29 5.75 34.0 36.7 8.5 8.0 15.6 14.4 8.8 n.m. 9.4 9.6 OP

TM 3.37 3.55 13.5 15.8 8.2 17.4 25.0 21.3 2.6 1.9 3.7 7.8 MP

Sector Avg 11.5 8.9 15.1 13.8

Comparing green apple to yellow apple. In this report, we make acomparison between the only two purely domestic focused mobile operatorsin Malaysia, i.e. Maxis and DiGi.

Maxis slightly ahead quantitatively. We find that Maxis leads the industryboth in terms of subscriber and revenue market share, as well as EBITDA

margins and postpaid ARPU. DiGi commands higher prepaid ARPU due to its

traditional focus. Unsurprisingly given Maxis as well as Celcoms lead in the

3G market, Maxis derives a bigger portion of its revenue from non-voice.

This has also resulted in Maxis having superior 3G network population

coverage, although the proposed active network sharing between DiGi and

Celcom could dramatically change industry dynamics. Despite lagging

behind, DiGi has remained prudent on capex spending while Maxis has been

aggressively modernising its network.

No clear winner in earnings growth and valuation. Excluding thepossibility of special dividends, we expect Maxis to offer higher dividendyields in 2010. Both companies will see steady single-digit earnings growth

going forward, although Maxis is suffering from some extra expenses due to

World Cup 2010. Maxis looks slightly cheaper based on PE multiples, but

dearer based on EV/EBITDA due to higher net gearing.

Maxis has a slight edge. In summary, from a quantitative perspective, welike Maxis for its market leadership and strength in the postpaid market,

allowing itself to capture the rising popularity of mobile broadband and

strong data revenue growth via the proliferation of cheaper smartphones.

While earnings growth in FY12/10 is lacking, this should pick up in FY12/11-

12 as margins recover post World Cup 2010. On a qualititative view, we like

where Maxis is heading by expanding its range of services to offer quad-play,

as we think Maxis is definitely in the right track by leveraging on the strength

of content that Astro has to offer.

Risks. These include: 1) weaker-than-expected subscriber additions; 2)execution (such as network upgrades & expansion); and 3) all-out price war.

Forecasts. No change to our forecasts for now. Investment case. We prefer Maxis given that it is marginally cheaper by

4.5%at 16.9x FY12/10 PE compared to DiGis 17.7x, while offering higher

dividend yield of 6.6% in 2010 compared to DiGis 5.7%. Going forward, we

believe Maxis is best positioned to capture the huge untapped potential that

mobile broadband has to offer due to its transformation into Malaysias first

quad-play telco, cross-selling opportunities within its higher quality postpaid

subscriber base and wide 3G network population coverage.

Corporate High l ig hts

Sec to r Upda te

TelecommunicationsSizing Up The Pure Mobile Domestic Players

Maxis vs. DiGi

Malasia

Please read important disclosures at the end of this report.

22 October 2010

RHB ResearchInstitute Sdn BhdA member of theRHB Banking GroupCompany No: 233327 -M

abc

KLCI

PER = 12x

PER = 11x

PER = 10x

M

ARKET

DATELINE

PP

7767/09/2011(028730)

Recom : Neutral(Maintained)

Relative Performance To KLCI

David Chong, CFA(603) 9280 2172

[email protected]

FBM KLCI

Maxis

Digi


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Comparing green apple to yellow apple. In this report, we make a comparison between the only two purelydomestic focused mobile operators in Malaysia, i.e. Maxis and DiGi. For completeness, we have included Celcom

in some of our analysis. We believe Maxis (re-listed end 2009) and DiGi are good comparables given that Axiata

continues to embark on its transformation to become a top regional mobile operator considering its wholly owned

Celcom now contributes less than half of its top line whereas Telekom Malaysia (TM) is largely a fixed line player.

We examined quantitative factors such as share price performance, subscriber base, average revenue per user

(ARPU), network coverage, margins, dividends, earnings and valuation metrics. On the qualitative side, we lookedat breadth of services, management, corporate governance and transparency.

Quantitative Analysis

DiGi outperformed Maxis share price performance. Looking at year-to-date (YTD) share price performance,DiGi has generated a respectable return of 19.2%, outperforming the KLCIs YTD return of 16.9% and Maxis

3.2%. DiGis share price has performed reasonably well mainly due to 1HFY12/10 earnings charting a respectable

growth of 9.2% yoy. In contrast, Maxis has been a laggard as 1HFY12/10 earnings fell 5% mainly due to margin

squeeze from higher expenses such as the FIFA World Cup sponsorship in 2Q.

We note DiGis share price suffered an anomaly on 4 Oct, plunging 14.5% to close at RM21.00 with just 36k

shares traded at that price in the absence of any negative news. Unsurprisingly, DiGi shares recovered all the

losses and in fact closed slightly higher the following day.

Chart 1 : Indexed Performance Of DiGi, Maxis And KLCI

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

DiGi Maxis KLCI

Source: Bloomberg

Maxis leads in both subscriber and revenue market share. As seen in the subsequent charts, Maxis leadsthe industry where market share is concerned in terms of total subscribers (both prepaid and postpaid) as well as

revenue. In terms of market share, DiGi is lagging behind in the postpaid market mainly due to its traditional

strong focus on the prepaid market, in particular the youth and foreign worker segments. On the other hand,

Maxis postpaid and prepaid market share closely resembles its overall subscriber market share. Effective

branding via its Maxis and Hotlink brands has allowed Maxis to maintain market leadership. Of late however,

Maxis postpaid market share has been eroded over the last several quarters by a resurgent Celcom which has

been successfully rejuvenated by its Performance Improvement Programmes.


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Chart 2 : Total Subscriber Market Share Trend Chart 3 : Revenue Market Share Trend

20%

25%

30%

35%

40%

45%

3Q08 4Q08 1Q 09 2Q 09 3Q 09 4Q09 1Q10 2Q10

Maxis Celcom Digi

20%

25%

30%

35%

40%

45%

50%

3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10

Maxis Celcom Digi

Source: Companies, RHBRIs estimates Source: Companies, RHBRIs estimates

Chart 4 : Prepaid Subscriber Market Share Trend Chart 5 : Postpaid Subscriber Market Share Trend

20%

25%

30%

35%

40%

45%

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxis Celcom Digi

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10

Maxis Celcom Digi


Maxis comes out tops in postpaid ARPU... As seen below, Maxis leads the industry with the highest AverageRevenue Per User (ARPU) given its: (1) strength in the urban, corporate and SME markets; and (2) aggressive

focus on data services. Capitalising on broadband and data opportunities, besides having the widest range of

smartphones, has allowed Maxis to sustain its market leading postpaid ARPU. Continued focus on providing

mobile broadband services via smartphones such as the iPhone should also help Maxis mitigate ARPU decline.

but DiGi is the winner in prepaid ARPU. As the first mobile operator to introduce prepaid plans in Malaysia,DiGi leads the industry in terms of prepaid ARPU via innovative plans, effective marketing and creative branding.

Nonetheless, DiGi acknowledges that the mobile market is increasingly saturated, with penetration standing at

109% in 2Q10. Armed with 3G spectrum just acquired two years ago from Time dotCom, DiGi is aiming to

expand aggressively its presence in the postpaid market, with broadband an integral part of its strategy to

generate revenue growth.

As a side note, Maxis prepaid ARPU suffered a pronounced dip in 1Q10 as Maxis relaunched the CampusZone

prepaid plan as Hotlink Youth Club targeted at the low price segment which caused some switching among

existing prepaid subscribers.


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Chart 6 : Maxis Commands Highest Postpaid ARPU Chart 7 : DiGi Leads With Highest Prepaid ARPU

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxis Celcom Digi

30.0

35.0

40.0

45.0

50.0

55.0

60.0

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxis Celcom Digi


Maxis has bigger contribution from non-voice. Perhaps not too surprisingly, Maxis has a bigger portion of itsrevenue from non-voice. Recall that DiGi only started rolling out 3G services in 2Q09, having bought over the 3G

spectrum from Time dotCom for RM654m in 2008. To recap, DiGi in 2006 had failed to secure one of the two 3G

licences tendered out. In contrast, Maxis as well as Celcom had several years of headstart to roll out 3G services

from the licences allocated under a previous tender.

Given Maxis huge headstart, it is difficult to see DiGi catching up in a short time period. Already, Maxis is

targeting to achieve 50% non-voice revenue in the next year or two. Maxis revenue contribution from non-voice

has been on a steady uptrend since 2Q09, on the back of its aggressive push into data services and helped by

being the first mobile operator to launch the iconic Apple iPhone in 1Q09.

Nonetheless, it is encouraging to see DiGi making progress in terms of wireless broadband (WBB) subscriber net

additions, which has been gradually rising since its own 3G launch in 2Q09. Not wanting to be left behind, DiGi

began offering iPhones to its subscribers in 2Q10. Just last month, both DiGi and Maxis launched the iPhone 4

which saw very encouraging responses. DiGi reportedly had 30,000 inquiries for the iPhone 4 prior to its launch in

Malaysia.

Chart 8 : WBB Subscribers Chart 9 : WBB Subscriber Net Adds

0

100

200

300

400

500

600

700

800

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

'k

Maxis WBB Cumulative Subs Celcom WBB Cumulative Subs DiGi WBB Cumulative Subs

0

20

40

60

80

100

120

140

160

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

'k

Maxis WBB Subs Net Adds Ce lcom WBB Subs Net Adds D iGi WBB Subs Net Adds



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Chart 10 : Non-Voice Revenue Chart 11 : Non-Voice Contribution to Mobile Revenue

100

200

300

400

500

600

700

800

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

'000

Maxis Celcom

10%

15%

20%

25%

30%

35%

40%

3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10

Maxis Digi


Maxis has broader 3G network population coverage. Given Maxis headstart in securing the 3G spectrum in2002, Maxis 3G coverage is much wider at 64% in 3Q10, and is expected to reach 72-75% by year end. We note

that Celcoms 3G network coverage is the highest in the industry at 75% now.

To drive the 3G network expansion, Maxis is allocating one third of its RM1.4bn capex planned for 2010.

Meanwhile, DiGi is targeting to increase its 3G network coverage from 35% to 50% by year end. To achieve this,

DiGi will allocate about half of its RM700m total capex spending this year on 3G network expansion.

In terms of total capex per subscriber, Maxis will spend RM106 in 2010, which is marginally higher than DiGis

RM86. However, based on just 3G capex per subscriber figures, DiGi will spend more at RM43, compared to

Maxis RM35. This is not too surprising as DiGi lags behind the industry in terms of 3G network population

coverage.

Should active sharing take place between Celcom and DiGi, the industry dynamics may change substantially.The

MOU signed between Celcom and DiGi may result in both companies collectively leapfrogging Maxis in terms of

3G coverage. Recall that in Jun 2010, Celcom and DiGi signed a memorandum of understanding to explore long-

term network and infrastructure collaboration in Malaysia. The collaboration will focus on three key areas

operations and maintenance, transmission and site sharing, and radio access network. This follows a similar

accord struck earlier between Robi (Axiatas Bangladesh subsidiary) and Grameenphone (Telenors Bangladesh

subsidiary). A definitive agreement is expected to be reached before year end once both parties have agreed on

the long-term economic and operational viability of this collaboration.

DiGi stays prudent on capex spending. To maximise its cash flow, DiGi has chosen to remain prudent with itscapex spending despite playing catch up on 3G network rollout in comparison to its two bigger peers. As seen

below, annual capex spending has been fairly consistent except for 2008. This has allowed DiGi to gradually

reduce its capex/revenue ratio from 15.7% to an estimated 13.3% in 2010. In contrast, Maxis has been spending

aggressively after a hiatus in 2008 as it embarked on a network modernisation programme and expand its 3G

network coverage and capacity.

While Maxis heavy capex spending may suggest that DiGi will be left behind, we believe the crystallisation of the

active sharing agreement between Celcom and DiGi will create a more even playing field. We think DiGi will be

able to tap into Celcoms wider 3G network coverage, while Celcom may benefit from having more capacity in

certain urban areas. Hence, we are not too worried for now about DiGi not ramping up capex on 3G network

expansion.


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Chart 12 : Annual Capex Spending Chart 13 : Annual Capex/ Revenue Ratio

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

2007 2008 2009 2010F

'm

Maxis Celcom Digi

6%

8%

10%

12%

14%

16%

18%

20%

2007 2008 2009 2010F

Maxis Celcom Digi


Maxis has highest EBITDA margins. Maxis leads the industry with annual EBITDA margins at c.50% in the lasttwo years. However, we expect Maxis margin to face some pressure in 2010 and dip slightly to 49% due to

higher direct expenses (mainly from higher hubbing expenses), lower interconnect rates effective Jun 2010 and

World Cup 2010 marketing expenses. While DiGis margins have trended lower yoy, we expect margins to remain

stable going forward despite handset subsidies as management continues to deliver opex efficiencies.

However, we wish to point out that the different accounting treatment adopted on how handset subsidies are

expensed off can influence the computation of EBITDA margins. DiGi recognises handset subsidies as expenses

directly into its cost of sales, in line with the accounting practice of parent company Telenor. However, Maxis

amortises handset subsidies which are capitalised over the contract period. Our estimates indicate if Maxis were

to directly expense off handset subsidies instead of amortising, its EBITDA margins would be lower by 1%-pt.

We think there may be potential upside to DiGis margins going forward should the active sharing agreement with

Celcom take off. In addition to capex savings, both companies will save on opex by removing duplication of base

station sites, addressing escalating rental fees, reducing utility bills and transmission costs, optimising

deployment of base stations per area and redeploying equipment between redundant and new sites.

Chart 14 : Annual EBITDA margins Chart 15 : Quarterly EBITDA trend

40%

42%

44%

46%

48%

50%

52%

54%

2007 2008 2009 2010F

Maxis Celcom Digi

400

500

600

700

800

900

1,000

1,100

1,200

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

'm

Maxis Celcom Digi


Different leverage measures yield different results. Maxis indicated they would not be adverse to aleveraged balance sheet and would still be comfortable with a net debt/EBITDA ratio of 1.75-2x. This may at first

glance suggest potential upside to dividends via specials, given Maxis current relatively low gearing. However,

management has downplayed the potential for specials, and instead reiterated that Maxis is on track to pay only

50 sen DPS (cumulatively since its re-listing) by 4Q10, which implies another 29 sen DPS to be declared in 2H10.


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Chart 16 : Gross Debt/ Equity Ratio Chart 17 : Net Debt/ Equity Ratio

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2008 2009 2Q10

Maxis Digi

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

2008 2009 2Q10

Maxis Digi


Chart 18 : Gross Debt/ EBITDA Ratio Chart 19 : Net Debt/ EBITDA Ratio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2008 2009 2010F

Maxis Digi

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.80.9

1.0

2008 2009 2010F

Maxis Digi


Maxis offers slightly better dividends. Excluding the possibility of special dividends in 2010, we expect Maxisto offer better dividend yields at 6.6% than DiGis 5.7%. We are expecting 100% payout for DiGi in 2010, but

note it has achieved c.130% payout historically and may choose to pay more than forecast by gearing up further.

For DiGi, we think there is still scope to support its >100% dividend payout given its capital structure guidance of

35-45% net debt to 55-65% equity. In 2Q10, DiGis net debt/equity ratio stood at 0.25x. So, we estimate an

additional 36 sen/share in special dividends from DiGi if it reaches its capital structure guidance by year end. All

in, DiGis FY12/10 DPS could reach 175 sen, translating into a superior dividend yield of 7.1%.

Chart 20 : Dividend Yield Chart 21 : Payout Ratio

0%

1%

2%

3%

4%

5%

6%

7%

8%

2008 2009 2010F

Maxi s Di gi

20%

40%

60%

80%

100%

120%

140%

2008 2009 2010F

Maxis Digi



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Both companies will see steady single-digit earnings growth. There is nothing much to separate the twocompanies in terms of earnings growth in FY12/11-12. FY12/10 may not be a good comparison, as DiGi had the

benefit of a low base effect following a blip in FY12/09 when margins were affected by higher opex and mobile

Internet expansion costs. Meanwhile, Maxis incurred significant marketing expenses for World Cup 2010

promotions which will result in downward pressure on margins for FY12/10 only. Going forward, both companies

will benefit from bigger non-voice contributions to drive earnings growth.

Chart 22 : Earnings Growth Chart 23 : Quarterly Revenue Trend

-15%

-10%

-5%

0%

5%

10%

15%

2008 2009 2010F 2011F 2012F

Maxis Digi

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

'm

Maxis Celcom Digi


Mixed valuation signals. Looking at PE multiples, Maxis appears to be cheaper than DiGi, but only marginally.The differential is only 3-5% for FY12/10-12. However, the EV/EBITDA ratios tell a different story; Maxis is more

expensive by 7-10% for FY12/10-12. This we believe may be due to Maxis higher net gearing relative to DiGi.

Chart 24 : PE Trend Chart 25 : EV/ EBITDA Trend

12

13

14

15

16

17

18

19

20

2008 2009 2010F 2011F 2012F

Maxis Digi

5

6

7

8

9

10

11

2008 2009 2010F 2011F 2012F

Maxis Digi


Qualitative Analysis

Maxis is undisputed in breadth of services. Maxis is set to be the first quad-play (mobile, broadband, fixed-line, IPTV) telco in Malaysia once it makes a soft launch sometime in 3Q10. The strategy to launch IPTV is part of

Maxis target to boost non-voice contribution to total revenue. We believe Maxis is well positioned to compete

with TMs IPTV (bundled with the UniFi fibre optic package) offerings given that Maxis can rely on sister company,

Astro for compelling content such as the English Premier League. We understand that Maxis has no intention to

compete directly with Astro, so IPTV may be seen as an alternative channel for Astro to further distribute its

content.


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DiGi on the other hand is for now limited to offering mobile and broadband services only. Whether DiGi plans to

offer IPTV is too early to tell at this stage. Seeing as to how expensive content can be judging by the fierce

bidding war for the English Premier League rights between SingTel and StarHub last year, we think DiGi will likely

remain focused on rolling out its broadband services in the medium term. This will help boost DiGis non-voice

revenue contribution and provide another leg of growth for the company. In addition, by avoiding additional

capex and expenses from not offering IPTV services, DiGi can preserve its cash flow to maintain its generous

dividend payout.

Maxis management has big ambitions. With a wider 3G network coverage and availability of strong contentvia sister company Astro, Maxis is seen to be the most aggressive telco by aiming to be the first to offer quad-

play services. Meanwhile, we see DiGis management as more conservative, choosing to remain focused on

building up its broadband market share. However, we understand that DiGi is not ruling out IPTV, and may do so

if there is sufficient demand in the market.

Both have equally capable management. Both Maxis and DiGi are led by capable management. Maxis has anexperienced key management team drawn from global and local talent that provides a balanced blend of

international telecommunications and relevant industry experience, local knowledge and understanding. DiGi on

the other hand is able to tap into Telenors experience and expertise in more advanced telecom markets.

Both are transparent with good corporate governance. Both companies provide sufficient disclosure onoperational and financial statistics, as well as quarterly conference calls with the investment community to

discuss about their businesses, challenges and outlook.

Summary

Maxis has a slight edge. In summary, from a quantitative perspective, we like Maxis more given its marketleadership in terms of a much larger subscriber as well as revenue market share. Maxis strength in the postpaid

market also bodes well for the company, as it is well positioned to capture the rising popularity of mobile

broadband and strong data revenue growth via the proliferation of cheaper smartphones.

DiGis balance sheet is less geared compared to Maxis, so that suggests DiGi has some potential to gear up and

pay out special dividends. Without special dividends however, Maxis offers better dividend yields in 2010.

Valuation-wise, Maxis is marginally cheaper as it trades at a slightly cheaper FY12/10 PE multiple of 16.9x

compared to DiGis 17.7x. We acknowledge earnings growth is lacking in FY12/10 for Maxis, but that should pick

up in FY12/11-12 as margins recover post World Cup 2010.

On a qualititative view, we like where Maxis is heading in terms of expanding its range of services by offeringquad-play, as we think Maxis is definitely in the right track by leveraging on the strength of content that Astro

has to offer. This is spearheaded by Maxis ambition to be the first telco to launch quad-play services to increase

revenue contribution from non-voice. The combination of compelling content and proliferation of smartphones

should help position Maxis for its next leg of growth. Meanwhile, DiGi should be able to carve out a slice of the

mobile broadband market through competitive pricing and proper branding.

Conclusion

In short, we prefer Maxis over DiGi. Maxis at 16.9x is marginally cheaper than DiGi by 4.5% on FY12/10 PEmultiple, while offering higher dividend yield of 6.6% in 2010 compared to DiGis 5.7%. Going forward, we

believe Maxis is best positioned to capture the huge untapped potential that mobile broadband has to offer due to

its transformation into Malaysias first quad-play telco, cross-selling opportunities within its higher quality

postpaid subscriber base and wide 3G network population coverage.


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Table 2 : Summary of Quantitative and Qualitative Analysis

Maxis DiGi

Quantitative Analysis

Total subscriber market share 2Q10

Revenue market share 2Q10

Postpaid ARPU 2Q10Prepaid ARPU 2Q10

Non-voice contribution 2Q10

3G network coverage End 2010

Capex spending 2010F

Capex/sub 2010F RM106 RM86

EBITDA margin 2010F

Gearing (Net debt/equity) 2Q10

Gearing (Net debt/EBITDA) 2010F

Net dividend yield 2010F

Earnings growth 2010F 0.6% 8.0%

Valuation (PE) 2010F

Valuation (EV/EBITDA) 2010F

Qualitative Analysis

Breadth of services 2Q10

Management style 2Q10

Transparency 2Q10

0.5

41%

42%

49%

RM103RM36

37%

75%

RM1.4bn

0.2

Adequate

More aggressive

6.6%

16.9

9.5

Quad play

0.9

Adequate

More conservative

0.1

5.7%

17.7

26%

25%

RM83RM47

21%

Dual play

50%

RM0.7bn

8.7

43%

Source: Companies, RHBRI

Risks

Risks to our view. These include: 1) weaker-than-expected subscriber additions; 2) execution (such as networkupgrades and expansion); and 3) all-out price war.

Forecasts

No changes to forecasts for now. We expect the single-digit earnings growth in the industry to be increasinglydriven by non-voice contribution as the broadband market remains relatively untapped with household

penetration only at 37.5% in 2Q10. Despite mobile penetration reaching 109% in 2Q10, we think there is still

room for operators to expand their subscriber base as we estimate mobile penetration could potentially rise to

120% by 2012. This we believe is achievable due to multiple SIM holders and opportunities in the under-served

rural areas. The subscriber mix will shift albeit gradually towards the postpaid segment as more users take up

mobile broadband packages due to: (1) Malaysias Internet-centric youth that comprises half the population; (2)

the proliferation of smartphones; and (3) expanding 3G network population coverage. As such, we think ARPUs

will continue to trend lower, but not by much despite the commoditisation of voice minutes, in the absence of

irrational price competition.

Valuations & Recommendation

Maintain Neutral on the sector. No change to our Neutral stance on the sector. Also, we maintain ourrecommendations for Maxis (Outperform, FV=RM5.75) and DiGi (Outperform, FV=RM26.35) based on DCF

valuation. TM (Market P erform, FV=RM3.55) remains primarily a dividend play, while Axiata (FV=RM4.75)

is still a Market Perform given its strong YTD share price performance.


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Table 3 : Maxis Earnings Forecast Table 4 : Maxis Forecast Assumptions

31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12

8 ,6 11 .0 9 ,3 96 .2 1 0,1 71 .7 1 0,7 88 .3

4 ,3 37 .0 4 ,6 45 .1 5 ,0 51 .1 5 ,3 60 .4

50.4 49.4 49.7 49.7

(1,179.0) (1,264.9) (1,389.6) (1,462.1)

3 ,1 58 .0 3 ,3 80 .3 3 ,6 61 .5 3 ,8 98 .3

36.7 36.0 36.0 36.1

Net interest expense (48.0) (238.5) (251.3) (226.3)

Associates 0.0 0.0 0.0 0.0

EI (103.0) 0.0 0.0 0.0

Pretax Prof it 3 ,0 07 .0 3 ,1 41 .7 3 ,4 10 .3 3 ,6 72 .0

Tax (775.0) (793.3) (861.1) (918.0)

Minorities 0.0 0.0 0.0 0.0

Net Prof it 2 ,2 32 .0 2 ,3 48 .4 2 ,5 49 .2 2 ,7 54 .0

Core Net Profit 2 ,3 35 .0 2 ,3 48 .4 2 ,5 49 .2 2 ,7 54 .0

Dep & Amort

EBIT margin (%)

EBIT

EBITDA margin (%)

Turnover

EBITDA

FYE Dec (RMm) 31-Dec-10 31-Dec-11 31-Dec-12

9.72 10.07 10.37

3.11 3.41 3.71

0.41 0.56 0.66

13.24 14.04 14.74

40 40 39

103 104 104

78 76 74

1,400 1,300 1,200

- Broadband

Capex (RMm)

- Prepaid

- Postpaid

ARPU (RM)

Total

Subscribers ('000)

- Postpaid

- Broadband

- Prepaid

FYE Dec


Table 5 : DiGi Earnings Forecast Table 6 : DiGi Forecast Assumptions

31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12

4 ,9 09 .6 5 ,2 71 .9 5 ,6 27 .8 5 ,9 47 .8

2 ,1 24 .6 2 ,2 82 .4 2 ,4 50 .8 2 ,5 87 .5

43.3 43.3 43.5 43.5

(731.1) (766.1) (811.3) (864.7)

1 ,3 93 .4 1 ,5 16 .4 1 ,6 39 .6 1 ,7 22 .9

28.4 28.8 29.1 29.0

Net interest expense (27.0) (36.0) (27.0) (21.0)

Associates 0.0 0.0 0.0 0.0

Pretax Profit 1 ,3 66 .5 1 ,4 80 .4 1 ,6 12 .6 1 ,7 01 .9

Tax (366.0) (399.7) (427.3) (451.0)

Minorities 0.0 0.0 0.0 0.0

1 ,0 00 .5 1 ,0 80 .7 1 ,1 85 .2 1 ,2 50 .9

FYE Dec (RMm)

EBITDA margin (%)

EBIT

Turnover

EBITDA

Dep & Amort

EBIT margin (%)

Net Profit

2010f 2011f 2012f

Subscribers ('000)- Prepaid 6.74 6.94 7.14

- Postpaid 1.31 1.43 1.56

- Broadband 0.13 0.25 0.35

Total 8.17 8.62 9.04

ARPU (RM)

- Prepaid 48.0 47.5 46.8

- Postpaid 85.8 87.1 87.6

- Broadband 100.0 97.5 95.1

Capex (RMm) 800.0 850.0 900.0

FYE Dec



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This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectivesof persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluateparticular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment orstrategy will depend on an investors individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents acceptsany liability for any loss or damage arising out of the use of all or any part of this report.

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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflectinformation known to, professionals in other business areas of the Connected Persons, including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation basedupon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Chart 26: Maxis Technical View Poin t

The share price of Maxis hit a high of RM5.53 in Feb2010, before triggering a strong profit-taking

pressure that dragged it to a support region near

RM5.30 in Apr and May 2010.

The selling pressure intensified in late May andpressed the stock to a low of RM5.10, before

initiating a technical rebound back to the region ofRM5.30 in Jun.

The stock surprised investors in Aug, with a sharp jump on its share price to RM5.54, a fresh high

level, but failed to sustain at above the RM5.50

level, forcing another round of retreat in the recent

weeks.

Of late, the stock retreated lower and closedyesterday at RM5.29, marginally below the critical

support level at RM5.30, with a negative candle

and poor short-term readings on the chart.

Technically, the stock should see further downsidepressure today, given that both the 10-day and 40-

day SMAs have also turned lower recently.

However, we believe the stock should be heldrelatively stable near the RM5.30 region in the near

term, based on the previous consolidation pattern

in Jun to Aug 2010.

As a result, we expect it to move sideways goingforward. Its chart outlook will turn negative only if

it loses the RM5.21 solid support level.


13/13

22 October 2010

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% ormore over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to takeon higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommendedsecurities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever forthe actions of third parties in this respect.

Documents

Telecommunications Sector Update : Sizing Up The Pure Mobile Domestic Players – Maxis vs. DiGi - 22/10/2010