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30 August 2012 Global

Equity Research Telecommunications Equipment

Wireless Infrastructure ASSUMING COVERAGE

Wireless equipment spend under pressure ■ Wireless equipment market to decline 6% in 2012 and remain flat in 2013.

We have updated our wireless capex model as part of a change in primary analyst coverage, and although we see wireless capex budgets indicating 7% growth in 2012 (driven by US and China), we believe the wireless equipment market could decline 6% in 2012. Further, with wireless capex growth likely to slow in 2013 (2% growth) post major portions of LTE builds in the US along with continued weakness in Europe, we assume industry revenues will be flat. We also estimate that cumulative wireless infra sales for Ericsson, NSN, ALU and ZTE declined 11% yoy in 1H12, and even assuming a pick-up in 2H12, the wireless equipment market could still be down 6% in 2012. We see this divergence between capex and equipment spend being driven by a declining equipment-to-capex ratio (32% in 2012E vs 36% in 2011).

Figure 1: Wireless equipment-to-capex ratio likely to decline in 2012E/2013E

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Wireless capex Wireless equipment spend Equipment to capex (%) Source: Company data, Credit Suisse estimates

■ Can LTE drive growth on its own? Having analysed wireless capex trends in the US, Japan and Germany, where LTE networks are being rolled out, we note that: Verizon in the US has managed 75% population coverage with LTE despite its wireless capex falling 18-31% yoy over the past four quarters, although we may see a different trend at AT&T if we see a significant 2H pick-up in wireless capex. In Japan, DoCoMo plans to boost LTE coverage to 70% by March 2013 while maintaining flat capex in FY13; but capex plans at KDDI (up 15% in FY13) suggest that LTE spending may be incremental to existing levels of capex.

■ EMs – 3G networks in place, but still waiting for subs. In most Latam and APAC markets, 3G penetration remains low in spite of carriers rolling out 3G networks. In major EM countries in APAC, 3G as a percentage of 2G base stations stands at ~40%, while it is only ~10% of the total subs. This suggests that carrier spending in these markets is likely to slow in 2012E/2013E.

■ Downgrading Ericsson to Underperform, reiterating Underperform on ALU. While we keep our 2012E/2013E EPS for Ericsson at SKr4.05/SKr5.00 (10%/13% below consensus), we see muted top-line and GM recovery, as we assume 2012/2013 sales growth of 0%/2%, with GMs (ex. restructuring) of 32.5%/33.9%. On ALU, although gross cash (ex. trapped) was €4.2bn in Q212, cash burn and €2.5bn of debt due by Jan 2015 indicate gross cash may decline to €2.6bn/€1.8bn/€750mn in 2013E/2014E/2015E. We estimate capital requirements of €1.1bn/€2.2bn between now and the end of 2014/2015. (See our reports, ‘Ericsson: Muted top-line and GM recovery’ and ‘Alcatel-Lucent: Cash flow issues remain’, also published today.)

Research Analysts

Achal Sultania 44 20 7883 6884

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Kulbinder Garcha 212 325 4795

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Talal Khan 212 325 8603

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Matthew Cabral 212 538 6260

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Alban Gashi 212 538 3033

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30 August 2012

Wireless Infrastructure 2

Table of contents Equipment spend under pressure 3 Wireless infra spend under pressure 6

Mobile capex to grow 7% in 2012E, but 2% in 2013E 7 Equipment spend down 6% in 2012E, flat in 2013E 13 Mix within capex also an issue at some carriers 14 Drivers for capex rise – some in place, some missing 15

Can LTE drive growth on its own? 18 Taking cue from LTE regions 19 What about recent 4G auctions in Brazil? 25

Market share within wireless infra 27 Business mix issues to remain in 2H, limited recovery in 2013E 29

LTE ramp and CDMA decline, especially in the US 30 China to remain a headwind for GMs 31 Quantifying the impact from EU network modernisation 33 Even history suggests a muted recovery 36 One positive may be rational pricing from Huawei 36

30 August 2012


Equipment spend under pressure Following weak trends in the wireless infrastructure market so far in 2012, we have taken a detailed look at two key issues for the industry – top-line growth and potential for GM recovery – which are likely to remain the focal points for investors over the next 12-18 months. In this report, we have also updated our proprietary wireless capex model, which tracks wireless capex at over 100 leading carriers globally; we also look at the impact of LTE rollouts on wireless capex budgets at leading carriers in regions where LTE has seen meaningful traction.

Our analysis yields three main conclusions:

Wireless capex could grow 7% in 2012E, slowing to 2% in 2013E…

Driven by NA and China, which account for 19% and 20% of global wireless capex, respectively, our model shows that it should continue to rise in 2012 (up 7% following an increase of 8% in 2011) before slowing to 2% growth in 2013.

2012E growth driven by US and China, but 2H needs to be exceptionally strong after a weak 1H. Capex forecasts by carrier indicate wireless capex in the US could be up by as much as 20% in 2012E driven by large-scale LTE rollouts. However, it is worth noting that US wireless capex was down 5% yoy in 1H12 owing mainly to strict capex discipline at Verizon. This implies that capex needs to be up 46% yoy in 2H12 to be up 20% for the full year, much higher than the average of 17% yoy growth seen in 2H over the past four years. Similarly, for China, based on capex guidance from carriers, it seems wireless capex could be up around 10% in 2012E. However, given that all vendors (Ericsson, ALU, NSN and ZTE) have seen lacklustre sales in China in 1H12, there needs to be a significant rebound in 2H12 if carriers are to meet their full-year budgets.

Wireless capex growth in 2013E should slow to 2%. For 2013, we believe that NA may start to see capex trending down, as we believe a significant portion of LTE networks will already be in place over the next 6-12 months. This, combined with continued weakness in Europe, suggests wireless capex in 2013E may only grow by 2%.

…but we expect equipment spend to decline 6% in 2012 and stay flat in 2013

Although we expect wireless capex to grow 7%/2% in 2012/2013, we believe the wireless infra market will likely remain under pressure. Here we would note three key points:

Wireless equipment market to decline 6% in 2012E, stay flat in 2013E. The cumulative wireless infrastructure-related sales for Ericsson, NSN, ALU and ZTE declined 11% yoy in 1H12 because of weak capex trends from carriers. Further, with wireless capex widely expected to slow in 2013 (up only 2%) (as a major portion of LTE builds in the US should be in place over the next 6-12 months) and continued weakness in Europe, we believe that any recovery in the wireless equipment market will remain muted (we assume flat top-line growth for the industry in 2013).

Mix within capex also an issue at some carriers. We are also seeing signs of wireless capex mix moving away from radio-access networks (RAN) at select carriers with increased focus on the transmission part. For example, China Mobile has stated that it expects to lower the spend on mobile networks from 57% of total capex in 2011 to only 41% in 2012, which implies a decline of 26% yoy in absolute terms. Even Vodafone had noted that mix of spend towards RAN declined in EU to 29% of regional capex in FY11/12 (down 2ppt yoy) and 40% for the AMAP (Africa, ME and APAC) region (down 7ppt), with increased spending in areas such as transmission and IT platforms.

Divergence between capex and equipment spend. We believe this divergence between capex and equipment spend is being driven by a declining equipment to capex ratio, which we estimate will fall to 32%/31% in 2012/2013 (down from 35%/36% in 2010/2011) as shown in Figure 2. Apart from the mix issues we are seeing at certain carriers which we discuss above, we believe the decline in this ratio is also being driven by ongoing LTE rollouts in certain regions (US, Japan, Korea, Scandinavia and Germany) and network modernisation in Europe.

30 August 2012


Figure 2: Wireless equipment-to-capex ratio likely to decline in 2012E/2013E

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Wireless capex Wireless equipment spend Equipment to capex (%) Source: Company data, Credit Suisse estimates

Can LTE drive growth on its own? Mixed trends in different regions

To understand the impact of LTE on the wireless equipment market, we have looked at wireless capex trends in the US, Japan and Germany, where LTE networks are being rolled out. Our analysis yields the following conclusions:

Limited impact from LTE on US capex so far, waiting to see if 2H12 records an uptick. Since launching LTE in December 2010, Verizon now covers 230 million people (75% of the population), and aims to have an LTE footprint similar to its 3G network by mid-2013. In spite of such aggressive LTE plans, its wireless capex has declined between 18% and 31% yoy over the past four quarters. Even assuming a strong pick-up in 2H12, we still believe that its wireless capex for 2012 may end up being down 1% yoy. Judging by FY capex budgets from tier I carriers, and weak spending patterns seen in 1H12, it seems that 2H spending needs to see a significant uptick driven by Sprint, AT&T and T-Mobile. However, equally, we would note that once initial rollouts of LTE are completed in the majority of the US markets, aggregate wireless capex in the region could decline in 2013.

LTE spend in Japan does not seem to be all incremental. We have also looked at the detailed mobile capex breakdown for NTT DoCoMo and KDDI in Japan, which shows mixed trends for overall capex from LTE rollouts. While DoCoMo has plans to increase LTE coverage to 70% by Mar-13 while maintaining flat capex levels in FY13, capex plans at KDDI suggest that LTE spending may be incremental to existing levels of capex leading to 15% growth in its FY13E capex budget.

Germany – capex declining in 2H12 after pick-up in 2011 driven by LTE. Our analysis of capex in Germany suggests that while there has been a modest increase in capex at Vodafone, which may have been driven by LTE rollouts (capex in Germany was up 7% in FY11/12 compared with a 5% decline for the rest of Europe), we have not seen such trends on a sustainable basis at Deutsche Telekom (capex in Germany down 5% yoy in 1H12 in spite of rolling out LTE to more states), which makes us question whether LTE on its own can be a sustainable growth driver for wireless capex spend at telecom operators.

Ericsson (Underperform, TP SKr57.5) – Muted top-line and GM recovery

While we maintain our 2012/2013 EPS estimates at SKr4.05/SKr5.00, our analysis of the wireless infrastructure market suggests that Ericsson will see a muted top-line and GM recovery in 2013. Given weak industry fundamentals and risks to consensus estimates (our EPS estimates are 10%/13% below consensus), we downgrade our rating to Underperform with a TP of SKr57.5 (implying 12% downside potential). For details, please see our Ericsson report titled ‘Muted top-line and GM recovery’ published concurrently.

30 August 2012


Flat top-line for Ericsson in 2012E, only 2% growth in 2013E. We expect Ericsson’s Networks-related sales (Networks + NRO accounting for 65% of sales) to decline 6% yoy in 2012, followed by 1% growth in 2013. Within Professional Services (30% of sales), we estimate sales will grow 12% yoy in 2012 (driven by solid contract momentum but also helped by the Telcordia acquisition and reversal of FX impact, which we estimate will have a positive impact of 4pp and 6pp, respectively, on 2012 sales growth). Therefore, we expect growth in PS sales to moderate to 4% in 2013. This drives our sales estimate of SKr226.9bn/SKr230.6bn (+0%/+2% yoy) for Ericsson in 2012/2013.

Negative GM drivers to persist, indicating muted recovery in 2013. Ericsson’s GMs (excl. restructuring) declined from 38.8% in Q111 to 32.7% in Q212 driven by three factors – Business Mix (160bp of GM pressure); EU Modernisation (180bp decline); and Increased Services in mix (270bp reduction). Although we expect the negative impact from Modernisation to reverse in 2013, we believe the GM recovery will be muted (we assume 33.9% in 2013 vs. 32.5% in 2012) owing to (1) Services will continue to rise in the mix (PS and NRO to account for 43% of sales in 2013E vs. 42% in 2012E); and we do not see a meaningful shift in capacity projects in 2013 given continued LTE rollouts in the US, along with large-scale TD-LTE rollouts by China Mobile. Even assuming declines in opex, we arrive at EBITA margins of 8.1%/10.5% for Ericsson in 2012E/2013E vs. 11.6% in 2011.

Valuation looks expensive. Post the recent rally, Ericsson is trading on a 2013E P/E of 13x our estimates, which looks expensive especially given our view around wireless infrastructure trends and risks to consensus estimates. Comparing this with large cap tech companies globally, we would note that this 13x P/E is at a 15% premium to the peer group based on our estimates.

Alcatel-Lucent (Underperform, TP €0.75) – Cash-flow issues remain

While we maintain our 2012/2013 revenue forecasts at €14.5bn/€14.1bn, we expect an operating loss of €37m in 2012 (OM loss of 0.3%) and profit of €138m in 2013 (OM of 1.0% vs. 1.5% previously). As we think ALU will struggle to deliver OMs of >1% on a sustainable basis and owing to growing concerns around liquidity, we reiterate our Underperform (TP of €0.75). In addition, we note that consensus estimates operating profits of €393m (OM of 2.7%) in 2013, which may prove optimistic. For details, please see our Alcatel-Lucent report titled ‘Cash-flow issues remain’ also published today.

Top-line and OM concerns likely to persist. Weak industry trends along with ALU’s weak 3G positioning and declines in CDMA indicate that group sales may decline 6%/2% in 2012E/2013E to €14.5/€14.1bn, in spite of IP growing at c20% per year. We also believe that the company may struggle to deliver OMs of >1% in 2013 because of (1) a continued decline in high-margin CDMA revenues; (2) adverse business mix in China, which is likely to continue; and (3) limited effectiveness of restructuring as evidenced by historical data.

Gross cash under pressure from cash burn and maturing debt. For ALU, we estimate cash burn of €550m/€250m in 2013/2014. Although Q212 gross cash (excl. trapped) was €4.2bn, €2.5bn of debt is due between now and January 2015, which drives our estimate that gross cash may decline from €4.2bn in Q212 to €2.6bn/€1.8bn/€750mn in 2013/2014/2015. Assuming a gross cash/sales ratio of 20% (versus an average of 25% over Q107–Q212), we estimate the need to maintain gross cash in the range of €2.8bn to €2.9bn, which suggests to us capital requirements of a total of €1.1bn/€2.2bn between now and end-2014/2015.

ALU may look at a combination of options to raise cash. Given the magnitude of funding, we believe ALU may need to look at a combination of options (patents, asset disposal, secured/unsecured credit, convertible debt or rights issues). Apart from generating cash from its patent pool (potentially €250mn to €400mn), we believe non-core Enterprise could be divested (with consensus multiples implying a value of €250mn to €650mn), with the rest likely to come from secured credit, convertible debt or rights issues.

30 August 2012


Wireless infra spend under pressure Following our detailed analysis of the wireless infrastructure market, where we have updated our proprietary wireless capex model (which tracks wireless capex spend at over 100 leading carriers globally), along with weak revenue trends for leading telecom infrastructure vendors in 1H12, we lower our revenue growth forecasts for the wireless infrastructure market. In summary, although we expect wireless capex in 2012/2013 to grow 7%/2% (with 2012E growth being driven by aggressive capex budgets at carriers in US and China), we expect wireless equipment spend globally to decline 6% in 2012 followed by flat levels in 2013. Reasons for this divergence between wireless capex and equipment spend could be driven by shift in capex mix at certain carriers with increased spend in areas like transmission and IT/IS support systems, something which is quite evident at Vodafone and China Mobile, along with LTE rollouts and EU modernisation contracts. Here we would note the following points:

Wireless capex to grow 7% in 2012E, slowing to 2% growth in 2013E. Based on our proprietary wireless capex model, we estimate that the wireless capex could continue to rise in 2012, following an 8% increase in 2011, driven by NA and China, which account for 19% and 20% of global wireless capex, respectively. Therefore, our wireless capex model shows an increase of 7% in 2012E before slowing to 2% growth in 2013E.

■ 2012 growth driven by US and China, but 2H needs to be very strong after a weak 1H. Capex forecasts by carrier show that wireless capex in the US could be up by as much as 20% in 2012 driven by large-scale LTE rollouts. However, it is worth noting that US wireless capex was down 5% yoy in 1H12 owing mainly to strict capex discipline at Verizon. This implies that capex has to be up 46% yoy in 2H12 to be up 20% for the full year, much higher than the average of 17% yoy growth seen in 2H over the past four years. Similarly, for China, based on capex guidance from carriers, it seems wireless capex could be up around 10% in 2012. However, given all vendors (Ericsson, ALU, NSN and ZTE) have seen lacklustre sales in China in 1H12, we believe there needs to be a significant rebound in 2H if carriers are to meet their full-year budgets.

■ Capex growth in 2013 should slow to 2%. For 2013, we believe that NA may start to see capex trending down given our view that a significant portion of LTE networks will already be in place over the next 6-12 months. This, combined with continued weakness in Europe, indicates that wireless capex in 2013E may grow by only 2% as shown in Figure 3.

Wireless equipment spend to decline 6% in 2012E, stay flat in 2013E. Although we expect wireless capex to be up 7%/2% in 2012/2013, we believe that the wireless equipment market may decline 6% in 2012 and remain flat in 2013. One thing to note is that cumulative wireless infrastructure-related sales for Ericsson, NSN, ALU and ZTE declined 11% yoy in 1H12 given weak capex trends from carriers. Further, with wireless capex widely expected to see a slowdown in 2013 (up only 2%, on our estimates) owing to a major portion of LTE builds in the US being in place and continued weakness in Europe, we believe that any recovery in the wireless equipment market will remain muted (we assume flat top-line for the industry in 2013).

Mix within capex also an issue at some carriers. We are also seeing signs of wireless capex mix moving away from radio access networks at select carriers with increased focus on transmission. This is evident from recent commentary from both China Mobile and Vodafone. China Mobile says it expects to lower the proportion of spend on Mobile Networks from 57% of total capex in 2011 to only 41% of the capex budget in 2012, which implies a decline of 26% yoy in absolute terms. This is due to higher capex in areas like buildings & infrastructure, support systems and business development, which, combined, should rise from 25% of capex in 2011 to 33% in 2012. Even Vodafone, at its FY11/12 results, had noted that the mix of spend towards radio technology declined in both its EU

30 August 2012


and AMAP regions. In fact, Radio accounted for 29% of total EU capex in FY11/12 (down 2ppt yoy) while it was 40% for the AMAP region (also down 7pp yoy), with increased spending in areas such as transmission and IT platforms.

Mobile capex to grow 7% in 2012E, but 2% in 2013E Looking at the wireless capex projections from leading carriers around the world, we estimate wireless capex could continue to rise in 2012, following an 8% increase in 2011. In fact, our proprietary wireless capex model, which tracks wireless capex forecasts for over 100 leading carriers globally, shows that wireless capex could increase 7% in 2012 before slowing to only 2% growth in 2013, as shown in Figure 3.

Figure 3: Global wireless capex to rise 7% in 2012E before slowing to 2% growth in 2013E Wireless capex forecasts on a regional basis Wireless capex (US$ bn) 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Western Europe 19.5 20.2 18.6 19.1 18.7 19.5 20.7 19.3 18.7

% change 1% 4% -8% 3% -2% 4% 6% -7% -3%

North America 24.9 26.7 23.2 23.1 22.2 25.2 27.6 33.0 32.3

% change 13% 7% -13% 0% -4% 14% 9% 19% -2%

Asia-Pacific 41.6 49.5 56.8 70.9 73.6 63.0 64.4 70.3 75.3

% change 18% 19% 15% 25% 4% -14% 2% 9% 7%

China 12.9 15.7 18.5 33.5 41.6 30.9 31.4 35.2 38.5

% change 13% 22% 18% 81% 24% -26% 2% 12% 9%

India 3.0 4.5 9.8 8.1 6.2 7.1 4.9 4.8 5.1

% change 38% 52% 118% -17% -24% 15% -30% -3% 6%

Asia Pacific ex China, India 25.8 29.3 28.5 29.3 25.8 25.1 28.0 30.4 31.8

% change 18% 14% -3% 3% -12% -3% 12% 9% 5%

Latin America 8.0 10.5 12.0 16.3 13.9 16.8 23.3 23.5 23.0

% change 56% 31% 14% 36% -14% 21% 38% 1% -2%

Emerging EMEA 14.7 15.1 20.8 27.3 23.8 24.5 25.6 25.9 25.4

% change 46% 2% 38% 31% -13% 3% 4% 1% -2%

Global wireless capex 108.8 121.9 131.3 156.7 152.2 149.1 161.5 172.0 174.7

% change 18% 12% 8% 19% -3% -2% 8% 7% 2%

Source: Company data, Credit Suisse estimates

2012 growth being driven by the US, but 2H needs to be very strong after a weak 1H. Regional capex forecasts show growth in 2012 is being driven by the US, where wireless capex from carriers could be up 20% yoy (as detailed in Figure 4) owing to large-scale LTE rollouts from the top three carriers – Verizon, AT&T and Sprint. As the US accounts for nearly 20% of global wireless capex, this alone should drive 4% capex growth in 2012 following a 9% uptick in 2011 when Verizon and AT&T were focused on increasing capacity on their existing CDMA EV-DO and HSPA networks respectively. However, it is worth highlighting two key points here:

■ Although we expect US wireless capex to increase by 20% yoy in 2012, it was down 5% yoy in 1H12 owing mainly to strict capex discipline at Verizon. This implies that capex has to be up 46% yoy in 2H12 to be up 20% for the full year. This implied guidance of 46% yoy growth in 2H12 is significantly higher than the average of 17% yoy growth seen in 2H over the past four years, and a peak of 26% yoy growth witnessed in 2H10.

■ Also given a significant portion of LTE networks will already be in place by the middle of 2013, we believe that capex may start to trend down in 2013. Based on estimates from our US Telecoms analyst, Jonathan Chaplin, we expect wireless capex to decline by 3% yoy in 2013.

30 August 2012


Figure 4: US carriers driving the majority of the growth in global wireless capex in 2012, but 2H12 needs to be very

strong Breakdown of wireless capex in US by carriers Wireless capex (US$ mn) Q111 Q211 Q311 Q411 Q112 Q212 Q312E Q412E 2009 2010 2011 2012E 2013E

Verizon 2,735 2,667 1,784 1,787 1,885 2,048 2,102 2,815 7,152 8,438 8,973 8,850 9,313

AT&T 1,870 2,511 2,520 2,858 2,324 2,345 2,839 3,492 6,066 9,171 9,759 11,000 11,195

Sprint 449 546 647 774 710 1,012 1,680 2,198 1,161 1,444 2,416 5,600 4,103

T-Mobile US 749 688 741 551 747 539 809 1,206 3,687 2,819 2,729 3,300 3,100

Leap 93 93 103 152 146 119 126 154 680 399 442 545 578

MetroPCS 187 265 248 190 144 182 252 372 832 790 890 950 936

Total US wireless 6,083 6,770 6,043 6,312 5,956 6,245 7,807 10,236 19,578 23,061 25,208 30,245 29,225

% change yoy 44% 19% 1% -12% -2% -8% 29% 62% 18% 9% 20% -3%


China another source of strength for 2012 capex but only if carriers’ FY budgets are met. The full-year 2012 guidance for wireless capex from the Chinese carriers (China Mobile, China Telecom and China Unicom) suggests wireless capex in the region could see 10% yoy growth in 2012E to Rmb225bn (US$ 35bn), as shown in Figure 5. Including wireline capex (which could be up 11% yoy based on guidance from operators), we could see total planned capex of Rmb328bn for 2012E (or US$51bn, up 10% yoy).

Figure 5: Wireless capex in China to be up 10% in 2012E if carriers meet FY guidance Detailed breakdown of wireless and wireline capex for the three carriers in China Total capex (Rmb bn) 2008 2009 2010 2011 2012E

China Mobile total (wireless) 166.3 169.4 147.3 149.5 154.9

GSM related 136.3 129.4 124.3 128.5 131.9

TD-SCDMA / TD-LTE 30.0 40.0 23.0 21.0 23.0

China Unicom total (wireless + wireline) 70.5 112.5 70.2 76.7 100.0

China Unicom total (wireless) 42.0 69.5 31.7 33.7 51.5

GSM 32.9 20.6 7.5 4.6 3.2

WCDMA 0.0 36.4 15.7 21.4 35.5

Broadband & Data 9.0 18.8 22.5 25.7 25.8

Transport Networks (assuming 50% is wireless) 18.2 25.0 17.0 15.4 25.6

IT Systems & Others 10.3 11.7 7.6 9.5 9.9

China Telecom total (wireless + wireline) 72.0 92.0 70.0 71.6 73.0

China Telecom total (wireless) 23.6 54.0 27.0 22.0 19.0

CDMA from Q408 23.6 54.0 27.0 22.0 19.0

Wireline 48.4 38.0 43.0 49.6 54.0

Total capex (Rmb bn) 308.8 374.0 287.5 297.7 327.9

% change yoy 21% -23% 4% 10%

Total wireless capex (Rmb bn) 231.9 292.9 206.0 205.2 225.4

% change yoy 26% -30% 0% 10%

Total wireline capex (Rmb bn) 76.9 81.1 81.6 92.5 102.5

% change yoy 5% 1% 13% 11%


However, as Alcatel-Lucent, Ericsson, NSN and ZTE have recorded lacklustre sales in China in 1H12, it remains to be seen whether carriers end up spending their FY budgets on wireless capex driven by a strong 2H recovery, or if the spending falls short of their FY budgets (announced in March 2012). Here we would note the following comments from equipment vendors regarding their China business:

■ Ericsson has noted that China accounted for 5% of group sales in 1H12. This implies reported sales of around SKr5.9bn in 1H12, which is down 22% yoy (Figure 6).

30 August 2012


■ Following weakness in Alcatel-Lucent’s GSM business in China in Q112 due to delays in the central bidding process, the company noted that its APAC sales declined by 14% yoy in Q212 (in local currencies) driven mainly by China which declined 21% yoy, while the rest of APAC was resilient, with good traction in Japan and Australia. Based on company statements, we estimate that Alcatel-Lucent’s China revenues declined by around 15% yoy during 1H12.

■ ZTE cited China as one of the reasons for the weakness in its 2012 interim results on 13 July 2012. The company stated that certain domestic carrier network contracts were not recognised in the results for the current reporting period as the tender activities of such carriers were postponed, which resulted in the company falling short of its targeted growth rate.

■ NSN has also seen a significant decline in its China business in 1H12; its Greater China sales have fallen by around 24% yoy in 1H12 (Figure 7).

Figure 6: Ericsson’s China sales declining 22% in 1H12… Figure 7: …while for NSN, it has fallen 24% yoy in 1H12

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Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Capex budgets in all regions (excl NA and China) remain muted. Apart from NA and China which we believe are driving capex growth in 2012, we expect wireless capex in most other regions to remain muted owing to:

■ WE – capex budgets likely to remain under pressure. Western Europe remains one of the weak spots for the overall wireless infrastructure market. As shown in Figure 3, based on our wireless capex model, we estimate spending in WE to decline 7% in 2012. Here the commentary around the capex environment from a number of leading carriers in the region remains muted as can be seen from Figure 8. Given the macroeconomic environment and the continued decline in services revenue, we believe that wireless capex budgets could remain under further pressure in 2013.

30 A

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ust 2012

Wireless In

frastructu

re 10

Figure 8: Capex commentary from WE carriers remains muted Recent commentary on capex spend from leading telecom operators in Western Europe

Date Carrier Region Currency Capex 2011 Capex 2012 (Old) Capex 2012 (New) Carrier commentary

13-Jul-12 Elisa Finland EUR Max 12% of revenue Max 12% of Revenue Max 12% of Revenue

"CapEx, w hich w as for the f irst half fully in line w ith guidance, 12%, EUR 92mn.....Main CapEx areas continuing, built up from over 3G and 4G mobile netw orks as w ell as f ixed access backbone netw orks, IT systems and customer equipments. Last year, our CapEx w as also EUR 54mn in the second quarter, EUR 41mn in the first quarter; this year EUR 41mn / EUR 42mn. And in regards to the CapEx to sales, w e clearly see that [max 12%] continues to be the guidance and w hat w ill happen."

18-Jul-12 TeliaSonera Europe / Eurasia SEKSEK 17.2 bn

(16.5 % of sales)13-14%

capex to sales13-14%

capex to sales"The CAPEX-to-sales ratio is expected to be approximately 13-14 percent in 2012, excluding license and spectrum fees."

20-Jul-12 VodafoneEurope / Africa / India

GBP GBP 6.4 bn Similar to Last year Similar to Last year " Capex for the June quarter w as GBP 1.1bn. What w ill happen is w ith 800 and 700 in some countries spectrum, and 850 in others, a low er order spectrum allow s one to build less macro sites to get coverage. But you w ould still require density and capacity, w hich can be served either in spectrum or in CapEx. "

24-Jul-12 KPN Netherlands EUR EUR 2.047bn EUR 2 - 2.2 bn EUR 2 - 2.2 bn"Capex for the first half of 2012 w as €70m higher compared to the f irst half of 2011 driven by the continuation of the high speed data netw ork roll-out in Germany and Belgium and increased investments to strengthen the Dutch market positions."

24-Jul-12 Telenor Europe / Asia NOKNOK 11.9 bn

(11.6% of sales)10 - 12% of sales 11 - 12% of sales

"Capex driven by netw ork upgrade in Norw ay and Asia ….capital expenditure as a proportion of revenues, excluding licences and spectrum, is expected to be in the range of 11-12%. CapEx to sales, a slight adjustment. Previous guiding w as 10% to 12%....w e have high activity level on 3G in Thailand, sw aps in Thailand, sw aps in DiGi and now starting sw aps in Pakistan….Capital expenditure (excl. licences) increased by NOK 310mn as higher netw ork investments in DTAC, Grameenphone and DiGi more than offset reduced investments in Uninor, Pakistan and other operations."

26-Jul-12France Telecom

France / Africa EUREUR 5.77 bn

12.7% of revenues10% of sales Slightly higher than 2011

"Regarding CapEx, as I said, w e had a slight increase in CapEx, but w e have mainly focused the CapEx on the strategic aspects w e need to focus on, especially LTE self-deployment, FTTH for the French market, and change also of -- sw ap 2G/3G in the other geographies....In terms of geographies, you see that there is a slight increase in France, increase in Spain because w e are accelerating some of the change of the structure for our 3G netw ork, and a slight increase in the rest of the w orld.....We have now launched 3G services in 14 out of 20 emerging countries...Regarding CapEx of the group, our CapEx for 2012 w ill be slightly above -- there w ill be a slight increase compared to the CapEx 2011 and it w ill represent nearly 1 point of revenue more than w hat w e had a year ago."

26-Jul-12 Telefonica Europe / Latam EUR €9 bn14 %

Capex to sales ratio14 %

Capex to sales ratio

"CapEx to sales guidance remains unchanged, at similar levels than in 2011. In the f ixed business, w e're accelerating the transformation, speeding up both our broadband connections w ith increased CapEx in the second half of the year to enhance commercial momentum in the f ixed router market.... Despite a signif icant higher budget for fiber investment in 2012, 20% up year-on-year, total CapEx in Spain w ill be dow n versus 2011"

02-Aug-12 Telecom Italia Europe / Brazil EUR EUR 6.1 bnOver EUR 15 bn

for 2012-2014 periodOver EUR 15 bn

for 2012-2014 period

"CapEx w ere up in the quarter yoy as ultra-broadband netw ork investment delays w ere recovered, and w ill now proceed according w ith our original plans. Our plan, of course, allow s for contingencies. For example, a speed of NGN investments is demand driven. If the economic recession continues and consumer demand becomes impacted materially, w e w ill slow dow n CapEx, and it's the normal business and managing a large company that has many levers to pull. Capex for the first half of 2012 amounted to €2,3bn (up €232mn compared w ith H1 2011)."

02-Aug-12Portugal Telecom

Portugal / Brazil EUR EUR 1,224 mn EUR 1,120 mn EUR 1,120 mn

"In the first half of 2012, our consolidated CapEx amounted to €522mn. That's equivalent to 15.6% of revenues. …In terms of CapEx, contrary to a lot of the sector and peer group companies, Portugal Telecom has invested significant amounts in the last few years in upgrading our technology and in investing in w hat w e think are future-proof netw orks….so w hat this really means is that CapEx, as w e have indicated to you in the past in our country, w ill continue to decline. Netw ork CapEx is clearly coming dow n..."

08-Aug-12 Sw isscom Sw itzerland CHF CHF 2.1 bn CHF 2.2 bnCHF 2.2 bn

(excl spectrum)

"Consolidated CapEx in the first quarter amounted to CHF1.017b, w hich is CHF108m higher than last year. The increase is mainly driven by Sw isscom Sw itzerland, w here w e invested 10% more than last year. Most of those additional CapEx w ent into our initiatives for the broadband infrastructure. CHF2.2b remains a fair assumption for 2012. This number excludes the cost for the mobile spectrum auction of CHF360m, w hich w ill of course ultimately be added to the 2012 CapEx bill....And I think the CapEx prof ile that w e are in actually on the mobile side is much the normal cycle; it's much more the normal cycle."

09-Aug-12Deutsche Telekom

Europe / US EUR EUR 8.4 bn EUR 8 bn EUR 8 bn

"We are not under-investing in terms of CapEx. Although f irst half-year CapEx came in 5% low er year on year, w e are sticking w ith our full year guidance of CapEx on the same level as last year. In the US, the netw ork modernization started in earnest only in June and w ill ramp in the second half of the year. And in Germany, w e'll continue to ramp, especially the LTE and broadband CapEx in the second half of the year….CapEx are expected to increase in the second half ."

16-Aug-12Telekom Austria

Europe EUR EUR 739 mn EUR 750 mn EUR 700 -750 mn

"We spent more than EUR 330mn compared to EUR 277mn last year....usually w e see in the fourth quarter higher CapEx spending than the quarters before. This year, w e had a dif ferent approach, so w e tried to see more continuous CapEx spending and, consequently, w e do expect that w e w ill see less spending in the second half and there is no particular one area w here w e are going to reduce it....so w e are confident that w e w ill be able to spend the amount w e are now guiding for, w ithout hampering our future"

Source: Company data

30 August 2012


■ Latam – following a strong pick-up in 2011, capex is likely to remain flat in 2012E/2013E. Latin America was one of the key growth drivers for wireless infrastructure spending in 2011, driven by large-scale network rollouts to extend the coverage of WCDMA technology across a number of cities. This is also evident from Figure 9, which shows that the number of cities in Brazil with WCDMA coverage increased from 1,287 at the end of 2010 to 2,625 in 2011. This also resulted in strong revenue growth in the Latin America region for equipment vendors such as Ericsson, NSN and Alcatel-Lucent, which saw yoy revenue growth of 23%, 21% and 15%, respectively, in 2011. Now with the bulk of WCDMA rollouts already done, we are seeing signs of a slowdown in extending coverage further, which we believe will result in nearly flat capex levels for both 2012E and 2013E, as we show in Figure 3.

Figure 9: WCDMA rollouts in Brazil reaching saturation levels WCDMA coverage in Brazil measured in terms of cities and population covered Cities covered with WCDMA technology in Brazil

Operator 2008 2009 2010 2011 1Q12 Apr-12 May-12 Jun-12

Vivo 314 579 1,206 2,516 2,727 2,789 2,831 2,831

Claro 282 389 402 657 866 877 890 929

TIM 23 55 195 488 512 517 517 530

Oi 99 168 211 250 308 319 320 346

CTBC 16 29 31 32 32 32 32 32

Sercomtel 0 2 2 2 2 2 2 2

Total 448 711 1,287 2,625 2,883 2,945 2,981 2,995

Population covered with WCDMA technology in Brazil

Operator 2008 2009 2010 2011 1Q12 Apr-12 May-12 Jun-12

Vivo 48.0% 60.7% 71.5% 82.8% 83.8% 84.3% 84.6% 84.6%

Claro 50.3% 54.5% 55.6% 62.0% 65.0% 65.5% 65.9% 66.6%

TIM 19.3% 27.3% 45.2% 53.9% 58.2% 58.5% 58.5% 58.8%

Oi 27.3% 41.7% 43.9% 46.3% 49.0% 50.3% 50.5% 50.7%

CTBC 1.1% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%

Sercomtel 0.0% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Total 58.8% 64.6% 72.6% 83.2% 85.3% 85.7% 86.0% 86.2%

Source: Anatel, Credit Suisse research

■ India – regulatory headwinds and weak 3G penetration to continue to impact spending decisions. India as a region has seen mixed trends in terms of growth over the past few years. In mid-2010, the telecom equipment market in India was significantly affected by the government’s decision to ask foreign equipment makers to allow regular security inspections and also share their network design and source code. After this issue was resolved, the Indian market saw the initial rollout of WCDMA networks. However, so far we have seen limited uptake of 3G services in India in spite of aggressive 3G pricing (data tariffs were slashed by up to 70% during Q212). Since mid-2011, there has been significant uncertainty around the spectrum awarded to carriers in 2008 auctions. Finally, in February 2012, 122 telecom licences across operators and circles in India were cancelled, followed by a number of delays in the subsequent spectrum auction. Following a recent meeting between a group of ministers, it has been decided that the spectrum auction may take place in November 2012 subject to the approval of the Supreme Court. However, the reserved prices for the spectrum auction have been set at a much higher level than the 2008 auctions. All these uncertainties in the regulatory environment and delays in decision making, along with weak 3G penetration and uptake of data services, suggests to us that the capex environment in the region may see limited recovery even in 2013.

■ 3G coverage in place in most of developing APAC. Apart from China and India, Asia Pacific as a region includes countries such as Indonesia, Philippines, Malaysia and Thailand, which are key to driving capex growth at a global level given their large and

30 August 2012


growing base of mobile subscribers. APAC (excluding China and India) was one of the key drivers of mobile capex growth in 2011 and has continued to be so this year. However, we believe this growth could slow, as 3G coverage at most of these carriers is already in place. To analyse 3G coverage in some of these markets, our Asian Telecoms Research team (led by Colin McCallum) published a report titled ‘Uncomplicated data pricing’ dated 24 July 2012, in which they analysed a number of 3G base stations vis-à-vis 2G base stations at some of the leading carriers in India, China, Philippines, Malaysia, Thailand and Indonesia, among others. In addition, the team looked at the total number of 3G subscribers to see the extent of 3G penetration compared with coverage levels. What is interesting to note here is that 3G penetration in most of these markets is much lower than 3G coverage levels, implying that the initial 3G network is already in place which should allow carriers to deal with the growing 3G/smartphone penetration without the need to increase capex investments. As such, we expect wireless capex growth in APAC (ex China and India) to slow to 5% in 2013 (down from 12% in 2011 and 9% in 2012), as shown in Figure 3.

Figure 10: 3G coverage is in place in most developing markets in APAC; but 3G subs penetration still needs to follow Details on 3G rollout in developing markets in APAC region Markets Operator 3G BTS ('000s) 2G BTS ('000s) 3G as % of 2G

BTS 3G subs ('000s) Total mobile

subs ('000s) 3G as % of total

subs China China Mobile 220 700 31% 59,563 667,195 9%

China Unicom 239 375 64% 48,860 209,487 23%

China Telecom 200 230 87% 43,550 135,830 32%

India Bharti NA 121 NA 9,000 181,279 5%

IDEA 13 83 15% 2,600 112,723 2%

Reliance NA 55 NA 3,200 153,045 2%

Indonesia Telkomsel 10 35 29% 10,988 109,880 10%

Indosat 4 16 23% 5,210 52,100 10%

XL 6 24 27% 4,641 46,400 10%

Malaysia DiGi 2 6 45% 2,285 9,900 23%

Maxis 5 7 71% 4,173 13,800 30%

Axiata 5 7 75% 3,466 12,000 29%

Philippines PLDT 8 13 60% 3,000 66,100 5%

Globe 8 13 60% 1,200 31,000 4%

Thailand AIS 4 17 21% 3,414 34,137 10%

TAC 5 12 40% 2,343 23,400 10%

True 6 20 30% 1,119 19,180 6%

Source: Credit Suisse Asian Telecoms Research Team (data as of March 2012)

o Indonesia. In Indonesia, two of the ‘big 3’ cellular operators, which account for over 70% of revenue market share, are already well through their extensive 3G rollouts. We estimated that XL and Telkomsel had perhaps reached 40-50% population coverage respectively as of June 2012, and we expect this to rise to 50-60% by the end of 2013. Although 25-30% of base stations in the country already have 3G support, the 3G subs base is only around 10% of total subscribers (as we show in Figure 10), which shows that carriers in Indonesia still have plenty of room to deal with growth in the 3G subscriber base and consequently in data traffic.

o Philippines, Malaysia and Thailand. A significant 3G investment phase commenced in the Philippines in early 2011, and so 3G network coverage has now expanded to c60% of population coverage, but 3G penetration within its subscriber base stands at a mere 5%. Even for Malaysia and Thailand, we see similar trends for 3G coverage and penetration.

30 August 2012


Equipment spend down 6% in 2012E, flat in 2013E Although wireless capex forecasts from carriers at the global level suggest that spending could be up by around 7% in 2012E, we believe that the wireless equipment market may decline by around 6% in 2012. Specifically, we note that the equipment-to-capex ratio is declining as we see in Figure 11, which could be driven by a combination of LTE rollouts happening in certain parts of the world (such as the US, Japan and Korea) along with network modernisation contracts in Europe. Here we make the following observations:

Figure 11: We estimate the wireless infrastructure market to decline 6% in 2012 and remain flat in 2013 US$ bn 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Wireless capex 108.8 121.9 131.3 156.7 152.2 149.1 161.5 172.0 174.7 172.6 171.3

% change 18% 12% 8% 19% -3% -2% 8% 7% 2% -1% -1%

Wireless equipment spend 51.8 52.7 54.4 58.5 51.8 51.5 58.5 55.0 54.9 55.9 57.0

% change 11% 2% 3% 7% -11% -1% 14% -6% 0% 2% 2%

Equipment to capex (%) 47.6% 43.2% 41.4% 37.3% 34.0% 34.5% 36.2% 32.0% 31.4% 32.4% 33.3%


Cumulative wireless sales for leading vendors declined 11% yoy in 1H12. This is based on wireless sales delivered by leading vendors Ericsson, NSN, Alcatel-Lucent and ZTE in 1H2012. We estimate that cumulative sales for wireless infra businesses for these four vendors were down 12% yoy in Q112 and down 10% yoy in Q212.

2H could see a spending uptick, but FY revenues could still be down 5% yoy for 2012E. Given the weakness seen in 1H12 especially in the NA and China regions, where wireless capex should grow by 20% and 10% yoy for CY12, respectively, on our estimates, we acknowledge that top-line growth in Q3 and Q4 could be better than the normal seasonal growth. Therefore, based on our forecasts for the wireless equipment businesses at these vendors, we estimate that their cumulative sales could be down 5% yoy in 2012.

Assuming normal seasonality for Q3/Q4 suggests further downside potential. If we were to assume that sales for these vendors grow in line with normal seasonality seen over the past five years for both Q3 and Q4, we estimate that their cumulative wireless equipment-related sales could be down 6% yoy in 2012 (which is 1pp lower than our current forecasts), as we detail in Figure 12.

Figure 12: Even assuming better than normal seasonality for Q3/Q4, sales for leading vendors could decline 5% in 2012 Revenue for the wireless equipment businesses for leading mobile infrastructure vendors Revenue (in 2012) based on current estimates for vendorsMobile infra sales (US$ mn) Q111 Q211 Q311 Q411 Q112 Q212 Q312E Q412E 2010 2011 2012EEricsson 5,599 5,739 5,646 6,286 4,892 5,166 5,203 6,581 17,740 23,271 21,842

% change qoq -2% 2% -2% 11% -22% 6% 1% 26%NSN 2,205 2,532 2,373 2,653 2,049 2,325 2,207 2,508 8,381 9,763 9,088

% change qoq -16% 15% -6% 12% -23% 13% -5% 14%ALU 1,555 1,501 1,435 1,242 1,096 1,220 1,275 1,514 5,380 5,732 5,104

% change qoq 2% -3% -4% -13% -12% 11% 4% 19%ZTE 666 978 923 1,168 737 949 1,089 1,418 3,359 3,735 4,193

% change qoq -40% 47% -6% 27% -37% 29% 15% 30%Total 10,025 10,750 10,377 11,349 8,775 9,659 9,773 12,020 34,860 42,502 40,227

% change qoq -8% 7% -3% 9% -23% 10% 1% 23%% change yoy 35% 30% 26% 4% -12% -10% -6% 6% 3% 22% -5%

Average seasonality of qoq growth Q1 Q2 Q3 Q4Ericsson -18% 7% -6% 29%NSN -25% 9% -6% 25%ALU -13% 5% -1% 6%ZTE -29% 40% -9% 32%2007-2011 (5 years) -20% 9% -5% 24%

Revenue (in 2012) based on normal seasonality for vendors in Q312 and Q412Mobile infra sales (US$ mn) Q111 Q211 Q311 Q411 Q112 Q212 Q312E Q412E 2010 2011 2012EEricsson 5,599 5,739 5,646 6,286 4,892 5,166 4,860 6,700 17,740 23,271 21,618NSN 2,205 2,532 2,373 2,653 2,049 2,325 2,184 2,764 8,381 9,763 9,322ALU 1,555 1,501 1,435 1,242 1,096 1,220 1,206 1,348 5,380 5,732 4,869ZTE 666 978 923 1,168 737 949 866 1,435 3,359 3,735 3,987Total 10,025 10,750 10,377 11,349 8,775 9,659 9,117 12,247 34,860 42,502 39,797

% change qoq -8% 7% -3% 9% -23% 10% -6% 34%% change yoy 35% 30% 26% 4% -12% -10% -12% 8% 3% 22% -6%

1

1) Wireless equipment relatedsales down 11% yoy in 1H12.Cumulative sales for Ericsson,NSN, ALU and ZTE for theirwireless equipment relatedbusiness is down 11% yoy in1H12. Given our view around pickup in 2H spending, we assumebetter than normal seasonality fortop-line in both Q3 and Q4. Thisleads us to believe that cumulativewireless equipment related sales forthese companies may decline 5%in 2012.

2) Normal seasonality suggests6% decline in sales in 2012. Ifwe were to assume normalseasonality seen over the last 5years for Q3/Q4, we estimate thatthe total wireless equipment relatedsales for Ericsson, NSN, ALU andZTE could be down 6% yoy in2012 (slightly lower than ourcurrent forecasts).

2

2


30 August 2012


Expecting flat revenue for the industry in 2013E. Given we expect wireless capex to see a slowdown in 2013 (up only 2% from 7% growth in 2012E) following the major portion of LTE builds in the US being completed over the next 6-12 months and continued weakness in Europe, we believe that any recovery in the wireless equipment market will remain muted (we assume a flat top-line for the industry in 2013).

Mix within capex also an issue at some carriers We are seeing signs of wireless capex mix moving away from radio access networks at select carriers with increased focus on transmission. This is evident from recent commentary from both China Mobile and Vodafone.

A significant move away from equipment at China Mobile. Although China Mobile (which supports GSM/TD-SCDMA standards and accounts for around 70% of wireless capex in China) has guided for wireless capex to rise 3% yoy in 2012 (from Rmb 128.5bn in 2011 to Rmb 131.9bn in 2012 for the listed company), the company has noted plans to lower the proportion of spend on Mobile Communications Networks from 57% of total capex in 2011 to only 41% of the capex budget in 2012, which implies a decline of 26% yoy in absolute terms. Even if we were to include the spend on the Transmission segment (which we expect to rise from 18% to 26% in the capex mix), we would note that total equipment related spending at China Mobile will still decline 8% yoy in absolute terms in 2012, as highlighted in Figure 13.

Figure 13: Breakdown of capex at China Mobile shows mix moving away from equipment Breakdown of capex at China Mobile over time

44%

57%

41%

23%

18%

26%

13%

6%

6%

7% 6%

8%

9% 9%16%

4% 4% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012E

Mobile Communication Networks Transmission Business Development Support Systems Buildings & Infrastructure Others

China Mobile listcoCapex (Rmb bn) 2010 2011 2012E 2011 2012EMobile Communication Networks (A) 54.7 73.2 54.1 34% -26%Transmission (B) 28.6 23.1 34.3 -19% 48%Business Development (C) 16.2 7.7 7.9 -52% 3%Support Systems (D) 8.7 7.7 10.6 -11% 37%Buildings & Infrastructure (E) 11.2 11.6 21.1 3% 82%Others (F) 5.0 5.1 4.0 3% -23%Total 124.3 128.5 131.9 3% 3%

Equipment related capex (A + B) 83.3 96.4 88.4 16% -8%

% change yoy

Source: Company data, Credit Suisse research

30 August 2012


This is due to higher capex in areas like buildings & infrastructure, support systems and business development, which we expect to rise from 25% of capex in 2011 to 33% in 2012E. Given our view that the GSM business at China Mobile is a higher margin business for vendors, we believe this decline in equipment related capex is a negative for equipment suppliers like Ericsson, Alcatel-Lucent and Nokia Siemens. The carrier also has ambitious plans for TD-LTE (4G) technology in 2013, capex for which is at the parent company level, and therefore not included in China Mobile’s official guidance.

Similar trends seen at Vodafone with capex mix moving away from RAN. Providing details around the mix of capex, at its FY11/12 results in May Vodafone noted that the mix of spend directed towards radio technology declined in its EU and AMAP (Africa, ME and APAC) regions. Radio accounted for 29% of total EU capex in FY11/12 (down 2ppt yoy) while it was 40% for the AMAP region (also down 7ppt yoy), with increased spending in areas like transmission and IT platforms. Again, this shift in spending from radio to other areas of networks is not positive for vendors like Ericsson which have a strong presence on the RAN equipment side.

Figure 14: Vodafone capex split in Europe Figure 15: Vodafone capex split in AMAP

31% 29%

17% 19%

4% 6%

35% 37%

13% 9%

0%

25%

50%

75%

100%

FY10/11 FY11/12

Fixed / Other Network services / IT platform Core Transmission Radio

£ 4.0bn £ 4.1bn

47%40%

15%21%

9% 9%

16% 20%

13% 10%

0%

25%

50%

75%

100%

FY10/11 FY11/12

Fixed / Other Network services / IT platform Core Transmission Radio

£ 2.2bn £ 2.3bn


Drivers for capex rise – some in place, some missing Growth in mobile data remains the key argument for an increase in capex and wireless equipment spending. This is being driven by an increase in mobile broadband subscriptions along with rising mobile data traffic per month per user. However, we note that carriers are finding it difficult to benefit from this strong growth in mobile data traffic by effectively monetising it. With continued weakness in the macro environment, this means that carriers are finding it difficult to justify a sustained increase in their capex budgets, especially in European markets. This has forced carriers to look for alternative options to improve capacity on their existing networks (such as data offloading to Wi-Fi and Femtocells, tiered plans for smartphone users, bandwidth optimisation, data caching to name a few) while maintaining a tight discipline around capex spending. We believe that, despite strong growth in mobile data traffic, wireless capex may see muted growth in 2013 (our wireless capex model suggests only 2% growth in 2013E).

Strong growth in mobile traffic driven by smartphones and tablets…

Traffic on wireless networks to grow at CAGR of ~50% over the next few years. According to a recent study by Ericsson on traffic on mobile networks in June 2012, the company expects the total number of mobile broadband subscriptions to rise from 1bn at the end of 2011 to around 5bn by 2017. It estimates the total subscriptions of data-heavy devices (which include smartphones, mobile PCs and tablets with cellular connectivity) to grow from 850mn users at the end of 2011 to around 3.65bn in 2017. This is split as:

■ Smartphone subscriptions to rise from 700mn in 2011 to over 3bn by 2017

■ PC/tablet mobile subscriptions to grow from around 200mn in 2011 to 650mn in 2017

30 August 2012


Robust growth in mobile broadband subscriptions combined with the rise in use of monthly data per subscription suggest that overall traffic on wireless networks globally may grow from around 650 PetaBytes (PB) per month in 2011 to slightly over 8,000 PB by 2017. As shown in Figure 17, this would imply a CAGR of 52% over the period 2011-2017.

Figure 16: Expected increase in traffic per month per sub Figure 17: Mobile traffic to grow at 52% CAGR over ‘11-‘17

0

2

4

6

8

10

2011 2017

Smartphones Mobile PCs

GB

/ m

on

th /

sub

scri

pti

on

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2011 2012 2013 2014 2015 2016 2017

Data - Mobile PCs / Tablets Data - Mobile Phones Voice

Pet

aByt

es p

er m

onth

Source: Ericsson Traffic and Market Report (June 2012) Source: Ericsson Traffic and Market Report (June 2012)

Similar study by Cisco shows even stronger growth in mobile traffic. Similar estimates around mobile traffic based on a study by Cisco in May 2012 show even stronger growth for mobile data traffic. According to the Cisco VNI study (Figure 18), mobile data traffic globally will grow at a CAGR of 78% rising from around 600 PB per month in 2011 to around 10,800 PB per month in 2016.

Figure 18: Cisco expects mobile data traffic to grow at a CAGR of 78% over 2011-2016 PB per month 2011 2012 2013 2014 2015 2016 CAGR 11-16

North America 119 259 493 844 1,305 1,964 75%

Western Europe 180 366 684 1,161 1,705 2,438 68%

Asia Pacific 206 438 832 1,503 2,614 4,323 84%

Latin America 40 77 146 267 455 738 79%

Central & Eastern Europe 34 68 134 253 439 706 83%

Middle East & Africa 18 45 91 187 378 635 104%

Global mobile data traffic 597 1,253 2,380 4,215 6,896 10,804 78%

Source: Cisco VNI Report (May 2012)

…but slowing growth in services revenue remains a headache for carriers

Despite strong growth in smartphones driving an increased level of traffic over mobile networks, we note that wireless services revenues for carriers at the global level continue to slow. Ultimately, it is these telecom operators who are end customers for infrastructure vendors. A continued slowdown in mobile service revenue growth for the carrier market and competitive pricing do not bode well for growth in the wireless infrastructure market.

Mobile service revenue growth at global level continues to slow down. Based on our proprietary database of leading carriers globally, we estimate that the mobile services revenue for operators may grow 5%/4% in 2012/2013E compared with 6% in 2010/2011 and an average of 14% over the period 2005-2008, as shown in Figure 19. Given the slowdown in services revenue growth, we believe operators will continue to find it difficult to justify an increase in their capex budgets on a sustained basis. This also forces carriers to look for alternative ways to deal with growing data traffic without the need to increase their capex spending.

30 August 2012


Figure 19: Service revenue growth for wireless carriers continues to see slowdown; 5%/4% growth in 2012/2013E Wireless service revenue forecasts on a regional basis Wireless Service revenues (US$ bn) 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Western Europe 157.7 167.3 174.1 179.2 179.8 181.7 179.6 170.5 167.6

% change 10% 6% 4% 3% 0% 1% -1% -5% -2%

North America 119.6 137.7 153.5 164.6 167.6 177.6 187.6 196.9 205.2

% change 13% 15% 11% 7% 2% 6% 6% 5% 4%

Asia-Pacific 186.2 204.7 225.1 243.8 256.3 272.5 295.5 319.7 342.1

% change 8% 10% 10% 8% 5% 6% 8% 8% 7%

China 43.2 52.0 61.4 74.7 81.6 91.0 104.5 118.1 131.5

% change 17% 20% 18% 22% 9% 11% 15% 13% 11%

India 8.8 12.3 15.8 22.7 23.9 26.8 29.9 33.5 36.3

% change 27% 39% 29% 44% 5% 12% 12% 12% 8%

Asia Pacific ex China, India 134.2 140.5 147.9 146.4 150.8 154.7 161.1 168.2 174.2

% change 5% 5% 5% -1% 3% 3% 4% 4% 4%

Latin America 39.4 60.8 86.4 97.6 105.3 117.5 131.2 142.5 148.1

% change 42% 54% 42% 13% 8% 12% 12% 9% 4%

Emerging EMEA 53.9 74.5 96.7 123.3 118.0 125.2 134.3 141.8 147.5

% change 43% 38% 30% 28% -4% 6% 7% 6% 4%

Global 556.9 645.1 735.7 808.4 827.1 874.5 928.2 971.4 1,010.5

% change 15% 16% 14% 10% 2% 6% 6% 5% 4%


Concerning revenue trends for WE carriers. Looking at the service revenue for wireless carriers on a regional basis in Figure 19, the trend looks increasingly concerning for operators in the WE region, where we believe that service revenues may decline 5%/2% in 2012/2013E (following a 1% decline in 2011) driven by a combination of weak economy, increased competitive intensity among operators and MTR (mobile termination rate) cuts. Given this weakness in revenue trends, we believe that wireless capex in the WE region will remain under pressure (note our database suggests that wireless capex in WE may decline 7%/3% in 2012E/2013E).

Also pressure on cash flows at European carriers leading to dividend cuts. This slowdown in service revenue growth along with margin pressure from increasing competition has put significant pressure on free cash flows at a number of telecom operators in Europe. With rising debt levels at some of these carriers, we have also seen dividend cut announcements in Europe over the last few months. In fact, as shown in Figure 20, we have already seen dividend cuts at Telefonica, KPN, Portugal Telecom, France Telecom and SFR, among others. Given this backdrop of cash flow pressure and dividend cuts, we believe this could also have a negative impact on capex spending from carriers.

Figure 20: A number of European carriers have been cutting dividend payments over the last few months Date EU Carrier Comments

Dec 2011 Telekom Austria TKA lowered its dividend floor for 2011 and 2012 from €0.76 per share to €0.38 per share

Dec 2011 Telefonica Telefonica cut its dividend forecast to €1.50 per share for 2012 and 2013, compared to the 2011 level of €1.60. The company had previously projected a dividend payment of €1.75 per share for 2012, and at least that amount from 2013

Feb 2012 Telecom Italia The company proposed a dividend payment of €900mn for 2012 compared to its earlier guidance of a 15% increase from the 2011 payment level of €1.2bn

Feb 2012 Vivendi (SFR) Vivendi announced that dividend per share would fall from €1.40 to €1.00, with shareholders also receiving one share for every 30 owned

Jun 2012 France Telecom FT will retain its dividend for 2012 based on company's results in 2011, but will reduce its dividend for 2013

Jun 2012 Portugal Telecom For 2012 to 2014, PT will pay an annual dividend of €0.325 per share, down from €0.65 paid for 2011

July 2012 KPN KPN cut its 2012 dividend to €0.35 per share compared to its previous forecast of €0.90 per share for 2012, after the company paid €0.85 per share for 2011

July 2012 Telefonica Telefonica scrapped €1.50 of dividend per share for 2012 and plans to resume half of the payout toward the end of 2013


30 August 2012


Can LTE drive growth on its own? So far we have seen large-scale rollouts for LTE technology in the US, Japan, Korea and parts of Europe (Germany and Scandinavia). As such, we have looked at wireless capex trends in some of these markets (US, Japan and Germany) during the course of LTE rollouts to understand the impact LTE could have on the wireless infrastructure market. In addition, there have recently been 4G spectrum auctions in Brazil. Given there are certain rollout obligations that carriers in Brazil may have to meet, especially in cities hosting the World Cup around mid-2014, we have also looked at the potential impact from LTE rollouts in Brazil. Our analysis leads us to the following conclusions:

The US has seen a limited impact on capex due to LTE, waiting to see if 2H12 sees an uptick. In the US, since first launching its LTE service in Dec 2010, Verizon now covers 230mn people (75% of the population) across 337 cities, and aims to have an LTE footprint similar to its 3G network by mid-2013. In spite of such aggressive LTE plans, its wireless capex spend has declined between 18% and 31% yoy over the last four quarters. Even assuming a strong pick-up in 2H12, we believe that its wireless capex for 2012E may end up being down 1% yoy. Similarly, AT&T has LTE coverage of 74mn people across 51 cities, but we believe that the 7% yoy increase seen in its wireless capex in 1H12 was mainly driven by an increase in Q112 arising from pent-up demand from 2H11, as there were uncertainties around the AT&T and T-Mobile merger. Judging by FY capex budgets from tier I carriers and weak spending patterns in 1H12, it seems to us that 2H spending could still see a significant uptick driven by Sprint’s Network Vision and LTE rollouts at AT&T and T-Mobile. However, we would equally note that once initial rollouts of LTE are completed in the majority of US markets, aggregate wireless capex in the region may start to decline from 2013.

Mixed trends in Japan – LTE spend does not seem to be all incremental. Another region that has seen strong rollout of LTE networks by operators is Japan, where we have looked at the detailed mobile capex breakdown for NTT DoCoMo and KDDI to understand the impact of the LTE rollout. We see mixed trends in terms of the impact from the increase in LTE capex on other areas of capex such as 3G. For example, while NTT DoCoMo has plans to increase LTE coverage to 70% by March 2013 while maintaining flat capex levels in FY13, capex plans at KDDI suggest that the LTE spending may be incremental to existing levels of capex leading to +15% yoy in FY13 capex budget. However, based on estimates from our Japan Telecoms analyst (Hitoshi Hayakawa), we believe that wireless capex in Japan for the top three carriers could be up 9% yoy in FY13E (year ending Mar 2013) driven by increased spending at KDDI and Softbank, but it could decline around 4% in FY14E once the bulk of LTE rollouts are carried out by these carriers in the next 6-9 months.

Germany – Capex declining in 2H12 after pick-up in 2011. Within Europe, we have seen LTE being deployed by major carriers in Germany since the beginning of 2011. Our analysis of capex at carriers in Germany suggests that while there has been a modest increase in capex spend at Vodafone, which may be driven by LTE rollouts (capex in Germany was up 7% in FY11/12 compared to 5% decline for rest of Europe), we have not seen such trends on a sustainable basis at Deutsche Telekom (capex in Germany down 5% yoy in 1H12 in spite of rolling out LTE to more states), which makes us question whether LTE on its own can be a sustainable growth driver for wireless capex spending from carriers.

Recent 4G auctions in Brazil – Increases may be offset by declines in other areas. In developing markets, we look at the potential impact from recent 4G auctions in Brazil. Our Latam Telecoms team estimates an incremental investment of around R$1bn (equivalent to US$0.5bn) per operator to install a sufficient number of base stations to cover the World Cup host cities by the end of 2013, as required by bidding rules. However, the team also expects that operators in Brazil are likely to maintain their capex guidance for 2012. Even

30 August 2012


for 2013E, it believes that the incremental capex for LTE may be offset by declines in other capex categories. Interestingly, America Movil at its Q212 earnings call noted that in spite of upcoming 4G rollouts, it still expects to maintain its overall capex plans of spending around US$30bn over the period 2010 to 2012.

Taking cue from LTE regions We look at wireless capex trends for carriers in some of the developed markets that are already seeing large-scale LTE rollouts. For the purpose of our analysis, we have done a detailed capex analysis for US carriers, which are rolling out nationwide LTE networks, along with carriers in Japan and Germany.

Limited impact so far on capex from LTE in the US, but 2H12E could see an uptick

In the US, we have already seen major plans from carriers to roll out LTE networks since the start of 2011. Verizon has been the leader in this regard, and is being followed by AT&T and Sprint. Even T-Mobile US has recently announced plans around preparatory work for the launch of an LTE service in 2013. However, looking at recent wireless capex trends at US carriers (note wireless capex in 2H11 and 1H12 was down 6% yoy and down 5% yoy, respectively), it seems that operators so far have been successful in rolling out LTE networks while maintaining tight control over their capex spend. Judging by full year capex budgets, we acknowledge there could be a significant uptick in spending in 2H12. However, we would also note that aggregate capex for US carriers could decline in 2013 once a majority of LTE rollouts are done at all major carriers. In terms of specifics on a carrier-by-carrier basis, we note the following points:

Verizon – The most aggressive in rolling out LTE so far... Having first launched LTE service in 38 markets in the US in Dec 2010, the carrier has since continued to expand its 4G coverage. For example, in July 2011, it had population coverage of 160mn people across 102 cities, which grew to 200mn people in 195 cities by January 2012. Most recently, in July 2012, Verizon noted its LTE network is available to nearly 75% of the US population, covering 230mn people in 337 cities (Figure 25). In terms of expansion, it is aiming to cover 260mn people across 400 cities by the end of 2012, with a goal of having an LTE footprint similar to its existing CDMA EV-DO network by mid-2013.

…but no significant increase in Verizon’s wireless capex plans. Verizon has already done the initial rollout of LTE in most of the major markets in the US, covering nearly 75% of the population. What is interesting is that the carrier has been able to extend its LTE coverage to such levels while maintaining a tight control on wireless capex. In fact, after the boost in 1H11 capex due to CDMA 3G upgrades related to the launch of the iPhone, Verizon’s wireless capex spend has declined in the range of 18% to 31% yoy over the last four reported quarters. In addition, at its recent Q212 results, management guided for aggregate capex (wireless + wireline) in 2012 to be flat to down compared to the 2011 level of $16.2bn. We estimate that the wireless portion with this will decline from $9bn in 2011 to $8.85bn in 2012E (down 1% yoy) as shown in Figure 21.

30 August 2012


Figure 21: Verizon’s wireless capex over years Figure 22: AT&T’s wireless capex over years

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AT&T planning for a capex uptick in 2H12, but so far capex has not increased significantly because of ongoing LTE rollouts. Our US Telecoms analyst (Jonathan Chaplin) expects that wireless capex at AT&T will grow 13% in 2012 before moderating to 2% growth in 2013 (Figure 22). In terms of an LTE rollout, the carrier had population coverage of 74mn people across 51 cities as of July 2012. Now the wireless capex spend at AT&T in 1H12 was up 7% yoy but part of that increase, especially in Q112, was also driven by pent-up demand from 2H11, owing to lower capex spend due to regulatory uncertainties around the approval of the AT&T and T-Mobile US merger. Although the company has maintained its FY capex guidance for 2012, during its Q212 earnings call, management noted:

“And so we do expect a trending up in capex the second half of the year. This is only because, in the first half of the year, our network team and others that use capex were real efficient and real careful and, if you will, spent the money like it was their own. You have to be careful in managing it. And so they spent a little bit less, but they still got their work done and now that we have got that efficiency, we are probably going to return more to a normal spend, which will not only have a tick-up in capex.” – John Stephens, Senior EVP & CFO, AT&T (24th July 2012)

These comments from management show that the company has been able to do initial rollouts of LTE in select markets without having a significant impact on its capex spend.

Sprint – a unique case of nationwide network modernisation. One of the key drivers for the 20% growth in wireless capex in the US is the ongoing Network Vision programme at Sprint. The carrier plans to double its capex from $3bn in 2011 to $6bn in 2012 as part of its network modernisation project. Our US Telecoms analyst (Jonathan Chaplin) expects that wireless capex will grow from $2.4bn in 2011 to $5.6bn for 2012 (up 132% yoy) before declining back to $4.1bn in 2013 (down 27% yoy), as shown in Figure 23. As of July 2012, Sprint had launched LTE service in five major markets covering 15 cities, while it aims to have more than 250mn people under its LTE network by the end of 2013. What is driving this strong growth in capex spend at Sprint in 2012, in our view, is the carrier’s plans to modernise its entire network. For example, it has already taken all of its 9,600 iDEN cell sites off air this year and has so far activated around 2,000 Network Vision sites on air with plans to increase that number to 12,000 by the end of 2012.

30 August 2012


Figure 23: Sprint’s capex plans driven by Network Vision Figure 24: US capex up 20% in 2012E, down 3% in 2013E

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Aggregate capex in the US could see 2H12 uptick, but followed by a decline in 2013. Judging by full year capex budgets from all major carriers in the US, and weak spending patterns in 1H12 (wireless capex down 5% yoy), it seems to us that 2H spending could see a significant uptick driven by a combination of Sprint’s Network Vision and LTE rollouts at AT&T and T-Mobile. However, equally we note that once initial rollouts of LTE are completed in the majority of key markets across the US, aggregate wireless capex in the region may start to decline from 2013 (we assume 3% yoy fall in 2013E as shown in Figure 24).

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Figure 25: Verizon has been the most aggressive with LTE rollouts in the US Details of LTE rollout coverage for top three US carriers

AT&T LTE coverage detailsJuly 2012: More than 74mn people in 51 cities in US

Sprint LTE coverage detailsJul 2012: LTE rolled out in 19 cities, to introduce additional markets through 2012End of 2013: More than 250mn people to be covered under its LTE network

Verizon LTE coverage detailsJan 2011: Launched LTE in 38 markets (home to 1/3rd of US population) in Dec 2010Jul 2011: More than 160mn people in 102 cities in USJan 2012: More than 200mn people in 195 cities in USJul 2012: More than 230mn people in 337 cities in US - nearly 75% of the populationEnd of 2012: More than 260mn people in 400 cities in USMid 2013: Goal of having LTE nationwide footprint similar to its 3G network

Verizon

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30 August 2012


Mixed trends at Japan carriers – Is LTE spend all incremental? Doesn’t look like it

Another region that has seen strong rollout of LTE networks by operators is Japan. We have looked at the detailed mobile capex breakdown for two of its largest carriers – NTT DoCoMo and KDDI – to understand the impact of the LTE rollout on overall capex budgets for the carriers. In this sub-section, we aim to cover two areas of interest – first, is the increase in LTE-related spending all incremental, or is it being offset by declines in 3G spending? Secondly, once the bulk of LTE rollouts are over by the end of FY13, what impact could it have on the aggregate capex environment in FY14?

We see mixed trends on the impact of the increase in LTE capex on other areas of capex like 3G. For example, as we show below, while NTT DoCoMo has plans to increase LTE coverage to 70% by March 2013 and still maintain flat capex levels in FY13, capex plans at KDDI suggest that the LTE spending may be incremental to existing levels of capex, leading to +15% yoy in FY13 capex budget. However, based on estimates from our Japan Telecoms analyst (Hitoshi Hayakawa), we believe that wireless capex in Japan for the top three carriers could be up 9% yoy in FY13E (year ending Mar 2013) driven by increased spending at KDDI and Softbank, but it could decline around 4% in FY14 (Figure 26), once the bulk of LTE rollouts are carried out by these carriers in the next 6-9 months.

Figure 26: Wireless capex in Japan to be up 9% this year (driven by KDDI and Softbank) before declining 4% next year Wireless capex in Japan for the top three carriers, fiscal year ending March (FY14 is year ending March 2014) Japan wireless capex (Yen mn) FY09 FY10 FY11 FY12 FY13E FY14E

NTT DoCoMo 737,600 686,508 668,476 726,800 735,000 705,000

KDDI 432,132 376,806 338,675 304,175 350,000 370,000

Softbank 199,177 184,770 351,525 422,766 500,000 450,000

Total Japan 1,368,909 1,248,084 1,358,676 1,453,741 1,585,000 1,525,000

% change yoy -9% 9% 7% 9% -4%


NTT DoCoMo’s FY13 capex budget implies LTE spend coming at the expense of 3G. After having launched its LTE service in December 2010, NTT DoCoMo has been extending its LTE coverage in terms of population covered by adding more LTE-enabled base stations. In fact, the carrier has already added 9,800 LTE base stations through the end of June 2012, resulting in 32% population coverage. As shown in Figure 27, DoCoMo plans to have a total of 21,000 LTE base stations by March 2013 (end of FY13), thereby covering nearly 70% of Japan’s population.

Figure 27: DoCoMo to extend LTE pop coverage from 32% to 70% over next 9 months LTE (Xi service) coverage expansion plans at NTT DoCoMo

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30 August 2012


In spite of targeting such an increase in LTE coverage (from 32% of population coverage to 70%), the carrier has guided for its wireless capex to be up only 1% for FY13 (year ending Mar 2013). Interestingly, looking at the split of capex by areas of spend, it seems that all the incremental spend towards LTE is being offset by declines in 3G capex (Figure 28), resulting in aggregate mobile capex being up only 1% yoy.

Figure 28: Flat capex at DoCoMo in spite of LTE rollouts Capex split at NTT DoCoMo by area of spend

Figure 29: Increase in KDDI capex being driven by LTE Capex split at KDDI by area of spend

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KDDI is looking for a 15% increase in FY13 capex, with LTE spend being all incremental. Contrary to DoCoMo capex plans, KDDI has guided for a 15% yoy increase in its wireless capex budget for FY13, year ending Mar 2013 (up from Yen 304bn in FY12 to Yen 350bn in FY13). This increase in wireless capex is being driven by LTE-related spending, which is expected to rise from Yen 34bn in FY12 to Yen 80bn in FY13, as shown in Figure 29. Interestingly, based on its FY capex guidance, this increase in LTE capex is not being offset by a decline in other areas, something we saw at NTT DoCoMo.

Germany – Capex declining again in 2H12 after pick-up in 2011 driven by LTE

Looking at LTE rollouts within Europe, Germany is one example where we have seen LTE technology being deployed by major carriers since the beginning of 2011. As such, to understand the impact of LTE on capex plans for carriers in this region, we have looked closely at capex spend in Germany for both Deutsche Telekom (DT) and Vodafone. Our analysis suggests that while there has been a modest increase in capex spend from Vodafone which may be driven by LTE rollouts, we have not seen such trends on a sustainable basis at DT, which makes us question whether LTE on its own can be a sustainable growth driver for wireless capex spending from carriers.

Figure 30: DT’s capex in Germany has declined 5% yoy in 1H12 after an increase in 2011 in € millions, unless otherwise stated DT cash capex (€ mn) Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 2010 2011 1H12

Germany 651 774 862 1,178 820 811 973 1,045 823 728 3,465 3,649 1,551

% change yoy 26% 5% 13% -11% 0% -10% 5% -5%

Europe 568 454 396 594 512 356 437 565 505 287 2,012 1,870 792

% change yoy -10% -22% 10% -5% -1% -19% -7% -9%

US 481 534 496 610 546 477 527 413 571 425 2,121 1,963 996

% change yoy 14% -11% 6% -32% 5% -11% -7% -3%

Others 234 279 282 158 242 235 240 207 270 186 953 924 456

% change yoy 3% -16% -15% 31% 12% -21% -3% -4%

Total capex 1,934 2,041 2,036 2,540 2,120 1,879 2,177 2,230 2,169 1,626 8,551 8,406 3,795

% change yoy 10% -8% 7% -12% 2% -13% -2% -5%


DT’s capex in Germany down 5% in 1H12 in spite of LTE rollouts. Although the carrier does not provide much detail on the split of capex in Germany within the wireless and wireline divisions, looking at total capex in Germany, we note that after being up 5% in

30 August 2012


2011 (which could be driven by LTE rollouts), capex is down 5% in 1H12, as shown in Figure 30. According to the company, after launching its LTE service first in Cologne in July 2011, DT has since covered 11 out of 16 federal states as part of its LTE rollout obligations by the end of Q112, and 14 out of 16 states as of Q212. This shows that LTE rollouts have not had a positive impact on DT’s capex spend in Germany for a sustainable period of time.

Vodafone has seen a modest increase in German capex budgets. Vodafone is another carrier that has been rolling out LTE in Germany. In fact, the company had around 2,900 LTE-enabled base stations as of June 2012, providing 35% of households coverage with nearly 200K subs using LTE service. This has increased from around 1,700 LTE base stations at the end of 2011. Given Vodafone’s capex in Germany has increased 8% and 7% in FY10/11 and FY11/12, compared to a decline of 3% and 5% for the rest of its European operation, it seems that the increase in German capex at Vodafone could have been driven by LTE rollouts.

Figure 31: Vodafone’s capex spend in Germany has seen a modest increase in the last couple of years in £ millions, unless otherwise stated VOD capex (£ mn) (year end Mar) H1 09/10 H2 09/10 H1 10/11 H2 10/11 H1 11/12 H2 11/12 FY 09/10 FY 10/11 FY 11/12

Germany 331 435 342 482 410 470 766 824 880

% change yoy 3% 11% 20% -2% 8% 7%

Rest of Europe 1,080 1,849 1,179 1,674 1,132 1,585 2,929 2,853 2,717

% change yoy 9% -9% -4% -5% -3% -5%

Total Europe 1,411 2,284 1,521 2,156 1,542 2,055 3,695 3,677 3,597

% change yoy 8% -6% 1% -5% 0% -2%


What about recent 4G auctions in Brazil? Apart from looking at the capex trends at carriers where we have seen LTE networks being rolled out on a large scale, we have also tried to look at the potential impact from recent 4G auctions in Brazil. We highlight the recent note published by our Latam Telecoms Research team (led by Andrew Campbell) titled 4G auction stays close to script; benign outcome dated 12 June 2012 whereby the team tried to quantify the potential upside to capex in 2013 arising from LTE rollouts.

An incremental $2bn for LTE rollouts in Brazil in 2013E. Our Latam Telecoms team estimates an incremental investment of around R$1bn (equivalent to US$0.5bn) per operator to install a sufficient number of base stations to cover the World Cup host cities by the end of 2013, as required by bidding rules. Given the frequency band selected by Anatel (the telecoms regulator in Brazil) for 4G, operators will require a greater number of base stations to cover the same area they currently cover with 3G. In addition, the team believes that the cost per incremental base station will be around R$300K to R$500K. This would imply roughly R$1bn of incremental capex for covering the World Cup host cities with LTE during 2013E. Adding this for all four operators in Brazil, the team estimates the incremental capex for LTE could be close to R$3.8bn (or close to US$2bn), as shown in Figure 32. As a frame of reference, we currently estimate that wireless capex in Latam will be around US$23.5bn for 2012E (up 1% yoy).

30 August 2012


Figure 32: Estimates of additional BTS for 4G coverage for the World Cup cities Host Cities Claro Oi TIM Vivo

Belo Horizonte 224 253 217 285

Brasilia 329 381 265 243

Cuiaba 85 76 51 59

Curitiba 185 211 208 127

Fortaleza 132 208 166 167

Manaus 121 109 160 175

Natal 63 81 70 79

Porto Alegre 192 207 126 144

Recife 128 139 150 141

Rio de Janeiro 665 689 603 574

Salvador 190 232 164 132

Sao Paulo 996 881 856 835

Current BTS units 3,310 3,467 3,036 2,961

Additional BTS (to double the current units) 3,310 3,467 3,036 2,961

Average cost per unit (R$ '000) 300 300 300 300

Incremental capex (R$ mn) 993 1,040 911 888

Cumulative capex for all 4 operators (R$ mn) 3,832


However, this incremental LTE capex could be offset by declines in other areas. Although our Latam Telecoms team believes that rolling out LTE in the World Cup cities in 2013 will involve incremental spend on base stations, it also expects that operators in Brazil are likely to maintain their capex guidance for 2012. Even for 2013E, it believes that the incremental capex for LTE may be offset by declines in other capex categories. Interestingly, America Movil (which operates under the Claro brand in Brazil) noted on its Q212 earnings call that in spite of upcoming 4G rollouts, it still expects to maintain its overall capex plans of spending around US$30bn over the period of 2010 to 2012.

“And I don't think we need more capex. We showed them [Anatel] what we're going to do on the capex for this year, and I think they are happy with the numbers that we showed them. But that's not something that we're going to increase. It's something that we have been doing for this year and what we're going to do until the end of next year. So that's mainly what is happening. And, in the capex through America Movil, what we said is that we're going to invest around $30 billion in three years. That was last year, this year, and the next one. And I think we are more or less on that range. We don't think there's going to be a big difference on what we think for the rest of this year and the next one” – Daniel Hajj, CEO of America Movil (27 July 2012)

30 August 2012


Market share within wireless infra Given our view around weak trends in the wireless infrastructure market to continue, here we have looked at the market share trends for leading vendors. As we see in Figure 33, there has been an evident shift in market shares amongst vendors, with Ericsson and Huawei gaining share in 2010/2011 mainly at the expense of Nokia Siemens.

Figure 33: Market share trends in the wireless equipment market over time Overall share (%) 2006 2007 2008 2009 2010 2011 2012E

Ericsson 31% 33% 34% 33% 36% 40% 40%

Nokia Siemens (incl MOT from 2011) 24% 20% 19% 17% 16% 19% 17%

Alcatel-Lucent 13% 12% 10% 9% 10% 9% 8%

Huawei 4% 8% 9% 12% 14% 14% 15%

ZTE 2% 4% 4% 6% 7% 6% 6%

Motorola (only iDEN from 2011) 10% 10% 8% 7% 6% 0% 0%

Nortel 6% 7% 6% 4% 0% 0% 0%

Samsung 1% 2% 1% 3% 3% 3% 3%

LG 0% 0% 1% 1% 1% 1% 1%

Others 7% 6% 7% 9% 8% 9% 9%

Global 100% 100% 100% 100% 100% 100% 100%

Source: Company data, Infonetics, Credit Suisse estimates

Ericsson’s market share to stabilise at ~40% after seeing recent share gains. We believe that Ericsson has increased its market share in the wireless infrastructure market from 33% in 2009 to 36% in 2010 (helped by acquisition of Nortel’s CDMA and Korea business) and then to 40% in 2011 driven by ongoing modernisation contracts in Europe and LTE rollouts in the US. In fact, LTE has been one of the key drivers for recent share gains seen by Ericsson, as it has emerged as the leading vendor in 4G technology followed by Alcatel-Lucent. This is something which is also evident from commercial contract wins announced by equipment vendors so far, as shown in Figure 34.

Alcatel-Lucent’s weak 3G positioning means share to see gradual erosion. Given Alcatel-Lucent’s weak positioning within 3G technology (WCDMA/HSPA), we believe that the company’s Wireless sales will continue to decline faster than the overall market. Although on a positive note, one of the areas where the company has seen strong traction has been LTE, especially in the US. In fact, it is one of the primary suppliers on LTE technology to the top 3 carriers in the US (Verizon, AT&T and Sprint) along with Ericsson, as can be seen in Figure 34. Although we expect LTE revenues to see strong growth, we believe this to be more than offset by declines in other technologies (GSM, CDMA and WCDMA) as we estimate LTE accounted for slightly over 10% of Alcatel-Lucent’s Wireless sales in 2011, which we expect to rise to over 30% in 2012. Given such dynamics, we think Alcatel-Lucent is likely to see continued market share erosion (we assume its share to decline from 10% in 2010 to 8% in 2012).

Nokia Siemens’ woes continue. Although Nokia Siemens has enjoyed strong 3G positioning in the past (something which has been an issue with Alcatel-Lucent), it has been facing issues with LTE traction (especially in the US) along with its reluctance to participate heavily in the ongoing EU network modernisation projects. Both these issues have resulted in significant share loss for the vendor over the last couple of years. In fact, the acquisition of Motorola Solutions’ Networks business (which we estimate had around 6% share in 2011) allowed NSN to grow its share from 16% in 2010 to 19% in 2011, but it implies that the vendor lost share on an organic basis. We now expect this to decline to 17% in 2012 as the vendor has chosen to be selective in bidding for contracts in an effort to mitigate the impact on profitability within its business.

30 August 2012


Figure 34: Ericsson leads in LTE with commercial contract wins at major carriers List of LTE commercial contracts (with subs base in ‘000) won by all major wireless equipment providers

Carrier Country Subs (2011) Carrier Country Subs (2011)Ericsson's LTE commercial wins Alcatel-Lucent's LTE commercial winsVerizon US 108,667 Verizon US 108,667AT&T US 103,247 AT&T US 103,247Sprint US 55,021 Sprint US 55,021T-Mobile US 33,730 NTT DoCoMo Japan 58,415Softbank Japan 28,635 Softbank Japan 28,635SK Telecom South Korea 27,316 Etisalat UAE 7,760Telstra Australia 12,223 Claro Puerto Rico 1,800Bouygues Telecom France 10,000 Antel Uruguay 1,500Rogers Canada 9,355 C Spire US 900MetroPCS US 9,347 Big River Broadband USLG UPlus Korea 9,220 Total subs 365,9453 Italia Italy 9,100TeliaSonera Sweden 6,290 Huawei's LTE commercial winsSwisscom Switzerland 6,082 Softbank Japan 28,635M Tel Bulgaria 4,900 Saudi Telecom Company Saudi Arabia 25,739TDC Denmark 3,388 MTS Uzbekistan 9,297DNA Finland 2,163 Etisalat UAE 7,760UNE Colombia 1,000 Bell Canada 7,427NetAmerica Alliance US Portugal Telecom Portugal 7,410National Broadband Network Australia Telus Canada 7,300Augere India T-Mobile Austria 3,828Total subs 439,684 Tele2 Sweden 3,724

Optimus Portugal 3,500Nokia Siemens' LTE commercial wins EMOBILE Japan 3,341NTT DoCoMo Japan 58,415 Telenor Norway 3,146Deutsche Telekom Germany 35,403 Movicel Angola 2,500T-Mobile US 33,730 Cox Communications US 2,350KDDI Japan 33,400 M1 Singapore 2,020SK Telecom South Korea 27,316 Wataniya Telecom Kuwait 1,725KT Korea 26,553 TeliaSonera Norway 1,657STC Saudi Arabia 25,739 UNE Colombia 1,000Telefonica Germany 18,380 BITE Latvia 240TeliaSonera Scandinavia 13,399 Aero2 / Mobyland PolandLG UPlus Korea 9,220 Genius Brand HongKongZain KSA Saudi Arabia 3,781 ZodaFones Western AfricaTele2 Sweden 3,724 Total subs 122,600Elisa Finland 3,659Qatar Telecom Qatar 2,450 ZTE's LTE commercial winsStarHub Singapore 2,192 Softbank Japan 28,635Hutchison 3G Austria 1,200 KPN Germany & Belgium 26,862Shaw Communication Canada 1,050 Ucell Uzbekistan 7,500Latvijas Mobilais Telefons Latvia 1,014 Telenor Hungary 3,370Zain Bahrain 800 CSL Limited Hong Kong 2,848Agri-Valley Communication US Movicel Angola 2,500Mosaic Telecom US U Mobile Malaysia 2,000Total subs 301,424 Hutchison Austria 1,200

Hi3g Sweden & Denmark 1,123Total subs 76,038

LTE COMMERCIAL CONTRACTS


Huawei’s share rising to 15%, but focus now shifting away from telecom infrastructure. After seeing group sales grow at a CAGR of 34% over 2006-2010 mainly driven by telecom infrastructure, Huawei registered only 3% top-line growth in its Carrier Networks business in 2011. Within wireless infrastructure, Huawei now holds around 15% market share and a respectable #3 position. Even at its analyst summit in Shenzhen in April 2012, the company noted its plans to consolidate its existing position but its tone seemed much more sanguine regarding potential for long term revenue growth in this market. This could indicate limited upside potential to its 15% market share in the wireless infrastructure market, especially as the company continues to struggle to penetrate into the US market.

ZTE’s share seems to be stuck at 6%. After having seen strong share gains between 2006 to 2009 mainly driven by traction in China and parts of emerging markets (like Africa), when its wireless infrastructure market share rose from 2% to 6%, ZTE’s share has been stuck at around 6% since then. While the vendor continues to have a strong presence in China, its traction in international markets remains weak. This is something which we believe is unlikely to change given Huawei already has been seeing increasing traction in most of these markets (except the US).

30 August 2012


Business mix issues to remain in 2H, limited recovery in 2013E Over the last few years, GMs in the telecom infrastructure sector have come under significant pressure. In fact, from a peak of 44% GMs in Q204, they have declined to around 33% for the most recent quarter. This decline was principally driven by change in business mix (more coverage projects as opposed to capacity upgrade projects) especially during 2007 and then due to increased level of competition from Chinese players (Huawei and ZTE) and most recently due to network modernisation projects in Europe and LTE rollouts in the US. In between this period, we have seen bursts of GM recovery driven by mix improvement, but still it is evident that the structural level of GMs for the industry is much lower. In this section, we focus on key drivers which we believe may have an impact on GMs for the wireless infrastructure market and would note the following observations:

Significant GM differential between LTE rollout and 3G expansion/upgrade contracts. With US carriers having aggressive plans to roll out LTE networks and reach coverage levels similar to their existing 3G footprint over the next 12-18 months, we believe that the bulk of wireless capex at Verizon, AT&T and Sprint is going to be directed towards LTE. This shift in capex creates a GM headwind for equipment vendors given the significant difference between the margin profiles of 3G expansion/software upgrade contracts and LTE rollout projects. In fact, we believe that GMs on LTE rollout contracts could be in the range of 10-20% compared to GMs of 60-65% for 3G software upgrade contracts in the US.

GM impact from continued decline in CDMA in 2013E. Given our view that CDMA business for both Ericsson and Alcatel-Lucent carries significantly higher GMs than other projects, we have also tried to estimate the GM contribution from CDMA business. Based on recent statements made by Ericsson about its CDMA revenue and given the significant differential in GMs between CDMA and LTE (we believe this could be as high as 40%), we estimate that the CDMA business on its own had around 140bp of positive margin impact on Ericsson’s group GMs for Q212, if we were to replace all of CDMA revenues with LTE revenues. With a significant decline expected in CDMA revenues over the next 12-18 months, we would note this as an ongoing headwind to GM improvement in 2013 for both Ericsson and Alcatel-Lucent.

China to remain a headwind for GMs. Another headwind for GMs in 1H12 for all equipment vendors (who have exposure to Chinese carriers) has been the adverse mix of capex spend at both China Mobile and China Unicom. In fact, we estimate that GSM capex in China could decline 26% in 2012 which will be offset by 3G capex plans from China Unicom, as the carrier targets aggressive WCDMA rollouts to extend its coverage to counties after having already covered 370 cities across China. In addition, China Mobile has also laid out an ambitious plan to roll out a TD-LTE network in 2013 (aiming for 200,000 TD-LTE base stations through new builds or upgrades) following the scale trials in select cities during 2012. Looking at the network plans for these carriers, we believe that most of these headwinds for margins may continue to persist over the next 12-18 months.

Some respite from reversal of GM impact from EU modernisation. One of the most discussed negative margin drivers for wireless infrastructure vendors (especially Ericsson) recently has been the ongoing network modernisation contracts in Europe. Our analysis suggests that EU network modernisation so far has had close to 200bp of negative impact on Ericsson’s GMs. We acknowledge that this impact from modernisation should reverse during 2013 as long as these projects start to decline in the business mix ending 2012; however, given the other negative GM drivers discussed above, along with top-line pressures in the industry, we believe that GM recovery in 2013 may prove to be gradual and muted.

30 August 2012


LTE ramp and CDMA decline, especially in the US One of the negative drivers for GMs for the wireless equipment vendors in 2012 has been the mix shift from 3G expansion/upgrade projects at carriers towards LTE rollouts, especially in the US. This has already had an impact on GMs for equipment vendors in Q212 and is likely to continue having an impact over the next 12 months until we see LTE being rolled out by all the major carriers in the US. In addition, we believe that the Network Vision project carried out by Sprint is similar to a network modernisation contract carrying lower GMs, and given the large scope of the project, we see this as another margin headwind for the wireless infrastructure vendors in the US.

Significant GM differential between LTE rollout and 3G expansion/upgrade contracts. As we have already discussed in the earlier section in the note, with tier I carriers in the US having plans to roll out LTE networks and reach coverage levels similar to their existing 3G footprint over the next 12-18 months, we believe that the bulk of wireless capex at Verizon, AT&T and Sprint is going to be directed towards LTE. For details on LTE rollouts at top US carriers, please refer to Figure 25. Although lower capex on 3G (both CDMA and WCDMA) should not have an impact on the top-line for equipment vendors as it is likely to be replaced by LTE-related revenues, it creates a GM headwind for equipment vendors given the significant difference between the margin profiles of 3G expansion or 3G software upgrade contracts and LTE rollout projects. In fact, we believe GMs on LTE rollout contracts to be in the range of 10-20% compared to GMs of 60-65% for 3G software upgrade contracts in the US. This creates a headwind for GM recovery for equipment vendors like Ericsson and Alcatel-Lucent, which have significant exposure to LTE contracts in the US.

Figure 35: We estimate CDMA still adds around 140bp of GMs at Ericsson’s group level in SKr millions, unless otherwise stated Positive GM impact from CDMA business Q211 Q212

Ericsson group revenue 54,770 55,319 Gross profit (excl restructuring) 20,963 18,097 Gross Margin % (excl restructuring) 38.3% 32.7% CDMA equipment revenue 4,000 2,000 Gross Margin % difference b/w CDMA and LTE (assumed) 40% 40% Gross profit (incremental from CDMA vs. LTE) 1,600 800 Ericsson group revenue (assuming CDMA revenue is replaced by LTE) 54,770 55,319 Gross profit (excl restructuring & CDMA being replaced by LTE) 19,363 17,297 Gross Margin % (excl restructuring & CDMA being replaced by LTE) 35.4% 31.3%

GM contribution coming from CDMA business (ppt) 2.9% 1.4%


GM impact from continued decline in CDMA in 2013E. Given our view that CDMA business for Ericsson (and also for Alcatel-Lucent, the other major CDMA supplier in the US) carries significantly higher GMs than other projects, we have also tried to estimate the GM contribution from CDMA business at the group level for Ericsson based on recent company disclosures. This is important especially given our view that the CDMA infrastructure market peaked during 2011 and is likely to see sharp declines over the next few years. In fact, Ericsson on its Q212 results noted that CDMA equipment sales for the company was SKr2bn in the quarter after declining close to 50% yoy. This CDMA business in the US is going to be replaced by LTE as both Verizon and Sprint direct their capex spend towards rolling out LTE networks. Given the significant differential in GMs between CDMA and LTE (we believe this could be as high as 40% or even higher), we estimate that the CDMA business on its own had around 140bp of positive margin impact on Ericsson’s group GMs for Q212 (as shown in Figure 35) if we were to replace all of CDMA revenues with LTE revenues. With a significant decline expected in CDMA revenues over the next 12-18 months, we would view this as an incremental negative for Ericsson’s (and also Alcatel-Lucent’s) GM improvement as we go through 2013.

30 August 2012


Sprint is carrying out a nationwide modernisation contract. As a reminder, Sprint in the US plans to double its capex from $3bn in 2011 to $6bn in 2012 as part of its Network Vision project. What is driving this strong growth in capex spend is that the carrier is effectively modernizing its entire network to support LTE technology. For example, it has already taken all of its 9,600 iDEN cell sites off air this year and has activated around 2,000 Network Vision sites on air so far. Further, it has plans to increase the number of Network Vision sites to 12,000 by the end of 2012. Given the hardware-intensive nature of the project, we believe that GMs for such contracts are significantly margin dilutive for equipment suppliers.

China to remain a headwind for GMs Another headwind for gross margins in 1H12 for all equipment vendors (who have exposure to Chinese carriers) has been the adverse mix of capex spend at both China Mobile and China Unicom. Specifically, this is due to the decline in high margin GSM related business for equipment vendors in the region, along with aggressive plans for rolling out a WCDMA network to counties at China Unicom. In addition, China Mobile has also laid out an ambitious plan to roll out a TD-LTE network in 2013 following the scale trials in select cities during 2012. Looking at the network plans for these carriers, we believe that most of these headwinds for margins may continue to persist over the next 12-18 months.

Figure 36: Declining GSM but aggressive 3G coverage push at China Unicom in 2012E Breakdown of wireless/wireline capex at China Unicom by technology over time

18%11%

6% 3%

32%

22%28% 36%

17%

32% 34% 26%

22% 24% 20% 26%

10% 11% 12% 10%

0%

25%

50%

75%

100%

2009 2010 2011 2012E

GSM WCDMA Broadband & Data Transport Networks IT Systems & Others

Total = Rmb 112.5bn Total = Rmb 76.7bnTotal = Rmb 70.2bn Total = Rmb 100.0bn


China Unicom has aggressive WCDMA rollout plans for 2012. China Unicom (which supports GSM/WCDMA standards) is planning to increase investments in its wireless network along with accelerated upgrade for its fixed line broadband network. Given its 3G service revenue has increased nearly three-fold yoy and in order to sustain this fast growth, the carrier has planned a capex budget of Rmb 100bn for 2012 (up 30% yoy). Within this, 3G related spending is expected to rise from 28% of the budget in 2011 to 35.5% in 2012 (Figure 36), as China Unicom plans to eliminate blind spots in urban areas and expand HSPA+ coverage.

Falling GSM along with rising 3G may prove to be an issue in terms of mix for vendors. Although driven solely by China Unicom’s aggressive 3G capex guidance, we would note that the headline wireless capex guidance at the aggregate level could see a healthy 10%

30 August 2012


growth in 2012. However, more importantly, within this wireless capex estimate, we would note that the mix towards GSM technology is expected to see significant declines both at China Mobile and China Unicom, resulting in a 26% yoy decline in absolute terms in 2012 (Figure 37). Similarly, CDMA related capex is also expected to decline 14% yoy in 2012. These declines are being more than offset by a significant increase in the 3G capex budget for 2012 which could rise 41% yoy in 2012, buoyed by aggressive WCDMA spending plans at China Unicom as the carrier aims to extend its existing 3G coverage. In fact, the company on the earnings call noted that while basic WCDMA rollout has been already completed in some 370 cities across China, it sees much work still needs to be done at the county level. We believe this significant change in mix away from higher margin GSM and CDMA businesses towards WCDMA coverage type projects could mean that business mix may prove to be an issue for all participating equipment vendors.

Figure 37: Decline in GSM and CDMA related capex may lead to a mix issue for vendors GSM capex breakdown (Rmb bn) 2010 2011 2012E

China Mobile 54.7 73.2 54.1

China Unicom 7.5 4.6 3.2

Total GSM related capex 62.2 77.8 57.3

% change yoy 25% -26%

CDMA capex breakdown (Rmb bn) 2010 2011 2012E

China Telecom 27.0 22.0 19.0

% change yoy -19% -14%

3G capex breakdown (Rmb bn) 2010 2011 2012E

China Mobile (TD-SCDMA) 23.0 20.0 23.0

China Unicom (WCDMA) 15.7 21.4 35.5

Total 3G related capex 38.7 41.4 58.5

% change yoy 7% 41%


China Mobile has aggressive TD-LTE plans. It is becoming increasingly clear that China Mobile has ambitious plans with respect to transitioning towards TD-LTE (4G) wireless standard. The company sees its mobile network evolving in three distinct elements. The GSM network will be used primarily for carrying voice traffic and maintaining leading voice experience, TD-SCDMA (its existing 3G standard) for carrying data on handsets for the mass market and TD-LTE for high quality wireless broadband experience. Specifically for TD-LTE, the carrier expects the rollout to progress in 3 phases, as shown in Figure 38.

■ Phase 1 – This phase has now been completed, with China Mobile having launched scale-trials in 6 cities using over 900 base stations.

■ Phase 2 – This part of the TD-LTE rollout will be implemented during 2012 with plans to construct over 20,000 base stations for scale trials in 9 cities. The company has noted that there is an ongoing upgrade of base stations in major cities in Zhejiang and Guangdong, with Hangzhou and Shenzhen expected to start pre-commercial trials. In addition, China Mobile expects the launch of multi-mode smartphones (which will support TD-LTE, LTE FDD, 3G and 2G standards) during 2012.

■ Phase 3 – For 2013, the company is targeting the number of TD-LTE base stations to exceed 200,000 either through new-builds or upgrades of existing 2G/3G base stations. As a frame of reference, China Mobile has around 700,000 GSM base stations and close to 220,000 TD-SCDMA base stations.

30 August 2012


Figure 38: China Mobile has accelerated its plans for TD-LTE large scale deployment

2011 2012 2013

Phase 1: Scale-trials in 6

cities, constructed over

900 base stations

Phase 2 (1H 2012): Successfully

completed scale-trials in “6+1” cities,

commence expanded build-out

Phase 3: Number of base stations

will reach 200,000 through new-

builds or smooth upgrade to

extend scale of pre-commercial

TD-LTE Scale Deployment Accelerated

Phase 2 (2H 2012): Base stations will

reach 20,000 with extended coverage to

13 cities. Over 90% effective coverage

in key areas of Hangzhou, Shenzhen,

and Guangzhou

Source: Company data

Quantifying the impact from EU network modernisation

One of the most discussed negative margin driver for wireless infrastructure vendors

(especially for Ericsson) recently has been the ongoing network modernisation contracts in

Europe. As such, we look at the rationale for such modernisation projects from a carrier’s

point of view, the role of infrastructure vendors in these projects and the negative impact

these projects have had on GMs for equipment vendors (especially Ericsson).

What is driving this big modernisation effort, especially in Europe? Given the early

deployment of GSM and WCDMA networks in Europe, in 2010 Ericsson estimated that

around 50% of installed base stations in Europe needed to be modernised over the next

couple of years. In our view, there are three main drivers for carriers to carry out such

modernisation projects. First, given the legacy nature of existing GSM/WCDMA networks,

carriers saw a number of areas where they could save opex costs post the modernisation

of networks (Figure 39). This ranged from lower site rental (cabinets supporting multi-

mode technologies instead of having separate cabinets for GSM, WCDMA and LTE), less

power consumption due to hardware efficiency, and less operational and maintenance

costs. Secondly, these modernised networks will also allow carriers to have an LTE-ready

network in place (at least from a hardware angle), rather than building one post 4G

spectrum auctions and regulatory approvals. And finally, it also improves the quality of

existing 3G networks, especially given the growth in mobile data traffic.

30 August 2012


Figure 39: Significant opex savings potential for carriers post network modernisation

Source: Ericsson (NA Industry Analyst Forum, Aug 2010)

Impact on Ericsson’s GMs from Network Modernisation: we estimate close to 200bp. Over the period Q111 to Q411, Ericsson saw its GMs (excl. rest.) decline from 38.8% in Q111 to 31.0% in Q411. To explain the drivers for such a sharp decline in GMs, the company noted this 790bp of yoy GM decline was due to 3 main factors. In fact, as per statements and guidance from Ericsson, we estimate this 790bp of GM pressure is split as follows:

■ Business mix (coverage/capacity projects) causing 340bp of yoy decline in GMs;

■ European Network Modernisation leading to another 180bp of GM pressure; and

■ Increased share of Services in revenue mix causing further 270bp of margin pressure.

For details on margin drivers on a quarterly basis over this period, refer to Figure 40.

For Q112, Ericsson witnessed a strong recovery in GMs whereby GMs improved from 31.0% in Q411 to 34.3% in Q112. According to Ericsson, this sequential improvement was driven by seasonality (from Q4 to Q1, as Q4 typically has more coverage projects which carry lower GMs), more projects relating to mobile broadband capacity (again, these carry higher GMs) and lower share of Services (down to 40% in Q112 from 42% in Q411). GM recovery in Q112 was followed by another round of margin pressure as GMs declined to 32.7% in Q212. According to the company, this reduction was driven by a higher share of Services (up to 44% in Q2 vs. 40% in Q1) and lower mobile broadband capacity projects in the quarter. As such, we estimate the impact on Ericsson’s GMs from EU network modernisation contracts to be close to 200bp. For details around our analysis on GM evolution for Ericsson going forward, please refer to our Ericsson note titled ‘Muted top-line and GM recovery’ published concurrently.

We acknowledge that this impact from modernisation should reverse during 2013 as long as these projects start to decline in the business mix ending 2012; however, given the other negative GM drivers discussed above, along with top-line pressures in the industry, we believe that GM recovery in 2013 may prove to be gradual and muted.

30 A

ug

ust 2012

Wireless In

frastructu

re 35

Figure 40: Estimating potential GM impact at Ericsson from multiple drivers over time – Services mix, EU modernisation and coverage/capacity projects Gross Margin (excluding restructuring) development for Ericsson since Q4 2010

36.6%

38.8%

38.3%

35.5%

31.0%

34.3%

32.7%32.4%

31.1%

33.8%34.4% 34.4%

33.1%

1.2%

1.4%

2.0% 2.3%

0.6%

1.1%

1.6%

2.5%

1.5%

0.3%

0.7%

0.9%

0.3%

0.3%0.8% 0.5%

1.1%0.3%

0.7%

1.7%

1.0% 1.0%

0.8%

0.2%0.5%

0.3%

28%

30%

32%

34%

36%

38%

40%

Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312E Q412E Q113E Q213E Q313E Q413E

Services share Modernisation Projects Business Mix (Coverage / Capacity) Gross Margin (excl restructuring, %)

GM impact over period Q111 to Q212:

Services share : Negative 2.7%

Modernisation projects: Negative 1.8%

Coverage / Capacity projects: Negative 1.6%

GM impact over period Q212 to Q413:

Services share : Positive 0.4%

Modernisation projects: Positive 1.8%

Coverage / Capacity projects: Negative 1.7%

FY 2012 GM (excl. rest.) = 32.5% FY 2013 GM (excl. rest.) = 33.9%

1) GM drivers over Q111–Q411. Over the period Q111–Q411,Ericsson saw its GMs (excl. rest.) decline from 38.8% to 31.0%.According to the company, drivers for this 790bp of GM declinewere split as a) adverse business mix (coverage/capacity)causing 340bp of margin decline; b) EU network modernisationleading to 180bp of GM drop; and c) Higher share of Services inrevenue mix causing 270bp of GM pressure.

2) GM drivers for Q1/Q212. After significant GM pressure seenin 2011, Ericsson saw some improvement in Q112, wherebyGMs came in at 34.3%. This was driven by better business mix(mobile broadband capacity projects) and lower share ofServices. But again in Q212, it declined to 32.7% due toincreased mix of Services and lower mobile broadband capacityprojects.

3) GM pressure to persist in 2H12. We see Services falling in revenue mix in 2H(from 44% in Q212 to 41% in 2H12), which will have some positive impact onEricsson’s GMs. We also assume EU modernisation to have no further GM impactin Q3 and a small positive impact in Q4 (30bp) as they start to decline in the mix.However, we also believe that business mix will continue to be negatively impacteddue to 3 reasons: a) US LTE rollouts (incl. Sprint modernisation project); b) lowGSM in China and aggressive 3G rollouts by China Unicom; and c) Q4 seasonalityimpact which typically has more coverage projects. This gives us GMs of32.4%/31.1% for Q3/Q412.

4) GMs of 34% for 2013. For Ericsson, we arrive at GMs of close to 34% for 2013.This assumes 150bp of GM improvement, which we expect to come from declinein EU modernisation. In terms of business mix and Services share, we do notexpect a significant change going into 2013. We believe that Services will remainhigh in the mix (43% in 2013 vs. 42% in 2012).

1

23

4


30 August 2012


Even history suggests a muted recovery Another way to look at the potential for GM recovery is analysing margin trends for the overall telecom infrastructure market over the last few years. For this analysis, we have included Nokia Siemens, Alcatel-Lucent, ZTE, Juniper, Cisco, Ciena and Tellabs to calculate the average GM (weighted by revenues) for the infrastructure market. One thing to note is that in the past after every step change in GMs for the overall industry, margins have not fully recovered to previous levels. For example, when Ericsson’s GMs declined from 43% in Q207 to 36% in Q307 due to mix issues, it only recovered back to 38% in 1H08 as can be seen from Figure 41. Similarly, with GMs falling from 39% in 1H11 to 31% in Q411, we think any potential recovery will be gradual and muted.

Figure 41: Gross Margins have not recovered fully after every step change in the past GM (weighted avg) for infra players over time (Ericsson, NSN, ALU, ZTE, Cisco, Juniper, Ciena, Tellabs)

20%

25%

30%

35%

40%

45%

50%

55%

Q1

00

Q3

00

Q1

01

Q3

01

Q1

02

Q3

02

Q10

3

Q30

3

Q10

4

Q30

4

Q10

5

Q30

5

Q10

6

Q30

6

Q10

7

Q30

7

Q10

8

Q30

8

Q10

9

Q30

9

Q11

0

Q31

0

Q11

1

Q31

1

Q11

2

Gro

ss m

arg

in (%

)

Infrastructure Sector Infrastrucutre Sector (ex Cisco) Ericsson Source: Company data, Credit Suisse research

One positive may be rational pricing from Huawei During its Global Analyst Summit in April 2012, Huawei management highlighted that its Carrier Networks business had seen muted growth in 2011 (up only 3% in 2011) and that this had further slowed to 5% in 1H12. At the event, the CEO had noted that the company had seen a significant growth slowdown within the telecom infrastructure business, especially within emerging markets, which was also impacted by macroeconomic and political instability. Further, management acknowledged that it continues to see signs of stringent capex budgets at wireless carriers, and it noted similar trends even in its 1H12 results. In addition, there seems to be a clear change in strategy at Huawei, whereby its focus is shifting from telecom infrastructure to mobile phones and enterprise end markets to drive future growth.

30 August 2012


Figure 42: Carrier Networks, accounting for 74% of group sales, grew only 3% yoy in

2011 Rmb in millions, unless otherwise stated % yoy change

Sales by segment (Rmb mn) 2009 2010 2011 2010 2011

Carrier Networks 124,442 145,800 150,145 17% 3%

Wireless Networks 45,911

Fixed Networks 49,761

Global Services 34,705

Carrier Software & Core Networks 19,768

Enterprise Business 5,834 9,164 57%

Consumer Business 24,617 30,914 44,620 26% 44%

Total 149,059 182,548 203,929 22% 12%


Huawei’s focus shifting from telecom infrastructure to phones and enterprise market. After seeing a significant slowdown in sales growth (only 12% growth in 2011), the company is looking to reaccelerate sales growth, as it targets 15-20% in 2012. However, we note that the company expects strong revenue growth within its Enterprise Business and around 30% long-term revenue growth within its Consumer Business (driven by mobile devices). By extrapolation, this implies that Huawei does not see strong growth within its Carrier Networks segment (which accounted for 75% of group sales in 2011).

Figure 43: Networks accounted for 80% of sales in 2010… Figure 44: …but focus shifting to Enterprise & Consumer

Carrier Networks80%

Enterprise Business

3%

Consumer Business

17%

Sales by segment (2010)

Wireless Networks

23%

Fixed Networks24%

Global Services17%

Carrier Software & Core Networks

10%

Enterprise Business

4%

Consumer Business

22%

Sales by segment (2011)

Carrier Networks

74%


Shift in focus may be a good thing for wireless infrastructure. After seeing group sales grow at a CAGR of 34% over 2006-2010, mainly driven by telecom infrastructure, Huawei registered only 3% top-line growth in its Carrier Networks business in 2011. Within the wireless infrastructure market, Huawei now holds around 15% market share and a respectable #3 position, along with strong positioning in certain wireline areas like optical networking. Within this segment, Huawei noted its plans to consolidate its existing position and it seemed much more sanguine regarding the potential for long-term revenue growth. While this may not be a positive sign of the overall growth in the telecom infrastructure market, on the positive side, we believe this could signal that Huawei may become less aggressive on pricing, especially as it may see limited upside to its 15% market share in the wireless infrastructure market.

30 August 2012


Companies Mentioned (Price as of 27 Aug 12) Alcatel-Lucent (ALUA.PA, Eu0.94, UNDERPERFORM [V], TP Eu0.75) America Movil (AMX, $25.42, OUTPERFORM, TP $30.00) AT&T (T, $36.87, OUTPERFORM, TP $36.50) Axiata Group Berhad (AXIA.KL, RM5.98, OUTPERFORM, TP RM6.40) Bharti Airtel Ltd. (BRTI.BO, Rs249.10, UNDERPERFORM, TP Rs220.00) China Mobile Ltd. (0941.HK, HK$83.55, OUTPERFORM, TP HK$101.00) China Telecom (0728.HK, HK$4.41, OUTPERFORM, TP HK$4.50) China Unicom Hong Kong Ltd. (0762.HK, HK$13.00, OUTPERFORM, TP HK$18.80) Cisco Systems, Inc. (CSCO, $19.36, OUTPERFORM, TP $25.00) Deutsche Telekom (DTEGn.F, Eu9.55, NEUTRAL, TP Eu9.00) DiGi.Com (DSOM.KL, RM4.79, OUTPERFORM, TP RM5.00) Elisa Corp. (ELI1V.HE, Eu17.00, OUTPERFORM, TP Eu20.00) Ericsson (ERICb.ST, SKr65.00, UNDERPERFORM, TP SKr57.50) France Telecom (FTE.PA, Eu11.45, NEUTRAL, TP Eu15.50) Globe Telecom, Inc. (GLO.PS, P1,080.00, OUTPERFORM, TP P1,330.00) Idea Cellular Ltd. (IDEA.BO, Rs74.95, UNDERPERFORM, TP Rs55.00) KDDI (9433, ¥569,000, OUTPERFORM, TP ¥570,000, OVERWEIGHT) KPN (KPN.AS, Eu6.93, OUTPERFORM, TP Eu12.00) Maxis Berhad (MXSC.KL, RM7.02, OUTPERFORM, TP RM8.00) MetroPCS, Inc. (PCS, $9.75, NEUTRAL, TP $9.00) Motorola Solutions, Inc. (MSI, $47.71, OUTPERFORM, TP $62.00) Nokia (NOK1V.HE, Eu2.68, NEUTRAL [V], TP Eu2.00) NTT DoCoMo, Inc. (9437, ¥136,500, OUTPERFORM, TP ¥150,000, OVERWEIGHT) Portugal Telecom (PTC.LS, Eu3.86, UNDERPERFORM, TP Eu4.00) PT Indosat Tbk (ISAT.JK, Rp5,300.00, OUTPERFORM, TP Rp8,150.00) Reliance Communication Ltd. (RLCM.BO, Rs52.15, NEUTRAL [V], TP Rs75.00) Samsung Electronics (005930.KS, W1,180,000, OUTPERFORM, TP W1,700,000) Siemens (SIEGn.DE, Eu75.27, OUTPERFORM, TP Eu90.00) Softbank (9984, ¥3,165, OUTPERFORM, TP ¥3,500, OVERWEIGHT) Sprint (S, $4.82, OUTPERFORM [V], TP $6.00) Swisscom (SCMN.VX, SFr395.50, UNDERPERFORM, TP SFr355.00) Telecom Italia (TLIT.MI, Eu0.74, NEUTRAL, TP Eu1.00) Telefonica (TEF.MC, Eu10.29, NEUTRAL, TP Eu14.00) Telekom Austria (TELA.VI, Eu6.29, NEUTRAL, TP Eu10.00) Telenor (TEL.OL, NKr104.40, OUTPERFORM, TP NKr107.00) TeliaSonera (TLSN.ST, SKr46.76, NEUTRAL, TP SKr52.00) Telkom SA Ltd. (TKGJ.J, R20.5, RESTRICTED, TP R0) True Corp PCL (TRUE.BK, Bt4.08, UNDERPERFORM, TP Bt2.80) Verizon, Inc. (VZ, $42.76, NEUTRAL, TP $45.00) Vodafone Group (VOD.L, 185 p, OUTPERFORM, TP 170.00 p) XL Group Plc. (XL, $23.20, NEUTRAL, TP $24.00) ZTE Corp. (0763.HK, HK$11.08, NEUTRAL, TP HK$12.00)

30 August 2012


Disclosure Appendix

Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for ALUA.PA ALUA.PA Closing

Price Target

Price

Initiation/ Date (Eu) (Eu) Rating Assumption 31-Aug-09 2.65 N 02-Sep-09 2.364 R 03-Sep-09 2.395 N 07-May-10 1.98 2.25 18-Nov-10 2.155 2 U 21-Feb-11 3.524 3 10-May-11 4.379 3.25 29-Jul-11 2.755 2.5 08-Nov-11 1.527 1.5 05-Jan-12 1.231 1.25 14-Feb-12 1.747 1.6 27-Apr-12 1.205 1.2 18-Jul-12 .903 .9 27-Jul-12 .832 .75

22

33

3

21

2

111

2.65RN

U

0

0.5

1

1.5

2

2.5

3

3.5

4

Closing Price Target Price Initiation/Assumption Rating

Eu

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for ERICb.ST ERICb.ST Closing

Price Target

Price

Initiation/ Date (SKr) (SKr) Rating Assumption 22-Sep-09 73.4 60 05-Jan-10 68.7 70 N 14-Apr-10 77.7 90 O 28-Apr-10 84.4 100 26-Jul-10 81 95 25-Oct-10 73.75 90 04-Jan-11 76.45 85 N 26-Jan-11 81.15 80 28-Apr-11 91.55 90 14-Jun-11 88.7 R 15-Jun-11 88.65 N 18-Jul-11 89.05 110 O 22-Jul-11 83.45 100 31-Aug-11 71.55 95 25-Oct-11 66.45 85 05-Jan-12 68 70 N 27-Jan-12 61.05 55 26-Apr-12 64.7 57.5

60

70

90

100

95

90

85

80

90

110

100

95

85

70

5558

N

O N

RN O

N

55

65

75

85

95

105

Closing Price Target Price Initiation/Assumption Rating

SKr

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a

30 August 2012


7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 45% (52% banking clients) Neutral/Hold* 42% (49% banking clients) Underperform/Sell* 11% (39% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names. Price Target: (12 months) for (ALUA.PA) Method: Alcatel Lucent's target price of 0.75 EUR is based on applying a 2012 EV/sales of 0.10x to our estimates, which we believe is fair given our operating margin assumptions for the company. Risks: The risks that may impede achievement of 0.75 EUR price target are: (1) pricing pressure within the mobile infrastructure abates and (2) we see an accereration in spending by carriers. Price Target: (12 months) for (ERICb.ST) Method: Our TP of SKr57.50 is based on 11.5x pro-forma 2013 EPS of SKr5.00. Risks: Risks to our SKr57.50 price target for Ericsson include risks from overall macro environment, conservative capex approach by operators, continued pricing pressure and aggressive bidding in wireless infrastructure contracts. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (ERICb.ST) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (ERICb.ST) within the past 12 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ERICb.ST) within the past 12 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ALUA.PA, ERICb.ST) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

30 August 2012


Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: ALUA.PA, DTEGn.F, ELI1V.HE, ERICb.ST, FTE.PA, KPN.AS, NOK1V.HE, PTC.LS, SIEGn.DE, SCMN.VX, TLIT.MI, TEF.MC, TELA.VI, TEL.OL, TLSN.ST, VOD.L.

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For Thai listed companies mentioned in this report, the independent 2010 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: True Corp PCL(Very Good). Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Achal Sultania, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

30 August 2012 Global

Equity Research

XX5454EU.doc

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