PT. Mirae Asset Sekuritas Indonesia - Initiation Report PDF

Telecommunication
Coming of age
Data avalanche
Across the world and in Indonesia, data consumption is taking center stage as the
Overweight (Initiate) new norm. As people transition to smartphones, data revenue has quickly become
the main revenue driver of telco companies in Indonesia.
Initiation Report
August 28, 2017 We believe that the real opportunity in data lies ahead supported by 1) continued
rapid uptake of smartphones, 2) strong emergence of over-the-top (OTT) services, 3)
growing digital native population, 4) aggressive rollout of 3G/4G networks, as well
PT. Mirae Asset Sekuritas Indonesia as accommodative data prices.
Infrastructure
The great migration to data
Giovanni Dustin Contrary to market consensus, we anticipate data yield to remain subdued this year.
+62-21-515-1140 (ext: 124) We believe that we are currently still in the migration stage, from legacy to data.
giovanni@miraeasset.co.id
We identify four anchor themes that will take place during this stage: 1) fixed line
revenue will continue to decline until it reaches an inflection point before gradually
(but marginally) rebounding, 2) data cannibalization process intensifies as the digital
landscape flourishes, 3) in order to i) grab market share, ii) accelerate migration to
data, and iii) encourage subscribers to consume more data, operators will continue
to wage price wars, and 4) data monetization will only start when most subscribers
have successfully migrated to data.
We stress that falling data price during this stage does not necessarily translate to
lower profitability for telco operators. We argue that migration to data will boost
data traffic and sequential increase in volume should be able to over-compensate
for the fall in data yield. Moreover, the ability of each company to migrate more
subscribers to 4G could prove to be a key differentiating factor in generating
profitability as 4G would translate to higher traffic and lower cost.
Initiate coverage with Overweight call, with ISAT as our top pick
We initiate our coverage on Indonesian telecommunication sector with an
Overweight recommendation.
Within the telco space, we recommend Indosat (ISAT/Buy/TP IDR8,100) as our

preferred pick. We expect ISAT to continue to grow and capture market share on the
back of 1) tamed debt level and streamlined cost structure, 2) prudent network
expansion, and 3) attractive package prices.
Main risks to our call include 1) stronger-than-expected competition that could lead
to a disruptive price war, 2) sudden and drastic changes to the regulations, and 3)
slower-than-expected data monetization.
Table 1. ()
Source: KDB Daewoo Securities Research
Telecommunication companies covered in this report

Market cap Target price EBITDA margin (%) ROE (%) EV/EBITDA (x)
Company name Ticker Rating
(IDRbn) (IDR/share) FY17F FY18F FY17F FY18F FY17F FY18F
Indosat ISAT Buy 34,641.3 8,100 43.7 43.6 10.6 12.3 4.3 4.1
Telekomunikasi Indonesia TLKM Trading Buy 480,816.0 5,400 51.0 51.5 19.7 20.1 8.2 7.4
XL Axiata EXCL Hold 39,117.9 3,950 37.3 37.5 1.4 3.6 6.4 5.9
Source: Mirae Asset Sekuritas Indonesia Research
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
August 28, 2017 Telecommunication
C O N T E N T S
Investment highlights 3
Telecommunication industry in Indonesia 4

Industry structure and backdrops 4
Data avalanche 7
The era of data 7
The great migration to data 11

Fixed line falling from grace 12
Declining legacy services 13
Aggressive data pricing 14
Data monetization 20
Eyes on the future 22
Regulatory landscape 24
Interconnection rate cut 24
Infrastructure sharing 246
Spectrum auction 257
Promotion scheme 29
Indosat (ISAT IJ) 30

Company background 31
Investment thesis 34
Valuation 41
Telekomunikasi Indonesia (TLKM IJ) 44

Valuation 56
XL Axiata (EXCL IJ) 59

Valuation 71
Mirae Asset Sekuritas Indonesia Research 2

Investment highlights
Favorable wind of change for the industry

Across the world and in Indonesia, consuming data is becoming the new norm. As
people transition to smartphones, data revenue has quickly become the main
revenue driver of telco companies in Indonesia. We believe that the real
opportunity in data lies ahead with continued rapid uptake of smartphones, strong
emergence of over-the-top (OTT) services, growing digital native population,
aggressive rollout of 3G/4G networks, and accommodative data package prices.
Our top pick for the sector is Indosat (ISAT). The company has exhibited better debt
control and performed a profitability turnaround as it reversed its net loss position
to a net profit in 1Q16. We believe that tamed debt level and streamlined cost
structure, prudent network expansion, as well as attractive package prices should
propel the company forward. With TLKM targeting the upper segment in the
market, this should provide an opportunity for ISAT to grab the bigger and
expanding mid-to-low segment.
Although we expect Indonesia’s largest telco company, Telekomunikasi Indonesia’s
(TLKM), cellular market share to deteriorate marginally in the future, we believe
that TLKM will still be able to maintain its market share leading position, as its
topline will be supported by further monetization, utilizing its huge subscriber base.
We also believe that TLKM’s earnings generation ability remains intact on the back
of its superior infrastructure, strong cash flow generation ability, and favorable
fixed line and broadband business outlook.
Next, we believe that XL Axiata (EXCL) is currently the most data-centric cellular
operator in Indonesia, as it has the highest data subscriber mix in the industry.
After a rough period of balance sheet restructuring, we believe that EXCL is now
ready to compete. EXCL’s improved infrastructure, high network capacity, and
affordable package prices, act as levers to attract higher value subscribers who
prioritize good data experience. However, note that higher dependency on data
revenue implies that data monetization is imperative for sustainable profitability.
Indosat (ISAT/Buy/TP IDR8,100)

 Streamlined cost structure, coupled with prudent network expansion, and
affordable package prices
 With TLKM targeting the upper segment in the market, ISAT can grab the
bigger and expanding mid-to-low segment.
 Our target price is based on DCF methodology and implies FY17F
EV/EBITDA of 4.3x. ISAT is currently trading at FY17F EV/EBITDA of 4.1x.
Telekomunikasi Indonesia (TLKM/Trading Buy/TP IDR5,400)

 Superior infrastructure, strong cash flow generation ability, favorable fixed
line and broadband business outlook, and enticing dividend yield
 Fixed line and fixed broadband profitability could be the next ‘leg’ in the
large-cap telco story to unlock value
EV/EBITDA of 8.2x. TLKM is currently trading at FY17F EV/EBITDA of 8.1x.
XL Axiata (EXCL/Hold/TP IDR3,950)

 Would benefit from stellar data growth in the long run, as it focuses on
data and higher value subscribers
 Possesses relatively strong network with high capacity that can act as
levers to attract higher value subscribers who prioritize data experience
EV/EBITDA of 6.4x. EXCL is currently trading at FY17F EV/EBITDA of 7.0x.
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Telecommunication industry in Indonesia
Industry structure and backdrops
Cellular is the new fixed line

Long gone are the days when people used public phone booths to make phone
calls. As technology advances, the cellular service takes the spotlight away from the
fixed line service. The now cellular-dominated industry is experiencing big shifts in
trends, characterized by less stable market shares compared to the old days.
Rule of three in Indonesian telco industry

The Indonesian telco industry has seven main players: Telekomunikasi Indonesia
(TLKM), Indosat Ooredoo (ISAT), XL Axiata (EXCL), Hutchinson 3 Indonesia (not
listed), Sampoerna Telekomunikasi Indonesia (not listed), Smartfren Telecom
(FREN), and Bakrie Telecom (BTEL). The top three companies, TLKM, ISAT, and EXCL,
control c.80% of the market share.
Unlike fixed line, cellular typically does not have a simple distinction between
incumbents and new entrants; although operators with smaller market share tend
to behave as challengers, competing more aggressively in price, trading off
margins for market share gains. TLKM, as the incumbent, holds the largest cellular
market share through its subsidiary, Telkomsel (55% as of 1H17), followed by ISAT
(30%) and EXCL (15%). Given this, ISAT and EXCL act as the challengers.
Figure 1. Industry’s data revenue will continue to grow Figure 2. TLKM leads the cellular subscriber market share
Legacy services Data
TLKM ISAT EXCL
100%
90%
80%
15%
70%
60%
50%
40% 55%
30%
30%
20%
10%
0%
FY14 FY15 FY16 FY17F FY18F FY19F
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research
Dynamic market share

With two basic revenue models of cellular: postpaid and prepaid, the industry’s
market share becomes more dynamic. This is due to the fact that prepaid is often
associated with a high churn rate. Subscribers can easily switch operators as it is
only a matter of changing sim cards. Ergo, higher number of postpaid subscribers
is more preferred by companies as these subscribers are considered more value
accretive due to their stickiness and high average revenue per user (ARPU) nature.
Therefore, it is not surprising to see companies putting great efforts to grow their
postpaid user base. Many believe that this is a sound plan, and that focusing on
postpaid subscribers could succeed. We would like to argue, however, that while
this plan looks good on paper, it would never be successful in reality.

We do not believe that the current industrial landscape favors the growth of the
postpaid segment due to a couple of considerations. Firstly, as the cellular market
is approaching saturation in big cities, incremental new subscribers will more likely
come from the mid-to-lower income segment of the population, located in smaller
cities outside Java. Considering the relatively low income per capita outside Java, we
doubt that subscribers from this segment will be willing to commit to monthly
payments. Secondly, the current prepaid packages are more feature-rich and
competitive compared to postpaid packages. Unsurprisingly, users that could
afford a postpaid plan are increasingly drawn to prepaid offerings, which often
include unlimited voice and SMS, nationwide roaming, and other attractive
bonuses, offered at fees lower than postpaid.
We expect postpaid ARPU to decline marginally as companies want to reduce the

gap between postpaid and prepaid pricings in order to expand their postpaid
segment. Similarly, prepaid ARPU will continue to decline as we believe companies
will continue to use prices and bonuses as primary levers to attract new subscribers
and expand market shares. It will, however, hit an inflection point and start to
bounce up in 2H18, in which we expect data monetization to start on the back of
higher penetration of 3G/4G devices (i.e., successful migration to data), exemplified
by limited volume growth. We expect to see surprises to the upside regarding data
monetization if competition subsides faster than expected (driven by faster-than-
expected data penetration) and/or the regulators managed to implement new
regulations regarding package prices and bonuses.
Figure 3. Industry’s postpaid vs. prepaid subscribers Figure 4. Industry’s average postpaid vs. prepaid ARPU
(000 subs) Prepaid Postpaid (IDR000/month)
Postpaid Prepaid
300,000 160
140
250,000
120
200,000
100
150,000 80
60
100,000
40
50,000
20
0 0
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16
Ample room for growth

Some believe that the telco industry is entering the sunset cycle. This is probably
true, but only for developed markets, like the US, which smartphone penetration
accounts for c.81%. On the other hand, we believe Indonesia is currently only
witnessing the tip of the iceberg. With large and young population, smartphone
penetration of only c.58% of total population and c.50% of industry, and a unique
number of subscribers of c.173mn people out of the c.261mn total population, we
believe the Indonesian telco industry still has ample room for growth. In addition,
telco companies are aggressively rolling out 3G/4G networks in and out of Java. This
will help bolster 3G/4G expansion outside java and give a further boost to data
traffic. Furthermore, the competitive landscape also translates to affordable
package prices that help push subscribers’ migration from legacy services to data.
We also believe that fixed line has not reached the end of the road. Despite the
cellular cannibalization effect, we believe the relatively low penetration rate in the
fixed line service means there is still room for growth, and TLKM’s Triple Play
bundle (fixed line, fixed broadband, and cable TV) could drive higher penetration in
the future. Furthermore, Indonesia’s fixed broadband segment has huge potential
as penetration is currently only at c.10%.
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Figure 5. Indonesia has large and young population Figure 6. Low internet penetration…
(mn people) (age) (%)

1,600
Population (L) 45 100
Median age (R)
40 90
1,400
80
35
1,200
70
30
1,000
60
25
800 50
20
600 40
15
30
400
10
20
200 5
10
0 0 0
Source: Worldometers, Mirae Asset Sekuritas Indonesia Research Source: McKinsey, Mirae Asset Sekuritas Indonesia Research
Figure 7. … and under-penetrated cellular market… Figure 8. … but the connected ones are very savvy
(mn) # of unique mobile users (L) (%) (avg hours/day)
200 Mobile penetration (R) 90 4
US Indonesia
180 80 4
160
70
3
140
60
3
120
50
100 2
40
80
2
30
60
1
20
40
10 1
20
0 0 0
Singapore Malaysia Thailand Vietnam Philippines Indonesia Time spent on internet via mobile device Time spent on social media
Source: We are Social, Mirae Asset Sekuritas Indonesia Research Source: McKinsey, Mirae Asset Sekuritas Indonesia Research

Data avalanche
The era of data

Across the world and in Indonesia, consuming data is becoming the new norm. As
people transition to smartphones, data revenue has quickly become the main
revenue driver of telco companies in Indonesia. We believe that the real
opportunity in data lies ahead with continued rapid uptake of smartphones, strong
emergence of over-the-top (OTT) services, growing digital native population,
aggressive rollout of 3G/4G networks, as well as accommodative data package
prices.
Swift data penetration

The original premise of the smartphone was that it would enable voice and data
communications via just one device. However, in the last decade, data capabilities
of smartphones have steadily ratcheted up in the form of bigger screens, faster
connectivity, more powerful processors, superior cameras, and improved graphics
capabilities—all of which contribute to the trend of people choosing data
communications instead of traditional voice calls. The rapid development of OTT
has significantly supported this trend.
Figure 9. Rising data penetration… Figure 10. …on the back of cheap smartphones
(%) (USD) (%)
Industry penetration Population penetration
100% 300 ASP of low-tier 1.8
smartphones (L)
90% 1.6
250 Cost as a % of
80% GDP per capita (R) 1.4
70% 200 1.2
60% 1
150
50% 0.8
40% 100 0.6
30% 0.4
50
0.2
20%
0 0
10%
0%
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: IDC Worldwide, Mirae Asset Sekuritas Indonesia Research
Note: No. of data users are based on data from companies under coverage
The industry’s smartphone penetration rate is at 50% and 51% as of FY16 and 1H17,
respectively, and we expect it to continue to increase and reach c.61% in 2H18F. We
believe that industry penetration figure is a more representative number of data
users in Indonesia, as SIM card penetration in Indonesia is at c.117%, which makes
population penetration number ambiguous.
Currently, there are many affordable smartphones available in the Indonesian

market. On the back of a recent change in regulation that requires all 4G handsets
to have at least 30% local content (by FY17), smartphone prices can only go south
and drive penetration higher.
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Table 2. 4G device minimum local content regulation

Scheme General calculation Requirements
1  Local value for R&D = at least 8%
 Manufacturing aspect =  Pre-loaded apps to mobile phones,
70% handheld computers, or tablet
 R&D aspect = 20% computers
 Application aspect = 10%  Minimum pre-load = 2 apps or 4 local
games
 Minimum number of active users of
local apps = 250k people
 Software injection in Indonesia
 Server in Indonesia
 Own local online app store
2  Local value for R&D = at least 8%
 Manufacturing aspect =  Pre-loaded apps to mobile phones,
10%, handheld computers and tablet
 R&D aspect = 20%, computers
 Application aspect = 70%  Minimum pre-load = 7 apps or 14 local
games
 At least a local app has 1mn active users
 Software injection in Indonesia
 Server in the country
 Own local online app store
 Price Cost, Insurance, and Freight (ClF) =
at least worth IDR6mn
3  Total investment of IDR250bn-400bn = 20% local content
 Total investment of IDR400bn-550bn = 25% local content
 Total investment of IDR550bn-700bn = 30% local content
 Total investment of more than IDR1tr = 40% local content
Source: Government data, Mirae Asset Sekuritas Indonesia Research
The rise of OTT

Currently, there is unprecedented demand for data, driven by the flourishing over-
the-top (OTT) ecosystem. For telco companies, the rise of OTT is a double-edge
sword. It slowly but surely edges out legacy services, but on the other hand, it
provides a new revenue stream.
OTT content refers to audio, video, and other media transmitted via the Internet as
a standalone product, that is, without an operator controlling or distributing the
content. Popular mobile applications like Skype and Whatsapp are examples of
OTT.
The rise of OTT brings up questions regarding competition with legacy services.
OTT services are cheaper and, many would argue, better than legacy services.
Bypass risk has become more pronounced in recent years due to the rapid growth
of OTT.
The main concern for companies and investors alike is the fact that smartphones,
when coupled with OTT, weaken operators’ control over the use of their networks
and increase bypass risk. Smartphones enable subscribers to download
applications of all kinds—including voice, video, and messaging applications—
independently of the operator. With 4G, the performance of OTT increases and with
it, the bypass risk.
We believe that legacy services stand no chance in challenging the superiority of

OTT. Time will eventually tell that data will reign supreme over legacy services.
Historically, legacy services have had the edge on their OTT competitors, in terms
of quality, convenience, and reliability. However, the pace of innovation in OTT is
extremely rapid, and the digital ecosystem facilitates this. OTT is tailored for
smartphones and tablets, while legacy services are not. This makes it difficult, in
our view, for legacy services to keep pace, particularly with respect to ease of use
and integration with other services. The stimulation of data traffic growth, however,
is undoubtedly positive for telco companies.

Figure 11. Growing OTT translates to rising internet users Figure 12. Indonesians use cellular to access the internet
(mn people) (mins/day)
Active internet users (L) 300
140 90%
Internet users/total population (R)
80%
120
250
70%
100
60%
200
80 50%
60 40% 150
30%
40
20% 100
20
10%
50
0 0%
0
Thailand Indonesia Malaysia Philippines Vietnam Singapore
Source: Fintech News Singapore, Mirae Asset Sekuritas Indonesia Research Source: Global Web Index, Mirae Asset Sekuritas Indonesia Research
Digital natives to lead data growth

Around 58% of Indonesia’s total population is considered ‘digital natives’—people
aged 12-34 born and live in the internet era. This generation should support growth
in data traffic as they tend to be more technologically savvy and receptive to
changes.
We believe that the high penetration of smartphones, coupled with the burgeoning
demand from the digital natives, will result in insatiable data traffic. Digital natives
often put the Internet within the utilities bracket, which means it is often perceived
as basic necessity. This characteristic represents a thriving revenue stream for telco
companies.
Research shows that Indonesians love to access the Internet and social media via
mobile phone. OTT, social media, as well as music and video streaming have
become an important part of the digital natives’ lives.
Figure 13. Digital natives to support higher data traffic Figure 14. Indonesian digital natives love social media
(age) (mn people)
Digital immigrants: This Social media users via cellular (L)
55-59 100 80%
older generation knew Social media users via cellular/total population (R)
internet when they were an
90
50-54 adult. They often feel the 70%
need to always learn to
adapt with new technology. 80
45-49
60%
70
40-44
50%
60
35-39
50 40%
30-34
40
30%
25-29
30
20-24 Digital native: This younger 20%
generation born and live in 20
15-19 the internet era. They tend 10%
to be trend leaders 10
10-14
(%) 0 0%
0 5 10 15 Indonesia Philippines Thailand Vietnam Malaysia Singapore
Source: Global Web Index, Mirae Asset Sekuritas Indonesia Research Source: We are Social, Mirae Asset Sekuritas Indonesia Research
Aggressive rollout of 3G/4G networks

Despite having just started rolling out 4G networks in 2015, Indonesian telco
companies have already been ramping up 3G and 4G networks recently by adding
c.44k of 3G and c.11k 4G base transceiver stations (BTSs) in FY16. Going forward,
we expect operators to increase 3G/4G network rollout, as data users continue to
rise.
In the long run, as the need for instant access to data grows, network quality will be
in the spotlight. We believe that the ultimate data experience will eventually
become the principal driver of smartphone user loyalty towards operators and the
key to reducing the churn rate.
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Figure 15. Rapid 3G/4G network rollout by operators, while 2G investments stay flat
(BTS units)
300,000 2G 3G 4G
250,000
200,000
150,000
100,000
50,000
0
FY12 FY13 FY14 FY15 FY16
Source: Company data, Mirae Asset Sekuritas Indonesia Research
Affordable data packages
As companies try to push migration to 4G and expand their subscriber base,

competition tightens, and this translates to low package prices and generous
bonus quotas.
Cellular data traffic in Indonesia reached 1,517PB in FY16, representing a 200%

increase in just two years. 4G offers Wi-Fi-like data speeds with the convenience of
full mobility, and coupled with data prices as low as c.IDR5k/GB, we view mobile
data demand as potentially insatiable. We project data traffic to grow by 196% to
reach c.4,500PB in FY19F.
Table 3. Popular prepaid data packages from TLKM, ISAT, and EXCL have affordable prices
Price as % of average
Operator Package 3G (GB) 4G (GB) Total (GB) Price (IDR/month) Data yield (IDR/GB)
monthly minimum wage
Gigamax basic 0.1 1 1.1 49,000 2% 44,545
Gigamax lite 1 5 6 89,000 4% 14,833
Gigamax pro 2 8 10 119,000 6% 11,900
Gigamax platinum 4 10 14 169,000 8% 12,071
Gigamax ultimate 8 20 28 299,000 14% 10,679
Telkomsel Flash 1+2 1 0 1 55,000 3% 55,000
TLKM Telkomsel Flash 1+5 1 1 2 60,000 3% 30,000
Telkomsel Flash 3+7 3 3 6 95,000 5% 15,833
Telkomsel Flash 2+7 2 3 5 95,000 5% 19,000
Telkomsel Flash 6+10 6 6 12 155,000 7% 12,917
Telkomsel Flash 5+9 5 5 10 155,000 7% 15,500
Telkomsel Flash 8+12 8 8 16 190,000 9% 11,875
Telkomsel Flash 15+14 15 10 25 290,000 14% 11,600
Freedom package M 2 3 5 59,000 3% 11,800
Freedom package L 4 8 12 90,000 4% 7,500
ISAT
Freedom package XL 8 12 20 126,000 6% 6,300
Freedom package XXL 12 25 37 169,000 8% 4,568
Xtra combo 5GB 2 3 5 59,000 3% 11,800
Xtra combo 12GB 4 8 12 89,000 4% 7,417
EXCL Xtra combo 18Gb 6 12 18 129,000 6% 7,167
Xtra combo 30GB 10 20 30 179,000 9% 5,967
Xtra combo 42GB 14 28 42 239,000 12% 5,690
Note: Calculations are based on basic data quota

The great migration to data
Contrary to market consensus, we anticipate data yield to remain subdued this

year. We believe that we are currently still in the migration stage, from legacy to
data.
We identify four anchor themes that will take place during this stage: 1) fixed line
revenue will continue to decline until it reaches an inflection point before gradually
(but marginally) rebounding, 2) data cannibalization process intensifies as the
digital landscape flourishes, 3) in order to i) grab market share, ii) accelerate
migration to data, and iii) encourage subscribers to consume more data, operators
will continue to wage price wars, and 4) data monetization will only start when most
subscribers have successfully migrated to data.
We stress that falling data price during this stage does not necessarily translate to
lower profitability for telco operators. We argue that migration to data will boost
data traffic and sequential increase in volume should be able to over-compensate
for the fall in data yield. Moreover, the ability of each company to migrate more
subscribers to 4G could prove to be a key differentiating factor in generating
profitability as 4G would translate to higher traffic and lower cost.
Figure 16. Indonesian telco industry’s BCG matrix
Source: Mirae Asset Sekuritas Indonesia Research
Figure 17. Falling yield does not necessarily translates to lower profitability
(IDRbn) TLKM's revenue (L) ISAT's revenue (L) (IDR/MB)
160,000 100
EXCL's revenue (L) Industry's average data yield (R)
90
140,000
80
120,000
70
100,000
60
80,000 50
40
60,000
30
40,000
20
20,000
10
0 0
FY14 FY15 FY16 FY17F
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Fixed line falling from grace
Fixed line falling from grace

Fixed line services include local, direct long-distance (DLD), and international call
services. TLKM still enjoys monopoly in this segment, with 99% market share. Due
to the inevitable decline of the sector growth and subsequently low potential of
value creation, the fixed line telephone segment seems to attract no new entrants.
In the past years, this segment has suffered from the cellular cannibalization effect.
Figure 18. TLKM controls the fixed line market share Figure 19. We expect fixed line revenue to gradually rebound
(IDRbn)
TLKM Others
8,500
8,000
1%
7,500
7,000
6,500
99%
6,000
The transformation of the fixed-line-centric industry into more cellular-centric one

happened rather hastily. In FY10, TLKM still derived 19% of its revenue from fixed
line. However, in FY16, only 6% of its revenue came from fixed line. We forecast that
by FY19F, fixed line will contribute 5% to TLKM’s revenue.
However, despite the aforementioned cellular cannibalization effect, we believe the

relatively low penetration rate in the fixed line service means there is still room for
growth. As of FY16, fixed line penetration is only c.4% of the total population. Since
the fixed line penetration is still concentrated in big metropolitan areas, we believe
that TLKM’s Triple Play bundle would support higher penetration and higher
retention rate in the sub-urban and rural areas. It is worth noting that in recent
years, while the usage continues to drop, the revenue from fixed monthly
subscription charges still continues to rise on the back of growing subscribers. We
expect the fixed charges to be the driver of fixed line revenue in the coming years
due to its sheer volume, driven by higher penetration. In addition, we believe that
as an attempt to further monetize the dying technology, TLKM will make sure the
yield stays elevated. A larger number of line in service (LIS) and higher yield will be
the drivers of TLKM’s fixed line revenue going forward. Our estimation implies a
growing LIS at a modest CAGR of 2% during FY17F-FY22F.
The cellular adoptions will eventually decelerate in the future when smartphone
penetration hits its saturation point. At that moment, we believe that fixed line
profitability could potentially be the next ‘leg’ in the large-cap telco story to unlock
value, and we believe that TLKM’s fixed line performance is close to its inflection
point.

Declining legacy services
Shrinking voice and SMS contribution

We believe there are two diverging trends realized as telco companies are pushing
cheap data packages with aggressive bonuses: 1) subscribers increasing their voice
usage on the back of the increased affordability of voice minutes, rising take-up of
voice bonuses, and ongoing substitution of fixed to cellular calling, and 2) usage
patterns shifting to become more data-intensive, with the proportion of time spent
on non-legacy activities increasing considerably.
What we suspect is a polarization in the usage of voice on mobile: some users are
increasing their voice call minutes, while at the other end of the spectrum, a
growing proportion are not using voice at all. As a result, the drop in minutes of
usage (MoU) is rather gradual.
Going forward, however, an increase in the number of subscribers migrating to 4G

and the ever-growing OTT ecosystem will exacerbate legacy services’ declining
trend, in our view. We expect the drop in voice revenue to be slower than that of
SMS, as SMS is more easily replaceable by OTT applications.
Figure 20. Declining voice traffic trend… Figure 21. …And shrinking SMS traffic
(bn mins) (bn SMS)
TLKM ISAT EXCL TLKM ISAT EXCL
500 800
450
700
400
600
350
500
300
250 400
200
300
150
200
100
100
50
0 0
FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY13 FY14 FY15 FY16 FY17F FY18F FY19F
Proliferation of data exclusives on the back of OTT’s growth
Deloitte predicts that in FY17F, more than 26% of smartphone users in developed
markets will not make any traditional phone calls in a given week. The ‘data
exclusive’ proportion continues to grow, from 22% of all smartphone users in 2015
and 11% in 2012. Data exclusives substitute legacy services with a combination of
messaging, voice, and video services delivered through OTT applications. We
believe that developing markets, including Indonesia, sooner or later, will
experience a rapid growth of data exclusives.
One of the key catalysts for the fall in the MoU and SMS of cellular service has likely
been the growth of OTT development. While legacy services have been declining,
instant messaging, voice calls, and video calls through OTT have become more
popular. Note that the growth of OTT does not only usurp private voice
conversations. Popular OTT applications, like Uber, Gojek, and Grab, are also
replacing the calls that were formerly made to order foods, request taxis, and book
appointments.
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All in all, we anticipate the growing OTT ecosystem to underpin the growth of data,
which will translate to the fall of legacy services usage. Data is cannibalizing voice
and SMS as people can now use data to make voice calls and text, instead of using
2G services. While we do see an inevitable shift from legacy services to data, in line
with higher smartphone penetration, we do not expect a massive drop in legacy
revenue in the near term as we believe that monetization is still possible by
increasing prices to compensate for falling usage. Nonetheless, we believe that
demand for data will continue to grow and become the main revenue driver for
telco companies going forward. We project data to contribute c.70% to total
revenue of telco companies in Indonesia by FY19F (vs. 25% in FY14)
Figure 22. MoU continues to slow down Figure 23. Growth of data exclusives in developed markets
(min/sub) 30%
Industry's average MoU
2,000 (L) 5%
1,800 YoY growth (R)

0% 25%
1,600
1,400 -5% 20%
1,200
-10%
15%
1,000
-15%
800
10%
600 -20%
400
5%
-25%
200
0 -30% 0%
FY14 FY15 FY16 FY17F FY18F FY19F FY12 FY15 FY17F
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Deloitte, Mirae Asset Sekuritas Indonesia Research
Aggressive data pricing

By imposing low prices, we believe that operators hope to 1) grab market share and
2) push migration to data and encourage subscribers to consume more data (i.e.,
by upgrading data packages and/or switching to 4G).
We do not expect the falling price to translate to lower profitability, as growing

subscriber base and higher data consumption per subscriber should over-
compensate for the fall in data yield. Furthermore, legacy services monetization
and growing 4G subscribers could also support topline growth.
However, the surge of data traffic could pose a potential problem for telco
companies. Low data yield, coupled with declining legacy services usage, could
squeeze operators’ margin and cap revenue growth potential. After all, the shift
from legacy services to data means shifting from a higher margin business to a
lower one. Note that in general, the margin for voice and SMS is c.60-70% and
c.80%, respectively, while that for data is c.15-20%.
This poses a potential problem, as operators have to increase network investments,

in order to cope with rising demand, amidst shifting revenue mix towards a lower
margin business. As such, we believe prudent cost control and timely subscriber
migration to 4G would benefit operators during this stage.
Larger subscriber base and market share
With TLKM being the premium player that targets the upper segment in the
market, we believe that it is unlikely for it to actively engage in the price war despite
the fact that its data price is higher than peers. While we do not expect TLKM to cut
package prices, we do not rule out the possibility of the company’s handing out
more bonus quotas to retaliate. In the highly unlikely event that TLKM does become
actively engaged in the price war, we believe it could increase its market share
quite considerably.

Currently, only ISAT and EXCL are actively engaged in the price war. We believe that
both companies are now running a huge cross-subsidy in order to grab market
share, especially outside Java. Both are using aggressive package pricings and
promotions to expand subscriber base outside Java. In essence, Java is being
utilized as a cash cow that ‘subsidizes’ low prices and promotions for subscribers
outside Java. This is apparent in promotions launched by ISAT and EXCL, which
include “IDR1/sec voice call to all operators” promotion, mainly aimed for
subscribers outside Java.
Figure 24. ISAT’s and EXCL’s IDR1/sec promotion Figure 25. Industry’s average data yield is still declining
(IDR/MB)
Industry's average data yield (L)
90 10%
YoY growth (R)
80
0%
70
-10%
60
50 -20%
40 -30%
30
-40%
20
-50%
10
0 -60%
However, the key question remains: by lowering prices, can the challengers finally
reign supreme over the incumbent? We believe that the incumbent will be able to
retain its throne as the market leader. We do expect, however, ISAT and EXCL to
gain more traction outside Java, albeit marginally. In the long run, we believe that
TLKM’s national subscriber market share will deteriorate slightly to c.50% in FY22F
(from 57% in FY16, 55% in 1H17).
Note that the population of Indonesia as of FY16 reached 261mn people, with
c.130mn internet users (51% penetration rate). Out of these users, c.85mn or 65%
are based in Java. The island itself only made up c.56% of Indonesia’s total
population (c.146mn people in Java), while the remaining 44% of the population
(c.115mn people) lives outside Java. Java market is close to its saturation point
(currently c.58% penetration in Java), which lead us to believe that the Ex-Java
market will be the growth area for operators. Thus, it is imperative for operators to
grab market share outside Java.
Through Telkomsel, TLKM still reigns with 55% of national cellular subscriber
market share, as of 1H17. Operators do not disclose market share numbers based
on region. However, according to our channel checks, the market share is rather
imbalanced geographically, with TLKM controlling c.78% of the market outside Java.
In contrast, TLKM controls only c.23% of the Java market. It means TLKM is still the
market share leader in Java, but with far less domination.
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Figure 27. …compared to Ex-Java market, where Telkomsel

Figure 26. Market share in Java is more fragmented…
dominates
TLKM ISAT EXCL Others TLKM ISAT EXCL Others
We believe that TLKM’s domination outside Java stemmed from two factors: 1) its
first-mover advantage, underpinned by its strong balance sheet that allows it to roll
out infrastructure aggressively outside Java over the years, and 2) regulatory
landscape that includes a high interconnection rate and the absence of mobile
number portability (MNP).
Firstly, we believe that the first-mover strategy bodes well for TLKM as its
infrastructure superiority outside Java allows it to secure a leading market share
position, giving it a strong advantage over its peers. Note that network quality is
number one priority for many subscribers. However, ISAT and EXCL cleaned up
their balance sheet and undergone massive investment period in recent years, and
both are still committed to continue to invest heavily in the coming years. Ergo, we
anticipate the coverage and quality gap with TLKM to gradually narrow. As the gap
narrows, accordingly, people will be more inclined to switch to operators who offer
cheaper packages, especially considering that subscribers outside Java (which we
believe will be the future growth driver) have relatively lower affluence level. As
such, we expect ISAT and EXCL to grab market shares, albeit gradually and
marginally, on the back of improved infrastructure quality and affordable data
prices.
Secondly, the continued delays in the interconnection rate regulation revision have
allowed operators to continue to take advantage of high off-net calls and impose
low on-net rates. This benefits TLKM as it has a huge subscriber base. In addition,
since Indonesia does not adopt MNP, many subscribers also avoid switching
operators as they do not want to change their phone number. A joint-research
from UC Davis and UC San Diego showed that when subscribers switch from one
mobile operator to another, they experience a disutility from losing their
relationship-specific investments made with a specific operator. Therefore, without
MNP adoption, subscribers tend to stick with their existing operator even when a
competitors offer cheaper packages. TLKM is the key beneficiary as its first-mover
advantage allows it to have a larger subscriber base. However, we believe that as
subscribers migrated to data, interconnection rates and MNP are becoming less-
relevant.

Figure 28. Challengers undergone massive investment period Figure 29. With better network quality, challengers can
in recent years to narrow the gap with the incumbent compete against the incumbent using low price offerings
(% of industry's total capex) TLKM ISAT EXCL
Reasons for choosing certain operators
100%
#1 Good network quality 2# Affordable price 3# Bonuses 4# Others
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: APJII, Mirae Asset Sekuritas Indonesia Research
Despite the fact that TLKM could lose some of its market share, we do not expect it
to lose its throne as the market leader as its revenue will be supported by further
monetization, utilizing its large subscriber base. In addition, we believe that it is
unlikely for ISAT and EXCL to truly equal TLKM’s network superiority given its
unparalleled infrastructure base and the fact that it is still aggressively investing
and rolling out new networks.
Nevertheless, we believe that with improved network coverage and quality, ISAT
and EXCL can expand their market share outside Java with their aggressive pricings
as the mid-to-low segment is still price-oriented. Both can expand their market
shares, but we doubt that they can take over TLKM as the market share leader. It is
also worth noting that as smartphone penetration rises, the pie gets bigger, and all
operators can benefit from a larger subscriber pool.
Figure 30. We expect TLKM’s subscriber market share to deteriorate marginally in the
long run
TLKM ISAT EXCL
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F FY22F
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Migration to data and climbing up the value ladder
In the short-to-medium term, we do not expect the decline in data prices to put
pressure on the top line growth. Firstly, falling data prices incentivize people to
switch to smartphones. Given this, data users and consumptions will continue to
grow and recompense for the declining yield. In other words, the growth in volume
will over-compensate the decline in yield. Secondly, lower data prices also
encourage existing data users to upgrade their data packages (consume more
data) and/or migrate from 3G to 4G, which, due to 4G’s fast speed nature, will result
in higher data traffic. In our view, the migration to 4G is the key to maintaining
sustainable revenue going forward as the 4G service boosts data traffic, and its
network is more cost-efficient. Ergo, we believe that operators will continue to offer
incentives (i.e., bonuses) and maintain or even lower data prices further in order to
push migration to data, especially 4G.
In the long run, we believe that two scenarios could play out:
 In the bear case, traffic growth continues to surge, driving increased

cellular capital intensity, while revenue growth remains sluggish and fairly
linear on the back of tightening competition and prolonged predatory
pricings.
 In the bull case, smartphone penetration reaches a saturation point and

traffic growth slows over time as the base becomes larger. Moreover,
operators are able to monetize data by increasing data yield and rein in
demand growth, and Moore’s law of cost reductions continues for network
infrastructures.
We are relatively bullish as we expect telco companies to be able to manage the

burgeoning demand through smarter data traffic control schemes, including off-
peak discounts and Wi-Fi offloading, as well as continued network rollout. Indeed,
we are already witnessing some operators that have applied this strategy. Going
forward, we believe that Wi-Fi accessibility will continue to improve and newer
smartphones should be able to connect with Wi-Fi hotspots more easily. As the
majority of subscribers still prefer to delay data-intensive uploading and
downloading until Wi-Fi is obtainable, we believe that we will see an increasing
amount of traffic being offloaded. The main challenge for operators will be finding
the right balance with respect to Wi-Fi offloading, in our view. Too little, and cellular
networks will become congested; too much, and (if it is via third-party or public
hotspots) subscribers will become less willing to pay for data packages.
We do not expect data prices to increase in the near future. In our view, data prices
are likely to stay low until telco companies manage to successfully migrate most of
their subscribers to data. Once the migration is complete, data prices will then start
to bounce up. We expect smartphone penetration to reach c.61% before operators
start to monetize data. Meanwhile, we anticipate some light data monetization (i.e.,
bonus quota reduction) as data penetration continues to gain momentum, but we
believe it is unlikely for data package prices to increase significantly until
penetration reaches the aforementioned level.

Prudent cost control to support margin and infrastructure rollout

During the data migration stage, we believe that revenue growth will stay robust
on the back of volume growth, but low prices will inevitably cap its growth
potential. Simultaneously, however, network capacity requirements increase rapidly
as data traffic continues to rise on the back of higher smartphone penetration and
lower data prices. Therefore, it is crucial for operators to invest effectively and
handle data traffic cost-efficiently, in our view. Prudent cost control would help
operators maintain their margin and profitability level, which in turn would allow
them to focus on infrastructure rollout.
In terms of network cost efficiency, EXCL has the lowest cost of telecom operation
per BTS, with IDR98mn/BTS, as oppose to TLKM and ISAT’s IDR242mn and
IDR211mn, respectively.
Figure 31. EXCL has the best network cost efficiency, while ISAT improved dramatically
after its network modernization project
(IDRmn/BTS)
450 TLKM ISAT EXCL
400
350
300
250
200
150
100
50
0
FY13 FY14 FY15 FY16
We also believe that prudent capex rollout would help operators in maintaining
stable FCF. Rolling out networks in tandem with demand (vs. ahead of the demand
curve) during this migration stage is essential, in our view. As such, we prefer ISAT’s
rollout strategy over EXCL’s. More on this in ISAT’s company discussion, on page 36.
4G is the key to maintain sustainable revenue going forward
We believe that migration to 4G is the key to maintain sustainable revenue going

forward as 4G services boost data traffic and its network is more cost-efficient.
Firstly, 4G drives up data consumption, which in turn boosts revenue. Users of 4G
use much more data and spend more than those of 3G. A research by Nokia shows
that 4G users are ten times more data hungry than 3G users. Secondly, 4G is more
cost-efficient. According to Nokia, deployment of LTE overlay is 48% cheaper than
traditional converged RAN LTE deployments. Therefore, by deploying LTE overlay
and migrating subscribers from 2G and 3G to 4G, operators can experience higher
data traffic and at the same time, relish lower capex and opex.
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Data monetization
The importance of data monetization is magnified by the fact that Indonesian telco
companies need to spend quite a fortune to increase the rollout of 3G/4G networks.
The network expansion is essential, however, as they need to increase their
capacity to handle the burgeoning data demand.
On a large number of packages these days, voice and SMS have become virtually
free. Through the monetization of data, telco players can benefit from the new
stream of revenue.
Timing of data monetization
As previously mentioned, we believe that the data monetization stage will start
when Indonesia’s smartphone penetration reaches c.61% (industry penetration).
Firstly, while we believe that smartphone market demographics will continue to
shift, we still expect technology laggards and the die-hard feature phone user base
to remain virtually unchanged. These groups tend to be older and are more likely
to be retired and/or have limited income. According to a research conducted by
Kantar, the majority of feature phone owners in Great Britain are over 55 years old.
Moreover, we also believe that children below the working age are less likely to
own smartphones.
Assuming that the current industry captures Indonesia’s age structure, we decided
to reduce Indonesia’s total population by the number of people above 55 years old
and children below the working age. From this calculation, we believe that
smartphone penetration should reach c.61% (industry penetration) before volume
growth slows down and the data monetization stage will begin (as we expect the
remaining c.39% will be late adopters of the smartphone technology). Looking at
the current growth rate of smartphone penetration, we expect Indonesia to reach
the said level of penetration in 2H18F.
Figure 32. Indonesia’s age structure Figure 33. Smartphone penetration to reach c.61% in 2H18F
(age) (%)
Legacy penetration Data penetration
100%
>65 90%
80%
55-64 70% 62%
60%
25-54 50%
40%
15-24 30%
20% 38%
0-14 10%
(%)
0%
0 10 20 30 40 50 FY14 FY15 FY16 FY17F FY18F FY19F
Source: CIA World, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research
Timing is everything
We believe that timing will play an important part in deciding the future market
share and profitability of Indonesian operators. We believe that operators will only
start to monetize data aggressively based on the industry’s data penetration and
not based on their own respective subscriber mix.
Late smartphone adopters are likely to come from outside Java with relatively lower
affluent level, which means they are more price-sensitive. Monetizing data earlier
than competitors could result in a higher churn rate as these price-sensitive
subscribers would prefer operators with cheaper packages. Based on this premise,
we expect operators to start the data monetization stage together, when the
industry’s smartphone penetration reaches c.61%.

As such, we believe that having a higher data subscriber mix ahead of the industry
could be precarious as revenue will become more unsustainable without data
monetization. As data monetization is limited when peers are still lagging behind,
we have to entertain the possibility that companies with a higher data mix ahead of
the industry could experience a margin squeeze.
Carrying out data monetization

In recent months, we have seen signs of light data monetization, which include
bonus quota reduction on data packages and marginal increases in data package
prices. It started in 4Q16, when ISAT decided to reduce bonus quotas of their data
packages. We expect some light data monetization to continue as smartphone
penetration continues to pick up steam, but we believe significant price hikes are
not due until smartphone penetration reaches c.61% in 2H18F.
We believe that there are two key catalysts that could mark the end of migration to
data and the start of data monetization stage: 1) when the majority of subscribers
are successfully migrated to data (at c.61% penetration), and 2) when all operators’
infrastructure quality is on-par with that of TLKM’s.
The first scenario is our base scenario for the Indonesian telco industry. As of 1H17,
industry’s smartphone penetration is at 51%. We believe that challengers (i.e., ISAT
and EXCL) will continue to impose low prices on their data packages until
smartphone penetration reaches c.61%.
On the other hand, we deem the latter scenario to be unlikely given the current
infrastructure superiority of the incumbent and the fact that TLKM is still
aggressively investing and rolling out new networks. However, if it happens, it is
when ISAT and/or EXCL boast the same network quality as that of TLKM, which
requires the challengers to invest aggressively while the incumbent’s investment
falters. When the playing field becomes level, all telco companies can decide to
monetize data by increasing prices or, alternatively, it could spark another price
war, in which case, could mark the start of data commoditization, where telco
companies are in danger of becoming ‘dumb pipes.’
It is also worth noting that if the promotion scheme regulation gets implemented,
we believe that it could expedite the data monetization process as it means
operators can no longer freely carry out promotions without a time limit. However,
we do not expect the promotion scheme regulation to see the light anytime soon.
As such, we believe that the data monetization stage will start when telco
companies manage to successfully migrate most of their subscribers to data (c.61%
smartphone penetration). Once smartphone penetration reached the
aforementioned level, operators will start to increase data prices.
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Eyes on the future
5G
Among developed countries, the US was relatively late in rolling out 3G networks;
2005 was really the first year in which 3G services were widely available. In contrast,
many European countries, like Germany, Italy, and the UK, started around 2004,
about a year ahead of the US. These pioneer countries boosted the development of
the global 3G ecosystems and in turn, the late adopter (i.e., the US) benefited from
the well-established system and easily achieved economies of scale. Unsurprisingly,
the 3G technology penetrated the US in no time. By the end of 2007, c.25% of the
US’ cellular subscribers was already using 3G devices. On the other hand, many of
the European countries that deployed 3G before US actually saw slower 3G
adoption.
Many Indonesian telco industry experts were quoted supporting the

implementation of 5G in Indonesia in 2020. However, with the aforementioned
lesson in mind, we believe that it would be better for Indonesia to wait until the
ecosystem of 5G to reach a solid stage, before rolling out the high-speed network.
Firstly, deploying 5G network in its infant stage means higher capital and lower
economies of scale. Secondly, the limited availability of 5G handsets during the
early stage would likely deter many would-be early adopters. Nonetheless, we think
5G adoption could benefit from what we believe to be high pent-up demand for
fast internet speed, thanks to substantial innovations in technologies in the past
years.
Note that 5G, by and large, will operate on very high frequencies, requiring towers
that are relatively close together (i.e., higher capex and opex). Ergo, we expect the
5G adoption to be rather gradual, and the rollout will begin in metropolitan areas.
Timing is important and telco companies should not rush to implement 5G. We
would like to argue that the more prudent move is to, first, migrate the majority of
subscribers to 3G/4G, then carry out data monetization before implementing the
5G technology. Note that as 3G/4G traffic continues to rise, telco companies still
need to rollout 3G/4G networks, and thus premature investments in new
technologies could hinder the short-and-medium term growth agenda and hurt
profitability.
Figure 34. 5G deployment roadmap from the International Telecommunications Union

(ITU)
Source: 3GPP, Mirae Asset Sekuritas Indonesia Research

Figure 35. How fast is fast?
Source: CNET, Mirae Asset Sekuritas Indonesia Research
Commoditization of data
A revenue shift from legacy services to data is inevitable, in our view. Over time, we
believe subscribers could be conditioned to believe that the bulk of their service
fees are for the data component, with legacy services included essentially for free.
Clearly, this evolution of consumer behavior poses risks to telco companies as they
are at risk of becoming ‘dumb pipes.’ However, we believe such progression is both
natural and inevitable.
Smartphones enable their users to directly surf the internet and connect to
application stores to purchase and download OTT. This translates to lower revenue
for telco companies as they cannot offer their traditional services as OTT will
control the total user experience. Operators must be content to provide only the
network connectivity and bandwidth.
If operators do settle into ‘dumb pipes’/data utility role, there are obvious negative
implications: the likelihood of service commoditization, less differentiation among
operators, less control over subscribers, less pricing power, and a value transfer to
OTT providers. The silver lining is that costs should also come down substantially
with a simplified business model, and data volumes are likely to continue to grow
rapidly.
We do not think, however, that this would happen in the near future. The internet is
made up of components almost entirely provided by traditional telco companies.
Local access, local switching, and long distance connections are all the basic
building blocks required to create the Internet. The only real difference is that the
connections are made using routers rather than traditional switches. Hence,
whatever happens, telco companies will still provide most of the crucial elements.
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Regulatory landscape
Government intervention is sometimes needed in order to create a healthy

competition that will benefit telco companies and customers. Currently, Indonesia’s
Ministry of Communications and Information Technology (ICT) has four main items
on its agenda for the telecom industry: 1) an interconnection rate cut, 2) an
infrastructure sharing regulation, 3) a spectrum auction, and 4) a promotion
scheme regulation. The spectrum auction is scheduled to be held in the coming
months, but as for the other agendas, there have been no concrete developments
due to a number of roadblocks.
Interconnection rate cut
Interconnection rules
In an ideally competitive market, the operators involved would reach mutually

satisfactory interconnection agreements between themselves. The simple supply-
demand dynamics determine the amount they can charge the consumers.
However, such agreements are not easily reached in the case of different networks
and/or where the scale of volume transfer is different, like in Indonesia. The
incumbent, TLKM, controls the majority of market share with 55% of the subscriber
market share as of 1H17. As such, regulators involvement is deemed necessary.
Note that interconnection is more than just about the cost of transporting a call
from one network to another. It also involves the physicality of connecting different
systems and other technical issues. Eventually, these costs will be passed through
to the subscribers via two different schemes: calling party pays (CPP) or receiving
party pays (RPP). The US and a few other countries adopt the RPP scheme for both
outgoing and incoming calls, while in many countries in Europe and Asia, including
Indonesia, the CPP scheme is used for outgoing local calls, but when roaming
outside the country, the receiving party also has to pay for the bulk of incoming call
charges.
We believe that the CPP scheme benefits telco players in Indonesia. A study by
International Telecommunication Union (ITU) shows that although the RPP markets
may outperform the CPP ones in the early years of cellular communications, history
demonstrated that CPP countries have much higher subscriber growth than RPP
countries. RPP dampens cellular use as it encourages subscribers to turn their
phone off and/or refuse to answer calls in order to avoid paying for excessive bills,
while CPP scheme allows cellular users to receive local calls for free.
Figure 37. As data users grow, interconnection rate could

Figure 36. Proposed interconnection rate cut
become obsolete
(IDR/min) Legacy users Data users
260 100%
18% decrease
90%
240
80%
220
70%
200
60%
180 50%
40%
160
30%
140
20%
120
10%
100 0%
Old Proposed FY13 FY14 FY15 FY16 FY17F FY18F FY19F
Source: Government data, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research

Regulators have to step in to resolve the situation
Government intervention is needed in order to create a healthy competition that

will benefit both sides of the aisle, telco companies and customers. Off-net tariff
(inter-operator tariffs) in Indonesia is more than ten times higher than on-net tariff
(calls to the same operator). This burden must eventually be paid by the customers
in the form of excessive off-net rates. This has occurred for years as operators have
been imposing high off-net rates and low on-net rates.
The club effect
The club effect is when operators compete by offering very low rates for on-net
calls (same operator) but do not compete for off-net calls (between operators). In
other words, it is a pseudo-competition. It started a few years ago, when
competitive pressures were peaking due to the greater number of operators.
Instead of lowering both their on and off-net tariffs, operators showed a creative
response by lowering tariffs for on-net services, while imposing high off-net rates.
At that time the difference in tariffs for on-net and off-net rates was very significant;
with off-net rates cost ten times more than on-net rates.
As a result, tariff wars and rampant advertising wars erupted but only for on-net
services. Off-net tariffs stayed flat. Subscribers then responded by using multi-SIM
phones or carry more than one mobile phone. The market adjusted to the
operators’ strategy and tried to get the maximum benefits from on-net rates of
each operator and avoid off-net tariffs that were too expensive, by using multiple
SIM cards. This trend still continues until today, characterized by SIM card
penetration at c.117% of the population in FY16.
The club effect provides an incentive for operators to continue to increase the
number of customers. More customers mean their on-net promotion value will be
higher. To achieve this, operators often focus on giving out the best promotions for
new users and/or pre-paid users, which indirectly affect their capabilities in gaining
and retaining subscribers.
Rate cut looks imminent, but progress has been slow
The off-net tariff in Indonesia is more than ten times higher than the on-net tariff.
Currently, the interconnection rate is IDR250/min. The government is now in the
process of determining a rate cut. The Ministry of Communication confirmed that
the interconnection rate cut proposal is a decrease of 18% from the current rate,
from IDR250/min to IDR204/min. Although the interconnection rate cut looks
imminent, it is currently still far from a done deal. The issues regarding
interconnection rate cut have already surfaced years ago, but the final verdict was
postponed multiple times, and the regulators are still kicking the can down the
road.
Regulators just recently appointed the Agency for Financial and Development
Supervision (BPKP) as an independent verifier and now waiting for the rate
calculation and verification process to be concluded before holding an internal
discussion that will result in a ministerial regulation (peraturan menteri/permen).
We expect deliberations over revising the interconnection regulation to drag on
until 2018.
Better late than never?
We believe that the interconnection rate revision has been dragging on for too
long. The impact of the revised regulation on the industry would not be as
significant if it had been revised three years ago, in our view. As the migration to
data have already started and will continue to intensify, we expect operators’ MoU
to inch lower. Ergo, the longer this revision drags on, the less impact it will have on
the industry. When the migration to data is complete, we believe that
interconnection rate could end up being obsolete.
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Infrastructure sharing
Passive vs. active infrastructure sharing
Indonesia is a growing market that requires vast network expansion. Operators

need to be capable of efficiently expanding their networks while keeping their cost
as low as possible. With infrastructure sharing, companies will be able to roll
networks out much faster, especially in rural areas, where it is more costly to set up
infrastructure. With the government requiring telco companies to have a rollout
obligation, this could mean a number of unprofitable investments as setting up
infrastructure in certain sparsely populated rural areas is costly and less lucrative.
Infra sharing is a good solution as it would allow companies to rely on a single set
of infrastructure for their networks.
There are six different options for infrastructure sharing: pure site sharing, site and
transmission sharing, Multi Operator Radio Access Network (MORAN), Multi
Operator Core Network (MOCN), Gateway Core Network (GWCN), and full network
sharing.
Currently, the telco industry in Indonesia only acknowledges MORAN. It is one of

the most commonly used schemes by telco companies globally. It is, however, not
always the best option. MORAN can only increase efficiency up to 20%, while MOCN
can reach 40%-50%.
Through MOCN, telco companies can achieve higher scale benefits as costs can be
mitigated through spectrum sharing arrangements with other operators or, to a
lesser degree, outsourcing of network construction and management (typically to
third parties).
Currently, ISAT shares four 4G LTE infrastructures with EXCL in four cities using
MORAN. Both operators are currently waiting for government regulations rolling
out more joint-networks using MOCN.
Figure 38. Through MOCN, telco companies can achieve higher scale benefits
Source: MCMC, Mirae Asset Sekuritas Indonesia Research
Cost efficiency and more
In an increasingly competitive market, cost efficiency plays a key part in

maintaining profitability. MOCN has been proven effective in many other markets;
it can reduce capex and opex, which would allow operators to escalate their
network rollout.
Furthermore, as companies loosen their focus on infrastructure management, they

can attend to other opportunities. This becomes especially important nowadays, as
competition tightens and regulatory landscape shifts.

Figure 39. Infrastructure sharing in other markets
Source: MCMC, Mirae Asset Sekuritas Indonesia Research
Potential game changer
We believe that the infra sharing regulation would incentivize ISAT and EXCL to
increase their rollout, especially in areas outside Java. Given that their stretched
balance sheets have restricted their network deployments in the past, capex and
opex efficiency from network sharing would certainly increase their investment
appetite.
As such, we believe that if the infra sharing regulation is approved, ISAT and EXCL
are likely to increase their joint-network rollout. A more aggressive network rollout
would result in the narrowing of coverage and quality gap between the incumbent
and the challengers, which in turn would add pressure to TLKM’s market share.
Slow development
There have been no concrete developments regarding the infra sharing

regulations. For legal reasons, the infra sharing regulations must be revamped
completely, which will take time. On top of that, regulators and telco operators
must engage in further discussions regarding the plan’s framework, as care must
be taken not to craft a deal that is unfair to the incumbent, considering TLKM is the
only operator that has invested aggressively outside Java. As such, we do not
expect a resolution in the near term.
Spectrum auction
More subscribers, higher traffic
As data users continue to grow, data traffic continues to rise. As traffic grows,
greater capacity is needed. But there is only a finite amount of spectrum available,
dictated by licenses.
The upcoming spectrum auction regulation talk reached a stalemate
Note that regulators have been delaying the 2.1 GHz frequency auction since 2014,
while the 2.3 GHz frequency band has been delayed since 2009.
After the long delays, the ministerial regulation on upcoming spectrum auctions
was finally expected to be passed in 2Q17, but it hit another roadblock due to
unresolved legal issues in the 2.3 GHz frequency, among other things.
While the original plan was to allocate two 5MHz blocks in the 2,100 MHz band and
one 15 MHz block in the 2,300 MHz spectrum, it was decided after much
deliberation to auction off a 30 MHz block (instead of 15 MHz) in the 2,300 MHz
spectrum (no change in the 2,100 MHz spectrum auction).
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From our discussions with the Indonesian telecommunication regulatory body

(BRTI), we learned that once the ministerial regulation is approved, regulators will
establish an auction committee to prepare required documentations before the
auction scheme is officially announced (and before the auctions can actually take
place). This could take around two weeks. All things considered, we expect the
auction to materialize sometime in 2018.
Regulators are encouraging the eventual auction winners to use the 2,100-2,300
MHz spectrums to combat capacity constraints in metropolitan areas, rather than
to expand coverage. We concur as it would be inefficient for telco operators to
expand coverage using high frequencies given that lower frequencies—which need
less power and can travel farther—provide better coverage. For operators wishing
to expand coverage, we expect them to wait for the spectrum re-farming of the 700
MHz band, which will be conducted in the future.
Figure 40. Spectrum allocation (as of FY16)

(MHz)
120 850 MHz 900 MHz 1,800 MHz 2,100 MHz 2,300 MHz
100
80
60
40
20
0
TLKM ISAT EXCL Hutchison

Promotion scheme
Regulating promotions
In an ideally competitive market, prices and promotions do not need to be

regulated because market forces would determine both. However, in markets
where fierce competition exists, regulators are obligated with the job of trying to
ensure competition can operate on a fair and equitable basis, for the benefit of
operators and subscribers. Currently, regulators believe that the price war has
become rather unhealthy for the industry and could threaten the industry’s
profitability, with subscribers as the main victim.
A regulation on promotion schemes is in the pipeline
Regulators are planning to establish a new regulation related to cellular operators’

promotions. It will be part of a new ministerial regulation, which will replace the
ministerial regulation 9/2008. The existing regulation controls the terms and
conditions of promotions, but does not regulate their time frame. According to
BRTI, the new regulation will focus on duration of promotions (i.e., how long
promotions can stay valid within the course of any particular year).
Discussions on the new regulation will start once the new interconnection rate
regulation is approved. Judging by the lengthy process of revising the
interconnection rate regulation, we do not expect the promotion scheme
regulation to see the light anytime soon.
If this regulation is implemented, we believe that it could expedite the data

monetization process as it means operators can no longer freely carry out
promotions without a time limit. However, note that this regulation only focuses on
promotions’ validity periods, and not the terms and conditions of promotions. As
such, operators can still run cross-subsidy promotions. Our recent discussion with
BRTI indicates no immediate plan from regulators to control the terms and
conditions of promotions.
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Indosat (ISAT IJ)

Little king in the mid-to-low segment
Infrastructure Tamed debt level and streamlined cost structure
We expect stable EBITDA margin of 44-45% for ISAT until FY19F. We expect tamed
(Initiate) Buy debt level to provide better earnings visibility for ISAT, which is projected to reach
c.IDR3tr in FY19F. Streamlined cost structure would also help ISAT to maintain its
Target Price (12M, IDR) 8,100 margin and profitability level, which in turn would allow the company to focus on
infrastructure rollout.
Share Price (8/25/17, IDR) 6,375
Reaping the benefit from network expansion and modernization
Expected Return 27.1% ISAT is set to benefit from its recent investment in modern, LTE-ready, single-RAN
network. These modernized networks are now c.25% more cost-efficient than the
EBITDA (17F, IDRtr) 13.9 older models, allowing the company to save up to 60% in fuel costs. As a result, cost
Cons. EBITDA (17F, IDRtr) 13.8 of telecom services/BTS should continue to decline.
EPS (17F, IDR) 311 ISAT currently aims for profitability by focusing on areas with the most profitable
Cons. EPS (17F, IDR) 355 subscriber profile. Its main target subscribers are casual data users, instead of the
EV/EBITDA (17F, x) 4.3 data-hungry subscribers. As such, ISAT is not driven by absolute capex as it does
Cons. EV/EBITDA (17F, x) 4.1 not aim to have the highest quality network, but instead, focuses on having a stable
Market Cap (IDRbn) 34,641.3 network available for all of its subscribers. We judge its strategy to be a prudent
Shares Outstanding (mn) 5,433.9 approach, especially during this data migration stage, in which most subscribers
Free Float (%) 1,125.3 are still not data-exclusives.
Foreign Ownership (%) 85.0
Beta (12M) 0.6 Little king in the mid-to-low segment
52-Week Low 5,150
52-Week High
TLKM will always be a premium player in the market that targets the upper
7,500
segment, reducing the possibility of its engaging in the price war despite its
(%) 1M 6M 12M premium data price (vs. peers). We see this as an opportunity for ISAT to grab the
Absolute 1.2 -8.9 2.0 bigger and expanding mid-to-low segment.
Relative -0.6 -18.8 -6.5
Initiate with Buy and TP of IDR8,100
(D-1yr=100) JCI ISAT
120 We initiate our coverage on ISAT with a Buy recommendation and a 12-month
110 target price of IDR8,100/share. Our TP implies FY17F EV/EBITDA of 4.3x. ISAT is
100
currently trading at FY17F EV/EBITDA of 4.1x. We expect ISAT to continue to grow
and grab market share on the back of: 1) tamed debt level and streamlined cost
90
80
structure, 2) prudent network expansion, and 3) aggressive pricing and exclusive
9/16
10/16
11/16
12/16
8/16
1/17
2/17
3/17
4/17
5/17
6/17
7/17
8/17
partnerships. Main risks to our call include: 1) stronger-than-expected competition

that could lead to a disruptive price war, 2) sudden and drastic regulatory changes,
and 3) slower-than-expected data monetization.
FY (Dec) FY15 FY16 FY17F FY18F FY19F

Revenue (IDRbn) 26,769 29,185 31,761 34,075 36,375
Operating EBITDA (IDRbn) 11,473 12,864 13,868 14,842 16,429
EBITDA margin (%) 42.9 44.1 43.7 43.6 45.2
Net profit (IDRbn) -1,310 1,105 1,687 2,153 3,084
EPS (IDR) -241 203 311 396 567
BVPS (IDR) 2,440.9 2,609.0 2,928.5 3,215.3 3,565.9
ROE (%) -10 8 11 12 16
EV/EBITDA (x) 4.0x 4.5x 4.3x 4.1x 3.7x
Note: All figures are based on consolidated IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates

Company background
History of Indosat
Established in 1967, PT Indosat Tbk or Indosat Ooredoo (ISAT) is one of the largest
telecommunication and information service providers in Indonesia, with 30%
subscriber market share as of 1H17. It is a member of the Ooredoo Group, a global
telecommunications provider. ISAT provides cellular, fixed data, and cellular
broadband services, as well as fixed telecommunication or fixed voice offerings. In
addition, it also provides fixed data or Multimedia, Internet and Data
Communication services, such as IPVPN, leased line, internet services, and IT
services to corporate segments.
Ooredoo Asia Pte. Ltd is the largest shareholder with 65% stake, while public owns
20.71% stake, and the remaining 14.29% is owned by the government of Indonesia
14.29%. ISAT went public in October 1994.
Figure 41. ISAT’s ownership structure and business portfolio
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Shareholder structure
Table 4. Shareholder composition (FY16) (Shares, %)

Entity Number of shares Percentage
Ooredoo Asia Pte. Ltd 3,532,056,600 65%
Public 1,125,251,900 21%
Government of Indonesia 776,624,999 14%
Source: Company data, Mirae asset Sekuritas Indonesia Research
Management team
Table 5. List of commissioners and directors (FY16)

Name Position
Waleed Mohamed Ebrahim Al-Sayed President Commissioner
Chris Kanter Commissioner
Astera Primanto Bhakti Commissioner
Ajay Bahri Commissioner
Ian Charles Dench Commissioner
Hans Kuropatwa Commissioner
Edy Sudarmanto Commissioner
Syed Maqbul Quader Independent Commissioner
Elisa Lumbantoruan Independent Commissioner
Wijayanto Samirin Independent Commissioner
Alexander Rusli President Director and Chief Executive Officer
Caba Pinter Director and Chief Financial Officer
Joy Wahjudi Director and Chief Sales and Distribution Officer
John Martin Thompson Director and Chief Technology Officer
Herfini Haryono Director and Chief Wholesale and Enterprise Officer
President Director and Chief Executive Officer
Alexander Rusli, has been the CEO of Indosat Ooredoo since November 2012. Prior
to Indosat Ooredoo, Rusli was a partner at Northstar Pacific, the largest private
equity fund in Indonesia, after moving from a nine-year stint for the government of
Indonesia as the chief of staff for two ministries: Ministry of Communication and
Information Technology and Ministry of State-Owned Enterprises. Rusli holds a
Doctor of Philosophy degree in Information Technology from Curtin University,
Western Australia.
Director and Chief Financial Officer
Caba Pinter, was appointed chief financial officer at Indosat Ooredoo effective July
2015. He was most recently the regional CFO for the Ooredoo Group in Doha, Qatar
in 2013-15. Previously, he was the CFO of Millicom International Cellular S.A. in
Ghana in 2001-02, finance director of Celtel Uganda in 2003-05, CFO and acting CEO
of Celtel Kenya in 2005-08, Africa CFO of Zain Africa in the Kingdom of Bahrain in
2008-10, and Africa CFO for Airtel Africa in Kenya in 2010-12. Pinter earned a
master’s degree in International Economics and Management (MIEM) from SDA
Bocconi in Milan, Italy.
Director and Chief Sales and Distribution Officer
Joy Wahjudi, was appointed director and chief sales and distribution officer of
Indosat Ooredoo in May 2014, and was subsequently appointed as an independent
director of Indosat Ooredoo since January 2015. Wahjudi, started in 1995, was the
GM finance and treasury for Mobile Selular Indonesia. In 1997, he joined XL Axiata
as a GM finance controller, where he was subsequently appointed to a variety of
senior positions, including GM corporate strategy in 2000-03, GM sales business
solution in 2003-05, VP region in 2005-06, and chief commerce officer from 2006 to
February 2014. Wahjudi holds a master of business administration in International

Business from California State East Bay, USA.
Director and Chief Wholesale and Enterprise Officer
Herfini Haryono, was appointed director and chief wholesale and enterprise officer
in October 2015. Previously, she was the chief information officer since February
2015, as well as acting chief technical officer (CTO) from May to October 2014 in
Indosat Ooredoo. She joined Indosat Ooredoo in early 2013. She has concurrently
served as a commissioner at Indosat Ooredoo subsidiaries, PT Lintasarta since June
2014 and PT Indosat Mega Media (IM2) since October 2016. Haryono received a
Diplomengineuer degree in Electrical Engineering specializing in Telecom from the
Technical University of Braunschweig, Germany in 1992.
Operation breakdowns
Figure 42. Revenue breakdown Figure 43. Cost of operation breakdown
Cellular MIDI Fixed line Cost of telecom services Depreciation and amortization
Personnel Marketing
General and adminitstrative
3%
14%
4%
5%
8%
47%
36%
83%
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Investment thesis
Our top pick for Indonesia’s telecommunication industry is Indosat. The company
exhibited better debt control and performed a profitability turnaround as it
reversed its net loss position to a net profit in 1Q16. We believe that tamed debt
level and streamlined cost structure, prudent network expansion, as well as
attractive package prices should propel the company forward. With TLKM targeting
the upper segment in the market (as the premium player, it is also unlikely to
actively engage in the price war despite its data packages being priced higher than
peers), this should be an opportunity for ISAT to grab the bigger and expanding
mid-to-low segment.
Tamed debt level and streamlined cost structure
We expect a stable EBITDA margin of 44-45% for ISAT until FY19F. We expect tamed
debt level to provide better earnings visibility for ISAT, which we project to reach
c.IDR3tr in FY19F. Streamlined cost structure would also help ISAT to maintain its
margin and profitability level, which in turn would allow the company to focus on
infrastructure rollout.
Tamed debt level
In FY14, ISAT was crippled by the sharp deterioration of IDR as its foreign
denominated debt comprised c.60% of the company’s total debt, and driving
earnings to a net loss of IDR2tr for the year. However, ISAT has since managed to
systemically reduce its USD debt exposure. It successfully refinanced its USD650mn
callable bond with IDR denominated bonds in 2Q15. Even though the USD
repayment was relatively costly at that time, we believe that it was a prudent action
by ISAT, given the volatility within the macro space during the period. ISAT’s forex
exposure is now reduced, with foreign denominated debt making up only 10% of
total debt as of FY16. The company expects USD denominated debt portion to fall
into the low single digit territory by the end of FY17F.
ISAT’s debt-to-equity ratio (DER) also decreased from 1.9x in FY14 to 1.7x in FY16,
and its net debt/EBITDA fell from 2.4x to 1.7x in the same period. We expect ISAT’s
net debt/EBITDA level to stabilize around 1.0x-1.5x going forward as profitability
turnaround should support free cash flow (FCF) growth. Stable debt level and lower
forex exposure will provide ISAT with better earnings visibility, which will translate
to better flexibility in deploying capital to increase network rollout.
Figure 44. Decreased forex exposure Figure 45. Improving DER and net debt/EBITDA
IDR USD (x) (x)
Net debt/EBITDA (L) DER (R)
100%
3.0 2.5
90%
80% 2.5
2.0
70%
2.0
60% 1.5
50% 1.5
40% 1.0
1.0
30%
20% 0.5
0.5
10%
0% 0.0 0.0
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Improved cost control to support growth
ISAT managed to improve its EBITDA margin from 42% in FY14 to 44% in FY16.
Going forward, we expect its EBITDA margin to expand to 45% in FY19F, with
support from better cost efficiency.
Going forward, ISAT plans to continue to improve cost control, by focusing on 4G

services and outsourcing a number of non-core functions.
Apart from the management’s focus on pushing subscribers to switch to 4G, there
are two main cost saving initiatives from ISAT: IT operations and managed power
and field services (MPFS). Firstly, the whole IT operation was outsourced to IBM
since the beginning of FY16, an arrangement which ISAT expects would translate to
lower cost, faster respond time to changes, and better flexibility. Secondly, the
MPFS was reorganized and outsourced. This reduces BTS maintenance costs, and
management expects the effects to be visible in FY17. In addition, ISAT also
connects many BTSs in remote sites to the state power grid, voiding the need for
two diesel generators to be placed at each site, which reduces energy cost. In FY16,
ISAT successfully reduced its fuel consumption for BTS sites by 6% YoY.
Figure 46. EBITDA margin to stay relatively flat before surging post FY18F
(IDRbn) EBITDA (L) EBITDA margin (R)
18,000 46%
16,000
45%
14,000
44%
12,000
10,000 43%
8,000 42%
6,000
41%
4,000
40%
2,000
0 39%
FY13 FY14 FY15 FY16 FY17F FY18F FY19F
Infrastructure sharing to reduce capex
Infra sharing has been proven effective in minimizing opex and capex in many
markets. Undoubtedly, this will support ISAT during its network expansionary
mode. It will lead to better FCF, which in turn could support further investment,
and/or introduction of dividend policy. However, we do not expect the infra sharing
regulation to be passed in the near term.
Reaping benefit from network expansion and modernization
ISAT is set to benefit from its recent investment in modern, LTE-ready, single-RAN
network. We believe that the company’s recent network investment is often
downplayed by its peers.
Aggressive network expansion and modernization
After the network expansion and modernization were concluded in FY15, Indosat
had a total of 50,687 BTSs (comprised of 23,596 2G BTSs, 23,730 3G BTSs, and 3,361
4G BTSs), showing an increase of 109% in two years. As of FY16, ISAT had a total of
56,483 BTSs (comprised of 24,042 2G BTSs, 27,724 3G BTSs, and 4,717 4G BTSs),
representing 10% YoY growth.
These modernized networks are now c.25% more cost-efficient than the older
models, and they can save up to 60% in fuel costs. As a result, cost of telecom
service/BTS should continue to decline.
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Figure 47. ISAT’s BTS growth over the years Figure 48. Better network efficiency post-modernization
(unit) 2G 3G 4G (IDRmn/BTS)
60,000 450 +49%
efficiency
400
50,000
350
40,000 300
250
30,000
200
20,000 150
100
10,000
50
0 0
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16
Continuous network improvement
Recent discussion with the management indicates that ISAT will limit capex at
around IDR6tr for the time being. However, they see possibilities of capex skewing
to the upside in the future if data traffic growth accelerates faster than their initial
expectation. We project ISAT’s capex to stay stable at c.IDR6tr until FY19F before
picking up subsequently as we believe that in the short-to-mid-term, management
prefers to have better stability by maintaining positive FCF. We believe that
continuous network rollout is imperative because challengers, including ISAT, need
to narrow the coverage and quality gaps with the incumbent.
Network for the masses
ISAT currently aims for profitability by focusing on areas with the most profitable
subscriber profile. Its main target subscribers are casual data users, instead of the
data-hungry subscribers. As such, ISAT is not driven by absolute capex as it does
not aim to have the highest quality network, but instead, it aims to have a stable
network available for all of its subscribers. We believe that this is a prudent
approach, especially during this data migration stage, in which most subscribers
are still not data-exclusives (i.e., data-hungry subscribers), in our view. Ergo,
subscribers need a stable instead of high-quality network. Rolling out high-quality
networks in sparsely populated areas during this stage would be EBITDA dilutive in
the short term, in our view.
Prudent network rollout
ISAT’s network utilization is quite high, with 125% data subs/3G-4G BTS, compared
to TLKM’s 105% and EXCL’s 62% (this method of calculation is not the most
accurate, as network capacity has many variables, but nonetheless it paints the big
picture). This is in line with the company’s growth strategy. Unlike EXCL, ISAT does
not target data-hungry subscribers. Instead, the company aims to provide network
services for the masses.
We believe this is a sensible approach for the current industry. We want to reiterate
our view that in the short-to-medium term, price (not network quality) will still be
the key to grabbing market share. Therefore, having low network utilization (i.e.,
better data experience) should not be a top priority for Indonesian operators at this
moment. As such, we prefer ISAT’s tactic of rolling out networks in tandem with
demand (vs. ahead of the demand curve).
However, note that if the rollout lags too far behind demand, we see higher churn
rate possibility for ISAT. Ergo, the rollout execution should be well-planned and
timely.

Figure 49. ISAT’s network utilization is relatively higher compared to peers
180%
TLKM ISAT EXCL
160%
140%
120%
100%
80%
60%
40%
20%
0%
FY14 FY15 FY16
Little king in the mid-to-low segment
TLKM will always be a premium player in the market that targets the upper
segment, reducing the possibility of its engaging in the price war despite its
premium data price (vs. peers). We see this as an opportunity for ISAT to grab the
bigger and expanding mid-to-low segment.
Profitability to be driven by larger subscriber base
ISAT has been experiencing a declining ARPU trend since 1Q16 on the back of a
larger subscriber base, data cannibalization, and declining data yield. We expect
ISAT’s low ARPU trend to continue until data yields start to pick up, which we expect
to happen in 2H18.
However, we believe that ISAT’s profitability will continue to improve as the

declining data yield and the falling legacy revenue can be offset by the expansion of
the subscriber base. We believe that ISAT’s pricing strategy will play an important
part in boosting its earnings generation ability and prove to be the winning card.
Figure 50. ISAT’s revenue continues to rise despite falling data yield
(IDRbn) (IDR/mb)
Revenue (L) Data yield (R)
35,000 400
30,000 350
300
25,000
250
20,000
200
15,000
150
10,000
100
5,000 50
0 0
FY13 FY14 FY15 FY16 FY17F
Aggressive pricing could prove to be fruitful
In order to expand its subscriber base outside java, as well as to push subscriber
migration to data, ISAT prices its data packages competitively. In our view, price
positioning still plays a major role in winning market share. In the short-to-medium
term, we believe that price (instead of network quality) will still be the key to
grabbing market share as 1) the industry has not reached the data-centric stage
(i.e., the majority of subscribers are still not data-exclusives), and 2) late adopters
are likely to come from outside Java, which have relatively lower affluent level.
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Headline prices and promotions are merely marketing gimmick
Currently, ISAT is aggressively pushing the Freedom Package as a complete data

package that boasts three main promos. The first promo is the “IDR1/second voice
call to all operators” for starter packages. The second is the data rollover promo,
which allows data subscribers to rollover their remaining quota to the next month.
The third promo is the unlimited quota for ISAT’s video streaming partner, Iflix, and
other social media, like Facebook, Whatsapp, Twitter, Line, and Path.
In contrast to the consensus’ view, we do not believe that this will have a negative
impact on ISAT’s profitability, in neither short term nor long term.
Firstly, we would like to argue that the aggressive promotions are mainly a
marketing gimmick to push data penetration. The IDR1/sec promo was originally
only applicable to starter packages for subscribers located outside Java, specifically
only for subscribers in Sumatra (except Lampung), Kalimantan, Sulawesi, and Nusa
Tenggara although it is now also available in Java (since March 2017). In addition,
this promo is valid only for the first 30 seconds of voice call and only for the first 10
calls of the day, while the cost of the remaining minutes depends on the cluster
based pricing. Therefore, the IDR1/sec actually only gives free 300 secs (5 mins) of
voice calls every day.
Secondly, we believe that the practicality of data rollover is relatively low. Only the
main quota is eligible for rollover to the next month, while the bonus quota cannot
be rolled over. Note that the main quota has to be consumed first before any bonus
quota can be consumed. As such, for most subscribers, the remaining main quota
available for rollover could be fairly low or even non-existent. We also believe that
this could help push migration to 4G and reduce ISAT’s churn rate since this promo
is only for selected 4G packages, and subscribers need to stay subscribed to the
same/higher package to be able to make use of the data rollover promo.
Thirdly, the so-called “unlimited quota” for social media is in fact, only a marketing
headliner. The “unlimited quota” is not actually unlimited, ISAT has a data
calculation method, and when the limit is reached, the connection will slow down.
Also, note that data-intensive apps, namely Spotify, Instagram, and Youtube, are
not included in the “unlimited quota” promotion. ISAT only provides a finite amount
of bonus quota for these apps, in accordance with different package prices.
Figure 51. Freedom Package encourages migration to 4G by offering higher 4G quota

Lastly, the big bulk of the regular quota is only available for 4G-enabled devices
(please see figure 69), which we believe is a part of ISAT’s strategy to push
subscribers to switch to 4G. As such, in order for subscribers to utilize the big bulk
of their data quota, they have to switch to 4G.
Note that EXCL also implements similar strategy, but offers relatively lower main
data quota.
It is also worth noting that ISAT has slowly implemented light data monetization by
reducing bonus data quota since late FY16, and this provides room for the company
to distribute other means of ‘subsidy’ to push penetration and migration to data.
All in all, we believe that ISAT’s aggressive pricing could prove to be fruitful in the
long run. Although the aggressive pricing and promotions are likely to put pressure
on ISAT’s data yield in the short term, the multiplier effect that comes from
enlarged subscriber base and migration to 4G will over-compensate for the
deteriorating yield.
Changes in regulatory landscape: Impacts on ISAT
We expect the proposed changes to regulations to bode well for ISAT as we believe
they are only incremental revisions which will not drastically change the big
framework of the industry. However, some changes can help ISAT to cement its
position as the market share leader in the mid-to-low segment.
(Negative - somewhat negative - neutral (or TBD) - somewhat positive - positive)
Interconnection rate: Somewhat positive
In our view, changes in the interconnection rate will not have much of an impact on
ISAT. Interconnection made up 11% of ISAT’s total revenue in FY14, but has come
down to 7% in FY16. We believe that this is related to the number of subscribers
(i.e., on-net calls) and the switch to data. As we expect data to make up for 78% of
ISAT’s revenue in FY19F, we believe that MoU will decline gradually. Ergo, the longer
this revision drags, the less impact it will have on ISAT. When the migration to data
is complete, we believe that it could make the interconnection rate obsolete.
Figure 52. Declining interconnection revenue of ISAT

(IDRbn) Interconnection revenue (L) % of revenue (R)
2,300 10%
2,100
9%
1,900
1,700
8%
1,500
1,300
7%
1,100
900
6%
700
500 5%
FY14 FY15 FY16
Infrastructure sharing: Positive
In an increasingly competitive market, low cost plays an integral part in maintaining

profitability. With infra sharing, operators can save on capex and opex. MOCN has
been proven effective in many other markets in reducing capex and opex.
Undoubtedly, this will support ISAT during its network expansion cycle. Capex
efficiency will lead to a better free cash flow, which in turn could support further
investment and/or introduction of dividends.
Research 39
Research
ISAT is currently sharing four 4G LTE infrastructures with EXCL in four cities using
MORAN. Since the pilot project, however, ISAT has not rolled out additional joint-
networks with EXCL. Our recent discussions with the management indicate that
ISAT prefers to wait for the regulations before adding more, using MOCN.
Spectrum auction: Somewhat positive
We believe that ISAT is likely to aim to win a spectrum block as it is looking to

expand its network capacity to accommodate the rising data traffic. In our view,
ISAT will be more inclined to win a block in the 2,100 MHz spectrum, which would
be a sweeter spot between coverage and capacity as far as 4G deployment is
concerned. A new block in the 2,100 MHz spectrum will also perfectly complement
its current spectrum mix.
However, even in the case of further delays, we doubt that the deferment of the
auction bears downside risk to ISAT as it still has enough network capacity to
accommodate the rising data traffic for at least another two years. We view this
spectrum auction as a rather long-term investment for ISAT.
Figure 53. ISAT still has a relatively ample spectrum capacity

(MHz)
100
80
60
40
20
0
Promotion scheme: Negative
We believe that the promotion scheme regulation is more likely to derail the
growth agendas of operators which use aggressive pricing as their key strategy to
attract price-sensitive subscribers and gain market share, which include ISAT.
As ISAT is aggressively pushing promotions through its Freedom package, we

believe that if the new promotion scheme regulation is passed, ISAT might have to
formulate a new strategy. The good news is that BRTI said that the new regulation
will focus only on promotion validity periods (i.e., how long promotions can stay
valid within the course of any particular year). Therefore, ISAT can still run a cross-
subsidy promotion.
regulation is approved (originally scheduled for end-July 2017 but delayed). Judging
by the lengthy process of revising the interconnection rate regulation, we do not
expect the promotion scheme regulation to see the light until next year. In the
event of continuous postponement of the promotion scheme regulation, we believe
that it will benefit ISAT. The regulation could be deemed obsolete when the
migration to data is completed and telco companies start to monetize data.
We believe that the new regulation will not mark the end of aggressive promotions
by ISAT. However, we have to entertain the possibility that ISAT will have to take
time in order to come back with a different pricing strategy.

Valuation
Initiate with Buy and TP of IDR8,100

We initiate our coverage on Indosat with a Buy recommendation and a 12-month
target price of IDR8,100. Our target price was derived using a DCF calculation. We
assume 10.5% WACC, 7.0% risk-free rate, 5.5% market risk premium, beta of 1, and
3% terminal growth rate for ISAT.
We have three different scenarios for our forecast, and we currently assume our
base case scenario for ISAT.
 Best case: The data monetization stage starts earlier-than-expected as

competitors’ top line growth slows down and they have to start
monetizing data in order to maintain profitability. This situation means
ISAT can start to increase their data prices, as well. As data yield increases,
ARPU growth would accelerate. For this scenario, we assume a more
aggressive increase in data yield, coupled with higher subscriber
acquisition, which would translate to higher-than-industry’s average top
line growth for ISAT.
 Base case: The data monetization stage starts when telco companies
manage to successfully migrate most of their subscribers to data, which
we believe will commence when smartphone penetration reaches c.61%.
Once the migration is complete, data yield will start to increase. For this
scenario, we estimate data yield to deteriorate before starting to increase
in 2H18 for ISAT.
 Weak case: The data monetization stage starts slower-than-expected as

subscriber growth remains robust, which forces operators to continue to
impose low prices and compete for market share. This condition would
translate to margin deterioration.
Our target price is based on DCF methodology and implies FY17F EV/EBITDA of
4.3x. ISAT is currently trading at FY17F EV/EBITDA of 4.1x. All in all, we expect ISAT
to continue to grow and grab market share on the back of: 1) tamed debt level and
streamlined cost structure, 2) prudent network expansion, and 3) attractive
package prices. Main risks to our call include: 1) stronger-than-expected
competition that could lead to a disruptive price war, 2) sudden and radical changes
to the regulations, and 3) slower-than-expected data monetization.
Research 41
Research
Indosat (ISAT IJ/BUY/TP: IDR8,100)
Income Statement (Summarized) Balance Sheet (Summarized)

(IDRbn) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F
Revenue 26,769 29,185 31,761 34,075 Cash and cash equivalents 3,623 1,850 2,061 3,492
Operating EBITDA 11,473 12,864 13,868 14,842 Account receivables 2,741 2,750 2,986 3,203
Depreciation and amortization -8,769 -8,973 -9,152 -9,335 Inventories 39 79 81 86
Operating EBIT 2,704 3,891 4,716 5,507 Advances 2,972 3,019 3,271 3,408
Financial income/(expense) -2,891 -2,364 -2,505 -2,654 Other current assets 543 374 435 966
Pretax income/(loss) from associates 0 0 0 0 Long-term investments 38 25 25 25
Non-operating income/(expense) -1,599 268 274 280 Fixed assets 41,822 39,078 37,459 35,308
Profit before tax -1,786 1,795 2,485 3,133 Other long-term assets 3,610 3,661 2,656 3,037
Taxation 622 -520 -596 -752 Total assets 55,389 50,839 48,974 49,525
Profit after tax -1,163 1,276 1,889 2,381 Account payables 7,027 5,227 5,517 4,342
Minority interests -147 -171 -201 -227 Short-term debt 7,586 8,366 8,138 3,088
Net profit -1,310 1,105 1,687 2,153 Other short-term liabilities 5,439 5,494 5,563 5,625
Long-term debt 20,057 15,309 11,710 16,832
Growth (YoY) 12/15 12/16 12/17F 12/18F Other long-term liabilities 2,015 2,266 2,723 3,187
Revenue 11% 9% 9% 7% Total liabilities 42,125 36,662 33,651 33,074
Operating EBITDA 14% 12% 8% 7% Paid in capital 543 543 543 543
Depreciation and amortization 7% 2% 2% 2% Additional paid in capital 1,547 1,547 1,547 1,547
Operating EBIT 50% 44% 21% 17% Retained earnings 9,731 10,836 11,932 13,009
Financial income/(expense) -14% -18% 6% 6% Total equity attributable to majority 12,483 13,350 14,447 15,524
Pretax income/(loss) from associates 0% 0% 0% 0% Non-controlling interest 781 827 876 927
Non-operating income/(expense) 304% -117% 2% 2% Total shareholders' equity 13,264 14,177 15,323 16,451
Profit before tax -9% -201% 38% 26%
Taxation 643% -183% 15% 26%
Profit after tax -38% -210% 48% 26%
Minority interests 13% 16% 18% 13%
Net profit -35% -184% 53% 28%
Cash Flow Statement (Summarized) Key Performance Indicators

(IDRbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F
Net income -1,310 1,105 1,687 2,153 Per share data
Depreciation 8,129 7,865 8,645 9,596 EPS (IDR) -241.1 203.4 310.5 396.3
Changes in NWC -2,280 -894 -418 -7,053 BVPS (IDR) 2,440.9 2,609.0 2,819.8 3,027.4
CF from operations 4,539 8,076 9,915 4,697 DPS (IDR) 0.0 0.0 108.7 198.1
PP&E investing activities -9,175 -5,122 -7,026 -7,446 Key ratio
Other investing activities 255 -39 1,005 -381 ROA (%) -2.4 2.2 3.4 4.3
CF from investing -8,920 -5,160 -6,020 -7,827 ROE (%) -9.9 7.8 11.0 13.1
Dividends paid 0 0 -591 -1,077 EBITDA margin (%) 42.9 44.1 43.7 43.6
Change in non-current liabilities 4,249 -4,497 -3,142 5,586 Net profit margin (%) -4.9 3.8 5.3 6.3
Change in equity 175 -238 0 0 Dividend payout ratio (%) 0.0 0.0 35.0 50.0
Change in minority interest 100 46 49 52 Current ratio (x) 0.5 0.4 0.5 0.9
CF from financing 4,524 -4,689 -3,684 4,561 Gross debt/equity (x) 1.8 1.5 1.2 1.0
Net worth adjustments 143 -1,773 210 1,431 Net debt/EBITDA (x) 2.1 1.7 1.3 1.1
Change in cash 143 -1,773 210 1,431
Beginning balance 3,480 3,623 1,850 2,061
Ending balance 3,623 1,850 2,061 3,492


(IDRbn) 1Q17 2Q17 3Q17F 4Q17F (IDRbn) 1Q17 2Q17 3Q17F 4Q17F
Operating EBIT 875 1,366 1,309 1,166 Advances 2,634 2,023 2,647 3,271
Financial income/(expense) -607 -463 -696 -739 Other current assets 262 284 359 435
Pretax income/(loss) from associates 55 56 57 58 Long-term investments 27 22 24 25
Non-operating income/(expense) 41 2 109 122 Fixed assets 37,474 36,190 36,825 37,459
Profit before tax 364 961 778 607 Other long-term assets 3,808 4,039 3,348 2,656
Taxation -98 -247 -114 -137 Total assets 49,588 49,396 49,185 48,974
Profit after tax 266 714 664 470 Account payables 3,991 4,118 4,818 5,517
Minority interests -37 -48 -52 -64 Short-term debt 7,211 5,624 6,881 8,138
Net profit 229 666 613 405 Other short-term liabilities 6,155 6,127 5,845 5,563
Long-term debt 15,542 16,693 14,202 11,710
Growth (QoQ) 1Q17 2Q17 3Q17F 4Q17F Other long-term liabilities 2,312 2,356 2,540 2,723
Revenue -5% 7% 4% 5% Total liabilities 35,211 34,919 34,285 33,651
Operating EBITDA -9% 15% 0% 2% Paid in capital 543 543 543 543
Depreciation and amortization -1% -1% 2% 10% Additional paid in capital 1,547 1,547 1,547 1,547
Operating EBIT -24% 56% -4% -11% Retained earnings 11,009 11,233 11,583 11,932
Financial income/(expense) 13% -24% 50% 6% Total equity attributable to majority 13,513 13,659 14,053 14,447
Pretax income/(loss) from associates 0% 0% 0% 0% Non-controlling interest 864 819 847 876
Non-operating income/(expense) -127% -95% 5218% 12% Total shareholders' equity 14,377 14,478 14,900 15,323
Profit before tax -29% 164% -19% -22%
Taxation -25% 153% -54% 20%
Profit after tax -30% 168% -7% -29%
Minority interests -43% 28% 8% 24%
Net profit -27% 191% -8% -34%
Research 43
Research
Telekomunikasi Indonesia (TLKM IJ)

Retaining the throne
Infrastructure With great infrastructure, comes great pricing superiority
TLKM boasts the most extensive infrastructure network in Indonesia. Occupied by

(Initiate) Trading Buy the pseudo-competition and balance sheet restructurings, other operators
neglected investments outside of Java in the past. We believe that the first-mover
Target Price (12M, IDR) 5,400 strategy bodes well for TLKM as its infrastructure superiority outside Java allows it
to secure a leading market share position, which puts the company in a distinctive
Share Price (8/25/17, IDR) 4,770 position that allows it to have a strong pricing advantage over its peers.
Strong cash flow generation to support investments and dividend

Expected Return 13.2%
Good profitability, coupled with meticulous cost control, supports TLKM’s CFO. Its
EBITDA (17F, IDRtr) 65.8 EBITDA of IDR59tr in FY16 was the highest among peers, grew at 10% CAGR during
Cons. EBITDA (17F, IDRtr) 66.6 FY11-FY16. While TLKM’s EBITDA margin in FY16 was 51%, it is considerably higher
than peers’. TLKM continues to book strong CFO over the past years and we believe
EPS (17F, IDR) 234.4
that this should provide TLKM with some flexibility in deploying capital to further
Cons. EPS (17F, IDR) 235.5
develop its infrastructure. A strong balance sheet and stable cash flow will enable
EV/EBITDA (17F, x) 8.2
TLKM to retain its throne as the market leader. Furthermore, we believe that TLKM
Cons. EV/EBITDA (17F, x) 7.7
can provide an enticing dividend play thanks to its strong balance sheet position.
Market Cap (IDRbn) 480,816.0
Shares Outstanding (mn) 100,800.0 Fixed line and broadband could be the next ‘leg’ to unlock value
Free Float (%) 49,192.9
Foreign Ownership (%) 73.9 Despite the cellular cannibalization effect, we believe that the relatively low
Beta (12M) 1.0 penetration level in the fixed line service means there is still room for growth. In
52-Week Low 3,624 addition, TLKM’s broadband business is still budding. We believe that it will
52-Week High 4,840 experience accelerated growth on the back of its retail fiber service, IndiHome. The
penetration of fixed broadband services in Indonesia is still relatively low, at less
(%) 1M 6M 12M
than 10%, among the lowest in the world. We believe that demand for high quality
Absolute 1.1 24.2 13.0
fixed broadband services will continue to increase along with the growing middle-
Relative -0.7 14.4 4.6
class segment in Indonesia.
JCI TLKM
Initiate with Trading Buy and TP of IDR5,400
(D-1yr=100)
120
110
100
We initiate our coverage on TLKM with a Trading Buy recommendation and a 12-
90 month target price of IDR5,400/share. Our TP implies FY17F EV/EBITDA of 8.2x.
80 TLKM is currently trading at FY17F EV/EBITDA of 8.1x. We expect TLKM to continue
9/16
10/16
11/16
12/16
8/16
1/17
2/17
3/17
4/17
5/17
6/17
7/17
8/17
to maintain its market share leading position given that 1) TLKM has exceptional
fundamentals and 2) the proposed changes are only incremental revisions that will
not drastically change the big framework of the industry. Main risks to our call
include 1) stronger-than-expected competition that could lead to a disruptive price
war and 2) sudden and drastic changes to the regulations.

Revenue (IDRbn) 102,470 116,333 129,107 141,397 153,906
EBITDA margin (%) 50.2 51.1 51.0 51.5 51.8
Net profit (IDRbn) 15,489 19,352 23,222 26,496 29,716
EPS (IDR) 156.4 195.4 234.4 267.5 300.0
BVPS (IDR) 943.1 1,065.4 1,189.1 1,330.2 1,489.0
ROE (%) 16.6 18.3 19.7 20.1 20.1
EV/EBITDA (x) 6.38x 7.12x 8.2x 7.4x 6.8x

Company background
Company in brief
History of Telekomunikasi Indonesia
Telekomunikasi Indonesia (TLKM) is the leading telecommunication provider and

largest mobile operator in Indonesia, with 178mn mobile subscribers as of 1H17
(55% market share). It is a state‐owned enterprise that operates in the
telecommunications and network services sector in Indonesia, established on
September 21, 1991. TLKM manages six products portfolio (mobile, fixed, wholesale
and international, network infrastructure, enterprise digital, and consumer digital)
which serve four customer segments (corporate, residential, individual, and various
other customer segments).
Figure 54. TLKM’s ownership structure and business portfolio


Government of Indonesia 51,602,353,559 52.09
Public 47,459,863,040 47.91
Source: Company data, Mirae Asset Sekuritas Indonesia
Management team

Name Position
Hendri Saparini President Commissioner
Dolfie Othniel Fredric Palit Commissioner
Hadiyanto Commissioner
Pontas Tambunan Commissioner
Margiyono Darsasumarja Independent Commissioner
Rinaldi Firmansyah Independent Commissioner
Pamiyati Pamela Johanna Waluyo Independent Commissioner
Alex J. Sinaga President Director
Abdus Somad Arief Director
Harry M. Zen Director
Herdy R. Harman Director
Dian Rachmawan Director
Honesti Basyir Director
Source: Company data, Mirae Asset Sekuritas Indonesia
President Director
Alex J. Sinaga is an Indonesian citizen and lives in Jakarta. Other than being the
president director of Telkom, Sinaga is also the president commissioner of
Telkomsel. His education background, among others, is a bachelor’s degree in
Electrical Engineering from Institut Teknologi Bandung and a master’s degree in
Telematics from the University of Surrey, Guidford-England.
Director of Finance
Harry M. Zen is an Indonesian citizen and lives in Jakarta. Other than being the
finance director, Zen is also the president commissioner of GSD and a
commissioner of Telkomsel. His educational background is a bachelor’s degree
from the University of Indonesia’s Faculty of Metallurgy and an MBA degree in
Corporate Finance Institutions and Market from the State University of New York,
Buffalo.
Director of Digital and Strategic Portfolio
Indra Utoyo is an Indonesian citizen and lives in Bandung. Other than being the
digital and strategic portfolio director, Utoyo is also the president commissioner of
MDI and a commissioner of Telkom Metra. Indra Utoyo’s educational background is
a bachelor’s degree from Institut Teknologi Bandung with a major in Electro
Telecommunication Engineering. He has an MBA degree in Communication and
Signal Processing from Imperial College of Science, Technology and Medicine,
University of London, England.

Director of Wholesale & International Service, Director of Enterprise &

Business Service
Honesti Basyir is an Indonesian citizen and lives in Bandung. Other than being the
wholesale and international service director, Basyir also has a dual position as
director for enterprise and business service (since September 13, 2016), the
president commissioner of Telin, and the president commissioner of Telkom Metra.
His educational background is a bachelor’s degree from Institut Teknologi Bandung
with a major in Industrial Engineering. He has a master’s degree in Corporate
Finance from Sekolah Tinggi Manajemen Bandung.
Director of Human Capital Management
Herdy Rosadi Harman is an Indonesian citizen and lives in Bandung. Other than
being the human capital management director, he also has a dual position as a
commissioner of GSD and commissioner of Infomedia. Harman’s educational
background is a bachelor’s degree from Universitas Padjajaran Bandung with a
major in Law. He has an MBA degree from the Asian Institute Management
Philippines-Institute Management Telkom University and master of law (LLM) from
American University, Washington DC, the United States.
Director of Network, IT & Solution
Abdus Somad Arief is an Indonesian citizen and lives in Jakarta. Other than being
the network, IT, and solution director, he also serves as the president commissioner
of Telkom Infra and a commissioner of Teltranet. Arief’s educational background is
a bachelor’s degree from Institut Teknologi Bandung with a major in Electro
Engineering. He has a master’s degree in Information and Technology Systems
from Institut Teknologi Bandung.
Director of Consumer Service
Dian Rachmawan is an Indonesian citizen and lives in Bogor. Other than being the
consumer service director, he also has a dual position as the president
commissioner of Telkom Akses. Rachmawan’s educational background is a
bachelor’s degree from Institut Teknologi Sepuluh November, majoring in Electro
and Telecommunication Engineering. He has a master’s degree in Communication
and Real Time System, Telecommunication Engineering from University of
Bradford, England.
Celullar Internet and IT services Telecom service expenses Depreciation and amortization
Fixed line Interconnection Personnel Interconnection
Network and other telco services General and administrative Marketing
6% 6%
4% 6%
6% 4%
41%
13%
18%
71%
25%

Investment thesis
We expect Indonesia’s largest telco company, Telekomunikasi Indonesia’s (TLKM),

market share to deteriorate marginally in the future. Nonetheless, we believe that
TLKM will still be able to maintain its market share leading position, on the back of
its superior infrastructure, strong cash flow generation ability, and favorable fixed
line and broadband business outlook. In the long run, we believe that its topline will
be supported by further monetization, utilizing its huge subscriber base.
With great infrastructure, comes great pricing superiority
TLKM boasts the most extensive infrastructure network in Indonesia. Occupied by

the pseudo-competition and balance sheet restructurings, other operators
neglected investments outside of Java in the past. Uniform network with good
quality cannot be enjoyed in small towns, especially in remote areas ex-Java. In fact,
there are still areas that are only reachable by one operator, which is TLKM. Other
operators invested so heavily in Java; they do not have the resources to compete
outside Java anymore. As a result, TLKM still enjoys a market share of c.78% outside
Java as of FY16.
It is true that investments outside Java are often unprofitable given that
infrastructure set up in certain sparsely populated rural areas is expensive and
have unfavorable return. However, we believe that the first-mover strategy bodes
well for TLKM as its infrastructure superiority outside Java allows it to secure a
leading market share position, which puts the company in a distinctive position that
allows it to have a strong pricing advantage over its peers.
Furthermore, as the first-mover, TLKM has already amassed a huge subscriber

base, allowing the company to take advantage of the interconnection rate that
implies off net–on net ratio of 6x-8x. When other operators decided to enter the
market outside Java, Telkomsel’s subscribers stay as sticky as ever, because
Telkomsel applies extremely low on-net tariff and steep off-net tariff. In other
words, Telkomsel simply makes it expensive for its subscribers to make phone calls
to other operators. This discourages long-time subscribers of Telkomsel to switch
to other operators as their friends and family are all using Telkomsel: switching to
other operators, even those that offer lower rates would still be costly for them in
the long run.
Going forward, as we see strong commitments from ISAT and EXCL to roll out
networks aggressively outside Java, we expect the coverage and quality gaps
between the challengers and the incumbent to gradually narrow. Combined with
their aggressive pricing strategy, we do see some downside risks in terms of
market share for Telkomsel. However, we do not expect Telkomsel to lose its
throne as the cellular market share leader as its revenue will be supported by
further monetization when data monetization begins. In addition, we believe that it
is unlikely for ISAT and EXCL to truly equal TLKM’s network superiority given the
current infrastructure superiority of TLKM and the fact that it is still aggressively
investing and rolling out new networks.
It is also worth noting that ISAT and EXCL have conveyed that they are not trying to
be the new Telkomsel, but instead, both are focusing on their own niche markets
within the mid-to-low segment.

Strong cash flow generation to support investments and dividends
Good profitability and cost control ensure stable CFO
Good profitability, coupled with meticulous cost control, supports TLKM’s cash flow
from operation (CFO). Its EBITDA of IDR59tr in FY16 was the highest among peers,
grew at 10% CAGR during FY11-FY16. While TLKM’s EBITDA margin in FY16 was
51%, it is considerably higher than those of ISAT and EXCL (44% and 38%,
respectively).
TLKM managed to control its costs meticulously. Its overall cost of revenue on
increased 9% CAGR during FY11-FY16; lower than revenue growth (10% CAGR FY11-
16). Going forward, we project TLKM’s margin to stay relatively flat as we expect
ARPU to grow rather gradually and costs to increase fairly in line with revenue.
After all, the shift from legacy services to data means shifting from a higher margin
business to a lower one. Note that in general, the margin for voice and SMS is c.60-
70% and c.80%, respectively, while that for data is c.15-20%.
We expect ARPU to grow progressively in the short-to-mid-term before picking up

steam, once the majority of subscribers are already successfully migrated to 3G/4G
(i.e., when smartphone penetration reaches c.61%) and the data monetization stage
starts.
Figure 57. TLKM has superior EBITDA… Figure 58. …and EBITDA margin
(IDRbn)
TLKM ISAT EXCL 55% TLKM ISAT EXCL
80,000
70,000
50%
60,000
50,000 45%
40,000
40%
30,000
20,000
35%
10,000
0 30%
FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY13 FY14 FY15 FY16 FY17F FY18F FY19F
TLKM has a limited exposure to currency fluctuations. However, note that the
company still books a small amount of USD revenue stemming from international
coverage, as well as some capex in foreign currencies. Its foreign currency debt is
around IDR1.6tr (6% of total debt), comprised of USD denominated debt (3.3%) and
JPY (2.6%).

Figure 59. TLKM’s debt mix is dominated by IDR debt

IDR USD JPY
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY12 FY13 FY14 FY15 FY16
TLKM’s good profitability translates to respectable debt ratio figures, with net
debt/EBITDA of 0.2x in FY16, faring better than its peers (ISAT=1.7x and EXCL =
1.5x).
Due to TLKM’s cash rich position, we expect the company to be able to keep its DER
and net debt/EBITDA relatively stable at c.0.3x and c.0.1x, respectively
Figure 60. We expect TLKM’s DER… Figure 61. …and net debt/EBITDA to stay stable
(x) (x)
0.40 0.08
0.35 0.07
0.30 0.06
0.25 0.05
0.20 0.04
0.15 0.03
0.10 0.02
0.05 0.01
0.00 0.00
FY14 FY15 FY16 FY17F FY18F FY19F FY14 FY15 FY16 FY17F FY18F FY19F
Stout CFO to support investment requirements
TLKM continues to book strong CFO over the past years. We believe that this should
provide TLKM with some flexibility in deploying capital to further develop its
infrastructure. A strong balance sheet and stable cash flow will enable TLKM to
retain its throne as the market leader. As we expect smartphone penetration to
continue to increase, we believe that 3G/4G network rollout will have to continue
going forward, in congruent with market’s burgeoning demand for data. As
smartphones’ prices continue to go south, we expect demand for 3G/4G to
continue its positive momentum going forward.
TLKM spent IDR29tr of capex in FY16 (43% or c.IDR13tr for Telkomsel), higher than
ISAT (IDR6.4tr) and EXCL (IDR5.6tr), and implying a capex/revenue ratio of 25%,
higher than ISAT (22%) but lower than EXCL (26%). We project TLKM’s top line to
grow c.9% CAGR FY17F-FY19F to reach IDR154tr in FY19F. This robust growth will
spur CFO and support the elevated capex level. We expect TLKM to maintain a
capex/revenue ratio of c.25%, with c.40% of capex spending utilized for Telkomsel’s
cellular network infrastructure.

Figure 62. TLKM’s investments is hard to matched (FY16 capex)

(IDRbn)
Capex (L) Capex/revenue (R)
35,000 27%
26%
30,000
26%
25,000 25%
25%
20,000
24%
43% of
15,000 TLKM's capex 24%
10,000 23%
23%
5,000
22%
0 22%
TLKM Telkomsel ISAT EXCL
Enticing dividend play
TLKM’s FY16 dividend payout ratio was 60% (absolute payout, excluding 10%
payout of special dividend). We project that TLKM’s dividend yield will stay flat at
c.60% (absolute payout) in FY17F-FY19F on the back of exceptional profitability.
However, if TLKM’s top line growth started to slow down and expansion to ease, we
see room for an increase in the absolute payout in the future. Currently, we project
TLKM’s cash position to stay stable above IDR1.5tr (including our projected 60%
dividend payout ratio) well into FY19F.
Figure 63. TLKM offers stable dividend payout ratio
80% TLKM ISAT EXCL
70%
60%
50%
40%
30%
20%
10%
0%

Fixed line and broadband could be the next ‘leg’ to unlock value
Fixed line could make a comeback
Despite the cellular cannibalization effect, we believe that the relatively low
penetration level in the fixed line service means there is still room for growth. Since
fixed line penetration is still concentrated in big metropolitan areas, we believe that
TLKM’s Triple Play bundle would be a key weapon to boost its penetration rate.
Although fixed line usage is actually declining due to the cellular substitution effect
and service bundling, it is still value accretive for TLKM as we expect further
penetration and monetization to continue.
The increase in the number of LIS (Lines in Service) and elevated yield will be the
drivers of TLKM’s fixed line revenue going forward. Our conservative estimation
implies a growing LIS at a modest CAGR of 2% during FY17F-FY22F.
In the long run, we have to entertain the possibility that the cellular adoption will
eventually slow down when smartphone penetration hits its saturation point. At
that moment, we believe that fixed line profitability could potentially be the next
‘leg’ in the large-cap telco story to unlock value.
Figure 64. Growing subscriber base (LIS) means… Figure 65. …Subscription fee will be the revenue driver
('000 people) (IDRbn)
11,500 7,000 Usage charges
Monthly subscription charges
11,000 6,000
10,500 5,000
10,000 4,000
9,500 3,000
9,000 2,000
8,500 1,000
8,000 0
FY13 FY14 FY15 FY16 FY17F FY18F FY19F FY13 FY14 FY15 FY16
Promising upsides in broadband business
TLKM’s broadband business is still budding. We believe that it will experience

accelerated growth on the back of its retail fiber service, IndiHome. Launched in
January 2015, it has demonstrated robust growth on the back of growing demand
for reliable retail internet services. The penetration of fixed broadband services in
Indonesia is still relatively low, at less than 10%, among the lowest in the world. We
believe that demand for high quality fixed broadband services will continue to
increase along with the growing middle-class segment in Indonesia.
In our view, broadband business could prove to be a game-changer in the long run.
TLKM’s only direct competitors in the broadband business are BizNet and Link Net
(LINK; Not Rated). However, note that both companies are largely focusing on
metropolitan areas in Java, with emphasis on the upper segment of the market (i.e.,
higher ARPU subscribers). On the other hand, TLKM aims to provide a nationwide
service armed with affordable pricings.
With this approach, we expect ARPU disadvantage to be more than compensated

by the larger subscriber growth. However, it is worth noting that in its infant stage,
broadband investment outside Java could be burdensome in the short-term,
putting into consideration the possibility that TLKM’s largest shareholder, the
Indonesian government, could decide to accelerate fiber rollout ahead of demand.
Aggressive rollout ahead of the demand curve may limit opportunities in the short
term. In the long term, however, this would give TLKM the first-mover advantage.
For our projections, we are yet to take into account any government intervention.

Therefore, we currently still project TLKM’s investment in fiber to stay in congruent

with demand.
Fiber rollout would benefit Telkomsel because 4G networks benefit from fiberized
BTSs, which would result in better service quality. At present, c.30% of TLKM’s BTSs
nationwide is already fiberized. In addition, we do see some ARPU upside for
IndiHome, albeit fairly limited, since it is already one of the cheapest in South East
Asia, even lower than its competitors. TLKM’s IndiHome ARPU as of FY16 is
c.IDR341k (c.18% lower than its LINK’s ARPU). We project IndiHome’s ARPU to
stabilize at c.IDR350k, going forward. In the short-to-medium term, we believe that
the market segment will stay fragmented (i.e., higher and lower ARPU segments),
but in the long run, we believe that both segments will converge and ARPU will
start to decline altogether due to Moore’s law of cost reductions and the
commoditization of retail internet services.
As of FY16, IndiHome had 1.6mn subscribers and c.16.4mn homes-passed, while

LINK had c.10.1mn subscribers and c.1.9mn homes-passed. We believe that
IndiHome will be the market share leader in the future on the back of its larger
number of homes passed. IndiHome benefits from TLKM’s first-mover advantage as
it assumes control of TLKM’s cable network investment in the past. This advantage
is hard to replicate as building new home-pass network in Indonesia remains a
challenge, legally and geographically.
Figure 66. IndiHome’s Triple Play Bundle (prices as of 1H17) Figure 67. IndiHome has homes-passed advantage
(mn homes)
Link Net IndiHome
18
16
14
12
10
0
Link Net IndiHome
Figure 68. IndiHome has lower ARPU… Figure 69. …but larger subscriber base
(IDR '000) ('000 people)
Link Net IndiHome Link Net IndiHome
450 1800
400 1600
350 1400
300 1200
250 1000
200 800
150 600
100 400
50 200
0 0
FY15 FY16 FY15 FY16

Changes in regulatory landscape: Impacts on TLKM
Many investors are concerned that the changes in regulations will lead to TLKM’s
losing its market share. The street expects regulatory changes to completely
change the telco industry landscape in Indonesia. We do not expect, however, the
changes in regulation to completely alter the status quo as the proposed changes
to the current regulations are merely an evolution, instead of a revolution. The
proposed changes are only incremental revisions that will not drastically change
the big framework of the industry.
Interconnection rate: Neutral (or TBD)
In our view, the proposed interconnection rate cut will not be a strong headwind
for TLKM. Firstly, interconnection only contributes around 4% to TLKM’s total
revenue. Secondly, a lower interconnection rate does not necessarily mean other
operators can easily grab Telkomsel’s market share outside Java. This is due to the
fact that more than 95% of TLKM’s total traffic is on-net. Currently, the on-net rate
of Telkomsel is as low as IDR20/min, which is still significantly lower than the
proposed new rate of IDR204/min. This means there is no substantial incentive for
subscribers to switch to other providers. Thirdly, as the migration to data
intensifies, the interconnection rate becomes less relevant.
Figure 70. TLKM’s interconnection revenue continues to decline

(IDRbn)
6,000 Interconnection revenue (L) Interconnection revenue as % of revenue (R) 7%
6%
5,000
5%
4,000
4%
3,000
3%
2,000
2%
1,000
1%
0 0%
Infrastructure sharing: Somewhat negative
The proposed regulation regarding the use of MOCN is still in a deadlock. We do

not expect a resolution in the near term as the government is still struggling to
work out a fair deal that will not disserve TLKM as it is the only telco company which
has invested aggressively outside Java so far.
While the revision of the infra sharing regulation will help other telco companies
compete with TLKM’s infrastructure, especially in areas ex-Java, we believe it alone
would not be enough to end TLKM’s dominance. The revised regulation will change
the landscape, but it does not necessarily mean a loss for TLKM. Firstly, we expect
the government to compensate TLKM for its existing infrastructure investment,
which will be shared with other operators. Although the scheme is yet to be ironed
out, our base case is that TLKM is likely to be fairly compensated. Secondly,
although this means TLKM could lose some pricing power outside Java, the new
regulation would benefit the industry and all telco companies, in our view. TLKM
can expand their network much faster with less cost and gets to benefit from the
bigger pool of subscribers. As the pie gets bigger, everybody wins.

Spectrum auction: Positive
We believe TLKM is likely to aim to win a spectrum block given that Telkomsel is
known to be facing capacity constraints in major cities in Java, especially during
peak hours. However, we doubt that the deferment of the auction bears downside
risk to TLKM, assuming it does not drag on until 2018. Only then we could see some
service quality deterioration, which might lead to reduced subscriber satisfaction
and a higher churn rate.
In our view, TLKM will be more inclined to try to win a block in the 2,100 MHz
spectrum, which would be a sweeter spot between coverage and capacity as far as
4G deployment is concerned. Moreover, a new block in the 2,100 MHz spectrum will
perfectly complement its current spectrum.
Promotion scheme: Positive
Assuming the promotion guidelines are eventually approved, we think TLKM will be
the key beneficiary, given that—as a premium player—it targets the upper segment
in the market. On the other hand, the guidelines are more likely to derail the
growth agendas of other operators which use aggressive pricing and promotions
as their key strategy to attract price-sensitive subscribers and gain market share.
Figure 71. TLKM has premium ARPU compared to peers

(IDR '000) TLKM ISAT EXCL
45
40
35
30
25
20
15
10
0
FY13 FY14 FY15 FY16

Valuation
Initiate with Trading Buy and TP of IDR5,400

We initiate our coverage on TLKM with a Trading Buy recommendation and a 12-
month target price of IDR5,400. Our target price was derived using a discounted
cash flow (DCF) calculation. We assume 10.3% WACC, 7.0% risk-free rate, 5.5%
market risk premium, beta of 0.9, and 3% terminal growth rate for TLKM.
base case scenario for TLKM.

TLKM would have fewer challenges in maintaining its market share and at
the same time, begins to increase their data prices as well. As data yield
increases, ARPU growth would accelerate. For this scenario, we assume a
more aggressive increase in data yield, coupled with higher subscriber
acquisition, which translates to significantly higher-than-industry’s top line
growth for TLKM.
scenario, we estimate data yield to stay relatively flat before starting to
increase in 2H18 for TLKM.
 Weak case: ISAT and/or EXCL boast the same network quality with TLKM,
as ISAT and/or EXCL manage to invest aggressively while TLKM’s
investment falters. When the playing field becomes level, all telco
companies can decide to monetize data by increasing prices. For this
scenario, we assume sluggish growth for TLKM’s top line as ISAT and/or
EXCL start to eat up TLKM’s market share gradually.
8.2x. TLKM is currently trading at FY17F EV/EBITDA of 8.1x. All in all, although we
expect TLKM’s market share to deteriorate slight in the future, we expect TLKM to
be able to maintain its market share leading position given that 1) TLKM has
exceptional fundamentals and 2) the proposed changes are only incremental
revisions that will not drastically change the big framework of the industry. Main
risks to our call include 1) stronger-than-expected competition that could lead to a
disruptive price war and 2) sudden and radical changes to the regulations.

Telekomunikasi Indonesia (TLKM IJ/Trading Buy/TP: IDR5,400)

(IDRbn) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F
Depreciation and amortization -18,534 -18,532 -19,459 -20,432 Inventories 528 584 1,076 1,156
Financial income/(expense) -1,491 -2,813 -1,923 -2,061 Other current assets 5,556 4,204 4,545 4,969
Pretax income/(loss) from associates -2 88 101 116 Long-term investments 1,807 1,847 1,888 1,929
Non-operating income/(expense) -46 -52 -21 -12 Fixed assets 103,700 114,498 126,245 138,979
Profit before tax 31,342 38,189 44,510 50,493 Other long-term assets 12,754 15,565 19,002 23,761
Taxation -8,025 -9,017 -10,683 -12,118 Total assets 166,173 179,611 196,764 221,469
Profit after tax 23,317 29,172 33,828 38,374 Account payables 14,284 13,690 14,979 16,099
Minority interests -7,828 -9,820 -10,606 -11,878 Short-term debt 4,444 5,432 5,414 6,446
Net profit 15,489 19,352 23,222 26,496 Other short-term liabilities 16,685 20,640 23,189 26,061
Long-term debt 30,168 26,367 26,249 31,249
Revenue 14% 14% 11% 10% Total liabilities 72,745 74,067 78,969 89,698
Operating EBITDA 13% 16% 11% 11% Paid in capital 5,040 5,040 5,040 5,040
Operating EBIT 15% 25% 13% 13% Retained earnings 70,457 76,615 85,904 96,502
Financial income/(expense) -1562% 89% -32% 7% Total equity attributable to majority 75,136 84,384 93,673 104,271
Pretax income/(loss) from associates -88% -4500% 15% 15% Non-controlling interest 18,292 21,160 24,122 27,500
Non-operating income/(expense) 229% 13% -60% -40% Total shareholders' equity 93,428 105,544 117,795 131,771
Profit before tax 10% 22% 17% 13%
Taxation 9% 12% 18% 13%
Profit after tax 10% 25% 16% 13%
Net profit 7% 25% 20% 14%

(IDRbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F
Net income 15,489 19,352 23,222 26,496 Per share data
Depreciation 14,064 4,628 5,344 5,558 EPS (IDR) 156.4 195.4 234.4 267.5
Changes in NWC -78 6,210 -390 1,626 BVPS (IDR) 943.1 1,065.4 1,189.1 1,330.2
Other investing activities -1,842 -2,851 -3,478 -4,800 ROA (%) 9.3 10.8 11.8 12.0
CF from investing -24,797 -18,277 -20,569 -23,092 ROE (%) 16.6 18.3 19.7 20.1
Dividends paid -8,783 -11,213 -13,933 -15,898 EBITDA margin (%) 50.2 51.1 51.0 51.5
Change in non-current liabilities 13,820 -3,027 1,082 5,705 Net profit margin (%) 15.1 16.6 18.0 18.7
Change in equity 195 3,090 0 0 Dividend payout ratio (%) 56.7 57.9 60.0 60.0
Change in minority interest 21 2,868 2,962 3,377 Current ratio (x) 1.4 1.2 1.1 1.2
CF from financing 5,253 -8,282 -9,889 -6,815 Gross debt/equity (x) 0.4 0.3 0.3 0.3
Net worth adjustments 514 -1,981 0 0 Net debt/EBITDA (x) 0.1 0.0 0.0 0.1
Change in cash 10,445 1,650 -2,282 3,772
Ending balance 28,117 29,767 27,485 31,258


Depreciation and amortization -4,773 -4,857 -4,865 -4,964 Inventories 613 1,139 1,107 1,076
Financial income/(expense) 321 -697 -656 -891 Other current assets 4,718 4,833 4,689 4,545
Pretax income/(loss) from associates 17 18 30 36 Long-term investments 1,865 1,924 1,906 1,888
Non-operating income/(expense) -50 41 -5 -7 Fixed assets 115,621 121,374 123,809 126,245
Profit before tax 12,324 10,931 10,841 10,414 Other long-term assets 15,851 12,533 15,768 19,002
Taxation -2,948 -2,812 -2,457 -2,466 Total assets 187,590 177,843 187,304 196,764
Profit after tax 9,376 8,119 8,384 7,948 Account payables 12,595 12,016 13,497 14,979
Minority interests -2,688 -2,703 -2,563 -2,651 Short-term debt 5,464 6,302 5,858 5,414
Net profit 6,688 5,416 5,821 5,297 Other short-term liabilities 22,628 21,005 22,097 23,189
Long-term debt 26,319 28,367 27,308 26,249
Revenue 3% 6% -2% 2% Total liabilities 75,133 75,819 77,394 78,969
Operating EBITDA 11% -2% -1% -1% Paid in capital 5,040 5,040 5,040 5,040
Depreciation and amortization -8% 2% 0% 2% Additional paid in capital 4,931 4,931 4,931 4,931
Operating EBIT 21% -4% -1% -2% Retained earnings 83,303 77,091 81,497 85,904
Financial income/(expense) -120% -317% -6% 36% Total equity attributable to majority 91,077 84,867 89,270 93,673
Pretax income/(loss) from associates -55% 6% 69% 18% Non-controlling interest 21,380 17,157 20,640 24,122
Non-operating income/(expense) -130% -182% -113% 27% Total shareholders' equity 112,457 102,024 109,910 117,795
Profit before tax 44% -11% -1% -4%
Taxation 88% -5% -13% 0%
Profit after tax 34% -13% 3% -5%
Minority interests 13% 1% -5% 3%
Net profit 45% -19% 7% -9%

XL Axiata (EXCL IJ)

The most data-centric operator in Indonesia
Infrastructure Aggressive network rollout to narrow the gap
Rising smartphone penetration in Indonesia translates to increased demand for

(Initiate) Hold data. Adapting to the shift in trend, EXCL aims to focus its growth around data. With
ramped up infrastructure, high network capacity, and affordable prices, EXCL is set
Target Price (12M, IDR) 3,950 to attract higher value subscribers who prioritize good data experience. In the near
term, however, we believe that investments in certain rural areas could be EBITDA
Share Price (8/25/17, IDR) 3,660 dilutive.
Data-focused value propositions

Expected Return 7.9%
As smartphone penetration continues to rise, EXCL decided to execute a dual-brand
EBITDA (17F, IDRtr) 8.3 strategy in order to capture the two different market segments: higher value
Cons. EBITDA (17F, IDRtr) 8.6 subscribers and mid-to-low value subscribers. EXCL has also addressed its
distribution issues, and we expect its revamped distribution channel to be more
EPS (17F, IDR) 28
effective going forward. While we do see that the dual-brand strategy could help
Cons. EPS (17F, IDR) 30.3
EXCL to capture both market segments, we also see a potential downside as
EV/EBITDA (17F, x) 6.4
capturing two different segments means EXCL has to be able to attract and retain
Cons. EV/EBITDA (17F, x) 7.0
segments with different value propositions. Therefore, the effectiveness of the
Market Cap (IDRbn) 39,117.9
dual-brand strategy hinges on the ability of the management to execute its
Shares Outstanding (mn) 10,688.0
strategies.
Free Float (%) 3,595.3
Foreign Ownership (%) 77.9 De-leveraged balance sheet to support transformation agenda
Beta (12M) 1.4
52-Week Low 2,030 In FY14, EXCL was highly leveraged with a debt level of 2.4x net debt/EBITDA.
52-Week High 3,660 Coupled with foreign currency-denominated debt comprising 66% of total debt, the
company delivered a net loss of c.IDR800bn. Thus, EXCL decided to clean up its
(%) 1M 6M 12M
balance sheet in order to be able to compete in the industry. The company
Absolute 11.6 17.3 18.8
managed to decrease its DER from 1.9x to 0.7x, and its net debt/EBITDA also fell
Relative 9.8 7.5 10.4
from 2.8x to 1.6x. We expect EXCL’s net debt/EBITDA level to stabilize around 1.0x-
(D-1yr=100) JCI EXCL 1.5x going forward, which is at the same level prior to the acquisition of Axis.
120
100
Initiate with Hold and TP of IDR3,950
80 We initiate our coverage on EXCL with a Hold recommendation and a 12-month
60 target price of IDR3,950/share. Our TP implies FY17F EV/EBITDA of 6.4x. EXCL is
9/16
10/16
11/16
12/16
8/16
1/17
2/17
3/17
4/17
5/17
6/17
7/17
8/17
currently trading at FY17F EV/EBITDA of 7.0x. We expect EXCL to continue to grow

and gain traction outside Java on the back of: 1) improved network coverage and
quality, 2) data-focused value propositions, and 3) healthier balance sheet. Main
risks to our call include: 1) stronger-than-expected competition that could lead to
undesired price war, 2) sudden and drastic changes to the regulations, and 3)
slower-than-expected data monetization.

Revenue (IDRbn) 22,876 21,341 22,171 24,049 26,021
EBITDA margin (%) 36.7 37.8 37.3 37.5 37.5
Net profit (IDRbn) -25 376 297 801 1,490
EPS (IDR) -2 35 28 75 139
BVPS (IDR) 1,318.5 1,984.4 2,012.2 2,064.7 2,162.2
ROE (%) 0 2 1 4 6
EV/EBITDA (x) 7.0x 5.2x 6.4x 5.9x 5.4x

Company background
History of XL Axiata
XL Axiata (EXCL) is engaged in the provision of mobile phone services and offering
various types of telecommunication products and services, such as voice, SMS, data
and other value-added mobile telecommunication services. In addition, it also
provides leased lines, rental of telecommunication towers, Internet service provider
and national roaming service. The company started operating commercially since
October 1996. As of 1H17, EXCL has 15% subscriber market share.
Shareholders as of January 2017: Axiata Investments (Indonesia) Sdn. Bhd. (66.4%)

and public (33.6%).
Figure 72. EXCL’s ownership structure and business portfolio


Axiata Investments (Indonesia) Sdn. Bhd. 7,092,656,612 66%
Public 3,595,303,811 34%
Management team

Name Position
Dian Siswarini President Director
Willem Lucas Timmermans Director
Mohamed Adlan Ahmad Tajudin Director
Yessie D. Yosetya Independent Director
Dr. Muhamad Chatib Basri President Commissioner
Tan Sri Jamaludin Ibrahim Commissioner
Chari TVT Commissioner
Dato’ Mohamed Shazalli Ramly Commissioner
Mohd. Khairil Kevin Loh Abdullah Commissioner
Peter J. Chambers Independent Commissioner
Yasmin Stamboel Wirjawan Independent Commissioner
Dr. David Robert Dean Independent Commissioner
President Director
Dian Siswarini graduated from Institut Teknologi Bandung. She joined XL Axiata in
1991 and held various key positions at the Department of Network and
Engineering. In June 2014, Dian Siswarini joined Axiata Group Berhad as Group
Chief of Marketing and Operations Officer to assist the growth of all subsidiaries of
Axiata, including XL Axiata. Dian Siswarini rejoined XL Axiata as Vice President in
January 7, 2015 and subsequently appointed as President Director in April 2015.
Dian Siswarini currently also serves as chairperson of the Risk and Business
Continuity Committee of XL Axiata.
Director
Willem Lucas Timmermans holds a degree in Business Administration from the

Business Administration and Economics School State University Groningen, the
Netherlands in 1983 and the title of Business Economics and Financing of the State
University of Groningen, the Netherlands in 1988. He was the finance director of PT
Bakrie Elektronik and vice president of Business Control and Investor Relation of PT
Telkomsel prior to his appointment as finance director of XL Axiata in 2006. In 2011,
he was assigned as the chief operating officer and entrusted with Strategic
Transformation from 2015 until now. Willem Lucas Timmermans also serves as a
non-executive director of Celcom Axiata Berhad since March 16, 2011.
Director
Mohamed Adlan Ahmad Tajudin obtained a degree in Economics and Statistics

from the University of Exeter, UK, and is now a member of the Malaysian Certified
Public Accountant and the Malaysian Institute of Accountant. Mohamed Adlan is
currently a member of the Risk and Business Continuity Committee of XL Axiata. He
then joined Celcom Axiata Berhad in 2003 and was appointed chief financial officer
(May 2005- May 2009) and chief corporate officer (May 2009-2011) with a scope of
responsibilities associated with the business portfolio. Tajudin currently serves as a
director at Celcom Timur (Sabah) Sdn Bhd since 26 April, 2006.

Independent Director
Yessie D. Yosetya earned a B.Sc. Electrical Engineering from the University of Satya
Discourse, Salatiga, Indonesia in 1997. Yosetya is currently a member of the Risk
and Business Continuity Committee of XL Axiata. Prior to her current position, she
first developed her career as manager billing system (2005-2006), general manager
of business support system (2006-2009), senior general manager of the IT
development (2009-2011), senior general manager of mobile finance (2011-2013),
vice president digital services (2013-2014), and chief digital services officer (2015-
2016).
Celullar Infrastructure Depreciation and amortization

Interconnection services Interconnection and others Salaries and benefits
Other telecommunication services Sales and marketing General and administrative
5% 7% 2%
8%
5%
9% 39%
87% 38%

Investment thesis
XL Axiata (EXCL) is currently the most data-centric cellular operator in Indonesia, as

it has the highest data subscriber mix in the industry. After a rough period of
balance sheet restructuring in FY15-16, we believe that EXCL is now ready to
compete. EXCL’s improved infrastructure, high network capacity, and affordable
package prices, act as levers to attract higher value subscribers who prioritize good
data experience. However, note that higher dependency on data growth implies
that data monetization is imperative for sustainable profitability.
Aggressive network rollout to narrow the gap
Rising smartphone penetration in Indonesia translates to increased demand for

data. Adapting to the shift in trend, EXCL aims to focus its growth around data. With
ramped up infrastructure, high network capacity, and affordable prices, EXCL is set
to attract higher value subscribers who prioritize data experience.
U900 improves network coverage
In 2H16, EXCL rolled out U900 services across the country utilizing the 900 MHz
frequency for 3G services, leading to the sharp increase in 3G BTS count (+112%
YoY), which are readily upgradable to 4G. U900 is implemented across Indonesia,
but EXCL claims that it will have the greatest benefits in remote areas, such as
Sumatra and Kalimantan. We believe that the rollout of U900 helps in narrowing
the coverage gap between EXCL and the incumbent in markets outside Java.
However, in terms of the quality gap, we believe that it will hinge on the ability of
EXCL to fiberize its BTSs going forward.
Furthermore, in 2016, EXCL became the first operator in Indonesia to commercially

launch 4.5G on the 1,800 MHz spectrum. Currently, it is only available in four cities:
Greater Jakarta area (Jabodetabek), Bandung, Surabaya, and Denpasar. The
implementation of the 4.5G technology is in line with EXCL’s commitment to
provide a better user experience for data subscribers. The rollout of such
technology in other areas would certainly help EXCL to position itself as a data-
centric operator that emphasizes on data experience.
Figure 75. EXCL’s spectrum is relatively on-par with ISAT, but with 46% less subscriber
(MHz)
100
80
60
40
20
0
It is also worth noting that EXCL has abundant amount of 1,800 MHz spectrum
allocated for data after it shifted away from no-value subscribers in 2015. The
change in strategy translated to a big churn in FY15, when its subscribers
decreased by 30% YoY. Thus, it currently has an ample network capacity to
accommodate the rising data traffic.

Aggressive network rollout will continue
EXCL is committed to ramping up its 3G/4G network. In FY16, we witnessed that

EXCL managed to add c.20k (+112% YoY) and 5k (+162% YoY) of 3G and 4G BTSs,
respectively, to reach a total of 84,484 BTSs across the country. The management
aims to build c.17k 4G BTSs this year, which we believe is a tad too optimistic. With
only c.5,400 4G BTSs added in 1H17 (32% of FY17 target), we believe that the FY17
number will be closer to c.12k.
Our recent discussion with the management suggests that they will limit capex at
around IDR7tr for the time being. However, they see possibilities of increasing the
capex level in the future in the event data traffic growth accelerates faster than
their initial expectation. We project EXCL’s capex to stay stable, below IDR7tr until
FY19F, before picking up afterwards, as we believe that the management prefers to
have better stability by booking positive FCF.
We believe that aggressive network rollout strategy bodes well for the challengers,
including EXCL, as it will help narrow the coverage and quality gaps with the
incumbent. In the near term, we believe that investments in certain rural areas
could be EBITDA dilutive.
Figure 76. Aggressive network rollout with focus on 3G and 4G

(unit)
90,000
2G 3G 4G
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
FY13 FY14 FY15 FY16
Data-focused value propositions
As smartphone penetration continues to rise, EXCL decided to execute a dual-brand

strategy in order to capture the two different market segments: higher value
subscribers and mid-to-low value subscribers. EXCL has also addressed its
distribution issues, and we expect its revamped distribution channel to be more
effective going forward.
Dual-brand strategy to target different market segments
EXCL’s dual-brand strategy is one of the key tenets of its transformation strategy to
be a data-centric operator. XL focuses on white-collar workers, while Axis focuses
on the youth segment.
In FY16, EXCL reached c.46mn subscribers (+11% YoY). However, it is worth noting
that this rapid growth was possibly due to a low base effect. In FY15, EXCL
experienced an extraordinary churn rate, stemming from its effort to reduce non-
value subscribers as a part of their transformation agenda to focus on higher value
(i.e., higher ARPU) subscribers.

While we do see that the dual-brand strategy could support EXCL to capture both
market segments, we also see potential downside as capturing two different
segments means EXCL has to be able to attract and retain segments with different
value propositions. Therefore, the effectiveness of the dual-brand strategy hinges
on the ability of the management to execute its strategies.
We also believe that the dual-brand strategy means higher operating cost for EXCL
as it requires both modern and traditional distribution channel, different pricing
and marketing schemes, as well as prudent network capacity control, in order to
cater to different needs. EXCL already has higher operating cost than that of ISAT,
and the dual-brand strategy could further hamper EXCL’s earnings generation
ability.
Figure 77. Dual-brand strategy: XL and Axis Figure 78. EXCL has the lowest EBITDA margin among peers
55% TLKM ISAT EXCL
50%
45%
40%
35%
30%
Attractive data-centric packages
In FY16, in line with the shifting trend of customers from legacy services to data
services, cellular revenue posted a slight decrease of 4.4% YoY. We believe that this
declining legacy service trend for EXCL is proliferated due to EXCL’s data-centric
approach. Indeed, EXCL currently has the highest data subscriber mix among
peers.
EXCL focuses on pushing data-led packages that have combo pricing—where

subscribers get data, as well as free/cheap legacy services as bonuses. This trend is
going viral within the industry, and we believe that this should support migration to
data. With EXCL’s higher data subscriber mix than peers, we believe that it is
imperative for the company to push subscribers to consume more data (by
upgrading their data packages) and/or switch to 4G. To date, EXCL’s data-centric
packages are proven to be quite effective as EXCL’s data consumption/sub is the
highest among peers.
Revamped distribution channels
One of the main objectives of EXCL’s transformation agenda is to focus on higher

value, data-oriented subscribers. In order to capture this segment, EXCL focuses on
building modern distribution channels for both acquisition and reloads without
abandoning the traditional distribution channels.
EXCL utilizes ATMs, hypermarkets, and non-telco retail outlets (such as Indomaret
and Alfamart), and device and gadget store chains (such as Erafone, Oke Shop and
online/e-commerce channel) as part of its modern channels. EXCL boasts more
than 84k modern distribution point-of-sales (POS) largely tapping onto the large
ATM presence of Indonesian banks and both convenience stores and mini-marts.

In FY16, despite the raging price war and larger subscriber base, EXCL managed to
gain slightly higher ARPU at IDR35k (+3% YoY). We ascribe this modest hike to its
revamped distribution channels, which target modern channels. We suspect that
modern channels are better in attracting and capturing higher value subscribers,
which leads us to believe that such strategy will support EXCL’s transformation
agenda going forward.
Figure 80. …while traditional channels still play a key part

Figure 79. Modern channels capture higher value subs…
outside Java
Source: Erafone, Mirae Asset Sekuritas Indonesia Research Source: Panoramio, Mirae Asset Sekuritas Indonesia Research
De-leveraged balance sheet to support transformation agenda
In FY14, EXCL was highly leveraged with a debt level of 2.4x net debt/EBITDA.
Coupled with foreign currency-denominated debt comprising 66% of total debt, the
company posted a net loss of c.IDR800bn. Thus, EXCL decided to ramp up its
balance sheet in order to be able to compete in the industry. The company
managed to decrease its DER from 1.9x to 0.7x, and its net debt/EBITDA also fell
from 2.8x to 1.6x. We expect EXCL’s net debt/EBITDA level to stabilize around 1.0x-
1.5x going forward, which is at the same level prior to the acquisition of Axis.
Major balance sheet restructuring
In FY15-16, EXCL decided to clean up its balance sheet, aimed at reducing the forex
sensitivity.
In FY15, EXCL issued its first tranche of its IDR5tr Sukuk Ijarah program, which was
met with strong demand. The first tranche of IDR1.5tr was used for working capital
purposes. In addition, EXCL also paid off a total of USD580mn un-hedged external
debt via combination of early repayment and local currency refinancing facility.
In FY16, EXCL executed rights issue II amounting to USD500mn. The net proceeds
from the rights issue were used to pay off USD500mn debt from Axiata Group
Berhad. As a result, EXCL’s USD-denominated debt now stands at USD350mn, with
the debt being fully hedged until maturity. Moreover, EXCL sold and leased back
2,500 towers to Protelindo, at a value of IDR3.56tr.
All in all, we judge the balance sheet clean up initiative to be a key prerequisite for
improved earnings visibility and network rollout flexibility. Though around 32% of
EXCL’s debt is still USD-denominated, going forward, we see less sensitivity from
forex fluctuations in the bottom line, given EXCL’s hedging policy.

Figure 81. EXCL managed to reduce USD debt mix Figure 82. EXCL’s leverage level will continue to improve
IDR USD (x) (x)
Net debt/EBITDA (L) DER (R)
100% 2.5 1.8
90%
1.6
80% 2.0
1.4
70%
1.2
60% 1.5
1.0
50%
0.8
40% 1.0
0.6
30%
20% 0.4
0.5
10% 0.2
0% 0.0 0.0
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 FY17F FY18F FY19F
Debt level to stabilize going forward
EXCL managed to lower its DER from 1.9x to 0.7x, and its net debt/EBITDA from 2.8x
to 1.6x. Currently, EXCL has no further plans to restructure its loans. Going forward,
its management guided net debt/EBITDA to stay around 1.0x-2.0x. However, we are
slightly more upbeat, and we expect EXCL’s net debt/EBITDA level to stabilize
around 1.0x-1.5x going forward, which is at the same level prior to the acquisition
of Axis. We believe that the combination of past restructurings, prudent capex
management, and improving CFO will translate to a stable debt level going
forward.
Elevenia divestment should ease burden on EXCL’s bottom line
Last week, EXCL announced that it decided to divest its 50% stake in Elevenia.
Similarly, SK Planet Global Holdings Pte. Ltd., owner of the other 50% stake in
Elevenia, is also selling its 50% stake. EXCL opted to sell its shares, in order to focus
on its core cellular business. To date, Elevenia is a loss-making business for EXCL.
The company booked IDR94bn loss in 1H17 acting as a drag on EXCL’s bottom line.
Companies that diversify too far, jeopardize their core operation, in our view. As
such, we relish this strategic move from EXCL, as we prefer telco companies that
focus on its core operation and avoid “diworsification.”
Deal closure is still subject to approvals from the regulators. However, as we

believe that the transaction will be a done deal in 2H17F, we have incorporated it to
our forecasts.
Figure 83. EXCL’s share of loss from JV operations

(IDRbn)
-300
-250
-200
-150
-100
-50
0
FY14 FY15 FY16 1H17

High risk/high reward
EXCL’s data-centric strategy is promising…
In the long run, as the need for ubiquitous, high data speed grows, network
coverage and quality will be in the spotlight. We believe that the ultimate data
experience will be the principal driver of smartphone user loyalty towards
operators and the key to reducing the churn rate.
EXCL’s improved infrastructure, coupled with high network capacity and affordable
package prices, can be used as a lever to attract higher value subscribers who
prioritize data experience.
Figure 84. EXCL has higher data subscriber mix than peers
Legacy users Data users
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
TLKM ISAT EXCL
…but not without risks
However, in the short-to-medium term, we believe that price (not network quality)
will still be the key to securing market share as 1) the industry has not reached the
data-centric stage (i.e., the majority of subscribers are still not data-exclusives), and
2) late adopters are likely to come from outside Java, who are at a relatively lower
affluent level.
As such, we see downside risk for EXCL, especially in the short-to-medium term as it
currently has the highest data subscriber mix among peers. We believe that a
higher data subscriber mix ahead of the industry could prove to be risky as revenue
will become more unsustainable without data monetization. Increasing data yield
ahead of the industry could be a premature move to make, since majority of
subscribers have yet to migrate to data. Furthermore, as we project late adopters
(lower affluent level) to come from outside Java, increasing prices could lead to a
high churn rate. Given competitors have ample (data migration) room to catch up,
we expect headwinds to EXCL’s margins given data yield for the operator is capped.
Furthermore, as EXCL aims to provide a differentiated data experience for its users,
it ought to invest in some sparsely populated area, which could be EBITDA dilutive
in the near term. Note that EXCL’s profitability turnaround is still in its mid-cycle, as
evidenced by its relatively FY16 weak operating EBIT and EBITDA. As such, we
prefer ISAT’s prudent approach to network rollout.

Changes in regulatory landscape: Impacts on EXCL
We expect the proposed changes to regulations to bode well for EXCL. We believe
that the proposed changes are only incremental revisions that will not drastically
change the big framework of the industry. However, some changes can help EXCL
to grow its subscriber data mix.
Interconnection rate: Somewhat positive
In our view, changes in the interconnection rate will not have meaningful impact on
EXCL. Interconnection made up 13% of EXCL’s total revenue in FY14, but has come
down to 8% in FY16. We believe that this is related to the number of subscribers
(i.e., on-net calls) and the switch to data. As we expect data to make up c.80% of
EXCL’s revenue in FY19F, we believe that MoU will decline gradually. Ergo, the
longer this revision drags on, the less impact it will have on EXCL. When the
migration to data is complete, we believe that it could make the interconnection
rate obsolete.
Figure 85. Decreasing interconnection revenue over the years

(IDRbn)
Interconnection revenue (L) Interconnection as % of revenue (R)
3,500 16%
3,000 14%
12%
2,500
10%
2,000
8%
1,500
6%
1,000
4%
500 2%
0 0%
FY13 FY14 FY15 FY16
Infrastructure sharing: Positive
In an increasingly competitive market, low cost is the key to profitability, and

operators can save on capex and opex by sharing towers. Passive sharing has been
proven effective in many other markets: it can reduce opex cost by c.30% and capex
cost by c.65%. Undoubtedly, this will support EXCL during its network expansionary
mode. Capex efficiency will lead to a better free cash flow, which in turn could
support further investment, and/or introduction of dividends.
EXCL is currently sharing four passive 4G LTE infrastructures with ISAT in four cities
using MORAN. Since the pilot project, however, EXCL has not rolled out additional
joint-networks with ISAT. Our recent discussion with the management indicates
that EXCL prefers to wait for the government regulations before adding more,
using MOCN.

Spectrum auction: Somewhat positive
We believe that EXCL is in a good position and is in no need to acquire new

spectrums. Its recent shift in strategy resulted in a big churn rate in FY15, when its
subscriber decreased by 30% YoY. Thus, it currently has an ample network capacity
to accommodate its rising data traffic. Furthermore, it just turned to profit in 1Q16
and, therefore, has limited cash. We believe that EXCL will not compete for the
2,100 MHz spectrum due to the high demand for this spectrum from TLKM and
ISAT, which have a relatively better cash position. However, we see high probability
of EXCL bidding for the 2,300 MHz spectrum given the better pricing rationale.
We doubt that the deferment of the auction bears downside risk to EXCL as the
company currently still has abundant network capacity.
Promotion scheme: Somewhat negative
We believe that the promotion scheme regulation is more likely to derail the
growth agendas of operators which use aggressive pricing as their key strategy to
attract price-sensitive subscribers and gain market share, including EXCL.
As EXCL is aggressively pushing promotions through its data-centric packages, we

believe that if the new promotion scheme regulation is passed, EXCL might have to
formulate a new strategy. However, we also see a potential upside for EXCL. Given
that its data subscriber mix is higher than peers, faster data monetization could
support better top line growth.
Note that BRTI stated that the new regulation will focus only on promotion validity
periods (i.e., how long promotions can stay valid within the course of any particular
year). Therefore, EXCL can still run a cross-subsidy promotion (i.e., its current
IDR1/sec promo)
regulation is approved (originally scheduled for end-July but delayed). Judging by
the lengthy process of revising the interconnection rate regulation, we do not
expect the promotion scheme regulation to see the light until next year. In the
event of continuous postponement of the promotion scheme regulation, we believe
that it will benefit EXCL, but not as much as it will benefit ISAT. The regulation could
be deemed obsolete when the migration to data is completed and telco companies
start to monetize data.

Valuation
Initiate with Hold and TP of IDR3,950

We initiate our coverage on XL Axiata with a Hold recommendation and a 12-month
target price of IDR3,950. Our target price was derived using a DCF calculation. We
assume 10.8% WACC, 7.0% risk-free rate, 5.5% market risk premium, beta of 1, and
3% terminal growth rate for EXCL.
base case scenario for EXCL.

EXCL can start to increase their data prices as well. As data yield increases,
ARPU growth would accelerate. This would bode well for EXCL as it has the
highest data subscriber mix. For this scenario, we assume a more
aggressive increase in data yield, coupled with higher subscriber
acquisition, which would translate to higher-than-industry’s average top
line growth for EXCL.
scenario, we estimate data yield to wane before starting to increase in
2H18 for EXCL.
 Weak case: The data monetization stage starts slower-than-expected as

subscriber growth stays high, which forces operators to continue to
impose low prices and compete for market share. As EXCL has the highest
data subscriber mix, this condition would result in squeezed margin.
6.4x. EXCL is currently trading at FY17F EV/EBITDA of 7.0x. All in all, we expect EXCL
to continue to grow and gain traction outside Java on the back of: 1) improved
network coverage and quality, 2) data-focused value propositions, and 3) healthier
balance sheet. Main risks to our call include: 1) stronger-than-expected competition
that could lead to a disruptive price war, 2) sudden and radical changes to the
regulations, and 3) slower-than-expected data monetization.

XL Axiata (EXCL IJ/Hold/TP: IDR3,950)

(IDRbn) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F
Operating EBITDA 8,393 8,058 8,262 9,016 Account receivables 921 663 687 601
Operating EBIT 1,258 12 48 552 Advances 4,012 4,021 4,102 4,184
Financial income/(expense) -1,256 -1,644 -1,302 -1,087 Other current assets 1,828 562 584 602
Pretax income/(loss) from associates -147 -255 -94 0 Long-term investments 0 0 0 0
Non-operating income/(expense) -485 2,072 1,825 1,667 Fixed assets 33,427 33,183 35,363 37,762
Profit before tax -631 186 477 1,132 Other long-term assets 15,266 14,907 13,174 13,594
Taxation 605 190 -114 -272 Total assets 58,844 54,896 56,172 58,733
Profit after tax -25 376 362 860 Account payables 5,283 6,503 7,743 8,459
Minority interests 0 0 0 0 Short-term debt 3,922 3,645 3,054 3,456
Net profit -25 376 362 860 Other short-term liabilities 6,543 4,329 4,373 4,781
Long-term debt 23,031 11,026 10,673 10,489
Revenue -2% -7% 4% 8% Total liabilities 44,753 33,687 34,600 36,559
Operating EBITDA -3% -4% 3% 9% Paid in capital 854 1,069 1,069 1,069
Operating EBIT -29% -99% 296% 1039% Retained earnings 7,605 8,002 8,364 8,966
Financial income/(expense) -24% 31% -21% -17% Total equity attributable to majority 14,092 21,209 21,571 22,174
Pretax income/(loss) from associates 45% 73% -63% -100% Non-controlling interest 0 0 0 0
Non-operating income/(expense) -53% -527% -12% -9% Total shareholders' equity 14,092 21,209 21,571 22,174
Taxation 203% -69% -160% 138%
Profit after tax -97% -1582% -4% 138%
Net profit -97% -1582% -4% 138%

(IDRbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F
Net income -25 376 362 860 Per share data
Depreciation 5,678 7,064 4,767 5,243 EPS (IDR) -2.4 35.1 33.9 80.5
Changes in NWC -131 162 550 1,500 BVPS (IDR) 1,318.5 1,984.4 2,018.3 2,074.6
Other investing activities -152 359 1,732 -420 ROA (%) 0.0 0.7 0.6 1.5
CF from investing -4,049 -6,461 -5,215 -8,062 ROE (%) -0.2 1.8 1.7 3.9
Dividends paid 0 0 0 -258 EBITDA margin (%) 36.7 37.8 37.3 37.5
Change in non-current liabilities -5,180 -9,794 220 434 Net profit margin (%) -0.1 1.8 1.6 3.6
Change in equity 36 6,721 0 0 Dividend payout ratio (%) 0.0 0.0 0.0 30.0
Change in minority interest 0 0 0 0 Current ratio (x) 0.6 0.5 0.5 0.4
CF from financing -5,144 -3,073 220 176 Gross debt/equity (x) 1.1 0.6 0.5 0.5
Net worth adjustments 33 21 0 0 Net debt/EBITDA (x) 1.8 1.5 1.3 1.2
Change in cash -3,639 -1,912 684 -282
Ending balance 3,312 1,400 2,084 1,802


Operating EBITDA 1,848 2,073 2,185 2,156 Account receivables 787 675 681 687
Operating EBIT 169 371 -188 -304 Advances 4,153 4,061 4,081 4,102
Financial income/(expense) -343 -333 -288 -339 Other current assets 369 573 579 584
Pretax income/(loss) from associates -44 -50 0 0 Long-term investments 0 0 0 0
Non-operating income/(expense) 145 110 682 888 Fixed assets 32,527 34,273 34,818 35,363
Profit before tax -73 98 206 245 Other long-term assets 14,649 14,040 13,607 13,174
Taxation 119 -2 -112 -120 Total assets 54,376 55,534 55,853 56,172
Profit after tax 47 97 94 126 Account payables 6,511 7,123 7,433 7,743
Minority interests 0 0 0 0 Short-term debt 5,071 3,350 3,202 3,054
Net profit 47 97 94 126 Other short-term liabilities 4,304 4,351 4,362 4,373
Long-term debt 9,489 10,849 10,761 10,673
Revenue 0% 8% -3% 5% Total liabilities 33,120 34,144 34,372 34,600
Operating EBITDA 1% 12% 5% -1% Paid in capital 1,069 1,069 1,069 1,069
Depreciation and amortization -27% 1% 39% 4% Additional paid in capital 12,144 12,139 12,139 12,139
Operating EBIT -137% 119% -151% 62% Retained earnings 8,043 8,183 8,273 8,364
Financial income/(expense) 37% -3% -13% 18% Total equity attributable to majority 21,256 21,390 21,481 21,571
Pretax income/(loss) from associates -49% 15% -100% -100% Non-controlling interest 0 0 0 0
Non-operating income/(expense) -83% -24% 518% 30% Total shareholders' equity 21,256 21,390 21,481 21,571
Taxation -23% -101% 6737% 7%
Profit after tax -78% 108% -3% 34%
Net profit -78% 108% -3% 34%

APPENDIX 1
Important Disclosures & Disclaimers
Disclosures
As of the publication date, PT. Mirae Asset Sekuritas Indonesia, and/or its affiliates do not have any special interest with the subject company and
do not own 1% or more of the subject company's shares outstanding.
Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving
Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes
Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening
Sell Relative performance of -10%
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Mirae Asset Sekuritas Indonesia, we may call a trading opportunity in case there is a technical or
short-term material development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s
estimate of future earnings.
The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and
economic conditions.
Analyst Certification
Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the research analyst
(the “Analysts”) primarily responsible for this report. PT. Mirae Asset Seukritas Indonesia (“Mirae Asset Daewoo”) policy prohibits its Analysts and
members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer,
director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any
compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with
this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm
profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and
private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of
interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.
Disclaimers
This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Stock
Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such
information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as
to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the
Indonesian language. In case of an English translation of a report prepared in the Indonesian language, the original Indonesian language report
may have been made available to investors in advance of this report.
The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment,
its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or
subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof.
This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect
transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall
not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment
objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent
judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of
the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on
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Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use
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Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this
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Telecommunication

Within the telco space, we recommend Indosat (ISAT/Buy/TP IDR8,100) as our

Telecommunication companies covered in this report

Telecommunication industry in Indonesia 4

The great migration to data 11

Indosat (ISAT IJ) 30

Telekomunikasi Indonesia (TLKM IJ) 44

XL Axiata (EXCL IJ) 59

Mirae Asset Sekuritas Indonesia Research 2

Favorable wind of change for the industry

Indosat (ISAT/Buy/TP IDR8,100)

Telekomunikasi Indonesia (TLKM/Trading Buy/TP IDR5,400)

XL Axiata (EXCL/Hold/TP IDR3,950)

Telecommunication industry in Indonesia

Industry structure and backdrops

Cellular is the new fixed line

Rule of three in Indonesian telco industry

Dynamic market share

Mirae Asset Sekuritas Indonesia Research 4

We expect postpaid ARPU to decline marginally as companies want to reduce the

Ample room for growth

(mn people) (age) (%)

Mirae Asset Sekuritas Indonesia Research 6

The era of data

Swift data penetration

70% 200 1.2

40% 100 0.6

Currently, there are many affordable smartphones available in the Indonesian

Table 2. 4G device minimum local content regulation

The rise of OTT

We believe that legacy services stand no chance in challenging the superiority of

Mirae Asset Sekuritas Indonesia Research 8

Digital natives to lead data growth

Aggressive rollout of 3G/4G networks

Source: Company data, Mirae Asset Sekuritas Indonesia Research

Affordable data packages

As companies try to push migration to 4G and expand their subscriber base,

Cellular data traffic in Indonesia reached 1,517PB in FY16, representing a 200%

Mirae Asset Sekuritas Indonesia Research 10

The great migration to data

Contrary to market consensus, we anticipate data yield to remain subdued this

Figure 16. Indonesian telco industry’s BCG matrix

Source: Mirae Asset Sekuritas Indonesia Research

Source: Company data, Mirae Asset Sekuritas Indonesia Research

Fixed line falling from grace

Fixed line falling from grace

The transformation of the fixed-line-centric industry into more cellular-centric one

However, despite the aforementioned cellular cannibalization effect, we believe the

Mirae Asset Sekuritas Indonesia Research 12

Declining legacy services

Shrinking voice and SMS contribution

Going forward, however, an increase in the number of subscribers migrating to 4G

Proliferation of data exclusives on the back of OTT’s growth

1,800 YoY growth (R)

1,400 -5% 20%

Aggressive data pricing

We do not expect the falling price to translate to lower profitability, as growing

This poses a potential problem, as operators have to increase network investments,

Larger subscriber base and market share

Mirae Asset Sekuritas Indonesia Research 14

Figure 27. …compared to Ex-Java market, where Telkomsel

TLKM ISAT EXCL Others TLKM ISAT EXCL Others