PP 7767/09/2011(028730)

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Se cto r Updat e
22 October 2010
MARKET DATELINE

Telecommunications Recom : Neutral

(Maintained)
Sizing Up The Pure Mobile Domestic Players
– Maxis vs. DiGi

Table 1: Telecommunications Sector Valuations

EV/
Fair EPS EPS GWTH PER EBITDA P/NTA P/CF GDY
Price Value (sen) (%) (x) (x) (x) (x) (%) Rec
(RM) (RM) FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY11 FY11 FY11
DiGi 24.60 26.35 152.4 160.9 9.7 5.6 16.1 15.3 8.1 26.9 9.8 8.2 OP
Axiata 4.41 4.75 35.0 38.4 15.6 9.6 12.6 11.5 5.8 2.6 6.0 3.2 MP
Maxis 5.29 5.75 34.0 36.7 8.5 8.0 15.6 14.4 8.8 n.m. 9.4 9.6 OP
TM 3.37 3.55 13.5 15.8 8.2 17.4 25.0 21.3 2.6 1.9 3.7 7.8 MP

Sector Avg 11.5 8.9 15.1 13.8

♦ Comparing green apple to yellow apple. In this report, we make a Relative Performance To KLCI
comparison between the only two purely domestic focused mobile operators
Digi
in Malaysia, i.e. Maxis and DiGi.

♦ Maxis slightly ahead quantitatively. We find that Maxis leads the industry FBM KLCI
both in terms of subscriber and revenue market share, as well as EBITDA
margins and postpaid ARPU. DiGi commands higher prepaid ARPU due to its
traditional focus. Unsurprisingly given Maxis’ as well as Celcom’s lead in the Maxis

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

This has also resulted in Maxis having superior 3G network population
coverage, although the proposed active network sharing between DiGi and
Celcom could dramatically change industry dynamics. Despite lagging
behind, DiGi has remained prudent on capex spending while Maxis has been
aggressively modernising its network.

♦ No clear winner in earnings growth and valuation. Excluding the

possibility of special dividends, we expect Maxis to offer higher dividend
yields in 2010. Both companies will see steady single-digit earnings growth
going forward, although Maxis is suffering from some extra expenses due to
World Cup 2010. Maxis looks slightly cheaper based on PE multiples, but
dearer based on EV/EBITDA due to higher net gearing.

♦ Maxis has a slight edge. In summary, from a quantitative perspective, we

like Maxis for its market leadership and strength in the postpaid market, PER = 12x
allowing itself to capture the rising popularity of mobile broadband and
PER = 11x
strong data revenue growth via the proliferation of cheaper smartphones.
While earnings growth in FY12/10 is lacking, this should pick up in FY12/11-
12 as margins recover post World Cup 2010. On a qualititative view, we like PER = 10x
where Maxis is heading by expanding its range of services to offer quad-play,
as we think Maxis is definitely in the right track by leveraging on the strength
of content that Astro has to offer.

♦ Risks. These include: 1) weaker-than-expected subscriber additions; 2)

execution (such as network upgrades & expansion); and 3) all-out price war.
abc
♦ Forecasts. No change to our forecasts for now.

♦ Investment case. We prefer Maxis given that it is marginally cheaper by KLCI

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

dividend yield of 6.6% in 2010 compared to DiGi’s 5.7%. Going forward, we
believe Maxis is best positioned to capture the huge untapped potential that David Chong, CFA
mobile broadband has to offer due to its transformation into Malaysia’s first (603) 9280 2172
quad-play telco, cross-selling opportunities within its higher quality postpaid david.chong@rhb.com.my
subscriber base and wide 3G network population coverage.

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 22 October 2010

♦ Comparing green apple to yellow apple. In this report, we make a comparison between the only two purely
domestic focused mobile operators in Malaysia, i.e. Maxis and DiGi. For completeness, we have included Celcom
in some of our analysis. We believe Maxis (re-listed end 2009) and DiGi are good comparables given that Axiata
continues to embark on its transformation to become a top regional mobile operator considering its wholly owned
Celcom now contributes less than half of its top line whereas Telekom Malaysia (TM) is largely a fixed line player.

We examined quantitative factors such as share price performance, subscriber base, average revenue per user
(ARPU), network coverage, margins, dividends, earnings and valuation metrics. On the qualitative side, we looked
at breadth of services, management, corporate governance and transparency.

Quantitative Analysis

♦ DiGi outperformed Maxis’ share price performance. Looking at year-to-date (YTD) share price performance,
DiGi has generated a respectable return of 19.2%, outperforming the KLCI’s YTD return of 16.9% and Maxis’
3.2%. DiGi’s share price has performed reasonably well mainly due to 1HFY12/10 earnings charting a respectable
growth of 9.2% yoy. In contrast, Maxis has been a laggard as 1HFY12/10 earnings fell 5% mainly due to margin
squeeze from higher expenses such as the FIFA World Cup sponsorship in 2Q.

We note DiGi’s share price suffered an anomaly on 4 Oct, plunging 14.5% to close at RM21.00 with just 36k
shares traded at that price in the absence of any negative news. Unsurprisingly, DiGi shares recovered all the
losses and in fact closed slightly higher the following day.

Chart 1 : Indexed Performance Of DiGi, Maxis And KLCI

130.0

125.0

120.0

115.0

110.0

105.0

100.0

95.0

90.0
Jan-10 Feb-10 Mar-10 A pr-10 May-10 Jun-10 Jul-10 A ug-10 Sep-10 Oct-10

DiGi Maxis KLCI

Source: Bloomberg

♦ Maxis leads in both subscriber and revenue market share. As seen in the subsequent charts, Maxis leads
the industry where market share is concerned in terms of total subscribers (both prepaid and postpaid) as well as
revenue. In terms of market share, DiGi is lagging behind in the postpaid market mainly due to its traditional
strong focus on the prepaid market, in particular the youth and foreign worker segments. On the other hand,
Maxis’ postpaid and prepaid market share closely resembles its overall subscriber market share. Effective
branding via its Maxis and Hotlink brands has allowed Maxis to maintain market leadership. Of late however,
Maxis’ postpaid market share has been eroded over the last several quarters by a resurgent Celcom which has
been successfully rejuvenated by its Performance Improvement Programmes.

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

45% 50%

45%
40%

40%
35%

35%

30%
30%

25%
25%

20% 20%
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxi s Cel com Digi Maxis Celcom Digi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

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

45% 55%

50%
40% 45%

40%
35%
35%

30%
30%
25%

25% 20%

15%
20%
10%
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxis Celcom Di gi Maxi s Cel com Digi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Maxis comes out tops in postpaid ARPU... As seen below, Maxis leads the industry with the highest Average
Revenue Per User (ARPU) given its: (1) strength in the urban, corporate and SME markets; and (2) aggressive
focus on data services. Capitalising on broadband and data opportunities, besides having the widest range of
smartphones, has allowed Maxis to sustain its market leading postpaid ARPU. Continued focus on providing
mobile broadband services via smartphones such as the iPhone should also help Maxis mitigate ARPU decline.

♦ … but DiGi is the winner in prepaid ARPU. As the first mobile operator to introduce prepaid plans in Malaysia,
DiGi leads the industry in terms of prepaid ARPU via innovative plans, effective marketing and creative branding.
Nonetheless, DiGi acknowledges that the mobile market is increasingly saturated, with penetration standing at
109% in 2Q10. Armed with 3G spectrum just acquired two years ago from Time dotCom, DiGi is aiming to
expand aggressively its presence in the postpaid market, with broadband an integral part of its strategy to
generate revenue growth.

As a side note, Maxis’ prepaid ARPU suffered a pronounced dip in 1Q10 as Maxis relaunched the CampusZone
prepaid plan as Hotlink Youth Club targeted at the low price segment which caused some switching among
existing prepaid subscribers.

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

115.0 60.0

110.0
55.0
105.0
50.0
100.0

95.0 45.0

90.0
40.0
85.0
35.0
80.0

75.0 30.0
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxis Cel com Di gi Maxi s Cel com Di gi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Maxis has bigger contribution from non-voice. Perhaps not too surprisingly, Maxis has a bigger portion of its
revenue from non-voice. Recall that DiGi only started rolling out 3G services in 2Q09, having bought over the 3G
spectrum from Time dotCom for RM654m in 2008. To recap, DiGi in 2006 had failed to secure one of the two 3G
licences tendered out. In contrast, Maxis as well as Celcom had several years of headstart to roll out 3G services
from the licences allocated under a previous tender.

Given Maxis’ huge headstart, it is difficult to see DiGi catching up in a short time period. Already, Maxis is
targeting to achieve 50% non-voice revenue in the next year or two. Maxis’ revenue contribution from non-voice
has been on a steady uptrend since 2Q09, on the back of its aggressive push into data services and helped by
being the first mobile operator to launch the iconic Apple iPhone in 1Q09.

Nonetheless, it is encouraging to see DiGi making progress in terms of wireless broadband (WBB) subscriber net
additions, which has been gradually rising since its own 3G launch in 2Q09. Not wanting to be left behind, DiGi
began offering iPhones to its subscribers in 2Q10. Just last month, both DiGi and Maxis launched the iPhone 4
which saw very encouraging responses. DiGi reportedly had 30,000 inquiries for the iPhone 4 prior to its launch in
Malaysia.

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

'k 'k

800 160

700 140

600 120

500 100

400 80

300 60

40
200

20
100

0
0
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxis WBB C umulative Subs C elcom WBB C umulative Subs DiGi WBB C umulative Subs Maxis WBB Subs Net Adds C elcom WBB Subs Net Adds DiGi WBB Subs Net Adds

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

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

'000
800 40%

700 35%

600
30%
500
25%
400

300 20%

200 15%

100
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 10%
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
Maxis Celcom
Maxi s Digi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Maxis has broader 3G network population coverage. Given Maxis’ headstart in securing the 3G spectrum in
2002, Maxis’ 3G coverage is much wider at 64% in 3Q10, and is expected to reach 72-75% by year end. We note
that Celcom’s 3G network coverage is the highest in the industry at 75% now.

To drive the 3G network expansion, Maxis is allocating one third of its RM1.4bn capex planned for 2010.
Meanwhile, DiGi is targeting to increase its 3G network coverage from 35% to 50% by year end. To achieve this,
DiGi will allocate about half of its RM700m total capex spending this year on 3G network expansion.

In terms of total capex per subscriber, Maxis will spend RM106 in 2010, which is marginally higher than DiGi’s
RM86. However, based on just 3G capex per subscriber figures, DiGi will spend more at RM43, compared to
Maxis’ RM35. This is not too surprising as DiGi lags behind the industry in terms of 3G network population
coverage.

Should active sharing take place between Celcom and DiGi, the industry dynamics may change substantially. The
MOU signed between Celcom and DiGi may result in both companies collectively leapfrogging Maxis in terms of
3G coverage. Recall that in Jun 2010, Celcom and DiGi signed a memorandum of understanding to explore long-
term network and infrastructure collaboration in Malaysia. The collaboration will focus on three key areas —
operations and maintenance, transmission and site sharing, and radio access network. This follows a similar
accord struck earlier between Robi (Axiata’s Bangladesh subsidiary) and Grameenphone (Telenor’s Bangladesh
subsidiary). A definitive agreement is expected to be reached before year end once both parties have agreed on
the long-term economic and operational viability of this collaboration.

♦ DiGi stays prudent on capex spending. To maximise its cash flow, DiGi has chosen to remain prudent with its
capex spending despite playing catch up on 3G network rollout in comparison to its two bigger peers. As seen
below, annual capex spending has been fairly consistent except for 2008. This has allowed DiGi to gradually
reduce its capex/revenue ratio from 15.7% to an estimated 13.3% in 2010. In contrast, Maxis has been spending
aggressively after a hiatus in 2008 as it embarked on a network modernisation programme and expand its 3G
network coverage and capacity.

While Maxis’ heavy capex spending may suggest that DiGi will be left behind, we believe the crystallisation of the
active sharing agreement between Celcom and DiGi will create a more even playing field. We think DiGi will be
able to tap into Celcom’s wider 3G network coverage, while Celcom may benefit from having more capacity in
certain urban areas. Hence, we are not too worried for now about DiGi not ramping up capex on 3G network
expansion.

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

'm
1,500 20%
1,400
18%
1,300
1,200 16%
1,100 14%
1,000
900 12%

800 10%
700
8%
600
500 6%
2007 2008 2009 2010F 2007 2008 2009 2010F

Maxi s Cel com Di gi Maxi s Celcom Di gi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Maxis has highest EBITDA margins. Maxis leads the industry with annual EBITDA margins at c.50% in the last
two years. However, we expect Maxis’ margin to face some pressure in 2010 and dip slightly to 49% due to
higher direct expenses (mainly from higher hubbing expenses), lower interconnect rates effective Jun 2010 and
World Cup 2010 marketing expenses. While DiGi’s margins have trended lower yoy, we expect margins to remain
stable going forward despite handset subsidies as management continues to deliver opex efficiencies.

However, we wish to point out that the different accounting treatment adopted on how handset subsidies are
expensed off can influence the computation of EBITDA margins. DiGi recognises handset subsidies as expenses
directly into its cost of sales, in line with the accounting practice of parent company Telenor. However, Maxis
amortises handset subsidies which are capitalised over the contract period. Our estimates indicate if Maxis were
to directly expense off handset subsidies instead of amortising, its EBITDA margins would be lower by 1%-pt.

We think there may be potential upside to DiGi’s margins going forward should the active sharing agreement with
Celcom take off. In addition to capex savings, both companies will save on opex by removing duplication of base
station sites, addressing escalating rental fees, reducing utility bills and transmission costs, optimising
deployment of base stations per area and redeploying equipment between redundant and new sites.

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

'm
54%
1,200
52%
1,100
50% 1,000

48% 900
800
46%
700
44%
600
42% 500

40% 400
2007 2008 2009 2010F 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Maxi s Cel com Digi Maxis Celcom Di gi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Different leverage measures yield different results. Maxis indicated they would not be adverse to a
leveraged balance sheet and would still be comfortable with a net debt/EBITDA ratio of 1.75-2x. This may at first
glance suggest potential upside to dividends via specials, given Maxis’ current relatively low gearing. However,
management has downplayed the potential for specials, and instead reiterated that Maxis is on track to pay only
50 sen DPS (cumulatively since its re-listing) by 4Q10, which implies another 29 sen DPS to be declared in 2H10.

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

0.8 0.50

0.7 0.45
0.40
0.6
0.35
0.5 0.30
0.4 0.25

0.3 0.20
0.15
0.2
0.10
0.1 0.05
0.0 0.00
2008 2009 2Q10 2008 2009 2Q10

Maxi s Digi Maxis Digi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

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

1.4 1.0
0.9
1.2
0.8
1.0 0.7

0.8 0.6
0.5
0.6
0.4
0.4 0.3
0.2
0.2
0.1
0.0 0.0
2008 2009 2010F 2008 2009 2010F

Maxis Di gi Maxi s Di gi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Maxis offers slightly better dividends. Excluding the possibility of special dividends in 2010, we expect Maxis
to offer better dividend yields at 6.6% than DiGi’s 5.7%. We are expecting 100% payout for DiGi in 2010, but
note it has achieved c.130% payout historically and may choose to pay more than forecast by gearing up further.
For DiGi, we think there is still scope to support its >100% dividend payout given its capital structure guidance of
35-45% net debt to 55-65% equity. In 2Q10, DiGi’s net debt/equity ratio stood at 0.25x. So, we estimate an
additional 36 sen/share in special dividends from DiGi if it reaches its capital structure guidance by year end. All
in, DiGi’s FY12/10 DPS could reach 175 sen, translating into a superior dividend yield of 7.1%.

Chart 20 : Dividend Yield Chart 21 : Payout Ratio

8%
140%
7%

6% 120%

5% 100%
4%
80%
3%
60%
2%

1% 40%

0% 20%
2008 2009 2010F 2008 2009 2010F

Maxi s Di gi Maxi s Di gi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

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♦ Both companies will see steady single-digit earnings growth. There is nothing much to separate the two
companies in terms of earnings growth in FY12/11-12. FY12/10 may not be a good comparison, as DiGi had the
benefit of a low base effect following a blip in FY12/09 when margins were affected by higher opex and mobile
Internet expansion costs. Meanwhile, Maxis incurred significant marketing expenses for World Cup 2010
promotions which will result in downward pressure on margins for FY12/10 only. Going forward, both companies
will benefit from bigger non-voice contributions to drive earnings growth.

Chart 22 : Earnings Growth Chart 23 : Quarterly Revenue Trend

'm
15% 2,400
2,200
10%
2,000
5% 1,800
1,600
0%
2008 2009 2010F 2011F 2012F 1,400
-5% 1,200

1,000
-10%
800
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
-15%

Maxis Celcom Digi

Maxis Digi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

♦ Mixed valuation signals. Looking at PE multiples, Maxis appears to be cheaper than DiGi, but only marginally.
The differential is only 3-5% for FY12/10-12. However, the EV/EBITDA ratios tell a different story; Maxis is more
expensive by 7-10% for FY12/10-12. This we believe may be due to Maxis’ higher net gearing relative to DiGi.

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

20 11

19
10
18
9
17
16 8

15
7
14
6
13
12 5
2008 2009 2010F 2011F 2012F 2008 2009 2010F 2011F 2012F

Maxis Digi Maxis Digi

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

Qualitative Analysis

♦ Maxis is undisputed in breadth of services. Maxis is set to be the first quad-play (mobile, broadband, fixed-
line, IPTV) telco in Malaysia once it makes a soft launch sometime in 3Q10. The strategy to launch IPTV is part of
Maxis’ target to boost non-voice contribution to total revenue. We believe Maxis is well positioned to compete
with TM’s IPTV (bundled with the UniFi fibre optic package) offerings given that Maxis can rely on sister company,
Astro for compelling content such as the English Premier League. We understand that Maxis has no intention to
compete directly with Astro, so IPTV may be seen as an alternative channel for Astro to further distribute its
content.

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DiGi on the other hand is for now limited to offering mobile and broadband services only. Whether DiGi plans to
offer IPTV is too early to tell at this stage. Seeing as to how expensive content can be judging by the fierce
bidding war for the English Premier League rights between SingTel and StarHub last year, we think DiGi will likely
remain focused on rolling out its broadband services in the medium term. This will help boost DiGi’s non-voice
revenue contribution and provide another leg of growth for the company. In addition, by avoiding additional
capex and expenses from not offering IPTV services, DiGi can preserve its cash flow to maintain its generous
dividend payout.

♦ Maxis management has big ambitions. With a wider 3G network coverage and availability of strong content
via sister company Astro, Maxis is seen to be the most aggressive telco by aiming to be the first to offer quad-
play services. Meanwhile, we see DiGi’s management as more conservative, choosing to remain focused on
building up its broadband market share. However, we understand that DiGi is not ruling out IPTV, and may do so
if there is sufficient demand in the market.

♦ Both have equally capable management. Both Maxis and DiGi are led by capable management. Maxis has an
experienced key management team drawn from global and local talent that provides a balanced blend of
international telecommunications and relevant industry experience, local knowledge and understanding. DiGi on
the other hand is able to tap into Telenor’s experience and expertise in more advanced telecom markets.

♦ Both are transparent with good corporate governance. Both companies provide sufficient disclosure on
operational and financial statistics, as well as quarterly conference calls with the investment community to
discuss about their businesses, challenges and outlook.

Summary

♦ Maxis has a slight edge. In summary, from a quantitative perspective, we like Maxis more given its market
leadership in terms of a much larger subscriber as well as revenue market share. Maxis’ strength in the postpaid
market also bodes well for the company, as it is well positioned to capture the rising popularity of mobile
broadband and strong data revenue growth via the proliferation of cheaper smartphones.

DiGi’s balance sheet is less geared compared to Maxis, so that suggests DiGi has some potential to gear up and
pay out special dividends. Without special dividends however, Maxis offers better dividend yields in 2010.
Valuation-wise, Maxis’ is marginally cheaper as it trades at a slightly cheaper FY12/10 PE multiple of 16.9x
compared to DiGi’s 17.7x. We acknowledge earnings growth is lacking in FY12/10 for Maxis, but that should pick
up in FY12/11-12 as margins recover post World Cup 2010.

On a qualititative view, we like where Maxis is heading in terms of expanding its range of services by offering
quad-play, as we think Maxis is definitely in the right track by leveraging on the strength of content that Astro
has to offer. This is spearheaded by Maxis’ ambition to be the first telco to launch quad-play services to increase
revenue contribution from non-voice. The combination of compelling content and proliferation of smartphones
should help position Maxis for its next leg of growth. Meanwhile, DiGi should be able to carve out a slice of the
mobile broadband market through competitive pricing and proper branding.

Conclusion

♦ In short, we prefer Maxis over DiGi. Maxis at 16.9x is marginally cheaper than DiGi by 4.5% on FY12/10 PE
multiple, while offering higher dividend yield of 6.6% in 2010 compared to DiGi’s 5.7%. Going forward, we
believe Maxis is best positioned to capture the huge untapped potential that mobile broadband has to offer due to
its transformation into Malaysia’s first quad-play telco, cross-selling opportunities within its higher quality
postpaid subscriber base and wide 3G network population coverage.

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Table 2 : Summary of Quantitative and Qualitative Analysis

Maxis DiGi
Quantitative Analysis
Total subscriber market share 2Q10 41% 26%
Revenue market share 2Q10 42% 25%
Postpaid ARPU 2Q10 RM103 RM83
Prepaid ARPU 2Q10 RM36 RM47
Non-voice contribution 2Q10 37% 21%
3G network coverage End 2010 75% 50%
Capex spending 2010F RM1.4bn RM0.7bn
Capex/ sub 2010F RM106 RM86
EBITDA margin 2010F 49% 43%
Gearing (Net debt/ equity) 2Q10 0.5 0.2
Gearing (Net debt/ EBITDA) 2010F 0.9 0.1
Net dividend yield 2010F 6.6% 5.7%
Earnings growth 2010F 0.6% 8.0%
Valuation (PE) 2010F 16.9 17.7
Valuation (EV/ EBITDA) 2010F 9.5 8.7

Qualitative Analysis
Breadth of services 2Q10 Quad play Dual play
Management style 2Q10 More aggressive More conservative
Transparency 2Q10 Adequate Adequate
Source: Companies, RHBRI

Risks

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

Forecasts

♦ No changes to forecasts for now. We expect the single-digit earnings growth in the industry to be increasingly
driven by non-voice contribution as the broadband market remains relatively untapped with household
penetration only at 37.5% in 2Q10. Despite mobile penetration reaching 109% in 2Q10, we think there is still
room for operators to expand their subscriber base as we estimate mobile penetration could potentially rise to
120% by 2012. This we believe is achievable due to multiple SIM holders and opportunities in the under-served
rural areas. The subscriber mix will shift albeit gradually towards the postpaid segment as more users take up
mobile broadband packages due to: (1) Malaysia’s Internet-centric youth that comprises half the population; (2)
the proliferation of smartphones; and (3) expanding 3G network population coverage. As such, we think ARPUs
will continue to trend lower, but not by much despite the commoditisation of voice minutes, in the absence of
irrational price competition.

Valuations & Recommendation

♦ Maintain Neutral on the sector. No change to our Neutral stance on the sector. Also, we maintain our
recommendations for Maxis (Outperform, FV=RM5.75) and DiGi (Outperform, FV=RM26.35) based on DCF
valuation. TM (Market Perform, FV=RM3.55) remains primarily a dividend play, while Axiata (FV=RM4.75)
is still a Market Perform given its strong YTD share price performance.

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

FYE Dec (RMm) 31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12 FYE Dec 31-Dec-10 31-Dec-11 31-Dec-12

Turnover 8,611.0 9,396.2 10,171.7 10,788.3

Subscribers ('000)

EBITDA 4,337.0 4,645.1 5,051.1 5,360.4

- Prepaid 9.72 10.07 10.37

EBITDA margin (%) 50.4 49.4 49.7 49.7 - Postpaid 3.11 3.41 3.71
- Broadband 0.41 0.56 0.66
Dep & Amort (1,179.0) (1,264.9) (1,389.6) (1,462.1) Total 13.24 14.04 14.74

EBIT 3,158.0 3,380.3 3,661.5 3,898.3

ARPU (RM)
EBIT margin (%) 36.7 36.0 36.0 36.1
Net interest expense (48.0) (238.5) (251.3) (226.3) - Prepaid 40 40 39
Associates 0.0 0.0 0.0 0.0 - Postpaid 103 104 104
EI (103.0) 0.0 0.0 0.0 - Broadband 78 76 74
Pretax Profit 3,007.0 3,141.7 3,410.3 3,672.0
Tax (775.0) (793.3) (861.1) (918.0)
Capex (RMm) 1,400 1,300 1,200
Minorities 0.0 0.0 0.0 0.0
Net Profit 2,232.0 2,348.4 2,549.2 2,754.0
Core Net Profit 2,335.0 2,348.4 2,549.2 2,754.0

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

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

FYE Dec (RMm) 31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-12 FYE Dec 2010f 2011f 2012f

Turnover 4,909.6 5,271.9 5,627.8 5,947.8

Subscribers ('000)
EBITDA 2,124.6 2,282.4 2,450.8 2,587.5 - Prepaid 6.74 6.94 7.14
EBITDA margin (%) 43.3 43.3 43.5 43.5 - Postpaid 1.31 1.43 1.56
- Broadband 0.13 0.25 0.35
Dep & Amort (731.1) (766.1) (811.3) (864.7)
Total 8.17 8.62 9.04

EBIT 1,393.4 1,516.4 1,639.6 1,722.9

EBIT margin (%) 28.4 28.8 29.1 29.0 ARPU (RM)
Net interest expense (27.0) (36.0) (27.0) (21.0) - Prepaid 48.0 47.5 46.8
Associates 0.0 0.0 0.0 0.0 - Postpaid 85.8 87.1 87.6
Pretax Profit 1,366.5 1,480.4 1,612.6 1,701.9
- Broadband 100.0 97.5 95.1
Tax (366.0) (399.7) (427.3) (451.0)
Minorities 0.0 0.0 0.0 0.0
Net Profit 1,000.5 1,080.7 1,185.2 1,250.9 Capex (RMm) 800.0 850.0 900.0

Source: Companies, RHBRI’s estimates Source: Companies, RHBRI’s estimates

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Chart 26: Maxis Technical View Point

♦ The share price of Maxis hit a high of RM5.53 in Feb
2010, before triggering a strong profit-taking
pressure that dragged it to a support region near
RM5.30 in Apr and May 2010.

♦ The selling pressure intensified in late May and

pressed the stock to a low of RM5.10, before
initiating a technical rebound back to the region of
RM5.30 in Jun.

♦ The stock surprised investors in Aug, with a sharp

jump on its share price to RM5.54, a fresh high
level, but failed to sustain at above the RM5.50
level, forcing another round of retreat in the recent
weeks.

♦ Of late, the stock retreated lower and closed

yesterday at RM5.29, marginally below the critical
support level at RM5.30, with a negative candle
and poor short-term readings on the chart.

♦ Technically, the stock should see further downside

pressure today, given that both the 10-day and 40-
day SMAs have also turned lower recently.

♦ However, we believe the stock should be held

relatively stable near the RM5.30 region in the near
term, based on the previous consolidation pattern
in Jun to Aug 2010.

♦ As a result, we expect it to move sideways going

forward. Its chart outlook will turn negative only if
it loses the RM5.21 solid support level.

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
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