Telecommunications: Telecommunications: Paradigm Shifts With Cloud Computing

TELECOMMUNICATIONS
SINGAPORE
Telecommunications: Paradigm Shifts With Cloud Computing
July 2011
Refer to last page-for important disclosures. Property Sector ASEAN
Contents
Executive Summary ........................................................................................................... 1 Key Recommendations ...................................................................................................... 2 Paradigm Shifts With Cloud Computing ........................................................................ 3 Positive Trends In Mobile Communications ................................................................... 8 Impact On Telecommunications Industry .................................................................... 10 Valuations ......................................................................................................................... 11 Risk Factors ..................................................................................................................... 15 Key Recommendations: ................................................................................................. 16 SingTel .......................................................................................................................... 17 M1 ................................................................................................................................. 27 StarHub .......................................................................................................................... 35 Appendices ...................................................................................................................... 42 Appendix A: Introduction To Cloud Computing ........................................................... 44 Appendix B: Cloud Strategies For Telcos ...................................................................... 52 Appendix C: Rights And Responsibilities Of Cloud Services ....................................... 53 Appendix D: Industry Statistics ...................................................................................... 55 Appendix E: Financial Performance ............................................................................... 58 Appendix F: Dividend History ....................................................................................... 59
Jonathan Koh, CFA (65) 6590 6620

jonathankoh@uobkayhian.com
This report uses the closing prices of 30 June 2011.
Executive Summary
Cloud computing, in its simplest form, is IT services delivered over internet connections. It creates convergence in communications and computing and has a direct and sustained positive impact on the telecommunications industry. Increasing adoption of cloud computing leads to four mega trends: TREND #1: NETWORK CONNECTIVITY BECOMES A CENTRAL COMPONENT OF CORPORATE IT SYSTEMS Cloud services are hosted at data centres located off premises and huge quantities of data are transferred between users computers and the data centres via the internet. Cloud computing, thus, requires secured high-speed network connectivity to the internet provided by telcos. TREND #2: SMARTPHONES, LAPTOPS AND TABLETS DIRECTLY ACCESS CLOUD SERVICES VIA WIRELESS BROADBAND, BYPASSING DESKTOP PCS High-speed packet access (HSPA) and long-term evolution (LTE) technologies make smartphones, laptops and tablets ideal platforms to directly access cloud services while on the move. They will be able to access cloud-based enterprise applications, such as customer relationship management (CRM), enterprise resource planning (ERP) and human resource management (HRM). TREND #3: GROWTH OF MOBILE DATA AND RISE OF TIERED DATA PLANS Many telcos have phased out unlimited data plans and have introduced tiered data plans to manage and monetise the explosive growth in mobile data traffic. In Singapore, SingTel has introduced premium priority mobile broadband plans that give priority to customers when its network is heavily loaded. Differentiated services and imposition of data caps will have a positive impact on post-paid ARPU. Trend #4: CLOUD COMPUTING CREATES A BUOYANT SME MARKET Cloud services are affordable and available to all companies regardless of size. SMEs could access powerful enterprise applications that were previously under the purview of larger competitors, leading to increased demand for fixed and wireless broadband services. Cloud computing has a positive impact on telcos mobile communications and wireless broadband businesses. Imposition of data caps and differentiated services, such as premium priority pass, will enhance post-paid mobile ARPU. Cloud computing boosts demand for hosting, fixed broadband and internet protocol virtual private network (IP VPN) services. However, IP VPN services are affordably priced and could cannibalise traditional international and local leased circuits. Thus, the overall impact on fixed network services is only marginally positive. Our preferred picks for telcos are SingTel and M1, which provide greater upside. SingTel (BUY/S$3.16/Target: S$3.48) offers the widest array of building blocks for cloud computing and is well positioned to provide end-to-end cloud-based IT systems for corporate customers. M1 (BUY/S$2.53/Target: S$2.89) benefits the most from the uplift in post-paid ARPU created by increased usage of wireless broadband as mobile accounted for 79.1% of operating revenue in 2010. We maintain a BUY recommendation for StarHub (BUY/S$2.79/Target: S$3.06) but feel that upside from expansion in fixed network services has been partially factored into its current share price.
Figure 1: Peer Comparison Singapore

Price @ Company Ticker Rec 30 Jun 11 (S$) Target Price (S$) Market Cap (US$m) FY -------- PE -------FY10 (x) FY11F (x) EV/EBITDA FY10 (x) FY11F (x) ROA FY11F (%) Yield FY11F (%)
SingTel M1 StarHub Average
ST SP M1 SP STH SP
BUY BUY BUY
3.16 2.53 2.79
3.48 2.89 3.06
40,975 1,866 3,893
03/2011 12/2010 12/2010
13.2 14.5 18.2 15.3
12.7 13.2 17.1 14.3
8.2 6.0 6.5 6.9
7.9 5.8 6.1 6.6
9.9 18.4 16.0 14.8
5.1 6.1 7.2 6.1
Source: Bloomberg, UOB Kay Hian
Telecommunications Sector
Key Recommendations
SingTel (BUY/S$3.16/Target: S$3.48) SingTel offers the widest array of building blocks for cloud computing. It is well positioned to provide end-to-end cloud-based IT systems with its IT & engineering business accounting for 24% of Singapore revenue in FY11. Pricing pressure experienced by Bharti Airtel has eased with average revenue per minute stabilising at about Rs0.44. New telecommunications policy to be finalised by end-11 could result in industry consolidation in India. SingTel has increased dividend payout ratio from 45-60% to 5570% and reduced the differential in yields with peers. Valuation is attractive after share price retracement and underperformance.
Figure 2: Price Chart SingTel
( lcy) 3.40
SINGAP OR E TELE COM L TD Si ngap ore Tel eco m Ltd / FSS TI In dex
(%) 1 10
3.20 1 00 3.00 2.80 90 2.60 2.40 60 40 20 0 Jul 10 Sep 10 No v 10 Jan 11 M ar 11 May 1 1 Jul 11 V olu me ( m) 80
M1 (BUY/S$2.53/Target: S$2.89) M1 focuses on providing fibre broadband for SMEs, enabling them to access cloud services. It will step up marketing efforts as coverage for Next Gen Nationwide Broadband Network (NGNBN) improves in 2H11. M1 benefits the most from the uplift in post-paid ARPU created by usage of wireless broadband to access cloud-based enterprise applications and differentiated priority services. Mobile communications accounted for 79.1% of operating revenue in 2010. We expect M1 to reward shareholders with regular special dividends.
Figure 3: Price Chart M1

( lcy) 2.80
M 1 LTD M 1 Lt d/ FS STI Index
(%) 1 30
2.60 2.40 2.20
1 20 1 10 1 00
2.00 1.80 4 V olu me ( m) 2 0 Jul 10 Sep 10 No v 10 Jan 11 M ar 11 May 1 1 Jul 11
90 80
StarHub (BUY/S$2.79/Target: S$3.06) StarHub will bundle Microsofts Office 365 with fibre broadband services for SMEs. It has also launched IP VPN services riding on infrastructure provided by NGNBN. Its addressable market has expanded from 800 commercial buildings within the CBD to more than 20,000 on an island-wide basis. The roll-out of NGNBN has been gradual and slower-thananticipated and we have lowered our expectation of revenue growth for fixed network services from 17.4% to 12.3% in 2012. We expect StarHub to undertake a capital management exercise in 2012 or 2013 through capital reduction.
Figure 4: Price Chart StarHub

( lcy) 3.0 0 2.8 0
STAR HUB L TD S ta rhu b L td/ FSST I Ind ex
(%) 13 0
12 0
2.6 0 11 0 2.4 0 2.2 0 2.0 0 10 V olu me ( m) 5 0 Jul 10 Sep 1 0 Nov 10 Jan 11 M ar 11 M ay 11 J ul 11 10 0
90
Paradigm Shifts With Cloud Computing

Cloud computing, in its simplest form, is IT services delivered over internet connections. It creates convergence in communications and computing and has a direct and sustained positive impact on the telecommunications industry. Cloud computing provides compelling value. It does not require upfront capex and users only pay a monthly subscription based on usage. It is highly scalable and significantly reduces the administrative costs of managing IT systems. According to the Boston Consulting Group, early adopters of cloud services, including Coca-Cola and GlaxoSmithKline, have already reported 10-30% cost reductions as a result of cloud-based messaging, collaboration and workflow tools. We expect increasing adoption of cloud computing to lead to four mega trends in the telecommunications industry: TREND #1: NETWORK CONNECTIVITY BECOMES A CENTRAL COMPONENT OF CORPORATE IT SYSTEMS In traditional client-server computing, users access services provided by servers through a local area network and telcos do not play any role. In cloud computing, cloud services are hosted at data centres located off premises. Users access cloud services through the internet via network connectivity provided by telcos. Telcos, thus, play a critical role in corporate IT systems. Cloud computing involves transfer of huge quantity of data to and from the internet and requires high-speed network connectivity to the internet. IP VPN is ideal for providing secured connectivity to access cloud services. According to research firm IDC, demand for IP VPN in Asia Pacific ex-Japan is projected to increase by a CAGR of 10.8% in 2010-14. Figure 5: Transition From Client-Server Computing To Cloud Computing
Client-Server Computing
Internet
Cloud Computing
Router Internet Switch
Local Area Network (LAN) Data Centers Server Client Computers Client Computers
Distributed Servers
Source: UOB Kay Hian
Figure 6: Demand For IP VPN In Asia Pacific Ex-Japan

(US$m) 3,000 2,500 2,000 1,500 1,000 500 0 2010 2011F 2012F 2013F 2014F
Source: IDC
TREND #2: SMARTPHONES, LAPTOPS AND TABLETS DIRECTLY ACCESS CLOUD SERVICES VIA WIRELESS BROADBAND, BYPASSING DESKTOP PCS The improvement in quality of wireless broadband connections through HSPA and LTE technologies makes smartphones, laptops and tablets ideal platforms to access cloud services. Users are able to access cloud-based enterprise applications and consumer-oriented cloud services through wireless broadband connections while on the move. Tech-savvy Singaporeans hooked to smartphones. According to market research firm TNS, 5.3m or 72% of mobile phones in Singapore are smartphones, the third highest in the world. The global average is only 28%. Singaporeans are hooked to smartphones as these devices allow them to engage in many activities, such as surfing the internet, updating friends through Facebook and playing computer games. The high penetration rate in Singapore is supported by high standard of living and high quality of mobile coverage. According to consultancy firm IBS, worldwide smartphones sales are projected to expand at a CAGR of 31.3% in 201014. Tablets shall populate the earth. Apple iPad, launched in Apr 10, has taken the market by storm and attracted new entrants, such as Motorola Xoom, Samsung Galaxy Tab, HP TouchPad and BlackBerry PlayBook. According to IBS, worldwide tablets sales are projected to expand at a CAGR of 74.8% in 2010-14. Tablets are expected to displace PCs, particularly lower-priced netbooks with smaller displays. Tablets are also likely to cannibalise the market for e-readers. According to IDC, about half of all tablets are purchased by companies who foresee an improvement in productivity by equipping executives and sales staff with tablets. Tablets combine the strengths of the usability of laptops and portability of smartphones. They are able to access cloud-based enterprise applications, such as CRM, ERP and HRM, through wireless broadband. Employees can also respond more substantively to emails with attached documents created on tablets.
Figure 7: Worldwide Smartphone Sales

(m units) 800 700 600 500 400 300 200 100 0 2010 2011F 2012F 2013F 2014F
Figure 8: Worldwide Tablet Sales

(m units) 200 180 160 140 120 100 80 60 40 20 0 2010
2011F
2012F
2013F
2014F
Source: IBS
Source: IBS
The arrival of LTE and 4G is expected to propel demand for smartphones and tablets over the longer term by providing expanded bandwidth, thus enabling more innovative data- and video-intensive applications.
TREND #3: GROWTH OF MOBILE DATA AND RISE OF TIERED DATA PLANS Explosive growth in mobile data traffic. Cisco Systems forecast mobile data traffic will double every year, increasing 39x over five years to reach 3.6 exabytes per month by 2014. It is estimated that laptops and other mobile-ready portables, including tablets, will account for 70% of mobile data traffic in 2014. Many innovative new cloud services are being developed for corporations and consumers. Proliferation of cloud services will encourage take-up of wireless broadband for tablets and bundled data plans for smartphones. Monetising mobile data traffic through tiered data plans. Unlimited and flat-rate data plans have proven to be effective in promoting usage of wireless broadband. However, unfettered growth in mobile data traffic could result in network congestion with high-intensity users unfairly penalising low-intensity users. In the US, many telcos have phased out unlimited data plans and have introduced tiered data plans. Verizon Wireless, the largest mobile operator, is expected to move to a usage-based pricing model and launch tiered data plans in Jul 11. SingTel has introduced premium priority mobile broadband plans that give priority to customers when its network is heavily loaded. Premium priority plans offer faster and more reliable internet connectivity, ensuring smooth streaming and downloads. More could be done to get data-intensive users to pay more for higher usage and value-added services. In the Philippines, Globe Telecom, an associate company of SingTel, implemented a daily rate for unlimited Facebook access. Usage of wireless broadband to access cloud-based enterprise applications and differentiated services, such as premium priority pass with more reliable internet connectivity, will have a positive impact on post-paid ARPU. We have factored in a 2% increase in post-paid ARPU in 2012 and 2013 for the three telcos, equivalent to a gradual 0.5% increase per quarter.
Figure 9: Mobile Data Traffic By Devices
Source: Cisco Systems
Figure 10: Comparison Of Data Plans For iPad 2

(2-year Contract) Plan Data Bundle (GB) Maximum Downlink Speed (Mbps) Monthly Subscription (S$) iPad 2 16GB WiFi + 3G (S$) Total Cost Over Two Years (S$) SingTel Mobile BroadBand Priority 7.2 Cap at 50GB* 7.2 40.00 399.00 1359.00 (Minimum) StarHub iPad MaxMobile Ultimate Unlimited 7.2 40.02 399.00 1359.48 M1 Data Unlimited Plan Unlimited 7.2 40.00 399.00 1359.00
* Excess charge of $0.001/2KB with minimum charge of $0.005 per data session but total bill capped at S$94.16/month. Source: Respective companies
Trend #4: CLOUD COMPUTING CREATES A BUOYANT SME MARKET Cloud computing helps SMEs improve bottom line. Cloud computing is a democratic technology as cloud services are affordable and available to all companies regardless of size. SMEs could now access powerful enterprise applications that were previously under the purview of larger competitors. According to Microsofts SME Cloud Adoption Study 2011, 39% of SMEs is expected to be paying for one or more cloud services in the next three years compared to the current 29%. The number of SMEs utilising cloud services will almost double over the next three years. SMEs will also be using an average of 3.3 cloud services compared with less than two services currently. The pace of adoption is expected to be gradual with SMEs likely to operate a hybrid model with a mix of off-premise cloud services and traditional on-premise infrastructure. In Singapore, SMEs are defined as manufacturing companies with net fixed-asset investments of less than S$15m and services companies employing fewer than 200 staff. This is a sizeable market with about 170,000 SMEs in Singapore. They contribute about 50% of value-added and employ 60% of the labour force. Cloud computing opens up a new untapped market for telcos to provide fixed broadband and IP VPN services for SMEs to access cloud services. Figure 11: Number Of Companies In Singapore
180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: CEIC, UOB Kay Hian
Positive Trends In Mobile Communications

We expect cloud services to permeate the mobile communications market. Popular social networking websites, such as Facebook and Twitter, are built based on cloud computing technologies and are easily accessed using smartphones, laptops and tablets through wireless broadband connections. Many innovative new cloud services are being developed. The proliferation of cloud services will encourage take-up of wireless broadband and bundled data plans. Sharing and synchronisation through iCloud. Apple has launched a set of free cloud services called iCloud that stores content on iPhone, iPad, iPod Touch and Mac in the clouds. It synchronises contacts, calendar and emails on different Apple products. iCloud automatically propagate the changes to all other devices when a document is edited. Backup is performed on a daily basis when each device charges its battery. iCloud includes iTunes in the clouds, which allows music previously purchased to be downloaded onto all devices. iCloud allows iPhone smartphones and iPad tablets to bypass desktop PCs as the media hub. Apple will invest US$500m in three data centres located at Maiden, North Carolina to host iCloud. The service could be extended to include videos and movies in the future. Figure 12: iTunes In The Cloud
Source: Apple
Other positive trends are also making smartphones indispensible in daily life: Smartphones becoming electronic wallets. Near Field Communications (NFC) is a contactless technology allowing devices to transfer data over short distances of around three inches or 10cm. The technology allows shoppers to make payments by tapping their smartphones at NFC-enabled point-of-sale (POS) systems. NFC technology has broad-based support from telcos, handset manufacturers and retailers. Googles Android 2.3 operating system supports NFC. Apples iOS currently does not support NFC but there is unconfirmed speculation that iPhone 5 would be supporting NFC. According to research firm Gartner, mobile payments will expand from US$32b in 2010 to US$245b in 2014, representing a CAGR of 66.3%.
Figure 13: Deployment Of NFC In Japan
Smartphones becoming game consoles. Sony Ericsson plans to regain lost ground in smartphones by leveraging on its highly popular PlayStation games. It will set up a certification programme to ensure handset manufacturers adhere to specific technical specifications required by PlayStation games. The effort will bring PlayStation games to a wider range of smartphones powered by the Android operating system. Sony Ericssons Xperia Play is the first smartphone to offer PlayStation games. It has a slide-out console that functions as a PlayStation controller. Gamers are able to purchase PlayStation games at PlayStation Store. Figure 14: Sony Ericssons Xperia Play
Source: Sony Ericsson
Impact On Telecommunications Industry

We believe cloud computing will have a positive impact on mobile communications and fixed network businesses: Mobile communications: Smartphones, laptops and tablets are ideal platforms for accessing cloud services, whether they are enterprise applications or consumeroriented services. Increased usage of wireless broadband, imposition of data caps and differentiated services, such as premium priority pass with more reliable internet connectivity, will have a positive impact on post-paid ARPU. We see cloud computing as a long-term positive for telcos mobile communications and wireless broadband businesses. Fixed network services: Cloud computing boosts demand for hosting, fixed broadband and IP VPN services. However, IP VPN services are affordably priced and could cannibalise traditional international and local leased circuits. Thus, we assess the overall impact of cloud computing on fixed network services to be only marginally positive. SingTel (BUY/S$3.16/Target: S$3.48) SingTel offers the widest array of building blocks for cloud computing. It is well positioned to provide end-to-end cloud-based IT systems with its IT & engineering business accounting for 24% of Singapore revenue in FY11. Pricing pressure experienced by Bharti Airtel has eased with average revenue per minute stabilising at about Rs0.44. New telecommunications policy to be finalised by end-11 could result in industry consolidation in India. SingTel has increased dividend payout ratio from 45-60% to 55-70% and reduced the differential in yields with peers. Valuation is attractive after share price retracement and underperformance.
M1 (BUY/S$2.53/Target: S$2.89) M1 focuses on providing fibre broadband for SMEs, enabling them to access cloud services. It will step up marketing efforts as coverage of NGNBN improves in 2H11. M1 benefits the most from the uplift in post-paid ARPU created by usage of wireless broadband to access cloud-based enterprise applications and differentiated priority services. Mobile communications accounted for 79.1% of operating revenue in 2010. We expect M1 to reward shareholders with regular special dividends.
StarHub (BUY/S$2.79/Target: S$3.06) StarHub will bundle Microsofts Office 365 with fibre broadband services for SMEs. It has also launched IP VPN services riding on infrastructure provided by NGNBN. Its addressable market has expanded from 800 commercial buildings within the CBD to more than 20,000 on an island-wide basis. The roll-out of NGNBN has been gradual and slower-than-anticipated and we have lowered our expectation of revenue growth for fixed network services from 17.4% to 12.3% in 2012. We expect StarHub to undertake a capital management exercise in 2012 or 2013 through capital reduction.
10
Valuations
Enhancement in intrinsic value. We have lowered the discount rate used in our DCF valuation for telcos from 8.5% to 8.0% due to: Preference for sustainable free cash flow. Unlike 2009 and 2010 when the economy was experiencing a sharp recovery and investors were attracted to growth stocks, we expect economic growth to moderate in 2011 and investors are likely to focus on value stocks with strong free cash flow. There is a renewed emphasis on sustainable free cash flow and high dividend yield due to limited opportunities for capital appreciation. Telcos ascending stature. Cloud computing enhances the economic role of telcos to corporations and consumers. Both large corporations and SMEs need secured network connections to access cloud services. For consumers, accessing cloud services while on the move via wireless broadband connections using smartphones, laptops and tablets will become more commonplace.
Our preferred picks for telcos are SingTel and M1, which provide greater upside: SingTel (BUY/S$3.16/Target: S$3.48) offers the widest array of building blocks for cloud computing and is well positioned to provide end-to-end cloudbased IT systems for corporate customers. M1 (BUY/S$2.53/Target: S$2.89) benefits the most from the uplift in postpaid ARPU created by increased usage of wireless broadband as mobile accounted for 79.1% of operating revenue in 2010. We maintain BUY on StarHub (BUY/S$2.79/Target: S$3.06) but feel that upside from expansion in fixed network services has been partially factored into its current share price.
Figure 15: Peer Comparison Singapore

Company SingTel M1 StarHub Average Ticker ST SP M1 SP STH SP Rec BUY BUY BUY Price @ 30 Jun 11 (S$) 3.16 2.53 2.79 Target Price (S$) 3.48 2.89 3.06 Mkt Cap (US$m) 40,975 1,866 3,893 FY 03/2011 12/2010 12/2010 -------- PE -------FY10 FY11F (x) (x) 13.2 14.5 18.2 15.3 12.7 13.2 17.1 14.3 EV/EBITDA FY10 FY11F (x) (x) 8.2 6.0 6.5 6.9 7.9 5.8 6.1 6.6 ROA FY11F (%) 9.9 18.4 16.0 14.8 Yield FY11F (%) 5.1 6.1 7.2 6.1
11
Figure 16: PE SingTel

(x) 28 24 20 16 12 8 4 2000
-1S D +1S D Mean
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Figure 17: PE M1
(x) 14 13 12 11 10
-1S D Mean +1S D
9 8 7 2003 2004 2005 2006 2007 2008 2009 2010 2011
Figure 18: PE StarHub

(x) 18
+1S D
16
Mean
14 12
-1S D
10 2005
2006
2007
2008
2009
2010
2011
12
Figure 19: EV/EBITDA SingTel

(x) 18 16 14 12 10 8 6 2000
-1S D Mean +1S D
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Figure 20: EV/EBITDA M1

(x) 8
+1S D
7
Mean
6 5 4 2003
-1S D
2004
2005
2006
2007
2008
2009
2010
2011
Figure 21: EV/EBITDA StarHub

(x) 10
+1S D
9 8 7 6 5 2005
-1S D Mean
2006
2007
2008
2009
2010
2011
13
Figure 22: Dividend Yield SingTel

(%) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-1S D Mean +1S D
Figure 23: Dividend Yield M1

(%) 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 2003
+1S D Mean
-1S D
2004
2005
2006
2007
2008
2009
2010
2011
Figure 24: Dividend Yield StarHub

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2006 2007 2008 2009 2010 2011
-1S D Mean +1S D
14
Risk Factors
Regulations. Telecommunications services are subject to extensive government regulation, which limits telcos ability to respond to competition and new technologies. Governments may change their policies relating to the telecommunications industry, hence affecting the financial performance of telcos. Competition. The telecommunications industry could become more competitive, resulting in pricing pressure and loss of market share. In particular, new players may be allowed to enter specific segments of the telecommunications market, thus creating more competition and pricing pressure. Technology. The telecommunications industry is characterised by rapid technological changes. New technologies could affect capex, operating cost and demand for existing products and services. Operators using newer and lower-cost technologies could gain an advantage over existing players. Economy. Changes in economic conditions have a direct impact on demand for telecommunications services, thus affecting the financial performance of telcos. Usage of mobile services, volume of IDD calls and roaming revenue are usually negatively affected during a recession.
15
Stock Recommendations
16
SINGAPORE
1 July 2011
Update
SINGAPORE TELECOMMUNICATIONS
Leading Player In Cloud Services; Valuation Turning Attractive
Well positioned for growth with cloud computing. Singapore Telecommunications (SingTel) offers the widest array of building blocks for cloud computing. It has close to 50% of data centre space in Singapore and is a leading provider of internet protocol virtual private network (IP VPN) services in the Asia Pacific region. It partners VMWare to deliver public cloud solutions and offers SaaS applications through its myBusiness online portal. Contribution from managed services, comprising hosting, IP VPN and other cloud-related services, grew 19.2% in FY11. Cloud computing leads to convergence of communications and computing. As a result, network connectivity becomes a central component of corporate IT systems. Having acquired National Computer Systems (NCS) in 2001 and Singapore Computer Systems (SCS) in 2008 to build up its IT & engineering (IT&E) business, SingTel is well positioned to provide integrated cloud-based solutions for corporate customers. However, contribution from international leased circuits was affected by competition and declined 24.2% in FY11. Contribution from local leased circuits has plateaued and competition could intensify as coverage for the Next Gen Nationwide Broadband Network (NGNBN) widens. IP VPN services, which are affordably priced, could progressively cannibalise international and local leased circuits. Positive impact on mobile communications. We estimate that corporate accounts make up about one-third of SingTels post-paid subscriber base. Usage of wireless broadband to access cloud-based enterprise applications and differentiated services, such as premium priority pass with more reliable internet connectivity, will have a positive impact on post-paid average revenue per user (ARPU). International and local leased circuits and fixed broadband, areas that could be affected by NGNBN, accounted for 19.9% of SingTels revenue vs 36.7% from mobile communications. Reiterate BUY. SingTel has improved its dividend payout and reduced the differential in yields with peers. We are also encouraged by the improvement in the operating environment for India-based Bharti Airtel and Philippines-based Globe Telecoms. Our sum-of-the parts (SOTP) valuation for SingTel is S$3.48.
Key Financials
Year to 31 Mar (S$m) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (S$ cent) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x) 2010 16,871.0 4,752.0 2,874.0 3,908.0 3,910.0 24.5 12.9 2.1 8.6 4.5 23.2 22.4 15.4 17.8 2011 18,071.6 4,990.3 3,021.7 3,826.2 3,801.9 23.8 13.3 2.1 8.2 8.2 21.2 18.7 14.5 16.0 2012F 19,274.8 5,197.9 3,175.9 3,975.7 3,975.7 24.9 12.7 2.0 7.9 5.1 20.6 18.9 15.8 15.9 4,030.3 0.99 2013F 20,025.6 5,405.0 3,383.0 4,272.8 4,272.8 26.8 11.8 1.8 7.6 5.5 21.3 17.5 16.4 16.1 4,348.2 0.98 2014F 20,907.2 5,637.1 3,615.1 4,572.2 4,572.2 28.6 11.0 1.7 7.3 5.9 21.9 16.3 17.1 16.3 4,779.7 0.96
BUY
(Maintained) Share Price Target Price Upside (Previous TP S$3.16 S$3.48 +10.1% S$3.16)
Company Description
SingTel is a leading communications group with significant presence in Singapore and Australia. SingTel owns stakes in six regional mobile associates, namely Bharti Airtel, Telkomsel, Advanced Info Service (AIS), Globe Telecom, Warid Telecom and Pacific Bangladesh Telecom.
Stock Data
GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg t'over (US$m): Telecommunicati on Services ST SP 15,936.2 50,358.5 40,985.2 50.9 S$3.32/S$2.85 1yr YTD 3.9 3.6 % 54.7 1.61 0.30
Price Performance
52-week high/low 1mth 3mth (1.6) 4.6 6mth 3.6
Major Shareholders
Temasek Hldgs FY12 NAV/Share (S$) FY12 Net Debt/Share (S$)
Price Chart
(lcy) 3.40
SINGAPORE TELECOM LTD Singapore Telecom Ltd/FSSTI Index
(%) 110
3.20 100 3.00
2.80 90 2.60
2.40 60 40 20 0 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Volume (m)
80
Jul 11
Source: Bloomberg
Analyst
Jonathan Koh, CFA +65 6590 6620 jonathankoh@uobkayhian.com
Source: SingTel, Bloomberg, UOB Kay Hian
Company Name 2 Refer to last page for important disclosures.
17
Cloud Computing Initiatives

SingTel is the most ardent promoter of cloud services among the three local telcos in Singapore: a) SingTel has launched PowerOn Compute in collaboration with VMWare, a leader in virtualisation technology recently acquired by EMC. PowerOn Compute is a hybrid cloud solution that allows companies to expand their private cloud infrastructure into the formers secure public cloud infrastructure. b) SingTel offers a full suite of IP VPN services with different levels of service level guarantees (SLG). Its Meg@POP offers IP VPN connections at symmetrical speed of up to 100Mbps at a subscription charge of S$500/month. c) SingTel offers a wide range of SaaS applications through myBusiness online portal, such as Intuits QuickBooks and Googles ONEOffice. d) SingTel is the largest provider of data centre space of over 500,000sf, almost half the total available in Singapore. e) SingTel provides end-to-end IT solutions through NCS. Its IT&E business accounted for 24% of Singapore revenue in FY11. Figure 1: Cloud Computing
Source: SingTel
Figure 2: Contribution From Data Services

(S$m) 300 250 200 150 100 50 0 1Q07 1Q08 1Q09 1Q10 Managed Services Others 1Q11 Local Leased Circuits International Leased Circuits
Source: SingTel
18
Singapore Telecommunications
Figure 3: Wireless Broad Subscriber Base*

('000) 900 800 700 600 500 400 300 200 100 0 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
* Includes data plans for smartphones (bundled), BlackBerry, laptops and tablets. Source: SingTel
Other Updates
Optus inks deal with NBN. SingTel Optus (Optus) has reached a landmark agreement with NBN Co. Optus will migrate its customers to the National Broadband Network (NBN) once the network is rolled out and is ready to provide services to customers. Optus estimates the total value of the agreement at A$800m on a post-tax net present value basis. The initial migration to NBN infrastructure will commence in 2014 and is expected to take up to four years to be completed. Optus will receive payments progressively on migration. The NBN project could level the playing field for Optus to provide fixed network services for both consumers and corporations. The deal with NBN Co is subject to approval from the Australian Competition and Consumer Commission (ACCC). Operating environment turning more favourable in India. Pricing pressure in mobile communications has eased after competitors depleted their financial resources, having put in expensive bids during the recent auction for 3G spectrum. Average revenue per minute has stabilised at about Rs0.44 over the past four quarters. Bharti Airtels share price rallied by 11.6% in 1H11, which enhanced our SOTP valuation by 1.8%. India is expected to relax rules on mergers & acquisitions (M&A) in the telecommunications industry. There are 9-14 mobile operators in each of the 22 service areas in India. M&A could be allowed if there are at least six players in any specific service area. Under existing rules formulated in 1999, a telco cannot hold a stake of more than 10% in another company operating in the same service area. The new national telecommunications policy is expected by end-11.
19
Figure 4: Average Revenue Per Minute Bharti Airtel

(Paisa) 90 85 80 75 70 65 60 55 50 45 40 Mar 07
Mar 08
Mar 09
Mar 10
Ma -11
Source: Bharti Airtel
Consolidation in the Philippines. Philippines Long Distance Telephone (PLDT) has agreed to acquire JG Summits 51.6% stake in Digitel and convertible bonds issued by Digitel for Php69.2b through a share swap. Digitel owns Sun Cellular and PLDT will control 70% of the mobile market in the Philippines post acquisition. PLDT plans to combine the two networks and reap cost savings from co-location of base stations, consolidation of overlapping technical systems and bulk purchase of network equipment and mobile devices. The transaction is expected to be completed in Jul 11. Rationality in pricing could return with the consolidation to just two mobile operators. Globe Telecom contributed S$188m or 9.3% of earnings from regional mobile associates and 3.8% of SingTels group pre-tax profit in FY11. Globe Telecom accounted for 2.8% of our SOTP valuation for SingTel. Telkom intends to fully own Telkomsel. Indonesias state-owned Telkom plans to increase its stake in subsidiary Telkomsel from 65% to 100% by acquiring SingTels 35% stake in Telkomsel. The move aims to improve Telkoms profitability. The plan is said to have been initiated by the Indonesian government, which owns 52.5% of Telkom, and was approved by shareholders during Telkoms recent AGM. Telkom was instructed to conduct a feasibility study before entering into a discussion with SingTel. Talks with SingTel are expected to be concluded by end-11. This could evolve to become a setback for SingTels regional ambition if it is compelled in any way to divest its stake in Telkomsel. Telkomsel contributed S$850m or 41.9% of earnings from its regional mobile associates and 17.1% of SingTels group pre-tax profit in FY11. Telkomsel accounted for 14.1% of our SOTP valuation for SingTel.
20
Figure 5: Earnings Contribution From Regional Mobile Associates

(S$m) 700 600 500 400 300 200 100 0 1Q07 1Q08 1Q09 1Q10 1Q11
Source: SingTel
Figure 6: SingTels Regional Footprint
Source: SingTel
Slower growth in FY12. SingTel has guided low single-digit growth for operations in Singapore and Australia for FY12. EBITDA is expected to grow at a low singledigit rate for Australia but to remain relatively unchanged for Singapore. Management has guided for a capex of S$900m for Singapore and A$1.2b for Australia. Upped dividend payout. SingTel has increased its dividend payout ratio to 55-70% of underlying net profit, from the previous 45-60%. SingTel has closed the gap in dividend yield with M1 and StarHub. It plans to review its need for cash on a threeyear basis and return surplus cash to shareholders via special dividends.
21
Valuation
Valuation is attractive. SingTel will be trading at the bottom end of its trading band once the stock goes ex-dividend (9 cents final dividend and 10 cents special dividend) on 5 August. Valuation is attractive after share price retracement and underperformance in 1H11. We have raised our earnings forecast for FY12 by 0.5% and FY13 by 1.8% due to the positive impact from cloud computing on managed services and post-paid mobile ARPU. Reiterate BUY. We maintain BUY recommendation for SingTel based on our SOTP valuation at S$3.48. The higher valuation was due to: a) a slightly lower discount rate of 8.0% instead of 8.5% to value Singapore operations and Optus, b) the rally in the share price of Bharti Airtel, and c) gradual increase in post-paid ARPU due to impact from cloud services. Key assumptions in our valuation include: a) We value SingTel and Optus using DCF with required rate of return at 8.0% (risk-free rate at 2.5% and equity risk premium at 5.5%). We have assumed beta of 1.0x and zero terminal growth. b) We used current market prices to value SingTels investments in associate companies Bharti Airtel, Advanced Info Service (AIS), Globe Telecom and SingPost. c) We applied FY11 EV/EBITDA of 6.0x to value SingTels 35% stake in Telkomsel. d) We assumed SingTel sells 75% of AssetCo, which owns passive infrastructure leased to network company (NetCo) OpenNet, at S$2.0b three years later. Figure 7: SOTP Valuation
Share Price (lcy) SingTel & Optus Associated Companies Bharti Airtel Telkomsel Globe Telekom Advanced Info Service SingPost Other Associated Companies Divest 75% stake in AssetCo Net Debt at end-FY12 Valuation of SingTel Group Target Price (S$): n.a. 400.30 n.a. 875 102.00 1.16 n.a. n.a. Valuation (lcy) 32,239 486,445 54,246 54,367 63,540 572 850 1,286 Exchange Rate 1.00 36.24 6,950 35.10 24.75 1.00 1.00 1.00 (S$m) 32,239 13,424 7,805 1,549 2,567 572 850 1,286 (4,853) 55,439 3.48 Remarks Based on DCF. Based on latest share price. Based on 2010 EV/EBITDA of 6.0x. Based on latest share price. Based on latest share price. Based on latest share price. Based on DDM. Assume assets sold at S$2b in three years.
Divided by 15,934.8m shares
Figure 8: Peer Comparison

Company SingTel M1 StarHub Average: Ticker ST SP M1 SP STH SP Rec BUY BUY BUY Price 30 Jun (S$) 3.16 2.53 2.79 Target Price (S$) 3.48 2.89 3.06 Market Cap (US$m) 40,975 1,866 3,893 FY 03/2011 12/2010 12/2010 -------- PE -------FY10 FY11F (x) (x) 13.2 14.5 18.2 15.3 12.7 13.2 17.1 14.3 EV/EBITDA FY10 FY11F (x) (x) 8.2 6.0 6.5 6.9 7.9 5.8 6.1 6.6 ROA FY11F (%) 9.9 18.4 16.0 14.8 Yield FY11F (%) 5.1 6.1 7.2 6.1
22
Company Background
SingTel is a leading communications group with a significant presence in Singapore and Australia. It provides a comprehensive suite of services including voice, data, wireless, internet, satellite platforms and pay TV (mio TV). SingTel was the sole provider of fixed-line national, international and mobile services in Singapore before the full liberalisation of the telecommunications industry in Apr 01. It remains the largest player for mobile and fixed network services in Singapore. SingTel expanded aggressively overseas and acquired Cable & Wireless Optus for A$14b in 2001. Optus is the second-largest communications group in Australia and provides a broad range of services including mobile, local, national and longdistance telephony, fixed network services, internet and satellite services and subscription television. SingTel owns stakes in six regional mobile associates, namely Bharti Airtel, Telkomsel, AIS, Globe Telecom, Warid Telecom and Pacific Bangladesh Telecom. SingTel as a group, including its regional mobile associates, had a total of 402.5m mobile subscribers as at Mar 11. SingTel acquired NCS in 2001 and SCS in 2008 to build up its IT&E business. SingTel was listed on the Singapore Exchange (SGX) Mainboard in Oct 93. It is the largest company by market capitalisation listed on SGX. SingTel derived 78% of proportionate EBITDA from outside Singapore in 4QFY11. Figure 10: Segmental Breakdown Proportionate EBITDA (4QFY11)
Others 1%
Optus 65% Singapore 35%
Figure 9: Segmental Breakdown Revenue (4QFY11)
Singapore 22% Regional Mobile 43% Optus 34%
Source: SingTel, UOB Kay Hian
Source: SingTel, UOB Kay Hian
Figure 11: Bridge Alliance
23
Figure 12: Profit & Loss

Year to 31 Mar (S$m) Revenue, net Operating expenses EBIT Other non-operating income Associate contributions Net interest income/(expense) Exceptional items Pre-tax profit Tax Minorities Net profit(rep./act.) Net profit(adj.) Deprec. & amort. EBITDA Per share data (S$ cent) EPS - diluted Reported EPS - diluted Book value per shares (BVPS) Dividend per share (DPS) Source: SingTel, UOB Kay Hian 2010 16,871.0 (13,997.0) 2,874.0 70.0 2,410.0 (309.0) (2.0) 5,043.0 (1,136.0) 1.0 3,908.0 3,910.0 1,878.0 4,752.0 2011 18,071.6 (15,049.9) 3,021.7 150.8 2,140.4 (344.3) 24.3 4,992.9 (1,169.5) 2.8 3,826.2 3,801.9 1,968.6 4,990.3 2012F 19,274.8 (16,098.9) 3,175.9 84.0 2,158.0 (330.0) 0.0 5,087.9 (1,112.2) 0.0 3,975.7 3,975.7 2,022.0 5,197.9 2013F 20,025.6 (16,642.7) 3,383.0 84.0 2,345.2 (330.0) 0.0 5,482.2 (1,209.4) 0.0 4,272.8 4,272.8 2,022.0 5,405.0 2014F 20,907.2 (17,292.1) 3,615.1 84.0 2,503.5 (330.0) 0.0 5,872.6 (1,300.4) 0.0 4,572.2 4,572.2 2,022.0 5,637.1
24.5 24.5 147.5 14.2
23.8 24.0 152.8 25.8
24.9 24.9 161.5 16.2
26.8 26.8 170.9 17.4
28.6 28.6 180.9 18.7
Figure 13: Balance Sheet

Year to 31 Mar (S$m) Cash/Near cash equiv. Accounts receivable/debtors Stocks Other current assets Current assets Fixed assets Investments Other financial assets Intangible assets Other non-current tangible assets Total non-current assets Total assets Accounts payable/creditors Short-term debt/borrowings Other current liabilities Current liabilities Long-term debt Other non-current liabilities Total non-current liabilities Total liabilities Minority interest - accumulated Shareholders' equity Liabilities and shareholders' funds Source: SingTel, UOB Kay Hian 2010 1,614.0 3,172.0 346.0 13.0 5,145.0 10,750.0 10,668.0 176.0 10,200.0 1,014.0 32,808.0 37,953.0 4,650.0 1,528.0 657.0 6,835.0 5,351.0 2,250.0 7,601.0 14,436.0 23.0 23,493.0 37,952.0 2011 2,738.0 3,449.0 299.0 69.0 6,555.0 11,113.0 10,506.0 0.0 10,218.0 890.0 32,727.0 39,282.0 4,450.0 2,699.0 1,392.0 8,541.0 4,587.0 1,805.0 6,392.0 14,933.0 20.0 24,329.0 39,282.0 2012F 2,432.9 3,808.8 435.3 0.0 6,677.1 11,491.0 11,793.0 0.0 10,218.0 926.1 34,428.2 41,105.2 4,897.1 2,699.0 1,407.9 9,004.0 4,587.0 1,771.7 6,358.7 15,362.7 22.0 25,720.5 41,105.2 2013F 2,526.2 3,952.9 451.8 0.0 6,930.9 11,469.0 13,267.3 0.0 10,218.0 963.7 35,918.0 42,848.9 5,082.4 2,699.0 1,424.5 9,205.8 4,587.0 1,818.1 6,405.1 15,610.9 22.0 27,216.0 42,848.9 2014F 2,578.1 4,132.6 472.3 0.0 7,183.0 11,447.0 14,899.8 0.0 10,218.0 1,002.9 37,567.7 44,750.7 5,313.3 2,699.0 1,441.7 9,454.0 4,587.0 1,871.4 6,458.4 15,912.4 22.0 28,816.3 44,750.7
24
Figure 14: Cash Flow

Year to 31 Mar (S$m) Operating cashflows Pre-tax profit Tax Deprec. & amort. Associates Working capital changes Others Cash from investing activities Capex (growth) Investments Proceeds from sale of assets Others Cash from financing activities Dividend payments Issue of shares Proceeds from borrowings Loan repayment Others/interest paid Net increase/(decrease) in cash Beginning cash Changes due to forex impact End cash Source: SingTel, UOB Kay Hian 2010 5,329.0 5,043.0 (370.0) 1,878.0 (2,410.0) (136.0) 1,324.0 (2,179.0) (1,923.0) (99.0) 17.0 (174.0) (2,634.0) (2,084.0) 11.0 0.0 (204.0) (357.0) 516.0 1,075.8 23.0 1,614.8 2011 6,043.0 4,992.9 (300.0) 1,968.6 (2,140.4) 15.0 1,506.9 (2,759.0) (2,005.0) (668.0) 24.0 (110.0) (2,141.0) (2,357.0) 7.0 840.0 (25.0) (606.0) 1,143.0 1,614.8 (20.0) 2,737.8 2012F 6,828.5 5,087.9 (320.0) 2,022.0 (2,158.0) (943.2) 3,139.8 (2,490.0) (2,400.0) 0.0 0.0 (90.0) (4,643.3) (4,273.3) 10.0 0.0 0.0 (380.0) (304.9) 2,737.8 0.0 2,432.9 2013F 5,236.5 5,482.2 (320.0) 2,022.0 (2,345.2) (345.8) 743.4 (2,090.0) (2,000.0) 0.0 0.0 (90.0) (3,053.2) (2,683.2) 10.0 0.0 0.0 (380.0) 93.2 2,432.9 0.0 2,526.2 2014F 5,382.7 5,872.6 (320.0) 2,022.0 (2,503.5) (430.1) 741.7 (2,090.0) (2,000.0) 0.0 0.0 (90.0) (3,240.7) (2,870.7) 10.0 0.0 0.0 (380.0) 52.0 2,526.2 0.0 2,578.1
Figure 15: Key Metrics

Year to 31 Mar (%) Growth Turnover EBITDA Pre-tax profit Net profit Net profit (adj.) EPS Profitability EBITDA margin EBIT margin Pre-tax margin Net margin ROE ROA ROIC RONTA Leverage Interest cover (x) Debt to total capital Debt to equity Net debt/(cash) to equity Current ratio (x) Source: SingTel, UOB Kay Hian 2010 13.0 9.5 15.1 13.3 11.6 11.6 2011 7.1 5.0 (1.0) (2.1) (2.8) (2.8) 2012F 6.7 4.2 1.9 3.9 4.6 4.6 2013F 3.9 4.0 7.7 7.5 7.5 7.5 2014F 4.4 4.3 7.1 7.0 7.0 7.0
28.2 17.0 29.9 23.2 17.8 11.0 6.0 14.2
27.6 16.7 27.6 21.2 16.0 9.9 6.1 13.5
27.0 16.5 26.4 20.6 15.9 9.9 6.4 13.6
27.0 16.9 27.4 21.3 16.1 10.2 6.4 13.2
27.0 17.3 28.1 21.9 16.3 10.4 6.6 12.9
15.4 22.6 29.3 22.4 0.8
14.5 23.0 29.9 18.7 0.8
15.8 22.1 28.3 18.9 0.7
16.4 21.1 26.8 17.5 0.8
17.1 20.2 25.3 16.3 0.8
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26
SINGAPORE
1 July 2011
Update
M1
Forging Ahead With LTE
Focuses on untapped SME market. M1 focuses on providing fibre broadband services for SMEs, enabling them to access cloud services. It will step up marketing efforts as coverage for Next Gen Nationwide Broadband Network (NGNBN) improves in 2H11. M1 inherited an active base of corporate and public sector customers when it acquired Qala Singapore, renamed M1 Connect, for S$14.9m in Sep 09. M1 Connect provides data centre services, such as co-location and shared hosting, and managed services, such as VOIP, wireless LAN, firewall services and mobile VPN. Forging ahead with LTE. M1 became the first telco in Southeast Asia to launch the long-term evolution (LTE) network in Jun 11. The new network provides downlink speed of 75Mbps and will be upgraded to 150Mbps by end12. It covers the CBD and is being expanded to provide nationwide coverage by 1Q12. M1 will initially focus on wireless broadband services for corporate customers using USB modems (known as dongles) priced at S$59.40/month. Usage of wireless broadband to access cloud-based enterprise applications and differentiated priority services will have a positive impact on post-paid mobile ARPU. M1 is a prime beneficiary as mobile communications accounted for 79.1% of operating revenue in 2010. Rewarding investors with regular special dividend. Management intends to regularly review M1s capital structure and could be gravitating towards smaller but more regular special dividends. M1 has a dividend policy of paying out 80% of net profit as ordinary dividends. The remaining 20% of net profit could be paid as special dividends if there is no urgent need for additional capex. Management foresees capex being reduced from S$100m to S$80m/year going forward as its backhaul transmission network is completed in 2010 and 2011. Gearing is low with net debt/EBITDA at 0.8x, below optimal level of 1.5x. Thus, M1 has the financial flexibility to dish out more special dividends. Reiterate BUY. Our target price for M1 is S$2.89 based on DCF (required rate of return: 8.0%, terminal growth: 0%).
Key Financials
Year to 31 Dec (S$m) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (S$ cent) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x) Source: M1 Ltd, Bloomberg, UOB Kay Hian 2009 783.5 309.9 181.8 150.5 150.5 16.8 15.0 8.8 8.3 5.3 19.2 102.1 47.7 62.8 2010 981.4 313.3 196.4 157.2 157.2 17.5 14.5 7.5 8.2 6.9 16.0 101.4 54.0 56.2 2011F 1,049.8 320.6 215.9 174.1 174.1 19.3 13.1 6.6 8.0 6.1 16.6 81.5 54.3 53.7 168.6 1.03 2012F 1,119.5 343.0 235.3 190.3 190.3 21.1 12.0 6.0 7.5 6.7 17.0 62.8 57.2 52.2 178.9 1.06 2013F 1,209.8 367.8 259.5 210.4 210.4 23.3 10.9 5.4 7.0 7.4 17.4 46.0 61.3 52.1 185.5 1.13
BUY
Company Description
M1 is the second licensed telecommunications service operator in Singapore.
Stock Data
GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg t'over (US$m): Telecommunication Services M1 SP 906.5 2,293.4 1,866.5 1.8
Price Performance
52-week high/low 1mth 3mth 4.1 6.5 6mth 9.2 S$2.55/S$2.07 1yr YTD 19.9 9.2 % 29.4 19.8 13.8 0.38 0.31
Major Shareholders
Khazanah Nasional Bhd Keppel T&T SPH FY11 NAV/Share (S$) FY11 Net Debt/Share (S$)
Price Chart
(lcy) 2.80
M1 LTD M1 Ltd/FSSTI Index
(%) 130
2.60
120
2.40
110
2.20
100
2.00
90
1.80 4 Volume (m) 2 0 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11
80
Jul 11
Source: Bloomberg
Analyst
27
Other Updates
Take-up for fibre broadband expected to improve in 2H11. 16,000 subscribers have taken up fibre broadband services since the launch of NGNBN in Sep 10 and M1 has a market share of about one third. M1 is restricted to a small addressable market due to the gradual pace of roll-out for NBNGN. Management intends to step up marketing efforts as coverage for NGNBN improves in 2H11. Moving ahead to LTE. M1 became the first telco in Southeast Asia to launch LTE in Jun 10. LTE is designed for efficient carriage of data traffic. The new network provides downlink speed of 75Mbps and will be upgraded to 150Mbps by end-12. It currently covers the CBD and is being expanded to provide nationwide coverage by 1Q12. M1 awarded a five-year S$280m turnkey contract for LTE to China-based Huawei Technologies. The LTE network will be able to handle rich multimedia content, such as video conferencing, transmission of high-definition content and social network updates. M1 will initially focus on wireless broadband services for corporate customers using USB modems (known as dongles) priced at S$59.40/month. Additional capacity caters for growth. M1 has secured one lot of 1800MHz spectrum for S$21.7m, beating competing bids from StarHub and SingTel. The additional bandwidth will boost M1s network capacity to cope with the rise in data traffic. It can be utilised for 3G, 4G or wireless broadband services. The new spectrum will last for six years and expire in Mar 17. We estimate amortisation charges at S$0.9m per quarter. Sibling rivalry. Keppel Transportation & Telecommunications (KT&T), which owns a 19.8% stake in M1, operates 150,000sf of data centre in Singapore and offers business continuity and disaster recovery services. There is duplication with KT&T and M1 Connect competing in data centre services. Although KT&T has more data centre space, it is handicapped and not able to bundle data centre services with network connectivity. M1 is well positioned to acquire KT&Ts data centres should the latter decide to streamline its telecommunications business.
28
M1
Figure 1: Contribution From Fixed Network Services

(S$m) 8 7 6 5 4 3 2 1 0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
Source: M1
Figure 2: Wireless Broadband Subscriber Base*

('000) 600 500 400 300 200 100 0 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11
* Includes data plans for smartphones (bundled), BlackBerry, laptops and tablets. Source: M1
Figure 3: Comparison of Data Plans for iPad 2

(2-year Contract) Plan Data Bundle (GB) Maximum Downlink Speed (Mbps) Monthly Subscription (S$) iPad 2 16GB WiFi + 3G (S$) Total Cost Over Two Years (S$) SingTel Mobile BroadBand Priority 7.2 Cap at 50GB* 7.2 40.00 399.00 879.00 (Minimum) StarHub iPad MaxMobile Ultimate Unlimited 7.2 40.02 399.00 879.24 M1 Data Unlimited Plan Unlimited 7.2 40.00 399.00 879.00
* Excess charge of $0.001/2KB with minimum charge of $0.005 per data session but total bill capped at S$94.16/month. Source: Various companies
Figure 4: M1s HomePac Fibre Broadband Plans

Maximum Downlink Speed (Mbps) Monthly Subscription (S$) 25Mbps 39.00 25Mbps 49.00 25Mbps 59.00 25Mbps 79.00 25Mbps 99.00 25Mbps 399.00
Source: Various companies
Figure 5: Milestones for NGNBN Network Coverage

31 Dec 10 30 Jun 12 Jan 13 60% 95% Universal Service Obligations: NetCo and OpCo to meet all reasonable requests for services at any location.
Source: iDA
M1
29
Valuation
We like M1 because of: a) sustainable growth in the mobile business which is the mainstay of earnings, b) capex moderation and low gearing support regularity in paying special dividends, and c) bundling of multiple services which helps M1 improve customer retention. We have raised our net profit forecast for 2012 by 2.3% and 2013 by 4.6% due to the positive impact of cloud computing on post-paid mobile ARPU. M1 provides 2011 dividend yield of 6.1%. If 20% of forecast net profit is paid out as special dividends, M1s dividend yield would improve to 7.6%. Maintain BUY. Our target price for M1 is S$2.89 based on DCF (required rate of return: 8.0%, terminal growth: 0%). We have used a slightly lower required rate of return of 8.0% instead of 8.5% due to: a) renewed emphasis on value stocks with strong free cash flow as a result of moderation in economic growth, and b) cloud computing enhancing the economic role of telcos to corporations and consumers. Key assumptions to our valuation include: a) b) c) Using a discount rate of 8.0%, with risk-free rate at 2.5% and equity risk premium at 5.5%, Beta at 1.0x, and Assumed 0% terminal growth.
Figure 6: Peer Comparison

Price Company Ticker Rec 30 Jun 11 (S$) SingTel M1 StarHub Average: ST SP M1 SP STH SP BUY BUY BUY 3.16 2.53 2.79 Target Price (S$) 3.48 2.89 3.06 Market Cap (US$m) 40,975 1,866 3,893 03/2011 12/2010 12/2010 FY --------- PE -------FY10 (x) 13.2 14.5 18.2 15.3 FY11F (x) 12.7 13.2 17.1 14.3 EV/EBITDA FY10 (x) 8.2 6.0 6.5 6.9 FY11F (x) 7.9 5.8 6.1 6.6 ROA FY11F (%) 9.9 18.4 16.0 14.8 Yield FY11F (%) 5.1 6.1 7.2 6.1
30
M1
Company Background
M1 is the second licensed telecommunications service operator in Singapore. It commenced commercial operations in Apr 97 with the launch of its GSM network. It began offering 3G services in Feb 05 and upgraded its 3G network to HSPA to support wireless broadband services in Dec 06. M1 offers mobile and fixed-line customers with IDD services using prefixes 002 and 021. It also sells international minutes to other international service providers on a wholesale basis. M1 and Vodafone entered into a partnership in 2003 whereby Vodafone and its partners customers will be seamlessly connected to M1s roaming services when travelling in Singapore. Similarly, M1s customers will utilise Vodafones roaming services across the latters global footprint. M1 is a member of Asia Mobility Initiative (AMI), along with other members such as Celcom in Malaysia, DTAC in Thailand, Excelcomindo in Indonesia, SmarTone-Vodafone in Hong Kong, SmarTone in Macau, IDEA Cellular in India and Sun Cellular in the Philippines. The alliance provides members customers with assured and seamless roaming experience. M1 aims to be the leader in personal voice and data communications, focusing on value, quality and customer service. It was listed on the Mainboard of the Singapore Exchange (SGX) in Dec 02. Figure 7: Revenue By Business (1Q11)
Handset Sales 28.4% Fixed Network Services 2.7% Int'l Call Services 12.5% Mobile 56.4%
Source: M1, UOB Kay Hian
Figure 8: Asia Mobility Initiative
Source: AMI
M1
31

Year to 31 Dec (S$m) Revenue, net Operating expenses EBIT Net interest income/(expense) Pre-tax profit Tax Net profit(rep./act.) Net profit(adj.) Deprec. & amort. EBITDA Per share data (S$ cent) EPS - diluted Reported EPS - diluted Book value per shares (BVPS) Dividend per share (DPS) Source: M1, UOB Kay Hian 2009 783.5 (601.7) 181.8 (6.5) 175.3 (24.8) 150.5 150.5 128.1 309.9 2010 981.4 (785.0) 196.4 (5.8) 190.6 (33.4) 157.2 157.2 116.9 313.3 2011F 1,049.8 (833.9) 215.9 (5.9) 210.0 (35.9) 174.1 174.1 104.6 320.6 2012F 1,119.5 (884.2) 235.3 (6.0) 229.3 (39.0) 190.3 190.3 107.8 343.0 2013F 1,209.8 (950.3) 259.5 (6.0) 253.5 (43.1) 210.4 210.4 108.3 367.8
16.8 16.8 28.6 13.4
17.5 17.5 33.7 17.5
19.3 19.3 38.2 15.4
21.1 21.1 42.3 16.9
23.3 23.3 46.8 18.7

Year to 31 Dec (S$m) Cash/Near cash equiv. Accounts receivable/debtors Stocks Other current assets Current assets Fixed assets Other financial assets Intangible assets Total non-current assets Total assets Accounts payable/creditors Short-term debt/borrowings Other current liabilities Current liabilities Long-term debt Deferred tax liability Total non-current liabilities Total liabilities Shareholders' equity Liabilities and shareholders' funds Source: M1, UOB Kay Hian 2009 7.4 100.8 25.4 7.1 140.7 611.4 0.8 84.6 696.8 837.5 153.0 269.0 71.7 493.7 0.0 87.7 87.7 581.4 256.1 837.5 2010 8.8 194.1 23.4 7.4 233.7 600.6 0.9 99.2 700.7 934.4 158.4 66.0 75.6 300.0 250.0 81.6 331.6 631.6 302.9 934.5 2011F 18.1 199.4 23.8 8.0 249.3 599.5 0.8 110.2 710.5 959.8 147.8 50.0 83.5 281.3 250.0 82.4 332.4 613.8 346.0 959.8 2012F 59.5 215.7 25.9 8.0 309.0 603.3 0.8 98.6 702.7 1,011.7 160.9 50.0 83.5 294.4 250.0 84.1 334.1 628.5 383.3 1,011.7 2013F 104.9 233.5 28.1 12.0 378.5 606.6 0.8 87.0 694.4 1,072.9 175.1 50.0 87.5 312.6 250.0 85.8 335.8 648.4 424.5 1,072.9
32
M1
Figure 11: Cash Flow

Year to 31 Dec (S$m) Operating cashflows Pre-tax profit Deprec. & amort. Working capital changes Others Cash from investing activities Capex (growth) Proceeds from sale of assets Others Cash from financing activities Dividend payments Issue of shares Proceeds from borrowings Loan repayment Others/interest paid Net increase/(decrease) in cash Beginning cash End cash Source: M1, UOB Kay Hian 2009 222.0 175.3 128.1 (41.0) (40.4) (131.7) (119.0) 0.6 (13.3) (100.7) (119.9) 0.3 42.5 (23.5) (0.1) (10.4) 17.8 7.4 2010 187.4 190.6 116.9 (83.8) (36.3) (120.3) (99.9) 0.5 (20.9) (65.7) (121.2) 8.5 297.0 (250.0) 0.0 1.4 7.4 8.8 2011F 279.8 210.0 104.6 (17.2) (17.7) (114.4) (114.4) 0.0 0.0 (156.0) (140.0) 0.0 (16.0) 0.0 0.0 9.4 8.8 18.1 2012F 274.4 229.3 107.8 (5.4) (57.3) (80.0) (80.0) 0.0 0.0 (153.0) (153.0) 0.0 0.0 0.0 0.0 41.3 18.1 59.5 2013F 294.6 253.5 108.3 (1.8) (65.4) (80.0) (80.0) 0.0 0.0 (169.2) (169.2) 0.0 0.0 0.0 0.0 45.4 59.5 104.9

Year to 31 Dec (%) Growth Turnover EBITDA Pre-tax profit Net profit Net profit (adj.) EPS Profitability EBITDA margin EBIT margin Gross margin Pre-tax margin Net margin ROE ROA ROIC RONTA Leverage Interest cover (x) Debt to total capital Debt to equity Net debt/(cash) to equity Current ratio (x) Source: M1, UOB Kay Hian 2009 (2.3) (2.1) (5.3) 0.2 n.a. 0.2 2010 25.3 1.1 8.7 4.5 4.5 4.1 2011F 7.0 2.3 10.2 10.8 10.8 10.2 2012F 6.6 7.0 9.2 9.3 9.3 9.3 2013F 8.1 7.2 10.6 10.6 10.6 10.6
39.6 23.2 82.5 22.4 19.2 62.8 18.3 31.5 38.6
31.9 20.0 69.7 19.4 16.0 56.2 17.7 28.5 35.2
30.5 20.6 68.2 20.0 16.6 53.7 18.4 28.5 33.8
30.6 21.0 69.0 20.5 17.0 52.2 19.3 29.5 34.5
30.4 21.5 69.6 21.0 17.4 52.1 20.2 30.7 34.2
47.7 51.2 105.0 102.1 0.3
54.0 51.1 104.3 101.4 0.8
54.3 46.4 86.7 81.5 0.9
57.2 43.9 78.3 62.8 1.0
61.3 41.4 70.7 46.0 1.2
M1
33
34
M1
SINGAPORE
1 July 2011
Update
STARHUB
Potential Gains From Corporate Customers Already Anticipated
Active participant in cloud computing. StarHub will bundle Microsofts Office 365, which is scheduled for launch in 2H11, with its fixed broadband services for SMEs. It also works with partners to offer cloud solutions, including Hitachi Data Systems for backup and storage, JustLogin for e-HR management, KAI Square for video surveillance, Wincor-Nixdorf for POS solutions and Zscaler for web security. NGNBN levels playing field to reach corporate customers. StarHub leverages on Next Gen Nationwide Broadband Network (NGNBN) to offer fixed network services to corporate customers. It introduced Fibre 100Mbps (NextGen) broadband connectivity at a subscription charge of only S$268/month. It also offers Switched Ethernet Intelligent, an internet protocol virtual private network (IP VPN) service that allows companies to gain intranet connectivity and access the internet and cloud services. With NGNBN, StarHubs addressable market has expanded from 800 commercial buildings within the CBD to more than 20,000 island-wide. But progress is slow. The rollout for NGNBN has been gradual and slower than anticipated. For areas that are already fibred up, existing contracts with incumbent SingTel need to expire before StarHub can step in. We have, thus, lowered our expectations of revenue growth for fixed network services from 17.4% to 12.3% in 2012. Capital management in 2012 or 2013. StarHub adopts a three-year view when deciding the level of dividend payout. Dividend of S$0.05/quarter is sustainable as it generates free cash flow (FCF) of S$390m pa on average against dividend payout of S$340m. Gearing is low with net debt/EBITDA at 0.8x, below the optimal level of 1.5-2.0x. Management could look into capital management through capital reduction in 2012 or 2013 given that the last capital management exercise was in 2007, which is more than four years ago. Maintain BUY. Our target price for StarHub is S$3.06 based on DCF (required rate of return: 8.0%, terminal growth: 0%).
Key Financials
Year to 31 Dec (S$m) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (S$ cent) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x) 2009 2,150.1 653.4 408.3 319.5 319.5 18.6 15.0 38.0 8.2 6.8 14.9 525.9 28.0 273.2 2010 2,237.6 598.8 339.3 260.3 260.3 15.1 18.4 88.5 9.0 7.2 11.6 1,051.7 24.2 289.5 2011F 2,254.8 639.9 363.5 279.1 279.1 16.2 17.2 63.0 8.4 7.2 12.4 764.4 30.6 429.7 304.1 0.92 2012F 2,340.4 673.9 401.2 311.5 311.5 18.1 15.4 107.7 8.0 7.2 13.3 1,257.0 31.6 517.9 329.2 0.95 2013F 2,481.8 722.8 460.4 360.0 360.0 20.9 13.3 77.9 7.4 7.2 14.5 804.1 33.8 680.8 350.1 1.03
(lcy) 3.00
STARHUB LTD Starhub Ltd/FSSTI Index
BUY
Company Description
StarHub is a quad-play telecommunications service operator. It offers mobile, pay TV, broadband and fixed network services for both consumer and corporate markets.
Stock Data
GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg t'over (US$m): Telecommunication Services STH SP 1,714.7 4,784.0 3,893.5 4.3 S$2.88/S$2.29 1yr YTD 23.5 6.1 % 49.1 10.0 7.5 0.04 0.34
Price Performance
52-week high/low 1mth 3mth 0.0 3.3 6mth 6.1
Major Shareholders
Asia Mobile Hldgs NTT Communications Aranda Investments FY11 NAV/Share (S$) FY11 Net Debt/Share (S$)
Price Chart
(%) 130
2.80
120
2.60 110 2.40 100
2.20
2.00 10 Volume (m) 5 0 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11
90
Jul 11
Source: Bloomberg
Analyst
Source: StarHub Ltd, Bloomberg, UOB Kay Hian
35
Cloud Computing Initiatives

StarHub has actively serviced corporate customers since being awarded the licence to provide fixed network services in Apr 00. It aims to be a trusted service provider for info-communications services: a) StarHub partners Datacraft Asia to provide business solutions covering converged communications, business continuity services and managed solutions to companies across 13 Asian countries and the US. StarHub will provide international connectivity and internet connections, which complement Datacrafts expertise in system integration. b) StarHub will bundle Microsofts Office 365 with its fixed broadband services for SMEs. Office 365 comprises of Office, SharePoint, Exchange and Lync and is scheduled for launch in 2H11. StarHub works with partners to offer cloud solutions, including Hitachi Data Systems for backup and storage, JustLogin for e-HR management, KAI Square for video surveillance, Wincor-Nixdorf for POS solutions and Zscaler for web security. These bundled solutions are available on both StarHubs fixed network and NGNBN. c) StarHub has launched various new services targeted at corporate customers since NGNBN commenced operations. It introduced Fibre 100Mbps (NextGen) broadband connectivity at subscription charge of only S$268/month. It also offers Switched Ethernet Intelligent, an IP VPN service allowing companies to gain intranet connectivity and access the internet and cloud service providers. The product serves as a potential replacement for traditional leased line services. d) StarHub has existing data centre facilities located at Tai Seng Drive and Ayer Rajah Crescent and will consider further expansion in data centres.
Other Updates
Growth from fixed network services. StarHub has a 20% market share for fixed network services within the CBD. Its addressable market for fixed network services will expand from 800 commercial buildings within the CBD to more than 20,000 on an islandwide basis riding on infrastructure provided by NGNBN. StarHub targets to garner a market share of 30% on an islandwide basis with NGNBN progressively creating a level playing field in fixed network services. The government intends to utilise NGNBN for a substantial portion of its requirement for telecommunications services. Many schools, army camps and government offices are located outside the CBD and are reliant on fixed network services provided by SingTel. StarHub is well positioned to secure contracts from government ministries and statutory boards as its wholly-owned subsidiary Nucleus Connect (NC) is the official Operating Company (OpCo) for NGNBN. Growth in fixed network services came mainly from increased interconnection revenue from international carriers in 2010. Management expects more progress in fixed network services at end-11. StarHub has beefed up its SME team to target areas that are already fibred up. However, existing contracts with SingTel need to expire before StarHub can step in.
36
StarHub
Enhancing international connectivity. StarHub is member of the 19-member consortium that built the 20,000km Asia-America Gateway (AAG), an optical fibre submarine cable system linking Southeast Asia to the US. This is a major milestone for StarHub to be able to manage and operate the Singapore link of AAG, which is its first cable landing station that commenced operations in Jan 10. Having its own landing stations allows StarHub to penetrate international leased circuits and international IP VPN markets. StarHub subsequently joined Asia Submarine-Cable Express (ASE), which is expected to commence operations by 3Q12. Figure 1: Contribution From Data & Internet
(S$m) 80 60 40 20 0 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Source: StarHub
Continuing to invest in 2011. Management has guided single-digit revenue growth and EBITDA margin of about 30% for 2011. Capex is expected to remain high due to the roll-over of capex for NGNBN from 2010 to 1H11 and upgrading of mobile network infrastructure. Management expects that capex will not exceed 13% of operating revenue. StarHub intends to maintain dividend at 5 cents/quarter or 20 cents/year, thus providing an attractive dividend yield of 7.2%. Normalisation in capex starting 2012. Capex is expected to revert to the usual range of 9-10% of operating revenue from 2012 onwards. Management expects its LTE network to be ready by end-11 and commercial operations to commence in early-12. Capex for LTE is minimal as its base stations are already LTE-compatible and only requires installation of plug-in cards and software switches. StarHub intends to utilise its existing 1800MHz spectrum slot for LTE.
StarHub
37
Valuation
We cut our net profit forecast for 2011 by 3.4% and 2012 by 6.0% due to the gradual pace of roll-out for NGNBN, which limits revenue growth for fixed network services. Maintain BUY. Our target price for StarHub is S$3.06 based on DCF (required rate of return: 8.0%, terminal growth: 0%). We have used a slightly lower required rate of return of 8.0% instead of 8.5% due to: a) renewed emphasis on value stocks with strong FCF as a result of moderation in economic growth, and b) cloud computing enhancing the economic role of telcos to corporations and consumers. Key assumptions in our valuation include: a) Using a discount rate of 8.0%, with risk-free rate at 2.5% and equity risk premium at 5.5%, b) Beta at 1.0x, c) Assumed terminal growth of 0%. StarHub offers the highest dividend yield of 7.2%. However, upside is limited compared to SingTel and M1 as we believe earnings contribution from expansion in fixed network services has already been partially factored into its current share price. StarHub outperformed SingTel by 3.6% in 1H11. Figure 2: Peer Comparison
Price Company Ticker Rec 30 Jun (S$) SingTel M1 StarHub Average: ST SP M1 SP STH SP BUY BUY BUY 3.16 2.53 2.79 Target Price (S$) 3.48 2.89 3.06 Market Cap (US$m) 40,975 1,866 3,893 03/2011 12/2010 12/2010 FY -------- PE -------FY10 (x) 13.2 14.5 18.2 15.3 FY11F (x) 12.7 13.2 17.1 14.3 EV/EBITDA FY10 (x) 8.2 6.0 6.5 6.9 FY11F (x) 7.9 5.8 6.1 6.6 ROA FY11F (%) 9.9 18.4 16.0 14.8 Yield FY11F (%) 5.1 6.1 7.2 6.1
38
StarHub
Company Background
StarHub is an integrated telecommunications service operator offering information, communications and entertainment services for both consumer and corporate markets. It launched mobile services in Apr 00. It operates a 3G mobile network that delivers maximum downlink speed of 21Mbps, which complements its GSM network, and is well-known for innovative features such as per second billing, free incoming calls and airtime rollover. StarHub acquired Singapore Cable Vision, which was renamed SCV in Jul 02. SCV operates an islandwide hybrid fibrecoaxial (HFC) network delivering multi-channel pay TV services, including highdefinition television and on-demand services. It also offers high-speed residential broadband services through its HFC network. StarHub operates an optical fibre network connecting over 800 commercial buildings within the CBD. It provides wholesale and business customers with domestic and international leased circuits, exchange lines, Ethernet services, frame relay, ATM, corporate broadband and IP VPN through the fixed network. StarHubs optical fibre network also supports its mobile, pay TV and broadband businesses. Its optical fibre network is connected to its cellular base stations through digital microwave links for backhaul transmission. StarHub also utilises its fixed network to deliver pay TV and broadband services to corporate customers residing within the CBD. StarHub pioneered Hubbing to deliver integrated and converged services. Hubbing allows StarHub to realise multiple revenue streams while generating greater customer satisfaction and lower churn. StarHub was listed on the Mainboard of the Singapore Exchange (SGX) in Oct 04. Figure 3: Revenue By Business (1Q11)
Sale of Equipment 5.0% Mobile 52.9%
Fixed Network Services 15.0% Broadband 10.7% Cable - Pay TV 16.4%
Source: StarHub, UOB Kay Hian
Figure 4: Conexus Mobile Alliance
Source: Conexus Mobile Alliance
StarHub
39

Year to 31 Dec (S$m) Revenue, net Operating expenses EBIT Net interest income/(expense) Pre-tax profit Tax Net profit(rep./act.) Net profit(adj.) Deprec. & amort. EBITDA Per share data (S$ cent) EPS - diluted Reported EPS - diluted Book value per shares (BVPS) Dividend per share (DPS) Source: StarHub, UOB Kay Hian 2009 2,150.1 (1,741.8) 408.3 (23.3) 385.0 (65.5) 319.5 319.5 245.1 653.4 2010 2,237.6 (1,898.3) 339.3 (24.7) 314.6 (54.3) 260.3 260.3 259.5 598.8 2011F 2,254.8 (1,891.4) 363.5 (20.9) 342.5 (63.5) 279.1 279.1 276.5 639.9 2012F 2,340.4 (1,939.2) 401.2 (21.4) 379.9 (68.4) 311.5 311.5 272.7 673.9 2013F 2,481.8 (2,021.4) 460.4 (21.4) 439.1 (79.0) 360.0 360.0 262.4 722.8
18.6 18.6 7.3 19.0
15.1 15.1 3.2 20.0
16.2 16.2 4.4 20.0
18.1 18.1 2.6 20.0
20.9 20.9 3.6 20.0

Year to 31 Dec (S$m) Cash/Near cash equiv. Accounts receivable/debtors Stocks Other current assets Current assets Fixed assets Other financial assets Intangible assets Total non-current assets Total assets Accounts payable/creditors Short-term debt/borrowings Other current liabilities Current liabilities Long-term debt Deferred tax liability Other non-current liabilities Total non-current liabilities Total liabilities Shareholders' equity Liabilities and shareholders' funds Source: StarHub, UOB Kay Hian 2009 234.2 241.5 28.2 22.6 526.5 785.1 5.3 415.7 1,206.1 1,732.6 573.5 290.4 61.6 925.5 605.4 61.2 14.7 681.3 1,606.8 125.8 1,732.6 2010 237.5 275.6 31.8 16.5 561.4 776.0 4.5 451.6 1,232.1 1,793.5 675.1 330.4 67.6 1,073.1 475.0 108.1 83.3 666.4 1,739.5 54.0 1,793.5 2011F 171.6 264.9 28.0 17.7 482.2 770.7 4.4 443.0 1,218.1 1,700.3 592.1 301.8 91.0 984.9 450.0 109.9 79.6 639.5 1,624.4 75.9 1,700.3 2012F 193.8 278.5 29.5 17.7 519.5 738.0 4.4 443.0 1,185.4 1,704.9 622.4 301.8 91.0 1,015.2 450.0 113.3 82.0 645.2 1,660.5 44.4 1,704.9 2013F 258.2 295.3 31.3 17.7 602.5 715.6 4.4 443.0 1,163.0 1,765.5 660.1 301.8 91.0 1,052.9 450.0 116.7 84.5 651.2 1,704.1 61.4 1,765.5
40
StarHub
Figure 7: Cash Flow

Year to 31 Dec (S$m) Operating cashflows Pre-tax profit Deprec. & amort. Working capital changes Others Cash from investing activities Capex (growth) Proceeds from sale of assets Others Cash from financing activities Dividend payments Issue of shares Proceeds from borrowings Loan repayment Others/interest paid Net increase/(decrease) in cash Beginning cash End cash Source: StarHub, UOB Kay Hian 2009 692.4 385.0 245.1 32.6 29.7 (230.0) (231.4) 0.7 0.7 (356.6) (316.7) 2.4 200.0 (217.9) (24.4) 105.8 128.3 234.1 2010 669.6 317.6 259.5 63.5 29.0 (268.2) (272.1) 2.1 1.8 (398.1) (316.7) 2.2 200.0 (290.4) 6.8 3.3 234.1 237.4 2011F 622.3 345.5 276.5 (68.6) 68.8 (271.5) (271.5) 0.0 0.0 (416.6) (343.0) 2.0 (53.6) 0.0 (22.0) (65.9) 237.4 171.6 2012F 625.9 379.9 272.7 15.4 (42.1) (240.0) (240.0) 0.0 0.0 (363.6) (343.0) 2.0 0.0 0.0 (22.6) 22.3 171.6 193.8 2013F 668.0 439.1 262.4 19.0 (52.6) (240.0) (240.0) 0.0 0.0 (363.6) (343.0) 2.0 0.0 0.0 (22.6) 64.4 193.8 258.2

Year to 31 Dec (%) Growth Turnover EBITDA Pre-tax profit Net profit Net profit (adj.) EPS Profitability EBITDA margin EBIT margin Gross margin Pre-tax margin Net margin ROE ROA ROIC RONTA Leverage Interest cover (x) Debt to total capital Debt to equity Net debt/(cash) to equity Current ratio (x) Source: StarHub, UOB Kay Hian 2009 1.1 1.4 0.6 2.6 2.2 2.2 2010 4.1 (8.4) (18.3) (18.5) (18.5) (18.5) 2011F 0.8 6.9 8.9 7.2 7.2 7.2 2012F 3.8 5.3 10.9 11.6 11.6 11.6 2013F 6.0 7.3 15.6 15.6 15.6 15.6
30.4 19.0 89.3 17.9 14.9 273.2 18.8 33.6 45.3
26.8 15.2 86.0 14.1 11.6 289.5 14.8 30.3 41.0
28.4 16.1 85.7 15.2 12.4 429.7 16.0 35.6 44.4
28.8 17.1 86.7 16.2 13.3 517.9 18.3 41.0 48.1
29.1 18.6 87.1 17.7 14.5 680.8 20.7 47.4 49.8
28.0 87.7 712.1 525.9 0.6
24.2 93.7 1,491.5 1,051.7 0.5
30.6 90.8 990.4 764.4 0.5
31.6 94.4 1,693.6 1,257.0 0.5
33.8 92.5 1,224.8 804.1 0.6
StarHub
41
42
StarHub
Appendices
43
Appendix A: Introduction To Cloud Computing

WHAT IS CLOUD COMPUTING? Cloud computing is the latest catchphrase and is likened to an industrial revolution in information technology (IT). It has the potential to transform the world, profoundly changing the way people work and companies operate. Cloud computing is, nevertheless, an illusive term with many IT companies creating a marketing fog over its basic concepts. Cloud Used In Network Diagram To Depict Internet
Internet
Router
Switch
Loc al Are a Network (LAN)
Server Client Computers
Cloud computing revolves around the internet, which has traditionally been depicted as a cloud in network diagrams. It refers to IT services that are delivered over internet connections. The services or applications, encompassing software and associated databases, reside at another physical location, usually a data centre. Similarly, distributed servers running these services are not co-located. The heavy lifting of processing and storing data is undertaken by distributed servers and data centres located off premises. Users can access these services using any desktop PCs, notebooks, smartphones or tablets through internet connections using web browsers. Google Mail is an example of a basic form of cloud computing. We access Google Mail through a web browser on our smartphones or tablets. The email application itself and the database of all our email correspondences do not exist on our computers but are delivered through the internet. The same applies to social networking sites such as Facebook and Twitter.
44
Cloud Computing Solution
Internet
Data Ce nters Client Computers
Distributed Servers
Paradigm shift in computing. Cloud computing represents a paradigm shift in the way software applications and IT infrastructure are delivered and consumed. Traditionally, large companies have to purchase hardware infrastructure and develop software applications and maintain these systems in-house. With cloud computing, software applications and hardware infrastructure are supplied by thirdparty providers and consumed on a pay-as-you-use basis. Pooling of resources in public clouds. In multi-tenanted or public clouds, thirdparty vendors provide a pool of computing resources located off premises, which are shared with the vendors other customers. Resources are dynamically allocated and may be hosted anywhere. VMWare estimates that server utilisation rates could improve from 5-15% to 60-80% with cloud computing. Increasing the number of tenants also lowers cost per tenant. Cloud computing is touted as a green technology as it promotes sharing of resources. Many large organisations are legally required to keep their servers, software and data within their own data centres. Private clouds enable them to achieve efficiencies by creating a cloud-like infrastructure in their own data centre while fulfilling their obligations to keep confidential information safe. It allows pooling and sharing of resources across different applications, departments and business units within the protection of a firewall. However, private clouds require higher upfront development cost, data centre costs and ongoing maintenance. The Facebook revolution. Mobile communications technologies, including highspeed packet access (HSPA) and long-term evolution (LTE), have brought cloudbased social networks Facebook and Twitter to mobile devices. The same transformation is evolving in corporate IT systems. Enterprise applications are similarly migrating to the clouds and are accessed using smartphones and tablets.
45
Evolution Of Computing Technologies

Technology Economic Business Model High up-front costs for hardware and storage
Mainframe
Centralised compute and storage Thin clients
Optimised for efficiency because of the high cost
Client/Server
PCs and servers for distributed compute, storage, and so on
Optimised for agility because of the low cost
Perpetual license for OS and application software
Cloud
Large data centres, ability to scale, commodity hardware and devices
Efficiency and agility an order of magnitude better
Ability to pay as you go, and only for what you use
Source: Microsoft
THREE SERVICE MODELS OF CLOUD COMPUTING Cloud computing allows computing to be disaggregated into components. It has three distinct layers, namely software, platform and infrastructure. The three ways to deploy cloud computing differs on the level of control over the way applications are created and used, and the types of hardware utilised. Three-layer Model of Cloud Computing
Software
(eg. spreadsheet)
Softw are
(eg. database)
Software
(eg. photo editor)
Build On
Platform
(software environment)
Build On Infrastructure
(physical hardware)
Software as a Service (SaaS). In cloud computing, software or application is webbased and can be assessed by any device with a web browser and access to the internet. SaaS applications are standard off-the-shelf with minimal customisation. The most popular SaaS applications are email, financial management (accounting), sales force automation and customer service. SaaS is well suited for individuals and SMEs with limited requirements for customisation.
46
Platform as a Service (PaaS). Platforms are purpose-built software development environments hosted on the internet. Users can access these tools to develop, test and deploy web-based applications, which ride on PaaS vendors cloud computing hardware. Technical programming knowledge is required and programmers are restricted to using only specific programming languages. PaaS vendors provide tools to speed up the programming process and also ensure that the programmes developed work seamlessly when migrated over to web servers. PaaS provides large corporations with greater flexibility to create customised applications but at the expense of higher costs. Infrastructure as a Service (IaaS). In cloud computing, hardware infrastructure, such as server, storage and bandwidth, are supplied by third-party providers. Besides physical hardware, IaaS vendors also provide related management and support functions, such as uninterrupted power supply, cooling system, backup, security and high-speed connections to the internet. IaaS allows companies to move their existing programmes and data into the clouds and close down their own local servers and data centres. Building Blocks Of Cloud Computing
Layer Characteristics Customers use vendor-determined applications on a take-it-or-leave-it basis. Available Services Intuit QuickBooks, Google Apps (Docs, Spreadsheet and Gmail), Microsoft Office Live Small Business and IBM Blue Cloud. Method of Billing Customers are charged based on number of users.
SaaS
PaaS
Customers use vendor-determined tools and infrastructure to create and run their own applications. Customers directly access vendor's cloud infrastructure to run applications of their own choosing.
Google App Engine, Salesforce.com and Microsoft Windows Azure.
Customers are charged based on usage and size of applications.
IaaS
GoGrid, Rackspace, Amazons Simple Storage Service (S3) and Amazons Elastic Compute Cloud (EC2).
Customers are charged based on usage of servers and storage.
47
VALUE PROPOSITIONS OF CLOUD COMPUTING On-demand service and broad network access. Users can access cloud services whenever and wherever they want. It does not matter where users are located as long as they have a device with a web browser and access to the internet. Scalability. Users can rapidly scale up and scale down based on their changing requirements throughout the peaks and troughs of business cycles. Scalability is also particularly important for start-ups and high-growth companies. Hardware assets and software licenses are not made redundant when a company downsizes. Pay-per-use billing. IT services are rented on a subscription basis. Monthly subscription payments are treated as operating expenditure and are variable in nature. There is no upfront capital expenditure for purchasing hardware or hefty software licensing fees. Cloud service providers automatically monitor and record resources usage and charge customers accordingly on a pay-per-use basis. Reduced IT management cost through outsourcing. Cloud computing allows companies to reduce administrative overheads involved in managing and maintaining IT infrastructure and software applications. Companies offload the administrative burden of procuring, installing and maintaining hardware, server operating system and application deployment to cloud service providers. Backing up data and disaster recovery are also the responsibility of cloud service providers. Offloading of non-core activities allows companies to focus on core competencies. Companies do not incur any additional cost to upgrade to the next version of software application or development platform. Cloud service providers have to constantly improve to ensure they remain competitive and relevant.
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OVERCOMING RESISTANCE TO CLOUD COMPUTING Security risks. Cloud services are accessible over the internet and are susceptible to security breaches. Former employees and contractors could continue to have access if accounts have not been deactivated. Hackers could also break into the system. Security breaches can be prevented by improving account management processes and imposing two-factor authentication. Chief Information Officers (CIOs) are concerned about theft of confidential information, such as credit card details, financial information, healthcare records and trade secrets. The concern is critical for public clouds located off premises where there is sharing of processing and storage facilities. It can, however, be argued that there is less risk of losing confidential data. In cloud computing, data is stored and controlled centrally in the clouds and security is not compromised when notebooks or tablets are stolen or lost. Vendor lock-in. Fear of being locked to a vendors cloud is a common fear among potential users of cloud computing solutions. The cloud computing era has just started and standards and best practices have not been established. Interoperability proposals are being made by many forum, task force and working group. Many cloud providers, including Cisco, IBM, Rackspace, Sun Microsystems and VMWare, support The Open Cloud Manifesto to promote choice, flexibility and openness in cloud computing. The choice of vendors for SaaS and PaaS is important to ensure they are financially stable and have progressive corporate culture to stay committed to customers and provide state-of-the-art solutions and services. Latency. In cloud computing, data is located off premises at any physical location. It takes some time for the data required to reach the user. Thus, cloud computing is not the ideal solution if data is required instantaneously.
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INCREASING ADOPTION OF CLOUD COMPUTING Gartner defines cloud computing as massively scalable IT provided as a service using internet technologies to multiple external customers. It projected that the global market for cloud services will grow from US$68.3b in 2010 to US$148.8b in 2014, representing a CAGR of 21.5%. Implementation has accelerated and many CIOs are making long-term strategic plans for deployment of cloud services. The financial services and manufacturing sectors are expected to be early adopters of cloud services. Cloud services provided by third-party vendors are estimated at 10.2% of spending on external IT services. According to a worldwide survey of 2,014 CIOs conducted by Gartner in 4Q10, 43% of CIOs expect the majority of IT applications to be running on cloud or SaaS technologies over the next four years compared with 3% now. Most CIOs expect introduction of cloud-based technologies to release 35-50% of infrastructure and operational resources. They intend to redeploy savings from adoption of cloud services for innovation and growth. Size Of SaaS, PaaS And IaaS Markets Enterprise Application Market
Source: Deloitte
Source: Deloitte
Main SaaS Segment Trends

Main Software Segments Content, Communications and Collaboration (CCC) Customer Relationship Management (CRM) Enterprise Resource Planning (ERP) Supply Chain Management (SCM) Digital Content Creation (DCC) SaaS Revenue* (US$b) 2008 2.2 1.8 1.3 0.8 0.1 2013 5.1 4.0 2.0 1.7 0.4 CAGR (%) 18.6 16.9 9.2 17.1 39.5 Share of SaaS of Total Enterprise Application Market (%) 2008 20 20 5 11 2 2013 26 30 6 16 9
*SaaS Revenue includes licenses, subscription, software maintenance and technical support services. Source: Gartner, Deloitte
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Companies are attracted to cloud-based enterprise applications as they are able to keep up with rapidly-expanding businesses, require only small upfront investment and incur lower recurring expenses. Initial concerns about security, response time, and service availability have diminished as SaaS computing models have matured and adoption becomes more widespread. Cloud Computing Adoption Curve
Companies Switching To The Cloud
Early Adopters Pioneers 2005 2010 2015
Late Adopters Laggards 2020 2025
We are at the start of a 10-year transition to cloud computing, potentially revamping the way IT services are delivered. Cloud computing is a revolutionary paradigm. It is a long-term trend with migration to the clouds to materialise over the next 10 years. According to Deloitte, SaaS market is projected to reach US$17.8b, which represents a CAGR of 17.2% in 2008-13. According to Gartner, SaaS revenue is expected to increase from 7.8% of the enterprise application software market in 2008 to 13.1% in 2013. PaaS and IaaS are expected to expand at a faster pace with CAGR of 51.6% and 53.6%, respectively in 2008-13 due to their current low bases.
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Appendix B: Cloud Strategies For Telcos

Telcos are beneficiaries of increasing adoption of cloud services. They are able to offer one-stop solutions by bundling cloud services with network connectivity, security and hosting services to reduce total cost of ownership and improve reliability for cloud service providers and corporate customers. There are various avenues for telcos to tap opportunities in cloud computing: Telcos could partner independent software vendors and leverage on their existing infrastructure to deliver SaaS applications. They can provide SaaS providers with hosting and data centre infrastructure. Telcos provide managed hosting services and help enterprises virtualise their data centre infrastructure through on-demand hosting. Telcos should also crosssell computing and storage as an integrated package. According to Cisco Systems, demand for cloud data centres would increase at a CAGR of 47.6% in 2010-13. Telcos help customers enjoy the benefits of public clouds and the security and reliability offered by private clouds. They improve security in the cloud environment by providing internet protocol virtual private network (IP VPN). IP VPN delivers data reliably and securely using an IP-based backbone like Multiprotocol Label Switching (MPLS) or Ethernet. According to IDC, demand for IP VPN would increase at a CAGR of 10.8% in 2010-14. Telcos provide fixed broadband for SMEs to access SaaS applications.
Telcos need to customise and differentiate their product offerings and service delivery. Those who are able to provide end-to-end cloud solutions on a regional basis and meet specific requirement, such as disaster recovery and enhanced security, would have an edge over competitors. Cloud Strategies For Telcos
Service Offerings
1. laaS should be the primary target Telcos should focus on niche highmargin laaS offerings 2. Selection of right SaaS strategy should be determined by the degree to which a telco wants to be involved in SaaS Hosting to support SaaS delivery Provide carrier-class data infrastructure, network connectivity and 24x7 monitoring 3. Operators should target specific industry segments requiring stringent Service Level Guarantees
Service Delivery
1. IP V PN should be the preferred delivery model for provisioning cloud services 2. Telcos should adopt the broker approach High quality of service and stringent security guidelines are required, making telcos ideal brokers Operators should become brokers after gaining significant experience as a cloud service vendor
Customers
1. Separate SME targeting SMEs have very different requirements and should be targeted with bundled services having low total cost of ownership 2. Focus on enhanced security, multi-country presence, and end-to-end cloud solutions for large enterprises
Source: Capgemini, UOB Kay Hian
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Appendix C: Rights And Responsibilities Of Cloud Services

The Gartner Global IT Council for Cloud Services has identified six rights and one responsibility of cloud computing services that will enable providers and consumers to work more productively together: The right to retain ownership, use and control one's own data. Service consumers should retain ownership of, and the rights to use, their own data. The Council insisted on the importance of data security in the issue of ownership and control. The provider must specify what it can do with the consumers data. Lack of clarity on this point can lead to costly legal battles. Lastly, the consumer could lose control of its data if the service provider goes out of business or is sold to another company. The original contract or service-level agreement must provide for the clear disposition of the service consumers data, in case the provider can no longer provide service. The right to service-level agreements that address liabilities, remediation and business outcomes. All computing services, including cloud services, suffer slowdowns and failures. However, cloud services providers seldom commit to recovery times, specify the forms of remediation or spell out the procedures they will follow. To make service-level agreements relevant to the business, providers do not have to customise them for every consumer; rather, the agreements should comprehensively address the business issues implied in the type of services offered. The provider's contract should not simply guarantee a certain turnaround time for adding capacity; it should specify how it will deliver that capacity. The right to notification and choice about changes that affect service consumers' business processes. Every service provider will need to take down its systems, interrupt its services or make other changes in order to increase capacity and otherwise ensure that its infrastructure will serve consumers adequately in the long term. Protecting the consumers business processes entails providing advanced notification of major upgrades or system changes, and granting the consumer some control over when it makes the switch. Such changes might include upgrading a software-as-a-service application, implementing salesforce.com, introducing new versions of services, changing the location from which the service is provided, entering or exiting a business, shuttering a facility, and so on. The right to understand the technical limitations or requirements of the service upfront. Most service providers do not fully explain their own systems, technical requirements and limitations so that after consumers have committed to a cloud service, they run the risk of not being able to adjust to major changes, at least not without a big investment. Service consumers and providers must do a better job of keeping each other informed about their technical limitations, particularly for complex, long-term projects or complex architectures and systems. The right to understand the legal requirements of jurisdictions in which the provider operates. If the cloud provider stores or transports the consumers data in or through a foreign country, the service consumer becomes subject to laws and regulations it may not know anything about. Service providers have not done a good job of explaining which jurisdictions they put data in and what legal requirements the service consumer must, therefore, meet. The service consumer needs reassurance that the provider does not violate any country's rules for which the consumer may be held accountable.
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The right to know what security processes the provider follows. With cloud computing, security breaches can happen at multiple levels of technology and use. Service consumers must understand the processes a provider uses, so that security at one level (such as the server) does not subvert security at another level (such as the network). Without this knowledge, service consumers risk security violations caused solely by the provider not accounting for the ways in which consumers might use a service. Service consumers also need to understand a providers business continuity plans, so that they can ensure that their own operations can continue in an emergency. Service providers are not consistent in explaining either their security processes or their business continuity plans. The responsibility to understand and adhere to software licence requirements. Providers and consumers must come to an understanding about how the proper use of software licences will be assured. On the one hand, providers must be held harmless, if the service consumer puts the software it licenses from a third party in the cloud yet violates the licensing agreement. On the other hand, the provider should not agree to an audit directly by the vendor, if the consumer owns the software licences. The service consumer must take charge of the audit, because it needs to consider the whole context both what the consumer runs in the cloud (perhaps using several service providers) and what it runs on its own infrastructure.
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Appendix D: Industry Statistics

SUBSCRIBER BASE AND PENETRATION RATE Mobile Subscriber Base
('000) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 M1 StarHub SingT el
Mobile Penetration Rate

(%) 160 140 120 100 80 60 40 20 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Source: Respective companies, UOB Kay Hian
Broadband Subscriber Base

('000) 600 500 400 300 200 100 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 StarHub SingT el
Broadband Penetration Rate

(%) 90 80 70 60 50 40 30 20 10 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Pay TV Subscriber Base

('000) 600 500 400 300 200 100 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 StarHub SingT el
Pay TV Penetration Rate

(%) 80 70 60 50 40 30 20 10 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
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MARKET SHARE Market Share Mobile Post-Paid

(%) 100 80 60 40 20 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 M1 StarHub SingT el
Market Share Mobile Pre-Paid

Revenue Share Mobile Post-Paid

Revenue Share Mobile Pre-Paid

Market Share Broadband

(%) 100 80 60 40 20 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 StarHub SingT el
Market Share Pay-TV

(%) 100 80 60 40 20 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 StarHub SingT el
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AVERAGE REVENUE PER USER (ARPU) ARPU Mobile Post-Paid

(S$) 100 90 80 70 60 50 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 M1 StarHub SingT el
ARPU Mobile Pre-Paid

(S$) 35 30 25 20 15 10 5 0 1Q05 1Q06 M1 1Q07 1Q08 StarHub 1Q09 1Q10 SingT el 1Q11
ARPU Broadband (StarHub)

(S$) 70 60 50 40 30 20 10 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
ARPU Pay-TV (StarHub)

(S$) 70 60 50 40 30 20 10 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
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Appendix E: Financial Performance

Revenue
(S$m) 2,500 2,000 1,500 1,000 500 0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 M1 StarHub SingT el*
EBIT Margin
(%) 40 35 30 25 20 15 10 5 0 -5 -10 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 M1 StarHub SingT el*
* Revenue from SingTels domestic Singapore operations. Source: Respective companies, UOB Kay Hian
* EBIT margin for SingTels domestic Singapore operations excluding exceptional items. Source: Respective companies, UOB Kay Hian
ROA (Group Basis)

(%) 25 20 15 10 5 0 -5 -10 1Q04 1Q05 1Q06 1Q07 M1 1Q08 1Q09 1Q10 1Q11 SingT el Group StarHub
Net Debt/EBITDA* (Group Basis)

(%) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 M1 StarHub SingT el Group
* EBITDA for SingTel excludes contributions from associates. Source: Respective companies, UOB Kay Hian
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Appendix F: Dividend History

Special Dividend and Capital Reduction
(cent) MobileOne EPS DPS Payout Ratio (%) Interim & Final Dividends Special Dividends Capital Reduction SingTel EPS DPS Payout Ratio (%) Interim & Final Dividends Special Dividends Capital Reduction StarHub EPS DPS Payout Ratio (%) Interim & Final Dividends Special Dividends Capital Reduction n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10.4 9.0 86.5 9.0 n.a. n.a. 17.6 11.5 65.3 11.5 n.a. 1:7@$2.13 18.7 16.0 85.5 16.0 n.a. 1:12@$2.86 18.3 18.0 98.5 18.0 n.a. n.a. 18.7 19.0 101.7 19.0 n.a. n.a. 15.3 20.0 130.4 20.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 12.0 13.0 108.1 4.1 8.9 n.a. 13.0 9.7 74.9 4.2 5.6 n.a. 9.8 4.3 44.0 4.3 n.a. n.a. 7.9 4.3 54.6 4.3 n.a. n.a. 25.2 5.1 20.4 5.1 n.a. 1:14@$2.36 19.0 10.4 54.7 6.4 4.0 n.a. 25.0 8.0 32.0 8.0 n.a. 1:20@$2.74 23.3 19.7 84.6 10.2 9.5 n.a. 24.9 12.5 50.2 12.5 n.a. n.a. 21.7 12.5 57.7 12.5 n.a. n.a. 24.6 14.2 57.8 14.2 n.a. n.a. 24.0 25.8 107.4 15.8 10.0 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 12.2 7.3 59.7 7.3 n.a. n.a. 13.5 9.4 69.8 9.4 n.a. n.a. 14.7 10.7 72.9 10.7 n.a. 1:14@$1.57 16.4 25.3 154.4 13.1 12.2 n.a. 16.6 13.3 79.9 13.3 n.a. 1:10@$2.22 18.5 15.4 83.3 10.8 4.6 n.a. 16.8 13.4 79.9 13.4 n.a. n.a. 16.8 13.4 79.8 13.4 n.a. n.a. 17.5 17.5 100.0 14.0 3.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Dividend Policy and Payout Ratio

M1 Maintain payout ratio at 80% of net profit. Current net debt/EBITDA is 0.8x and management targets optimal capital structure with net debt/EBITDA at 1.5x. Payout at 60-70% of free cash flow. StarHub Current net debt/EBITDA is 0.8x and management targets optimal capital structure with net debt/EBITDA at 1.5-2.0x. Maintain payout ratio at 55-70% of net profit. SingTel Current net debt/EBITDA is 0.8x and management targets optimal capital structure with net debt/EBITDA at 1.5-2.0x.
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Telecommunications: Telecommunications: Paradigm Shifts With Cloud Computing

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TELECOMMUNICATIONS

Telecommunications: Paradigm Shifts With Cloud Computing

Jonathan Koh, CFA (65) 6590 6620

This report uses the closing prices of 30 June 2011.

Figure 1: Peer Comparison Singapore

SingTel M1 StarHub Average

BUY BUY BUY

3.16 2.53 2.79

3.48 2.89 3.06

40,975 1,866 3,893

03/2011 12/2010 12/2010

13.2 14.5 18.2 15.3

12.7 13.2 17.1 14.3

8.2 6.0 6.5 6.9

7.9 5.8 6.1 6.6

9.9 18.4 16.0 14.8

5.1 6.1 7.2 6.1

Source: Bloomberg, UOB Kay Hian

Figure 3: Price Chart M1

2.60 2.40 2.20

2.00 1.80 4 V olu me ( m) 2 0 Jul 10 Sep 10 No v 10 Jan 11 M ar 11 May 1 1 Jul 11

Figure 4: Price Chart StarHub

2.6 0 11 0 2.4 0 2.2 0 2.0 0 10 V olu me ( m) 5 0 Jul 10 Sep 1 0 Nov 10 Jan 11 M ar 11 M ay 11 J ul 11 10 0

Paradigm Shifts With Cloud Computing

Router Internet Switch

Source: UOB Kay Hian

Figure 6: Demand For IP VPN In Asia Pacific Ex-Japan

Figure 7: Worldwide Smartphone Sales

Figure 8: Worldwide Tablet Sales

Figure 9: Mobile Data Traffic By Devices

Source: Cisco Systems

Figure 10: Comparison Of Data Plans For iPad 2

Source: CEIC, UOB Kay Hian

Positive Trends In Mobile Communications

Figure 13: Deployment Of NFC In Japan

Source: UOB Kay Hian

Source: Sony Ericsson

Impact On Telecommunications Industry

Figure 15: Peer Comparison Singapore

Source: Bloomberg, UOB Kay Hian

Figure 16: PE SingTel

Source: UOB Kay Hian

9 8 7 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: UOB Kay Hian

Figure 18: PE StarHub

Source: UOB Kay Hian

Figure 19: EV/EBITDA SingTel

Source: UOB Kay Hian

Figure 20: EV/EBITDA M1

Source: UOB Kay Hian

Figure 21: EV/EBITDA StarHub

Source: UOB Kay Hian

Figure 22: Dividend Yield SingTel

Source: UOB Kay Hian

Figure 23: Dividend Yield M1

Source: UOB Kay Hian

Figure 24: Dividend Yield StarHub

Source: UOB Kay Hian

3.20 100 3.00

2.40 60 40 20 0 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Volume (m)

Source: SingTel, Bloomberg, UOB Kay Hian

Company Name 2 Refer to last page for important disclosures.