Highlights

• Gathered positive developments from recent meeting. While striding for more improvements, management is upbeat on business prospects going into 2016.

• Celcom: launched several disruptive postpaid and prepaid offerings post IT stabilization which led to net adds of 61k subs in 2Q15, reversing the trend of 3 consecutive quarterly attritions. BSS enhancements are still in progress for process simplification, improving customer experience and speed to market. Distribution has also improved gradually since last year’s East Coast flood causing the loss of 950 dealers. Embarked on sales distribution reform with Central region as pilot since 2Q15 and currently assessing its effectiveness. Plan for nationwide adoption in 4Q15 once proven successful.

• XL: the switch from volume to value game with 3R strategy (revamp, rise and re-invent) has yielded encouraging signs even at the early stage of the 3 year program. As a result, XL is expecting EBITDA growth to outpace revenue’s in 3Q15. Taking proactive steps to address IDR fluctuations including early repayment / refinance existing debts and explore further monetization of assets through disposal of the remaining 6.5k telco towers. Strongly believe in fixed-mobile convergence which in turn led to its interest in acquiring LinkNet.

• edotco: target to be world top 10 (in terms of size, tenancy ratio, yield and efficiency) before its floatation. Currently ranks 15-16 with circa 16k towers inclusive of recently proposed acquisition of MTC. With 1.25k towers, MTC has circa 17% market share in a 4-player Burmese market. Ooredoo as anchor tenant and no restriction to offer colocation to Telenor and MPT which may lead to higher tenancy ratio. Vying for another M&A deal over next 1 year to achieve ambition.

• Regulatory: heightened but manageable, including: - Sri Lanka: telecom levy; - Malaysia: GST, 900Mhz refarming (no progress); - Bangladesh: spectrum auction, BTRC audit, tax, tower; - Indonesia: interconnect fees, spectrum auction; and - Cambodia: new telecom law.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and listing of Robi.

Risks

• Regulatory risks, FOREX fluctuations and competitive risks.

Forecasts

• Maintained.

Rating

BUY , TP: RM7.52

Positives

• mobile internet growth, margin improvements through collaborations/sharing, recoups prepaid tax via GST, unlock value through tower listing.

Negatives

• Challenging operating environment in Indonesia, Axis to weigh down XL in the short term, OTT substituting voice and SMS, unable to monetize data.

Valuation

• Reiterate BUY on the back of unchanged SOP-derived TP of RM7.52 (see Figure #2).

Source: Hong Leong Investment Bank Research - 16 Oct 2015