Regional Industry Focus

Asian Telecom Sector

Refer to important disclosures at the end of this report

DBS Group Research . Equity

10 April 2013

Myanmar telecom potential MXAPJTC Index: market 99.8

SingTel, Digicel and KDDI are strong contenders to secure the two licenses Myanmar mobile market could be worth US$2bn in 2016; but 75-80% penetration target by 2015-16 is too ambitious In order to create shareholder value, each winner should not invest more than US$1.6bn - 2.0bn over the next three years International experience and strong local partnership may be the winning formula. Myanmar is expected to pre-qualify applicants on 11 April and announce two telecom license winners on 27 June, 2013. The winners will participate in a virgin market with <10% mobile penetration. SingTel, Digicel and KDDI are well placed due to their solid track record of international operations and partnerships with strong Myanmar parties. SingTels partner KBZ is an influential conglomerate. Digicels partner Yoma is Myanmars only listed real estate company with broadening business interests and KDDIs partner is a Japan-Myanmar co-operation body. Cambodian experience suggests that Myanmars target may be too ambitious. Myanmar aims to achieve 75%-80% penetration by 2015-16 with four operators. Cambodia, the closest country in terms of GDP per capita and population density (although population is only 25% of Myanmar) took almost five years to grow from 9% penetration in 2006 to 76% penetration in 2011 with nine operators. Hence, considering Myanmars larger and more populous footprint with fewer operators, we believe Myanmars current penetration target is aggressive. We believe the country may take five to six years to achieve 80% penetration. Potential market size of US$2.0bn in 2016F. Our base case scenario projects a market size of US$2b p.a. by 2016 on a 55% penetration rate and a US$5 monthly ARPU assumption. In our bull case scenario (70% penetration rate), market revenue could potentially grow to US$2.5bn. Our analysis suggests US$1.6bn-2.0bn enterprise value for the winner. Based on enterprise value per subscriber, we estimate that a player may fetch US$1.6-2bn by 2016. Hence, to create shareholders value, the winner should not invest more than US$1.6bn - 2.0b. Feels good to win but little fundamental impact on stocks. For Analyst SingTel, our estimated EV of the Myanmar market could potentially sachin@dbsvickers.com add only 3-4% to SingTels current EV of US$53b, implying this would be a small market relative to SingTels existing coverage. For Tsz Wang TAM CFA, +852 2971 1772 Yoma, Digicels win would add new business. But, we believe Yomas tw_tam@hk.dbsvickers.com stake in the consortium would be small and could probably only Chirasit VUTTIGRAI +66 0 2657 7836 qualify as an investment. It is too early to assess the investment chirasitv@th.dbsvickers.com required of Yoma but we feel that Yomas local network and domain knowledge would be its biggest value-add to the consortium while the Soros-backed Quantum would provide the financial support.
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com ed: OY / sa: JCx

MXAPJTC Index: 124.06

Analyst Sachin MITTAL +65 6398 7950 sachin@dbsvickers.com TAN Ai Teng +65 6398 7967 AiTeng@dbsvickers.com STOCKS
Price S$ Mkt Cap Target Price US$m S$ Performance (%) 3 mth 12 mth Rating

SingTel Yoma Strategic Holdings China Mobile Telekomunikasi Indonesia Axiata Group True Corporation

3.66 0.775

46,976 722

3.40 0.80 84.00 10,000 5.30 4.50

11.6 5.4 (6.7) 18.0 (0.5)

18.1 HOLD 77.6 HOLD (1.0) HOLD 43.1 HOLD 25.2 FV FV

82.80 214,381 10,800 6.66 7.40 22,336 18,573 3,672

39.6 107.9

Source: DBS Vickers

Enterprise value per subscriber of players in lowARPU countries

ARPU (US$) Major players in the country 5 5 6 6 8 EBITDA margin (2012) 46% 46% 26% 38% EV/subscriber (US$) 128 119 90 77 63

XLAxiata, Indonesia Indosat, Indonesia IdeaCellular, India RelianceComm, India Smart&Hello, Cambodia*

3.5 3 3 2.1 4.45

*Based on Axiatas deal to merge Smart and Hello in Cambodia Source: DBS Vickers

Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (DBSVR), are to contact DBSVR at +65 6398 7950 in respect of any matters arising from or in connection with this report.

Industry Focus Asian Telecom Sector

Current situation in Myanmar Two telecom service licenses by H113

According to the government's latest official data, the mobile base was 5.44 million subscribers at the end of December 2012, translating to a below 10% mobile penetration. Multiple technologies without interconnection. State-owned Myanmar Post and Telecommunications (MPT) runs several different networks, including CDMA 450 MHz, CDMA 1800 MHz, GSM 1900 MHz and UMTS 2100 MHz. Interconnection is not well established within these networks and as a result people have to use multiple SIM cards. Furthermore, Myanmar also suffers from a lack of base stations (~400 in the whole country), almost exclusively in the commercial hub Yangoon and the new capital Naypyidaw. This gives the country very limited capacity - especially for international traffic - as submarine cable links are few and far between. Too expensive SIM cards. On top of the interconnection, coverage and capacity issues, pricing is the main reason why mobile phone uptake is so low in the country. Due to the limited number of phones, official handsets retail for anywhere from US$600 to US$1400, although cheaper blackmarket alternatives do exist. But while the official SIM card price is roughly US$150, black market prices run upwards of US$600. Despite this, the local calling rate is relatively low at US$0.05 per minute. But with a nominal GDP per capita of US$715 per year, mobile phone ownership is still out of reach for most citizens. However, MPT announced on 4 April that it intends to start selling SIM cards for less than US$2 each. Chinese vendors dominate equipments and handsets. Due to trade restrictions and political reasons, global equipment vendors like Motorola and Ericsson pulled out of the country in 1996-98. Chinese vendors have dominated the Myanmar market. Huawei and ZTE are major suppliers on both the network and handset side. On January 15, 2013, Myanmar called for the expression of interest regarding tenders for two telecommunications service licenses. The license awards will raise the number of operators to four, including state-owned Myanmar Post and Telecommunications (MPT) and Internet service provider Yataraporn Teleport (YPT). As widely announced in the press, the government has three major goals. (i) Increase overall tele-density to 75% - 80% by 2015-16 (versus ~9% in 2012) Make telecommunication services affordable for the masses

(ii)

(iii) Give people choice for their telecommunication needs.

Final winners to be announced in June 2013 Following the deadline for the expression of interest on February 8, 2013, Myanmar has initiated the second stage of the licence award process - the pre-qualification stage where applications are due no later than April 4, 2013. The selection committee will then announce the applicants to be invited for the third stage on April 11, 2013. Two entities will be selected using a comparative evaluation method on June 27, 2013.

The criteria: International operating experience is crucial

The Telecom Operator Tender Evaluation and Selection Committee issued a manual on Rules for Pre-qualification Applications. Some of the key conditions are:

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Industry Focus Asian Telecom Sector

Highlights of Rules of Pre-qualifications for telco license
Operating experience Co u n try 1 : a t l e a s t 5 0 .1 % s ta ke and management control of at least four years in a mobile operator that was commercially launched no later than December 31 2008; minimum of 4 m mo b i l e s u b s c ri b e rs as of December 31 2012 and annual g ro s s re ve n u e o f mo re th a n US$ 4 0 0 m in 2012 Co u n try 2 : a t l e a s t 3 0 % s ta ke in another mobile operator in a different country with 1 m s u b s c ri b e rs If the applicant is a consortium, it must include an experienced operator, which fulfils all the requirements. There can be only O NE experienced operator with the largest ownership interest o f a t l e a s t 4 0 % Applicant/consortia must proposed equity interests, voting rights for each member of the consortium at time of application for pre-qualification Proof that operator has been compliant with telecom regulations in countries of operation Financing plan is required only in the next stage during Licensee selection process Committee will enquire cross ownership; highest scoring prequalified applicant may not have more than 10% direct or indirect inteterest in second highest scoring applicant Not a pre-requisite as mobile telecom business is not within the list of activities that foreign investors must work with Myanmar nationals

Consortium structure

Compliance

Financial requirements Cross owerships of bidders

Local partner

Source: The Ministry of Communications and Information Technology

From the conditions laid out, it is clear that substantial international operating experience is a hard rule. In the Q&A report, the Committee insisted that operational requirements are not negotiable and rejected secondary experience of 1m subscribers in two countries instead of one. And, there can only be one experience operator who is required to hold a majority stake of no less than 40%. The Committee also pointed out that all applicants that meet the conditions will progress to the next round, which implies there is no cap on the number of pre-qualified applicants.

Major players interested in securing the licenses A total of 22 players have shown interest in securing the license, indicating tough competition. Some of the major players are as follows. (i) Singapores SingTel with local partner KBZ and Myanmar Telephone Company Limited (M-Tel). SingTel provides telecom services in Singapore, Australia and holds stakes in companies in India, Indonesia, Thailand, the Philippines and Bangladesh. SingTel has submitted the bid in partnership with local player KBZ who runs banks, airlines and several other businesses in Myanmar. Nothing much is known about M-Tel. Jamaicas Digicel with Quantum and Yoma. Digicel has operations in 31 markets across the Caribben, Central America and Ocenia. Quantum Strategic Partners is a fund backed by billionaire investor George Soros. Yoma Strategic Holding is a real estate player in Myanmar and is listed on SGX.

(ii)

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Industry Focus Asian Telecom Sector

(iii) Japans KDDI. KDDI is the second largest cellular player in Japan. It has operations in the US and Mongolia ( via a stake in Mobicom) KDDI owns the biggest undersea fiber network in Asia and is very strong in proving enterprise services across the region. KDDI also opened its Myanmar office in Dec 2012. China Mobile with Vodafone. China Mobile is a dominant telecom player in China with the largest mobile subscriber base in the world with over 700m subscribers in 2012. UK-based Vodafone is the second largest mobile operator by subscribers. Vodafone owns and operates networks in over 30 countries. Indias Bharti Airtel. Bharti is the third largest mobile operator by subscribers in the world. The company operates in multiple geographies spanning India, Africa, Sri Lanka and Bangaldesh. South Africas MTN. The group operates in many African, European and Middle Eastern countries. MTN has GSM licences in 21 countries and Internet service provider businesses in 13 countries, across three continents (vii) Noways Telenor. Telenor is the Nordic regions biggest phone company by revenue and has wireless assets in Asia including India, Malaysia, Thailand and Bangladesh. (viii) Malaysias Axiata. Axiata has operations in Malaysia, Indonesia, Sri Lanka and investments in Singapore and India. (ix) Singapore Technologies and Telemedia (STT). STT is a unit of Temasek Holdings and holds stakes in telecom companies in Singapore, Malaysia, Vietnam as well as cable TV operator in Philippines Thailands True Corp. True Corp is the smallest of the three operators in Thailand. The company does not have substantial operations outside the country. Indonesias PT Telkom. Telkom is a dominant telecom player in Indonesia, but does not have substantial international operations outside the country.

(iv)

(x)

(v)

(xi)

(vi)

(xii) Philippines PLDT. PLDT is a dominant telecom player in the Philippines but does not have substantial operations outside the country.

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Industry Focus Asian Telecom Sector

Applicants for pre-qualifications of telco license
Operating experience - 2 countries, 5 years track record, 50% stake in primary market with 4 m subscribers & US$400m revenue + 30% stake in 2nd market with 1 m subscribers 1 Singapore Telecommunications (Singtel) + KBZ + Myanmar Telephone Company Limited (M-Tel) 2 Digicel 3 KDDI Corporation + Sumitomo Corporation + Myanmar Information and Communication Technology Development Corporation (MICTDC) + A1 Construction 4 Vodafone + China Mobile 5 Axiata Group Berhad 6 Telenor Mobile Communications AS 7 Airtel Consortium 8 Qatar Telecom (Qtel) Q.S.C (Ooredoo) 9 Viettel Group 10 Millicom International Cellular S.A. 11 MTN Consortium 12 France Telecom-Orange + Marubeni 13 Orascom Telecom Media and Technology Holding + Epic 14 STT Communications + BeWell Company Limited + Frontiir Company Limited 15 PT Telekomunikasi Indonesia Tbk + Myanmar Telecommunications Network Public 16 China Telecommunications Corporation 17 First Pacific 18 Charoen Pokphand Group + True Corporation + Thana Telecom Corporation 19 SK Telecom + RedLink Communications 20 Integrated Global Communications (IG Com) + Myanmar Technologies and Investment Corporation Limited (MTI) 21 ACO Investment Group 22 Asia Megalink

Consortium structure only one experienced operator

Local partner

SingTel Digicel KDDI

KBZ, M-Tel Yoma MICTDC

Vodafone Axiata Telenor Airtel Qatar Viettel Millicom MTN France Telecom-Orange Orascom Telecom STT Communications

not specified not specified not specified not specified not specified not specified not specified not specified not specified not specified not specified Myanmar Telecommunications Network Public not specified not specified not specified not specified not specified not specified not specified

Below 50.1% stake in mobile operator Lack of overseas experience Only operates in China PLDT only operates in the Philippine True only operates in Thailand No substantial telco presence out of Korea Unknown Unknown Unknown

China Telecom PLDT True Corp SK Telecom Unknown Unknown Unknown

Source: The Ministry of Communications and Information Technology, DBS Vickers

From the list above, it is clear that a lack of operating experience or interests in a mobile operator outside the primary market will disqualify some bidders. SingTel, Digicel, China Mobile & Vodafone, Bharti Airtel, MTN, Telenor & Axiata seem to satisfy the condition. Some people

expect Myanmar to steer clear of telcos from neighbouring countries due to political considerations. In any case, SingTel Digicel and KDDI satisfy all of the above conditions as their home countries do not share any border with Myanmar.

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Industry Focus Asian Telecom Sector

Market size
Drawing from Cambodias experience Population 55m in Myanmar versus 15m in Cambodia according to The World Factbook published by Central Intelligence Agency. Area - 677K sq km versus 181K sq km according to The World Factbook published by Central Intelligence Agency. GDP per capita US$715 versus US$897 according to data published by The World Bank.

Mobile subscriber and penetration projections in Myanmar

2010 Mobile Subscribers Mobile Penetration 0.6 1.0% 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F 1.2 5.4 12 19 26 33 39 45

2.0% 8.5% 18.4% 31.7% 43.3% 55.0% 65.0% 75.0%

Source: DBS Vickers

Investment required over the next five years According to Deloittes report titled Myanmar The next Asian telecommunications Greenfield there are currently 14,000 kilometers of fibre in Myanmar and around 1,800 towers. Over 80% of the fibre infrastructure is owned by the military, while MPT owns the rest. However, in order to achieve the target of 75-80% penetration by 2015 bearing in mind that the majority of the population lives outside the major cities an estimated 15,000 towers and hundreds of thousands of kilometres of fibre must be deployed in order to significantly increase the telecommunications uptake and generate revenues for investors. We estimate that the country needs US$3bn of investment in towers and base stations and about US$1-2bn in fibre network to achieve 80% penetration. As such, we estimate total investment of US$4-5bn over the next seven years. One of the interested players - Digicel has also indicated an initial project investment of between US$1.5bn and US$2 bn per player.

Cambodia took five years to grow from 9% penetration in 2006 to 76% penetration in 2011 with nine mobile operators in country. Myanmar has a much bigger population and land area. The Myanmar government plans to have just four operators in place, which makes it difficult to believe that 75%-80% penetration can be achieved in three to four years.

We project Myanmars cellular market to be worth US$2.0b by 2016. Cambodias ARPU was around US$4.45 in 2011 for merged Smart and Hello which became the number two player in Cambodia with a 35% market share in an eight player market. Based on average revenue per user of US$5 per month and a 55% penetration, we estimate Myanmars market to be worth US$2bn in 2016.

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Industry Focus Asian Telecom Sector

Enterprise value per subscriber of players in low-ARPU countries
ARPU (US$) XL Axiata, Indonesia Indosat, Indonesia Idea Cellular, India Reliance Comm, India Smart & Hello, Cambodia* 3.5 3 3 2.1 4.45 Major players in the country 5 5 6 6 8 EBITDA margin (2012) 46% 46% 26% 38% 128 119 90 77 63 EV/subscriber (US$)

*Based on Axiatas deal to merge Smart and Hello in Cambodia Source: DBS Vickers

Higher EV per subscriber in Myanmar due to fewer players. We prefer to go with enterprise value per subscriber as the key matrix in low ARPU countries such as India and Indonesia. It is very clear from the table above, that the more players in the sector, the lower the EV per subscriber, due to lower margins and higher customer churn. We assign 10% higher EV per subscriber to Myanmar than the US$123 per subscriber in Indonesia due to the fewer players in Myanmar. As such, we use EV per subscriber of US$135 in Myanmar. Assumption of 35% market share for each international player in a four player market. With four players in Myanmar, we do not think competition will be too intense there, but the country may achieve only 55% mobile penetration by 2016 in our base case scenario. We assume that each of the international players would secure 35% market share, leaving 30% to the two local players.

Base case scenario suggests US$1.56bn an enterprise value in 2016. Based on a 60m population, 55% mobile penetration and 35% market share, this translates into 11.6m subscribers for each international operator. And based on US$135 EV per subscriber, this would lead to an enterprise value of US$1.56bn in 2016. This suggests that international players would destroy value if they invest more than US$1.56bn in cumulative capex over the next three years; the market would still value the business at only US$1.56bn. Bull case scenario suggests enterprise value of US$1.98bn in 2016. In our bull case, we project 70% penetration by 2016F and 35% market share which translates to 14.7m subscribers for each international operator. Using US$135 EV per subscriber, it translates to an enterprise value of US$1.98n in 2017F. Clearly it suggests that international players will destroy value if they invest more than US$1.98bn in cumulative capex over the next three years as the market will value the whole business at only US$1.98bn.

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Industry Focus Asian Telecom Sector

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Industry Focus Asian Telecom Sector

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