8Telecom International Holdings Co. Ltd.

Company note 21 February 2017

Unrated

Current Price S$0.139 Fair Value S$0.181 – S$0.298 Up / (downside) 30.1% - 114.7%

Stock Statistics

Market cap S$12.88m 52-low S$0.098

52-high S$0.96 Avg daily vol 83,484

No of share 92.63m Free float 21.6%

Key Indicators

ROE 17F na ROA 17F na

P/BK nm Net gearing nm

Major Shareholders

Wilson Lim 25.8% Manfaith 20.7%

Chung Fui Leng 19.0%

Historical Chart

Source: Bloomberg

Potential Telco of Tomorrow

▪ This is a growth story. 8Telecom underwent a transformation during 2015/2016. It sold off its businesses, paid out a special dividend and is currently the 51% owner of Arete M Pte. Ltd since 1 August 2016. As of 30 September 2016, 8Telecom has negligible revenue and assets. The interesting part of 8Telecom is that Arete M has been granted a license by the Infocomm Media Development Authority (IMDA) to use the 1.79 to 1.80 GHz radio frequency spectrum for the provision of communication solutions.

▪ Globally, private LTE networks are gaining traction. With the spectrum, Arete M intends to offer dedicated private LTE networks to industrial users and public safety/emergency services. Currently, these users usually rely on radio networks for voice and complementary networks e.g. Wi-Fi for data. A private LTE network will aggregate these services and not compromise on reliability and availability, whereas public LTE networks being shared with consumers and commercial users may not be able to offer the same level of service quality always. Emerging applications in other countries include LTE networks for rail/offshore communication and maritime navigation.

▪ Tight spectrum supply provides first mover advantage. Whereas the existing telcos pay more than S$1m per year of 10MHz of spectrum, Arete M has secured its spectrum for about S$80k per year as it has proved that it can operate within the “guard” spectrum put in place to separate the spectrums used by the telcos. The 10MHz of spectrum that Arete M obtained was originally not available to the telcos, thus explaining for the lower cost.

▪ True potential as enabling technology of drones. The advantage of a dedicated LTE network is that it can serve large amounts of data to multiple users over a wide range of up to 10km with low interference and latency, due to the fewer number of users as compared to a public LTE network. Other communication protocols such as Wi-Fi, microwave transmission or Sigfox are less versatile and are subject to limitations such as short range and/or low data transmission rates. The advantages of the dedicated LTE network make it suitable for communication that demand for high reliability, especially for safety reasons, such as within fleets of unmanned vehicles which are currently on trial by various agencies.

▪ Indicative valuation of S$135m to S$387m. 8Telecom currently has a market cap of S$12.9m backed by negative equity of S$0.3m and tangible assets of S$0.5m as of end 3Q16. Nonetheless, more advanced IoT companies have been valued at up to US$600m. For illustrative purposes, we have provided a rough valuation of S$135m to S$387m (S$0.181 to S$0.298 per 8Telecom share, after discount and dilution). The risk is that telcos may enter this space once spectrum freed up after the deployment of 5G networks in e.g. 2020. Therefore, fast execution is imperative.

Liu Jinshu

(+65) 6236-6887 jinshu.liu@nracapital.com www.nracapital.com

Key Financial Data*

(RMB m, FYE Dec) 2013 2014 2015 9M15 9M16

Sales 428.2 562.9 536.6 0 0

Gross Profit 95.3 115.0 99.9 0 0

Net Profit 17.2 8.0 8.2 9.4 2.2

EPS (cents) 18.51 8.68 8.83 nm nm

EPS growth (%) na -53.1 1.7 nm nm

PER (x) 3.7 7.8 7.7 nm nm

NAV/share (cents) 5.60 5.73 5.76 nm -1.71

DPS (Singapore cents) 0.12 0.26 na nm nm

Div Yield (%) 0.9 1.9 na nm nm

Source: Company, NRA Capital *These financial figures are mainly reflective of the disposed businesses and are provided for illustrative purpose only.

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8Telecom International Holdings Co. Ltd.

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Background – Enabler of Tomorrow’s Connected World

8Telecom’s 51% owned subsidiary Arete M Pte Ltd sees itself as an infocomm services company that provides innovative telecommunication systems and solutions to enterprises. Its key service is in the design, set up and operation of private dedicated LTE networks for government agencies and private enterprises. In addition, Arete M is also developing a ground control platform to control multiple unmanned aerial vehicles via LTE network connections.

To complement its LTE network services, Arete M also provides simple plug and play wireless and Narrow Band IoT solutions (NBIoT) for the networking of devices in replacement of wired connections. Finally, Arete M also provides fibre infrastructure installation services for building owners.

As an example, Arete M can install both wired and wireless LTE networks for a facility starting from its telecom riser or main distribution frame (MDF) room. In turn, these networks can be connected directly to e.g. network of drones via LTE, or to wireless or NBIoT networks that link up a mesh of connected or networked devices e.g. sensors along an assembly line or large facility.

Figure 1: Illustration of Services

How the different wireless networks differ

Range Data Rate

LTE Long, up to 10km High, up to 100 Mbits/s downlink

Wi-Fi Short, 50m to 100m High, up to 600 Mbits/s

NBIoT Long, 2km to 50km, depending on protocol Low, up to 100 kbps, depending on protocol

Source: NRA Capital

In-building fibre installation LTE network deployment

Connect to handsets with smartphone capabilities, drones, security cameras and other devices

Wireless and NBIoT network

Connect to sensors, e.g. weight measurement, motion detection, fire detection across storage units in a warehouse, leakage detection along a pipeline e.g. at a refinery, etc.

Depending on requirements with regards to mobility, data transfer rates, connection quality, network latency and costs, devices may be connected using different methods, e.g. fibre, wi-fi or LTE.

8Telecom International Holdings Co. Ltd.

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1 Huawei eLTE Success Stories – China Southern Power Grid.

Dedicated LTE Networks Gaining Adoption

We reckon that Arete M will start off with the deployment of private LTE networks. The technology and systems are readily available with completed case studies by vendors such as Huawei. On the other hand, Arete M has just been assigned 10 MHz of radio frequencies by the IMDA for the operation of LTE networks in Singapore.

Our latest mobile phone networks are examples of an LTE network. In turn, the network operator, e.g. Singtel sends and receives data between its cell towers and users’ mobile phones using specified radio frequencies. Therefore, Arete M can be said to have the technical resources to operate as a small telco.

Figure 2: Wireless Networks and Radio Frequencies

Source: NRA Capital

Existing two-way radio mainly for voice communication. Mobile broadband is highly used by consumers and businesses for mobile productivity and lifestyle uses. However, many industries, e.g. ports, mines, oilfields, government agencies and emergency services, e.g. police forces and fire departments continue to rely on e.g. conventional two-way radio or terrestrial trunked radio for voice communication. The low data transfer rate of these networks means that real time video communication is not feasible.

Coverage of public LTE networks can be limited in industrial environments. Where there is coverage by the local telcos, mobile broadband may be used for data retrieval and submission to complement trunked radio networks, but mobile broadband can be very slow or not available in harsh environments e.g. mines, oil fields, offshore locations.

A telco can install a cell tower to cover rural areas. However, this coverage is shared by all users in the area. Due to the low density of cell towers in rural areas, devices may suffer from dropped connections when loads peak. In fact, urban areas too suffer from connectivity issues time to time as more users use mobile data for communication, e.g. sending of video messages. The public GSM network has been used for data collection and optimisation across an electricity power grid. However, the public network only provided a device online rate of 60% to 80%.1

Most wireless devices communicate using radio frequencies. By allocating different bands of frequencies to different networks, multiple networks of devices can coexist and operate.

Certain frequency bands are allocated for public use, such as the frequencies used by our home Wi-Fi network. Typically, short range devices can use these frequencies to operate in.

8Telecom International Holdings Co. Ltd.

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2 http://www.firstnet.gov/news/firstnet-outlines-operational-readiness-first-100-days-nationwide-public-safety-broadband 3 https://blog.networks.nokia.com/lte/2016/11/28/great-momentum-mission-critical-lte/ 4 Huawei eLTE Success Stories – Shanghai Police

Public safety/Emergency services networks are increasingly turning to dedicated LTE solutions. Globally, there appears to be a movement for public safety and emergency services networks to switch over from two-way radio and trunked radio services to LTE networks. In the US, the First Responder Network Authority (FirstNet) was created in 2012 to put in place a high speed nationwide wireless broadband network dedicated to public safety. As of December 2016, FirstNet is operationally ready to deploy such a network.2 In Japan, field tests are being carried out for future nation-wide deployment of mission critical LTE network and services.3 In fact, police forces in some cities in China are already using LTE broadband for voice and video communication and broadband data access.4

Difference between dedicated and public network solutions. The crux of the issue is that public safety and emergency services communication networks need to have higher availability, security and resilience than standard commercial LTE networks. The network needs to have sufficient capacity to ensure almost instantaneous communication much alike our typical push-to-talk radio.

Figure 3 shows some of the deployment options as described in a 2014 whitepaper by Nokia. The first three options entail the use of shared spectrum which poses limitations. By sharing the same pool of radio frequencies (or spectrum) with consumers, telcos will face the challenge of allocating spectrum between consumers and public safety agencies during emergencies. The fourth option entails the sharing of existing physical infrastructure with the option with shared or dedicated spectrum. The last option entails the use of dedicated radio frequencies in a public safety services network.

Figure 3: Examples of Deployment Options

MBB= mobile broadband, MVNO =Mobile Virtual Network Operator, RAN = Radio Access Network

Source: http://resources.alcatel-lucent.com/asset/200168

8Telecom International Holdings Co. Ltd.

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LTE networks have been deployed in multiple industrial environments. Based on case studies provided by Huawei, LTE networks have been deployed as the data and communication systems of railways, ports, power grids, offshore oil fields and mines.

In the case studies provided, namely the metro systems of Zhengzhou, Chongqing and Shenzhen, Wi-Fi based communication systems suffered from poor performance at high train speeds and interference from external devices, e.g. mobile phones etc. Real time video communication was also limited by the uplink capacity of existing systems. Network coverage was also limited by challenges such as mountainous terrain. These challenges were solved via the implementation of LTE networks that utilized dedicated spectrum – no interference from Wi-Fi and other telco networks.

In Singapore, our MRT lines continue to rely on Wi-Fi based communication systems and we envisage scope for existing and future systems to be upgraded to private LTE networks, especially for the new Thomson and East Coast lines.

Figure 4: Features of Huawei’s Mass Transit eLTE Multi-Service Solution

Source: http://e.huawei.com/en/marketing-material/onLineView?MaterialID={40B74140-6855-4C77-9A72-D9BCF62CBB5B}

8Telecom International Holdings Co. Ltd.

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5 http://www.tampnet.com/tampnet-introduces-4glte-in-the-north-sea/ 6 https://www.linkedin.com/pulse/how-lte-can-change-oil-gas-networked-field-sebastian 7 https://www.ecom-ex.com/nc/blog/post/offshore-4g-lte-connectivity-is-becoming-a-reality/

Increasing workplace efficiency – Converged service network. The case studies of the port and mine also highlighted another benefit of dedicated private LTE networks. Prior to implementing its own LTE network, the Tianjin port would use short range Wi-Fi for mobile data transmission, CDMA for voice trunking and optical fibre for video surveillance. The LTE network combined these three networks together and eliminated both coverage and surveillance holes due to the limitations of these networks. The same outcome was created at a mine in Inner Mongolia that also used Wi-Fi for data, trunking for voice and wired video surveillance systems.

Figure 5: Converged Service Network

Source: Nokia – Re-imagine mining networks for 2020 and beyond

Example: The digital oil field. In fact, the oil and gas sector has been an active user of private LTE networks starting with Tampnet’s 4G/LTE deployment in the UK in 2013.5 Currently, offshore communication within fleets of rigs and vessels is facilitated via satellite connections.6 These systems are costly, e.g. US$300,000 for each satellite connection. Secondly, satellite communication is subject to disruption during bad weather. A private LTE network facilitates communication and allows engineers to send and receive high volume data in real time, thus enabling the usage of sensors and mobile devices such as tablets in real time. Reports indicate improvements in productivity and Norway’s Statoil has, in 2015, ordered a 4G network to be installed on and connect all 34 of its platforms in the North Sea.7

8Telecom International Holdings Co. Ltd.

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8 https://blog.networks.nokia.com/lte/2016/04/21/private-lte-game-changer-industries/

Figure 6: A Connected Oil and Gas Field

Source: http://www.tetratoday.com/news/oil-and-gas-bringing-the-expert-to-the-problem-with-lte/

Opportunities for Arete M. In a nutshell, a private LTE network offers a) high data speeds, b) save costs by aggregating services on a single network, c) supports critical time-sensitive communication via its low latency and d) provides security via features such as encryption and authentication.8

Given Arete M’s own radio frequency spectrum of 1.79 GHz to 1.80 GHz, the company can implement its private LTE networks across various facilities in Singapore, e.g. mass rapid transit, sea ports, parks, airports, refineries and large scale storage facilities, private security agencies, e.g. Aetos. Public safety and emergency services may also provide opportunities for Arete M, but the users will most likely come with their own radio frequencies.

8Telecom International Holdings Co. Ltd.

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9 http://www.dji.com/mavic/info#specs 10 http://www.fiercewireless.com/tech/verizon-lays-out-its-lte-drone-initiatives

LTE is a Potential Enabling Technology for Unmanned Vehicles

To extend operating area of civil drones. Topping its LTE initiative, Arete M is also developing a ground control platform to control multiple unmanned aerial vehicles (UAV) based on LTE networks. Currently, drones can be controlled via Wi-Fi for up to 80m and by remote controllers for up to 7km.9 For longer distances, drones are controlled via satellite for operating distances of up to thousands of kilometres. The search is on for a communication solution for operating distances of tens to hundreds of kilometres without resorting to satellite connections. Connecting drones to a LTE network is currently being tested as a potential solution.10 In fact, other unmanned vehicles and crafts can be connected to a LTE network for long range control.

To ensure the safety of beyond line of sight drone use. Drones have been reported to fly-off and crash into structures such as buildings when they lose connections with their remote controllers due to issues such as interference. A dedicated network with high signal strength assurance will be able to mitigate against this risk of drone use and facilitate commercial application.

To enable the operation of fleets of autonomous vehicles. Given the reliable control of a fleet of drones over long distances, the potential will then be opened for truly driverless cars and vessels that can safely operate on their own and with minimal human intervention. Once truly “human-less” drones are proven, fleets of drones can be economically used for business.

Arete M has signed expression of interests with six drone manufacturers to collaborate on the development of a platform to control LTE drones.

Figure 7: Police Coast Guard is looking at UAVs and USVs as a force multiplier

Source: http://www.straitstimes.com/sites/default/files/attachments/2016/03/21/st_20160321_nnpolice_2153514.pdf

8Telecom International Holdings Co. Ltd.

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11 Each telco in Singapore bids for radio frequencies that they have the exclusive right to use in spectrum auctions. OpenSignal has this example to illustrate the relevance of spectrum - “For instance, let’s say we have an LTE cell tower with 100 Mbps of total capacity. Theoretically that tower could supply a single user with a fat 100 Mbps connection or it could divide that capacity among 10 users, simultaneously providing each of them a 10 Mbps connection. If you double the number of users to 20, those connection speeds drop to 5 Mbps and so forth. But suppose we double the amount of spectrum used by our cell tower? We’d wind up doubling our capacity, and suddenly we could supply those 20 users each with a 10 Mbps connection.”

Dedicated LTE has Window of Opportunity as Telcos Compete on Their Public Networks Amidst Limited Spectrum

Will the telcos dedicate spectrum to compete against Arete M? Just to recap, Arete M is able to offer dedicated LTE network services due to it having been assigned the rights to 10 MHz of radio frequency spectrum in Singapore. It is possible that the telcos may dedicate spectrum to offer similar services. However, we argue that they will prioritize spectrum use to service their own existing mobile voice and data clients.

Spectrum is valuable as having more frequencies means that they can serve more customers with the same number of base stations or cell towers. As mobile data usage increases, they actually have to build more cell towers or otherwise acquire more spectrum to deliver the same quality of service.11 An increasingly congested network that serves more users and data traffic per MHz of spectrum also explains why we sometimes experience dropped calls or slow data download rates.

Figure 8: Drivers of Growth in Mobile Data Traffic

Source: Whitepaper on Spectrum, February 2013, Huawei

In Singapore, 464.2 MHz of spectrum has been allocated to the three local telcos to serve their combined 8.375m users across land area of 720km2. This translates to an average of 180,400 users per 10 MHz of spectrum and an average of 154.7 MHz of spectrum per network operator. We calculated that the ongoing spectrum auctions by IMDA will add 175 MHz of spectrum for the four telcos, including TPG Telecom, from 2017. There is also another 35 MHz of potentially spare spectrum that may be reallocated for mobile network use.

8Telecom International Holdings Co. Ltd.

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12 175 MHz of new spectrum will come from 2016-2017 auctions, split between 90 MHz from 703 to 803 MHz (with a 10MHz gap between 748 MHz and 758 MHz), 40 MHz from 2.3 GHz to 2.34 GHz and 45 MHz from 2.57 GHz to 2.615 GHz. Based on our research of Singapore’s spectrum policy, 20 MHz from 1880 to 1900 MHz (currently used by digital enhanced cordless telephone systems) and 35 MHz from 2010 to 2025 MHz (currently not assigned) may be also be reallocated for mobile network use. Additional spectrum may also arise from the reallocation of uses in other frequencies which may take several years as existing uses have to be phased out. (as of end 2016)

Very costly for telcos to dedicate spectrum. All in, there may be 45% or 210 MHz more of spectrum that can be allocated to the telcos.12 This brings total spectrum up to 674.2 MHz of spectrum and will reduce the ratio of users to spectrum by roughly 30% to 124,200 users per 10 MHz of spectrum. However, the average amount of spectrum for each telco will only increase by 9% from 154.7 MHz to 168.6 MHz, due to the addition of the fourth telco.

With the introduction of the fourth telco, competition will likely increase as the telcos attempt to beat each other in terms of network and service quality. To allocate 10MHz of spectrum or 6% to 6.5% of their capacity for dedicated networks will be very costly.

Likely, the telcos will roll out similar solutions that entails the sharing of spectrum with their existing users at the early stage. Due to their large user bases, their ability to assure a high level of signal quality may be limited and may not be able to achieve “mission critical” and safety requirements.

Figure 9: Spectrum allocated for mobile network communication

Source: IMDA, NRA Capital

A B C D E F G H I J K L

703 2680

700 MHz, 900 MHz, 2.3 GHz and 2.5 GHz Spectrum Rights (2016) Auction

Unallocated Spectrum

Other uses

1785 MHz to 1805 MHz, of which 1790 MHz to 1800 MHz has been allocated to Arete M

Spectrum allocated to existing telcos are in shades of blue

A & B: 703-803 MHz available for bidding with 10 MHz guard band between 748-758 MHz

C & D: 882-960 MHz currently in use with three gaps 887-890 MHz (3 MHz), 915-927 MHz (12 MHz) and 932-935 MHz (3 MHz). Figure shows new spectrum from 885 to 960 for allocation with gap at 915-930 MHz (15 MHz) from 1 April 2017 onwards

E & F: 1710-1880 MHz with gap at 1785 to 1805 MHz (20 Mhz) was allocated in 2013 and expires 30 June 2030. Arete M’s spectrum at 1790 to 1800 MHz sits within the guard band

G: 1904.9–1979.7 MHz and H: 2110.3 –2169.7 MHz were allocated in 2001 and 2010 and will expire by 31 Dec 2021.

I: 2.3–2.34 GHz fully allocated to TPG Telecom in 2016

J: 2.5-2.56 GHz was allocated in 2013 and expires Jun 2030. K: 2.57-2.615 GHz is up for bidding. L: 2.62-2.68 GHz was allocated in 2013 and expires Jun 2030. The “guard band” between J and K is 10 MHz and 5 MHz between K and L.

8Telecom International Holdings Co. Ltd.

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13 For clarity, it is not necessary for a user to acquire spectrum within the established guard bands. However, this user will have to compete with other priority users and bidders such as the telecommunication companies. On the other hand, constrained frequencies such as the space within established guard bands in the spectrum allocated for LTE networks are relatively harder to come by.

Limited Spectrum Also Limits New Entrants

With such demand for spectrum, how did Arete M get its 10 MHz? The 1.79 to 1.80 GHz band is part of the previously unused 1785 to 1805 MHz guard band of the 1710 to 1880 MHz spectrum band (E & F of Figure 9). When allocating spectrum to the telcos, IMDA has set aside unallocated spectrum acting as borders, also known as guard bands, between for instance the uplink and downlink spectrum, such as the 10 MHz space between 748 and 758 MHz within the 703 to 803 spectrum (the gap between A and B). This unallocated spectrum serves the purpose of minimizing interference when using the spectrums and is not available to the telcos.

Arete M has essentially demonstrated to the IMDA that by maintaining a 5 MHz guard band, the centre gap of 10 MHz can be utilized without causing interference to foreign networks in border areas or to the networks of other telecommunication companies or spectrum right holders (See Figure 10). The spectrum around 1785 to 1805 has been auctioned and will only expire in 2030. Hence, Arete M will not face competition for this specific band for some time. The 10 MHz of spectrum itself is administratively assigned to Arete M by IMDA and is not subject to similar expiry conditions like that of auctioned spectrum. The 1790 to 1800 MHz band has another advantage. Huawei’s eLTE solutions have been implemented based on the 1.8 GHz frequency band among other frequencies used, meaning that there is a ready suite of equipment to utilize this band.

Figure 10: 1800 MHz Centre Gap

Source: IMDA, NRA capital

Currently, only two more “guardband” spectrum available for new entrants. If a minimum of 5 MHz of guard band is needed, we counted that there are only two available spectrum bands out of the five identified gaps and one potentially reallocated 1880 to 1904.9 MHz spectrum band in Figure 9 (See Figure 11).13 Available spectrum can actually arise not just from the narrower guard bands between allocated spectrums (such as the 1785 to 1805 centre gap), but also at the edge of currently allocated spectrums (if no guard band is required), such as the 1880 to 1904.9 MHz band. However, we reckon that such “edge” spectrum can be utilized by the telecommunication companies and the priority will likely be to auction the edge spectrum to them, based on past practices.

Previously unallocated 20 MHz wide guard band to minimize interference

The centre 10 MHz of spectrum has been allocated to Arete M in 2016, with a narrower 5 MHz guard band on either side.

8Telecom International Holdings Co. Ltd.

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14 We did not ascertain if these are indeed designated guard bands, but deduced as such based on their position within the larger spectrum.

Competing for spectrum from other uses is costly. TPG Telecom is paying S$105m, before other fees, for 60 MHz of spectrum over a duration of 15 years shows that spectrum has value. For new entrants with the objective of introducing niche or new services like Arete M, the best option will be to tap onto available spectrum within designated guard bands that the four telcos cannot use.

Figure 11: Current “Guard Bands” within Spectrum allocated for LTE networks14

Lower limit (MHz)

Upper limit (MHz) Range

Available spectrum (Range less 5 MHz

on either side) Remarks

748 758 10 0

915 930 15 5 Usable, but data rates will be lower than that of larger bandwidths

1785 1805 20 10 Taken up by Arete M

1880 1904.9 24.9 14.9 Likely to be reserved for mobile phone communication due to its width and adjacency to other spectrums

2560 2570 10 0

2615 2620 5 0

Source: NRA Capital

Based on previous spectrum auctions, the four telcos generally pay more than S$1m per 10 MHz per year of spectrum. This is where Arete M will enjoy a short term cost advantage. In Arete M’s case, its spectrum costs will comprise of mainly the relevant application and processing fees, annual spectrum management fees and the relevant radio-communication licence fees. Based on the license given to Arete M, the annual fee payable is currently about S$80,000. The fee will increase only when annual revenue exceeds S$50m.

Figure 12: Historical Spectrum Costs

Spectrum Auction Issue /

Auction Date Frequency Range

(MHz) Cost + Fees

(S$m) Term (years) Cost ($m/MHz/yr) Winner New Entrant Auction (2016) 14-Dec-16 60 106.39 15 0.12 TPG Telecom Interim 1800 MHz Spectrum Right (2013) 11-Sep-13 10 15.52 3.55 0.44 Singtel 1800 MHz Spectrum Right (2013) 26-Jul-13 40 65.42 13.25 0.12 M1 1800 MHz Spectrum Right (2013) 26-Jul-13 60 98.13 13.25 0.12 Singtel 1800 MHz Spectrum Right (2013) 26-Jul-13 50 81.78 13.25 0.12 Starhub 2.5 GHz Spectrum Right (2013) 1-Jul-15 40 41.61 15 0.07 M1 2.5 GHz Spectrum Right (2013) 1-Jul-15 40 41.61 15 0.07 Singtel 2.5 GHz Spectrum Right (2013) 1-Jul-15 40 41.61 15 0.07 Starhub 1800 MHz Spectrum Right (2011) 1-Apr-11 10 22.55 6 0.38 M1 3G Spectrum Right (2010) 1-Nov-10 10 20.01 11.17 0.18 M1 3G Spectrum Right (2010) 1-Nov-10 10 20.01 11.17 0.18 Singtel 3G Spectrum Right (2010) 1-Nov-10 9.6 20.01 11.17 0.19 Starhub 2G Spectrum Right 23-Apr-01 35 100.00 20.7 0.14 M1 2G Spectrum Right 23-Apr-01 35 100.00 20.7 0.14 Singtel 2G Spectrum Right 23-Apr-01 35 100.00 20.7 0.14 Starhub PCMTS 14-Mar-14 70 2.20 3.05 0.01 Singtel 1800 MHz Spectrum Right 1-Apr-09 10 1.64 8 0.02 Starhub PCMTS 1-Jan-09 50 8.86 8.25 0.02 M1 PCMTS 1-Jan-09 50 7.30 8.25 0.02 Singtel PCMTS 1-Jan-09 50 8.55 8.25 0.02 Starhub Wireless Broadband Spectrum Rights 24-May-05 20 1.62 10 0.01 inter-touch Wireless Broadband Spectrum Rights 24-May-05 24 2.72 10 0.01 M1 Wireless Broadband Spectrum Rights 24-May-05 30 3.04 10 0.01 Pacific Internet Wireless Broadband Spectrum Rights 24-May-05 30 2.30 10 0.01 Qala Wireless Broadband Spectrum Rights 24-May-05 24 2.67 10 0.01 Singtel Wireless Broadband Spectrum Rights 24-May-05 12 1.31 10 0.01 Starhub

Source: IMDA, compiled by NRA Capital Cost estimates are on best effort basis based on available information

8Telecom International Holdings Co. Ltd.

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New Technology Poses Threat to Arete M

Leveraging on competing protocols to provide a one-stop solution. Other than LTE and Wi-Fi, there are a number of competing protocols such as Sigfox, Neul and LoRaWan that can match or even exceed the range of LTE networks. However, these protocols generally have low data transmission rates and are more suited for data collection from and communication with low powered sensors in connected environments. The dedicated LTE network is most suited for uses where broadband speeds are needed.

Some of new these protocols rely on radio frequencies that have been reserved for industrial, scientific and medical (ISM) and other uses that do not require licensing. As such, they may be subject to interference from other devices working at the same frequencies and cannot be used for mission critical purposes. The same reasoning applies for extended Wi-Fi networks.

In general, we foresee that LTE networks will edge out at the winner to connect drones and other unmanned vehicles. Public transportation and security surveillance will also likely rely on LTE. For other uses in relation to the Internet of Things, other protocols may be more effective. Therefore, it is actually shrewd for Arete M to offer both LTE and NBIoT services as complementary solutions.

Figure 13: A Non-Exhaustive List of Protocols

Protocols Frequency Range Data Rates Bluetooth 2.4 GHz 50-150m 1Mbps Zigbee 2.4 GHz 10-100m 250kbps Z-Wave 900 MHz 30m 9.6/40/100kbits/s WiFi 2.4 GHz and 5 GHz 50-100m 600 Mbps max Cellular/LTE 900/1800/1900/2100 MHz 10km and up to 35km for GSM 3-10Mbps (LTE) NFC 13.56 MHz 10cm 100-420kbps Sigfox 900 MHz 30-50km 10-1000bps Neul 900 MHz, 458 MHz, 470-790 MHz 10km up to 100kbps LoRaWan Various 2-5km 0.3 to 50kbps

Source: https://www.rs-online.com/designspark/eleven-internet-of-things-iot-protocols-you-need-to-know-about

The larger threat arises from 5G networks. In January 2017, M1 announced that it has successfully achieved data speeds of 35Gbps in trials as part of the objective for successful deployment by 2020. From the broader perspective, such high-speed networks expand the number of mobile applications for users. Autonomous driving has been stated as one of the potential uses. Its adds on to the commercial value of private LTE networks and aids in its adoption.

However, M1’s 5G trials were based on the 73GHz band. Usage of such high frequencies is less crowded. The threat of 5G networks is that they may free up lower frequency spectrum for telcos to dedicate to private networks in the future, thus posing competition to Arete M.

Therefore, Arete M’s first mover advantage with its initial 1.79 GHz to 1.80 GHz spectrum is shrinking and that fast implementation and scaling up will be a critical success factor going forward. Contract wins within the next one to two years will be key.

8Telecom International Holdings Co. Ltd.

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15 http://www.businessdailyafrica.com/Taxpayers-to-fork-out-Sh45bn-for-national-security-network-/539546-2353560-format-xhtml-f4bq95/index.html 16 http://ted.europa.eu/udl?uri=TED:NOTICE:133654-2014:TEXT:EN:HTML&src=0 17 http://www.samsung.com/global/business-images/insights/2016/Samsung-Public-Safety-LTE-Solution-1.pdf

Potential Valuation of S$135m to S$387m

The challenge is that Arete M currently does not have an established financial track record. Forming projections will depend on factors such as the number of private LTE contracts secured and whether LTE drones take-off. While we do know that Huawei has signed 164 enterprise “eLTE” contracts and implemented 84 commercial networks as of 4Q15, the value of these contracts is not openly disclosed.

Depending on the complexity and design of the network, costs may also vary. Contract values may range from about S$200m in Kenya15 to billions of dollars in the UK. The British government is revamping its emergency services network at an estimated cost of GBP 555m to GBP 1.2 billion to approximately 300,000 devices.16 This translates to a cost of S$3,263 to S$7,120 per device. In Korea, the government is in the midst of rolling out a LTE network for communication across its 4,800km rail network at a cost of US$1.6 billion or S$0.47m per km of coverage.17

To estimate that potential of 8Telecom and Arete M, we segmented Arete M’s markets into two parts – project based revenue and subscription based revenue. Target markets such as rail, maritime navigation and ports, and oil rigs are deemed as sources of project based revenue. Conversely, drones and unmanned crafts are treated as sources of subscription based revenue, where a drone user can subscribe to a “LTE-for-drone” service. For project based and subscription revenue, we form our estimates based on the unit project costs as derived from Figure 14.

Figure 14: List of Sample Projects for Financial Estimation Purpose

List of Sample Projects Unit value Remarks

UK emergency services network (GBP 555m to GBP 1.2 billion for 300,000 devices)

S$3,263 – S$7,120 per device Equivalent to at least S$50 per device per month over five years.

Korea LTE-R - to deploy through 4,800km of rail network at cost of US$1.6 billion

S$466,667 per km

Korea LTE-M - to enable high speed communication for up to 80,000 ships as far as 100km offshore at cost of US$112m

S$650 per sq. km. (based on 2,413 km of coast line and 100km range)

One satellite connection used by oil rigs S$420,000 each (US$0.3m each)

A current mobile data price plan by an existing telco S$20 per month

Source: Footnote 16, 17 6

Based on the assumptions in Figure 14 and assuming that each project takes two to three years to complete, we estimate that Arete M will initially make S$50.4m to S$75.6m of revenue per annum from potential infrastructure projects in Singapore and oil and gas projects in south east Asia, to be sustained as Arete M expands regionally (See Figure 15). In addition, we project unmanned craft/drone population of 5% to 10% of existing vehicle population in Singapore that will yield S$11.5m to S$57.4m of revenue per year based on a subscription rate of S$20 to S$50 per month. Given the nature of drones and its uses, we reckon that vehicle population is a good proxy for market sizing purpose. Based on these assumptions, the projected long term revenue potential of Arete M is about S$61.9m to S$133m per annum.

8Telecom International Holdings Co. Ltd.

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Figure 15: Revenue Estimates and Assumptions

Potential Markets Est. Project Value

(S$m) Remarks

Project based revenue sources

Rail - Thomson East Coast Line and Cross Island Line (93km over 11 years) 43.40 Based on S$0.47m per km (See Figure 14)

Existing rail network (170km as of end 2015) 79.33 Based on S$0.47m per km (See Figure 14)

Maritime navigation in Singapore (Coast line of 193km) 12.54 Based on S$650 per sq. km (See Figure 14)

No of contracted oil rigs in South east asia (38 rigs as per HIS) 15.96 Based on S$0.42m per rig (See Figure 14)

Total contract value (S$m) 151.23

Est. average project duration 2 - 3 years

Project Based Revenue per annum S$50.41m – S$75.62m

Assume that Arete M is able to expand overseas and sustain such annual revenue levels.

Subscription based revenue source

Vehicle population in Singapore as of Dec 2016 956,430

Assume drone population to be 5% to 10% of vehicle population 47,822 - 95,643

Revenue per device S$20 – S$50 Monthly subscription

Annual subscription revenue S$11.48m – S$57.39m

Total revenue S$61.89m – S$133.00m

Project based + subscription based

Source: NRA Capital

Blue skies valuation of up to S$387m. Our blue skies scenario estimates that Arete M may be worth S$387m, based on annual revenue of S$133m, net margin of 20% (Singtel: 23.2%, see Figure 17) and 14.54x P/E (peer average, see Figure 17). The base case scenario valuation of S$135m is based on annual revenue of S$61.9m, net margin of 15% (M1 and Starhub: 14.1% - 14.2%) and 14.5x P/E. However, it will likely take some time before Arete M achieves such scale and we discount the indicative valuation of S$135m to S$387m by 20% over five years to yield S$54.2m (base scenario) to S$155.4m (blue skies scenario).

Given 8Telecom’s 51% stake and 92.63m shares outstanding, we arrived at an indicative/potential valuation of S$0.299 to S$0.856 per 8Telecom share (pre-dilution). Assuming that S$7.85m to S$22.48m will be raised by 8Telecom to fund Arete M’s growth, the post dilution valuation per 8Telecom share is about S$0.181 to S$0.298 (average of S$0.240).

Figure 16: Some Quick and Dirty Estimates

S$m Base Scenario Blue Skies Scenario

Annual revenue (See Figure 15) 61.89 133.00

Assumed net margin 15% 20%

Est. Net profit 9.28 26.60

P/E (peer average of 14.54x) 14.54 14.54

Potential valuation 134.98 386.77

51% attributable to 8Telecom 68.84 197.25

Discounted back by 5 years at 20%/yr 27.67 79.27

Pre-dilution Potential valuation per 8Telecom share (92.63m shares) 0.299 0.856

Implied equity base (assume 30% ROE) 30.94 88.67

51% attributable to 8Telecom 15.78 45.22

Capital requirement - Above discounted back by 5 yrs at 15%/yr 7.85 22.48

No of 8Telecom shares to issue based on 13 cents issue price 60.36 172.95

Revised no of shares (current = 92.63m) 152.99 265.58

Post-dilution potential valuation per 8Telecom share 0.181 0.298

Source: NRA Capital

8Telecom International Holdings Co. Ltd.

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18 https://gigaom.com/2014/09/22/huawei-buys-internet-of-things-networking-firm-neul/ 19 https://www.sdxcentral.com/articles/news/comcast-will-test-lora-iot-network-two-markets/2016/10/ 20 https://techcrunch.com/2016/11/18/french-iot-startup-sigfox-confirms-e150m-series-e-at-a-valuation-of-around-e600m/

Figure 17: Net Margins and P/E of Existing Telcos

Company Name Mkt Cap (S$bn) P/E P/B

Div Yield

T12 Revenue

(S$m)

T12 Net Income (S$m)

T12 Net Margin ROA ROE

M1 Ltd 1.93 12.94 4.74 6.2% 1,061 149.7 14.1% 13.4% 36.7% StarHub Ltd 4.84 14.14 24.82 7.1% 2,397 341.4 14.2% 16.6% 178.5% Singapore Telecommunications Ltd 64.83 16.54 2.41 4.4% 16,498 3,835.4 23.2% 8.4% 14.9%

Average 23.86 14.54 10.65 5.9% 6,652 1,442.2 17.2% 12.8% 76.7%

Source: Bloomberg (extracted on 16 Feb)

The spectrum rights alone are worth S$18m. If we do not factor in future growth potential, and using TPG Telecom’s bid for its spectrum as a reference (S$1.2m per 10 MHz per year), we can value Arete M’s spectrum at S$18m or S$9.2m attributable to 8Telecom.

We do not base our estimates on the mobile population of more than 8m users in Singapore. Private LTE networks is a niche market and initial take up should be a single digit percent of the larger public LTE market. Therefore, we do not find it meaningful to use such a large base as a start.

Valuation for IoT communication services providers has been rising. When Huawei acquired Neul in 2014, it paid a price of US$25m.18 Previously, Comcast entered into a deal with Semtech for warrants valuing Semtech at US$30m. Semtech is a semiconductor company that has deployed LoRaWan IoT networks in various projects around the world.19

NBIoT player Sigfox fetched a valuation of US$600m in a round of funding conducted in late 2016 – about US$60 per connected device. Sigfox has about 10m devices registered on its network.20 Our S$164.8m valuation for close to 100,000 devices translates to about S$1,723 per device. The difference is due to Sigfox’s services catering to low data consumption commercial use, whereas Arete M’s focus is on high data consumption and high reliability public safety uses. However, these examples show that the race is on to provide mobile connectivity to the IoT. Nonetheless, we leave 8Telecom unrated at this juncture, pending further developments such as contract wins.

8Telecom International Holdings Co. Ltd.

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