The Role of Price Elasticity UBS 170408 Eng

UBS Investment Research

Compelling Analogy™: Indonesia Mobile

The role of price elasticity

Building a roadmap from analogies: India and China We believe the evolution of the Indian and Chinese mobile markets provides a number of interesting perspectives on how the Indonesian mobile market maybehave in a declining tariff environment. Indonesian mobile operators are cuttingtariffs and we note that declining tariffs are not necessarily negative for mobileoperators. We think lower tariffs may prove to be a blessing in disguise, as priceelasticity in an under-penetrated market—such as Indonesia—could result in higher mobile adoption, more usage and better economies of scale.

Telkomsel is likely to emerge as a key beneficiary, in our view Given Telkomsel’s (PT Telkom Indonesia’s 65%-owned mobile subsidiary) dominant position in the market with a current 90% population coverage, webelieve the company will emerge as a key beneficiary of price elasticity inIndonesia. We also expect Indosat Tbk (Indosat), the number two player, to benefitfrom price elasticity. Given the rapid cuts in tariffs by the incumbent operators, weexpect smaller operators such as Bakrie Telecom and Hutch Indonesia to strugglein a lower tariff environment.

Reiterate Buy ratings on PT Telkom and Indosat We have re-worked our financial models using price elasticity as a variable andtaken into account higher capital expenditure for expansion of minutes’ capacity.We maintain our Buy ratings on PT Telkom (new sum-of-the-parts-based 12-month price target of Rp12,500 with a WACC of 11%) and Indosat (new DCF-based 12-month price target of Rp8,700 with a WACC of 12.75% and a terminalEV/EBITDA multiple of 6x). We reiterate our Sell rating on Bakrie Telecom with a DCF-based 12-month price target of Rp320 (a WACC of 14.5% and a terminalEV/EBITDA multiple of 5x).

Global Equity Research

Indonesia

Wireless Communications

Compelling analogy

17 April 2008

www.ubs.com/investmentresearch

Suresh A Mahadevan, CFAAnalyst

[email protected]+852-2971 6562

Lydia ChanAssociate Analyst


This report has been prepared by UBS Securities Asia Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 28. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.ubs.com/independentresearch or may call +1 877-208-5700 to request a copy of this research.

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Compelling Analogy™: Indonesia Mobile 17 April 2008

UBS 2

Contents page

Compelling AnalogyTM: the role of price elasticity 3 — Indonesian mobile operators are not operating in the ‘sweet spot’ of the demand-

supply curve.........................................................................................................4 — Price elasticity—the India experience...................................................................5 — Price Elasticity—the China experience.................................................................6 — Indonesia is not another Thailand, in our view......................................................8 — UBS’s view on price elasticity in Indonesia...........................................................9 — Is there a capex risk? .........................................................................................12 — Risks to our hypothesis ......................................................................................12 — Indonesian telcos have under-performed ...........................................................13

Telkom Indonesia 14 — Telkomsel has launched off-net promos on “simPATI Pe De”.............................15

Indosat Tbk 21 — Segmenting subscribers with new promos .........................................................22

We would like to thank Anjali Anand for her assistance.

Suresh A Mahadevan, CFA

[email protected]

+852-2971 6562

Lydia ChanAssociate Analyst



UBS 3

Compelling AnalogyTM: the role of price elasticity

As we have pointed out before, Indonesian mobile operators have charged high tariffs that resulted in low usage levels among Indonesian mobile subscribers.

High tariffs also prevented Indonesian mobile operators from achieving the economies of scale of Indian and Chinese operators such as Bharti Airtel and China Mobile.

With increased competition, tariffs are now beginning to decline in Indonesia. While telco stocks have de-rated based on worries about increased competition, we believe there is a positive side to falling tariffs: price elasticity.

Our analysis of the evolution of the Indian and Chinese mobile markets in a falling tariff environment suggests that price elasticity could help drive economies of scale in Indonesia. The incumbent operators in Indonesia, such as Telkomsel and Indosat Tbk (Indosat), should benefit from price elasticity, in our view.

We also looked at the Thai mobile market, which did not experience much price elasticity, and conclude that conditions in Thailand were quite different to that prevailing in Indonesia—the lack of an interconnect regime, a higher proportion of post-paid users and revenues, and lower data usage.

We model price elasticity for the Indonesian mobile operators as a key variable and conclude that falling tariffs are not necessarily bad for shareholder value, as we expect price elasticity to be felt in Indonesia. An incumbent operator such as Telkomsel should be best positioned to take advantage of price elasticity, given its ability to add voice capacity at little incremental cost.

We remain positive on Indonesian telcos with Buy ratings on both Telkom and Indosat. We lower our 12-month price targets: Telkom from Rp13,800 to Rp12,500; and Indosat from Rp9,600 to Rp8,700. We have a Sell rating on Bakrie Telecom. We expect Q108 results to disappoint because:

— Tariffs have declined significantly, as most operators have started promoting much cheaper tariffs for longer duration calls and price elasticity needs a quarter or two to manifest itself.

— The first quarter is a seasonally weak quarter for Indonesia.

Table 1: Indonesian telco valuation comps

Rating Current Price Estimated Prior price PE (x) EV/EBITDA (x)

price (Rp) target (Rp) upside target (Rp) 2008E 2009E 2010E 2008E 2009E 2010E

Telkom Buy 9,100 12,500 37.4% 13,800 12.1 10.9 9.9 6.3 5.6 5.1

Indosat Buy 6,650 8,700 30.8% 9,600 15.4 13.2 12.5 4.6 4.3 4.1

Bakrie Tel Sell 280 320 14.3% 320 19.1 13.3 9.5 8.2 5.4 4.2

Note: Priced as at 16 April 2008. Source: UBS estimates

Price elasticity is the positive side of falling tariffs

We model price elasticity as a key variable for Indonesian mobile operators

We have Buy ratings on Telkom and Indosat, and a Sell rating on Bakrie Telecom


UBS 4

Indonesian mobile operators are not operating in the ‘sweet spot’ of the demand-supply curve A comparison of Telkomsel (Telkom’s 65%-owned mobile subsidiary) and Indosat with regional emerging market peers is shown below: the lack of scale of Indonesian mobile operators is evident in higher capex per minute and the higher operating cost per minute. Indonesian operators also fare poorly on capital productivity. All these metrics could improve significantly if price elasticity emerges in the Indonesian mobile market, in our view.

Table 2: Indonesian mobile subs have very low MOU

Parameter (based on Jul-Sept 2007 quarter) Telkomsel Indosat Bharti China Mobile

Mobile subs (m) 44.46 22.03 48.88 349.66

Implied ARPU (US$) 9.56 6.25 9.17 11.91

% non-voice 32.9% 33.0% 9.8% 25.2%

Non-voice ARPU (US$) 3.15 2.06 0.90 3.00

Voice ARPU (US$) 6.41 4.19 8.27 8.91

Minutes of use per month 112 89 469 463

Revenue per min (US cents) 5.71 4.69 1.76 1.92

Cost per min (US cents) 2.44 2.47 1.04 0.89

Capex per min (US cents)1 6.51 13.33 2.26 3.00

Minutes in network (m)2 14,700 5,629 64,375 474,005

Capital productivity3 56% 35% 73% 64%

1 Capex per min is estimated for China Mobile based on previous quarters, as it does not report quarterly fixed assets. 2 Minutes in network is for July-Sept 2007 quarter for all companies. 3 Capital productivity is calculated for Telkom Indonesia (not Telkomsel), and estimated for China Mobile based on previous quarters since it does not report quarterly fixed assets. Source: Company data, UBS estimates

We believe Telkomsel and Indosat do not currently operate in the ‘sweet spot’ of the demand-supply curve, as evidenced by:

— Tariff levels that are over 2-3x higher than the Indian and Chinese operators charge.

— Minutes of use by customers that are less than a quarter of what Indian and Chinese mobile subscribers use.

As a result, Telkomsel and Indosat are unable to enjoy the benefits of economies of scale currently enjoyed by China Mobile and Bharti.

We also find that Indonesian mobile operators have yet to witness price elasticity because mobile tariffs have been high. The key question is, now that tariffs are declining, will price elasticity kick-in in Indonesia? Given Indonesia’s demographics are not that dissimilar to India and China, we expect price elasticity to kick-in in the next few quarters.

When tariffs drop, price elasticity may take around one to two quarters to develop. While telco stocks may de-rate further before the effects of price elasticity appear, we believe further share price weakness will provide emerging market investors with a good opportunity to accumulate these stocks.

Indonesian operators may be able to improve minutes-based KPIs, if price elasticity kicks in

Price elasticity may take a few quarters to develop after tariffs drop


UBS 5

Price elasticity—the India experience Table 3: Evidence of price elasticity at Bharti Airtel

Bharti operating stats Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05

Mobile revenue (Rs m) 6,144 6,566 7,566 8,580 9,896 10,890 12,263 14,697 16,165 17,464

VAS as % of revenue 3.1% 2.9% 2.9% 4.3% 4.9% 5.9% 8.6% 8.6% 9.4% 10.2%

Mobile voice revenue (Rs m) 5,954 6,376 7,347 8,211 9,411 10,247 11,208 13,433 14,645 15,683

Minutes carried (b) 2.18 2.98 3.77 4.49 5.31 6.57 7.98 9.56 11.14 13.32

% change 36.4% 26.5% 19.3% 18.3% 23.7% 21.5% 19.8% 16.6% 19.5%

Voice revenue / minute (Rs) 2.73 2.14 1.95 1.83 1.77 1.56 1.40 1.41 1.31 1.18

% change -21.5% -8.9% -6.3% -3.1% -12.0% -10.0% 0.1% -6.5% -10.4%

Price elasticity 1.7 3.0 3.1 5.9 2.0 2.2 NM 2.6 1.9

Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07

Mobile revenue (Rs m) 19,052 21,742 24,134 28,411 33,022 37,579 42,431 46,976 50,579 56,105

VAS as % of revenue 10.9% 9.7% 10.7% 10.8% 10.3% 10.4% 10.1% 9.9% 9.8% 9.3%

Mobile voice revenue (Rs m) 16,975 19,633 21,552 25,343 29,621 33,671 38,145 42,325 45,622 50,887

Minutes carried (b) 15.28 18.64 23.19 28.19 33.84 41.04 49.24 57.13 64.38 73.84

% change 14.7% 22.0% 24.4% 21.6% 20.0% 21.2% 20.0% 16.0% 12.7% 14.7%

Voice revenue / minute (Rs) 1.11 1.05 0.93 0.90 0.88 0.82 0.77 0.74 0.71 0.69

% change -5.6% -5.2% -11.8% -3.3% -2.6% -6.2% -5.6% -4.4% -4.4% -2.8%

Price Elasticity 2.6 4.3 2.1 6.6 7.6 3.4 3.6 3.7 2.9 5.3

Source: Company data

Operating data for Bharti Airtel for the past 20 quarters illustrate the effect of price elasticity. As revenue per minute declined, mobile minutes carried on the network multiplied. In the past 20 quarters, revenue per minute dropped c75%, whereas mobile minutes carried increased around 34x. Price elasticity (as measured by the ratio of the percentage change in volume of minutes to the percentage change in tariff reductions) has ranged from 1.7-7.6. While existing users have used more minutes, the vast majority of the incremental minutes came from new users attracted to the mobile network by lower tariffs. India’s under-penetration, falling handset prices and improving geographical coverage are other factors that led to rapid mobile adoption in India.

Table 4: Bharti minutes based KPIs

Three months ending Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07

Revenue per minute (US cents) 2.70 2.52 2.33 2.09 1.96 1.91 1.85 1.77 1.82 1.76 1.65

Cost per minute (US cents) 1.76 1.60 1.48 1.33 1.25 1.20 1.15 1.08 1.08 1.04 0.98

Spread per minute (US cents) 0.94 0.92 0.85 0.76 0.71 0.70 0.69 0.69 0.74 0.72 0.67

EBITDA margin 35% 36% 36% 36% 36% 37% 38% 39% 41% 41% 41%

Mobile minutes carried (m) 13,321 15,281 18,636 23,187 28,194 33,844 41,035 49,240 57,125 64,375 73,840

Capex per min (US cents) 3.52 3.30 2.90 2.71 2.47 2.47 2.31 2.06 2.23 2.26 2.11

Return on equity (LTM) 31% 31% 29% 29% 30% 32% 35% 38% 41% 42% 41%

Return on capital employed (LTM) 20% 21% 22% 22% 22% 24% 27% 30% 33% 34% 34%


Price elasticity has ranged from 1.7-7.6


UBS 6

Price Elasticity—the China experience Table 5: Evidence of price elasticity at China Mobile

China Mobile operating stats H204 H105 H205 H106 H206 H107 H207

Mobile revenue (Rmb m) 117,573 114,547 128,494 136,979 158,379 166,580 191,188

VAS as % of revenue 17.5% 19.7% 21.5% 22.6% 24.2% 25.2% 26.7%

Mobile voice revenue (Rmb m) 97,027 91,990 100,864 106,053 119,996 124,665 140,046

Minutes carried (b) 407 418 485 569 683 829 990

% change 2.7% 16.0% 17.3% 20.0% 21.4% 19.5%

Voice revenue / minute (Rmb) 0.24 0.22 0.21 0.19 0.18 0.15 0.14

% change -7.7% -5.5% -10.4% -5.7% -14.4% -6.0%

Price Elasticity 0.4 2.9 1.7 3.5 1.5 3.3


While the competitive intensity of India’s mobile market has led to falling tariffs China Mobile, despite being the dominant incumbent, decided to cut tariffs in order to stimulate demand, particularly from rural China. The past three years of China Mobile’s operating data indicate that while revenue per minute realisations declined 42%, minutes carried on the mobile network improved 143%, indicating the positive effects of price elasticity.

Table 6: China Mobile minutes based KPIs

Six months ending Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07

Revenue per minute (US cent) 2.64 2.58 2.32 2.25 1.95 1.81

Cost per minute (US cent) 1.19 1.16 0.99 1.10 0.90 0.86

Spread per minute (US cent) 1.44 1.42 1.32 1.15 1.05 0.96

EBITDA margin % 54.7% 55.0% 57.2% 51.3% 53.9% 52.8%

Mobile minutes carried (m) 418,060 485,060 569,200 682,900 828,820 990,070

Capex per min (US cent) 4.50 4.27 3.90 3.51 3.22 2.91

Return on equity (LTM) 20.8% 21.3% 21.9% 22.4% 23.2% 25.3%

Return on capital employed (LTM) 24.7% 25.9% 29.8% 32.5% 36.8% 42.8%


China Mobile, despite being the dominant incumbent, decided to cut tariffs in order to stimulate demand


UBS 7

Price elasticity in Indonesia: Excelcomindo’s recent performance

Excelcomindo has led the market in reducing tariffs for its pre-paid customers from Q207 onwards. The table below illustrates the effect of price elasticity experienced by Excelcomindo. While revenue per minute realisations fell 69%, minutes carried on the network rose 4.4x (Q207-Q407), clearly illustrating the effect of positive elasticity.

Table 7: Operating stats for Excelcomindo (2007)

Excelcomindo Q107 Q207 Q307 Q407

Mobile revenue (Rp b) 1,660 1,903 2,068 2,631

VAS as % of revenue 29.0% 29.0% 29.0% 29.0%

Mobile voice revenue (Rp b) 1,179 1,351 1,468 1,868

Minutes carried (b) 1.9 1.7 3.0 7.5

% change -21.7% -11.1% 79.2% 145.9%

Voice revenue / minute (Rp) 615.5 793.8 481.5 249.1

% change 11.5% 29.0% -39.3% -48.3%

Elasticity 1.9 0.4 2.0 3.0


Table 8: Excelcomindo minutes based KPIs

Three months ending Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07

Revenue per minute (US cent) 8.8 9.2 8.5 6.1 7.2 8.8 5.2 2.7

Cost per minute (US cent) 4.9 5.4 5.0 4.1 4.1 5.1 3.0 1.6

Spread per minute (US cent) 3.9 3.7 3.5 2.0 3.1 3.7 2.2 1.1

EBITDA margin % 44.4% 40.6% 41.6% 33.4% 43.1% 41.9% 42.2% 41.0%

Mobile minutes carried (m) 1,136 1,308 1,556 2,444 1,915 1,702 3,050 7,500

Capex per min (US cent) 23.0 26.5 19.5 13.3 18.4 22.9 13.5 6.0

Return on equity (LTM) n/a n/a n/a n/a 11.3% 13.8% 7.0% 5.7%

Return on capital employed (LTM) n/a n/a n/a n/a 9.5% 10.4% 8.2% 8.0%



UBS 8

Indonesia is not another Thailand, in our view Table 9: AIS operating data

AIS operating statistics Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406

Mobile revenue (Bt m) 21,355 21,034 19,628 18,820 20,409 21,089 18,231 17,833 18,077

VAS as % of revenue 5.6% 6.3% 6.6% 7.9% 7.7% 8.6% 9.9% 10.1% 10.4%

Mobile voice revenue (Bt m) 20,159 19,709 18,333 17,333 18,838 19,275 16,426 16,032 16,197

Minutes carried (b) 14.94 14.64 18.42 22.69 23.21 23.29 33.30 27.85 28.04

% change -2.0% 25.8% 23.1% 2.3% 0.4% 42.9% -16.4% 0.7%

Voice revenue / minute (Bt) 1.35 1.35 1.00 0.76 0.81 0.83 0.49 0.58 0.58

% change -0.3% -26.1% -23.2% 6.2% 1.9% -40.4% 16.7% 0.3%

Elasticity (7.3) 1.0 1.0 (0.4) (0.2) 1.1 1.0 (2.1)


The above table illustrates what happened in Thailand when tariffs were cut by the incumbent operator, AIS. While revenue per minute realisations fell 57%, minutes carried increased only 88% in Q404-Q406, resulting in very low elasticity. Many investors and analysts are worried that Indonesia may follow Thailand’s example (as opposed to the Indian/Chinese path of mobile market evolution). We believe Indonesia’s mobile market will behave more like India and China than Thailand as:

Interconnect regime. Thailand did not have any interconnect regime in 2005-06, and tariff reductions were not just “on-net” and were applicable for all calls. Therefore smaller operators such as True were providing off-net calls to larger operators such as AIS, were not compensated for the calls but were obliged to carry them anyway.

SMS versus voice. Thailand’s revenue from SMS is under 10% while SMS constitutes 30% of mobile revenue in Indonesia. Therefore when Thailand’s voice tariffs fell, it hit a higher percentage of the revenue base.

Post-paid versus pre-paid. The most damaging effect of the price war in 2005-06 was on post-paid revenue. Although post-paid users constituted only 15% of subscribers, they were closer to 35% of revenue in Thailand. The elasticity argument is much weaker for post-paid than pre-paid, as post-paid subscribers are often not constrained as much by their wallets. Post-paid revenue constitutes a much smaller percentage of revenue in Indonesia and the promotions are all on the pre-paid brands.

High oil prices. Thailand is one of the few developing economies in Asia not to have aggressively capped fuel prices. Consequently, for low-end prepaid users in particular, the higher cost of filling up one’s motorcycle or pickup truck’s petrol tank could erode the money available to chat on the phone. Also, given Thailand’s penetration rate historically has been higher than Indonesia, there were more low-end users in the system than in Indonesia. Thailand’s domestic economy also slowed to near-recession from 2005 and was an important factor limiting upside from elasticity.

Thailand exhibited very low elasticity despite a 57% decline in revenue per minute realisations

Thai elasticity hindered by lack of interconnect regime, lower proportion of revenue from SMS, higher proportion of revenue from post-paid, and high oil prices


UBS 9

UBS’s view on price elasticity in Indonesia (1) We believe Indonesia’s mobile market is under-penetrated.

We believe headline mobile penetration of around 40% is misleading because of the presence of multiple SIM cards. Indonesia is predominantly a pre-paid market with a monthly churn rate of 12%, and there is a fair degree of duplication of SIM cards. Also, a significant proportion of mobile users in the bigger cities carry a fixed wireless phone to take advantage of lower local call rates.

An average Indonesian consumer uses roughly a quarter of the minutes used by an Indian or Chinese consumer because voice tariffs in Indonesia are relatively higher than in India or China. Also, SMS use in Indonesia is around 3x of that of India and 2x that of China.

While the relative price difference between voice tariff and SMS tariff could partly explain this, we think the use of English script for the Indonesian language of Bahasa is another reason. While the Indonesian consumer is unlikely to match the voice usage of his/her Indian/Chinese counterpart, it is probable that Indonesian mobile usage could improve significantly because of rising competition leading to falling revenue per minute realisations.

(2) Mobile tariffs in Indonesia have fallen significantly

As we show below, tariffs have fallen significantly. Also, the longer the call, the cheaper it is for the pre-paid customer. This has led to a change in consumer behaviour towards longer duration calls. Therefore we expect existing users to improve their usage and for new pre-paid users to be attracted to the mobile network as a result of declining tariffs.

Table 10: Old versus new tariffs

Tariff (Rp/second) Old New Comment

Telkomsel simPATI on-net local 25 25/0.5

on-net long distance 67 25/0.5Rp25/second for 1st, 6th, 11th minutes, Rp0.5/second for 2nd-5th minutes, 7th-10th minutes, and so on.

off-net local 27 25

off-net long distance 67 25

Indosat IM3 on-net local 17 15/0.000…01

on-net long distance 17 15/0.000…01Rp15/second for first 90 seconds, Rp0.000…01/second afterwards.

off-net local 26 15/0.000…01

off-net long distance 67 15/0.000…01Rp15/second for 1st 90 seconds, Rp0.000…01/second for next 2nd 90 seconds, Rp15/second for 3rd 90 seconds, and so on.

Excelcomindo Bebas on-net local 25 10/0.000…01

on-net long distance 25 10/0.000…01Rp10/second for the 1st/ 1st two/ 1st three minutes depending on time of day, and Rp0.000…01/second afterwards.

off-net local 25 25/0.000…01/10

off-net long distance 25 25/0.000…01/10Rp25/second for the 1st two minutes, Rp0.000…01/second for the 2nd-10th minute, and Rp10/second afterwards.


High churn rate and subscribers who have more than one phone inflate headline mobile penetration

Average Indonesian mobile usage is around 25% of India or China

Tariff per minute declines for longer duration calls


UBS 10

Table 11: Telkomsel simPATI call duration cost old versus new

(Rp) On-net Local On-net long distance Off-net local Off-net long distance

old new Old new old new old new

1 minute 1,500 1,500 4,000 1,500 1,600 1,500 4,000 1,500

3 minutes 4,500 1,560 12,000 1,560 4,800 4,500 12,000 4,500

5 minutes 7,500 1,620 20,000 1,620 8,000 7,500 20,000 7,500

10 minutes 15,000 3,240 40,000 3,240 16,000 15,000 40,000 15,000


Table 12: Indosat IM3 call duration cost old versus new


old new old new old new old new

1 minute 1,000 900 1,000 900 1,550 1,500 4,000 1,500

3 minutes 3,000 1,350 3,000 1,350 4,650 2,250 12,000 2,250

5 minutes 5,000 1,350 5,000 1,350 7,750 4,500 20,000 4,500

10 minutes 10,000 1,350 10,000 1,350 15,500 8,250 40,000 8,250


Table 13: Excelcom Bebas’ call duration cost old versus new


old new old new old new old new

1 minute 1,500 600 1,500 600 1,500 1,500 1,500 1,500

3 minutes 4,500 600/1,200/1,8001 4,500 600/1,200/1,8001 4,500 3,000 4,500 3,000

5 minutes 7,500 600/1,200/1,8001 7,500 600/1,200/1,8001 7,500 3,000 7,500 3,000

10 minutes 15,000 600/1,200/1,8001 15,000 600/1,200/1,8001 15,000 3,000 15,000 3,000

Note: 1 Cost depends on time of day. Source: Company data


UBS 11

(3) We have modelled elasticity as a key driver for Telkomsel and Indosat.

Figure 1: Modelling using price elasticity as a driver

% change in revenue per minute

Elasticity factor

Change in total minutes carried

Mobile revenues (Total minutes * revenue/minute)

Drivers Output

Source: UBS estimates

Table 14: Telkomsel elasticity assumptions

YE 31 December Q108E Q208E Q308E Q408E Q109E Q209E Q309E Q409E

Revenue/minute (Rp) 452.8 430.2 408.6 388.2 368.8 350.4 332.8 316.2

% change -14.0% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0% -5.0%

Elasticity factor 0.6 1.9 2.5 2.2 0.8 1.7 2.4 2.1

Minutes carried (b min) 18.3 20.0 22.5 25.0 26.0 28.2 31.6 34.9

% change 8.4% 9.5% 12.5% 11.0% 4.0% 8.5% 12.0% 10.5%

Total mobile revenue (Rp bn) 8,283 8,616 9,209 9,711 9,594 9,889 10,522 11,045


Table 15: Indosat elasticity assumptions

YE 31 December Q108E Q208E Q308E Q408E Q109E Q209E Q309E Q409E

Revenue/minute (Rp) 349.2 331.7 311.8 296.2 281.4 264.5 243.4 223.9

% change -15.0% -5.0% -6.0% -5.0% -5.0% -6.0% -8.0% -8.0%

Elasticity factor 0.5 1.6 2.5 2.5 0.8 1.6 2.2 1.9

Minutes carried (b min) 6.3 6.8 7.8 8.8 9.1 10.0 11.8 13.5

% change 6.8% 8.0% 15.0% 12.5% 4.0% 9.6% 17.6% 15.2%

Mobile voice revenue (Rp bn) 2,192 2,249 2,431 2,599 2,567 2,645 2,862 3,033



UBS 12

Is there a capex risk? As tariffs drop and price elasticity kicks in, a key issue that needs to be addressed is, does capex risk exist. We believe there is no major capex risk in Indonesia at present for the following reasons:

Incumbent mobile operators in Indonesia such as Telkomsel and Indosat have an abundance of spectrum. While Telkomsel has 2 x 7.5 MHz in the 900 MHz band and 2 x 22.5 MHz in the 1800 MHz band, Indosat has 2 x 10 MHz in the 900 MHz band and 2 x 20 MHz in the 1800 MHz band. Our discussions with equipment vendors indicate that up to 24 TRXs (transceivers) can be accommodated at each site, resulting in a capacity of around 125 erlangs per site. Assuming a dimension of 20 milli-erlang per subscriber, they can accommodate around 6,250 subscribers per site.

Indonesian operators historically have not used optimisation techniques such as half rates and AMR (adaptive multi rate). If they did, peak period capacity can be raised around 30-40%.

Telkomsel’s current population coverage of around 90% compares with Indosat’s coverage of over 80%. If price elasticity is stimulated, Indonesian operators could easily shift some coverage capex into capacity capex (which is cheaper if capacity expansion takes place in regions where coverage exists).

Risks to our hypothesis Given the relatively higher SMS usage (30%) of Indonesian mobile

subscribers (versus India at 8% and China at 12%), there may not be a high propensity to use voice despite a fall in voice tariffs. In other words, Indonesian subscribers may have a habit of relying on SMS, which may not be reversible even under lower tariffs.

The Bahasa language uses English script, which makes it easier to rely on SMS as opposed to voice calls (compared with India and China) .Even with falling tariffs, Indonesian customers may use SMS as a non-intrusive, convenient way to communicate.

We believe the economic growth prospects for India and China are higher than Indonesia. Therefore, we may not see the high degree of price elasticity in Indonesia that took place in India and China.

The recent occurrence of food inflation in Indonesia poses a risk. If food inflation persists through most of 2008, we are unlikely to witness our forecast level of elasticity.

Irrational competition in the Indonesian mobile sector will lead to mobile companies operating in the sub-optimal part of the demand-supply curve where they charge cheaper tariffs than the propensity of customers to pay. We see some evidence of irrational competition in Indosat’s off-net call pricing during off-peak hours, where the company has priced its calls below the interconnect rate.

Indonesian mobile operators have an abundance of spectrum that can accommodate high capacity per site

Optimisation techniques can boost capacity by around 30-40%

Coverage capex can be shifted to capacity capex

Risks include dependency on SMS, loss of purchasing power due to food inflation, irrational competition, and macro economic risks.


UBS 13

As an emerging market country, Indonesia faces macroeconomic risks on several fronts that may de-rail real GDP growth. If the economy falls into a recession, elasticity may not be as strong as we forecast.

Indonesian telcos have under-performed Chart 1: Indonesian telcos versus Jakarta Composite Index

Source: Bloomberg

Telkom and Indosat have underperformed the Indonesian stock market significantly since January 2007, as investors are concerned about price competition. However, we believe the telcos will outperform because:

Indonesian tariffs have started to decline and we expect 2008 will be the year that price elasticity effects are apparent in the Indonesian mobile market. Though Q108 earnings are likely to disappoint and may result in further short-term price weakness, we believe Telkom and Indosat will re-rate as investors receive more data points on price elasticity.

Telkom and Indosat are essentially plays on Indonesian consumption. We believe the sector is not exposed to a US recession and has good earnings visibility which is likely to cause out-performance. We believe valuation multiples are compelling (see the table below).

Table 16: Indonesian telco valuation comps

Rating Current Price Estimated Prior price PE (x) EV/EBITDA (x)

price (Rp) target (Rp) upside target (Rp) 2008E 2009E 2010E 2008E 2009E 2010E

Telkom Buy 9,100 12,500 37.4% 13,800 12.1 10.9 9.9 6.3 5.6 5.1

Indosat Buy 6,650 8,700 30.8% 9,600 15.4 13.2 12.5 4.6 4.3 4.1

Bakrie Tel Sell 280 320 14.3% 320 19.1 13.3 9.5 8.2 5.4 4.2

Note: Priced as at 16 April 2008. Source: UBS estimates

We believe telcos will outperform as price elasticity is stimulated


UBS 14


Telkom Indonesia

Positioned as the market leader Telkomsel’s leadership makes it best positioned

We believe Telkomsel (Telkom Indonesia’s 65%-owned mobile subsidiary) is bestpositioned to leverage price elasticity effects that are likely to play out in theIndonesian mobile market. With current population coverage of over 90% and a50%+ subscriber market share, we believe Telkomsel has a competitive advantagein terms of its on-net promotions.

Checks indicate good traction for “simPATI Pe De” Telkomsel has launched the “Pe De” promotion for its “simPATI” pre-paid brand. Our checks indicate the promotion has very good traction. The “Kartu As” brandhas been re-positioned but we have yet to note significant traction.

Q108 result could disappoint Our checks indicate Indonesia’s mobile industry as a whole may record negativeQoQ revenue growth in Q108 as: 1) Q1 is seasonally a low quarter; and 2) whiletariffs have declined significantly, price elasticity takes one to two quarters to fullymanifest.

Valuation: reiterate Buy with a new Rp12,500 price target We modelled Telkomsel using price elasticity as a key driver and raised our capexassumption to account for higher usage caused by price elasticity. We maintain ourBuy rating on Telkom. We revise down slightly our 12-month sum-of-the-parts-based price target from Rp13,800 to Rp12,500. We value Telkomsel and Telkomex-Telkomsel using a WACC of 11%.

Highlights (Rpbn) 12/05 12/06 12/07E 12/08E 12/09ERevenues 41,807 51,294 62,353 70,825 77,810EBIT (UBS) 17,171 21,593 27,664 29,948 31,685Net Income (UBS) 8,510 10,169 14,008 15,561 16,492EPS (UBS, Rp) 422 504 695 772 818Net DPS (UBS, Rp) 145 267 348 390 454 Profitability & Valuation 5-yr hist av. 12/06 12/07E 12/08E 12/09EEBIT margin % 43.5 42.1 44.4 42.3 40.7ROIC (EBIT) % 44.0 53.2 61.9 59.8 56.9EV/EBITDA (core) x 4.8 6.9 6.6 6.0 5.4PE (UBS) x 12.3 15.2 13.1 11.8 11.1Net dividend yield % 3.5 3.5 3.8 4.3 5.0 Source: Company accounts, Thomson Financial, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rp9,100 on 16 Apr 2008 23:38 HKT Suresh A Mahadevan, CFA Analyst [email protected] +852-2971 6562

Lydia Chan Associate Analyst [email protected] +852-2971 5526

Global Equity Research Indonesia

Fixed-Line Communications

12-month rating Buy Unchanged 12m price target Rp12,500/US$54.40 Prior:Rp13,800/US$60.06

Price Rp9,100/US$40.10 (ADR) RIC: TLKM.JK BBG: TLKM IJ

Trading data (local/US$) 52-wk range Rp12,650-8,400/US$56.58-37.50Market cap. Rp183,456bn/US$20.2bnShares o/s 20,160m (ORD)/504m (ADR)ADR ratio 1 ADR:40 ORDFree float 49%Avg. daily volume ('000) 25,367/20Avg. daily value (Rpm) 238,325.1/0.8 Balance sheet data 12/07E Shareholders' equity Rp35,016bnP/BV (UBS) 5.2xNet Cash (debt) (Rp2,916bn) Forecast returns Forecast price appreciation +37.4%Forecast dividend yield 4.3%Forecast stock return +41.7%Market return assumption 11.5%Forecast excess return +30.2% EPS (UBS, Rp) 12/07E 12/06 From To Cons. ActualQ1 155 155 - 137Q2 171 171 - 123Q3 167 167 - 164Q4E 178 202 - 8112/07E 671 695 66112/08E 753 772 737 Performance (Rp)

04/05

07/05

10/05

01/06

04/06

07/06

10/06

01/07

04/07

07/07

10/07

01/08

04/08

0

2000

4000

6000

8000

10000

12000

14000

0

20

40

60

80

100

120

140

Price Target (Rp) (LHS) Stock Price (Rp) (LHS)Rel. Jakarta Comp (RHS)

Stock Price (Rp) Rel. Jakarta Comp

Source: UBS www.ubs.com/investmentresearch


UBS 15

Telkomsel has launched off-net promos on “simPATI Pe De” Following the implementation of cost-based interconnect rates on 1 April 2008, Telkomsel launched new promotional tariffs, reducing off-net pricing for long distance calls from Rp60/second to Rp25/second, as well as reducing SMS pricing.

Telkomsel has also tweaked its earlier on-net promotion, charging Rp25/second for the first, sixth and eleventh minute, and Rp0.5/second for the second to fifth, seventh to the tenth minute and so on. The previous promo charged Rp25/second for the first minute and Rp0.5/second from the second minute onwards.

Table 17: Telkomsel simPATI PeDe promotional tariffs

Rp/second New promo tariff

On-Net#

Local 25 / 0.5

Long Distance 25 / 0.5

Off-Net

Local 25

Long Distance 25

PSTN

Local 15

Long Distance 35

SMS

On Net 100

Off Net 150

# For on-net calls Rp0.5/second 2nd minute to 5th minute, and 7th minute to the 10th minute and so on. Source: Company data

Figure 2: simPATI promo



UBS 16

Table 18: Telkom Indonesia key assumptions

YE 31 December 2005 2006 2007E 2008E 2009E 2010E

Telkomsel

Industry mobile subs (m) 51.4 69.8 103.5 133.3 156.6 176.2

Telkomsel mobile subs (m) 24.3 35.6 47.9 56.9 63.9 69.9

Subscriber market share 47.3% 51.0% 46.3% 42.7% 40.8% 39.7%

Implied ARPU (Rp 000) 104.5 98.2 87.2 81.7 80.2 80.0

% change -6.0% -11.2% -6.3% -1.8% -0.3%

Chargeable MOU (min/sub/month) 42 51 49 59 72 87

Incoming MOU (min/sub/month) 53 65 63 76 92 111

Free MOU (min/sub/month) 2 3 2 3 4 4

Blended MOU (min/sub/month) 97 119 115 138 168 203

% change 22.2% -3.4% 20.0% 21.7% 20.8%

Total minutes carried (b min) 24.5 42.5 57.9 85.9 120.8 162.1

% change 73.3% 36.4% 48.2% 40.7% 34.2%

Voice revenue/ minute (Rp) 806 597 539 420 342 286

% change -26.0% -9.7% -22.1% -18.5% -16.4%

Elasticity factor - 2.8 3.8 2.2 2.2 2.1

Gross revenue (Rp t) 26.1 34.9 44.0 50.8 57.7 63.9

Net revenue (Rp t) 21.1 29.1 38.8 44.6 50.1 55.5

Gross EBITDA margin 59.0% 59.4% 58.0% 56.5% 54.1% 52.6%

Capex/sales 32.6% 37.7% 30.7% 28.7% 21.0% 18.0%

Telkom (ex-Telkomsel)

Revenues (Rp t) 21.9 23.9 27.3 30.5 32.5 34.9

EBITDA margin 46.8% 45.9% 46.7% 44.6% 45.2% 45.6%

Capex/sales 23.9% 24.1% 13.9% 23.9% 20.0% 18.5%

Fixed line subs (m) 8.7 8.7 8.7 8.8 8.8 8.8

Fixed line ARPU (Rp 000) 88.8 80.7 73.0 69.6 66.8 64.2

Telkom Flexi subs (m) 4.1 4.2 6.2 9.2 11.7 13.9

Telkom Flexi ARPU (Rp 000) 48.8 60.6 61.0 56.8 54.6 52.4

Telkom Speedy subs (m) - 0.1 0.2 0.5 1.2 2.5

Telkom Speedy ARPU (Rp) - 314.0 283.4 202.0 129.7 112.5

Source: Company data, UBS estimates


UBS 17

Table 19: Telkomsel discounted cash flow

YE 31 Dec (Rp bn) 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

EBIT 21,513 22,684 24,414 25,774 26,221 26,685 27,128 27,954 28,225 28,192

Tax Rate 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%

EBIT*(1-t) 14,968 15,783 16,986 17,932 18,243 18,567 18,874 19,449 19,638 19,615

+ D & A 7,190 8,524 9,200 9,643 10,472 10,954 11,154 10,747 10,726 10,886

- Capex (14,560) (12,114) (11,504) (11,111) (10,813) (10,377) (9,826) (9,198) (8,517) (8,173)

+ Change in working capital 1,242 1,033 1,116 906 831 696 370 281 561 57

FCFF 8,840 13,225 15,798 17,370 18,733 19,840 20,573 21,279 22,408 22,384

FCFF - Discounted 8,840 12,553 13,509 13,380 13,000 12,403 11,587 10,797 10,242 9,217

Value of cash-flows thro 2016 115,527

Terminal value - 7x EV/EBITDA 121,019 Risk-Free rate 9.3%

Equity risk premium 5.0%

Enterprise value 236,547 Beta 0.85

Net Debt / (Cash) 464 Cost of equity 13.5%

Equity value 236,082 Post-tax cost of debt 6.3%

Telkom stake 65% Debt/Equity ratio 35%

Value per share 7,612 WACC 11.0%


Table 20: Telkom ex-Telkomsel discounted cash flow

YE 31 Dec (Rp bn) 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

EBIT 8,435 9,001 9,233 9,676 11,693 14,178 14,646 14,646 15,579 14,742

Tax Rate 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%

EBIT*(1-t) 5,904 6,301 6,463 6,773 8,185 9,924 10,252 10,252 10,905 10,319

+ D & A 5,179 5,684 6,670 6,897 6,129 4,481 4,509 4,808 4,063 5,036

- Capex (7,280) (6,497) (6,448) (6,458) (6,338) (6,005) (5,507) (4,938) (4,317) (3,907)

+ Change in working capital 532 443 478 388 356 298 159 120 240 24

FCFF 4,336 5,930 7,162 7,601 8,332 8,699 9,414 10,243 10,891 11,473

FCFF - Discounted 4,336 5,629 6,124 5,855 5,782 5,438 5,302 5,197 4,978 4,724

Value of cash-flows thro 2016 53,365 Risk-Free rate 9.3%

Terminal value - 5.5x EV/EBITDA 47,032 Equity risk premium 5.0%

Beta 0.85

Enterprise value 100,398 Cost of equity 13.5%

Net Debt / (Cash) 1,857 Post-tax cost of debt 6.3%

Equity value 98,541 Debt/Equity ratio 35%




UBS 18

Table 21: Telkom sum-of-the-parts

(Rp bn) Enterprise Net Debt Equity Telkom’s Value per WACC Terminal

Value (Cash) Value stake share (Rp) EV/EBITDA

Telkomsel 236,547 464 236,082 65% 7,612 11.0% 7x

Telkom (ex-Telkomsel) 100,398 1,857 98,541 100% 4,888 11.0% 5.5x

Sum of the parts 12,500


Figure 3: UBS vs. consensus

0% 10% 20% 30% 40% 50% 60% 70%

Buy

Hold

Sell

YE 31 December (Rp b) 2007E 2008E 2009ERevenues - UBS 62,353 70,825 77,810 Revenues - Consensus 62,025 70,750 78,690 % delta 0.5% 0.1% -1.1%

EBITDA - UBS 38,254 42,317 45,893 EBITDA - Consensus 37,228 41,795 45,703 % delta 2.8% 1.2% 0.4%

Net profit - UBS 13,894 15,561 16,492 Net profit - Consensus 13,433 15,144 16,857 % delta 3.4% 2.8% -2.2%

Source: Bloomberg, UBS estimates

UBS 19

Telkom Indonesia

Income statement (Rpbn) 12/02 12/03 12/04 12/05 12/06 12/07E % ch 12/08E % ch 12/09E % chRevenues 20,802 27,116 33,948 41,807 51,294 62,353 21.6 70,825 13.6 77,810 9.9Operating expenses (ex depn) - - - - - - - - - - -EBITDA (UBS) 12,791 17,486 21,899 25,660 31,716 38,254 20.6 42,317 10.6 45,893 8.5Depreciation (3,662) (5,510) (7,311) (8,489) (10,123) (10,590) 4.6 (12,369) 16.8 (14,208) 14.9Operating income (EBIT, UBS) 9,129 11,976 14,588 17,171 21,593 27,664 28.1 29,948 8.3 31,685 5.8Other income & associates (31) 367 334 420 195 68 -65.1 0 - 0 -Net interest (1,103) (1,017) (952) (833) (631) (782) 23.9 (359) -54.1 (306) -14.7Abnormal items (pre-tax) 3,753 126 (1,221) (517) 836 (114) - 0 - 0 -Profit before tax 11,748 11,452 12,749 16,241 21,994 26,836 22.0 29,589 10.3 31,379 6.0Tax (2,899) (3,861) (4,179) (5,184) (7,040) (8,225) 16.8 (8,877) 7.9 (9,414) 6.0Profit after tax 8,849 7,591 8,571 11,058 14,954 18,611 24.5 20,712 11.3 21,965 6.0Abnormal items (post-tax) 0 0 0 0 0 0 - 0 - 0 -Minorities / pref dividends (810) (1,504) (1,956) (3,064) (3,948) (4,717) 19.5 (5,152) 9.2 (5,474) 6.3Net income (local GAAP) 8,039 6,087 6,615 7,994 11,006 13,894 26.2 15,561 12.0 16,492 6.0Net Income (UBS) 4,286 5,961 7,835 8,510 10,169 14,008 37.7 15,561 11.1 16,492 6.0

Tax rate (%) 25 34 33 32 32 31 -4.3 30 -2.1 30 0.0Pre-abnormal tax rate (%) 36 34 30 31 33 31 -8.2 30 -1.7 30 0.0

Per share (Rp) 12/02 12/03 12/04 12/05 12/06 12/07E % ch 12/08E % ch 12/09E % chEPS (local GAAP) 199 151 328 397 546 689 26.2 772 12.0 818 6.0EPS (UBS) 106 148 389 422 504 695 37.7 772 11.1 818 6.0Net DPS 58 93 158 145 267 348 30.1 390 12.0 454 16.6Cash EPS 197 284 751 843 1,007 1,220 21.2 1,385 13.5 1,523 9.9BVPS 725 859 899 1,155 1,392 1,737 24.8 2,123 22.2 2,491 17.3

Balance sheet (Rpbn) 12/02 12/03 12/04 12/05 12/06 12/07E % ch 12/08E % ch 12/09E % chNet tangible fixed assets 28,826 35,080 40,071 46,193 55,233 62,877 13.8 73,293 16.6 78,641 7.3Net intangible fixed assets 4,751 5,144 5,411 4,493 4,437 3,492 -21.3 2,548 -27.0 1,603 -37.1Net working capital (incl. other assets) (2,804) (2,793) (2,537) (5,125) (8,195) (11,444) 39.6 (12,865) 12.4 (14,050) 9.2Other liabilities (5,384) (6,258) (8,222) (7,728) (8,095) (8,894) 9.9 (8,894) 0.0 (8,894) 0.0Operating invested capital 25,389 31,174 34,724 37,833 43,379 46,030 6.1 54,081 17.5 57,300 6.0Investments 183 65 83 101 89 89 0.0 89 0.0 89 0.0Total capital employed 25,572 31,238 34,807 37,934 43,468 46,120 6.1 54,170 17.5 57,389 5.9Shareholders' equity 14,614 17,313 18,128 23,292 28,069 35,016 24.8 42,796 22.2 50,218 17.3Minority interests 2,596 3,708 4,938 6,305 8,187 8,187 0.0 8,187 0.0 8,187 0.0Total equity 17,209 21,021 23,066 29,598 36,256 43,203 19.2 50,983 18.0 58,405 14.6Net debt / (cash) 8,363 10,217 11,740 8,336 7,212 2,916 -59.6 3,186 9.3 (1,015) -Debt deemed provisions 0 0 0 0 0 0 - 0 - 0 -Total capital employed 25,572 31,238 34,807 37,934 43,468 46,120 6.1 54,170 17.5 57,389 5.9

Cash flow (Rpbn) 12/02 12/03 12/04 12/05 12/06 12/07E % ch 12/08E % ch 12/09E % chOperating income (EBIT, UBS) 9,129 11,976 14,588 17,171 21,593 27,664 28.1 29,948 8.3 31,685 5.8Depreciation 3,662 5,510 7,311 8,489 10,123 10,590 4.6 12,369 16.8 14,208 14.9Net change in working capital (1,914) 1,608 1,150 1,328 3,899 3,711 -4.8 1,775 -52.2 1,476 -16.8Other (operating) 0 (352) 976 3,292 1,668 486 -70.9 (240) - (198) -17.6Operating cash flow 10,878 18,742 24,025 30,280 37,283 42,451 13.9 43,851 3.3 47,171 7.6Net interest received / (paid) (1,103) (1,017) (952) (833) (631) (782) 23.9 (359) -54.1 (306) -14.7Dividends paid (2,327) (3,739) (3,812) (4,675) (7,439) (6,947) -6.6 (7,780) 12.0 (9,070) 16.6Tax paid (2,899) (3,861) (4,179) (5,184) (7,040) (8,225) 16.8 (8,877) 7.9 (9,414) 6.0Capital expenditure (6,421) (8,751) (9,565) (12,022) (16,319) (17,290) 5.9 (21,840) 26.3 (18,612) -14.8Net (acquisitions) / disposals 3,705 0 0 0 0 0 - 0 - 0 -Other (2,415) 1,061 (51) (1,073) (1,096) 0 - 0 -39.9 0 -38.5Share issues 0 0 0 0 0 0 - 0 - 0 -Cash flow (inc)/dec in net debt (583) 1,423 2,624 3,333 1,841 4,444 141.4 (156) - 4,295 -FX / non cash items 0 (3,277) (4,147) 71 (717) (148) -79.3 (114) -23.4 (94) -17.6Balance sheet (inc)/dec in net debt (583) (1,854) (1,523) 3,404 1,124 4,296 282.1 (270) - 4,202 -Core EBITDA 11,074 14,789 18,313 20,483 24,748 29,675 19.9 32,672 10.1 35,407 8.4

Maintenance capital expenditure (1,664) (8,751) (9,565) (12,022) (16,319) (17,290) 5.9 (21,840) 26.3 (18,612) -14.8Maintenance net working capital 0 1,608 1,150 1,328 3,899 3,711 -4.8 1,775 -52.2 1,476 -16.8Operating free cash flow, pre-tax 9,410 7,646 9,898 9,788 12,328 16,096 30.6 12,607 -21.7 18,271 44.9

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.

UBS 20


Fixed-Line Communications

12-month rating Buy

12m price target Rp12,500

Company profile Telkom Indonesia (Telkom) is the incumbent domestic telephoneservice provider and owns 65% of Indonesia's largest cellularoperator, Telkomsel. In 1996, Telkom divided its franchise into sevenregions and formed partnerships with domestic and internationaltelecom companies to develop five of these areas, known as joint-ownership schemes. However, these no longer exist. Telkomselcontrols more than 50% of the Indonesian mobile market and hasclose to a 68% revenue market share. Telkom also has a fixedwireless business under TelkomFlexi. The Indonesian governmenthas a 51% stake in Telkom.

Value (EV/OpFCF & P/E)

12/05 12/06 12/07 12/08E 12/09E0.0x

5.0x

10.0x

15.0x

20.0x

0.0x

5.0x

10.0x

15.0x

20.0x

EV/OpFCF (LHS) P/E (RHS)

Profitability

12/05 12/06 12/07(E) 12/08(E) 12/09(E)39.00%

40.00%

41.00%

42.00%

43.00%

44.00%

45.00%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

EBIT margin (LHS) ROIC (RHS)

ROE v Price to book value

12/05 12/06 12/07(E) 12/08(E) 12/09(E)32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

46.0%

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

6.0x

ROE (LHS) Price to book value (RHS)

Growth (UBS EPS)

12/05 12/06 12/07(E) 12/08(E) 12/09(E)30000

40000

50000

60000

70000

80000

0.0%

10.0%

20.0%

30.0%

40.0%

Revenue (LHS) UBS EPS Growth (RHS)

Telkom Indonesia

Valuation (x) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09EP/E (local GAAP) 11.2 12.6 14.1 13.2 11.8 11.1P/E (UBS) 12.3 11.8 15.2 13.1 11.8 11.1P/CEPS 6.5 5.9 7.6 7.5 6.6 6.0Net dividend yield (%) 3.5 2.9 3.5 3.8 4.3 5.0P/BV 3.4 4.3 5.5 5.2 4.3 3.7EV/revenue (core) 2.5 2.8 3.3 3.2 2.7 2.5EV/EBITDA (core) 4.8 5.7 6.9 6.6 6.0 5.4EV/EBIT (core) 5.8 6.8 7.9 7.1 6.5 6.1EV/OpFCF (core) 7.9 11.9 13.8 12.2 15.4 10.5EV/op. invested capital 2.6 3.2 4.2 4.4 3.9 3.5

Enterprise value (Rpbn) 12/05 12/06 12/07E 12/08E 12/09EAverage market cap 100,743 154,885 183,456 183,456 183,456+ minority interests 5,622 7,246 8,187 8,187 8,187+ average net debt (cash) 10,038 7,774 5,064 3,051 1,085+ pension obligations and other 0 0 0 0 0- non-core asset value (92) (95) (89) (89) (89)Core enterprise value 116,311 169,810 196,618 194,605 192,639 Growth (%) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09ERevenue 26.6 23.2 22.7 21.6 13.6 9.9EBITDA (UBS) 25.5 17.2 23.6 20.6 10.6 8.5EBIT (UBS) 23.3 17.7 25.8 28.1 8.3 5.8EPS (UBS) 17.6 8.6 19.5 37.7 11.1 6.0Cash EPS 23.2 12.2 19.4 21.2 13.5 9.9Net DPS 30.0 -8.3 84.5 30.1 12.0 16.6BVPS 25.7 28.5 20.5 24.8 22.2 17.3

Margins (%) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09EEBITDA / revenue 63.1 61.4 61.8 61.4 59.7 59.0EBIT / revenue 43.5 41.1 42.1 44.4 42.3 40.7Net profit (UBS) / revenue 22.7 20.4 19.8 22.5 22.0 21.2

Return on capital (%) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09EEBIT ROIC (UBS) 44.0 47.3 53.2 61.9 59.8 56.9ROIC post tax - 32.7 35.5 43.0 41.9 39.8Net ROE 39.2 41.1 39.6 44.4 40.0 35.5

Coverage ratios (x) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09EEBIT / net interest 13.2 20.6 NM NM NM NMDividend cover (UBS EPS) 2.6 2.9 1.9 2.0 2.0 1.8Div. payout ratio (%, UBS EPS) 43.0 34.3 53.0 50.1 50.5 55.5Net debt / EBITDA 0.5 0.3 0.2 0.1 0.1 NM

Efficiency ratios (x) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09ERevenue / op. invested capital 1.0 1.2 1.3 1.4 1.4 1.4Revenue / fixed assets 0.8 0.9 0.9 1.0 1.0 1.0Revenue / net working capital NM NM NM NM NM NM

Investment ratios (x) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09EOpFCF / EBIT 0.7 0.6 0.6 0.6 0.4 0.6Capex / revenue (%) 28.8 28.8 NM 27.7 NM 23.9Capex / depreciation 1.4 1.4 1.6 1.6 1.8 1.3

Capital structure (%) 5Yr Avg 12/05 12/06 12/07E 12/08E 12/09ENet debt / total equity 56.2 35.8 25.7 8.3 7.4 (2.0)Net debt / (net debt + equity) 36.0 26.4 20.4 7.7 6.9 (2.1)Net debt (core) / EV 12.3 8.6 4.6 2.6 1.6 0.6

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rp9,100 on 16 Apr 2008 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Suresh A Mahadevan, CFA Analyst [email protected] +852-2971 6562



UBS 21


Indosat Tbk

Price elasticity likely to benefit Indosat Indosat management is beginning to believe in price elasticity

While Excelcomindo and Telkomsel managements were early believers in thepositive effects of price elasticity, we note Indosat management is only nowbeginning to change—Indosat’s recent price promotions suggest a new stancetoward price elasticity.

Successful turnaround puts the company in good position Indosat’s current management team has managed to successfully turnaround thecompany by reviving revenue growth. With population coverage of over 80%,Indosat is also well positioned to take advantage of the rising mobile usage in Indonesia, in our view.

We think recent pricing schemes are not fully rational Our analysis of Indosat’s recent pricing schemes suggests certain areas wherepricing is not fully rational. For instance, Indosat’s current Mentari promotioncharges Rp5/sec for off-net long distance calls to PSTN and other mobileoperators. The termination rate for off-net long distance PSTN calls works out atRp10.4/sec and for off-net long distance mobile calls at Rp8.2/sec.

Valuation: reiterate Buy with new Rp8,700 price target We modelled Indosat using price elasticity as a key driver and raised our capexassumption to account for higher usage caused by price elasticity. We maintain ourBuy rating and lower marginally our 12-month DCF-based price target from Rp9,600 to Rp8,700. We use a WACC of 12.75% and terminal EV/EBITDA of 6x.

Highlights (Rpbn) 12/06 12/07 12/08E 12/09E 12/10ERevenues 12,239 16,488 18,867 21,736 24,031EBIT (UBS) 3,172 4,293 4,636 5,393 5,941Net Income (UBS) 1,410 2,042 2,333 2,728 2,924EPS (UBS, Rp) 259 376 429 502 538Net DPS (UBS, Rp) 128 185 215 251 269 Profitability & Valuation 5-yr hist av. 12/07 12/08E 12/09E 12/10EEBIT margin % 25.1 26.0 24.6 24.8 24.7ROIC (EBIT) % 13.9 17.4 16.7 16.9 17.1EV/EBITDA (core) x 4.7 5.5 4.7 4.4 4.1PE (UBS) x 15.5 18.9 15.5 13.2 12.4Net dividend yield % 3.4 2.6 3.2 3.8 4.0 Source: Company accounts, Thomson Financial, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rp6,650 on 16 Apr 2008 23:38 HKT Suresh A Mahadevan, CFA Analyst [email protected] +852-2971 6562




12-month rating Buy Unchanged 12m price target Rp8,700/US$47.33 Prior:Rp9,600/US$52.23

Price Rp6,650/US$36.11 (ADR) RIC: ISAT.JK BBG: ISAT IJ

Trading data (local/US$) 52-wk range Rp9,900-5,850/US$51.81-32.74Market cap. Rp36,136bn/US$3.92bnShares o/s 5,434m (ORD)/109m (ADR)ADR ratio 1 ADR:50 ORDFree float 45%Avg. daily volume ('000) 11,090/3Avg. daily value (Rpm) 75,544.3/0.1 Balance sheet data 12/08E Shareholders' equity Rp17,711bnP/BV (UBS) 2.0xNet Cash (debt) (Rp12,312bn) Forecast returns Forecast price appreciation +30.8%Forecast dividend yield 3.2%Forecast stock return +34.0%Market return assumption 11.5%Forecast excess return +22.5% EPS (UBS, Rp) 12/08E 12/07 From To Cons. ActualQ1E 104 104 - 89Q2E 105 103 - 66Q3E 107 105 - 110Q4E 116 117 - 11012/08E 432 429 40612/09E 505 502 452 Performance (Rp)

04/05

07/05

10/05

01/06

04/06

07/06

10/06

01/07

04/07

07/07

10/07

01/08

04/08

0

2000

4000

6000

8000

10000

0

20

40

60

80

100

120

Price Target (Rp) (LHS) Stock Price (Rp) (LHS)Rel. Jakarta Comp (RHS)

Stock Price (Rp) Rel. Jakarta Comp

Source: UBS www.ubs.com/investmentresearch


UBS 22

Segmenting subscribers with new promos Indosat is in the middle of re-positioning its IM3 and Mentari brands. IM3 promos are tailored for subscribers making infrequent, long duration calls. Mentari promos feature a simple tariff structure that targets subscribers making frequent short duration calls.

Indosat launched its latest IM3 promo tariffs in early March, which were similar to Xlcom promos. On-net calls are charged at Rp15/second for the first 90 seconds, then Rp0.000…01/second afterwards (see IM3 promo in Figure 4). Off-net calls are charged at Rp25/second for the first 90 seconds, then Rp0.000…01/second for the next 90 seconds, Rp25/second for the next 90 seconds, and so on.

Table 22: Current Indosat IM3 promotional tariffs

Tariff/second On-net Off-net

First 90 seconds Rp15 Rp25

Next 90 seconds Rp0.000…01 Rp0.000…01

Next 90 seconds Rp0.000…01 Rp25

Every 90 second cycle Rp0.000…01 Rp0.000…01


More recently, Indosat launched new promo tariffs for its Mentari brand featuring a simple tariff structure with flat rates per minute.

Table 23: Indosat Mentari promotional tariffs

Rp/second New promo tariff1

On-net

Local 20 / 5

Long Distance 20 / 5

Off-Net

Local 20 / 5


PSTN

Local 20 / 5


Note: 1 Rp20 during peak hours, Rp5 during off-peak hours. Source: Company data

Figure 4: IM3 promo


Figure 5: Mentari promo



UBS 23

Table 24: Indosat key assumptions

YE 31 December 2005 2006 2007 2008E 2009E 2010E

Indosat

Revenues (Rp trn) 11.59 12.24 16.49 18.87 21.74 24.03

EBITDA margin 58.1% 57.6% 52.9% 52.4% 52.2% 52.0%

Total capex / sales 63% 57% 59% 58% 41% 33%

Indosat mobile

Industry mobile subs (m) 51.35 69.76 103.45 133.25 156.62 176.16

Indosat mobile subs (m) 14.50 16.70 24.55 30.05 34.05 37.05

Subscriber market share 28% 24% 24% 23% 22% 21%

Implied ARPU (Rp/sub/month) 57,504 54,224 52,843 45,880 44,718 44,752

% change -26% -6% -3% -13% -3% 0%

Blended MOU (min/sub/month) 92 88 86 92 116 145

% change -4% -3% 7% 25% 26%

Total minutes carried n/a 15.0 20.8 29.6 44.4 61.7

% change 39% 43% 50% 39%

Revenue/Minute (Rp) n/a 414 413 322 253 204

% change 0% -22% -21% -19%

Elasticity factor 1.9 2.3 2.0

Mobile revenue (Rp trn) 8.64 9.23 12.75 14.69 17.14 19.02

Mobile capex / sales 73% 65% 66% 63% 45% 36%

Indosat StarOne

Indosat StarOne subs (m) 0.27 0.38 0.63 0.93 1.18 1.43

Implied ARPU (Rp/sub/month) 43,401 49,583 37,676 33,800 32,468 31,189

Indosat StarOne revenue (Rp trn) 0.09 0.15 0.22 0.30 0.41 0.48

Source: Company data, UBS estimates


UBS 24

Table 25: Indosat discounted cash flow

(Rp bn) 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

EBIT 4,862 5,619 6,167 6,428 6,578 6,708 6,831 6,953 7,113 7,314

Tax Rate 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%

EBIT*(1-t) 3,404 3,933 4,317 4,500 4,605 4,696 4,782 4,867 4,979 5,120

+ D & A 5,028 5,732 6,335 6,774 7,124 7,395 7,602 7,768 7,887 7,964

- Capex (10,920) (8,862) (7,950) (7,081) (6,194) (5,405) (4,756) (4,385) (3,916) (3,472)

+ Working capital 879 (658) (483) (442) (446) (372) (269) (69) (132) (123)

FCFF (1,609) 145 2,218 3,751 5,088 6,314 7,360 8,181 8,818 9,489

FCFF - Discounted (1,609) 136 1,853 2,779 3,343 3,680 3,804 3,750 3,585 3,422

Value of cash-flows thro 2017 24,743 Risk free rate 9.30%

Terminal value - 6x EV/EBITDA multiple 34,842 Equity market premium 5.00%

Enterprise value 59,586 Beta 1.05

Net (Debt) / Cash (12,312) Cost of equity 14.55%

Equity value 47,274 Cost of debt 8.65%

Debt/total capital 30%



Figure 6: UBS versus consensus

0% 10% 20% 30% 40% 50% 60% 70%

Buy

Hold

Sell

(in Rp b) 2008E 2009E 2010ERevenues - UBS 18,867 21,736 24,031 Revenues - Consensus 19,299 22,036 24,568 % delta -2% -1% -2%

EBITDA - UBS 9,890 11,351 12,502 EBITDA - Consensus 10,079 11,511 12,752 % delta -2% -1% -2%

Net profit - UBS 2,333 2,728 2,924 Net profit - Consensus 2,455 2,979 3,512 % delta -5% -8% -17%

Source: Bloomberg, UBS estimates.

UBS 25

Indosat Tbk

Income statement (Rpbn) 12/03 12/04 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chRevenues 8,230 10,430 11,590 12,239 16,488 18,867 14.4 21,736 15.2 24,031 10.6Operating expenses (ex depn) - - - - - - - - - - -EBITDA (UBS) 4,112 5,708 6,732 7,052 8,715 9,890 13.5 11,351 14.8 12,502 10.1Depreciation (2,038) (2,819) (3,307) (3,880) (4,422) (5,255) 18.8 (5,958) 13.4 (6,561) 10.1Operating income (EBIT, UBS) 2,074 2,889 3,426 3,172 4,293 4,636 8.0 5,393 16.3 5,941 10.2Other income & associates 183 321 (23) (113) (167) 0 - 0 - 0 -Net interest (691) (910) (1,050) (1,036) (1,196) (1,285) 7.4 (1,475) 14.8 (1,741) 18.0Abnormal items (pre-tax) 4,500 0 0 0 0 0 - 0 - 0 -Profit before tax 6,066 2,300 2,353 2,023 2,930 3,351 14.4 3,917 16.9 4,200 7.2Tax 18 (725) (698) (576) (860) (1,005) 17.0 (1,175) 16.9 (1,260) 7.2Profit after tax 6,083 1,576 1,655 1,447 2,070 2,346 13.3 2,742 16.9 2,940 7.2Abnormal items (post-tax) 0 0 0 0 0 0 - 0 - 0 -Minorities / pref dividends (23) (25) (31) (36) (28) (12) -55.6 (14) 12.3 (16) 11.5Net income (local GAAP) 6,061 1,551 1,624 1,410 2,042 2,333 14.3 2,728 16.9 2,924 7.2Net Income (UBS) 1,561 1,551 1,624 1,410 2,042 2,333 14.3 2,728 16.9 2,924 7.2

Tax rate (%) 0 31 30 28 29 30 2.3 30 0.0 30 0.0Pre-abnormal tax rate (%) 0 32 30 28 29 30 2.3 30 0.0 30 0.0

Per share (Rp) 12/03 12/04 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chEPS (local GAAP) 1,171 293 303 259 376 429 14.3 502 16.9 538 7.2EPS (UBS) 301 293 303 259 376 429 14.3 502 16.9 538 7.2Net DPS 146 154 149 128 185 215 15.9 251 16.9 269 7.2Cash EPS 695 827 920 973 1,190 1,396 17.4 1,599 14.5 1,746 9.2BVPS 2,325 2,547 2,765 2,831 3,063 3,259 6.4 3,510 7.7 3,780 7.7

Balance sheet (Rpbn) 12/03 12/04 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chNet tangible fixed assets 14,093 17,243 21,565 25,147 30,671 36,465 18.9 39,595 8.6 41,211 4.1Net intangible fixed assets 3,345 3,013 2,683 2,645 2,350 2,124 -9.6 1,897 -10.7 1,671 -11.9Net working capital (incl. other assets) 383 (968) (817) (2,047) (5,177) (5,981) 15.5 (5,243) -12.3 (4,740) -9.6Other liabilities (266) (750) (1,394) (1,784) (2,467) (2,476) 0.4 (2,485) 0.4 (2,494) 0.4Operating invested capital 17,554 18,538 22,036 23,962 25,378 30,131 18.7 33,764 12.1 35,647 5.6Investments 383 135 3 9 3 3 0.0 3 0.0 3 0.0Total capital employed 17,937 18,673 22,040 23,970 25,382 30,134 18.7 33,767 12.1 35,650 5.6Shareholders' equity 12,040 13,185 14,315 15,386 16,643 17,711 6.4 19,075 7.7 20,538 7.7Minority interests 147 165 176 201 297 310 4.2 324 4.5 339 4.8Total equity 12,050 13,169 14,255 15,356 16,742 17,823 6.5 19,201 7.7 20,679 7.7Net debt / (cash) 5,887 5,504 7,785 8,614 8,639 12,312 42.5 14,567 18.3 14,971 2.8Debt deemed provisions 0 0 0 0 0 0 - 0 - 0 -Total capital employed 17,937 18,673 22,040 23,970 25,382 30,134 18.7 33,767 12.1 35,650 5.6

Cash flow (Rpbn) 12/03 12/04 12/05 12/06 12/07 12/08E % ch 12/09E % ch 12/10E % chOperating income (EBIT, UBS) 2,074 2,889 3,426 3,172 4,293 4,636 8.0 5,393 16.3 5,941 10.2Depreciation 2,038 2,819 3,307 3,880 4,422 5,255 18.8 5,958 13.4 6,561 10.1Net change in working capital 170 1,543 (211) 1,172 3,801 879 -76.9 (658) - (483) -26.6Other (operating) (216) (190) 823 (566) (1,764) 161 - 156 -3.6 216 39.0Operating cash flow 4,065 7,060 7,344 7,658 10,751 10,931 1.7 10,848 -0.8 12,235 12.8Net interest received / (paid) (691) (910) (1,050) (1,036) (1,196) (1,285) 7.4 (1,475) 14.8 (1,741) 18.0Dividends paid (151) (754) (817) (12) (705) (1,167) 65.5 (1,364) 16.9 (1,462) 7.2Tax paid 18 (725) (698) (576) (860) (1,005) 17.0 (1,175) 16.9 (1,260) 7.2Capital expenditure (3,993) (5,417) (7,298) (6,053) (7,377) (10,920) 48.0 (8,862) -18.8 (7,950) -10.3Net (acquisitions) / disposals 0 0 0 0 0 0 - 0 - 0 -Other 366 697 1,177 (342) 5 12 132.5 14 12.3 16 11.5Share issues 0 149 7 8 0 0 - 0 - 0 -Cash flow (inc)/dec in net debt (225) 397 (1,388) (502) 424 (3,446) - (2,028) -41.1 (178) -91.2FX / non cash items (308) (14) (893) (327) (449) (227) -49.5 (227) 0.0 (227) 0.0Balance sheet (inc)/dec in net debt (533) 383 (2,281) (829) (25) (3,673) 14594.9 (2,255) -38.6 (405) -82.0Core EBITDA 4,112 5,708 6,732 7,052 8,715 9,890 13.5 11,351 14.8 12,502 10.1

Maintenance capital expenditure (3,993) (5,417) (7,298) (6,053) (7,377) (10,920) 48.0 (8,862) -18.8 (7,950) -10.3Maintenance net working capital 170 1,543 (211) 1,172 3,801 879 -76.9 (658) - (483) -26.6Operating free cash flow, pre-tax 289 1,834 (777) 2,171 5,139 (151) - 1,831 - 4,069 122.2

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.

UBS 26



12-month rating Buy

12m price target Rp8,700

Company profile Indosat was established as an IDD operator, but now focuses moreon the cellular market. Indosat is Indonesia's second-largest mobile operator. It has close to a 21% revenue market share. More than 90%of its subscriber base is prepaid. At the end of 2003, Indosat,Satelindo, and IM3 merged, with Indosat remaining the legal entity.The company has fully integrated the operations and networks of thethree different companies.

Value (EV/OpFCF & P/E)

12/06 12/07 12/08E 12/09E 12/10E0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

0.0x

5.0x

10.0x

15.0x

20.0x

EV/OpFCF (LHS) P/E (RHS)

Profitability

12/06 12/07 12/08(E) 12/09(E) 12/10(E)24.00%

24.50%

25.00%

25.50%

26.00%

26.50%

12.00%

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

EBIT margin (LHS) ROIC (RHS)

ROE v Price to book value

12/06 12/07 12/08(E) 12/09(E) 12/10(E)8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

14.00%

15.00%

1.6x

1.7x

1.8x

1.9x

2.1x

2.2x

2.3x

2.4x

ROE (LHS) Price to book value (RHS)

Growth (UBS EPS)

12/06 12/07 12/08(E) 12/09(E) 12/10(E)5000

10000

15000

20000

25000

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Revenue (LHS) UBS EPS Growth (RHS)

Indosat Tbk

Valuation (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EP/E (local GAAP) 17.2 19.7 18.9 15.5 13.2 12.4P/E (UBS) 15.5 19.7 18.9 15.5 13.2 12.4P/CEPS 4.7 5.3 6.0 4.8 4.2 3.8Net dividend yield (%) 3.4 2.5 2.6 3.2 3.8 4.0P/BV 1.4 1.8 2.3 2.0 1.9 1.8EV/revenue (core) 2.6 2.9 2.9 2.5 2.3 2.1EV/EBITDA (core) 4.7 5.0 5.5 4.7 4.4 4.1EV/EBIT (core) 9.9 11.2 11.1 10.1 9.3 8.6EV/OpFCF (core) NM 16.4 9.3 NM 27.3 12.6EV/op. invested capital 1.4 1.5 1.9 1.7 1.6 1.5

Enterprise value (Rpbn) 12/06 12/07 12/08E 12/09E 12/10EAverage market cap 27,145 38,675 36,136 36,136 36,136+ minority interests 188 249 304 317 332+ average net debt (cash) 8,200 8,627 10,475 13,439 14,769+ pension obligations and other 0 0 0 0 0- non-core asset value (6) (6) (3) (3) (3)Core enterprise value 35,527 47,545 46,912 49,889 51,233 Growth (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10ERevenue 16.0 5.6 34.7 14.4 15.2 10.6EBITDA (UBS) 24.4 4.8 23.6 13.5 14.8 10.1EBIT (UBS) 28.6 -7.4 35.3 8.0 16.3 10.2EPS (UBS) 26.7 -14.4 44.8 14.3 16.9 7.2Cash EPS 21.6 5.8 22.2 17.4 14.5 9.2Net DPS - -14.4 44.8 15.9 16.9 7.2BVPS 8.4 2.4 8.2 6.4 7.7 7.7

Margins (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EEBITDA / revenue 52.8 57.6 52.9 52.4 52.2 52.0EBIT / revenue 25.1 25.9 26.0 24.6 24.8 24.7Net profit (UBS) / revenue 13.4 11.5 12.4 12.4 12.6 12.2

Return on capital (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EEBIT ROIC (UBS) 13.9 13.8 17.4 16.7 16.9 17.1ROIC post tax - 9.9 12.3 11.7 11.8 12.0Net ROE 10.4 9.5 12.8 13.6 14.8 14.8

Coverage ratios (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EEBIT / net interest - 3.1 3.6 3.6 3.7 3.4Dividend cover (UBS EPS) - 2.0 2.0 2.0 2.0 2.0Div. payout ratio (%, UBS EPS) - 49.3 49.3 50.0 50.0 50.0Net debt / EBITDA 1.2 1.2 1.0 1.2 1.3 1.2

Efficiency ratios (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10ERevenue / op. invested capital 0.5 0.5 0.7 0.7 0.7 0.7Revenue / fixed assets 0.5 0.5 0.5 0.5 0.5 0.6Revenue / net working capital NM NM NM NM NM NM

Investment ratios (x) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10EOpFCF / EBIT NM 0.7 1.2 NM 0.3 0.7Capex / revenue (%) NM NM NM NM NM NMCapex / depreciation 1.9 1.6 1.7 2.1 1.5 1.2

Capital structure (%) 5Yr Avg 12/06 12/07 12/08E 12/09E 12/10ENet debt / total equity 50.6 56.0 51.9 69.5 76.4 72.9Net debt / (net debt + equity) 33.6 35.9 34.2 41.0 43.3 42.2Net debt (core) / EV 23.6 23.1 18.1 22.3 26.9 28.8

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rp6,650 on 16 Apr 2008 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Suresh A Mahadevan, CFA Analyst [email protected] +852-2971 6562



UBS 27


UBS 28

Statement of Risk

Irrational competition from new entrants is a major risk for Telkomsel and Indosat. There is macro risk associated with the Indonesian economy and rupiah weakness that could affect the telcos. Telkom faces some risk relating to execution of its fixed-line business. Although management is trying its best to focus on shareholder value, Telkom’s legacy could thwart these efforts. Also, there is some regulatory risk associated with the interconnect rates being reviewed annually to ensure they are in line with international best practice that could create some short-term earnings pressure. Indosat also faces risks associated with executing the new strategy formulated by senior management. Indosat is currently more vulnerable to new entrants to the mobile market, such as Hutchison and Maxis.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


UBS 29

Required Disclosures This report has been prepared by UBS Securities Asia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 59% 38%Neutral Hold/Neutral 34% 35%Sell Sell 7% 26%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 67%Sell Sell less than 1% 25%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2008. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 30

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are : Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE) : Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price dateBakrie Telecom BTEL.JK Sell N/A Rp280 16 Apr 2008Indosat Tbk8, 16 ISAT.JK Buy N/A Rp6,650 16 Apr 2008Telkom Indonesia8, 14, 16 TLKM.JK Buy N/A Rp9,100 16 Apr 2008

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long

common stock position in this company. 14. UBS Limited acts as broker to this company. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. Bakrie Telecom (Rp)

01-A

pr-0

5

01-Ju

n-05

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ug-0

5

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ec-0

5

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eb-0

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6

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6

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8

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pr-0

8

0

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300

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Price Target (Rp) Stock Price (Rp)

SellNo Rating

Source: UBS; as of 16 Apr 2008


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Indosat Tbk (Rp)

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pr-0

5

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n-05

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6

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n-06

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6

01-F

eb-0

7

01-A

pr-0

7

01-Ju

n-07

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ug-0

7

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7

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eb-0

8

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8

0

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Buy 1Buy 2

BuyNo Rating

Source: UBS; as of 16 Apr 2008 Telkom Indonesia (Rp)

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pr-0

5

01-Ju

n-05

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5

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ec-0

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6

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pr-0

6

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n-06

01-A

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6

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ct-06

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ec-0

6

01-F

eb-0

7

01-A

pr-0

7

01-Ju

n-07

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7

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ct-07

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eb-0

8

01-A

pr-0

8

0

5000

10000

15000


Buy 2Neutral 2

BuyNo Rating

Source: UBS; as of 16 Apr 2008 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%. Additional Prices: Bharti Airtel Ltd., Rs806.70 (16 Apr 2008); China Mobile (HK) Ltd, HK$127.40 (16 Apr 2008); Source: UBS. All prices as of local market close.


UBS 32

Global Disclaimer This report has been prepared by UBS Securities Asia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG is referred to as UBS SA. This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitute a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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The Role of Price Elasticity UBS 170408 Eng

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