INDONESIA

Trimegah Yearbook 2006

Telecommunication

Overweight
Analyst: Arhya Satyagraha

Mobile Trend Still a Hit

Main Points

We expect the GSM market to post strong growth of 26.9% to 55.1m subscribers by the end of 2006, with prepaid
subscriber registration proving to be a minor road bump. Estimated 2005 subscribers to reach 43.4m.

CDMA segment to face stiff competition as Bakrie Telecom makes a push for market share, while the Sampoerna
family and the Sinar Mas Group are also planning to enter the market. 3G services still awaits a license retender,
but TLKM and ISAT are prepared to offer the service.

Sector trades at attractive valuations compared to its regional peers, with a 2006 P/E and EV/EBITDA of 11.3x and
4.0x. Strong earnings growth of 19.0% at the top line and 29.9% at the bottom line on the back of strong GSM and
CDMA growth leads us to OVERWEIGHT the industry.

Sector Outlook

Indonesia's telecoms industry is still promising despite ample
new competition in both GSM and the growing CDMA market.
We expect the industry to be crowded next year as PT Bakrie
Telecom (BT) arrives in force post its planned IPO in early 2006
to compete in the CDMA segment. Meanwhile, we forecast the
GSM market to tighten with a rejuvenated PT Excelcomindo
Pratama post its own IPO.

We remain upbeat that total GSM subscribers reach 55.1m by
the end of 2006, from an estimated 43.4m in 2005, despite
fears that prepaid subscriber registration would hamper growth.
Although we feel this threat is real, it should not hamper longterm growth, while the low penetration rate of only 19.0%
provides ample room for sub growth. For 2006, we expect
Telkomsel and Indosat to post subscriber growth of 28.8% and
24.4%, translating to 31.8m and 17.1m subscribers, respectively.
Industry trends point to continued targeting of the lower income
class market for growth, reinforcing the trend of declining ARPU:
We estimate ARPU for Telkomsel and ISAT to drop to Rp76,015
and Rp64,327 respectively.

The CDMA market is also set to continue its rapid growth in
2006. The major player, Telkom Flexi, is expected to post strong
40% growth from 3.3m subscribers to 4.6m by the end of 2006.
The CDMA segment represents the new star in the sector as it
offers the same pulse tariff as fixed line, which has been its
main selling point over the past couple of years. This segment

GSM Domestic Market Share 2002-2007F

is set to become more competitive as BT plans an aggressive

expansion of its network post-IPO. In addition, the recent
entry of the Sampoerna family as well as the probable entry
of the Sinar Mas Group should further turn up the heat on
current players.

The Government plans to retender 3G licenses, probably in
early 2006 after delaying the process in November 2005.
Both TLKM and ISAT have begun testing and have indicated
their preparedness to launch services this year. However,
affordability of handsets and frequency availability remain
concerns. The Government is in the process of sorting out
the frequency that 3G will use: Under the new proposal, 3G
will use 2100Mhz instead of the earlier plan of 1900MHz,
which is still occupied by CDMA operators.

We rate the sector as OVERWEIGHT and remain optimistic on
the prospects for cellular growth. We expect top line industry
growth to hit 19.0% in 2006, with net profit to grow by 29.9%.
Valuation wise, the telecoms sector also trades attractively
compared to its regional peers. 2006 P/E and EV/EBITDA stand
at 11.3x and 4.0x, respectively. TLKM and ISAT are the two
telecommunications companies in our equities universe, and
we rate them both BUY. Our preference is TLKM, which
trades at a 2006 P/E and EV/EBITDA of 10.6x and 3.8x,
respectively, while ISAT is traded at 14.7x and 4.8x,
respectively.

Regional Telcos: Valuation Matrix

(%)

(m)

EV/EBITDA (x)

70

70

12.0

60

60

50

50

40

40

30

30

20

20

Sing Tel

10.0

8.0

China Mobile

Globe Telecom
4.0

0
2002

2003

Total Subscribers (RHS)

2004

2005E

ISAT (LHS)

Source: Company & Trimegah Research

p.30

Pilipino Telephone

10

0
2006F
EXCL (LHS)

2007F

SECTOR

6.0
Telstra

10

StarHub

Maxis
ISAT

TLKM

China Unicom
P/E (x)

2.0
-

5.0

10.0

15.0

20.0

TLKM (LHS)

Source: Bloomberg & Trimegah Research

25.0

30.0

35.0