international stock? why not?

Many American investors are not investing in international stocks because it is harder to find legitimate

sources of news. Yet, when the news finally reaches up to the surface, it is considered ―too late‖ for most

investors to grab the possibly abnormal return.

Another reason is the volatility of international stocks. American investors are not physically present in the

country where they invest in so it is hard to find timely news and sell or buy on the news.

Investors of international stocks are also faced with various ―special‖ risks including:

The purpose of investing in a portfolio is to minimize risks through

diversification, and based on the current data, The West Texas

A&M SMIF portfolio consists of 19.62% cash, 18.68% fixed income,

and 61.70% equity. Among equities held, the dominant is informa-

tion technology stocks (21.27%) and various other industries.

However, the portfolio does not have stocks in the telecommuni-

cation service industry and the utility industry. Therefore, stocks in

the telecommunication industry will make a good addition to the

portfolio.

We are looking at five new stocks to be added to the current

portfolio holdings: Indonesian PT Indosat Tbk (NYSE: IIT) and PT

Telekomunikasi Indonesia (NYSE: TLK), Chinese China Telecom

Corporation Limited (NYSE: CHA) and China Mobile Limited

(NYSE: CHL), and Japanese Nippon Telegraph and Telephone Cor-

poration (NYSE: NTT).

Executive Summary: International Stocks? Why Not?

I N S I D E

T H I S I S S U E :

Executive

Summary

1

Macroeconomic

Analysis

2

Industry

Analysis

8

Managerial

Comparison

16

Company

Overview

18

Financial

Statement

Valuation

28

Fundamental

Valuation

30

Relative

Valuation

36

Technical

Valuation

38

Summary 46

E D I T O R I N C H I E F :

K A R I N A L I N A R D Y

THE LINARDY INVESTMENT GROUP V O L U M E 2 : S P R I N G 2 0 1 1

F I N D O U T :

Why American

investors are re-

luctant to invest

internationally

How international

stocks minimize

your risk through

diversification

Which interna-

tional stocks have

the potential to

grow

About The SMIF Portfolio

Changes in currency exchange rates

Dramatic changes in market value

Political, economic and social events in a certain

country

Less information

However, international stocks are still at-

tractive because they add diversity

(spreading the risks of investing to other

foreign markets), and growth (investors can

take advantage of potential growth in

emerging markets and developing coun-

tries).

Despite of the risks tied to international

investing, the pros outweigh the cons. For

what it is worth, international stocks are

very useful when it comes to diversification

and while investing will always be risky, an

investor‘s goal remains to minimize risks.

Lack of liquidity (foreign markets may have

lower trading volumes and time differences will

affect the hours of stock exchange centers, mak-

ing it difficult to trade immediately)

Different market operations

(Source: U.S. Securities and Exchange Commissions, 2007)

China Telecom Corp. Ltd. (NYSE: CHA)

9.99%

China Mobile Ltd. (NYSE: CHL) 6.98%

PT Indosat Tbk (NYSE: IIT) 10.43%

PT Telekomunikasi Indonesia (NYSE: TLK)

10.11%

Nippon Telegraph & Telephone Corp. (NYSE: NTT)

4.88%

STOCK MINIMUM

ANNUALIZED HPR

P A G E 2

Macroeconomic Analysis Different countries have different macroeconomic conditions. We

are looking at three countries in Asia that have different labels to

each of them. They are a newly emerging market who has become

everybody‘s favorite in the last few years, China, one of the fastest

growing developing countries in South East Asia, Indonesia, and a

developed Asian country, Japan.

Each country has its own unique potential in the future. Macroeco-

nomic analysis will capture an overview of each country.

Country Overview: China

The term ―BRIC‖ was first introduced in 2001 by Jim O‘Neill (CNN Money, 2009). BRIC stands for

Brazil, Russia, India, and China, also known as the ―Big Four‖ (Dawson, 2005). The four countries

represent countries with newly advanced technology which are viewed to have huge potential

growth in the near future. These four emerging markets are maturing developing countries.

Among all four, China is the country that does the most business transactions with the U.S. and has

the biggest influence in the U.S. economy considering the percentage amount of U.S. bond holdings

(U.S. Department of The Treasury, 2011).

The evolving market-oriented economy has played to the Chinese benefit. According to Mergent

Online (2010a), the steps to market-oriented economy including the phasing out of agriculture in-

dustry and gradual liberalization of prices, fiscal policy decentralization, more autonomy for govern-

ment owned companies, stock markets development, and more freedom in foreign trade and in-

vestment. China strengthened its foreign direct investment inflow after it became World Trade

Organization (WTO) member in December 2001.

In the beginning of 2010, China was under pressure to appreciate its Chinese Renminbi Yuan

(CNY) as it was undervalued by 10-50% to the dollar (Mergent Online, 2010a). Nevertheless, the

undervalued currency gave China a competitive advantage as their products became relatively

cheaper in the U.S. and in many other countries. According to Mergent Online (2010a), favorable

exchange rates were a key contributor to China‘s large trade surpluses of US$2995.5 billion in

2008 and US$196.1 billion in 2009.

Mergent Online (2010a) reported key

economic figures as follows:

GDP purchasing power parity:

US$8.791 trillion (2009 estimate)

GDP real growth rate: 8.7% (2009

estimate by National Bureau of

Statistics of China)

GDP per capita: US$6,500 (2009

T H E L I N A R D Y I N V E S T M E N T G R O U P

China’s Great Wall: One of The

Seven World Wonders

S O U R C E : G E O H I V E . C O M

Source: Mergent Online (2010a)

13%

59%

5%

7%

9%7%

GDP Composition (2006)

Agriculture, hunting, forestry, fishing

Mining, manufacturing, utilities

P A G E 3 V O L U M E 2 : S P R I N G 2 0 1 1

The biggest foreign direct investment in China comes from the manufacturing

sector and the real estate sector which account for 51.95% and 18.66% of

the total foreign investment in 2009 (Mergent Online, 2010a)

With 2.8% of the population below the poverty line in 2007 and an unem-

ployment rate of 4.3% as of December 2009 (Mergent Online, 2010a), China

had proven itself to be able to maintain its economy and income distribution.

Inflation rate of 2.7% as of February 2010 (Mergent Online, 2010a) also

proves that China‘s government has effective economic policies.

Country Overview: China (cont.)

20%

72%

8%

Population by Age

0-14 years

15-64 years

65 years and over

Source: Mergent Online (2010a)

China has a vast population. By December 2009, China‘s

population had grown to 1.3347 billion people (Mergent

Online, 2010a). Due to a high supply of labor, employees are

being paid low and this has become a competitive advantage

of labor in the manufacturing industry, creating a relatively

cheap product due to low labor cost. A lot of U.S. compa-

nies outsource their production to China.

The population growth rate as of 2009 was 0.506 with 90.9%

literate based on 2000 census (Mergent Online, 2010a).

China‘s currency is the Chinese Yuan Renminbi (CNY) and was trading at an average of CNY6.5662/USD during the period Janu-

ary 1, 2011 to April 14, 2011. The period high was CNY6.6286 /USD, with the low of CNY6.5264/USD (Oanda, 2010a). As we

can see from the graph below, the currency exchange value is trending down, meaning that the Yuan is depreciating against the

dollar.

The low exchange rate between the dollar and Chinese Yuan attracts investors to invest in China as the cost of investing be-

comes cheaper. The low exchange rate also plays a big role in the growth of the Chinese manufacturing industry as their prod-

ucts become relatively cheaper than local U.S. products and possibly other imported goods from other countries. This strategy

has long been the most effective strategy in boosting China‘s economy.

There is a debate over whether or not the Chinese should revaluate their Yuan. The low value of Yuan has hurt the U.S. econ-

omy as people are switch-

ing to consume imported

goods, slowing down the

U.S. manufacturing indus-

try. However, if the Yuan is

appreciating against the

dollar then Americans will

lose purchasing power as

Chinese goods become

relatively more expensive.

Davidson (2006) argued

through his article on

NPR.com that “eventually

China must revalue its currency,

or else global imbalances

(America's $200 billion annual

trade deficit with China) will

grow too large.”

Source: Oanda (2011)

P A G E 4 Country Overview: Indonesia Indonesia is a developing country with potential and a lot of room for improvements. The

Indonesian government plays a significant role in the market. The economy is based on a

mixed market system where the government owns companies that supply basic needs, includ-

ing gas, water, rice, and electricity. The country has a large supply of natural gas, crude oil, and

other natural resources; those are the main sources of export revenue. However, since the

1990s production has been declining.

Indonesia is famous for its tourism and its cultural diversity. Its main sector used to be agricul-

ture but due to industrialization and continuous development, manufacturing has been the

main contributor to the GDP.

With the fourth largest population in the world, Indonesia has a lot of labor supply. In 2009,

Mergent Online (2010b) estimated a labor force of 113.3 million. Cheap labor wages and qual-

ity products have attracted U.S. manufacturers to outsource their production to Indonesia.

U.S. branded clothing with a ―Made in Indonesia‖ tag attached is easy to find.

Nevertheless, the government is

still facing problems including pov-

erty, unemployment, corruption,

infrastructure, complex regulatory

environment, and inequality of

resource distribution among re-

gions (Mergent Online, 2010b).

The Central Intelligence Agency

(CIA, 2011b) reported 13.33% of

the population lives below the

poverty line and the unemploy-

ment rate was 7.1% in 2010.

T H E L I N A R D Y I N V E S T M E N T

Jakarta, the capital city of

Indonesia

Mergent Online (2010b) reported key

economic figures as follows:

GDP purchasing power parity—

US$969.2 billion (2009 estimate)

GDP real growth rate— 4.5% (2009

estimate), placing Indonesia as the

country with the 46th (estimate)

highest growth rate in 2010 (Central

Intelligence Agency, 2011d)

GDP per capita—US$4,000 (2009

estimate).

15%

48%

37%

GDP Composition

Agriculture

Industry

Services

Source: Mergent Online (2010b)

Home of the Komodo dragons and

the beautiful Bali beaches

Agriculture Industry Services

% 42.1 18.6 39.3

0

10

20

30

40

50

%

Labor Force

The population growth rate was

estimated at 1.097% in 2010

(Mergent Online, 2010b). The liter-

acy rate in Indonesia is 90.4% of the

total population (Mergent Online,

2010b).

28%

66%

6%

Population by Age

0-14 years

15-64 years

65 years and over




The currency is Rupiah (IDR) and it is

trading at an average rate of IDR

8,800.94/USD (period January 1, 2011 –

April 14, 2011), with a high of IDR

8,984.73/USD and a low of IDR

8,605.85. The overall trend since Janu-

ary 1, 2011 is declining, meaning the

currency is depreciating against the

dollar.

Similar to Chinese Yuan, a low Rupiah

value is attractive to foreign investors.

Mergent Online (2010b) reported an

estimate of US$73.57 billion of foreign

investment in Indonesia as of December

31, 2009. With Indonesian products

relatively cheaper due to the low ex-

change rate, exports exceeded imports

by an estimate of US$35.18 billion in

2009 (Mergent Online, 2010b).

Country Overview: Japan Japan has the third largest economy in the world after the U.S. and China

(Mergent Online, 2010c). Its economy is mainly supported by government-

industry cooperation, a strong work ethic, and the use of sophisticated technol-

ogy. With only 1% of total GDP allocated for country defense (Mergent Online,

2010c), Japan can afford intensive R&D which boost invention and massive de-

velopment in technology, especially in the robotic area.

The uniqueness of the Japanese economy lies on „keiretsu‟ and a guaranteed life-

time employment for a substantial portion of the urban labor force (Mergent

Online, 2010c). Keiretsu stresses how manufacturers, suppliers, and distributors

work together as a continuous line to provide goods and services to customers.

Japan‘s industrial sector is heavily dependent on raw materials and fuels imported from China, the U.S., Saudi

Arabia, UAE, Australia, and Indonesia. The government protects and subsidizes its agricultural sector, and thus

became self-sufficient in rice production. Japan is also one of the world‘s largest fish suppliers.

According to Mergent Online (2010c), Japan‘s overall real economic growth over the last 30 years had been impressive,

averaging at 10%, 5%, and 4% in the 1960s, 1970s, and 1980s respectively. But, the asset price bubble of the late 1980s

had slowed growth to an average of 1.7%.

The Central Intelligence Agency (CIA, 2011c) presented the following

key economic figures:

GDP purchasing power parity— US$4.338 trillion (2010 estimate),

placing Japan on the 4th compared to other countries

GDP official exchange rate— US$5.391 trillion (2010 estimate)

GDP real growth rate—3% (2010 estimate)

GDP per capita— US$34,200 (2010 estimate).

Japan‘s capital city, Tokyo

1%

23%

76%

GDP Composition

agriculture

industry

services

Source: CIA (2011c)


P A G E 6

Asimo, Japanese robot

that brought a revolution

to robotic industry

Country Overview: Japan (cont.) Japan‘s population is 126,475,664 based on July 2011 estimate (CIA, 2011c), placing it the 10th

largest country based on population. A literacy rate of 99% (CIA, 2011c) is a competitive ad-

vantage.

Unlike most other countries with a positive population growth rate, Japan‘s population growth

rate is at a negative 0.278% annually based on

July 2011 estimate (CIA, 2011c). Japan has

more seniors compared to the number of

people in the productive age group. This has

been a problem for the government.

A labor force of 65.7 million in 2010 has

placed Japan as the 9th largest labor force in

the world (CIA, 2011c). The unemployment

rate based on 2010 estimate was 5.1% (rank

number 49 in the world), with 15.7% of the

population below the poverty line based on a

2007 estimate (CIA, 2011c).

Another thing that needs to be considered when investing in Japan is the

huge government debt equivalent to 192% of total GDP as of 2009

(Mergent Online, 2010c).

Japan‘s position in international trade has remained positive with a esti-

mated surplus of US$128.4 billion in 2010 (CIA, 2011c).

Foreign investment in Japan was estimated at US$205.4

billion as of September 31, 2009 (Mergent Online, 2010c).

The consumer prices inflation rate was –0.7% based on a

2010 estimate (CIA, 2011c).


13%

64%

23%

Population by Age

0-14 years

15-64 years

Source: CIA, 2011c

4%

26%

70%

Labor Force

Agriculture

Industry

Services

Source: CIA, 2011c

The latest recent development in Japan was the massive earthquake off the coast

of Japan, measured at 8.9 on the Richter scale, that triggered a tsunami on March

11, 2011. This resulted in nuclear reactor fires in Fukushima and the destruction

of Sendai airport.

The Nikkei Index plunged 12% on the day of the tsunami, but is back up now al-

though not as high as before the

tsunami. This might be a sign

that they are recovering. The question is how fast they will

recover.

Nine days after the tsunami, Upbin (2011) on Forbes.com

wrote an article on Warren Buffett saying the quake pre-

sents a buying opportunity. The next day after the article

was published online, Ray (2011) on Forbes.com confirmed

Buffett‘s buying opportunity statement on Japan‘s tech

losses. On the same day, Fontevecchia (2011), also on

Forbes.com, wrote that Dave Rosenberg agreed on Buf-

fett‘s statement.

These statements from two big investors will definitely

affect market behavior and it seems like the market is

pretty confident that Japan will be back up soon if not

later. Source: Yahoo! Finance, 2011


Japan‘s currency is Yen (JPY) and was trading at an average of JPY82.50/USD over the period of January 1, 2011 to April 14, 2011.

The high was JPY85.24/USD and the low was JPY78.89/USD. On the day of the tsunami, the Japanese Yen was still trading at

JPY82.87/USD and then gradually depreciated against the dollar and finally hit the low of JPY78.89 on March 18, 2011 after the gov-

ernment announced the serious radiation alert from the Fukushima nuclear plant. However, on March 19, 2011, the Yen was back up,

trading at JPY81.03 and peaked on April 7, 2011.

With all the damage from the tsunami, the Japanese government needs to keep the Yen trading at a relatively high value because they

need to build back the buildings. While investors remain positive of Japan‘s growth in the future, the high value of the Yen has made

the cost of investing in Japan relatively more expensive than before the tsunami.

Kihara (2011) on Reuters.com explained that Japan will have modest fiscal spending and extremely loose monetary policy to support

the economy post-tsunami. The government will continue spending with the emergency budget to avoid stagnation. Also, the govern-

ment will flood the market with money to boost trading and investing.


Sendai Airport before and after the tsunami

P A G E 8

Industry Analysis—Mobile Communication The current world wide trend in telecommunication involves smart phones

and Internet access. A relatively new innovation introduced by Apple Inc. that

brought a revolution to the industry was the iPhone 3G, which was then fol-

lowed by newer generations of similar phones. While it was not the first smart

phone, Apple‘s iPhone 3G was a huge boom and had brought a new era of

telecommunication by making it affordable to middle-class people. Partnering

with AT&T as the exclusive carrier, the iPhone 3G was a hit. This trend then

globalized, making smart phones a need and not as much a luxury.

Globalization and the Internet also play a big part in this industry. People now are

without borders. Generation Z or the Net Generation or iGeneration refers to

young people who are tech-savvy, always connected to the internet to access

information and to connect with others (i.e.: via Facebook, Twitter, and other

social media). A smart phone engages all these needs, making internet part of our

daily lives with smart phone as the tool.


The Gerson Lehrman Group (2011) said that smart phones have really changed the face of mobile telecommunica-

tion industry and sales of smart phones account for 20% of all mobile cellular sales on a global level. Furthermore,

Gerson Lehrman Group (2011) also said that the trend will continue in the near future with Asia, especially China,

as the leader of growth in the developing markets.

As the emerging markets are moving forward with increases in population and standard of living, it presents a new

opportunity for investors investing in the communication industry. China is currently holding a competitive advan-

tage with a large population and high population growth.

With penetration of mobile phone well over 100% in most developed countries (Gerson Lehrman Group, 2011),

the growth rate is predicted to slow down. On the other hand, a medium to low mobile phone penetration in de-

veloping countries and emerging markets allows for high growth in this industry.

Key insights in Gerson Lehrman Group‘s (2011) research on global mobile telecommunication industry are:

In 2011 there are well over 5 billion mobile subscriptions worldwide and trillions of text messages are being

sent every year. As mobile phone use continues to grow in popularity; interest continues in comparing the cost

of mobile service packages around the world;

Asia had over 2.6 billion mobile subscribers going into 2011 and was home to eight of the top 10 mobile opera-

tors in terms of subscriber numbers

in the world.

In the 1990s, people used mobile phone as

mean of communication only. They use

their phones to call others, and send and

receive text messages. With the spread of

the Internet, mobile internet, and social

media, mobile phones are now a part of a

lifestyle and a social compass.

Other gadgets such as the iPad, XOOM™,

BlackBerry® Playbook™, and Kindle™

also use a 3G connection, and such use

will only nurture the growth of the tele-

communication industry.

“The smart phone

trend will continue

for the near future,

Asia, particularly

China, will lead the

growth in the

developing markets.

“

(Gerson Lehrman

Group, 2011)

Taken from: Mashable (2010).


From the Mobile Demographics (Q2 2009) chart, we

can conclude that in 2009, the industry‘s main target

market was people, especially male businessmen, age

18-34 with a yearly income of $75k USD and over.

Today, with the advent of social media such as Face-

book and Twitter, location based phone applications,

and the revolution of how people get daily news

through electronic media, today‘s target market is

even bigger, representing a promising future growth

and profit. The higher the level of mobile internet

penetration, the higher the demand for smart

phones, and thus the higher demand for telecommu-

nication providers.

Since both the telecommunication provider industry

and phone manufacturing industry are closely tied

together, we need to look closely at the maturity

level of smart phones and other telecommunication

devices.

The chart to the left illustrates how the number of

standard cellphones in use is declining, just as corded

phones and fax machines. However, smartphones

are still rising and are at a growth stage.

The relatively low Internet and mobile phone pene-

tration is also why the telecommunication industry in

is attractive to investors, especially in Asia.

Taken from: Mashable (2010).

Taken from: Online Marketing Trends (2011)

Source: ITU World Telecommunication/ICT Indicators Database (2008)


P A G E 1 0


Industry Analysis—Fixed-Line Communication The fixed line communication industry is almost mature, however telecommunication companies

that used to only offer fixed land line service and installation have now diversified their services

by providing home internet services. This strategy is saving the industry and has prolonged the

industry‘s maturity stage.

Even though a lot of people are now switching to mobile communication devices and using them

as their main phone line, companies are growing and they still need fixed land lines. Also, the

penetration rate for fixed land line communication in developing countries is still growing.

Today, people can avoid home phone lines, but they still need home internet service and tele-

communication companies are providing them with internet service and long-distance and inter-

national telecommunication services.

While mobile-broadband subscribers are growing at an increas-

ing rate, fixed-broadband subscribers are also growing but at a

slow steady rate.

Despite of the slower growth rate, there is still room for im-

provement. Telecommunication companies are competing

against each other with their internet connection speed and

other attributes, such as discounts, loyalty rewards, and more.

It is not a secret that fixed-line phones will one day

become obsolete. While today there are still un-

tapped markets, growth, and room for improvement,

investors must always be cautious when deciding on

holding fixed-line telecommunication stocks for long

term investing.

Investors need to be aware of threats to the fixed-

line communication industry, such as mobile Inter-

net, mobile phone service, and VOIP (Voice Over

Internet Protocol). Skype™ has introduced cheaper

plans for international cell phones and land-line calls

(Albanesius, 2010), and this is seen as a threat to the

industry.


Industry Analysis Country Specific: China

P A G E 1 1 V O L U M E 2 : S P R I N G 2 0 1 1

According to Mergent Online (2010a), the Chinese telecommunications

market is the largest in the world. Their mobile phone subscribers have

surpassed the number of fixed-line subscribers.

The Central Intelligence Agency (CIA, 2011) reported key numbers as

follows:

Telephones – main lines in use: 313.68 million (2009) – world rank: 1

Telephones – mobile/cellular: 747 million (2009) – world rank: 1

Internet hosts: 15.251 million (2009) – world rank: 6

Internet users: 389 million (2009) – world rank: 1

Although China placed first in number of internet users, penetration of broadband usage remains low; Mergent Online (2010a) re-

ported a 28.9% internet penetration rate in 2009. This means China still has a lot of room for growth in internet telecommunications.

S O U R C E :

M E R G E N T

O N L I N E

( 2 0 1 1 A )

A

C

B

Graph A: Fixed-line vs. Mobile Penetration in China.

Graph B: Mobile Subscribers by Operators.

Graph C: Internet Subscribers in China

*Graph source: Maverick China Research.

P A G E 1 2

Industry Analysis Country Specific: Indonesia


According to Mergent Online (2010a), in 2010 the total population of Indonesia

was 242,968,342 (July 2010 estimate), of which 27.7% are in the age of 0-14 years,

and 66.2% are in the age range of 15-64 years (the remaining 6.1% are 65 years old

and over). The industry‘s main target is people in the age range of 15-64, however

since the Blackberry boom, children age 14 and below are now also cell phone

users. This phenomenon will expand the target market and the likelihood of P.T.

Indosat (NYSE: IIT) getting new customers. With an Internet penetration rate of

10% based on 2009 estimate (Mergent Online, 2010a), there is still a lot of room

for improvement especially in the telecommunication industry.

As for P.T. Telekomunikasi Indonesia (NYSE: TLK), their market is tied to the

housing industry. Their main industry is providing land phone lines for both houses

and businesses. However, according to Perry (2011) Indonesia a housing bubble

period is forming in the country. Perry (2011) also mentioned that Hiramsyah

Thaib, president director of a Indonesia‘s prominent Bakrieland Developer,

claimed a 20-30% growth rate this year alone. More good news is that the govern-

ment will keep its interest rate at a record-low 6.5% to push the economy despite

the growing inflationary pressure (Perry, 2011). Quoting Franken (2011), ―With its

strong economy, expanding middle class, growing housing loan market and increasing

demand for high-end real estate in the residential, commercial and retail segments, the

fundamentals for the local property market are solid. If the government can put an ena-

bling legal framework in place to support investment and resolve issues related to land

acquisition, this will give the sector a welcome fillip and should help to maintain sustained

growth over the long term.” This will only push the housing industry to go further

and increase demand for land lines.

Based on a 2009 estimate, the number of main lines in use (land lines) was 42.5

million and the number of mobile cellular lines in use was 180 million (Mergent

Online, 2010a), and this number will continue to grow.

S O U R C E : M E R G E N T O N L I N E ( 2 0 1 0 B )

The Central Intelligence Agency (CIA, 2011b) collected key industry key information as follows:

Telephones main lines in use—33.958 million (2009), world rank: 9th

Telephones mobile cellular—159.248 million (2009), world rank: 6th

Internet hosts—1.269 million (2010), world rank: 39th

Internet users—20 million (2009), world rank: 22nd

Mergent Online (2010b) reported an Internet penetration rate of 10% based on a 2009 estimate. The 20

million Internet users in 2009 represent the 10% penetration rate and placed Indonesia as the 22nd coun-

try with most internet penetration. This means there is still a lot room of improvement, especially with

the recent BlackBerry® boom in Indonesia.


Source: Yahoo! and TNS Net Index of Indonesia in 2010 -

Indonesia Internet Place of Access .

Taken from: Singapore Management University (2011b)

Source: Cool Founders

Taken from OnlineMarketing-Trends.com (2011)

P A G E 1 4

Industry Analysis Country Specific: Japan


Japan has excellent growth in technology, thus possesses one of the most advanced

communication networks in the world. The mobile phone subscriber penetration rate

was at 78.2% by the end of June 2010 (Singapore Management University , 2011c). This

is not a surprising rate considering a literacy rate of 99%. Internet World Stats (2010)

reported that 78.2% of Japan‘s total population are Internet users.

The Central Intelligence Agency (CIA, 2011c) reported key figures as follows:

Telephones main lines in use—44.364 million (2009), world rank: 5th

Telephones mobile cellular—114.917 million (2009), world rank: 7th

Internet service providers—54.846 million (2010), world rank: 2nd

Internet users—99.182 million (2009), world rank: 3rd

Taken from: Singapore Management University (2011c)


The existence of mobile Internet has given business and advertising

models a new face. According to Japan's Ministry of Internal Affairs

and Communications, the country‘s market for mobile content and

services market grew by 12% to hit 1.52 trillion yen (US$17.3 bil-

lion) in 2009 (Singapore Management University, 2011c). Japanese

companies now spend more money on Internet advertising, includ-

ing mobile internet advertising.

Taken from Singapore Management University (2011c)

P A G E 1 6

Managerial Comparison Sales—Based on the

given sales trends, four

out of five companies

managed to grow over

the past four years.

NTT‘s sales are trend-

ing down and that is a

red flag to investors.

NTT is a mature com-

pany and should diver-

sify its business and be

more competitive in

the market to win

market share and gain

sales.

Div. Payout—Based on dividend payout ratio, IIT is the most attractive company. Investors who want dividends should

consider investing in IIT because for every dollar the company earned as net income, investors recieve an average of 61.6%

in dividends. On another note, a company that pays a lot in dividends as a percentage of net income is not retaining a lot of

money to expand their business. NTT‘s 8.5% dividend payout ratio may not be attractive to value investors but may be a

good signal for possible future growth.


EPS—Earnings Per-Share shows how much a com-

pany earns per its stock price. CHA has maintained a

phenomenal trend over the last four years. But in-

vestors need to keep in mind that 2008 was an

anomaly for CHA due to a devastating earthquake

that occurred in mainland China. This has created an

issue where a lower-than-usual past value would

create a significant ―unreal‖ growth trend. Taking out

2008‘s figure, we will have an EPS growth of -0.06%.

However, EPS growth from 2009 to 2010 alone was

22.99%, a pretty high figure, and we expect CHA to

maintain growth as the sales trend is going up.

IIT, however, placed last in terms of EPS growth

trend with -31.73% growth rate. An increasing com-

petition between mobile service providers has

forced IIT to play the aggressive pricing strategy to

win the market. Another possibility is the increasing

depreciation and costs.

Dividend yield – There is no phenomenal figure

here. Value investors should go for TLK as it pays more in dividend per $1 invested in the com-

pany. However, the relatively low dividend yield is a sign that the five companies are retaining

their earnings to be able to grow their companies in the future. Growth investors see this as an

attractive feature.


NPM – As a rule of thumb, the higher the net profit margin, the

better a company handles itself during a recession. Investors

want a profitable company and therefore the safest choice

would be CHL with a net profit margin average of 25.5%.

P/E – Value and GARP investors would prefer a low P/E. The P/

E ratio indicates how much investors are paying for every $1 the

company earns – in this case, the lower the P/E, the cheaper the

price of a stock. Normally, we would compare a company‘s P/E

to the industry‘s P/E ratio, but since we are comparing five com-

panies from two different industries (mobile service providers

and fixed-line communication providers) in three different coun-

tries with different development levels, we do not have a good

ratio benchmark. In general, the P/E ratio usually ranges from 10

-20, so based on this rule, we can conclude that IIT is overbid

and NTT would be the cheapest stock in terms of P/E.

P A G E 1 8


Company Overview We are looking at five companies whose stocks can potentially be a good addition to our SMIF

Portfolio. They are China Telecom Corporation Limited, China Mobile Limited, PT Indosat Tbk,

PT Telekom Indonesia, and Nippon Telegraph & Telephone Corporation.

CHA is an integrated telecom service provider offering fixed-line, broadband access,

and mobile services (Morningstar, 2011a). It has 64% of the total market share, serving

180 million subscribers in 20 out of 31 provinces in southern China. The company‘s

stock was first listed on NSE in November 2002.

CHA is a subsidiary of China Telecom Group owned by the state-owned Assets Super-

vision and Administration Commission (SASAC). Standard & Poor‘s (2011a) reported

175 million access lines in service (down 13.5 million in 2010) and 63.5 million broad-

band subscribers (up 10 million).

Standard & Poor‘s (2011a) classifies wireline telephone services as local, domestic long

distance, international long distance, and interconnection fees, and wireline non-voice

services as internet access and value-added services.

China Telecom acquired CDMA business in 2008. Related to that strategy, CHA focuses its resources

mainly on urban areas to increase capacity and improve quality. Their strategy is to leverage the CDMA

network and the existing fixed line network to improve customers‘ experiences. Their future strategy is to

significantly increase their wireless subscriber base while keeping revenue per user stable (Standard &

Poor‘s, 2011a).

Morningstar (2011a) said that China Telecom is in good financial health with a Net-Debt-to-EBITDA ratio

a little bit below 0.7.

In 2009, China Telecom spent capital spending equaled to 18% of revenues. The number increased to 20%

of revenue in 2010. Standard & Poor‘s (2011a) predicted a capital spending increase of 16% in 2011 which

equaled 21% of revenue. An increase in capital spending will be used to accelerate the broadband network

expansion. The dividend is expected to be stable in 2011 and 2012.

China Telecom also reveals its plan to acquire the CDMA network from its parent company by the end of

2012 valued at CNY100 billion. This acquisition is said to be supported by debt issuance.

C H I N A T E L E C O M C O R P O R A T I O N L I M I T E D ( N Y S E : C H A )

Highlights:

Forecasted 6% revenue increase in 2011 and

5% in 2012. Wireless and broadband internet

service should be the main drivers in 2011 and

2012.

EBITDA margins narrowed to 34.5% in 2010.

Analysts expect an increase to 34.6% in 2011

and 34.7% in 2012 as costs for the wireless

segment increase along with revenue growth.

EPS estimate of $3.46 and $4.10 in 2011 and

2012 respectively.

Risks:

Aggressive pricing strategy while cost for the

wireless segment is predicted to go up.

Possibility of slow revenue and subscriber

growth and also weaker growth in CDMA busi-

ness.

A relatively high business risk considering a

beta of 1.07 plus international systematic risk

and exchange rate risk.


In addition, Standard & Poor‘s (2011a) also reported a ‗high‘ in qualitative risk assessment and an ‗average‘ volatility leve l. This

reflects the volatility of CHA‘s operations in an emerging market and the competitive nature of the telecommunications industry

as a whole (Standard & Poor‘s, 2011a). However, since March 2011, technical indicators for CHA have been bullish (Standard &

Poor‘s, 2011a) and Wall Street analysts recommend a ‗buy/hold‘ for CHA.

Source: Standard & Poor‟s (2011a)

Source: Standard & Poor‟s (2011a)

Source: Morningstar (2011a)

Source: Morningstar (2011a)

P A G E 2 0


C H I N A M O B I L E L I M I T E D ( N Y S E : C H L )

China Mobile Limited was first founded in 1997 in Hong Kong and the company cur-

rently employs 145, 954 employees with 133 stockholders. As the leading mobile

service provider in China, China Mobile has 584 million subscribers at the end of

2010, up 61.7 million subscribers since 2009.The service mainly covers regions with

more economic advancement, municipalities, and autonomy. Its majority shareholder

is China Mobile (Hong Kong) Group Limited with an equity interest as high as 74.2%

in April 2010.

CHL operates on GSM network, a telecommunication system based on digital trans-

mission which allows roaming. China‘s wireless penetration rate is up 50.6% from

2009 and Standard & Poor‘s (2011b) believes this is the result of CHL‘s aggressive

expansion in rural areas.

With a 3G network license in China, China Mobile Limited is believed to still maintain its position as the

number one mobile company in China. It lost its market share from 60% to 53% in 2010 due to competi-

tion. The Chinese government has posted regulations that benefit CHL‘s competitor, China Unicom, to

encourage a more competitive market in the industry. The new regulations enabled China Unicom to cut

their service tariffs by up to 10% below the government standard rates, but China Mobile‘s superior cov-

erage and capacity will help maintain strong subscriber growth.

In the future, China Mobile Limited plans a capital spending of over CNY125 billion annually for the next

three years to support its expansion. With CNY258 billion in net cash and free cash flow generation of

CNY107 billion (up 38% from 2009), the planned capital spending is viable. Moreover, the dividend is ex-

pected to increase from Hong Kong Dollar (HKD) $3.01 per share in 2010 to HK$3.08 in 2011 and

HK$3.23 in 2012.

Standard & Poor‘s (2011b) valued China Mobile Limited as ‗medium‘ in qualitative risk assessment and has

a low volatility in the market. Medium risk means that the emerging market risk for CHL is offset by its

strong cash flow generation and strong balance sheet and its market leadership position in China‘s wire-

less industry (Standard & Poor‘s, 2011b). However, since March 2011, the technical indicators for CHL

have been bearish and Wall Street‘s analysts are recommending a hold.

Highlights:

A forecasted net subscriber growth of 6% in 2011 and 4% in 2012.

EBITDA margins are estimated to narrow down to 48.5% in 2011 and

48% in 2012 (EBITDA margin was 49.3% in 2010). CHL needs to

match its competitors‘ aggressive pricing and improve 3G service

quality.

A forecasted increase in EPS from $4.50 in 2010 to $4.65 in 2012

(based on exchange rate of USD0.129/HKD).

Risks:

CHL‘s growth and market share are increasing

but at a decreasing rate – a sign of maturity.

Analysis and recommendation include greater-

than-expected tariff reductions and a weak local

currency (Hong Kong Dollar – HKD) versus

the dollar.

* N O T E S :

CHL is a Hong Kong based

company which operates

with the Hong Kong Dollar

(HKD) as its currency.

During January 1, 2011 –

April 14, 2011 period, the

high was HKD7.8012/USD

and the low was HKD

7.7689/USD. The currency

was trading at an average

rate of HKD 7.7851/USD.


Source: Morningstar (2011b)

Source: Morningstar (2011b)

Source: Standard & Poor‟s (2011b)

P A G E 2 2


P T I N D O S A T T B K ( N Y S E : I I T )

PT Indosat Tbk was established by the Indonesian government in No-

vember 1967 as a foreign investment company to provide international

telecommunications services in Indonesia and began commercial opera-

tions in September 1969 to build, transfer and operate an International

Telecommunications Satellite Organization, or Intelsat, earth station in

Indonesia to access Intelsat‘s Indian Ocean Region satellites for a period

of 20 years (Indosat Tbk, 2011). The company has grown

since then and currently employs a total of 6,712 em-

ployees.

Indosat is the second largest integrated telecommunica-

tions network and mobile service provider in Indonesia. Its services include cellular services

that serve GSM 900 and 1800 and 3G network, wireless broadband services, broadband mul-

timedia, data and Internet, and fixed telecommunications services. As of December 31, 2009,

it served approximately 33.1 million cellular subscribers, including wireless broadband sub-

scribers; and approximately 721,127 wireless broadband services subscribers (Standard &

Poor‘s, 2011c).

Morningstar (2011c) indicated that the company has about 33 million cellular customers,

placing it as the second largest with 24% market share. The two largest shareholders are

Qatar Telecom Pte. Ltd. (the company is also operates as a subsidiary of Qatar Telecom)

and the Indonesian government.

Standard & Poor‘s (2011c) views IIT as overvalued, however Credit Suisse (2011) reported

that Indosat has outperformed the market and is getting serious about cost cutting. Based on

technical valuation, since April 2011, the technical indicators for IIT have been bullish with

average volatility (Standard & Poor‘s, 2011c).

With the smartphone boom in Indonesia, mobile service providers have been more competi-

tive than ever. Their strategies include aggressive pricing, cost cutting, and other promotions.

Indosat is not an exception and the company competes through pricing and cost. The com-

pany‘s competitive advantages are well-known name brand and good coverage, as well as

medium tariffs.

Highlights:

An attractive growth opportunity – Indonesia has

the lowest wireless penetration in Asia, repre-

senting a tremendous room for improvement.

Aggressive marketing strategies and improved

wireless network quality.

Management dedication to improve net-

work quality.

Morningstar (2011c) predicts a total

annual revenue growth of 5% on average

for the next five years and EBITDA mar-

gins averaging about 50% during the five

year period. The company had steady

revenue growth over the past three

years despite of growing competition.

Risks:

A possible slower-than-expected increase in the

penetration rate given the country‘s low income

per capita.

Unstable political and financial systems as part of

systematic risks.

The most effective way to increase market share

is through aggressive pricing, which could hurt the

company in the end.

Amidst the steady growth, a shallow economic

moat makes Indosat‘s position vulnerable to in-

creasing competition.


Source: Morningstar (2011c)

Source: Indosat Tbk. (2011)

Source: Standard & Poor‟s (2011c)

Source: Morningstar (2011c)

Source: Standard & Poor‟s (2011c)

P A G E 2 4


P T T E L E K O M U N I K A S I I N D O N E S I A ( N Y S E : T L K )

Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk was founded in

1884. It provides telecommunication and network services worldwide (Standard &

Poor‘s, 2011d). The company‘s main business segment is providing fixed wireline con-

nections for local, domestic long-distance, and international telephone services, and

other services such as leased lines, telex, transponder, satellite, and Very Small Aper-

ture Terminal (VSAT) service. The company also provides mobile cellular telecommu-

nication services with data and internet services as well. It includes short messaging

service for fixed wireline, fixed wireless, cellular phones, dial-up and broadband inter-

net access, VoIP, and other multimedia services. The company has grown to 105.1

million customers in December 2009.

The company has solid corporate governance, proven by the awards they received in

2009:

Among the ―Most Trusted Companies based on Corporate Governance Perception Index Assess-

ment‖ and a ―Trusted Company based on Investor and Analyst‘s Assessment Survey‖ from the Indo-

nesian Institute of Corporate Governance (IICG) (December 2009)

The ―Best Good Corporate Governance — Non Financial Sector‖ by Business Review magazine and

the Indonesian Institute for Corporate Directorship (IICD), (May 2009)

PT Telekom Indonesia is the leading integrated telecommunications provider in Indonesia and is the prin-

cipal provider of fixed-line services in Indonesia (Morningstar, 2011d). It is the parent company of

Telkomsel with 65% ownership. Telkomsel itself is the largest wireless carrier in the country with a46%

market share (Morningstar, 2011d).

Standard & Poor‘s (2011d) valued this stock as slightly overvalued with a fair value rank of 2 (second to

lowest). The company‘s business has low volatility with beta 1.07. All the technical indicators for PT Tele-

komunikasi Indonesia have been bearish since November 2010.

Highlights:

The company‘s main business segment is providing fixed

wireline connections which are closely tied to the real es-

tate industry and the growth of small and big businesses.

The early stage of the housing boom in the Indonesian mar-

ket will give TLK a chance to grow.

The cellular service segment will have a lot of room for

growth given the relatively low penetration in Inter-

net and the recent BlackBerry® boom.

Telkom Indonesia reported a strong sustainable

growth in 2009 and is expected to keep growing.

Telkom Indonesia has the widest and the best net-

work coverage, creating a valuable service quality

and is the competitive advantage to attract and retain

customers.

Telkom Indonesia‘s main customers are business

executives with higher use and knowledge of the

Internet and the telecommunication industry, they

are more reluctant to switch to another carrier and

are less elastic to price changes.

Risks:

A more defined target market makes it harder for

Telekom Indonesia to attract customers from

younger age groups.

Aggressive pricing strategies of competitors.

A possible slower-than-expected increase in the

penetration rate given the country‘s low income

per capita.

Unstable political and financial systems as part of

systematic risks.

The most effective way to increase market share

is through aggressive pricing, which could hurt the

company in the end.


Source: Morningstar (2011d)

Source: Morningstar (2011d)

Source: Standard & Poor‟s (2011d)

Source: Standard & Poor‟s (2011d)

Source: Telkom Annual Report (2009)

P A G E 2 6


N I P P O N T E L E G R A P H & T E L E P H O N E C O R P O R A T I O N ( N Y S E : N T T )

Nippon Telegraph and Telephone Corporation and its subsidiaries provide telecommunications

services to residential and business customers in Japan (Standard & Poor‘s, 2011e). The company

was founded in 1952 in Tokyo, Japan and it offers services for fixed and mobile voice, packet com-

munications, system integration, and other telecommunications related services. Nippon Tel & Tel

Corporation also sells telecommunications equipment and operates telephone networks. In addi-

tion, the company also involved in building maintenance, real estate property rental, systems devel-

opment, leasing, and research and development businesses; and provides data communications ser-

vices, such as information communications systems and computer networking, as well as strategic

planning, systems planning and systems design, and installation of information communications sys-

tems and computer networks (Standard & Poor‘s, 2011e).

Nippon Tel & Tel‘s business in the fixed line segment is struggling to create a descent return but

NTT‘s subsidiary, NTT DoCoMo that provides wireless telecommunication services is the cash

cow. Since 1999, NTT DoCoMo has been the leading company in terms of technology by being one

of the first telecommunication companies to offer Internet access. In December 2010, NTT

DoCoMo launched LTE (4G) service that provides a better and faster connection. This is a competitive

advantage which should be noted by investors and competitors in the industry.

NTT's other major business is its global information, communications, and technology (ICT) division

(Morningstar, 2011e). NTT‘s main consumers are multinational Japanese-based businesses. NTT acquired

Dimension Data in South Africa and Keane in the U.S. in 2010 to improve business and network quality.

Morningstar (2011e) mentioned that one of NTT‘s biggest issues is the poor return on invested capital

because, outside of DoCoMo, the business is not run very efficiently. To tackle this problem, NTT is

reducing head count in fixed-line division to make the company leaner and meaner.

Highlights:

NTT wholly owns NTT DoCoMo which in turn owns

63% of DoCoMo, the largest mobile service provider in

Japan. As a subsidiary, NTT DoCoMo generates the

most cash for NTT and the growth is predicted to be

sustainable since the launching of the 4G network.

NTT has a solid balance sheet and is generating

around JPY500 billion (approximately USD 6

billion) in the form of free cash flow.

The acquisition of South African Dimension

Data and American Keane in 2010 will increase

its business and market segment at an interna-

tional level.

Risks:

NTT‘s business outside of DoCoMo is not run

well despite the enormous amount of free cash

flow generated annually.

NTT‘s competitor, KDDI acquired J:COM, the

largest cable television operator in Japan. This

could be a serious threat to NTT.

DoCoMo is slowly losing market share to Soft-

bank due to exclusive ownership of iPhone

rights.

The recent earthquake could add to the gov-

ernment‘s debt and may increase the interest

rate.

Japan‘s extremely high ratio of seniors to chil-

dren reduces market share per age group.

Standard & Poor‘s (2011e) views NTT‘s stock as

undervalued with a beta of 0.30 and low volatility.

However, the technical indicators for NTT have

been bearish since March 2011. Though, Wall

Street analysts indicated this period as a buy pe-

riod, meaning this bear market will turn into a bull-

ish market in the future.


Source: Morningstar (2011e)

Source: Morningstar (2011e)

Source: Standard & Poor‟s (2011e)

Source: Standard & Poor‟s (2011e)

Taken from Nippon Telegraph and Telephone Corporation (2011)

Taken from NTT DoCoMo

P A G E 2 8 Financial Statement Valuation


Through 2010,

CHA was able to

grow their sales

and net income

with less debt.

CHA Sales and net income are increasing from 2008, which was an anomaly for CHA due to

the acquisition of all its subsidiaries and a devastating 7.9 magnitude earthquake killing

over 69,000 in central south-west China on May 12, 2008. This explains the low net income in 2008.

Total assets, however, were decreasing. Based on investigation on their financial statements, this is caused

by a lower amount of cash held in 2010, a huge drop in short-term deposits (CNY 7,569 million in 2009 and

CNY 1,753 million in 2010), lower accounts receivable, and an increase in depreciation.

In overall, CHA‘s financial health is improving over time judging from increasing sales, net income, net profit

margin, total asset turnover, return on assets and return on equity. These improvements are followed by

the decreasing debt ratio (a decrease from 105.24% in 2008 to 75.61% in 2010). Through 2010, CHA was

able to grow their sales and net income with less debt.

Based on their liquidity ratio, CHA is not liquid, with assets equal to around 40% of its total liabilities. This is

an unfavorable thing for investors but judging from the three-year trend, the ratio is expected to increase,

making CHA more and more liquid as their business grows.

An increase in fixed asset turnover shows an increasing productivity, and so does the increase in times inter-

est earned.

The possible future problem would come from a relatively low net profit margin. In recession, companies

with higher profit margins have a better chance to survive. The three-year trend in net profit margin is posi-

tive but the question is how fast they can get the margin up to a more competitive level in the industry.

No bond rating data was found on Moody‘s nor Standard & Poor‘s.


CHL While sales, net income, and total assets are trending up, its net profit margin, total asset turnover, return on

assets, and return on equity are trending down. This means that even though CHL generated more revenue, it

had a significant increase in costs and depreciation.

CHL had been taking more and more debt each year (an

increasing debt to equity ratio), although the increase is

not significant and operating on debt is not necessarily a

bad thing, investors would prefer a decreasing figure.

Taking more debt to leverage the business is supposed

to increase return on both assets and equity, but the

opposite happened to CHL‘s returns. However, an in-

creasing credit rating by both Moody‘s and Standard &

Poor‘s shows a good debt management, thus investors

do not need to worry about CHL‘s debt level.

The telecommunication industry is a strongly competitive industry where companies apply aggressive pricing strategies to win

market share. In this case, CHL needs to take more control on its costs and spending.

CHL is getting less and less liquid based on its current ratio. This is normal as CHL has been taking more debt. CHL‘s current

ratio is still above 1 so investors do not need to worry much, but must always be cautious as the ratio is decreasing.

There is no significant growth in fixed asset turnover – CHL has been able to keep its performance level at a stable level, though

investors would love to see an improvement in productivity to increase returns.

A higher times interest earned reflects a small amount of interest CHL owes and a higher amount of operating income. Al-

though CHL‘s operating profit margin is trending down, CHL was able to increase its times interest earned ratio and this was

caused by a decreasing financing costs (interest costs).

IIT Sales was constantly going up, but net income and total assets were dropping in 2010. The good

news was its total liabilities were down from 2009 figures. A decreasing net income can be explained

by an increase in cost of services, depreciation, marketing budget, as well as the cost of financing. Due to in-

creasing competition in the industry, one of the survival tactics is through advertising. A national advertisement

on TV and billboards and heavy promotions will increase costs and therefore reduce net income. Also, in order

to retain customers, IIT needed to improve its service quality.

IIT‘s debt ratio was lower in 2010 than in 2009. Debt was taken as leverage to improve return on both assets

and equity, but instead of increasing, the ratios were decreasing. This is a red flag for IIT considering that the net

profit margin dropped from 10.07% in 2008 to 3.27% in 2010. During a bull market, IIT needs to decrease its

costs and spending to compete in price wars. During a bear market, IIT will need to work harder to increase

the margin as it is relatively low. A higher net profit margin provides a cushion during recession and IIT has a

relatively thin cushion to prevent them from going down during recession.

Another red flag is IIT‘s current ratio. IIT is not liquid with a current ratio of 0.51 – current liabilities are twice as large as current

assets.

As for productivity, IIT has maintained the same level of productivity. With overall ratios trending down, IIT should have been

more productive in utilizing its assets to create more sales, revenues and increase profit margin.

The

telecommunication

industry is a

strongly competitive

industry where

companies apply

aggressive pricing

strategy to win the

market share.

Source: Moody‟s (2011)

Source: China Mobile Limited (2011)

P A G E 3 0


TLK Overall, TLK is in really good shape financially. Sales, net income, and total assets are in-

creasing. TLK maintained a net profit margin of around 16.8% even though its operating

profit margin is slightly decreasing. This shows that TLK can maintain their costs well.

A stable total asset turnover and fixed asset turnover show stable productivity and thus create a stable

profit level. Although investors would prefer increasing productivity ratios, stable productivity ratios also

mean good things for the company, especially in a competitive industry.

Total liabilities were decreasing, followed by a decreasing debt ratio. Return on assets remained relatively

stable at around 11.5% (a slight, insignificant decrease of 0.14% from 2008‘s ratio); return on equity showed

a significant decrease of 10.65% from 2008‘s ratio, but it is quite acceptable since they were taking a lot less

debt in 2010.

An increasing current ratio, up to 0.9 in 2010, means that TLK is getting even more liquid each year. Also, a

significant debt to equity ratio from 2008‘s 165.94% to 2010‘s 76.83% is a favorable financial highlight.

As of January 17, 2011, Moody‘s (2011) increased TLK‘s bond rating from Baa2 to Baa1. Another financial

highlight for TLK‘s investors.


NTT Sales and net income were decreasing, followed by a decreasing net profit margin, return

on assets and equity. Total liabilities were more or less at the same level throughout the

past three years. Debt ratios decreased from 2009 to 2010, and this explains the decreasing return on eq-

uity. A relatively low net profit margin will decrease its chance of survival during recession. Since NTT is

heavy on technology, a high depreciation level will always be a problem as technology becomes obsolete in

a relatively short period and needs to be replaced. Nevertheless, NTT needs to take charge of its operating

costs judging from its relatively low operating profit margin.

NTT maintained a stable productivity level judging from its stable total asset turnover ratio and fixed asset

turnover ratio.

NTT is liquid with a current ratio slightly greater than 1, a favorable highlight to investors.

Its debt level was 58.88% in 2010 (a decrease from 2009‘s 61.17%). NTT is highly leveraged with a ratio of

debt-to-equity of 143.18% in 2010. A times interest earned ratio of more than 20 shows that NTT can

easily pay out its interest on debt.

NTT‘s bond rating by Moody‘s (2011) shows a long time rating of Aa1.


Overall, TLK is in

really good shape

financially.

NTT is liquid with a

current ratio slightly

greater than 1 and

has earned an Aa1

bond rating from

Moody’s.

Fundamental Valuation


CHA

The table on the left is the current calculation

of CHA stock based on the current price of

$64.59 and beta 1.07. Current EPS is $3.21,

growing at 15% rate. Current dividend is 0.98,

growing at 0.34% and future dividend yield is

1.52.

Based on these figures, the calculations for

CHA indicate that CHA is an undervalued

stock based on its Annualized HPR of 11.84%

and a positive alpha, but it is overvalued in

terms of dividend valuations.

Sensitivity analysis tells us if the market

changes and both P/E and EPS are as expected

then expected HPR would be 11.837%, but if

the market performs less than expected with

P/E and EPS both dropped 20%, then we can

expect an HPR of –3.034%.

For growth investors, this stock is a buy because it is

undervalued, however value investors who want divi-

dends should re-consider this stock.

To determine the minimum value of annualized HPR

where investors would break even (alpha = 0), we modi-

fied EPS growth rate, dividend growth rate, and future

dividend yield (right table).

For CHA to be a good buy for both value and growth

investors, it needs to have:

A minimum annualized HPR of 9.99%

An EPS growth rate of 12.79%

A dividend growth rate of 9%

A future dividend yield of 1.48%.

Value migration analysis examines where the value in an

industry lies and it looks at the trend of the firm. There

are three phases of value migration: value inflow (ratio

>2), stability (ratio 0.8-2.0), and value outflow (ratio

<0.8). We want to invest in a firm at value inflow stage

or stability stage with dividend to compensate the

slower growth. When a firm is at the value outflow

stage, its product/services have become obsolete.

Value Migration Ratio is found by dividing a firm‘s market value by its revenue.

CHA‘s value migration ratio is 1.85, which means that it is at stability stage and it does compensate for the slower growth by paying out

dividends.

P A G E 3 2


CHL

Based on current performance, CHL

is undervalued with an annualized

HPR of 9.71% and EPS growth rate of

6%, indicating a buy. A beta less than

1 is also an attractive feature of this

stock. CHL is also undervalued based

on dividend valuations.

CHL is a good stock for growth in-

vestors who are looking for underval-

ued stocks, and also for value inves-

tors who want good dividend pay-

ments.

Through sensitivity analysis, we know

that if the market drops and both P/E

and EPS are 20% less than expected,

then we can safely expect an HPR of

–3.768%.

The threshold value for CHL can be seen from calculations on the table below. We redid the calculations to find the minimum annu-

alized HPR of the stock by modifying the highlighted input data. The goal is to get alpha equals to zero, which is the point where in-

vestors break even.

Based on the calculations, CHL

needs to have:

A minimum annualized HPR

of 6.98%

An EPS growth rate of

3.08%

A dividend growth rate of

7.5%, and

A future dividend yield of

3.74%.

CHL‘s value migration ratio is

1.78 which tells us that CHL is at

the stability stage.

Again, based on current figures,

CHL has outperformed its

threshold and has proven itself

to be a good stock with future

gain potential for investors.


IIT

IIT is an undervalued stock

based on expected HPR and

alpha calculations. However, it

is an overvalued stock based on

its dividend growth model and

Gordon‘s model calculations.

IIT may be a good buy for

growth investors who want

potential future gain on capital,

but it is probably not a good

stock for value investors who

want dividend payments.

With beta of 1.1, IIT is 10%

more volatile than the market.

Current calculation indicates an

annualized HPR of 11.04% and a

positive alpha. IIT has a current

EPS of $0.7, growing at 2.21%.

Its current dividend is $0.651, growing at 1.9% with a future dividend yield of 2.1%.

Sensitivity analysis tells us if the market drops and P/E and EPS are both 20% less than expected, then the expected HPR would drop to

–3.439%.

While it is a good stock for growth investors, we need to find out the minimum threshold for IIT to be a good buy for both types of

investors. The table on the right shows

the modified calculations to get alpha = 0,

the breakeven point.

Based on the re-done calculations, we

know that to be a good stock for growth

and value investors, IIT needs to have:

A minimum annualized HPR of

10.43%


A dividend growth rate of 7.9%, and

A future dividend yield of 1.7%..

IIT‘s value migration ratio is 2.67 which

tells us that its services have become

obsolete, especially with all the new com-

petitors in the market. But, if IIT manages

to retain its customers and provide a

better quality service and increase its

sales, then there is still a chance for IIT to

grow.

P A G E 3 4


TLK

Based on current calculations, TLK is

overvalued with an annualized HPR of

6.18%, and current EPS of $2.72, grow-

ing at 1.7% annually. Based on Dividend

growth model and Gordon‘s model,

TLK is also overvalued. An overvalued

stock indicates a no-buy.

Through sensitivity analysis, if P/E and

EPS drop by 20% then investors will

have an expected HPR of - 8.354%.

Based on our modified calculations, to

be considered a good stock, TLK needs

to have:

A minimum annualized HPR of

10.11% to get a positive alpha,


A dividend growth rate of 9.73%,

and

A future dividend yield of 0.3%.

The question is, can TLK reach these

thresholds? Looking back at the trend,

TLK has been growing its EPS at only

0.42% and an average of 3.5% dividend

yield over the past four years. Also TLK

needs to increase its annual HPR up to

10.11%, a pretty significant increase.

TLK‘s value migration ratio is 1.45,

meaning that TLK is at the stability stage

and its services have not become obso-

lete so there is a chance for improve-

ment.

We do not know how the future would

be for TLK, but we can tell that based

on today‘s calculations, TLK is a no-buy.


NTT Based on current calculations,

NTT is undervalued with

alpha of 0.0015. NTT does

not pay dividends and there-

fore the dividend growth

model and Gordon‘s model

do not apply in the valuation.

Currently, NTT has a re-

quired rate of return of

4.88% and an EPS growth rate

of 4.6% (higher than the mini-

mum required EPS growth)

and therefore indicates a buy.

A low beta of 034 is an ex-

tremely attractive feature of

this stock, revealing that NTT

is 66% less volatile than the

market.

Sensitivity analysis indicates that if the market drops and P/E and EPS are 20% less than expected, investors should expect an HPR drop

to –9.491%.

We modified the calculations to find the threshold value for NTT. The table below shows the result.

The minimum annualized HPR for

investors to break even is 4.88%

with an EPS growth rate of 4.46%.

Based on today‘s figures, NTT has

passed the threshold, offering

investors an annualized HPR of

5.03% and an EPS growth of 4.6%.

This represents an undervalued

stock, which is a good buy.

The downside of this stock is that

it does not pay dividends so inves-

tors whose aim is dividend pay-

ments should not invest in this

stock.

NTT‘s value migration ratio is

1.86. NTT is at a stability value

stage and should compensate its

investors with dividend for the

slowing growth, but it is not pay-

ing dividends.

P A G E 3 6

Relative Valuation Relative valuation gives investors an idea which stocks are cheaper than others. This valuation

is very useful when investors are faced with budget constraints. We are using three compara-

tive ratios: Price per-Sales, Price per-Earnings, and Price per-Book Value. The calculations are

based on high price per share and low price per share each year to determine the possible

range, and then we calculated the average.

P/Sales indicates how much investors are paying for each $1 of sales generated by the com-

pany. Investors, especially value and GARP investors, prefer a lower P/Sales ratio to avoid

overpaying for a stock. A modification to this ratio is (P/Sales)/NPM which tells us how much

investors are paying for a stock based on its sales and net profit margin. Again, the lower num-

ber, the relatively cheaper the stock is.

P/E is the most widely used ratio. It indicates how much an investor is paying for $1 the com-

pany earns. Like P/Sales ratio, we want a lower number to avoid overpaying for a certain

stock, and also there is a tendency for P/E to revert back to trend, therefore we want a lower

P/E before it comes back up. (P/E)/EPS growth is a modification of this ratio that ties earnings

per-share growth rate. This is also called a PEG ratio. A higher growth rate will make a lower

PEG and this if favorable. As a general rule, we prefer a PEG below 1 (undervalued). A PEG of

1 is viewed as fairly valued, and a PEG greater than 1 means that the stock is overvalued.

Lastly, it is P/Book Value. Investors prefer a low price-to-book value ratio. The lower the ra-

tio, the cheaper an investor is paying for each $1 of the company‘s equity. (P/BV)/ROE ties

together the relationship between stock price, book value, and the return on equity. Investors

prefer lower a number for this ratio to avoid overpaying.



H I G H L I G H T S :

-CHA seems to be growing even more undervalued each year from 2008 to 2010. An

undervalued stock is a good deal but it needs to grow for investors to be able to get a

significant return.

-CHL is overvalued based on the PEG ratio, but has a lower P/E compared to CHA

whose PEG is significantly lower.

-IIT is definitely overvalued judging from its P/E and PEG ratio. A negative EPS growth rate is highly unfavor-

able to investors. If their growth does not show much improvement in the future then IIT is definitely a no-

buy.

-TLK‘s 2009 PEG ratio is not showing. This is due to zero EPS growth from 2008 to 2009. But in 2010, TLK

managed to grow its EPS , therefore creating an attractive PEG ratio.

-There is not a meaningful value in NTT‘s revenue per share and book value per share due to the exchange

rate between the dollar and the yen. This has caused absolute higher ratios for P/Sales and P/Book Value.

However but P/E and PEG ratios had been decreasing from year to year, indicating that NTT is an underval-

ued stock. An improved EPS growth rate in 2010 made the PEG ratio attractive and if NTT could improve

the growth rate in the future, then the stock is a still a buy.

The top two stocks are CHA and TLK. With a

PEG ratio as the guideline, investors should only

consider CHA, TLK, and NTT. Growth investors

should consider NTT even though they need to

pay more for every $1 of sales generated and for

every $1 of equity. Value and GARP investors,

however, should not invest in NTT.

CHL and IIT could still be a buy for growth inves-

tors if they are sure that the companies can still

grow their sales and earnings in the future.

P A G E 3 8

Technical Valuation Technical valuation is based on past performance and the supply and demand of the stock. There

is no guarantee that past performance will reflect a stock‘s future performance. Investors need

to be aware of this. In this section, we present a line chart and point & figure chart for each

stock.

A line chart shows the price fluctuation over a certain amount of years. Included in this chart are

the 50 days moving average and 200 days moving average. A stock that moves above its 50 and

200 days moving average is considered a good stock. A stock movement below 50 days moving

average is a sell sign, and when it crosses its 200 moving average from above, it is an affirmative

bearish sign.

A P&F chart shows resistant and support lines for each stock. The resistant line represents the

highest price a stock can go but for some reason, the stock cannot push up beyond the line. The

support line is the lowest a stock fell. A bullish stock has both resistant and support lines trend-

ing up. P&F removes daily price volatility from the picture, making it easier to see the big picture.


The chart above compares CHA‘s, CHL‘s, IIT‘s, TLK‘s, and NTT‘s daily price fluctuation over the last five

years. Up to December 2010, CHL is the leader, however starting 2011, the trend is going down and

CHA surpassed CHL.

NTT, TLK, and IIT move together. This is interesting because NTT is a company in a developed country,

Japan, while TLK and IIT are both companies in Indonesia, a developing country.


C H A

The orange line represents the

50-day moving average and the

blue line represents the 200-day

moving average.

CHA is looking bullish now with

price movement above its 50

and 200-day moving average.

The 50-day moving average line

is moving away from its 200-day

moving average, creating a wider

disparity between them.

At the beginning of 2011, CHA

was down in an upward market

but the 50-day moving average

line did not cross the 200-day

moving average and price shot

back up quickly.

CHA is not quite back to its

highest price point in the begin-

ning of 2008, but the trend suggests a bullish performance and we are hoping that the trend will continue

to go up.

According to the chart, the best time to buy CHA was in mid-February 2010 where the 50-day moving

average bottomed out.

The X‘s in the P&F chart

show an upward price

movement, and the O‘s

show a downward price

movement.

CHA‘s support lines are

increasing, creating higher

new lows—a bullish sign.

CHA has yet to find its new

resistant line. According to

the chart, the last resistant

line was at $54/share, and

now CHA is trading at

around $65/share, breaking

out from its past resistant

line—another bullish sign.

CHA‘s bullish price objec-

tive is $68, still above the

resistant level. Technical

analysts believe that, CHA

would go up to $68/share

and $58.35 would be a

good buy price.

P A G E 4 0


CHL

CHL is looking bearish with a price

movement below the 50 and 200-

day moving average.

CHL is now moving downward;

this movement is called collecting

or finding a bottom.

CHL had its season in the sun at

the beginning of 2008 before the

global recession started, and has

yet to pull itself back up.

Based on the current trend line,

investors should not buy CHL

unless they are sure that the price

will trend back up in the future.

Nevertheless, the best strategy is

to wait until CHL‘s price bottoms

out to buy and bet that the price

will go up soon if not later.

A double bottom break-

down is a definite bearish

sign.

CHL‘s resistant line has

increased from its last resis-

tant line in 2010. It is a

good sign.

The support line is also

trending up over time, but

in 2011 we can see the

price drop as everybody

sells to get out as soon as

CHL found its new resistant

level in the end of 2010.

The preliminary bearish

price objective of $36/share

means that investors believe

that the price will go down

to $36 and it would be a

good price to buy and $46

is a good price to sell.


I IT

IIT is bullish with price move-

ment above its 50 and 200-day

moving average. The price bot-

tomed out in February 2011

and it has been trending up.

Treading volume was incredibly

high in March 2011, pushing the

price back up.

Interestingly, the 50-day moving

average has not passed its 200-

day moving average even

though the price is trending up.

Looking at the very end of the

chart, the 50-day moving aver-

age has just crossed the 200-

day moving average from below

recently—a definite bullish sign.

Investors who got in during mid February and stayed until the beginning of March 2011 will get the most benefit from this

bullish run.

As long as IIT could maintain its trend, this could be IIT‘s longest bullish run.

The support lines are

trending up. The latest high-

est price was $35/share in

2010 and IIT has not been

able to surpass that price,

but it is on its way to make

a new resistant line.

Technical analysts believe

that IIT‘s bullish price objec-

tive is $58, meaning that the

price is believed to be going

up and $58 would be a

good price to sell. Analysts

also believe that $30.97 is a

good price to buy.

P A G E 4 2


TLK

TLK has just started trending up

after bottoming out. This is the

perfect time for investors to get in

and be part of the bullish run.

The price is now making its way

up, crossing the 50 and 200-day

moving average from below, a

bullish market is right on the cor-

ner.

The spike in trading volume in

April 2011 shows that investors

are getting in and pushing the price

up.

TLK‘s support line is going up

and has yet to find a new sup-

port level.

The resistant line went down

and bottomed out in 2008,

and now the price is climbing

back up—a bullish sign.

Technical analysts believe that

the bullish price objective is

$70, meaning that they believe

TLK‘s price will go up to

around $70/share and believe

that it is a good price to sell.

Analysts also believe that

$36.14/share is a good buy

price.


NTT

NTT was in a bullish

condition from mid-

2010 up until March

2011– price was mov-

ing above the 50 and

200-day moving aver-

age.

In March 2011, Japan

was hit by a tsunami,

causing a nuclear plant

failure. The market

panicked and investors

sold their Japanese

stocks and the price

plunged below the 50

and 200-moving aver-

age line.

The economy is heal-

ing and investors are

investing back in Japanese stock, pushing the price back up. The price is now moving on top of the 200-day moving average, but

below 50-day moving average line.

Based on the 50-day moving average line, it seems like the stock has topped and is going back down towards the 200-day moving

average. But, we do not know whether the 50-day moving average is going to cross the 200-day moving average from above, or it

is just a small dip in an upward market.

Technical analysts believe that

NTT is bullish with a price

objective of $26.5/share. Ana-

lysts believe that $23.15 is a

good buy price and $26.5 a

good sell price.

The support line is trending

up since 2008, creating higher

new lows for NTT.

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203 28th Street, Suite #17

Canyon, TX 79015

Phone: 337-853-5269

E-mail: [email protected]

The Linardy Investment Group was founded in 2010 and has been pub-

lishing a bi-annual stock valuation newsletter. This edition focuses on

international markets and their telecommunication industries.

Karina Linardy, founder and Editor in Chief, is the sole researcher and

responsible for helping investors identify the right opportunities.

Linardy holds a Master of Science in Finance & Economics from West

Texas A&M University.

The Linardy Investment Group

Your wealth is our concern.

Based on various valuations, we believe that investors should consider CHA,

IIT, and NTT for addition to the SMIF portfolio. The purpose of adding telecom-

munication stocks is to diversify the risks in the portfolio, and being interna-

tional gives an edge to all three stocks. Dividends are good, but the growth of stocks is believed to be more important for

young investors.

We believe that CHA is a good stock based on current fundamental valuation considering that it offers higher annualized HPR

and good management (shown by a positive trend in sales, payout ratio, EPS, dividend yield and net profit margin). Based on

relative valuation, CHA is undervalued and is also cheapest based on P/Sales and P/Book Value calculations. Based on technical

valuation, CHA is also bullish. The only downside is that CHA is not liquid.

CHL is certainly not the cheapest stock among the five, but it is still undervalued based on HPR and dividend calculations. CHL

also has good management with a positive managerial trend over the past four years. CHL is very liquid. On the downside, it is

overvalued based on its PEG ratio and it has a bearish-looking technical valuation. Although technical valuations are not always

proven correct, we suggest that investors wait until CHL‘s price bottom to buy. CHL is a good stock and has a potential but

this may not be the right time to buy.

IIT is not liquid and as a negative EPS trend over the last four years, and it is the most expensive (among the five stocks) based

on P/E. It is also overvalued based on PEG due to a negative growth rate, but it is still an undervalued stock based on the of-

fered annualized HPR, indicating a buy. Based on technical valuation, IIT is looking bullish.

We like TLK because it has a positive managerial trend over the last four years and is expected to continue to grow. Moreover,

TLK is almost liquid and has managed to show an improvement in liquidity over the past three years. But, we fell out of love

with it because it offers a lower than minimum required annualized HPR, indicating a no-buy. On a lighter note, TLK‘s price has

just bottomed out recently and it is looking bullish now. Again, technical valuations are not always proven correct. Investors

who believe that TLK will go up, would need to take the risk of getting a lower than minimum HPR.

NTT is a liquid company but its sales have been decreasing over the past four years. IT does not pay dividends but offers a

higher than minimum annualized HPR, indicating the possibility of abnormal returns in the future. NTT‘s technical valuation is

also looking bullish.

Investing always involves risks since we cannot predict the future. All suggestions are based on various valuations of past per-

formance that may or may not reflect future performance.

SUMMARY

international stock? why not?

Documents

new stocks

international investing

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american investors

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