sector note telco - overall · pdf filewe initiate coverage on the philippines telco industry...

Telecommunications│Philippines│June 28, 2017

Sector Note

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Telco - Overall Battle of the giants

We initiate coverage on the Philippines telco industry with Neutral, as we expect ■service revenue growth to pick up in FY17-19F but to be offset by elevated capex.

Data revenue stream will continue to drive topline growth, underpinned by expansion ■in mobile data, home broadband and corporate data revenues, in our view.

We believe Globe will continue to grab mobile market share as it is well positioned to ■benefit from the surge in mobile data revenues.

We initiate coverage on Globe Telecom (GLO PM) with Hold and TP of Php1,987. ■ We initiate coverage on PLDT Inc (TEL PM) with Hold and TP of Php1,732. ■

Data revenue stream to drive topline growth We estimate industry data revenue will expand at a FY17-19F CAGR of 14% on the back of an FY17-19F CAGR of 18% in mobile data revenue, and also driven by a rise of 12% in home broadband revenue and 11% in corporate data revenue, p.a., respectively, in FY17-19F. We project this, in turn, to drive industry service revenue growth of 3%/3.9% yoy in 2017F/18F, from a flat 0.2% in 2016, amid declining voice and SMS revenue. Price competition has been stable YTD, with ARPUs stabilising after a plunge in mid-2016.

Globe to continue grabbing market share We believe that Globe will sustain its FY16 sales momentum as it continues to grab market share from PLDT, on the back of rising data revenue contribution. As of 1Q17, Globe’s data revenue comprised 53% of total revenue, versus PLDT’s 44%. We also think that Globe is well positioned to benefit from the upcoming surge in mobile data revenues, as it has better execution on the ground in terms of marketing and promotions. We estimate Globe’s revenue market share to rise from 50% in 2016 to 52% by 2019F.

Initiating sector coverage with a Neutral rating We initiate coverage on the Philippines telco industry with Neutral. While we expect industry service revenue growth to pick up, elevated capex spending is likely to push up depreciation and financing costs, resulting in a slight decline in FY17-19F net margins. On the positive side, we think new entrants are unlikely in foreseeable future as structural barriers to entry remain high and return on investment from such a venture would be low.

Globe: Likely to gain market share but pricey We initiate coverage on Globe with a Hold rating and DCF TP of Php1,987 (WACC: 8.13%). While we expect Globe to gain market share in FY17-19F, we think its elevated depreciation and financing costs could weigh down net margins. Upside risk for the stock is mobile revenue market share exceeding our forecast of 52% by 2019F. Downside risks are negative outcome of the Philippine Competition Commission’s (PCC) review on its purchase of San Miguel Corporation’s telco assets and competition from PLDT.

PLDT: Net profit recovering but service revenues still weak We initiate coverage on PLDT with a Hold rating and a target price of Php1,732 based on DCF valuation (WACC: 8.04%). PLDT’s net profit has started to recover since 4Q16, but the medium-term outlook for its service revenue growth remains weak, as long as mobile internet revenue does not outpace declining voice/SMS revenue. Upside risks are faster-than-expected growth in PLDT's home broadband subs base and expansion of its data centres. Downside risks are the pending PCC review and competition from Globe.

Figure 1: Globe and PLDT’s mobile subscriber base (in ’000)

SOURCES: COMPANY REPORTS

Philippines

Neutral

Highlighted companies

Globe Telecom HOLD, TP PHP1,987, PHP2,118 close

We expect Globe Telecom (Globe) to continue grabbing market share from PLDT, on the back of rising data revenue contribution. We forecast Globe’s revenue market share to reach 52% by 2019F.

PLDT Inc HOLD, TP PHP1,732, PHP1,867 close

Although it has lost market share in the wireless business in recent years, we think that PLDT will successfully defend its market share in the fixed line business moving forward, on the back of its strong infrastructure backbone and firm foothold in the enterprise category.

Summary valuation metrics

Analyst(s)

Ralph Christian BODOLLO

T (63) 2 888 7118 E [email protected]

Daphne Ashley SZE T (63) 2 888 5827 E [email protected]

P/E (x) Dec-17F Dec-18F Dec-19F

Globe Telecom 18.27 18.10 16.90

PLDT Inc 19.48 19.64 18.50

P/BV (x) Dec-17F Dec-18F Dec-19F

Globe Telecom 4.21 3.98 3.71

PLDT Inc 3.57 3.33 3.11

Dividend Yield Dec-17F Dec-18F Dec-19F

Globe Telecom 4.22% 4.10% 4.14%

PLDT Inc 3.97% 3.06% 3.24%

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Globe PLDT

Telecommunications│Philippines│Telco - Overall│June 27, 2017



Figure 2: Regional sector comparison

SOURCES: CIMB, SB EQUITIES

Company Bloomberg Recom Price Target Price Market Cap

Ticker (local curr) (local curr) (US$ m) 2017F 2018F 2017F 2018F EPS EBITDA 2017F 2018F

Axiata AXIATA MK HOLD 4.94 5.20 10,339 43.2 32.6 6.9 6.1 9.2 9.3 1.2 2.6

Maxis MAXIS MK HOLD 5.64 6.30 9,879 19.9 19.7 10.9 10.6 3.5 2.7 3.9 4.3

DiGi DIGI MK HOLD 4.99 5.20 9,048 23.6 23.2 13.6 13.1 2.6 3.6 4.2 4.3

TM T MK HOLD 6.62 6.50 5,802 28.4 26.1 8.0 7.7 2.1 1.3 3.2 3.4

MY telcos avg (ex-outliers) 28.8 25.4 9.8 9.4 4.3 4.2 3.1 3.7

SingTel ST SP ADD 3.80 4.10 44,770 16.3 15.6 9.1 8.8 1.4 (1.1) 4.6 4.8

Starhub STH SP REDUCE 2.74 2.45 3,418 17.1 17.9 8.9 9.0 (13.2) (3.9) 5.8 5.8

M1 M1 SP REDUCE 2.18 1.70 1,463 14.4 15.9 7.9 8.8 (11.9) (3.5) 5.6 5.0

SG telcos avg (ex-outliers) 15.9 16.5 8.6 8.9 (7.9) (2.8) 5.3 5.2

TLKM TLKM IJ ADD 4,520.00 4,600.00 34,257 20.2 18.3 9.7 8.8 12.6 9.2 3.1 3.3

XL EXCL IJ ADD 3,410.00 3,900.00 2,740 131.0 29.1 6.3 5.4 (311.9) 9.6 0.0 1.0

Indosat ISAT IJ ADD 6,500.00 8,100.00 2,656 16.6 12.2 3.8 3.4 46.7 7.1 3.0 4.1

Link Net LINK IJ ADD 5,175.00 5,700.00 1,184 16.5 13.9 7.5 6.5 17.0 12.2 2.1 2.5

Indo telcos avg (ex-outliers) 46.0 18.4 6.8 6.0 12.6 9.5 2.1 2.7

DTAC DTAC TB HOLD 52.75 49.40 3,680 135.9 140.5 5.3 6.6 16.7 3.2 0.4 0.4

True TRUE TB REDUCE 6.20 5.25 6,096 (116.7) (36.2) 6.5 7.7 37.3 (23.0) 0.0 0.0

Jasmine JAS TB HOLD 8.20 7.90 1,541 16.1 11.2 10.4 7.9 39.7 23.2 6.2 6.6

JASIF JASIF TB ADD 11.40 13.20 1,847 11.7 11.6 11.2 11.1 2.4 2.4 8.4 8.4

Thaicom THCOM TB ADD 17.10 28.10 552 12.2 10.9 3.0 2.3 0.5 3.7 4.9 4.9

Intouch INTUCH TB ADD 57.50 59.00 5,432 22.7 19.4 21.0 18.0 (14.8) (14.8) 4.4 5.0

Thai telcos avg (ex-outliers) 45.6 45.6 10.1 9.5 1.2 -1.4 4.5 4.7

Globe Telecom GLO PM HOLD 2,118.00 1,987.00 5,594 18.3 18.1 7.5 7.1 1.4 6.7 4.2 4.1

PLDT TEL PM HOLD 1,867.00 1,732.00 8,027 14.0 14.1 6.4 6.1 (0.3) 5.7 4.0 3.1

PH telcos avg (ex-outliers) 16.1 16.1 6.9 6.6 0.6 6.2 4.1 3.6

Asean Telcos avg (ex-outliers) 17.9 16.6 7.9 7.6 3.2 3.7 4.1 4.3

Core P/E (x) EV/EBITDA (x) 3-year CAGR (%)^ Div Yield (%)




Battle of the giants

The Philippines telco story

The Philippines telco industry has consolidated into a duopoly comprising Globe and PLDT, after PLDT acquired Digitel in 2011. In recent years, the Philippines telco industry has evolved from a traditional call and SMS business format to a data-centric one, underpinned by the growing smartphone market and rising demand for connectivity. In recognition of the emerging mobile data trend, Globe launched the country’s first free Facebook campaign in 2013, aimed at encouraging subscribers to develop the habit of using smartphones to access online content. As a result, Globe’s first-mover advantage has enabled it to gain revenue market share from previous market-leader PLDT, which saw its market share dwindle from above 70% in 2011 (post-Digitel acquisition) to 50% in 2016.

Industry outlook

The Philippines mobile market at a glance

The Philippines mobile subscriber base was 125.56m at end-2016, with Globe and PLDT each holding 50% of the market. Smartphone penetration at end-2016 was 55%, derived from Globe’s and PLDT’s subscriber penetration rate of 61% and 50%, respectively, as of end-2016.

Figure 2: Key Philippine mobile market data

SOURCES: COMPANY REPORTS, SB EQUITIES ESTIMATES

Mobile penetration rate in the Philippines was 122% at end-2016 due to multiple SIM ownership, which is a prevailing trend in developing countries where most subscribers are price-sensitive and use prepaid SIM cards, according to a GSMA Intelligence report titled “The Mobile Economy” which was published in 2016.

Figure 3: Regional mobile penetration rate (2016)


2011 2012 2013 2014 2015 2016

Population (m) 94.8 96.5 98.2 99.9 101.6 103.3

Subscribers (m) 93.74 102.99 108.52 113.90 121.55 125.56

Penetration, connections 98.9% 106.7% 110.5% 114.0% 119.7% 121.6%

Subscriber growth 10% 5% 5% 7% 3%

SIM per capita 0.99 1.07 1.11 1.14 1.20 1.22

% prepaid 96% 96% 96% 96% 96% 96%

% smartphones 5% 9% 17% 28% 40% 55%

Blended ARPU (Php) 158 145 141 136 139 127

Recurring mobile revenues 157,183 170,793 178,639 180,849 196,898 188,373

Recurring revenue growth 9% 5% 1% 9% -4%

119%

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142%

133%

139%

93%

0% 50% 100% 150% 200%

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https://www.gsma.com/mobileeconomy/archive/GSMA_ME_2016.pdf




Data revenue streams to drive topline growth

In our view, data revenue growth will be fuelled by rising mobile data usage, broadband subscription and demand for information and communications technology (ICT) services. Hence, we expect data revenues to dominate local telco operators’ topline in FY17-19F as the Philippines telco industry continues to undergo transition to a data-centric business format.

Figure 4: Globe and PLDT’s data/total service revenues


Given its first-mover advantage in mobile data, we believe Globe will maintain its robust 2016 sales momentum moving forward, as it had a head start in expanding its data revenues, reducing the negative impact from deteriorating voice and SMS revenue. As of end-2016, data revenues represented 49% of Globe’s consolidated service revenues. We project that Globe’s data revenues will account for 63% of its service revenues by 2019F.

Figure 5: Globe’s data revenue mix

SOURCES: SB EQUITIES ESTIMATES, COMPANY REPORTS

As for PLDT, its delayed recognition of the mobile data trend has taken a toll on its wireless business, as the decline in legacy voice/SMS revenue outweighed the uptick in mobile data revenue in 2016. Data revenues accounted for 41% of PLDT’s topline as of 2016. We continue to expect PLDT’s wireless market share to decline, as long as the legacy business accounts for a larger share of the revenue pie.

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Figure 6: PLDT’s data revenue mix


At the industry level, we project data revenue to expand at a FY17-19F CAGR of 14%, on the back of an 18% CAGR in mobile data revenue over the same period, and also on a 12% and 11% rise in home broadband and corporate data revenues p.a., respectively, over FY17-19F. We expect this, in turn, to propel service revenues up by 3.0%/3.9% in 2017F/2018F from the flattish 0.2% growth in 2016.

Figure 7: Data revenue stream, based on our projections (Php m)


Drivers of data revenue expansion

For the foreseeable future, we expect voice and SMS revenues to deteriorate as subscribers shift to “freemium” communication applications such as Whatsapp, Viber and WeChat, and mobile data continues to account for a bigger portion of the wireless revenue. In our view, key drivers of rising mobile data adoption in the country are the growing smartphone market, consumers’ sizeable appetite for social media and the rise of video content streaming. In 2016, smartphone penetration rate in the Philippines was 55%. According to a report published by Euromonitor on Oct. 8, 2016, titled “Mobile Phones in the Philippines,” smartphone sales volume rose 52.4% over 2011-2016,

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underpinned by the availability of low-cost smartphones. The report also noted that smartphones with larger screens (measuring 4.7-5.49 inches) had gained traction and became a popular replacement for tablets in 2016, as video-on-demand services such as iWantTV, iFlix and Netflix enabled consumers to stream television shows and movies on their smartphones. For 2017-2021F, Euromonitor estimates smartphone sales volume growth to decline to 11.7%, as smartphone penetration rates increase.

Figure 8: Smartphone sales (in Php m)

SOURCES: EUROMONITOR

Another driver of rising mobile data adoption in the country is the young population of 102.5m. According to the National Statistics Authority, Filipinos of ages 24 and below will comprise roughly 50% of the population in2015-2020F.

Figure 9: The Philippines population, by age and gender (2015) Figure 10: The Philippines population, by age and gender (2045F)

SOURCE: NATIONAL STATISTICS AUTHORITY SOURCE: NATIONAL STATISTICS AUTHORITY

A recent study by social media management platform Hootsuite and UK-based consultancy We are Social Ltd revealed that on average, Filipinos spend 3 hours and 42 minutes per day on social media sites like Facebook, Snapchat and Twitter, as shown in Figure 12. Social media penetration rate in the Philippines in 2016 was 58%, with 60m active Facebook users (of which 90% access Facebook via mobile devices). A closer look revealed that 49% of the Facebook users in the Philippines in 2016 were aged 13-24 years.

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Figure 11: Social media penetration (2016) Figure 12: Time spent on social media in 4Q16 (hours per day)

SOURCES: WE ARE SOCIAL, HOOTSUITE SOURCES: WE ARE SOCIAL, HOOTSUITE

Globe to continue grabbing market share

We believe that Globe will sustain its 2016 sales momentum moving forward, as it continues to grab market share from PLDT, on the back of a rising data revenue contribution. In our view, Globe’s first-mover advantage in the mobile data segment mitigated the decline in its mobile revenues from the deterioration in traditional voice/SMS revenues.

Figure 13: Mobile revenue breakdown (2010-16)

SOURCES COMPANY REPORTS

We think that Globe will continue to be the primary beneficiary of the mobile data boom as 61% of its mobile subscribers at end-2016 were smartphone users, compared to PLDT’s 50%. Moreover, Globe’s marketing thrust towards digital lifestyle is being widely embraced by its subscribers, as seen in the surge in mobile data usage in 2016.

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PLDT - Wireless Mix 2010 2011 2012 2013 2014 2015 2016

Voice 48% 47% 48% 49% 50% 45% 40%

Data 3% 4% 5% 7% 10% 19% 26%

SMS 47% 47% 45% 43% 39% 36% 34%

Globe- Mobile Mix 2010 2011 2012 2013 2014 2015 2016

Voice 49% 51% 48% 44% 44% 43% 37%

SMS 51% 49% 40% 40% 37% 31% 25%

Mobile browsing and data 0% 0% 12% 16% 18% 26% 38%




Figure 14: The Philippines mobile data usage (in Petabytes) Figure 15: The Philippines mobile subscriber market share

SOURCE: COMPANY REPORTS SOURCE: COMPANY REPORTS

However, we believe that PLDT will continue to lag behind Globe in terms of mobile revenue market share, as long as its legacy business accounts for the major portion of its revenue pie. We observe that despite attractive data plans and content partnerships, PLDT’s subscriber base erosion continued in 2016. This, and its ongoing brand realignment could take a toll on its mobile data revenue growth.

Figure 16: Globe’s and PLDT’s mobile revenue market share


In line with our investment thesis that data revenues will continue to drive topline growth in the Philippines telco industry, we forecast that Globe’s and PLDT’s subscribers’ mobile data revenue will increase by 18% and 27%, respectively in 2017F, with PLDT coming from a low base in 2016 to play catch-up with Globe.

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Figure 17: PLDT’s mobile data revenues (in Php m) Figure 18: Globe’s mobile data revenues (in Php m)

SOURCES: SB EQUITIES ESTIMATES, COMPANY REPORTS SOURCES: SB EQUITIES ESTIMATES, COMPANY REPORTS

Although both PLDT and Globe compete in the home broadband segment (fixed and wireless), we estimate that PLDT’s home broadband revenue (including wireless) will expand by 15%, in 2017F while Globe’s will increase by 17%.

Figure 19: PLDT’s home broadband revenues (in Php m) Figure 20: Globe’s home broadband revenues (in Php m)

*includes wireless and fixed broadband revenues



Figure 21: Number of broadband subscribers (in ’000)


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Despite its current weakness in the mobile data segment, we believe that PLDT will continue to defend its leading market share in the enterprise category as it has a more established enterprise unit and a firm foothold in the data centre industry. We forecast corporate data revenues in 2017F to rise by 10% and 17% for PLDT and Globe, respectively, with PLDT coming from a high base in 2016. Potential catalysts for PLDT’s corporate data revenue growth are its strong ICT service capabilities and expansion of its data centres. Currently, PLDT operates nine data centres in major cities such as Metro Manila, Subic, Cebu and Davao, with total rack capacity of about 9,000 by end-2017F (based on our estimates).

Figure 22: PLDT’s corporate data revenues (in Php m) Figure 23: Globe’s corporate data revenues (in Php m)

SOURCES: SB EQUITIES ESTIMATES, COMPANY REPORTS SOURCES: SB EQUITIES ESTIMATES, COMPANY REPORTS

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Valuation and Recommendation

Globe Telecom (Hold, TP: Php1,987)

Using a DCF valuation approach, we estimate Globe Telecom’s 12-month fair value to be Php1,987 per share based on 133m outstanding common shares. We obtain the 12-month fair value of the stock by multiplying the net present value per share (Php1,921) by 1+WACC (8.13%) and deducting the expected dividend payout for 2017F (Php89). Our target price implies 7.5x FY17F EV/EBITDA and 17.1x FY17F core P/E. The stock currently trades at 18.3x FY17F core P/E, above the ASEAN average of 17.9x. We reiterate that Globe Telecom is our top pick longer term, as it continues to grab subscribers and mobile revenue market share from PLDT, on the back of strong mobile data take up among its subscribers. Moreover, we estimate a 5% p.a. service revenue growth over 2017-19F as Globe continues to be aggressive in growing its fixed line business. While we expect Globe to gain market share in FY17-19F, we think its elevated depreciation and financing costs could weigh down net margins.

PLDT Inc.

Using a sum-of-parts valuation (SOP) methodology, we estimate PLDT’s net asset value to be Php1,732/share based on 216m outstanding common shares. We use a DCF-based valuation for the core business, while a market value approach to value PLDT’s 6.1% stake in Rocket Internet. Our valuation implies a FY17F core P/E of 14.03x and EV/EBITDA of 8.12x. The stock is currently trading at 14x FY17F core P/E and we believe it is fully valued, though it is trading at a lower P/E than its regional peer average of 17.9x. We believe that PLDT is back on track as its net income is slowly recovering qoq from the slump in 3Q16, as seen in its 1Q17 performance. Although its net income has been recovering, service revenue growth remains weak as a result of a still-heavy contribution from its declining legacy business.

Possible third telco player?

Key industry developments

In Aug 2015, Telstra (TLS AU) announced that it planned to enter the Philippines telco industry with an investment of up to $1bn in a joint venture with San Miguel Corporation (SMC PM). Given the country’s 40% foreign ownership limit, the market assumed that SMC’s 60% stake in the JV would include its 700MHz spectrum asset. However, talks between Telstra and SMC fell through when Telstra insisted on a guarantee that it would receive full return of its investment should the deal encounter any regulatory setbacks. As a result, SMC sold its highly-coveted 700MHz spectrum to Globe and PLDT for total consideration of Php69.1bn in May 2016. Under the agreement, Globe and PLDT each acquired 50% equity interest in SMC’s telco business.

Given that SMC’s 700Mhz spectrum was acquired by Globe and PLDT, in exchange, both telecom operators surrendered a part of their spectrum allocation to the National Telecommunications Commission (NTC). After the acquisition of the SMC telco assets, the NTC initially planned to hold an auction for the surrendered spectrums of Globe and PLDT. However, during the Philippines Telecom Summit in Mar 2017, the Department of Information and Communications Technology (DICT) Secretary Salalima stated that a spectrum auction would not be necessary unless demand exceeds frequency supply.

Given the latest government directives on the telco sector, we ask if it is still feasible for a third player to enter the Philippines telco arena?

Structural barriers to entry for new player

Telco giants Globe and PLDT have been in the Philippines telco industry for decades, evolving with consumer preferences, as well as structural and regulatory requirements of the industry. It would not be easy for a new player to enter the Philippines telco industry, as the duopolistic market would be difficult to


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disrupt. We identified the key barriers to entry that a new entrant must face if it ventures into the PH telecom space, as follows:

1) Securing a legislative franchise

In order to secure spectrum allocation, the prospective third telco player must first secure a legislative franchise. A legislative franchise enables a telco operator to “construct, install, establish, operate and maintain telecommunication systems throughout the Philippines”. Figure 24 below shows the step-by-step process of securing a legislative franchise. It takes at least five months on average from the submission of requirements to the franchise taking effect. The issued franchise is effective for a 25-year period, during which new entrants are subject to three performance conditions: 1) the operator must commence operations within one year from the approval of the NTC permit; 2) it must commence operations within three years from the franchise taking effect; and 3) it must operate continuously for two years. The legislative franchise would be revoked if the NTC permit holder fails to comply with the conditions listed above.

Apart from the two major telco players (Globe and PLDT), the following companies were given telco franchises that lapsed into law (if not signed by the president it becomes a law automatically) on 30 Jun 2016: Avocado Broadband Telecoms Incorporated (RA No.10895), AMA Telecommunications Incorporated (RA No.10897), Infinivan Incorporated (RA No.10898), Metro Connections and Telecom Corporation (RA No.10902), and Megamanila Telecom Corporation (RA No.10903). In addition, the Congress recently approved the extension of franchise for: Byers Communications Incorporated (RA No.10887), Corona International Incorporated (RA No.10889), Philippine Telegraph and Telephone Corporation (RA No.10894), as well as Bell Telecommunication Philippines Incorporated (RA No.10900).

http://www.rappler.com/business/infographics/138065-san-miguel-belltel-employees-termination

http://www.rappler.com/business/infographics/138065-san-miguel-belltel-employees-termination


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Figure 24: Process to secure legislative franchise framework

SOURCES: CONGRESS FRANCHISE COMMITEE, SB EQUITIES

2) Spectrum auction

Once its franchise has been approved, the prospective third player must submit a study detailing the operational, financial and marketing feasibility of its project to the NTC for spectrum allocation and equipment permits. DICT Secretary Salalima recently commented that a spectrum auction was not necessary but the DICT would offer spectrum allocation to applicants on a case-by-case basis as the need arises. He intends to provide new entrants with frequencies that are just sufficient to kick-start operations. The NTC has not

Company must be SEC-

registered.

Company files House Bill in

Congress.

Company finds a congressman to

sponsor authorship of Bill.

Franchise Committee advices company of

requirements via Congressman.

Company files documentary

requirements to the Committee on

Franchise for review.

Submit to Chairman of Franchise Comm.

to discuss at commitee level.

Once aproved, Bill goes to Plenary for Second Reading.

Once approved, Bill moves to

Third Reading.

Once House of Representatives

approved the Bill, it moves to Senate.

Find a senator to sponsor the

Bill.

Referral to the Committee of Public Service

(First Reading)

Once Senate approves, Bill goes

back to the House of Rep for the enrolled

copy.

Bill moves to the Office of the

President for his signature and the Bill

becomes a Law.

Company files Acceptance of Franchise and

Affidavit of Publication.

Franchise is effective 15 days after newspaper

publication.

Submit requirements to NTC for spectrum

and equipment needs.

min. paid up capital of Php200m

take into consideration: political, geographical and personality influence of the Congressman

Requirements: SEC certificate, feasibility study on the technical and economic viability of the project for first-time applicants; audited financial statements for renewal.

Referral to the Committee of

Franchise. (First Reading)

Once approved, Bill goes to Plenary for

Second Reading.

Submission of documentary requirements.

Once approved, Bill moves to

Third Reading.

House of Representatives approves the minor corrections, if any.

Enrolled copy needs the signatures of the House Speaker and Secretary General, Senate President and Senate Secretary.

If the President did not sign the bill within 30 calendar days upon receipt, the bill automatically becomes a law.


14

disclosed the exact amount of spectrum available to assign to a prospective third telco player.

Case study: Indonesia’s upcoming spectrum auction The Indonesian government recently announced that it will hold a spectrum auction for the 2100MHz and 2300MHz bands by mid-2017F, with a reserve price of Rp296bn (2x5MHz) for the 2100MHz and RP183bn (15MHz) for the 2300Mhz. Only existing operators would be allowed participate in the 2100MHz bid but anyone can participate in the 2300MHz bid. The auction will be carried out in two stages, with the final price set at double the highest bid, while the lowest bid would determine the annual licence fee.

3) Insufficient cell towers

The lack of cell tower sites is another structural limitation to discourage any new entrants to the Philippines telco industry, as red tape prevents telco operators building enough towers to ease network traffic congestion and improve internet speed. Based on 3Q16 TowerXchange data, the Philippines lagged behind Asian peers in terms of number of cell tower sites with 16,300 towers, in contrast to Vietnam’s 70,000 and Indonesia’s 86,322 towers. Apart from the cell tower site issues, telco operators lament the red tape that also causes infrastructure backlog. In particular, Globe claimed that in 2015, it allocated budget to construct more than 1,000 new cell tower sites but it could only build less than 50% of its target, as government permits took 6-8 months to obtain.

Case study: Digitel Between its establishment in 2003 and 2011 (when PLDT acquired the company) , Digitel built roughly 4,400 cell tower sites.

Figure 25: Number of cell tower sites by ASEAN country

SOURCES: 3Q16 TOWER XCHANGE DATA

4) Foreign ownership limit and financial capacity

Another issue that a new telco player would face is the government’s foreign ownership limit (FOL) of 40%. In our view, constitutional reform on FOL is possible but ambitious under the Duterte administration, even if the government is willing to reverse the 40% constitutional restriction on foreign ownership. As a result, a foreign entrant must find a strong local partner with valuable assets to finance 60% of the joint venture capital. During the DICT Philippines Telecom Summit in Mar 2017, Ericsson Country Head Sean Gowran stated that in order to match PLDT’s and Globe’s coverage and capacity, a new entrant must spend capex of US$10bn over five years. Simply put, existing players Globe and PLDT each spend capex of US$750m-

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15

1bn per year on the maintenance and expansion of their networks. This means that the prospective new entrant must spend double the current annual capex of Globe and PLDT in order to compete with them.

Grabbing market share

Once it has overcome the four structural issues mentioned above, the prospective third entrant must capture market share from industry leaders Globe and PLDT. The duopolistic nature of the Philippines telco market (with each incumbent holding 50% of the market) means that it would take the new entrant years to break even in terms of operations, let alone grab a sizeable chunk of the market.

Case study: Digitel’s foray into the Philippines telco industry Digitel launched Sun Cellular in 2003 and pioneered the “24/7 unlimited call and text” service via disruptive pricing under its low-cost and niche strategy. At that time, mobile penetration rate in the Philippines was 27% and the highly-underpenetrated market gave Sun Cellular the opportunity to position its brand by providing customers with more value for their money in the form of unlimited text and call services for longer validity periods (no expiry of prepaid credits). Sun Cellular spent Php900m-Php1bn a year on advertising (print and digital media) over 2008-2010 to relay its brand proposition to customers. Sun Cellular held 16% market share in 2011, when PLDT acquired Digitel.

Given the above-mentioned structural barriers to entry, we maintain our view it is unlikely that a third telco player will emerge in the Philippines in the foreseeable future, as it would face a high level of risk for likely low and slow return on investment, given the current industry landscape.

Risks

Regulatory risks

Globe Telecom and PLDT’s regulatory overhang continues to be the pending Philippine Competition Committee’s (PCC) review on the SMC telco asset acquisition. As of February 17, 2017, the Court of Appeals (CA) issued a Resolution denying PCC’s Motion for Reconsideration (Sept 2016) for lack of merit. On April 18, 2017, the PCC filed before the Supreme Court a Petition to Annul the Writ of Preliminary Injunction issued by the Court of Appeals restraining PCC’s review of the said transaction. The petition remains pending resolution with the Supreme Court. As of May 31, 2017, both telecom operators have already made the final payment to SMC regarding the Vega Telecom transaction.

Third player entrant

The entry of another telco company in the Philippine telco space could dilute market share for existing players. While structural barriers are high, the government is keen to invite a potential third telco player to enter the industry to improve network connectivity in the country. The Department of Information and Communication Technology (DICT) has enough bandwidth to support the maiden operations of a new participant.

Telco - Mobile│Philippines│June 28, 2017

Company Note │ Alpha series



Globe Telecom Catching up with PLDT

We expect PLDT’s data revenue streams to rise by 3-year CAGR of 15% (FY16-19F) ■largely driven by expansion of the mobile data and home broadband divisions.

We estimate Globe’s Philippines mobile revenue market share to rise from 49% in ■2016 to 52% in 2019F.

We project net profit CAGR of 2% for FY17F-19F, supported by higher data revenue, ■partly offset by larger capex.

We initiate coverage on Globe with a Hold rating and DCF-based target price of ■Php1,987 (WACC: 8.13%).

Pushing data usage Globe’s (GLO PM) strategy for FY17F is to strengthen its position in the mobile data, home broadband, and corporate data divisions through infrastructure improvements and marketing packages. We forecast 2017F-19F data revenue CAGR of 15%. Furthermore, we estimate data-related revenue streams to account for 63% of total revenue by 2019F on account of the continued shift in consumers’ preference towards a digital lifestyle.

Grabbing market share Globe’s mobile subscriber base increased from 52.9m at end-2015 (45% of the market in 2015) to 62.8m subscribers at end-2016 (50% of the market in 2016). Globe’s aggressive subscriber acquisition efforts via value-for-money promotions and custom-made data plans enable it to grab market share and grow its subscriber base. We forecast Globe’s Philippines revenue market share to rise to 52% in 2019F.

Net income to rise 2% in 2017-19F We forecast a flattish EPS of Php116 for FY17F as the rise in service revenues is likely to be just enough to cushion uptick in depreciation and financing costs, as well as projected equity in losses of associates from the amortisation of Vega Telecom spectrum. As Globe continues to win mobile market share, along with a 61% subscriber smartphone penetration rate, we forecast Globe’s mobile data usage to surge 28% p.a. in 2017F-19F. Mobile data was the largest contributor to Globe’s topline in FY16.

High capex-to-sales ratio to persist until 2018F We estimate Globe’s capex to stay elevated in the next two years, translating into a 27-28% capex-to-sales ratio, as it improves and expands its infrastructure base to catch up with rival PLDT’s existing infrastructure setup. As such, we assume the low end of its historical dividend payout ratio for 2017F (75%) as the company uses internally-generated funds to finance its capex. This, in turn, implies 2.26x gross debt-to-EBITDA ratio in 2017F, below its debt covenant threshold of 3x.

Likely to gain further market share but looks pricey We initiate coverage on Globe with a Hold rating and a DCF-based target price of Php1,987 (WACC: 8.13%). While we expect Globe to gain further market share in 2017F-19F, we think elevated depreciation and financing cost could weigh down net margins. Upside risk includes mobile revenue market share exceeding our forecast of 52% by 2019F. Downside risks include pending PCC review of the purchase of San Miguel Corporation’s (SMC PM) telco assets and rising competition from PLDT (TEL PM).

SOURCE: COMPANY DATA, CIMB FORECASTS

Philippines

HOLD (previously NOT RATED) Consensus ratings*: Buy 5 Hold 10 Sell 5

Current price: PHP2,118

Target price: PHP1,987

Previous target: PHP

Up/downside: -6.2%

CIMB / Consensus: -2.7%

Reuters: GLO.PS

Bloomberg: GLO PM

Market cap: US$5,594m

PHP281,148m

Average daily turnover: US$3.13m

PHP156.1m

Current shares o/s: 133.2m

Free float: 21.7% *Source: Bloomberg

Key changes in this note

Not applicable.

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) 1 8.1 -11.8

Relative (%) 0.9 -0.6 -13.9

Major shareholders % held Singapore Telecom International 47.1

Ayala Corporation 31.0

Analyst(s)




Financial Summary Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Revenue (PHPm) 119,969 126,183 132,618 139,350 146,948

Operating EBITDA (PHPm) 45,420 49,502 52,498 56,248 60,193

Operating EBITDA Margin 37.9% 39.2% 39.6% 40.4% 41.0%

Net Profit (PHPm) 16,497 15,878 15,445 15,588 16,703

Core EPS (PHP) 113.5 120.2 115.9 117.0 125.4

Core EPS Growth 5.86% (3.56%) 0.92% 7.15%

FD Core P/E (x) 18.65 17.62 18.27 18.10 16.90

DPS (PHP) 83.00 88.00 89.38 86.94 87.74

Dividend Yield 3.92% 4.15% 4.22% 4.10% 4.14%

EV/EBITDA (x) 7.54 7.66 7.48 7.14 6.85

P/FCFE (x) 30.27 22.03 16.98 14.50 21.62

Net Gearing 102% 153% 165% 168% 171%

ROE 25.5% 26.1% 23.7% 22.6% 22.7%

% Change In Core EPS Estimates

CIMB/consensus EPS (x) 1.04 1.01 1.02

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Telco - Mobile│Philippines│Globe Telecom│June 28, 2017

17

Catching up with PLDT

Background

Company profile

Since its partnership with Singapore Telecommunications Limited (SingTel) in 1993, Globe Telecom Inc (Globe) has become a major telco services provider in the Philippines, with widespread mobile and broadband networks across the country. It offers mobile calls, SMS and data services under three brands: Globe Postpaid, Globe Prepaid and TM. It also provides fixed line communication, along with wired and wireless broadband services to individual and enterprise clients. As at end-2016, Globe has 62.8m mobile subscribers, 1.1m home broadband subscribers and 1.2m landline subscribers.

The Globe group is composed of the following companies:

Figure 1: Globe group corporate structure (wholly-owned subsidiaries)

SOURCE: COMPANY REPORTS

Shareholders and management team

As at end-2016, the principal shareholders of Globe were Ayala Corporation (30.7%) and Singapore Telecom (47.2%). Ayala Corporation is a Philippine conglomerate with interests in real estate development, financial services, telecommunications, water distribution, infrastructure, automotive dealerships, as well as power and transport infrastructure. Meanwhile, Singapore Telecom is a communications group based in Singapore which has strategic partnerships with telco operators across Asia and Africa.

Figure 2: Key management members

SOURCE: COMPANY WEBSITE

Name Position

Ernest L. Cu President and CEO

Alberto M. de Larrazabal Chief Commercial Officer (CCO)

Rosemarie Maniego-Eala Chief Finance Officer (CFO), Treasurer and Chief Risk Officer

Carmina J. Herbosa Chief Audit Executive (CAE)

Gil B. Genio Chief Technology and Information Officer (CTO)

Maria Aurora Sy-Manalang Chief Information Officer (CIO)

Rebecca V. Eclipse Chief Customer Experience Officer (CCEO)

Renato M. Jiao Chief Human Resource Officer (CHRO)

Vicente Frolian M. Castelo General Counsel

Bernard P. Llamzon EVP for Channel Management

Solomon M. Hermosura Corporate Secretary

Marisalve Clocson-Co

Chief Compliance Officer, SVP for Law and Compliance, and Assistant Corporate

Secretary


18

Mobile segment

Globe’s mobile segment consists of three divisions: voice, SMS and data. Subscribers may choose from a pay-per-use standard rate or subscribe to unlimited voice/SMS packages in different denominations to suit the subscriber’s budget. Meanwhile, Globe’s mobile data service is accessible via smartphones and portable devices (e.g. nomadic sticks) through LTE, 3G, HSPA+ and GPRS technologies using ‘volume-based consumable data plans’, a deviation from previous ‘unlimited time-based data plans’ for more efficient data pricing scheme based on data consumption.

Figure 3: Globe’s unlimited voice/SMS package


As at end-2016, Globe enjoyed 50% Philippine market share with 62.8m prepaid and postpaid subscribers. As majority of Filipinos are price-sensitive, 96% of Globe’s subscribers were connected through prepaid subscriptions.

Globe Prepaid serves the conventional market, while Touch Mobile (TM) focuses on the value-conscious slice of the market. Subscribers can top up their prepaid credits in different denominations through various reloading channels such as prepaid cards, bank channels and Share-A-Load, a consumer-to-consumer top up system.

Figure 4: Globe’s subscriber base (in m) and market share Figure 5: Globe’s subscriber mix (2016)

SOURCE: COMPANY REPORTS SOURCE: COMPANY REPORTS

Globe Postpaid offers different plan packages that cater to a subscriber’s lifestyle and needs, such as the recently launched myLifestyle plan wherein subscribers get access to unlimited call and SMS on top of a digital lifestyle app pack of their choice.

With rising smartphone penetration, social media usage and mobile video content viewing, mobile data adoption in the country is an emerging trend. As such, Globe came up with the GOSURF50 promo to push mobile data consumption among its subscribers. As the industry deviates away from the traditional call and SMS business, Globe’s thrust towards mobile data adoption

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19

has been widely accepted by its followers as seen in its mobile data take-up in 2016. Furthermore, Globe has been expanding its data services to encompass a wider variety of categorical applications by partnering with different content providers and coming up with specific app promotions that cater to a subscriber’s digital personality with respect to entertainment, music, social networking and games.

Figure 6: Globe’s GOSURF50 promo


Fixed line segment

Globe’s fixed line segment offers fixed line voice, home broadband and corporate data services. Fixed line voice services are usually bundled with internet plans for individual consumers, while offering voice solutions such as conferencing and domestic/international toll-free services for its enterprise clients. Home broadband segment provides wired and wireless broadband services with focus on providing high bandwidth speed to enable access to a wide range of online entertainment content. Corporate data, on the other hand, offers a diverse suite of enterprise packages encompassing connectivity, storage and cloud solutions.

Figure 7: Globe’s broadband plans at end-May 2017


Outlook

Globe to continue winning market share in the wireless business

We believe that Globe’s wireless market share will expand to 52% by 2019F as we see continuous improvement in Globe’s data revenue mix (53% of total revenue as of 1Q17). We forecast data-related revenue streams to reach 63% of total revenue by 2019F, underpinned by 3-year data revenue CAGR of 15% (2016-19F), largely driven by expansion in the mobile data and home broadband divisions.


20

Figure 8: Globe’s data/non-data revenue mix


We believe that its 50% subscriber market share in 2016, with a subscriber smartphone penetration rate of 61%, allows Globe to be more versatile with its data-related promotions, as compared to a few years ago when rival PLDT had a bigger share of the market. With 96% of its subscribers under prepaid subscriptions in 2016, custom-made promotions with limited validity (e.g. GOSAKTO50) would allow subscribers to get more value out of the service while maintaining an affordable budget. We forecast Globe mobile data revenue CAGR of 15% over a 3-year horizon (FY16-19F), with petabyte usage CAGR of 28% over the same period, as we expect rising data volume to continue to offset the low-margin nature of the business.

Figure 9: Mobile data revenues (in Php m)


Apart from the company’s early recognition of the mobile data trend, we think that Globe has successfully persuaded its subscribers to buy into the digital lifestyle via its solid on-the-ground execution, particularly its focus on marketing and promotions in the form of launches, events, screenings and strong online presence. Since 2013, Globe has been aggressive in its marketing activities, evidenced by the steep increase in its marketing and promotion expenses in 2013-16. In contrast, PLDT turned to subsidies, reducing marketing and promotion activities, to protect its subscriber base.

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Figure 10: Selling and marketing expenses – Globe vs. PLDT (in Php m)

Figure 11: Mobile subsidies – Globe vs. PLDT (in Php m)



With these developments, we forecast Globe to capture 52% Philippines mobile revenue market share by 2019F, underpinned by a surge in mobile data revenues despite the steady decline in voice and SMS revenues, as more and more subscribers adopt the digital lifestyle. We estimate Globe’s mobile data to increase 18% yoy in 2017F but its voice and SMS revenues to fall by 6% and 8%, respectively, in 2017F.

Figure 12: Globe’s revenue market share


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Figure 13: Mobile business revenue mix (%) Figure 14: Mobile business revenues (in Php m)

SOURCES: COMPANY REPORTS, SB EQUITIES ESTIMATES SOURCES: COMPANY REPORTS, SB EQUITIES ESTIMATES

Globe growing its home broadband business

Aside from winning market share in the wireless business, Globe intends to compete in the fixed line business, particularly in the home broadband segment.

With the proliferation of smart TVs, Globe At Home, Globe’s home broadband brand positions itself as a home solution to address the family’s different entertainment needs through a customisable plan based on the household’s budget and desired connection speed.

The plan is bundled with a monthly mobile data allocation with access to exclusive entertainment content on higher-priced plans. For 2017F, we estimate a 17% rise in the home broadband division underpinned by continuous subscriber growth, increased preference towards online video streaming and an underpenetrated broadband market.

Figure 15: Home broadband revenues (in Php m)


We think PLDT will remain the market leader in the home broadband segment moving forward as it has a larger base of wired and wireless broadband customers. Despite this, we think Globe can catch up with PLDT as Globe’s value proposition in the home broadband division leverages on the video-content streaming trend which requires heavy data transmission for watching content at a higher resolution.

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We forecast 17% yoy growth for corporate data revenue in 2017F as Globe comes from a low base vis a vis rival PLDT, which dominates the market in the enterprise category.

Figure 16: Corporate data revenues (in Php m)


However, as Globe continues to ramp up its fixed line business, we observe that capex remains elevated. We forecast capex-to-sales ratio to hover at 27-29% in 2017F-19F as Globe plays catch-up with PLDT in terms of infrastructure setup in order to deliver fast and efficient mobile data connection. In 2016, Globe’s capex-to-sales ratio was 28%, higher than PLDT’s 25% and regional peers’ average of 23%. We forecast capex of c.$750m for FY18F, given Globe’s efforts to promote mobile data usage among its subscribers, alongside home broadband and corporate data growth.

Figure 17: Capex-to-sales ratio of regional peers (2016)

SOURCES: BLOOMBERG

Globe historically turned to the debt market to finance a sizeable chunk of its capex. We expect depreciation and amortisation cost as a result of capital spending to rise 8% p.a. in 2017F-19F, higher than our expected 3-year sales CAGR of 5%. We expect capex to stabilise in 2020F onwards as we project Globe to have industry-leading 52% Philippines mobile (cellular) revenue market share in 2019F vs. 49% in 2016.

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Figure 18: Globe’s capex (in Php bn)


Financials

Project net profit CAGR of 2% for 2017F-19F

We forecast Globe net profit CAGR of 2% for 2017F-19F, on the back of higher service revenue, fuelled by mobile data and home broadband service revenues, which would offset elevated capex, depreciation and financing costs. We forecast reported EPS of Php116 for 2017F.

Figure 19: Financial summary


Net sales to increase 5% p.a. until 2019F We expect Globe’s net sales to increase by 3-year CAGR of 5% (FY17F-19F), on the back of rising smartphone adoption and attractive data plans resulting in higher demand for mobile data. Globe’s ARPU was steady in 1Q17 and it relies on the low switching cost of prepaid subscribers, as well as the prevalence of multi-SIM card ownership to boost its mobile subscriber base. We forecast Globe’s mobile revenue market share to rise from 49% in 2016 to 52% by 2019F. In our view, the increase in mobile data revenues would offset declining revenues from the call and SMS businesses as more customers switch to over the top (OTT) chat applications and platforms.

On the fixed line business, we believe that Globe’s continuous expansion among untapped households is the home broadband business’ key growth driver. Moreover, cross-selling opportunities between the fixed line voice and corporate data segments would allow Globe to deepen its relationship with corporates by offering value-added services such as software development to complement existing corporate needs.

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FYE Dec (Php m) 2015 2016 2017F 2018F 2019F

Revenues 119,969 126,183 132,618 139,350 146,948

EBITDA 45,420 49,502 52,498 56,248 60,193

Net income 16,497 15,878 15,445 15,588 16,703

Revenue growth 16% 5% 5% 5% 5%

EBITDA growth 13% 9% 6% 7% 7%

Net income growth 23% -4% -3% 1% 7%


25

Figure 20: Service revenue summary

SOURCES: SB EQUITIES ESTIMATES

Estimate EBITDA margin of 41-43% in 2017F-19F

We forecast EBITDA margin of 41-43% for FY17F-19F on the back of lower interconnection costs and larger contributions from the low-margin data segment. We expect net margin to narrow from 13% in 2016 to 11% in 2019F, as higher financing cost and share of associate’s losses from the Vega Telecom asset purchase negatively affect Globe’s bottomline.

Figure 21: Financial margins


We assume 75% dividend payout ratio for FY17F-19F

Historically, Globe paid out 75-90% of the prior year’s core net profit as dividends. However, with increased capex, we believe there is a risk that the dividend payout ratio may be lowered. Management has yet to provide guidance on its dividend payout ratio for FY17F. We have assumed the low end of Globe’s historical dividend payout (75%) and estimate 4.1-4.2% dividend yield in FY17F-19F. Our assumption of 75% dividend payout ratio is supported by the Globe’s solid balance sheet with gross debt/EBITDA of 2.26x at end-2017F (based on our estimates), which is below Globe’s gross debt/EBITDA covenant threshold of 3x.

Figure 22: Globe’s historical dividend payout ratio

SOURCE: COMPANY REPORTS

FYE Dec (Php m) 2015 2016 2017F 2018F 2019F

Mobile Service Revenues 91,243 91,876 94,178 97,277 102,001

Fixed Line Service Revenues 22,436 28,113 32,246 35,880 38,753

Mobile Revenues Growth 16.9% 0.7% 2.5% 3.3% 4.9%

Fixed Line Revenues Growth 7.1% 25.3% 14.7% 11.3% 8.0%

Mobile Subscribers (in '000s) 52,933 62,799 65,236 67,770 70,097

2015 2016 2017F 2018F 2019F

EBITDA margin 40.0% 41.3% 41.5% 42.2% 42.8%

EBIT margin 20.2% 20.3% 20.8% 20.4% 20.6%

Net income margin 12.6% 12.7% 11.6% 11.2% 11.4%

70%72%74%76%78%80%82%84%86%88%

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26

Risks

Regulatory risk

Regulatory overhang for Globe includes the Philippine Competition Committee (PCC) review of the Php69bn SMC telco asset sale in 2016. The Court of Appeal had previously denied Globe’s application for a temporary restraining order and injunction against the PCC’s review of the SMC deal. The PCC has oversight of mergers, acquisitions and transactions and has the right to sanction anti-competitive agreements in the market.

Possibility of third telco entering the fray

The entry of another telco company in the Philippine telco space could dilute market share. While structural barriers are high, the government is keen to invite a potential third telco to enter the industry to improve network connectivity in the country. The government is ready to hand over initial spectrum allocation should a third telco prove it can provide better services than the incumbents.

Intensifying competition

Globe and PLDT have been competing for decades, with PLDT’s recent loss of subscriber base presenting an opportunity for Globe to grab market share. We observe rigid price competition driving ARPUs and margins down in 2016. Despite claims that the price war has subsided in the mobile segment, both telco operators have to look out for new opportunities to capitalise on the rising mobile data trend.

Meanwhile, OTT (over the top) messaging applications present more affordable alternatives to the call and SMS businesses, resulting in declines in these two segments. The shift to OTT applications is on the back of the rising usage of smartphones.

SWOT analysis

Figure 23: SWOT analysis

SOURCES: SB EQUITIES

Strengths:

Weakness: Threats:

Increased competition (price)

Market saturation

Opportunities:

Growing subscriber base Underpenetrated broadband market

Good subscriber reception of the digital lifestyle

adoption

Increasing mobile data adoption among

Filipinos

High capex to service revenue ratio to drive

depreciation expensePCC review

Lack of infrastructure capacity to sustain data

growthThird player entrant


27

Valuation and recommendation

DCF valuation

Our DCF valuation estimates Globe’s equity value at Php1,987 per share based on 133m outstanding common shares. We obtain the 12-month fair value of the stock by multiplying the net present value per share (Php1,921) by 1+WACC (8.13%) and deducting the expected dividend payout for 2017F (Php89).

Figure 24: FCF analysis


Key assumptions in our valuation model are weighted average cost of capital (WACC) of 8.13% and cost of equity of 10.3%. Using the returns from the latest 5-year government bond offering, we assume risk-free rate of 4.30% and 6.0% equity risk premium. We also assume cost of debt of 5.8% and terminal growth rate of 3%, which is in line with the central bank’s median long-run inflation rate projection for the Philippines.

We initiate coverage on Globe with a Hold rating and target price of Php1,987.

Figure 25: DCF valuation


(Php m) 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F

EBIT 24,287 25,653 27,613 28,358 30,324 32,712 34,434 36,670 40,639 42,822 45,461 55,667

Income tax 6,983 6,049 6,010 6,066 6,500 7,087 7,553 8,421 9,545 10,139 10,882 13,746

Net Operating Profit After Tax (NOPAT) 17,304 19,605 21,602 22,292 23,824 25,624 26,880 28,250 31,094 32,683 34,579 41,921

Depreciation and amortization 21,133 23,849 24,886 27,890 29,869 32,030 34,952 36,970 36,710 37,932 38,753 32,186

Capex 32,100 36,700 37,500 37,500 40,000 39,000 37,000 36,000 35,000 34,000 33,000 32,000

Net working capital (18,457) (29,379) (33,524) (34,197) (39,382) (40,731) (37,093) (29,105) (19,158) (5,525) 13,668 33,227

Change in net working capital (4,850) (10,922) (4,144) (673) (5,185) (1,349) 3,638 7,988 9,947 13,633 19,193 19,559

Minority interests (12) 10 10 10 11 12 12 14 16 17 18 22

Unlevered FCF 11,174 17,685 13,142 13,365 18,889 20,016 21,206 21,245 22,872 22,998 21,156 22,571

Yoy % change 58% -26% 2% 41% 6% 6% 0% 8% 1% -8% 7%

Discount factor 1.00 1.00 1.00 0.92 0.86 0.79 0.73 0.68 0.63 0.58 0.54 0.49

Discounted FCF 13,142 12,360 16,155 15,831 15,512 14,371 14,308 13,305 11,319 11,168

Terminal value Php m 453,039

Total discounted free cash flow 137,472

PV of terminal free cash flow 224,162

Total present value free cash flows 361,633

Net interest bearing debt 105,729

Total Company Equity Value m 255,905

Number of Common shares outstanding m 133

Net Present Value per share Php 1,921

12-month fair value Php 1,987


28

Implied valuations

Our target price implies 7.5x FY17F EV/EBITDA and 17.1x FY17F core P/E. The stock currently trades at 18.3x FY17F core P/E.

Figure 26: Implied valuations on TP


Peer comparison

Globe trades at 7.5x FY17F EV/EBITDA, below the 7.9x average of its ASEAN peers’. In terms of P/E, Globe currently trades at 18.3x FY17F P/E, above the ASEAN average of 17.9x.

Given the expected elevated capex during the year and our dividend payout ratio assumption of 75%, we forecast Globe to register FY17F dividend yield of 4.2%, broadly in line with the 4.1% average of its ASEAN peers.


SOURCES: CIMB, SB EQUITIES ESTIMATES

2016 2017F 2018F 2019F

EV/EBITDA 5.96 7.53 7.18 6.89

P/E 12.36 17.07 16.92 15.79

P/BV 3.10 3.93 3.71 3.47





DiGi DIGI MK HOLD 4.99 5.20 9,048 23.6 23.2 13.6 13.1 2.6 3.6 4.2 4.3

TM T MK HOLD 6.62 6.50 5,802 28.4 26.1 8.0 7.7 2.1 1.3 3.2 3.4


SingTel ST SP ADD 3.80 4.10 44,770 16.3 15.6 9.1 8.8 1.4 (1.1) 4.6 4.8


M1 M1 SP REDUCE 2.18 1.70 1,463 14.4 15.9 7.9 8.8 (11.9) (3.5) 5.6 5.0


TLKM TLKM IJ ADD 4,520.00 4,600.00 34,257 20.2 18.3 9.7 8.8 12.6 9.2 3.1 3.3

XL EXCL IJ ADD 3,410.00 3,900.00 2,740 131.0 29.1 6.3 5.4 (311.9) 9.6 0.0 1.0




DTAC DTAC TB HOLD 52.75 49.40 3,680 135.9 140.5 5.3 6.6 16.7 3.2 0.4 0.4








PLDT TEL PM HOLD 1,867.00 1,732.00 8,027 14.0 14.1 6.4 6.1 (0.3) 5.7 4.0 3.1





29

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

22.00%

22.75%

23.50%

24.25%

25.00%

25.75%

26.50%

2.80

3.30

3.80

4.30

4.80

5.30

5.80

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-10.0%-8.2%-6.4%-4.6%-2.8%-1.0%0.8%2.6%4.4%6.2%8.0%

11.012.013.014.015.016.017.018.019.020.021.0


12-mth Fwd FD Core P/E vs FD Core EPS Growth

12-mth Fwd Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss

(PHPm) Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Total Net Revenues 119,969 126,183 132,618 139,350 146,948

Gross Profit 97,296 104,646 109,861 115,648 121,894

Operating EBITDA 45,420 49,502 52,498 56,248 60,193

Depreciation And Amortisation (21,133) (23,849) (24,886) (27,890) (29,869)

Operating EBIT 24,287 25,653 27,613 28,358 30,324

Financial Income/(Expense) (2,854) (3,945) (5,147) (5,694) (6,110)

Pretax Income/(Loss) from Assoc. (154) (855) (1,000) (1,000) (1,000)

Non-Operating Income/(Expense) 2,188 1,084 0 0 0

Profit Before Tax (pre-EI) 23,467 21,937 21,466 21,664 23,214

Exceptional Items

Pre-tax Profit 23,467 21,937 21,466 21,664 23,214

Taxation (6,983) (6,049) (6,010) (6,066) (6,500)

Exceptional Income - post-tax

Profit After Tax 16,484 15,888 15,455 15,598 16,714

Minority Interests 12 (10) (10) (10) (11)

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Net Profit 16,497 15,878 15,445 15,588 16,703

Recurring Net Profit 15,126 16,014 15,445 15,588 16,703

Fully Diluted Recurring Net Profit 15,126 16,014 15,445 15,588 16,703

Cash Flow


EBITDA 45,420 49,502 52,498 56,248 60,193

Cash Flow from Invt. & Assoc.

Change In Working Capital (7,550) (11,572) 736 1,813 (584)

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense

Other Operating Cashflow 1,366 1,680 (6,250) (6,828) (7,224)

Net Interest (Paid)/Received 2,774 3,409 5,271 5,828 6,224

Tax Paid (6,056) (5,557) (6,010) (6,066) (6,500)

Cashflow From Operations 35,953 37,463 46,244 50,994 52,109

Capex (31,956) (36,610) (37,500) (37,500) (40,000)

Disposals Of FAs/subsidiaries

Acq. Of Subsidiaries/investments (1,319) 14 0 0 0

Other Investing Cashflow 714 (21,065) (4,953) (4,942) (4,963)

Cash Flow From Investing (32,560) (57,662) (42,453) (42,442) (44,963)

Debt Raised/(repaid) 5,929 33,007 12,826 10,907 5,907

Proceeds From Issue Of Shares

Shares Repurchased

Dividends Paid (11,017) (11,682) (11,909) (11,584) (11,691)

Preferred Dividends (553) (552)

Other Financing Cashflow (2,765) (3,807) (5,271) (5,828) (6,224)

Cash Flow From Financing (8,406) 16,965 (4,354) (6,505) (12,007)

Total Cash Generated (5,013) (3,234) (563) 2,047 (4,862)

Free Cashflow To Equity 9,322 12,808 16,617 19,459 13,053

Free Cashflow To Firm 619 (23,608) (1,480) 2,723 922

Losses from associates in FY17F to come from the amortisation of the Vega Telecom spectrum.

We expect heightened capex in FY17F-19F.


30

BY THE NUMBERS… cont’d


Balance Sheet


Total Cash And Equivalents 11,814 8,633 8,050 10,097 5,235

Total Debtors 21,936 26,945 28,319 29,756 31,379

Inventories 4,489 4,580 5,103 5,375 5,681

Total Other Current Assets 8,833 12,865 12,865 12,865 12,865

Total Current Assets 47,073 53,023 54,337 58,093 55,160

Fixed Assets 129,040 142,252 158,838 173,080 188,502

Total Investments 1,499 34,181 34,181 34,181 34,181

Intangible Assets 13,057 14,833 15,938 16,384 16,169

Total Other Non-Current Assets 5,012 5,574 5,574 5,574 5,574

Total Non-current Assets 148,607 196,840 214,532 229,219 244,426

Short-term Debt 0 4,500 4,500 4,500 4,500

Current Portion of Long-Term Debt 7,974 5,830 8,656 9,564 10,471

Total Creditors 49,827 59,138 61,770 65,292 66,637

Other Current Liabilities 7,729 12,934 12,934 12,934 12,934

Total Current Liabilities 65,530 82,402 87,860 92,290 94,542

Total Long-term Debt 64,255 95,398 105,398 115,398 120,398

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 6,494 6,670 6,670 6,670 6,670

Total Non-current Liabilities 70,750 102,068 112,068 122,068 127,068

Total Provisions 2 1,917 1,917 1,917 1,917

Total Liabilities 136,282 186,387 201,845 216,275 223,527

Shareholders' Equity 59,392 63,440 66,976 70,981 75,993

Minority Interests 6 37 46 56 67

Total Equity 59,398 63,476 67,023 71,037 76,060

Key Ratios

Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Revenue Growth N/A 5.18% 5.10% 5.08% 5.45%

Operating EBITDA Growth N/A 8.99% 6.05% 7.14% 7.01%


Net Cash Per Share (PHP) (453.5) (728.7) (829.3) (895.8) (976.7)

BVPS (PHP) 445.8 476.1 502.7 532.7 570.3

Gross Interest Cover 7.20 6.26 5.24 4.87 4.87

Effective Tax Rate 29.8% 27.6% 28.0% 28.0% 28.0%

Net Dividend Payout Ratio 66.8% 73.6% 77.1% 74.3% 70.0%

Accounts Receivables Days N/A 70.89 76.05 76.06 75.93

Inventory Days N/A 77.06 77.65 80.68 80.53

Accounts Payables Days N/A 925.9 969.7 978.4 961.0

ROIC (%) N/A 20.6% 20.5% 18.7% 18.4%

ROCE (%) N/A 17.0% 15.5% 14.6% 14.6%

Return On Average Assets 10.3% 8.9% 7.9% 7.7% 7.8%

Key Drivers


Group Mobile Subscribers (m) 52.93 62.80 65.24 67.77 70.10

Group Fixed Voice Subscribers (m) 1.14 1.24 1.35 1.47 1.56

Grp fixed brdband subscribers (m) 1.03 1.13 1.23 1.33 1.40

Group Pay TV Subs (m) N/A N/A N/A N/A N/A

Group Mobile ARPU (US$/mth) 3.4 2.8 2.5 2.4 2.5

Grp fixed voice ARPU (US$/mth) 6.6 5.6 4.8 4.4 4.2

Grp fixed brdband ARPU (US$/mth) 20 22 23 24 25

Group Pay TV ARPU (US$/mth) N/A N/A N/A N/A N/A

We project modest revenue growth of 5.5% for FY19F.

We forecast aggressive fixed capital growth in FY17F-19F due to elevated capex.

We project that the number of Globe subscribers will rise steadily in 2017F-19F.

Telco - Integrated│Philippines│June 28, 2017

Company Note │ Alpha series



PLDT Inc Getting back on track

We expect net profit to increase by 3% p.a. over FY17F-19F. ■ We believe PLDT will continue to lose market share to Globe Telecom (GLO PM, Hold, ■TP: Php1,987) in the wireless business due to slow mobile data take-up.

We expect fixed line revenue to register a 3-year CAGR (2017F-2019F) of 8%, fuelled ■by revenue growth from home broadband, corporate data and data centre divisions.

We initiate coverage with a Hold rating and DCF-based (WACC: 8.04%) target price of ■Php1,732.

Net profit to expand 3% p.a. over FY17F-19F We estimate net profit to increase by 3% p.a. over FY17F-19F, on the back of growing fixed line business and cost management initiatives despite declining wireless revenues. We expect healthy EBITDA margins to support bottomline, despite associate losses from the Vega Telecom deal. Furthermore, we expect depreciation and financing costs to stabilise after FY18F, as it would have completed its network modernisation programme by FY18F.

PLDT continues to lose market share in the wireless business We believe that PLDT will continue to lose market share in the wireless business as long as legacy businesses (e.g. call and SMS) continue to take a larger portion of the revenue pie. As of 1Q17, PLDT’s data revenue mix was at 44% versus Globe’s 53%. Moreover, PLDT’s decline in voice/SMS revenues is outstripping the uptick in mobile data revenues due to weak mobile data take-up.

Focusing on fixed line business We estimate fixed line data revenues to grow 8% p.a. over FY17F-19F, buoyed by strong data monetisation from the home broadband, corporate data and data centre divisions. Management is shifting its focus from the wireless segment to the fixed line business due to a decline in the legacy business and a rise in data-driven services, particularly home broadband and corporate data.

Infrastructure initiatives Key to defending PLDT’s position in the Home and Enterprise business units is its continuous network modernisation and expansion programme, in our view. At present, PLDT has 150,000km of fibre optic network infrastructure to sustain the expanding data traffic of its wireless and fixed line networks. We forecast its capex-to-sales ratio to decline from FY17F’s 28% to 25% in FY19F, as PLDT is on track to complete its network modernisation programme by FY18F.

Dividend payout ratio of 60% We have assumed a dividend payout ratio of 60% with a DPS of Php74 and a net debt-to-EBITDA ratio of 2.09x for FY17F. Upside risks to payout ratio could arise if the net debt-to-EBITDA ratio falls to 2.0x.

PLDT: recovering but service revenues still weak We initiate with a Hold rating and a DCF-based TP of Php1,732 (WACC: 8.04%). PLDT’s net profit is starting to recover but we think its service revenue growth will remain weak in the medium term as long as mobile internet revenue growth does not outpace the decline in voice/SMS revenues. Upside risks include faster-than-expected growth in home broadband subs base and expansion of its data centres. Downside risks include the pending Philippine Competition Committee (PCC) review and competition from Globe.

SOURCE: COMPANY DATA, SB EQUITIES ESTIMATES

Philippines

HOLD (previously NOT RATED) Consensus ratings*: Buy 6 Hold 7 Sell 6

Current price: PHP1,867

Target price: PHP1,732

Previous target: N/A

Up/downside: -7.2%

CIMB / Consensus: 0.9%

Reuters: TEL.PS

Bloomberg: TEL PM

Market cap: US$8,027m

PHP403,376m

Average daily turnover: US$6.63m

PHP330.5m

Current shares o/s: 216.1m

Free float: 53.8% *Source: Bloomberg

Key changes in this note

Not applicable.

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) 7.1 15.3 -10.3

Relative (%) 7 6.6 -12.4

Major shareholders % held NTT Docomo, Inc. 14.5

Philippine Telecommunications Investment Corp. 12.1

Metro Pacific Resources, Inc. 10.0

Analyst(s)




Financial Summary Dec-15A Dec-16A Dec-17F Dec-18F Dec-19F

Revenue (PHPm) 171,103 165,262 167,049 171,590 177,558

Operating EBITDA (PHPm) 74,120 71,129 78,350 80,978 83,987


Net Profit (PHPm) 22,065 20,006 20,711 20,542 21,806

Core EPS (PHP) 139.3 139.3 133.2 132.4 138.2

Core EPS Growth (0.01%) (4.39%) (0.59%) 4.42%

FD Core P/E (x) 13.40 14.02 14.10 13.51

DPS (PHP) 122.0 77.0 74.1 57.0 60.6

Dividend Yield 6.53% 4.12% 3.97% 3.06% 3.24%

EV/EBITDA (x) 6.32 6.90 6.37 6.12 5.86

P/FCFE (x) 14.45 11.29 15.87 18.78

Net Gearing 99% 132% 122% 110% 100%

ROE 27.3% 26.2% 24.6% 23.9%

% Change In Core EPS Estimates

CIMB/consensus EPS (x) 0.96 0.96 0.98

69.0

85.7

102.3

1,100

1,600

2,100

Price Close Relative to PCOMP (RHS)

1

2

3

Jun-16 Sep-16 Dec-16 Mar-17

Vo

l m

Telco - Integrated│Philippines│PLDT Inc│June 27, 2017

32

Getting back on track

Background

Longest running telco operator in the country

Following the merger of four US-owned telephone companies, PLDT Inc. was incorporated in 1928 under American leadership. In 1968, PLDT became a Filipino-controlled organisation under the management of Ramon Cojuangco and built the country’s initial cellular telephone network in 1987. Since then, it has become one of the major telco companies in the Philippines with one of the largest market capitalisation in the country.

Figure 1: PLDT’s history

SOURCES: COMPANY WEBSITE

Organisational structure

PLDT holds a franchise until 2028 to deliver basic and enhanced telecommunication services within the Philippines, including, but not limited to, mobile, wired and wireless telecommunication systems and fibre optics. The figure below shows the corporate structure of PLDT and its subsidiaries across its major business lines. PLDT noted that two of its subsidiaries, Smart and DMPI, maintain their own franchises.

Figure 2: PLDT’s Subsidiaries (as of 2016)

SOURCES: COMPANY WEBSITE, COMPANY REPORT

PLDT History

1928

PLDT was incorporated and given the franchise to establish and operate telephone services in the

country

1929

The link between Manila and Baguio was established, making the first national long distance calls

possible.

1933

Overseas radio-telephone service was established between the Philippines and the US and other parts

of the world

1941 During WWII, US armed forces destroyed the PLDT system to prevent the Japanese from using it.

1968

PLDT finally became a Filipino-controlled corporation when Ramon Cojuangco and his group of Filipino

industrialists and businessmen bought the controlling stake of GTE of New York.

1985 National Direct Dialing (NDD) and International Direct Dialing (IDD) services started in 1985.

1987 PLDT established the country's first cellular telephone network in 1987.

1998

PLDT announced the entry of First Pacific which acquired a 17.5% stake in PLDT for approximately

Php29.7bn or some $749m at that time.

1999

PLDT forged a strategic partnership with NTT Communications Corp (NTTCom), a wholly-owned

subsidiary of Nippon Telegraph and Telephone Corp. of Japan.

1999 PLDT acquirerd Smart Communications, Inc. (Smart), the country's largest mobile phone operator.

2011 PLDT acquired Digitel from the JG Summit Group.

Subsidiaries and Affiliates Percentage of Ownership (Direct/Indirect)

Wireless

Smart Communications, Inc and Subsidiaries 100%

Digitel Mobile Philippines, Inc. 99.6%

Smart Broadband, Inc. and Subsidiaries 100%

Fixed Line

PLDT Clark Telecom, Inc. 100%

PLDT Subic Telecom, Inc. 100%

PLDT-Philcom, Inc. and Subsidiaries 100%

PLDT-Maratel, Inc. 98.0%

Digital Telecommunications Philippines, Inc.

ePLDT, Inc. and Subsidiaries 100%

Pilipinas Global Network Limited 64.6%

Others

PLDT Communications and Energy Ventures, Inc. 100%

Philippine Global Investments Holdings, Inc. 100%


33

Shareholders and management

At end-2016, PLDT was primarily owned by the Philippine Telecommunications Investment Corporation (12.05%), NTT Docomo, Inc (10.55%) and Metro Pacific Resources (9.98%), while the public held 30.58%. Figure 3 below shows PLDT’s corporate structure and key management members.

Figure 3: Board of Directors (as of end-2016)


Business groups

The PLDT Group is organised into two big business units: Wireless and Fixed Line.

Wireless business

The wireless business provides mobile, home broadband, and digital platform and mobile financial services, which comprised 96%, 3% and 1%, respectively, of PLDT’s wireless services revenues in FY16. PLDT’s subsidiaries, Smart and DMPI (Sun Cellular), utilise 3G HSPA, 4G HSPA and LTE technologies, with a dual-band GSM network enabling them to deploy 1,800Mhz and 900MHZ in dense urban areas.

Figure 4: Smart GIGASURF50 promo Figure 5: Sun Cellular’s promo

SOURCE: COMPANY WEBSITE SOURCE: COMPANY WEBSITE

As at end-2016, PLDT had a mobile subscriber base of 62.7m, representing a 50% market share in the Philippines. It handles three brands under its wireless business: Smart, Sun Cellular and TNT, with the Smart brand serving the young and highly innovative market, Sun Cellular tapping into entrepreneurs and niche markets, and TNT serving the value-seeking groups. PLDT’s subscriber base is predominantly prepaid (96%), while postpaid brands – Smart Gold and Sun Cellular Postpaid – had a combined market share of 53% in the postpaid space as at end-2016.

Board of Directors Age Director since

Manuel Pangilinan 70 1998

Helen Dee 72 1986

Ray Espinosa 60 1998

James Go 77 2011

Bernido Liu 54 2015

Hideaki Ozaki 51 2011

Artemio Panganiban 80 2013

Ma. Lourdes Rausa-Chan 63 2011

Albert del Rosario 77 2016

Pedro Roxas 60 2001

Atsuhisa Shirai 55 2016

Amado Valdez 70 2016

Marife Zamora 63 2016


34

Figure 6: PLDT’s subscriber base, by brand (2016)


Fixed Line business

The fixed line business offers voice and data services, serving retail, corporate and small- and medium-enterprise clients; this business contributed 41% of the service revenues in 2016. As at end-2016, PLDT had a total of 2,438,473 fixed line subscribers. PLDT’s fixed line business is backed by an 11,893km domestic fibre optic network (DFON), along with Smart’s digital microwave backbone network, and is connected to two international gateway switching exchanges and several regional submarine cable systems.

PLDT Home offers home broadband services under Home DSL and Home Fibr brands. It serves 1.4m subscribers, which grew 21% yoy in 2016 due to the company’s aggressive fiber-to-the-home (FTTH) network expansion and modernisation of its copper network. Meanwhile, its corporate data and data centres continue to provide connectivity, disaster recovery, server hosting and cloud services, and had a combined rack capacity of over 6,797 racks at end-2016 from its seven data centres. PLDT targets to have ten operational data centres with a rack capacity of 9,000 by end-2017F.

Figure 7: PLDT Home’s broadband packages

SOURCES: COMPANY WEBSITE

Title:

Source:


37%

48%

16%

Smart TNT Sun Cellular


35

Outlook

Losing market share in the wireless business

We believe that PLDT will continue to lose market share in the wireless business as long as legacy businesses (e.g. call and SMS) continue to take a larger portion of the revenue pie. As the local industry focus shifts to data-related revenue streams, we think that PLDT’s late-mover disadvantage in recognising the mobile data trend took a toll on its data revenue mix and wireless service revenues. In FY16 and 1Q17, data and broadband accounted for 41% and 43% (vs. Globe’s 49% and 53%) of total service revenues, respectively. Moreover, PLDT’s net service revenue growth has been negative over the past eight quarters, as the decline in voice and SMS revenues more than offset the uptick in mobile data revenue. This dynamic is attributed to PLDT’s declining subscriber base over the past eight quarters, the prevalence of over-the-top (OTT) platforms and PLDT subscribers’ weak mobile data usage as compared to rival Globe.

Figure 8: PLDT’s revenue mix


PLDT’s lower mobile subscriber base was attributed to Globe’s aggressive subscriber acquisition efforts and promotional strategies, in our view. As subscriber stickiness does not exist in the Philippine telco industry, low switching cost enables subscribers to easily switch between brands and operators. From a mobile revenue market share perspective, PLDT ended 2016 with a lower 51% market share vs. 54% as at end-2015.

Figure 9: PLDT’s mobile revenue market share


Title:

Source:


0%

20%

40%

60%

80%

100%

120%

2015 2016 2017F 2018F 2019F

Data Non-data

Title:

Source:


44%

45%

46%

47%

48%

49%

50%

51%

52%

53%

54%

55%

2015 2016 2017F 2018F 2019F


36

Moreover, we think that one of the main causes of weak mobile usage is PLDT’s subscribers’ smartphone penetration rate of 50% (half of which pay for mobile data), despite the operator’s attractive volume-based data pricing. Weak smartphone penetration rate directly translates to low mobile data usage, as mobile data can only be accessed through smartphones. In contrast, we observe that Globe’s digital lifestyle philosophy seems to resonate more with its mobile subscribers as the company enjoys a 61% subscriber smartphone penetration rate, with 48% of its total mobile subscribers as mobile data users, evident in the mobile data uptake among its subscribers.

Figure 10: PLDT’s mobile data revenues (in Php m)


With these developments, we estimate wireless service revenues to decrease by 1% p.a. over FY17F-19F, as we estimate voice and SMS revenues to decline by 10% and 9% p.a. until FY19F, respectively. On the other hand, we forecast mobile internet revenue to register a FY17F-19F CAGR of 22%, underpinned by growing smartphone and mobile data adoption.

Figure 11: PLDT’s cellular revenues (in Php m) Figure 12: PLDT’s cellular revenue components (in Php m)



Expanding fixed line business Moving forward, we believe that PLDT will be able to continuously expand its fixed line revenue, albeit at a slower pace than Globe’s, buoyed by strong data monetisation from the home broadband, corporate data and data centre divisions and PLDT’s aggressive network modernisation and infrastructure expansion programme. Management has emphasised the shift in the company’s focus to the fixed line business, as the fixed line business continues to increase its topline contribution, amid declining wireless revenues.

Title:

Source:


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2015 2016 2017F 2018F 2019F

80,000

85,000

90,000

95,000

100,000

105,000

110,000

2015 2016 2017F 2018F 2019F

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

2015 2016 2017F 2018F 2019F

Voice SMS Mobile internet


37

We forecast fixed line data revenues to grow 8% p.a. over FY17F-19F, with the home broadband division set to contribute a 3-year CAGR of 17%, underpinned by PLDT’s expanding home broadband subscriber base of 1.72m with a revenue market share of 60% as at end-16. While Globe has also started to compete in the home broadband space, we believe that PLDT’s long-term presence in the market and its robust fibre-to-the-home (FTTH) infrastructure would enable it to scale up and defend its market share.

Figure 13: Fixed line service revenues


In defending PLDT’s position in the Enterprise market, we think that higher corporate data margins on the back of PLDT’s sustained efforts in building its data centres and expanding its managed ICT services would enable it to expand the business. We estimate FY17F-19F CAGRs of 11% for corporate data, and 15% for data centres as corporates continue to adopt cloud-based and disaster recovery solutions. PLDT currently hosts nine data centres in four key areas: Metro Manila, Clark, Cebu and Davao, with a target rack capacity of over 9,000 racks by end-2017F.

Key to protecting PLDT’s fixed line business is its continuous network modernisation and expansion programme, in our view. At present, PLDT has 150,000km of fibre optic network infrastructure to sustain the expanding data traffic of its wireless and fixed line networks. In 2017F, PLDT aims to increase its FTTH installed capacity to 1.1m and modernise 1.7m copper ports to enable speeds of up to 100Mbps using very-high-bit-rate digital subscriber line (VDSL). With expanding reach, we believe PLDT can tap under-served markets and effectively convert them into subscribers, particularly in the home broadband and fixed line segments. Furthermore, we forecast FY18F-19F capex to decline from theh FY17F level of Php46bn, as PLDT is on track to complete its network modernisation programme by FY18F.

Figure 14: PLDT’s capex allocation spent (in Php bn)

SOURCES: COMPANY REPORTS, SB EQUITIES

in Php m 2015 2016 2017F 2018F 2019F

Home broadband 12,338 14,896 17,692 20,830 23,171

Corporate 18,806 19,980 21,966 24,529 27,192

Data centers 2,604 2,835 3,289 3,782 4,349

Fixed line service revenues 65,475 69,006 74,777 81,673 87,953

Yoy % change

Home broadband 20.7% 18.8% 17.7% 11.2%

Corporate 6.2% 9.9% 11.7% 10.9%

Data centers 8.9% 16.0% 15.0% 15.0%

Fixed line service revenues 5.4% 8.4% 9.2% 7.7%

Title:

Source:


17.222.1

17.1

23

30.3 32.128.8

13.7

13.7

11.7

11.7

12.9 10.7 17.2

0

5

10

15

20

25

30

35

40

45

50

2011 2012 2013 2014 2015 2016 2017F

Wireless Fixed Line


38

Financials

Bottomline to grow 3% p.a. until 2019F

We project net profit to grow 3% p.a. over FY17F-19F, supported by fixed line revenue growth and efficient cost management amid continuous declines in voice and SMS revenues. Aside from cost saving initiatives in manpower and cost of sales, we think that that capital expenditure over the next three years would decline from the FY17F level of Php46bn as PLDT would have completed its network modernisation programme by FY18F. Furthermore, PLDT’s service revenue is beginning to recover, but we think its medium-term service revenue growth outlook will remain weak as long as the mobile internet revenue growth does not outpace the declines in voice/SMS revenues. We estimate basic EPS of Php97 for FY17F.

Figure 15: Financial summary


Service revenues to register a 3-year CAGR of 2.5% over FY17F-19F

We forecast service revenues to register a FY17F-19F CAGR of 2.5%, led by 22%, 17% and 11% annual revenue growth in mobile data, home broadband and corporate data, respectively. We believe the growth in fixed line data revenues is underpinned by a growing necessity for internet and landline connectivity under the home and enterprise business units. On the other hand, we project wireless service revenues to decrease by 1% p.a., as we estimate voice and SMS revenues to decline by 11% and 10% p.a., respectively, in FY17F-19F. We project PLDT’s service revenues to grow by 2.5% p.a. in FY17F-19F, which is slower than our 5% estimate for Globe.

Figure 16: Service revenue breakdown


FYE Dec (Php m) 2015 2016 2017F 2018F 2019F

Revenues 171,103 165,262 167,049 171,590 177,558

EBITDA 70,218 61,161 67,308 69,936 72,945

Net income 22,075 20,162 20,871 20,699 21,973

Revenue growth 0.0% -3.4% 1.1% 2.7% 3.5%

EBITDA growth 0.0% -12.9% 10.1% 3.9% 4.3%

Net income growth 0.0% -8.7% 3.5% -0.8% 6.2%

in Php m 2015 2016 2017F 2018F 2019F

Wireless Service revenues:

Cellular 105,655 96,497 93,533 92,188 92,752

Home broadband 3,040 2,772 2,710 2,804 2,931

Total wireless service revenues 110,682 100,582 97,475 96,193 96,884

Intersegment eliminations 1,494 1,467 1,422 1,403 1,413

Net wireless service revenues 109,188 99,115 96,053 94,790 95,471

Fixed Line service revenues:

Local exchange 17,076 17,792 18,801 19,807 20,812

ILD 9,219 8,056 7,734 7,502 7,277

NLD 3,958 3,782 3,631 3,558 3,487

Data and broadband 33,748 37,711 42,947 49,141 54,712

Total gross fixed line service revenues 65,475 69,006 74,777 81,673 87,953

Intersegment Eliminations 11,733 10,920 11,833 12,924 13,918

Net fixed line service revenues 53,742 58,086 62,944 68,748 74,035

Total service revenues 162,930 157,210 158,997 163,538 169,506


39

Net margin to expand to 12.5% in FY17F

We estimate net margin to expand to 12.5% in FY17F from 12.2% in FY16, on the back of rising EBITDA due to cost-saving initiatives that is likely to offset PLDT’s lower share of associates’ profit arising from the sale of Beacon Electric in Jun 2017 and the amortisation of Vega Telecom assets. However, in 2018F, we expect a slight net margin contraction because Beacon Electric will not contribute to PLDT’s equity share as it was fully sold in 2017. In 2019F, net margin moves up to 12.4% as service revenues and EBITDA pick up. We anticipate EBITDA margin to bounce back to the 42-43% levels in FY17F-19F, due to management’s efficient cost management initiatives.

Figure 17: PLDT’s margins

SOURCES: CIMB, COMPANY REPORTS

Dividend payout of 60%

In 2016, PLDT’s Board of Directors amended the dividend policy from a dividend payout of 75% to 60% of core EPS, in order to fund its capital expenditure and manage the cash and gearing ratios. We think capex will slowly decline in the next three years, with capex-to-sales ratio decreasing from 28% in FY17F to 25% in FY19F. We assume a 60% payout ratio and estimate a DPS of Php74 for FY17F with a dividend yield of 3.9%.

Our assumption of a 60% payout ratio still holds as PLDT aims to lower its net debt-to-EBITDA to 2.0x. Net debt-to-EBITDA ratio stood at 2.2x as at end-Mar 2017, with the covenant allowing up to 3.0x. With the full divestment of Beacon Electric, we think PLDT’s leverage would improve as proceeds from the divestment will be used to fund capex and pay down debt. Our dividend payout assumption is further supported by a FY17F net debt-to-EBITDA ratio of 2.09x.

Figure 18: PLDT’s DPS and dividend payout ratio


Risks

Regulatory overhang

PLDT’s regulatory overhang continues to be the Philippine Competition Committee’s (PCC) Supreme Court petition to allow it to proceed with its investigation on the acquisition of San Miguel’s telco assets. The PCC deemed the Vega Telecom (VTI) transaction as “deficient and defective in form and substance,” hence, the transaction was not deemed “approved” by the PCC. In Aug 2016, the Court of Appeals issued an injunction to cease the PCC’s review of the Php69bn purchase of San Miguel Corporation’s telco assets.

Direct competition

The Philippine telco industry is a duopoly comprising PLDT and Globe, with each having 50% share of the subscriber market as at end-2016. PLDT’s market share came down to 50% at end-2016 from 60% in 2015, as Globe was aggressive in acquiring subscribers. With the emergence of data-related revenue streams, we believe this new line of business would provide a new avenue for existing players to compete in the mobile and fixed line businesses

2015 2016 2017F 2018F 2019F

EBITDA margin 43.1% 38.9% 42.3% 42.8% 43.0%

Net margin 12.9% 12.2% 12.5% 12.1% 12.4%

ROA 5.0% 4.3% 4.3% 4.2% 4.4%

ROE 28.4% 25.2% 24.1% 17.5% 17.3%

2015 2016 2017F 2018F 2019F

DPS (in PHP) 122 77 74 57 61

Dividend payout ratio (%) 75% 60% 60% 60% 60%


40

through attractive data plans and fast connection speeds, amid a dying legacy business. In particular, both telco operators are aggressive in pushing marketing and infrastructure initiatives towards boosting mobile data usage and home broadband subscription to fuel topline growth, in our view.

Possibility of third telco player

We believe the Duterte government is keen to attract potential telco operators to join the existing players, Globe and PLDT, in providing mobile and fixed line services. The Department of Information and Communication Technology (DICT) has enough bandwidth to support the maiden operations of a new participant. However, spectrum allocation is not the only issue as regulatory approvals, financial capacity and other structural barriers continue to deter potential players.

SWOT analysis

Figure 19: SWOT analysis

SOURCES: SB EQUITIES

Valuation

DCF-based valuation

Using a sum-of-parts valuation (SOP) methodology, we estimate PLDT’s net asset value to be Php1,732/share based on 216m outstanding common shares. Our sum-of-parts valuation involves a mix of DCF-based and market value-based approaches to value PLDT’s core business. We use a DCF-based valuation for the core business, while a market value approach to value PLDT’s 6.1% stake in Rocket Internet.

Figure 20: SOP valuation


Strengths Opportunities

Dominance in providing enterprise requirements

SMEs and corporates' cloud storage and

connectivity requirements

Leading position in home broadband Under-penetrated home broadband market

Well-established fixed line infrastructure Mobile data adoption among Filipinos

Weaknesses Threats

Late mover in embracing the mobile data trend PCC Review

Dependence on the Wireless business Stiff competition from Globe Telecom

Frequent changes in the management Third player entrant

Market/Equity Value of segments in Php m % of NAV Valuation

Core business 509,616 98% Enterprise Value (DCF)

Rocket Internet (as of June 19) 11,081 2% Market Value

Total Market/Equity Value of segments 520,697

add: cash 38,722

Less: Bank & Other Debt 185,032

Less: Minorities 362

Net asset value 374,025

Current number of shares 216

NAV/share (Php) 1,732


41

Figure 21: DCF analysis of core business


Figure 22: WACC assumptions


Figure 23: Rocket Internet’s market valuation


Our valuation model assumes a weighted average cost of capital (WACC) of 8.04%. We further assume a cost of equity of 10.5%, risk-free rate of 4.30% and an equity risk premium of 6%. Terminal growth rate is assumed to be 3%, in line with the central bank’s median projections of long-term inflation rate.

Implied multiples

Our valuation implies a FY17F core P/E of 14.03x and EV/EBITDA of 8.12x. The stock is currently trading at 14x FY17F core P/E.

2016 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F

EBIT Phpm 24,703 30,621 31,447 33,146 36,761 43,749 46,064 48,546 51,655 54,843 58,338

Income tax 1,909 7,719 7,656 8,127 9,165 11,091 12,184 12,965 13,929 14,921 16,022

Net Operating Profit After Tax (NOPAT) 22,794 22,901 23,791 25,019 27,596 32,658 33,881 35,581 37,726 39,922 42,316

Depreciation and amortization 34,455 35,758 37,561 38,870 39,861 37,825 38,755 39,534 40,102 40,577 40,975

Capex 43,082 46,000 45,000 44,500 44,000 43,500 43,500 43,000 43,000 43,000 43,000

Net working capital (95,884) (82,404) (80,329) (80,059) (75,029) (74,924) (71,424) (66,086) (59,060) (52,489) (47,256)

Change in net working capital (28,659) 13,480 2,075 270 5,030 105 3,500 5,338 7,027 6,570 5,234

Minority interests 156 160 158 166 186 223 244 257 274 292 311

Unlevered FCF 42,982 (660) 14,435 19,285 18,613 27,101 25,880 27,033 28,076 31,221 35,368

Discount factor 1 1.00 0.93 0.86 0.79 0.73 0.68 0.63 0.58 0.54 0.50

Discounted FCF (660) 13,360 16,521 14,759 19,890 17,581 16,998 16,340 16,818 17,634

Terminal value Php m 722,799

Total discounted free cash flow 149,241

PV of terminal free cash flow 360,375

Total present value free cash flows 509,616

Cost of debt % 4.9%

Tax rate % 30.0%

After-tax cost of debt % 3.4%

Debt weighting % 35.0%

Risk-free rate % 4.30%

Equity risk premium % 6.0%

Beta x 1.0

Cost of equity % 10.5%

Equity weighting % 65.0%

WACC % 8.04%

Terminal Growth rate % 3.0%

Rocket Internet

Shares outstanding (m) 165

Price (EUR, as of June 19, 2017) 20

Market cap (EUR m) 3,303

PLDT's share 6%

Market Value (EUR m) 201.47

EUR/PHP rate (as of June 13,2017) 55

Market Value (PHP m) 11,081


42

Figure 25: Implied valuation multiples based on our TP

SOURCES: CIMB, COMPANY REPORTS

Comparative analysis

At 14x FY17F P/E, we think the company is trading favourably at a lower P/E than its regional peer average of 17.9x. Meanwhile, PLDT’s FY17F EV/EBITDA of 6.2x is also lower than regional peers’ average of 7.9x. However, due to elevated capex and gearing ratios, PLDT has reduced its dividend payout ratio in recent years, resulting in our FY18F dividend yield projection of 3.1%, which is lower than the 4.3% of its regional peers.


SOURCES: CIMB, SB EQUITIES ESTIMATES

2016 2017F 2018F 2019F

EV/EBITDA 7.18 8.12 7.76 7.39

P/E 10.50 14.03 18.21 17.16

P/BV 2.70 3.30 3.07 2.86





DiGi DIGI MK HOLD 4.99 5.20 9,048 23.6 23.2 13.6 13.1 2.6 3.6 4.2 4.3

TM T MK HOLD 6.62 6.50 5,802 28.4 26.1 8.0 7.7 2.1 1.3 3.2 3.4


SingTel ST SP ADD 3.80 4.10 44,770 16.3 15.6 9.1 8.8 1.4 (1.1) 4.6 4.8


M1 M1 SP REDUCE 2.18 1.70 1,463 14.4 15.9 7.9 8.8 (11.9) (3.5) 5.6 5.0


TLKM TLKM IJ ADD 4,520.00 4,600.00 34,257 20.2 18.3 9.7 8.8 12.6 9.2 3.1 3.3

XL EXCL IJ ADD 3,410.00 3,900.00 2,740 131.0 29.1 6.3 5.4 (311.9) 9.6 0.0 1.0




DTAC DTAC TB HOLD 52.75 49.40 3,680 135.9 140.5 5.3 6.6 16.7 3.2 0.4 0.4








PLDT TEL PM HOLD 1,867.00 1,732.00 8,027 14.0 14.1 6.4 6.1 (0.3) 5.7 4.0 3.1





43

BY THE NUMBERS


24.00%

24.70%

25.40%

26.10%

26.80%

27.50%

2.30

2.80

3.30

3.80

4.30

4.80


P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-10.0%

-5.6%

-1.3%

3.1%

7.5%

11.9%

16.3%

20.6%

25.0%

6.8

7.8

8.8

9.8

10.8

11.8

12.8

13.8

14.8


12-mth Fwd FD Core P/E vs FD Core EPS Growth

12-mth Fwd Rolling FD Core P/E (x) (lhs)

FD Core EPS Growth (rhs)

Profit & Loss


Total Net Revenues 171,103 165,262 167,049 171,590 177,558

Gross Profit 144,172 138,936 145,625 149,648 154,860

Operating EBITDA 74,120 71,129 78,350 80,978 83,987

Depreciation And Amortisation (42,285) (46,426) (47,729) (49,532) (50,841)

Operating EBIT 31,835 24,703 30,621 31,447 33,146

Financial Income/(Expense) (5,460) (6,308) (6,478) (6,494) (6,450)

Pretax Income/(Loss) from Assoc. 3,241 1,181 164 (881) (881)

Non-Operating Income/(Expense) (2,978) 2,495 4,284 4,284 4,284

Profit Before Tax (pre-EI) 36,328 33,113 39,633 39,397 41,141

Exceptional Items

Pre-tax Profit 26,638 22,071 28,591 28,355 30,099

Taxation (4,563) (1,909) (7,719) (7,656) (8,127)

Exceptional Income - post-tax

Profit After Tax 22,075 20,162 20,871 20,699 21,973

Minority Interests (10) (156) (160) (158) (166)

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Net Profit 22,065 20,006 20,711 20,542 21,806

Recurring Net Profit 30,095 30,093 28,772 28,602 29,867

Fully Diluted Recurring Net Profit 30,095 30,093 28,772 28,602 29,867

Cash Flow


EBITDA 74,120 71,129 78,350 80,978 83,987

Cash Flow from Invt. & Assoc.

Change In Working Capital 2,093 (17,469) (939) 2,614 635

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense

Other Operating Cashflow 7,994 9,237 415 (672) (712)

Net Interest (Paid)/Received (5,919) (6,956) (8,010) (8,201) (8,191)

Tax Paid (8,544) (6,965) (7,719) (7,656) (8,127)

Cashflow From Operations 69,744 48,976 62,096 67,064 67,591

Capex (42,805) (42,259) (46,000) (45,000) (44,500)

Disposals Of FAs/subsidiaries

Acq. Of Subsidiaries/investments

Other Investing Cashflow 3,567 277 12,916 1,076 1,111

Cash Flow From Investing (39,238) (41,982) (33,084) (43,924) (43,389)

Debt Raised/(repaid) 27,283 20,919 6,712 2,275 (2,725)

Proceeds From Issue Of Shares

Shares Repurchased

Dividends Paid (32,532) (22,987) (16,003) (12,325) (13,084)

Preferred Dividends

Other Financing Cashflow (6,136) (13,273) (7,393) (7,570) (7,561)

Cash Flow From Financing (11,385) (15,341) (16,685) (17,620) (23,370)

Total Cash Generated 19,121 (8,347) 12,327 5,519 833

Free Cashflow To Equity 57,789 27,913 35,723 25,414 21,477

Free Cashflow To Firm 36,425 13,950 37,022 31,340 32,394


44

BY THE NUMBERS… cont’d


Balance Sheet


Total Cash And Equivalents 47,884 41,460 53,859 59,683 60,851

Total Debtors 24,898 24,436 26,639 25,372 26,254

Inventories 4,614 3,744 2,863 2,916 3,007

Total Other Current Assets 14,045 16,489 16,489 16,489 16,489

Total Current Assets 91,441 86,129 99,850 104,460 106,602

Fixed Assets 195,782 203,188 213,430 220,869 226,499

Total Investments 67,191 71,311 57,372 57,372 57,372

Intangible Assets 72,117 70,280 70,280 70,280 70,280

Total Other Non-Current Assets 28,564 44,211 44,211 44,211 44,211

Total Non-current Assets 363,654 388,990 385,293 392,732 398,362

Short-term Debt

Current Portion of Long-Term Debt 16,911 33,273 35,070 36,206 36,469

Total Creditors 136,965 145,169 143,613 145,012 146,620

Other Current Liabilities 4,790 3,571 3,571 3,571 3,571

Total Current Liabilities 158,666 182,013 182,254 184,789 186,661

Total Long-term Debt 143,982 151,759 156,673 157,813 154,824

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 0 0 0 0 0

Total Non-current Liabilities 143,982 151,759 156,673 157,813 154,824

Total Provisions 38,549 32,810 32,810 32,810 32,810

Total Liabilities 341,197 366,582 371,738 375,412 374,295

Shareholders' Equity 113,608 108,175 112,883 121,100 129,822

Minority Interests 290 362 522 680 846

Total Equity 113,898 108,537 113,405 121,780 130,669

Key Ratios


Revenue Growth N/A (3.41%) 1.08% 2.72% 3.48%

Operating EBITDA Growth N/A (4.0%) 10.2% 3.4% 3.7%


Net Cash Per Share (PHP) (523.1) (664.5) (638.2) (621.8) (603.7)

BVPS (PHP) 525.8 500.7 522.5 560.5 600.9

Gross Interest Cover 6.63 4.86 5.20 5.18 5.39

Effective Tax Rate 17.1% 8.6% 27.0% 27.0% 27.0%

Net Dividend Payout Ratio 89.6% 69.7% 40.5% 31.4% 31.9%

Accounts Receivables Days N/A 54.63 55.80 55.32 53.06

Inventory Days N/A 58.10 56.28 48.07 47.63

Accounts Payables Days N/A 734.3 888.8 866.6 861.9

ROIC (%) N/A 12.6% 13.7% 13.1% 13.4%

ROCE (%) N/A 12.3% 13.8% 13.6% 13.8%

Return On Average Assets N/A 8.07% 9.20% 8.95% 9.11%

Key Drivers


Group Mobile Subscribers (m) 68.61 62.76 62.32 61.95 61.61

Group Fixed Voice Subscribers (m) 2.30 2.44 2.57 2.71 2.84

Grp fixed brdband subscribers (m) 1.26 1.45 1.77 1.91 2.06

Group Pay TV Subs (m) N/A N/A N/A N/A N/A

Group Mobile ARPU (US$/mth) 2.8 2.7 2.5 2.5 2.5

Grp fixed voice ARPU (US$/mth) 13.9 13.2 12.5 12.4 12.4

Grp fixed brdband ARPU (US$/mth) 18 18 18 19 19

Group Pay TV ARPU (US$/mth) N/A N/A N/A N/A N/A


45

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46

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Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report.

The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.

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The current prices/yields in this issue are based upon closing prices from Bloomberg as of the day preceding publication. Please note that neither the German Federal Financial Supervisory Agency (BaFin), nor any other supervisory authority exercises any control over the content of this report.

Hong Kong: This report is issued and distributed in Hong Kong by CIMB Securities Limited (“CHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB Securities Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CHK has no obligation to update its opinion or the information in this research report.

This publication is strictly confidential and is for private circulation only to clients of CHK.


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CIMB Securities Limited does not make a market on other securities mentioned in the report.

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The research analysts, strategists or economists principally responsible for the preparation of this research report are segregated from the other activities of CIMB India and they have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues, client feedback and competitive factors. Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed or proposed to be performed by CIMB India or its affiliates.

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This research report is not an offer of securities in Indonesia. The securities referred to in this research report have not been registered with the Financial Services Authority (Otoritas Jasa Keuangan) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market law and regulations.

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Recipients of this report are to contact CIMB Research Pte Ltd, 50 Raffles Place, #19-00 Singapore Land Tower, Singapore in respect of any matters arising from, or in connection with this report. CIMBR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If you have not been sent this report by CIMBR directly, you may not rely, use or disclose to anyone else this report or its contents.

If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. If the recipient is an accredited investor, expert investor or institutional investor, the recipient is deemed to acknowledge that CIMBR is exempt from certain requirements under the FAA and its attendant regulations, and as such, is exempt from complying with the following : (a) Section 25 of the FAA (obligation to disclose product information); (b) Section 27 (duty not to make recommendation with respect to any investment product without having a reasonable basis where you may be reasonably expected to rely on the recommendation) of the FAA; (c) MAS Notice on Information to Clients and Product Information Disclosure [Notice No. FAA-N03]; (d) MAS Notice on Recommendation on Investment Products [Notice No. FAA-N16]; (e) Section 36 (obligation on disclosure of interest in securities), and (f) any other laws, regulations, notices, directive, guidelines, circulars and practice notes which are relates to the above, to the extent permitted by applicable laws, as may be amended from time to time, and any other laws, regulations, notices, directive, guidelines, circulars, and practice notes as we may notify you from time to time. In addition, the recipient who is an accredited investor, expert investor or institutional investor acknowledges that a CIMBR is exempt from Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arising from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA, the recipient will also not be able to file a civil claim against CIMBR for any loss or damage arising


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from the recipient’s reliance on any recommendation made by CIMBR which would otherwise be a right that is available to the recipient under Section 27 of the FAA.

CIMB Research Pte Ltd ("CIMBR"), its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMBR, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory, underwriting or placement services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.

As of June 27, 2017, CIMBR does not have a proprietary position in the recommended securities in this report.

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CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services.

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Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (“CIMBS”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CIMBS has no obligation to update its opinion or the information in this research report.

If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient are unaffected.

CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions.

AAV, ADVANC, AMATA, AOT, AP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BEM, BH, BIG, BLA, BLAND, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EGCO, EPG, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, KAMART, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MINT, MTLS, PLANB, PSH, PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAWAD, SCB, SCC, SCN, SGP, SIRI, SPALI, SPCG, SPRC, STEC, STPI, SUPER, TASCO, TCAP, THAI, THANI, THCOM, TISCO, TKN, TMB, TOP, TPIPL, TRUE, TTA, TTCL, TTW, TU, TVO, UNIQ, VGI, VIBHA, VNG, WHA.

Corporate Governance Report:

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.

The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result

Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited


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(“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. Unless specified to the contrary, this report has been issued and approved for distribution in the U.K. and the EEA by CIMB UK. Investment research issued by CIMB UK has been prepared in accordance with CIMB Group’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom subject to relevant regulation in each jurisdiction, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc.

CIMB Securities (USA) Inc does not make a market on other securities mentioned in the report.

Neither CIMB Securities (USA) Inc., nor its affiliates have managed or co-managed a public offering of any of the securities mentioned in the past 12 months.

Neither CIMB Securities (USA) Inc., nor its affiliates have received compensation for investment banking services from any of the company mentioned in the past 12 months.

Neither CIMB Securities (USA) Inc., nor its affiliates expects to receive or intends to seek compensation for investment banking services from any of the company mentioned within the next 3 months.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2016, Anti-Corruption 2016

AAV – Very Good, n/a, ADVANC – Very Good, Certified, AEONTS – Good, n/a, AMATA – Excellent, Declared, ANAN – Very Good, Declared, AOT – Excellent, Declared, AP – Very Good, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Very Good, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – not available, Declared, BCP - Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, Declared, BEC - Good, n/a, BH - Good, Declared, BIGC - Excellent, Declared, BJC – Good, n/a, BJCHI – Good, Declared, BLA – Very Good, Certified, BPP – not available, n/a, BTS - Excellent, Certified, CBG – Good, n/a, CCET – not available, n/a, CENTEL – Very Good, Certified, CHG – Very Good, n/a, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, Declared, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, Declared, ECL – Good, Certified, EGCO - Excellent, Certified, EPG – Good, n/a, GFPT - Excellent, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Very Good, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Declared, ICHI – Very Good, Declared, INTUCH - Excellent, Certified, ITD – Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Declared, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Declared, M – Very Good, Declared, MAJOR - Good, n/a, MAKRO – Good, Declared, MALEE – Very Good, Declared, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Declared, MEGA – Very Good, Declared, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Very Good, Declared, PLAT – Good, Declared, PSH – not available, n/a, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Declared, RATCH –

Rating Distribution (%) Investment Banking clients (%)

Add 55.9% 5.2%

Hold 30.0% 1.6%

Reduce 10.4% 0.3%

Distribution of stock ratings and investment banking clients for quarter ended on 31 March 2017

1244 companies under coverage for quarter ended on 31 March 2017


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Excellent, Certified, ROBINS – Very Good, Declared, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI - Good, n/a, SPALI - Excellent, Declared, SPRC – Very Good, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, Declared, TCAP – Excellent, Certified, THAI – Very Good, Declared, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Very Good, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Good, n/a, TMB - Excellent, Certified, TNR – not available, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Very Good, Declared, TTW – Very Good, Declared, TU – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into:

- Companies that have declared their intention to join CAC, and

- Companies certified by CAC

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

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