www.dbsvickers.com

ed: TH / sa: JC

Two options Data usage is flattening while legacy business is

declining; Korea's experience suggests flat data usage once 4G penetration reaches 65%-70% as in Singapore now.

Two ways to go for telcos- witness ARPU decline due to flattish data usage; or launch bigger or unlimited data plans as in Korea to defend ARPU

Downgrade M1 and StarHub to Fully Valued as we cut FY15F/16F earnings significantly

4G penetration has reached ~70% in Singapore. Average revenue per user (ARPU) stagnated in Korea as 4G penetration reached 65% due to flat data usage over 3Q13-1Q14. Average data usage stood at 2.2GB versus data allowance of 2.5GB on most popular plans in Korea. Subsequently, Korean telcos introduced unlimited data plans at 10-20% premium to the most popular plans to boost ARPU. They also benefitted from cuts in handset subsidies and marketing expenses due to the regulatory pressure, resulting in healthier earnings. Expect declining ARPU due to flattening data usage or stable ARPU with higher capex in Singapore. By June 2015, average data usage per customer at M1 stood at 3.2GB, flat q-o-q. Most popular plans in Singapore offer data allowance of 3-4GB per month. In our view, Singapore telcos need to launch unlimited data plans to defend ARPU, in our view. However, there are two important differences from Korea: (i) Unlike Korea, voice & SMS revenue make up a big portion of mobile revenue in Singapore (over 50%) with roaming accounting for ~24% of this legacy business. Unlimited data plans will cause capex to rise but ARPU may not rise much due to declining legacy business; and (ii) Handset subsidies and marketing expenses are unlikely to drop in Singapore as telcos may want to lock in customers before the 4th telco's entry. Downgrade both M1 and StarHub to Fully Valued with revised TPs of S$2.94 and S$3.70 respectively. We cut our FY15F/16F earnings for M1 by 4%/9% and for StarHub by 5%/9% as we assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier, as telcos may not launch unlimited data plans. High handset subsidy on iPhone 6 is another key reason for our earnings cut for FY15F. Meanwhile, if potential 4th telco is successful in building the network using vendor financing, M1 & StarHub could lose up to 10% & 4% of their revenues by 2022 respectively.

STI : 3,352.65 Analyst Sachin MITTAL +65 6682 3699 sachinmittal@dbs.com

STOCKS

Majority of mobile service revenue in Singapore, still comes from declining legacy businesses

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Voice SMS Data

Source: DBS Bank

Postpaid ARPUs are likely to decline if data usage does not grow

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S$ ARPU ‐ postpaid

Singtel Starhub M1 *Net ARPU for M1 as that translates into service revenue Source: Company data

DBS Group Research . Equity 27 July 2015

Singapore Industry Focus

Telecom Sector

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

M1 3.27 2,233 2.94 (8.7) (14.6) FV StarHub 3.94 4,974 3.70 (8.6) (5.5) FV

Source: DBS Bank, Bloomberg Finance L.P

Industry Focus

Telecom Sector

Page 2

Reliance on legacy revenues still high in Singapore. Despite high penetration level of smartphones and introduction of 4G services, Singapore's mobile sector continues to have significant exposure to legacy revenues. Voice and SMS accounted for around 57% of the revenue in 1H15 as shown below. We estimate that international and roaming revenues contribute 12% of the sector’s revenue, which will continue to decline sharply as consumers use Whatsapp, Facetime and LINE calls over Wi-Fi when overseas. . Legacy businesses make up more than 50% of service revenue in Singapore

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Source: DBS Bank Roaming revenues are still a substantial part of service revenue in HK and Singapore

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Source: DBS Bank Average voice pricing is quite high in Singapore. In fact, voice pricing is highest in Singapore compared to the countries in the region. However, in many developed countries, we are seeing a trend of packages that offer data-based pricing with unlimited voice calls.

Voice pricing in Singapore is expensive on a regional basis

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Source: DBS Bank Data pricing in Singapore is moderate on a regional basis

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Source: DBS Bank Postpaid ARPUs have flattened despite rising data usage

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S$ ARPU ‐ postpaid

Singtel Starhub M1 *Net ARPU for M1 as that translates into service revenue Source: Company data

Industry Focus

Telecom Sector

Page 3

Korean telcos case study

ARPU stagnated at Korean telcos when LTE adoption reached 65%

 

Source: Company data Average data usage in Korea stagnated well before the data allowance of 2.5GB

Source: Company data Popular LTE smartphone plans (1Q14) in Korea

Source: Company Data

Company Base fee (KRW) Voice (min) Data (GB)

SKT 52,000 250 2.5

KT 52,000 250 2.0

LG U+ 52,000 250 2.5 Source: Company data, DBS Bank Korean telcos raised data caps to win market share subsequently. Since then, Korean telcos have increased data allowances for the sub-KRW60,000 plans (KRW52,000 plan by SKT offers 6.5GB of data now) while introducing unlimited plans at higher price brackets (KRW60,000 and above) due to competitive pressures, which has increased the average data consumption levels. They had to incur higher capex but benefitted from cuts in handset subsidies and marketing expenses due to the regulatory pressure, resulting in healthier earnings SK Telecom & LG U+ saw 3% and 1% annual rise in ARPU in 1Q15

Source: Company data Marketing costs under control due to regulatory pressure in Korea

Source: Company data

Industry Focus

Telecom Sector

Page 4

Relevance to Singapore Data growth may be slowing at 3GB usage level in Singapore.

Source: Company data We believe telcos have already captured most of the upside from data growth. M1 disclosed that 72% of its subscribers are on tiered-data plans (4G), with 23% of them exceeding their data caps in 2Q15. Average data usage by smartphone users is approaching the 3-4GB data allowance offered by popular tiered-data plans, priced around S$60-65. With excess data charges as high as S$10.70 per GB, we believe average mobile data usage per user would stagnate around 3.5GB levels. Singapore also has a strong fixed broadband network, with many of the residences already having access to relatively cheap high-speed internet. As a result, there is a strong incentive for data-hungry smartphone users to switch to Wi-Fi networks as much as possible. Popular postpaid plans in Singapore

SingTel StarHub M1

Name Combo 3 4G 4 Reg

Price $62.90 $62.90 $61.00

Voice 300 350 300

SMS 1200 1200 1200

Data 3GB 4GB 4GB

Wifi 2GB N/A N/A Source: Company data

High Handset Subsidy in Singapore Handset subsidy on rise due to iPhone 6’s popularity in Singapore

Source: Company data iPhone 6’s popularity is a burden on telcos – at least in FY15F. Apple reviews the postpaid plans and handset subsidies offered by telcos and expects telcos to bear the marketing expenses for iPhones. Samsung, on the other hand, allows telcos to decide the subsidy levels and does not expect telcos to bear the marketing expenses for Samsung phones. Our thoughts on the 4th telco Potential 4th telco to face multiple operating challenges. The biggest challenge would be getting the sites for rooftop towers. As we understand, building owners are required to provide free access for in-building coverage but not for towers. Most of the sites are already occupied by existing telcos. We believe network capex for the 4th telco could well exceed US$500m versus US$250m-300m capex intended by MyRepublic. Besides, a 60% lower reserve price may not be realised due to competition between MyRepublic and OMGTel if both decide to bid for the spectrum despite these challenges. Much depends on results of HetNet trials. HetNet technologies allow consumers to connect to different networks such as Wi-Fi, 4G and 3G networks seamlessly. Currently, there is a need for authentication via a password for each network, which does not allow a seamless handover. HetNet technology may allow telcos to invest 30-40% capex investment compared to traditional technology for similar coverage. SingTel, StarHub, M1 and MyRepublic are involved in HetNet trails in Jurong Lake district. The results of HetNet trials are expected towards the end of 2015. However, if the HetNet trials are not successful, we doubt MyRepublic will have a business case to bid for the 4th telco spectrum.

Industry Focus

Telecom Sector

Page 5

Vendor financing will be the key to the funding. We have learnt that equipment vendors like Huawei and Ericsson go to the extent of funding 80-100% of the network construction by extending credit. Unlike banks, these vendors are not afraid to take technology risks on unproven technologies like HetNet. This implies that new entrants have to get the funding mainly for the spectrum auction only which is likely to be less than S$100m even if there is an aggressive bidding between the two possible contenders. M1 & StarHub could lose up to 10% & 4% of their revenues by 2022 respectively if 4th telco is successful. In Malaysia, the 4th mobile player - U Mobile - has captured only 6-7% revenue share after six years. Singapore is a postpaid-dominated (unlike Malaysia) market with handset subsidies, multi-product bundling and 2-year contracts. We model a 7% revenue share for the new telco by 2022. We have factored in a 10% adverse impact on M1’s revenue in 2022 versus 4% adverse impact on StarHub’s revenue.

Stock Recommendations We downgrade M1 to Fully Valued with revised DCF-based TP (WACC 6.8%, terminal growth rate 1%) of S$2.94. We cut our FY15F/16F earnings for M1 by 4%/9% as we assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. In addition, we anticipate an increase in cost of sales, as we expect higher data allowances in FY16F. For FY17F, we assume a 3% decline in postpaid ARPU due to new competition. In addition, we have assumed that M1 will have to increase its normalised capex (excluding spectrum)-to-sales ratio to 12% versus our 11% assumption earlier due to more competition from the 4th telco. We downgrade Starhub to Fully Valued with revised DCF-based TP (WACC 6.5%, terminal growth rate 0%) of S$3.70. We cut our FY15F/16F earnings for Starhub by 5%/9% as we assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. In addition, we anticipate increase in cost of sales as data allowances are increased by telcos. For FY17F, we assume 1% decline in postpaid ARPU due to new competition as StarHub is relatively more insulated than M1.

Regional Valuations

Mkt Price Target CA GRCompany Cap LCL Price % 14-16

(US$m) 23- J ul LCL Upside Rcmd (%) 15F 16F 15F 16F 14F 15F 15F 16F 15F 16F

China / Hong Kong SHCOMP Index 4,124

China Mobile 265,985 100.70 120.00 19% Buy 2 15.2 14.5 2.8% 3.0% 1.9x 1.8x 4.8x 4.5x nm nm

China Telecom 8,092 4.52 5.60 24% Buy 10 15.0 13.6 2.1% 2.1% 1.0x 0.9x 3.9x 3.8x 1.0x 1.0x

China Unicom 35,033 11.34 11.20 -1% Hold 9 16.2 15.2 2.2% 2.2% 0.9x 0.9x 3.4x 3.1x 1.2x 1.0x

Smartone Telecom 2,095 15.34 16.00 4% Buy 26 20.3 18.8 3.5% 4.3% 5.0x 4.5x 5.5x 5.6x nm 0.5x

Hutchison Telecom 2,132 3.43 3.40 -1% Hold 10 18.0 16.5 4.2% 4.5% 1.5x 1.4x 7.3x 7.2x 1.1x 1.4x

Malay sia KLCI Index 1,722.44

Digi.Com 10,788 5.31 5.85 10% Hold 3 20.8 19.3 4.8% 5.2% 61.0x 61.0x 12.9x 12.0x 0.2x 0.2x

Maxis Bhd 12,930 6.59 5.80 -12% Fully Valued 7 24.3 22.7 4.1% 4.2% 10.5x 10.5x 13.2x 12.8x 1.8x 1.8x

Telekom 6,569 6.69 7.65 14% Buy 10 25.8 22.0 3.5% 4.1% 3.3x 3.2x 7.3x 7.0x 0.6x 0.6x

Axiata Group 14,327 6.37 6.45 1% Hold 8 23.3 21.0 3.7% 4.5% 2.6x 2.6x 9.5x 9.1x 1.5x 1.5x

Singapore ST I Index 3,356

M1 2,251 3.29 2.94 -11% Fully Valued 0 17.1 17.2 5.8% 5.8% 7.8x 7.7x 9.7x 9.7x 0.8x 0.8x

Starhub 4,974 3.94 3.70 -6% Fully Valued -1 18.4 18.6 5.1% 4.8% 45.5x 39.1x 9.5x 9.4x 0.6x 0.5x

Thailand SET Index 1,445

Advanced Info Serv ice 21,186 248.00 225.00 -9% Hold 13 19.5 16.1 5.1% 6.2% 15.6x 15.4x 10.9x 10.5x 0.5x 0.5x

Shin Corp 7,417 80.50 90.00 12% Buy 12 16.4 14.2 6.1% 7.0% 18.4x 18.3x 16.4x 14.2x nm nm

Total Access Comm. 5,171 76.00 78.00 3% Hold -8 22.6 19.8 4.4% 5.0% 5.5x 7.0x 6.9x 6.3x 1.1x 0.9x

ThaiCom 1,118 35.50 40.16 13% Hold - 15.5 - 3.2% 2.3x 2.1x 0.10 nm nm -

Indonesia J CI Index 4,903

Indosat 1,763 4,360 4,250 -3% Hold nm 35.6 - 0.0% 0.0% 1.7x 1.7x 3.6x 3.4x 1.4x -

PT Telekom 21,344 2,845 3,200 12% Buy 8 17.6 16.6 4.5% 4.8% 4.2x 4.1x 6.6x 6.4x nm nm

XL Axiata 2,107 3,315 4,970 50% Buy nm 30.2 21.8 1.8% 2.7% 1.9x 1.8x 5.4x 4.9x 2.4x 2.1x

PT Sarana Menara 3,037 4,000 4,700 18% Buy nm 25.4 - 0.0% 0.0% 8.7x 6.5x 12.2x 10.5x 1.7x -

Tower Bersama 3,043 8,525 10,400 22% Hold 29 28.7 26.6 0.7% 0.8% 10.9x 5.8x 15.3x 13.4x 4.5x 4.0x

EV /EBITDAPE (x ) Div idend Y ield (%) Net Debt /EbitdaP/BV

Source: DBS Bank; Bloomberg Finance L.P.

Page 6

www.dbsvickers.com ed: TH / sa: JC

FULLY VALUED (Downgrade from BUY)

Last Traded Price : S$3.27 (STI : 3,352.65) Price Target : 12-Month S$ 2.94 (-10 downside) (Prev S$ 3.60) Potential Catalyst: Result of HetNet trials by end of 2015 Where We Differ: 5%/10% below consensus FY15F/16F due to ARPU concerns and adverse impact of fair value accounting Analyst Sachin MITTAL +65 6682 3699 sachinmittal@dbs.com

Price Relative

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Relative IndexS$

M1 (LHS) Relative STI INDEX (RHS) Forecasts and Valuation FY Dec (S$ m) 2014A 2015F 2016F 2017F

Turnover 1,076 1,108 1,111 1,099 EBITDA 336 343 345 344 Pre-tax Profit 217 217 217 212 Net Profit 176 179 179 175 Net Pft (Pre Ex.) 176 179 179 175 EPS (S cts) 19.1 19.2 19.1 18.7 EPS Pre Ex. (S cts) 19.1 19.2 19.1 18.7 EPS Gth (%) 10 0 0 (2) EPS Gth Pre Ex (%) 10 0 0 (2) Diluted EPS (S cts) 18.8 19.2 19.1 18.7 Net DPS (S cts) 18.9 19.2 19.1 18.7 BV Per Share (S cts) 42.4 42.6 42.5 42.1 PE (X) 17.1 17.0 17.1 17.5 PE Pre Ex. (X) 17.1 17.0 17.1 17.5 P/Cash Flow (X) 11.0 9.3 10.2 10.2 EV/EBITDA (X) 9.8 9.7 9.6 9.9 Net Div Yield (%) 5.8 5.9 5.9 5.7 P/Book Value (X) 7.7 7.7 7.7 7.8 Net Debt/Equity (X) 0.7 0.6 0.7 0.9 ROAE (%) 44.5 45.2 44.9 44.1 Earnings Rev (%): (4) (8) (5) Consensus EPS (S cts): 20.3 21.3 21.6 Other Broker Recs: B: 8 S: 5 H: 12 ICB Industry : Telecommunications ICB Sector: Mobile Telecommunications Principal Business: MobileOne is one of the main telecommunication operators in Singapore.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P.

At A Glance Issued Capital (m shrs) 937 Mkt. Cap (S$m/US$m) 3,063 / 2,233 Major Shareholders Axiata Group (%) 29.7 Keppel T&T Ltd (%) 20.0 Singapore Press Holdings (%) 13.9 Free Float (%) 36.4 3m Avg. Daily Val (US$m) 4.7

Company Focus

M1 Bloomberg: M1 SP | Reuters: MONE.SI Refer to important disclosures at the end of this repor

DBS Group Research . Equity 27 Jul 2015

ARPU concerns

Postpaid ARPU may decline due to flat data usage and decline in legacy revenue

iPhone 6’s popularity is a burden at least in FY15F, although M1 is more resilient

Downgrade to Fully Valued with revised TP of S$2.94

Postpaid ARPU may decline due to flat data usage and

decline in legacy revenue. Voice and SMS accounted for over 50% of the mobile revenue in 1H15, roaming revenues contribute ~10% of mobile revenue which, will continue to decline sharply. Meanwhile, data usage may be flattish, as seen in markets such as Korea when 4G penetration reaches 65-70%. M1 disclosed that 72% of its subscribers are on tiered-data plans (4G), with 23% of them exceeding their data caps in 2Q15. Average data usage per person was flat q-o-q at 3.2GB in 2Q15, which is a cause for concern.

iPhone 6’s popularity is a burden – at least in FY15F. Apple reviews the postpaid plans and handset subsidies offered by telcos and expects telcos to bear the marketing expenses for iPhones. Samsung, on the other hand, allows telcos to decide the subsidy levels and incurs the marketing expenses for Samsung phones. By using fair value accounting (FVA) for iPhones, M1 is able to smoothen its earnings but its free cash flow will still be impacted due to higher subsidies. We cut our FY15F/16F earnings for M1 by 4%/9%. We assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. In addition, we have assumed that M1 will have to increase its normalised capex (excluding spectrum)-to-sales ratio to 12% vs. our 11% assumption earlier due to more competition from the 4th telco We use discounted cash flow valuation (WACC 6.8%, terminal growth 1%) to derive a target price of S$2.94. M1 could lose up to 10% of its revenue by 2022 due to the entry of the 4th telco, based on our estimates.

Company Focus

M1

Page 7

INVESTMENT THESIS

Profile Rationale

M1 is the smallest of the three telecom operators in Singapore. M1 provides mobile services and has also started to provide fixed broadband services by riding on National Broadband Network.

Postpaid ARPU may decline due to flat data usage and decline in legacy revenue. Data usage may be flattish, as seen in markets such as Korea when 4G penetration reaches 65-70%. M1 disclosed that 72% of its subscribers are on tiered-data plans (4G), with 23% of them exceeding their data caps in 2Q15. Average data usage per person was flat q-o-q at 3.2GB in 2Q15, which is a cause for concern. iPhone 6’s popularity is a burden – at least in FY15F. Apple reviews the postpaid plans and handset subsidies offered by telcos and expects telcos to bear the marketing expenses for iPhones. By using fair value accounting (FVA) for iPhones, M1 is able to smoothen its earnings but its free cash flow will still be impacted due to higher subsidies. We cut our FY15F/16F earnings for M1 by 4%/9%. We assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. In addition, we have assumed that M1 will have to increase its normalised capex (excluding spectrum)-to-sales ratio to 12% vs. our 11% assumption earlier due to more competition from the 4th telco. M1 could lose up to 10% of its revenue by 2022 due to the entry of the 4th telco, based on our estimates.  

Valuation Risks

We use discounted cash flow valuation (WACC 6.8%, terminal growth 1%) to derive a target price of S$2.94. M1’s dividend yield is atractive at over 6% but we see nig downside to the share price.

Successful HetNet rollout by 4th telco at low capex . We have assumed that the 4th telco will gain 7% revenue share of the mobile market by 2022, which could be more if HetNet technology proves to be disruptive.

Source: DBS Bank

Company Focus

M1

Page 8

Income Statement (S$ m) Balance Sheet (S$ m)

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Turnover 1,076 1,108 1,111 1,099 Net Fixed Assets 686 710 733 752 Cost of Goods Sold (743) (766) (768) (757) Invts in Associates & JVs 0 0 0 64 Gross Profit 334 342 343 343 Other LT Assets 116 104 92 81 Other Opng (Exp)/Inc (113) (119) (120) (123) Cash & ST Invts 23 44 32 6 Operating Profit 221 223 223 219 Inventory 30 32 32 32 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 150 159 160 158 Associates & JV Inc 0 0 0 0 Other Current Assets 23 23 23 23 Net Interest (Exp)/Inc (4) (6) (6) (8) Total Assets 1,028 1,072 1,072 1,115 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 217 217 217 212 ST Debt 52 52 52 52 Tax (41) (38) (38) (37) Creditor 157 199 200 197 Minority Interest 0 0 0 0 Other Current Liab 65 65 64 64 Preference Dividend 0 0 0 0 LT Debt 250 250 250 300 Net Profit 176 179 179 175 Other LT Liabilities 109 109 109 109 Net Profit before Except. 176 179 179 175 Shareholder’s Equity 395 398 398 393 EBITDA 336 343 345 344 Minority Interests 0 0 0 0 Total Cap. & Liab. 1,028 1,072 1,072 1,115 Sales Gth (%) 6.8 2.9 0.3 (1.1) EBITDA Gth (%) 7.4 2.3 0.4 (0.1) Non-Cash Wkg. Capital (19) (49) (49) (48) Opg Profit Gth (%) 12.1 0.9 0.0 (1.7) Net Cash/(Debt) (279) (258) (270) (346) Net Profit Gth (%) 9.8 2.0 (0.3) (2.4) Effective Tax Rate (%) 19.0 17.5 17.5 17.5 Cash Flow Statement (S$ m) Rates & Ratio

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Pre-Tax Profit 217 217 217 212 Gross Margins (%) 31.0 30.8 30.9 31.2 Dep. & Amort. 114 120 122 126 Opg Profit Margin (%) 20.5 20.1 20.1 19.9 Tax Paid (29) (39) (38) (38) Net Profit Margin (%) 16.3 16.2 16.1 15.9 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 44.5 45.2 44.9 44.1 Chg in Wkg.Cap. (30) 31 0 0 ROA (%) 17.5 17.1 16.7 16.0 Other Operating CF 0 0 0 0 ROCE (%) 23.0 22.8 22.8 21.8 Net Operating CF 273 329 301 300 Div Payout Ratio (%) 100.0 100.0 100.0 100.0 Capital Exp.(net) (178) (133) (133) (132) Net Interest Cover (x) 55.3 38.8 35.7 28.5 Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.1 1.1 1.0 1.0 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 49.9 50.9 52.4 52.7 Div from Assoc & JV 0 0 0 (64) Creditors Turn (avg days) 98.3 100.7 112.5 114.7 Other Investing CF 0 0 0 0 Inventory Turn (avg days) 17.3 17.6 18.1 18.4 Net Investing CF (178) (133) (133) (196) Current Ratio (x) 0.8 0.8 0.8 0.7 Div Paid (197) (176) (179) (179) Quick Ratio (x) 0.6 0.6 0.6 0.5 Chg in Gross Debt 52 0 0 50 Net Debt/Equity (X) 0.7 0.6 0.7 0.9 Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) 0.7 0.6 0.7 0.9 Other Financing CF 19 0 0 0 Capex to Debt (%) 59.1 44.0 44.2 37.5 Net Financing CF (126) (176) (179) (129) Z-Score (X) 4.8 4.6 4.7 4.7 Currency Adjustments 0 0 0 0 N. Cash/(Debt)PS (S cts) (30.0) (27.7) (28.9) (37.1) Chg in Cash (32) 21 (12) (25) Opg CFPS (S cts) 32.9 32.0 32.2 32.1 Free CFPS (S cts) 10.3 21.0 17.9 18.0 Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 FY Dec 2014A 2015F 2016F 2017F Turnover 250 346 295 277 Revenues (S$ m) Cost of Goods Sold (166) (261) (212) (194) Post Paid Cellular 591 619 626 619 Gross Profit 84 86 82 83 Pre Paid Cellular 80 88 92 94 Other Oper. (Exp)/Inc (28) (30) (26) (28) IDD Revenue 89 88 86 84 Operating Profit 56 56 56 55 Fixed network services 71 78 82 86 Other Non Opg (Exp)/Inc 0 0 0 0 Others 245 235 226 217 Associates & JV Inc 0 0 0 0 Total 1,076 1,108 1,111 1,099 Net Interest (Exp)/Inc (1) (1) (1) (1) Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 55 55 55 54 Key Assumptions Tax (10) (11) (10) (10) Post paid ARPU 55.6 54.9 54.3 53.0 Minority Interest 0 0 0 0 Net Handset Subsidy (85.0) (73.0) (72.3) (65.1) Net Profit 45 45 46 44 Postpaid subscribers (K) 1,149.0 1,161.0 1,172.6 1,172.6 Net profit bef Except. 45 45 46 44 EBITDA 85 86 83 84 Sales Gth (%) 4.4 38.4 (14.9) (6.1) EBITDA Gth (%) 1.3 2.2 (3.6) 0.4 Opg Profit Gth (%) 0.5 0.9 0.4 (2.3) Net Profit Gth (%) 1.4 0.0 2.7 (3.1) Gross Margins (%) 33.5 24.8 28.0 29.9 Opg Profit Margins (%) 22.2 16.2 19.1 19.9 Net Profit Margins (%) 17.8 12.8 15.5 16.0 Source: Company; DBS Bank

www.dbsvickers.com ed: TH / sa: JC

FULLY VALUED (Downgrade from HOLD) Last Traded Price: S$3.94 (STI : 3,356.37) Price Target : S$3.70 (-6% downside) (Prev S$4.35) Reason for Report : Earnings revision Potential Catalyst: Quarterly dividends Where We Differ: 3%/5% below consensus FY16F/17F earnings Analyst Sachin MITTAL +65 6682 3699 sachinmittal@dbs.com

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015F 2016F 2017F Revenue 2,387 2,407 2,431 2,454 EBITDA 748 759 768 780 Pre-tax Profit 456 454 448 446 Net Profit 370 369 364 362 Net Pft (Pre Ex.) 370 369 364 362 EPS (S cts) 21.5 21.4 21.2 21.1 EPS Pre Ex. (S cts) 21.5 21.4 21.2 21.1 EPS Gth (%) (3) 0 (1) 0 EPS Gth Pre Ex (%) (3) 0 (1) 0 Diluted EPS (S cts) 21.5 21.4 21.2 21.1 Net DPS (S cts) 20.0 20.0 19.0 19.0 BV Per Share (S cts) 8.7 10.1 11.2 13.2 PE (X) 18.3 18.4 18.6 18.7 PE Pre Ex. (X) 18.3 18.4 18.6 18.7 P/Cash Flow (X) 10.4 10.4 10.3 10.1 EV/EBITDA (X) 9.6 9.5 9.4 9.2 Net Div Yield (%) 5.1 5.1 4.8 4.8 P/Book Value (X) 45.5 39.1 35.1 29.7 Net Debt/Equity (X) 2.8 2.5 2.1 1.5 ROAE (%) 319.8 228.7 198.7 172.1 Earnings Rev (%): (5) (8) (11) Consensus EPS (S cts): 21.6 21.8 22.2 Other Broker Recs: B: 4 S: 11 H: 11 ICB Industry : Telecommunications ICB Sector: Mobile Telecommunications Principal Business: Spore-based integrated information, communications and entertainment company, providing a broad range of mobile, cable TV, broadband and fixed network services.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

At A Glance Issued Capital (m shrs) 1,728 Mkt. Cap (S$m/US$m) 6,808 / 4,974 Major Shareholders Asia Mobile Holdings (%) 56.5 Nippon Telegraph (%) 10.0 Mediacorp (%) 0.0 Free Float (%) 33.6 3m Avg. Daily Val (US$m) 6.3

DBS Group Research . Equity 27 Jul 2015

Singapore Company Focus

StarHub Bloomberg: STH SP | Reuters: STAR.SI Refer to important disclosures at the end of this report

Mobile to face pressure Postpaid ARPU may decline going forward due to

declining legacy revenue amid flattish data usage

iPhone 6’s popularity is a burden on telcos – at least in FY15F

Downgrade to Fully Valued with revised DCF-based TP of S$3.70

Postpaid ARPU may decline due to flat data usage and

decline in legacy revenue. Voice and SMS accounted for over 50% of mobile revenue in 1H15. We estimate that international and roaming revenues contribute 12% of mobile revenue which, will continue to decline sharply as consumers use Whatsapp, Facetime and LINE calls over Wi-Fi when overseas. Meanwhile, data usage may be flattish, as seen in markets such as Korea when 4G penetration reaches 65-70%. In our view, there is a need for telcos to launch bigger or unlimited data capacity plans at 10-20% premium to the most popular plans to defend ARPU by incurring high capex. However, we do not sense any urgency from telcos as yet.

iPhone 6’s popularity is a burden on telcos – at least in FY15F. Apple reviews the postpaid plans and handset subsidies offered by telcos and expects telcos to bear the marketing expenses for iPhones. Samsung, on the other hand, allows telcos to decide the subsidy levels and incurs the marketing expenses for Samsung phones.

Downgrade to Fully Valued. We cut our FY15F/16F earnings for Starhub by 5%/9% as we assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. In addition, we anticipate an increase in cost of sales as data allowances are increased by telcos. We use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$3.70. StarHub could lose up to 4% of its group revenue by 2022 due to the 4th telco's entry, based on our estimates.

88

108

128

148

168

188

208

2.4

2.9

3.4

3.9

4.4

4.9

Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Relative IndexS$

StarHub (LHS) Relative STI INDEX (RHS)

Page 10

Company Focus

StarHub

INVESTMENT THESIS

Profile Rationale

StarHub is the second largest of the three telecom operators in Singapore. StarHub provides mobile services, pay TV, fixed broadband and fixed voice services, popularly known as quadruple play services.

Expect postpaid ARPU to decline due to flat data usage amid decline in big legacy revenue. We cut our FY15F/16F earnings for Starhub by 5%/9% as we assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. In addition, we anticipate an increase in cost of sales as data allowances are increased by telcos. Price competition in fixed broadband. The decline in ARPU is unlikely to return to previous levels in the near term, as StarHub is likely to pursue its current strategy to preserve market share. However, revenue is showing signs of recovery due to an expanded subscriber base. Potential 4th player could pose a threat. 4G spectrum auction, expected in 1Q16, could result in a 4th mobile player entering the market in 1H17. This is likely to challenge pricing levels and erode market share for existing players. We believe StarHub could lose 4% of its revenue to the new player.

Valuation Risks

We use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$3.70.

Decline in mobile roaming. A potential decline in mobile roaming and broadband margins are the key downside risks to our estimates.

Source: DBS Bank

Page 11

Company Focus

StarHub

Income Statement (S$ m) Balance Sheet (S$ m)

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Turnover 2,387 2,407 2,431 2,454 Net Fixed Assets 911 953 955 938 Cost of Goods Sold (1,957) (1,979) (2,009) (2,035) Invts in Associates & JVs 0 0 0 0 Gross Profit 430 428 422 419 Other LT Assets 405 405 405 405 Other Opng (Exp)/Inc 47 47 47 47 Cash & ST Invts 264 256 279 336 Operating Profit 477 474 468 466 Inventory 42 43 43 44 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 162 163 165 166 Associates & JV Inc 0 0 0 0 Other Current Assets 203 203 203 203 Net Interest (Exp)/Inc (21) (20) (20) (20) Total Assets 1,987 2,022 2,049 2,091 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 456 454 448 446 ST Debt 200 200 200 200 Tax (86) (85) (84) (84) Creditor 796 802 810 818 Minority Interest 0 0 0 0 Other Current Liab 197 184 183 183 Preference Dividend 0 0 0 0 LT Debt 488 488 488 488 Net Profit 370 369 364 362 Other LT Liabilities 158 175 175 175 Net Profit before Except. 370 369 364 362 Shareholder’s Equity 149 173 193 228 EBITDA 748 759 768 780 Minority Interests 0 0 0 0 Total Cap. & Liab. 1,987 2,022 2,049 2,091 Sales Gth (%) 0.7 0.8 1.0 0.9 EBITDA Gth (%) 0.7 1.5 1.1 1.5 Non-Cash Wkg. Capital (586) (578) (583) (588) Opg Profit Gth (%) 0.7 (0.5) (1.3) (0.5) Net Cash/(Debt) (423) (431) (408) (352) Net Profit Gth (%) (2.8) (0.5) (1.2) (0.5) Effective Tax Rate (%) 18.8 18.8 18.8 18.8 Cash Flow Statement (S$ m) Rates & Ratio

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Pre-Tax Profit 456 454 448 446 Gross Margins (%) 18.0 17.8 17.3 17.1 Dep. & Amort. 271 285 300 314 Opg Profit Margin (%) 20.0 19.7 19.3 19.0 Tax Paid (65) (98) (85) (84) Net Profit Margin (%) 15.5 15.3 15.0 14.8 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 319.8 228.7 198.7 172.1 Chg in Wkg.Cap. 2 5 6 6 ROA (%) 19.3 18.4 17.9 17.5 Other Operating CF (10) 7 (10) (10) ROCE (%) 39.9 38.0 36.4 35.3 Net Operating CF 655 653 659 672 Div Payout Ratio (%) 92.9 93.4 90.0 90.0 Capital Exp.(net) (322) (327) (302) (297) Net Interest Cover (x) 23.1 23.2 23.4 23.9 Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.2 1.2 1.2 1.2 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 21.8 24.6 24.6 24.6 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 167.7 172.2 172.2 172.7 Other Investing CF 3 0 0 0 Inventory Turn (avg days) 9.3 9.2 9.2 9.2 Net Investing CF (319) (327) (302) (297) Current Ratio (x) 0.6 0.6 0.6 0.6 Div Paid (345) (344) (344) (328) Quick Ratio (x) 0.4 0.4 0.4 0.4 Chg in Gross Debt 0 0 0 0 Net Debt/Equity (X) 2.8 2.5 2.1 1.5 Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) 2.8 2.5 2.1 1.5 Other Financing CF 6 10 10 10 Capex to Debt (%) 46.8 47.5 43.9 43.2 Net Financing CF (339) (334) (334) (318) Z-Score (X) 3.8 3.8 3.9 3.9 Currency Adjustments 0 0 0 0 N. Cash/(Debt)PS (S cts) (24.6) (25.1) (23.7) (20.4) Chg in Cash (3) (8) 23 56 Opg CFPS (S cts) 37.9 37.7 37.9 38.7 Free CFPS (S cts) 19.4 19.0 20.7 21.7 Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions

FY Dec 2Q2014 3Q2014 4Q2014 1Q2015 FY Dec 2014A 2015F 2016F 2017F

Turnover 576 592 647 618 Revenues (S$ m) Cost of Goods Sold (394) (419) (467) (467) Mobile 1,248 1,245 1,256 1,267 Gross Profit 182 174 181 151 Cable TV & Broadband 592 594 594 592 Other Oper. (Exp)/Inc (63) (50) (56) (57) Fixed Network 378 398 411 425 Operating Profit 119 123 124 94 Equipment sale 170 170 170 170 Other Non Opg (Exp)/Inc 0 0 0 0 Others N/A N/A N/A N/A Associates & JV Inc 0 0 0 0 Total 2,387 2,407 2,431 2,454 Net Interest (Exp)/Inc (4) (4) (8) (4) EBITDA (S$ m) Exceptional Gain/(Loss) 0 0 0 0 Mobile 453 459 464 456 Pre-tax Profit 115 119 117 90 Cable TV & Broadband 109 107 107 121 Tax (21) (21) (22) (17) Fixed Network 139 147 151 155 Minority Interest 0 0 0 0 Equipment sale 47 47 47 47 Net Profit 94 98 94 74 Others N/A N/A N/A N/A Net profit bef Except. 94 98 94 74 Total 748 759 768 780 EBITDA 187 191 193 162 EBITDA Margins (%) Mobile 36.3 36.9 36.9 36.0 Sales Gth (%) 0.9 2.7 9.4 (4.6) Cable TV & Broadband 18.4 18.0 18.0 20.5 EBITDA Gth (%) 5.8 1.9 0.8 (15.8) Fixed Network 36.8 36.8 36.6 36.5 Opg Profit Gth (%) 7.3 3.7 1.1 (24.5) Equipment sale 27.5 27.4 27.4 27.4 Net Profit Gth (%) 11.9 3.6 (3.6) (21.8) Others N/A N/A N/A N/A Gross Margins (%) 31.6 29.3 27.9 24.5 Total 31.3 31.6 31.6 31.8 Opg Profit Margins (%) 20.6 20.8 19.2 15.2 Net Profit Margins (%) 16.4 16.5 14.6 11.9 Source: Company; DBS Bank

Industry Focus

Telecom Sector

Page 6

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published,the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 30 Jun 2015, except China Mobile, China Telecom, China Unicom, SmarTone, Hutchison Telecom, M1, SingTel, StarHub

2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 30 Jun 2015.

Industry Focus

Telecom Sector

Page 7

3.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the China Unicom, Indosat, Tower Bersama

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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Wong Ming Tek, Executive Director, ADBSR

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DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888 , Company Regn. No. 196800306E