Indonesia Telecom - Brand race competition continues - Deutsche Bank

Intense advertising spends are keeping prices low
Last year we talked about a brand race in the telecom sector as a way to gain customer attention, particularly in establishing perceptions as cheap brands. Therefore, it is unlikely that the competition will ease off. The latest data from Nielsen Advertising show that gross adspend in Indonesia has risen 23% to Rp60tr (net adspend estimate: Rp48tr). Telcos are still the largest spenders, up 43% yoy – with increasing adspending from 2 small GSM operators. These factors will keep service prices from rising, in our view.

Seven of 10 brand spenders are related to the telecom sector
In our report dated 14 July 2010, we highlighted that seven of the 10 biggest brand spenders are Indonesian telecom companies. Looking at ad spend by brand, it appears that two small GSM operators appear remarkably aggressive considering their limited coverage. Both are among the top 10 ad spenders by brand. No doubt, Telkomsel (Tsel) Kartu As and Simpati are among the largest ad spenders; given the smaller operators’ limited coverage, Tsel may have outspent them. However, this suggests the threat of intense competition from these small operators remain and this may have prevented operators from raising service charges, which we believe dampens potential future growth. In addition, we also argue that the non-majors’ relatively large subscriber market share of 22% may suggest a high churn rate in the industry.

Smaller operators gaining meaningful “incremental” revenue shares
The industry may not have been focusing too much on two small GSM operators’ incremental market shares. We believe that their recent efforts may have yielded some positive results. In the past three years they have gained some shares, particularly the smaller GSM-based operators. Based on our channel checks (and data from DGPT), we estimate in 2010, their combined revenue may have doubled to Rp1.9tr from Rp927bn in 2009. We calculate their combined revenue market share to total industry share at 2.2% in 2010 – up from 1.2% in 2009. The GSMbased operators’ implied combined revenue market share would have been 2.5% in 2010 – up from 1.3% in 2009. While this may be small, the fact that the GSM industry only grew 8% in revenue in 2010 implies that the combined incremental revenue market share from these two small GSM operators is at approximately 17%, a meaningful share, in our view. Perhaps this partly explains the sluggish topline growth at major GSM operators. If we strip out EXCL’s non cellular revenue, then the smaller GSM operators’ incremental revenue shares would have been higher by approximately another 10bps.

Neutral weighting; XL is our top pick
Given the above, we reiterate our neutral weighting on the Indonesian telecom sector. In the absence of price rises, the Indonesian telcos will deliver inferior earnings growth to the market. Within the sector, XL is our top pick. We have derived XL’s target price based on DCF. Upside/downside risks to the sector are less/more intense competition, higher/lower pricing and subscriber spending.