XL Axiata (EXCL IJ; CP: CP: IDR5,350; BUY) Target Price: IDR7,250 - BNP Paribas

Key issues
ƒ There has been a rapid shift in revenue mix from Voice/SMS to Data. However, usage is still very low, standing at 9Mb/month for 2.5G and 40-50Mb/month for 3G handsets. XL sees exponential increase in data usage in the next few years, as users upgrade to 3G and smartphones. XL has set aside a bigger portion of its capex (50% of IDR6t) to build its data network, including fiberising transmission in six major cities in Indonesia (Java & including Medan).
ƒ XL will pursue partnerships with other players for RAN & transmission (backhaul) sharing, to reduce the cost of building its network infrastructure to support its data business. Other cost reduction initiatives include working with other players to bring in international servers (caching) to Indonesia to reduce international connectivity cost.
ƒ XL does not want to be too aggressive on data pricing as they need to manage profitability of the data business. Unlike the voice minute factory strategy, just lowering prices may not result in additional data usage. For Data, there is a need to manage the entire ecosystem, from increasing the adoption of data-capable
handsets in the market to providing attractive content/services.

Questions raised
ƒ How are the data margins compared to Voice/SMS? Data margins are currently lower than Voice & SMS. However, this is expected to rise as Data reaches a more optimal scale in 3-5 years time.
ƒ When will 60Mhz be auctioned? 60 MHz at the 2.3 GHz spectrum will be auctioned by the government next year, which will provide additional spectrum to support the data business and can be used for future LTE services.

Current view
ƒ Our TP of IDR7,250 is DCF-based on WACC: 11.3%, terminal growth: 3.0%. We maintain BUY on the stock.