Industry / Telecommunications

Telecommunications (Indonesia)

Group Research / November 15, 2018

Photo Credit - AFP

Overall Outlook

Mobile sector to witness 7-8% revenue growth in 2019 versus 2-3% decline in 2018. We expect the Indonesian mobile sector to record mid-high single-digit growth in FY19 on the back of steady subscriber additions and bottoming out of data yields in 9M18. We believe markets outside Java (ex-Java) will be the key focal point in FY19, as all major operators race to expand 4G coverage in the region and capitalise on growing demand for data. The industry is likely to record 2-3% decline in FY18 due to the weak 1H18, when the prepaid SIM registration exercise resulted in intense competition in the industry and heavy subscriber losses.

Competitive landscape in Java likely to remain moderate, expect more action outside Java. The competitive landscape in Java has improved since the end of the prepaid SIM registration era in 1H18, with Telkomsel and Indosat instituting ~5-10% upward adjustments to uplift the heavily depressed data yields in the industry. XL Axiata however, largely maintained its pricing to counter the threat from Smartfren, the fifth largest operator in terms of subscriber share which has developed a strong 4G/4G+ network in Java with aggressive pricing. XL Axiata is expected to institute upward price revisions in 4Q18 in some regional clusters within Java. We don’t foresee major disruptions to the current state of benign competition in Java. 
However, XL Axiata maintains its aggressive pricing outside Java in a bid to double its ~15% market share in the region over the next five years. Much of XL Axiata’s market share gains would have to be at the expense of Telkomsel, which dominates the ex-Java region with ~80% market share. We expect the competitive landscape outside Java to remain heated in FY19. 
Capex to remain elevated amid ex-Java expansion. Indonesian telecommunications companies (telcos) are accelerating their expansion plans, with ex-Java as the key focal point. Indonesia has one of the cheapest data pricing in the region and is a major reason for Indonesian operators to increase capital expenditure (capex) and upgrade network capacity. XL Axiata has added nearly 50k 3G/4G base stations since 3Q16. Telkomsel, which added over 64k 3G/4G base stations since 3Q16, has been building its 4G network both within and outside Java, leveraging the 2.3GHz spectrum acquired in 2017.. XL has spent ~Rp5t capex per year on average since 2015 (~29% as a % of service revenue) to accelerate its expansion outside Java, where the operator expects to achieve 80% population coverage on its 4G network by the end of the year. Indosat is playing catch up, having guided for ~Rp 8t in capex (33% of FY17 cellular service revenue) to plug its network deficits with XL Axiata and Telkomsel. Indosat is currently upgrading its equipment in existing coverage regions. Indosat’s new management plans to take a more aggressive stance on ex-Java expansion in FY19, having announced plans to disburse over US$2b (~Rp 30t) for expansion in the next few years.

High speed fixed broadband penetration in Indonesia has doubled in the last 15 months. We estimate that high speed fixed broadband penetration (connections over 5Mbps) in Indonesia doubled over the past year from 4% household penetration in 1H17 to 8% household penetration as of 3Q18. This was largely driven by aggressive expansion by Telkom Indonesia, which added nearly 2.7m subscribers over the same period. All major fixed broadband players are aggressively expanding their coverage regions to capitalise on the growing appetite for high speed data among the expanding middle income class in Indonesia. Extrapolating the growth in high speed broadband penetration over the past year, coupled with the growing interest in the segment by incumbents and new operators like XL Axiata and Indosat, we expect to see penetration of high speed broadband services rising to at least 20% over the next three years, adding ~9m new households to the high speed broadband segment.

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