>Telecom Sector (CITI)

Asia Connect #2, 2009

Coming With Low Expectations: Thoughts from the Road

* Coming with low expectations — Our recent meetings with US investors highlighted low expectations on competitive and regulatory concerns for the sector (Indonesia an exception). While we know the sector is well-held for defensive reasons, and this is likely to be a source of funds into any market rally, we view that some stocks are set to outperform if operational delivery beats current low expectations.

* Indian wireless: Expectations very low — We were surprised by the low expectations and walked away from most meetings sensing that the various concerns (regulation, escalating price competition, declining elasticity etc.) have all been discussed to death. We think stocks are primed for disappointing results, although Idea’s strong 1Q indicates otherwise and we believe this bodes well for the sector and Bharti, our top pick.

* China: To each their own — The only investor consensus was that there is no need to be involved in the sector for now, if there was an alternative. We saw wide divergence in stock choices/ preference orders. Our view is that CM offers relative earnings stability on a 1-yr view and that investors use sub P/B parity entry points to look for longer term entry opportunities into CT and CU.

* Indonesia: Warm and fuzzy feeling — We were surprised by the positive stance of investors and suspect an improving macro outlook plays its part as well. The industry is in repair and expectations are for profit growth to accelerate. With stocks having moved up, we advocate exiting into strength as we see delivery disappointing versus built up expectations (Indosat’s recent 1Q results are a case in point).

* Korea: Skepticism rules — The wireless margin expansion story on LT contracts reducing churn is widely consensus and not believed at all, as reflected in SKT and LGT valuations, and we see risk-reward to the upside at these levels. We and most investors think KT will disappoint into any post (KTF) merger. If anything were to surprise on the contrary then KT at BVPS (W34k) levels could become an interesting play.

* Top themes and stock plays — Bharti is attractive for growth and TWM, PLDT for yield. We view there is risk-reward upside in SKT, LGT at current levels. CT, CU potential entry points at discount to book (HK$3/HK$9.9 respectively) – higher discount for CU given its lower execution track record/longer inflexion period to earnings recovery. OnMobile attractive as a VAS play on robust Indian subscriber g rowth. Top Sells include Indosat, TataCom and PCCW.

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