Wellington Perspective

The Mobile Telecoms Industry in Indonesia Enters

The 5G Era

October 2021

Wellington Capital
Advisory
 Table of Contents

I. The Telco Industry in Indonesia 3

II. MNOs Focus on Fixed Broadband Service 6

III. Indosat – Tri Merger vs XL– AXIS Merger 7

IV. Shifts in Industry Dynamics and User Behavior 9

V. 5G Development in Indonesia 13

2 Wellington Capital
Advisory
The Mobile Telecoms Industry in Indonesia
There are now four competing MNOs, following the recent merger of Indosat Ooredoo and Hutchison Tri (‘Indosat Ooredoo Hutchison’ / ’ISAT’).
Telkomsel remains the dominant provider with almost 50% subscriber market share and the highest CAPEX commitment.

Telkomsel Indosat Ooredoo Hutchison XL Axiata Smartfren

Primary shareholders Telkom: 65% Ooredoo Group: 32.8% Axiata Group: 66.7% Global Nusa Data: 25.9%
(End-2020) Singtel: 35% Hutchison Group: 32.8% Public: 33.3% Public: 30.7%
Public: 14.0% Sinarmas Group: 16.9%
Tri Telekomunikasi Indonesia: 10.8% Wahana Inti Nusantara: 15.8%
Indonesian Government: 9.6% Bali Medika Telecom: 10.7%

Subscriber market share

(End-2020) 47.9% 35.7% 16.4% 7.4%

No. of BTS 107,523 31,000

(End-2020) 73,397 57,089 35,000
50,252 37,805 52,892
Tri Hutchison
26,817 31,393 62,887 Indosat Ooredoo

2G 3G 4G 2G 3G 4G 2G 3G 4G 4G

Capex spend 16.1 13.4 10.9 8.0 6.2 7

(IDR Tn) 7.3 7.3 2.9
4.5 4.3
3.6
13.7 8.7 8
2018 2019 2020
*Cash outflow from investing 2019 2020 P.2021 2019 2020 P.2021 2019 2020 P.2021

Spectrum Assets
22.5 45 30 50 22.5 60 60 15 45 30 22 40
(MHz)
850 1800 2100 2300 Total 147.5 MHz Total 142.5 MHz Total 90 MHz Total 62 MHz
MHz MHz MHz MHz

Market positioning • Best coverage and network quality - especially • The best data experience with various • Dual brand strategy • Alternative provider for youth segment
in remote areas bundling packages at competitive price XL: Professional users with active digital lifestyle
• Premium service pricing points AXIS: Youth segment • Pioneer of e-SIM service in Indonesia

Current development • Commercial launch of 5G in 11 cities • Commercial launch of 5G in 3 cities • Commercial launch of 5G in 13 cities • Currently testing 5G adoption within
• Expansion of VoLTE service in 230 • Migration of existing 3G network • Continued expansion of 4G network in rural certain sectors in several cities
cities/districts infrastructure to LTE 4G geographies

3 Wellington Capital Sources : WCA analysis; Company Report

Advisory
The Mobile Telecoms Industry in Indonesia is changing due to consolidation
Indosat Ooredoo Hutchison is now the clear #2 MNO in Indonesia – well ahead of XL Axiata in revenue terms

FY 2020 | Pre-Merger 1H 2021 | Post-Merger

Revenue Revenue
IDR Tn IDR Tn

100 100

75 75

50 50
87
43
25 25
6.9
28 26
15 9 15 13
0 - - - - 0 - - - 5

Revenue
Share 53% 17% 16% 9% 5% 52% 26% 16% 6%

4 Wellington Capital Sources : WCA analysis; Company Report

Advisory
However, XL Axiata still outperforms Indosat Ooredoo Hutchison in selected key metrics
EBITDA margin performance and Average Revenue Per User (ARPU) yield illustrate the underlying strength and stability of XL Axiata

FY 2020 | Pre-Merger 1H 2021 | Post-Merger

EBITDA Margin EBITDA Margin
% %
100% 100%

80% 80%

60% 60%

40% 40%
58.7% 58.7%
50.2% 50.0%
20% 40.9% 20% 37.8%
25.8% 32.4% 33.0%

0% 0% Estimate

ARPU 50 ARPU 50
IDR k IDR k
40 40

30 30
44.6 45.0 20 44.0
20 36.0 35.6 36.0
31.9 28.0 28.1
10 10
0 0
Estimate 1Q 2021

5 Wellington Capital Sources : WCA analysis; Company Report

Advisory
Competitive intensity is increasing in the Fixed Broadband Services market
With revenue mix for MNOs continuing to shift towards data services, operators are increasingly targeting the home internet access market.
As a consequence, the dynamics between the MNOs and the incumbent ISPs are changing.

MNOs Non-MNOs

Owners

Brand

Service 2015 2020 2016 2017 2018 2000 2007 2013 2015
Launch

Target
Market1

Pricing2 Mid-market Budget Mid-market Budget Premium Premium Premium Mid-market Premium

<N/A> subs 859,000 subs 301,000 subs 210,000 subs

Customer 8.3 m 250,000 <100,000 116,000 1,000
Base 1.1 m 2.7 m 1.5 m 2.0 m
subs subs subs subs subs
home passes home passes home passes home passes

Speed
Score 17.78 28.02 26.38 20.96 16.69 40.66 16.51 N/A 35.63
(Mbps)
[1] Retail [2] Budget: < IDR 50K/month
6 Wellington Capital Sources : News; McKinsey Report, Ookla Mid-market: starts from IDR 150K/month
SME
Premium: starts from IDR 300K/month
Advisory
Corporate
The merger of Indosat Ooredoo and Hutchison Tri signals the move towards industry consolidation
and highlights the challenges of 5G rollout
Notable points from the merger Comparison: Indosat Ooredoo/Tri merger vs. XL/Axis acquisition

1. Spectrum from the merger is fully retained

 The Omnibus Law allows the merged entity 2014 2021
150 to retain all combined spectrum
 Following consolidation, the company will
865 Mn 6,000 Mn
100
Transaction
50 have access to 142.5 MHz spectrum size (USD)
0 bandwidth
850 MHz 1800 MHz
2100 MHz 2300 MHz  ISAT is now the 2nd largest spectrum owner,
just behind Telkomsel Subscriber 23.3% 28.4%
market share
per 2013 per 2020
2. Change in scale and scope
 The combined customer base comprises 100 60
15
million active subscribers (c. 28% market share) 7% 30 110
Spectrum
 ISAT is now ranked as a the clear #2 in the 17% ownership
28% 2014 2021
market, with XL and Smartfren falling behind change (MHz)
Spectrum acquired: 15 MHz Spectrum acquired: 60 MHz
 The merged entity now has the resources to Spectrum rescinded: 20 MHz
scale up the existing 4G network and to 48%
2013 2020
accelerate 5G rollout
Financial 63
3. Trigger for further market consolidation performance
(IDR Tn)
16
2
39 8 28 15
52

 The Indosat-Hutchison consolidation increases the Revenue Asset Revenue Asset

competitive pressure on both XL and Smartfren, each
faced with the task of developing a critical 5G presence
 A merger between XL and Smartfren merger is the likely
scenario, enabling the merged entity to provide a credible
alternative in an upcoming 3-player market
7 Wellington Capital Sources : WCA analysis; Company Annual Report; News
Advisory
 Events Objectives Impact
The Telco Industry in
Indosat – Tri merger • Operational synergies deliver benefits for
Indonesia is customers, partners and shareholders
• Merged entity becomes the clear #2
MNO after Telkomsel
maturing at pace • Cost efficiencies for network build and • ISAT credit rating is downgraded due
operations to debt guarantees from Ooredoo
• Accelerated 5G service rollout parent company being eliminated

MNOs
Market consolidation, a more XL Axiata negotiating the • Develop and expand access to enterprise • XL ranks 2nd in fixed broadband
permissive regulatory acquisition of Link Net sector subscriber share upon acquiring
• Strengthen XL’s position as a full service Linknet
environment and the advent • Synergy with Linknet’s fiber business
of 5G technology are the operator, especially in fixed broadband
and enterprise account base
primary drivers of this
Telkomsel-XL and • Provide LTE 4G network access to
change government operational • Wider coverage for Telkomsel and XL
communities in 7,903 villages located in
co-operation (KSO) remote and unserved geographic areas • Enhancement of CSR programs
• Improved connectivity in rural areas.
Re-farming of 2.3 GHz • Realigning spectrum assets into contiguous
spectrum frequency blocks to improve capacity allocation and
• Optimum spectrum utilization
completed in September throughput performance
2021 (i.e. Telkomsel and Smartfren)

Digital Road Map • Ensure greater equity in digital infrastructure • Near-ubiquitous network access
2021-2024 • Accelerate national digital transformation • Greater empowerment of MSMEs
Government

• Improve MNO business eco-system

Omnibus Law • Strengthen mechanisms to ensure sharing
• Supportive environment for ongoing
of active and passive infrastructure assets
Source: Company Publication; Kominfo.co.id; industry consolidation
Omnibus Law • Remove FDI limitation for the telco industry • Enhance investment prospects

Analog Switch-Off (ASO) • Re-allocate 700 MHz for 4G and 5G • Optimization of spectrum allocation
8 Wellington Capital November 2022 networks for mobile broadband services
Advisory
The Enablement of Digital Transformation is a critical focus for the MNOs
Each MNO is aiming to deliver extreme value to their respective customer bases through hyper-personalized services and loyalty programs – powered
increasingly by data analytics capabilities and artificial intelligence smarts

Data Analytics Platform-

New Lines of Business New Digital Channels
Partnerships

MNOs provide
seamless access
Fixed Wireless
Broadband
Digital Service
Provider for Gen Z
Specialized services via
for corporations and
SMEs digital apps
to a broad array of
content categories
and
functionality
Specialized services
Fixed Wired (optic
fiber) Broadband
Digital Service
Provider for Gen Z for corporations and domains
SMEs

OTT
Services
Fixed Wired and Digital Service Specialized services
Wireless Broadband Provider for Gen Z for corporations and
SMEs Gaming and
My XL
Entertainment

E-wallet/
Wifi Modem Digital Service Specialized services e-Payment
Provider with e-Sim for corporations and
SMEs
services

Create hyper-personalized
Re-branding for specific Enhance customer engagement and
offers and AI-supported services for
market niches loyalty
micro segments

9 Wellington Capital Sources : WCA analysis; McKinsey Report

Advisory
 The behavior of
Internet users has
changed
Changing Behavior of MNO-led Initiatives Performance Impact
dramatically during Broadband Users
the COVID-19
pandemic. Home-based activities are
driving broadband demand
5.0

Thousands
Strategic collaboration 4.0
with the Government

6.6
3.0 1H 2020
‘Learn from Home’ internet
access quotas; 2.0 1H 2021

Learn Work Shopping Data Usage

3.1

3.0
This phenomenon is Enhanced broadband Traffic1.0

4.2

2.2

2.2
presenting new opportunities …from Home
infrastructure in rural -
(in thousand petabyte)
areas, etc. Telkomsel Indosat XL
to all MNOs in Indonesia Growth 55.6% 40.3% 33.4%

Impacts 200.0
Capex allocation to
increase capacity of 150.0
+ 73.7% existing infrastructure 1H 2020
to 202.6 million users 100.0

169.2
Internet 1H 2021
Users 50.0

160.1

60.3
57.2

55.7

56.8
Targeted marketing Subscribers
(in million people)-
14% from total spending; programs
‘Pandemic’-related
Telkomsel Indosat XL
Growth 5.4% 5.1% 1.9%
Internet Ranked 3rdafter foodstuffs and packages for all market
Spending healthcare spending segments impacted by
COVID-19 70.0

Thousands
Source: BPS, We Are Social (2021); Google
+ 53 mins Fixed broadband
50.0
to 8 hours 52 mins 1H 2020

69.5
Mobility Report (2021); Duration service expansion 30.0 1H 2021
Targeting end-user

66.9

13.5

15.0

13.1

13.0
10.0
Revenue
+ 6% in residential areas segments located in
residential areas and (in billion rupiah)
10 Wellington Capital -10.0 Telkomsel Indosat XL

Advisory Mobility
- 17% in CBD areas multi-occupancy buildings Growth 3.9% 11.4% -0.8%

Concentration
 ASEAN peer markets: Mobile Broadband Penetration (2020; %)
Comparative .
Singapore 132% 29%
penetration of
mobile and fixed Malaysia 102% 27%

broadband 4G/LTE
Thailand
services across
88% 47% 6% GSM

ASEAN Indonesia 54% 42% 31%

3G

Fixed broadband penetration Vietnam 36% 47% 53%

in Indonesia is amongst the
lowest in ASEAN at < 4% Philippines 32% 32% 94%
nationwide.
0% 20% 40% 60% 80% 100% 120% 140% 160% 180%
Geographic and administrative
barriers are major constraints
on network infrastructure ASEAN peer markets: Fixed Broadband Penetration (2020; %)
rollout. .
Singapore 26.70%

Vietnam 17.20%

Thailand 16.60%

Malaysia 10.40%
Source: Telegeography; World Bank
Indonesia 3.90%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

11 Wellington Capital
Advisory
*) “0%” means the data from respectable countries aren’t available
 ASEAN peer markets : Fixed Broadband Throughput (August 2021; in Mbps)
Throughput
.
speeds for both Singapore 262.20
fixed and mobile
broadband Thailand 221.00

services in Malaysia 103.28

Indonesia are the
lowest across Vietnam 75.30

peer markets in Philippines 72.56

ASEAN
Indonesia 26.95

The vast majority of 0.00 50.00 100.00 150.00 200.00 250.00 300.00
Indonesian users favour
mobile broadband services, ASEAN peer markets : Mobile Broadband Throughput (August 2021; in Mbps)
due to the superior versatility
.
and convenience offered.
The availability of more Singapore 91.75
affordable and flexible data
Thailand 49.37
packages is also a major
consideration for Indonesian Vietnam 41.16
consumers.
Philippines 33.77
Source: Speedtest Global Index
Malaysia 29.14

Indonesia 21.96
12 Wellington Capital
Advisory
0.00 50.00 100.00 150.00 200.00 250.00 300.00
5G deployment is emerging as the major battleground for the MNOs in Indonesia
5G technology is being introduced on a limited basis, available currently in selected Tier 1 cities.
Telkomsel Indosat XL Smartfren

Status Commercial operations Commercial operations Commercial operations Commercial trials

(May 2021) (June 2021) (August 2021) (June 2021)
1.8 GHz w/ standalone spectrum Trial #1 @ 28 GHz
Spectrum 2.3 GHz w/ standalone spectrum 1.8 GHz w/ DSS implementation
2.1 GHz w/ DSS implementation Trial #2 @ 26 GHz
 Sustain a market leadership position  Utilize 5G technology as the foundation  Build a scalable 5G ecosystem,  Manage technology partnerships
through accelerated implementation of for building a world-class digital including an integrated fiber network with equipment vendors and network
5G technology telecoms and internet company. infrastructure services providers
 Leverage 2.3 GHz spectrum to provide  Develop strategic vendor relationships  Collaborate with leading technology - Telenity/ZTE
Strategic greater capacity and throughput with leading infrastructure partners partners to provide a robust supply  Utilize newly re-farmed 2300 MHz
Imperatives  Develop private 5G applications for the (Nokia/Ericsson/Qualcomm) chain network for 5G devices spectrum to harmonize network
enterprise sector  Align 5G service area rollout with  Deliver marketing programs to inform expansion programs
 Migrate existing customers to 5G with established patterns of high mobile primary target segments of the benefits - Existing 4G LTE coverage
attractive price promotions data consumption of 5G access - Planned 5G services roll-out

5G Deployment Map
Medan

Batam Total Cities

Riau 11

Papua 5
Balikpapan
8
Banjarmasin 2
Source: Company Website; News Makassar
Subang
Greater Jakarta Solo Surabaya

Denpasar
Bandung
13 Wellington Capital Yogyakarta
Advisory
The industry continues to address the technical and commercial challenges associated with the deployment
of 5G technology

Barriers Latest Update

 Legacy regulations and current policy provisions are  The Omnibus Law encourages active and passive infrastructure
Roll-out slowing the utilization of small cell clusters in the rollout of 5G sharing, which allow small cells to be installed in buildings, on
1 coverage - especially in dense urban areas. electricity poles and other ‘street furniture’.
Challenges  Large scale 5G implementation programs require high capex  Industry consolidation will drive capex and opex efficiencies as a
commitments due to the inherent cell density characteristics stimulus to accelerating nationwide 5G deployment.

 Passive infrastructure sharing regulations allow the installation

 Provision of fiber backhaul and fronthaul capacity to support
Fiber of BTS fiberization/fronthaul capacity in 3rd party facilities.
core 5G network infrastructure – within all geographic sectors
2 Infrastructure across the archipelago (viz. dense urban, metropolitan, rural,
 MNOs are testing wireless broadband infrastructure as a
fiber-based backhaul alternative, thereby enabling them to expand
and remote areas).
coverage in rural areas.

 The competition for low-to-mid-band spectrum in Indonesia  The Analog Switch Off (ASO) is intended to reallocate 700 MHz
Spectrum has raised auction price levels and may affect the penetration spectrum for both 4G and 5G networks.
3 and coverage of 5G technology in the short to medium term.  Re-farming of 2.3 GHz spectrum frequency has been completed
Availability  Aggregate spectrum allocation of 2,047 MHz is required to in order to enhance capacity provision and throughput speeds
support 5G, while the current allocation is just 737 MHz.  The 3.5 GHz band is currently reserved for satellite transmission.

 Several manufacturers are introducing 5G-compatible

Device  Compatibility and inter-working of all device categories with
4 Availability 5G standards
smartphones in Indonesia, but the range of devices is still limited
due to the immaturity of the market

 The Indonesia Digital Road Map 2021-2024 comprises five policy

 The development of the 5G ecosystem in Indonesia is still in
components: 1) Regulation; 2) Availability of radio frequency
5G progress and does not yet support the mass consumer
5 Eco-system market, as well as the delivery of private and public enterprise
spectrum; 3) Efficient and adaptable business operating models; 4)
Adequate infrastructure; and 5) Commercial readiness (viz. end-
applications
user devices, eco-system, and digital talent).

14 Wellington Capital Sources : News, Ministry of Communications and Informatics, WCA analysis
Advisory
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Wellington Capital
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