No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa Capital Markets and accordingly this report and any part of its content may not be distributed or made available by any means within Malaysia.

Important disclosures, including any required research certifications, are provided on the last two pages of this report.

Ramakrishna Maruvada (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com

What's new In an unusually strong message, Maxis Berhad (Maxis) has said it will be ‘uncompromising’ in defending its market share in 2012.

What's the impact Maxis’ warning appears to have been triggered by market-share loss: in the past two years, Maxis has lost 3.2pp in revenue share, mainly to DiGi.com (Digi). Maxis has already started making good on its threat: it signalled higher marketing expenses in 1Q12 and launched attractive packages for international calls. While we do not expect an imminent across-the-board deterioration in tariffs – as all the Malaysia operators we cover are unlikely to want to reduce their dividend payouts – we foresee increases in competitive intensity in segments where Digi has been traditionally strong: the migrant worker and youth markets. We saw

a similar situation in Singapore in 2006, when Singapore Telecom (SingTel), faced with weak operational prospects, challenged StarHub’s dominance in the migrant-worker segment.

What we recommend We are cutting our 2012-14 EBITDA forecasts by 2-4% and lowering our DCF-based six-month target price to RM3.63 (from RM3.78). We are downgrading our rating to Underperform (4) (from Hold [3]) as: 1) valuations are rich with the stock trading 2SD above its past-six-year average, 2) our new dividend yield forecast of 4-5% over 2012-14 does not appear compelling, and 3) the prospect of a special dividend (of up to RM0.55/share) is unlikely to materialise in the near term due to balance-sheet constraints.

How we differ Given that the company delivered results ahead of market expectations over the past two years, we believe the current share price factors in a scenario where this continues to be the case. For example, we estimate that Digi’s share price is discounting a 2011-14 EBITDA CAGR of 9% (our forecast: 6%). The likelihood of upward revisions to our and the Bloomberg-consensus EBITDA

forecasts appears low given the likely increase in competitive pressure. Forecast revisions (%) Year to 31 Dec 12E 13E 14E Revenue change (0.5) (1.0) (1.0) Net-profit change 0.3 (0.7) (4.2) EPS change 0.3 (0.7) (4.2) Source: Daiwa forecasts

Share price performance

2.4

2.9

3.4

3.9

4.4

Feb-11 May-11 Aug-11 Nov-11 Feb-1290

110

130

150

170

DiGi.Com Bhd (LHS)Relative to FBMKLCI (RHS)

(RM) (%)

12-month range 2.58-4.16 Market cap (US$bn) 10.30 Average daily turnover (US$m) 8.90 Shares outstanding (m) 7,775 Major shareholder Telenor Group (49.0%) Financial summary (RM) Year to 31 Dec 12E 13E 14E Revenue (m) 6,480 6,801 7,029 Operating profit (m) 1,736 2,288 2,554 Net profit (m) 1,342 1,775 1,910 Core EPS 0.173 0.228 0.246 EPS change (%) 7.1 32.2 7.6 Daiwa vs Cons. EPS (%) (1) 4 1 PER (x) 23.1 17.5 16.2 Dividend yield (%) 4.3 4.3 4.6 DPS 0.173 0.171 0.184 PBR (x) 25.0 23.0 22.4 EV/EBITDA (x) 10.1 9.6 9.3 ROE (%) n.m. n.m. n.m. Source: Bloomberg, Daiwa forecasts

Telecommunication services / Malaysia

27 February 2012

DiGi.Com Bhd DIGI MK

Target price: RM3.78 → RM3.63 Up/downside: -9.0% Share price (24 Feb): RM3.99

Maxis threat: real or rhetoric?

• Maxis signals aggression in the areas where Digi is dominant: the migrant worker and youth markets

• We are cutting our 2012-14 EBITDA forecasts by 2-4% • Rating downgraded to Underperform

How do we justify our view?How do we justify our view?

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 2 -

Key assumptionsYear to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Total mobile subs (m) 6.41 7.06 7.72 8.77 9.92 10.78 11.55 12.28 Subscriber net add (m) 1.10 0.65 0.66 1.05 1.16 0.86 0.77 0.73 Blended ARPU (Local curr.) 59.0 59.0 55.0 52.0 50.0 49.8 48.5 47.1

Profit and loss (RM m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Service revenue (voice) 3,550 3,905 3,939 4,028 3,988 3,948 3,908 3,869 Service revenue (data) 813 909 971 1,172 1,631 2,232 2,592 2,860 Others 0 0 0 206 345 300 300 300 Total revenue 4,363 4,814 4,910 5,406 5,964 6,480 6,801 7,029 Other income 13 12 9 33 11 20 20 20 COGS (889) (1,091) (1,171) (1,404) (1,575) (1,724) (1,836) (1,898) SG&A (730) (790) (781) (787) (787) (852) (895) (929) Other op. expenses (1,328) (1,411) (1,574) (1,620) (2,017) (2,188) (1,802) (1,669) Operating profit 1,429 1,535 1,393 1,628 1,596 1,736 2,288 2,554 Net-interest inc./(exp.) 17 12 (27) (31) (37) (15) (13) (7) Assoc/forex/extraord./others 0 0 0 0 0 0 0 0 Pre-tax profit 1,445 1,547 1,366 1,597 1,559 1,721 2,275 2,546 Tax (383) (406) (366) (419) (306) (379) (501) (637) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 1,063 1,141 1,000 1,178 1,253 1,342 1,775 1,910 Net profit (adjusted) 1,063 1,141 1,000 1,178 1,253 1,342 1,775 1,910 EPS (reported) (RM) 0.142 0.149 0.129 0.152 0.161 0.173 0.228 0.246 EPS (adjusted) (RM) 0.142 0.149 0.129 0.152 0.161 0.173 0.228 0.246 EPS (adjusted fully-diluted) (RM) 0.142 0.149 0.129 0.152 0.161 0.173 0.228 0.246 DPS (RM) 0.161 0.188 0.178 0.163 0.175 0.173 0.171 0.184 EBIT 1,429 1,535 1,393 1,628 1,596 1,736 2,288 2,554 EBITDA 2,110 2,171 2,125 2,401 2,764 3,036 3,172 3,273

Cash flow (RM m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 1,445 1,547 1,366 1,597 1,559 1,721 2,275 2,546 Depreciation and amortisation 681 636 731 773 1,167 1,300 884 720 Tax paid (353) (403) (347) (443) (496) (379) (501) (637) Change in working capital (114) 255 (89) 359 127 (564) 67 48 Other operational CF items (56) 15 20 69 79 15 13 7 Cash flow from operations 1,604 2,050 1,681 2,356 2,436 2,093 2,738 2,684 Capex (678) (897) (717) (641) (604) (713) (680) (703) Net (acquisitions)/disposals 0 0 0 0 0 0 0 0 Other investing CF items 1 (10) 0 11 1 0 0 0 Cash flow from investing (678) (906) (717) (630) (603) (713) (680) (703) Change in debt 0 98 523 75 (350) 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (1,237) (1,501) (1,376) (1,353) (1,190) (1,512) (1,667) (1,876) Other financing CF items 18 13 (13) (28) (47) (15) (13) (7) Cash flow from financing (1,219) (1,390) (865) (1,305) (1,586) (1,527) (1,679) (1,883) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (292) (246) 99 420 248 (147) 379 98 Free cash flow 926 1,154 964 1,715 1,832 1,380 2,058 1,982 Source: Company, Daiwa forecasts

Financial summary

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 3 -

Balance sheet (RM m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 577 331 430 851 1,098 952 1,330 1,429 Inventory 9 17 13 43 68 71 75 77 Accounts receivable 352 421 420 437 457 518 544 562 Other current assets 0 10 11 0 0 0 0 0 Total current assets 937 779 874 1,331 1,623 1,541 1,949 2,068 Fixed assets 2,677 2,870 2,896 2,960 2,509 2,061 1,998 2,121 Goodwill & intangibles 251 994 950 846 732 592 452 312 Other non-current assets 13 12 12 0 0 0 0 0 Total assets 3,877 4,656 4,732 5,137 4,863 4,194 4,399 4,501 Short-term debt 100 298 150 0 150 150 150 150 Accounts payable 1,180 1,494 1,429 1,838 1,968 1,426 1,496 1,546 Other current liabilities 446 476 447 433 475 518 544 562 Total current liabilities 1,726 2,267 2,026 2,272 2,593 2,094 2,190 2,259 Long-term debt 200 100 772 1,023 578 578 578 578 Other non-current liabilities 374 392 413 495 281 281 281 281 Total liabilities 2,300 2,759 3,211 3,790 3,452 2,953 3,049 3,117 Share capital 90 770 770 770 770 261 261 261 Reserves/R.E./others 1,487 1,128 752 577 642 981 1,089 1,123 Shareholders' equity 1,578 1,897 1,521 1,347 1,411 1,242 1,350 1,383 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 3,877 4,656 4,732 5,137 4,863 4,194 4,399 4,501 EV 29,644 30,716 31,509 31,171 30,652 30,799 30,420 30,322 Net debt/(cash) (277) 67 492 172 (370) (224) (602) (701) BVPS (RM) 0.210 0.247 0.196 0.173 0.182 0.160 0.174 0.178

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) 19.4 10.4 2.0 10.1 10.3 8.7 5.0 3.4 EBITDA (YoY) 24.5 2.9 (2.1) 13.0 15.1 9.9 4.5 3.2 Operating profit (YoY) 33.9 7.4 (9.2) 16.8 (2.0) 8.7 31.8 11.6 Net profit (YoY) 31.9 7.4 (12.3) 17.7 6.4 7.1 32.2 7.6 EPS (YoY) 31.9 4.8 (13.3) 17.8 6.3 7.1 32.2 7.6 Gross-profit margin 79.6 77.3 76.2 74.0 73.6 73.4 73.0 73.0 EBITDA margin 48.4 45.1 43.3 44.4 46.3 46.9 46.6 46.6 Operating-profit margin 32.7 31.9 28.4 30.1 26.8 26.8 33.6 36.3 ROAE 63.8 65.7 58.5 82.1 90.9 n.m. n.m. n.m. ROAA 26.6 26.7 21.3 23.9 25.1 29.6 41.3 42.9 ROCE 72.7 73.6 58.8 67.7 70.8 84.5 n.m. n.m. ROIC 84.6 69.4 51.3 68.0 100.2 131.5 202.2 267.8 Net debt to equity net cash 3.5 32.3 12.8 net cash net cash net cash net cash Effective tax rate 26.5 26.3 26.8 26.2 19.6 22.0 22.0 25.0 Accounts receivable (days) 27.2 29.3 31.3 28.9 27.4 27.5 28.5 28.7 Payables (days) 103.6 101.4 108.6 110.3 116.5 95.6 78.4 79.0 Net interest cover (x) n.a. n.a. 51.6 52.7 43.2 115.1 180.2 341.3 Net dividend payout 113.8 126.6 138.3 107.5 108.6 100.0 75.0 75.0 Source: Company, Daiwa forecasts

Company profile DiGi.Com Berhad (Digi) is the third-largest telecoms company in Malaysia in terms of cellular subscribers in Malaysia. It derives the bulk of its revenue from the provision of mobile-communication services. Norway's Telenor Group is the majority shareholder, with a 49% stake.

Financial summary continued …

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 4 -

Maxis threat: real or rhetoric?

Digi’s share-price outlook is negative as the stock appears ‘priced for perfection’.

The nature of Maxis’ threat

At its 4Q11 results briefing, Maxis (MAXIS MK, RM5.99, Underperform [4]) said it would be ‘uncompromising’ in defending its market share in 2012 and would compete aggressively to achieve this. The words used by the management were unusually strong, and it is clear to us the comments have been motivated by the steady decline in the company’s market position over the past few years. For example, Maxis lost 3.2pp in wireless revenue share over the 4Q09-4Q11 period. Digi was the primary beneficiary, gaining 2.9pp in revenue share over the same period. Malaysia: wireless-revenue shares

20

25

30

35

40

45

50

Mar-0

9

Jun-0

9

Sep-0

9

Dec-0

9

Mar-1

0

Jun-1

0

Sep-1

0

Dec-1

0

Mar-1

1

Jun-1

1

Sep-1

1

Dec-1

1

Maxis Celcom Digi

Revenue market share (%)

change from 4Q09 to 4Q11Maxis -3.2 p.p, Celcom +0.3 p.p, Digi +2.9 p.p

Source: Companies, Daiwa estimates

The key questions for investors now are: 1) how aggressively will Maxis be, and 2) what effect will it have on the players in the industry. Rhetoric aside, we believe there are practical constraints that will limit the extent to which Maxis can be aggressive. This is because the company, like all the other Malaysia operators we cover, pays healthy dividends and would in all likelihood be wary of endangering its dividend outlook. For example, in 2011, Maxis declared RM3bn in dividends (RM0.40/share),

which is 10% higher than the free cash flow it generated for the year. As such, it appears to us that Maxis will be selective in its approach to competition. We expect the company to do the following: 1) increase its sales and marketing expenditure across all the key market segments, 2) lower the premium on tariffs – Maxis’ tariffs are generally higher than those of its competitors due to it being a premium brand – in certain market segments such as the Internet, 3) engage in aggressive price competition in segments where it has low market shares (eg, the migrant-worker segment).

Actions taken by Maxis

Maxis’ talk of aggressive action does not appear to be just an empty threat, as we are already seeing some changes on the ground. The company recently: 1) adjusted certain tariffs in the Internet segment to match those of its competitors, and 2) unveiled ‘hot ticket’ promotions that bundle a lot of freebies and value for international calls made to some destinations, such as the Philippines, Indonesia, and Bangladesh. Management also said that: 1) the high level of sales and marketing expenditure it incurred in 4Q11 was continuing into 1Q12, and 2) it has amended its offerings in the mobile-roaming segment.

Implications for the industry

We believe the initiatives already taken (or currently being contemplated) by Maxis will take time to achieve their goal: a reversal of the trend of losing market share. Given that the stock is trading at what we regard as rich valuations, we maintain our Underperform rating on Maxis. The impact on Celcom and Digi will depend on the extent and in what manner they respond to Maxis’ actions. We expect Digi to adopt a wait-and-see attitude to mitigate the short-term impact. We believe Celcom will also be affected negatively, but to a lesser extent than Digi. We do not yet foresee a risk of across-the-board price cuts in the industry, and believe the competitive pressure will increase only in some market segments (international calls, roaming, and mobile Internet). Maxis’ current predicament, its actions and likely competitor responses may mirror the events that transpired in the Singapore telecoms market over 2006-09, where incumbent SingTel managed to gain

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 5 -

footholds in market segments where it previously had a very small presence.

Implications for Digi

The experience of the Singapore operators shows us that penetrating the migrant-worker market takes time and requires a substantially different marketing effort than those used for conventional subscribers. For example, although SingTel launched its Hot 100 product in 3Q06, StarHub’s prepaid revenue was only affected in 1Q08, after it chose to respond to sustained price pressure from SingTel over the 2006-07 period. As such, it is not at once obvious to us the degree to which Digi’s 2012 revenue and costs might be affected. This will, to some extent, depend on when and in what manner Digi chooses to respond. The medium-term effects, however, appear to be a lot clearer. Given the strength of the terms it has used, we believe Maxis is unlikely to back off from being aggressive on prices in segments where it has low market share. Such a strategy, as the SingTel experience shows, should also benefit the instigator, even though the industry revenue-growth potential in this segment is likely to ease.

Why are we downgrading our rating before waiting for more evidence of a slowdown?

Even though it is too early to tell whether Maxis’ strategy will be successful, we think the company’s announcement and its recent actions in the IDD and Internet segments are enough for us to be concerned about our investment rating for Digi. This is because we believe the stock is ‘priced for perfection’.

Digi: management guidance vs. actual Year Revenue-growth Full-year Full-year guidance revenue growth YoY price performance 2008 High single-digit percentage 10.4% -12.1% 2009 Continued revenue pressure 2.0% 0.7%

2010 Above industry average of about 5% 10.1%

12.0%

2011 High single-digit percentage 10.6% 57.7% 2012E Mid-to-high single-digit

percentage Our forecast: 8.7%

(9.2% previously) YTD: 2.8%

Source: Company, Daiwa forecasts

In our view, a key factor that has contributed to Digi’s impressive share-price performance over the past two years has been management’s ability to deliver results above market expectations. For example, since 2008, the company has always exceeded the guidance it has issued at the start of the year.

Digi: share price vs. consensus 2012 EBITDA revisions

2,200

2,400

2,600

2,800

3,000

3,200

2.0

2.5

3.0

3.5

4.0

4.5

Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11

Price (LHS) Consensus 2012 EBITDA (RHS)Daiwa 2012 EBITDA (RHS)

(RM) (RM)

Source: Bloomberg, Daiwa

Given this track record, we believe the share price is already factoring in a scenario of a revenue-growth trajectory that is well ahead of management’s guidance. Such a scenario, we believe, is contingent on further market-share gains and a benign competitive outlook, a prospect made more difficult in light of Maxis’ threat to defend its market share. For example, we estimate that the shares are currently factoring in a 2011-14 revenue CAGR of 7.3% and the EBITDA margin improving by 2pp. This compares with our new forecast of a 5.6% revenue CAGR and 0.2pp EBITDA-margin improvement over the same period. In other words, we forecast a 5.8% CAGR in the EBITDA over 2011-14, while the market is currently factoring in an 8.8% EBITDA CAGR over the period. Digi’s valuations also appears rich to us: the stock is trading at 2SD above its past-six-year average. As such, we are lowering our rating from Hold to Underperform. Digi: historical 12-month forward EV/EBITDA

2 3 4 5 6 7 8 9

10 11

Jan-0

6Ap

r-06

Jul-0

6Oc

t-06

Jan-0

7Ap

r-07

Jul-0

7Oc

t-07

Jan-0

8Ap

r-08

Jul-0

8Oc

t-08

Jan-0

9Ap

r-09

Jul-0

9Oc

t-09

Jan-1

0Ap

r-10

Jul-1

0Oc

t-10

Jan-1

1Ap

r-11

Jul-1

1Oc

t-11

Jan-1

2

+2 stdev

+1 stdev

Mean

12M forward EV/EBITDA (x)

-1 stdev

-2 stdev

Source: Bloomberg, Company, Daiwa

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 6 -

Digi: historical 12-month forward PER

5 7 9

11 13 15 17 19 21 23 25

Jan-0

6Ap

r-06

Jul-0

6Oc

t-06

Jan-0

7Ap

r-07

Jul-0

7Oc

t-07

Jan-0

8Ap

r-08

Jul-0

8Oc

t-08

Jan-0

9Ap

r-09

Jul-0

9Oc

t-09

Jan-1

0Ap

r-10

Jul-1

0Oc

t-10

Jan-1

1Ap

r-11

Jul-1

1Oc

t-11

Jan-1

2

+2 stdev

+1 stdev

Mean

12M forward PER (x)

-1 stdev

-2 stdev

Source: Bloomberg, Company, Daiwa

Prospects for special dividends We believe Digi’s balance sheet needs to be restructured before the company’s theoretical capital-management potential can be realised. In theory, assuming the company can gear its balance sheet to 1.5x net debt/EBITDA by 2012, it could return RM4.3bn, or RM0.55/share (14% yield), to shareholders through capital-management initiatives. However, the full realisation of this potential is limited by the fact that its book value is only RM0.18/share. Thus, despite having an under-geared balance sheet (2011 net-cash position), we forecast annual dividend yields of only about 4-5% over the 2012-14 period. Digi’s management has said previously that it has engaged external consultants for advice on ways to restructure the balance sheet. While the declaration of special dividends remains a key risk to our bearish thesis, we are unsure how and in what timeframe the company can address the constraints imposed by the lack of reserves on its balance sheet. Our best assessment, given the complex nature of the issue, is that special dividends are unlikely in 1H12.

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 7 -

Key forecasts We expect ongoing aggressive pricing from Maxis in certain market segments to lower the medium-term revenue-growth potential that we see for Digi, which has a dominant presence in the youth and migrant worker markets. We also expect Digi’s traffic costs to increase in the medium term, as lower industry tariffs will likely boost the volume of international calls made. Sales and marketing costs are also likely to be higher than we expected initially. We are cutting our 2011-14 revenue CAGR forecast to 5.6% (vs. 6.0% previously), and forecast the EBITDA margin to rise by 0.2pp (vs. 1.5pp previously) over this period.

Digi: key forecasts (RM) 2011 2012E 2013E 2014E CAGR (2011-14E) Revenue 5,964 6,480 6,801 7,029 5.6 EBITDA 2,764 3,036 3,172 3,273 5.8 EBITDA margin (%) 46.3 46.9 46.6 46.6 0.2pp PBT 1,559 1,721 2,275 2,546 17.8 Net profit 1,253 1,342 1,775 1,910 15.1 Subscribers ('000) 9,920 10,783 11,553 12,284 Blended ARPU (RM) 50.0 49.8 48.5 47.1 Traffic costs (as a % revenue) 26.4 26.6 27.0 27.0 0.6pp Marketing costs (as a % revenue) 8.9 9.0 9.0 9.0 0.1pp Blended tax rate (%) 19.6 22.0 22.0 25.0 Operational cash flow 2,436 2,093 2,738 2,684 3.3 Capex (604) (713) (680) (703) Free cash flow 1,832 1,380 2,058 1,982 2.6 Source: Company, Daiwa forecasts

Changes to earnings forecasts We are cutting our 2012-14 EBITDA forecasts by 2-4%, as we are lowering our revenue and EBITDA margin assumptions for this period. In particular: 1) we are lowering our average revenue per user (ARPU) assumptions for 2012-14 by 0.5-1.0%, and 2) we are increasing our assumptions for traffic costs and sales and marketing expenditure by 0.3-0.7pp and 0.5 pp, respectively, over this period. We are also lowering our effective tax-rate assumptions for 2012-13 to 22% (from 25%). This is in line with the company’s guidance and reflects the company’s likely recognition of government tax incentives for its broadband business for those years, which we had not factored into our previous forecasts. Overall, we are raising our 2012 earnings forecast by 0.3%, but lowering our 2013-14 earnings forecasts by 0.7% and 4.2%, respectively.

Digi: key forecast changes (%) 2012E 2013E 2014F Revenue (0.5) (1.0) (1.0) EBITDA (2.2) (3.5) (3.5) EBITDA margin -0.8pp -1.2pp -1.2pp PBT (3.6) (4.5) (4.2) Net profit 0.3 (0.7) (4.2) Subscribers ('000) 0.0) 0.0 0.0 Blended ARPU (RM) (0.5) (1.0) (1.0) Traffic costs (as s a % revenue) 0.3pp 0.7pp 0.7pp Marketing costs (as s a % revenue) 0.5pp 0.5pp 0.5pp Blended tax rate -3pp -3pp 0pp Operational cash flow (0.3) (1.0) (3.3) Capex (0.5) (1.0) (1.0) Free cash flow (0.2) (1.0) (4.1) Source: Company, Daiwa forecasts

Changes to target price We are lowering our DCF-based six-month target price by 4%, driven largely by the 4% cut we have made to our 2014 free cash flow forecast. Investment risks The company’s announcement of capital-management initiatives beyond what we have factored into our DPS forecasts or its ability to continue to exceed its annual guidance could cause the share price to rise above our target price.

Stocks mentioned Singapore Telecom (SingTel) (ST SP, S$3.12, Hold [3]) StarHub (STH SP, S$2.92, Hold [3]) M1 (M1 SP, S$2.46, Hold [3]) Axiata Group Berhad (Axiata MK, RM5.15, Outperform [2]) Maxis Berhad (Maxis MK, RM5.99, Underperform [4]) Telekom Malaysia Berhad (T MK, RM5.08, Hold [3]) Celcom (not listed) is a wholly owned subsidiary of Axiata

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 8 -

Case study: the Singapore prepaid price war The Singapore operators’ experience over the 2006-09 period makes for a good case study as to how developments in Malaysia’s telecoms industry could unfold. The Malaysia and Singapore telecoms markets share many attributes: both are dominated by three players that have largely been predictable in their competitive behaviour; both offer generous dividends to their shareholders, and in both cases it is the dominant players that tried (or trying in the case of Maxis) to wrestle back market share by attacking the migrant-worker market. Migrant workers constitute an important part of Singapore’s prepaid customer base, perhaps more so than in Malaysia, where the vast majority of the general population prefers to use prepaid SIM cards. StarHub, one of the most recent entrants to the Singapore telecoms market, has focused on the migrant-worker segment since 2002 and within a few years has risen to become the dominant player (by market and revenue share) in this segment.

Key developments in the Singapore prepaid market

Date Key Developments Lowest industry

tariffs S$/min Feb-05 M1: launched free incoming calls 0.220 Jul-06 SingTel: launched Hot 100 bundle 0.062 Mar-07 SingTel: slashed prepaid tariff to 8-16cents/min (from 22cents/min) 0.034 Dec-07 StarHub: responded to SingTel with Happy 128 product 0.026 Dec-11 0.038 Source: Daiwa

Both M1 and SingTel have made several attempts to penetrate this market only to realise much later that the prepaid SIM segment requires completely different marketing and sales campaigns than the traditional post-paid market. For example, in 2005, SingTel targeted its sales efforts at the ‘student and home-maker’ market segments, using above-the-line newspaper advertisements. In 2006, Allen Lew, the current CEO of the SingTel Singapore business, took charge, and it was only then that the company realised that the prepaid SIM segment, which is dominated by migrant workers, requires a completely different marketing approach. SingTel launched the Hot 100

prepaid SIM bundle product in July 2006 and started marketing at shops frequented by migrant workers on their days off. It also organised special events (eg, the SingTel dormitory idol 2009) and has been marketing directly in the native languages of the foreign workers since 2006. The key takeaways of these marketing efforts that began in 2006 are:

Singapore prepaid segment: industry revenue growth and market shares

10

20

30

40

50

60

0

10

20

30

40

50

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

Revenue growth (LHS) SingTel (RHS)M1 (RHS) StarHub (RHS)

(%) Revenue share (%)Jul 06: SingTel launched Hot 100 productMar 07: SingTel slashed prices for Hot 100

Source: Companies, Daiwa estimates

1) It took more than a year following the initial launch of the Hot 100 product before SingTel’s efforts started to pay off in terms of market-share gains.

2) SingTel has since managed to reverse its weak market position in prepaid market.

Singapore prepaid market shares

20

25

30

35

40

45

50

1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

SingTel M1 StarHub

(%)

Source: Companies, Daiwa estimates

3) StarHub has behaved sensibly by not reacting to its competitors’ every move; its prepaid revenue in 4Q07 was 21% higher than 3Q06, the quarter when SingTel launched its attack; but its revenue fell on a QoQ basis in 1Q08, after it decided to match the competition in terms of pricing and product features, following sustained and focused price attacks by SingTel.

Telecommunication services / Malaysia DIGI MK

27 February 2012

- 9 -

StarHub: prepaid revenue and effective tariffs

0.00

0.05

0.10

0.15

0.20

0.25

0.30

30

40

50

60

70

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

Prepaid revenue (LHS) rev/min (RHS)

(S$m) (S$/min)StarHub: Tariff cuts were not elastic enough to boost revenue

Source: Companies, Daiwa estimates

4) The prepaid-industry pie expanded due to positive price elasticity during 2006-08, but the pace has become a lot more sluggish since 2009 due to low tariffs; StarHub’s run-away operational momentum in this segment until 2006 was completely arrested by 2009. For example, StarHub’s prepaid revenue in 4Q11 was below the level seen during 4Q07, the quarter when it decided to match the competition on price.

StarHub: prepaid revenue and group traffic expenses

FY05 FY06 FY07 FY08 FY09 FY10 FY11 Prepaid revenue (S$m) 160 215 261 244 259 264 249 % YoY 62 35 22 (7) 6 2 (5) Traffic costs (S$m) 179 204 239 242 266 262 247 % YoY 3 14 17 1 10 (2) (6) Source: Company

5) StarHub’s traffic costs over 2006-09 have also increased as a result of the huge increase in call volume, although it has been difficult to isolate the impact of this as the post-paid market segment still

accounts for a significant proportion of overall traffic costs.

6) Tariffs in the critical post-paid segment were not affected even as competitive pressures in the prepaid market intensified. SingTel increased its post-paid market share over 2006-11, though this was mainly as a result of the company entering into exclusive arrangements with Apple during the initial release of iPhone 3S in 2008.

Evolution of competition in the Singapore prepaid market

0

100

200

300

400

500

600

Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11

SingTel M1 StarHub

Minutes of Use (per sub/month)

Jul-Sep05 STH/ST matched freeincoming calls

Jul06:SingTelHOT 100

Mar07: SingTel tariffcut 22cents to 8/12cents/min

Dec07 StarHub responded to SingTel price cuts

Feb05: M1Free incomingcalls

Source: Companies, Daiwa

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Daiwa’s Asia Pacific Research Directory

Hong Kong

Regional Research Head Nagahisa MIYABE (852) 2848 4971 nagahisa.miyabe@hk.daiwacm.com

Regional Research Co-head Christopher LOBELLO (852) 2848 4916 christopher.lobello@hk.daiwacm.com

Head of Product Management John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com

Head of Thematic Research; Product Management Tathagata Guha ROY (852) 2773 8731 tathagata.guharoy@hk.daiwacm.com

Head of China Research, Chief Economist (Regional) Mingchun SUN (852) 2773 8751 mingchun.sun@hk.daiwacm.com

Macro Economics (Regional) Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com

Head of Hong Kong Research; Regional Property Coordinator; Co-head of Hong Kong and China Property; Property Developers (Hong Kong)

Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com

Automobiles and Components (China) Jeff CHUNG (852) 2773 8783 jeff.chung@hk.daiwacm.com

Head of Greater China FIG; Banking (Hong Kong, China) Grace WU (852) 2532 4383 grace.wu@hk.daiwacm.com

Banking (Hong Kong, China) Queenie POON (852) 2532 4381 queenie.poon@hk.daiwacm.com

Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Joseph HO (852) 2848 4443 joseph.ho@hk.daiwacm.com

Consumer, Pharmaceuticals and Healthcare (China) Hongxia ZHU (852) 2848 4460 hongxia.zhu@hk.daiwacm.com

Internet (Hong Kong, China) Alicia HU (852) 2532 4180 alicia.hu@hk.daiwacm.com

Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Eric CHEN (852) 2773 8702 eric.chen@hk.daiwacm.com

IT/Electronics - Semiconductor/IC Design (Taiwan) Ashley CHUNG (852) 2848 4431 ashley.chung@hk.daiwacm.com

Regional Head of Materials; Materials/Energy (Regional) Alexander LATZER (852) 2848 4463 alexander.latzer@hk.daiwacm.com

Materials (China) Felix LAM (852) 2532 4341 felix.lam@hk.daiwacm.com

Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Mark CHANG (852) 2773 8729 mark.chang@hk.daiwacm.com

Small/Medium Cap (Regional) John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com

Head of Solar Pranab Kumar SARMAH (852) 2848 4441 pranab.sarmah@hk.daiwacm.com

Transportation – Aviation, Land and Transportation Infrastructure (Regional) Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com

Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)

Dave DAI (852) 2848 4068 dave.dai@hk.daiwacm.com

Head of Custom Products Group; Custom Products Group Justin LAU (852) 2773 8741 justin.lau@hk.daiwacm.com

Custom Products Group Philip LO (852) 2773 8714 philip.lo@hk.daiwacm.com

Custom Products Group Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com

South Korea

Head of Research; Strategy; Banking/Finance Chang H LEE (82) 2 787 9177 chlee@kr.daiwacm.com

Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com

Banking/Finance Anderson CHA (82) 2 787 9185 anderson.cha@kr.daiwacm.com

Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com

Consumer/Retail Sang Hee PARK (82) 2 787 9165 sanghee.park@kr.daiwacm.com

IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com

Materials (Chemicals); Oil and Gas Jihye CHOI (82) 2 787 9121 jihye.choi@kr.daiwacm.com

Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com

Custom Products Group Shannen PARK (82) 2 787 9184 shannen.park@kr.daiwacm.com

Taiwan

Banking/Diversified Financials Jerry YANG (886) 2 8758 6252 jerry.yang@daiwacm-cathay.com.tw

Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8758 6247 y.kawashima@daiwacm-cathay.com.tw

IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw

IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8758 6248 alex.chang@daiwacm-cathay.com.tw

IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8758 6251 chris.lin@daiwacm-cathay.com.tw

India

Head of India Research; Pharmaceuticals and Healthcare Kartik A. MEHTA (91) 22 6622 1012 kartik.mehta@in.daiwacm.com

Deputy Head of Research; Strategy; Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com

All Industries Fumio YOKOMICHI (91) 22 6622 1003 fumio.yokomichi@in.daiwacm.com

Automobiles and Components Ambrish MISHRA (91) 22 6622 1060 ambrish.mishra@in.daiwacm.com

Capital Goods/Utilities Saurabh MEHTA (91) 22 6622 1009 saurabh.mehta@in.daiwacm.com

FMCG; Consumer Percy PANTHAKI (91) 22 6622 1063 percy.panthaki@in.daiwacm.com

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Singapore

Head of Singapore Research Tony DARWELL (65) 6321 3050 tony.darwell@sg.daiwacm.com

Quantitative Research Josh CHERIAN (65) 6499 6549 josh.cherian@sg.daiwacm.com

Quantitative Research Suzanne HO (65) 6499 6545 suzanne.ho@sg.daiwacm.com

Banking (ASEAN) Srikanth VADLAMANI (65) 6499 6570 srikanth.vadlamani@sg.daiwacm.com

Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH (65) 6499 6548 adrian.loh@sg.daiwacm.com

Property and REITs David LUM (65) 6329 2102 david.lum@sg.daiwacm.com

Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com

Thematic Research Amy CHEW (65) 6321 3085 amy.chew@sg.daiwacm.com

Philippines

Head of the Philippines Research; Strategy; Capital Goods; Materials Rommel RODRIGO (63) 2 813 7344 ext 302 rommel.rodrigo@dbpdaiwacm.com.ph

Economy; Consumer; Power and Utilities; Transportation – Aviation Alvin AROGO (63) 2 813 7344 ext 301 alvin.arogo@dbpdaiwacm.com.ph

Property; Banking; Transportation – Port Danielo PICACHE (63) 2 813 7344 ext 293 danielo.picache@dbpdaiwacm.com.ph

- 12 -

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Office / Branch / Affiliate Address Tel Fax

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- 13 -

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- 14 -

United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. 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The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Capital Markets Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association