Flashnote

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Global Research

Telecoms, Media & Technology

Diversified Telecoms
Equity – Singapore
M1 LTD (M1 SP)
Neutral N: 2010 results – smartphone and payout surprise
Target price (SGD) 2.47  4Q10 revenues beat estimates thanks to strong smartphone
Share price (SGD) 2.49 sales but EBIT and profits missed consensus
Potential return (%) 3.7
Performance 1M 3M 12M
 A special cash dividend brought full year payout to a better
Absolute (%) 6.9 10.7 26.4
Relative^ (%) 3.5 8.3 13.3 than expected 100% level
Index^ STRAITS TIMES IDX
RIC MONE.SI  We increase target price to SGD2.47 (vs SGD2.31) on higher
Bloomberg M1 SP
forecasts and maintain our 90% payout assumption
Market cap (USDm) 1,747
Market cap (SGDm) 2,242
Enterprise value (SGDm) 2542
Free float (%) 36 4Q10 ended strong on revenues and payout. M1’s 4Q10 revenues at SGD263MM
Note: (V) = volatile (please see disclosure appendix)
(+7% qoq, +21% yoy) beat both HSBC and Bloomberg consensus estimates by 11% and
12%, respectively, on the back of another surge in smartphone sales. Furthermore, a
19 January 2011 special cash dividend of SGD0.035 on top of a final dividend of SGD0.077 also beat
Luis Hilado* estimates with a full year payout of 100% against 80% minimum commitment.
Analyst
The Hongkong and Shanghai Banking Mixed bag for 4Q10 EBITDA and profits. EBITDA at SGD77MM (-2% qoq and yoy)
Corporation Limited, Singapore Branch
+65 6239 0656 and reported profit at SGD38MM (-5% qoq, +1% yoy) were 5% and 8% higher than
luishilado@hsbc.com.sg HSBC, respectively, but 2% and 4% below consensus. We had assumed a higher level of
Tucker Grinnan* opex on the back of NBN start up costs.
Analyst
The Hongkong and Shanghai Banking Profit upgrades. We have raised our handset sales assumptions as iPhone demand
Corporation Limited
852 2822 4686
appears to remain strong as M1’s competitors even experience shortages this year. We
tuckergrinnan@hsbc.com.hk have tamed down some of our opex assumptions such as G&A and traffic expenses. As
Rajesh Raman* such, our 2011e and 2012e profit forecasts are raised by 8% and 9%, respectively. We
Associate, Bangalore have maintained our earlier assumptions that recurring payout will be raised to 90%
starting this year.
View HSBC Global Research at:
http://www.research.hsbc.com 2011e driven by NBN. We have maintained our NBN revenue forecasts and expect the
*Employed by a non-US affiliate of gains in broadband (BB) market share by M1 to be the main driver for this year’s revenue
HSBC Securities (USA) Inc, and is not
registered/qualified pursuant to FINRA growth. To recall, we forecast M1 to take a c15% share of the BB market by 2012e.
regulations
Meanwhile, given the nature of M1’s iPhone accounting we anticipate that postpaid
Issuer of The Hongkong and Shanghai
report: Banking Corporation Limited service revenues will stabilize before resuming growth in 2012e+.

MICA (P) 142/06/2010 Our DDM based target price is raised by 7% to SGD2.47 as our profit upgrade drives
MICA (P) 193/04/2010
dividends higher. Combined with the 4Q10 cash dividends, this is a potential return of
Disclaimer & 3.7%. Our DDM is based on a 10-year average payout of 90%, a terminal growth of 0.5%
Disclosures and a COE of 8%. Irrational competition is the main risk to such target while an even
This report must be read better payout would provide an upside risk. M1 trades at a 2011e PE of 13.8x; a new high
with the disclosures and on its 12-month forward PE band.
the analyst certifications in
the Disclosure appendix,
and with the Disclaimer,
which forms part of it
 M1 LTD (M1 SP)
Diversified Telecoms abc
19 January 2011

Financials & valuation

Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (SGDm) Mobile Subscribers ('000) 1,911 1,973 2,028 2,081
Blended ARPU (SGD) 41 44 44 44
Revenue 982 1,023 1,022 1,024 Operating Expenses 785 819 806 798
EBITDA 313 324 335 345 EBITDA 313 324 335 345
Depreciation & amortisation -117 -121 -119 -119 Capex 120 125 129 126
Operating profit/EBIT 196 204 216 226 DPS (SG Cents) 18 16 17 18
Net interest -6 -6 -6 -6
PBT 191 198 210 220
HSBC PBT 191 198 210 220
Taxation -33 -36 -38 -40 Valuation data
Net profit 157 162 173 181
Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 157 162 173 181
Cash flow summary (SGDm) EV/sales 2.6 2.5 2.5 2.4
EV/EBITDA 8.1 7.8 7.5 7.3
Cash flow from operations 188 289 295 303 EV/IC 3.7 3.7 3.6 3.6
Capex -120 -125 -129 -126 PE* 14.2 13.8 13.0 12.4
Cash flow from investment -120 -125 -129 -126 P/Book value 7.4 7.0 6.7 6.3
Dividends -121 -156 -150 -158 FCF yield (%) 3.1 7.2 7.3 7.8
Change in net debt 46 -7 -16 -19 Dividend yield (%) 7.0 6.5 6.9 7.3
FCF equity 70 162 164 175 Note: * = Based on HSBC EPS (fully diluted)
Balance sheet summary (SGDm)
Intangible fixed assets 99 117 133 142 Price relative
Tangible fixed assets 602 589 582 580
3.5 3.5
Current assets 234 254 266 432
Cash & others 9 50 66 235 3 3
Total assets 935 959 981 1,154 2.5 2.5
Operating liabilities 234 217 215 214 2 2
Gross debt 316 350 350 500 1.5 1.5
Net debt 307 300 284 265
Shareholders funds 303 319 336 354 1 1
Invested capital 692 692 701 706 0.5 0.5
0 0
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
M1 LTD Rel to STRAITS TIMES INDEX
Ratio, growth and per share analysis
Year to 12/2010a 12/2011e 12/2012e 12/2013e Source: HSBC

Y-o-y % change
Note: price at close of 18 Jan 2011
Revenue 25.3 4.2 -0.1 0.2
EBITDA 1.2 3.5 3.3 2.9
Operating profit 8.1 3.6 6.2 4.6
PBT 8.8 3.8 6.3 4.7
HSBC EPS 4.2 3.1 6.3 4.7
Ratios (%)
Revenue/IC (x) 1.5 1.5 1.5 1.5
ROIC 25.8 25.0 26.6 27.8
ROE 56.2 52.2 52.7 52.3
ROA 18.3 17.6 18.3 17.4
EBITDA margin 31.9 31.7 32.8 33.7
Operating profit margin 20.0 19.9 21.1 22.1
EBITDA/net interest (x) 54.0 57.8 59.7 61.5
Net debt/equity 101.4 94.0 84.4 74.8
Net debt/EBITDA (x) 1.0 0.9 0.8 0.8
CF from operations/net debt 61.0 96.3 103.8 114.2
Per share data (SGD)
EPS reported (fully diluted) 0.18 0.18 0.19 0.20
HSBC EPS (fully diluted) 0.18 0.18 0.19 0.20
DPS 0.18 0.16 0.17 0.18
Book value 0.34 0.35 0.37 0.39

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Diversified Telecoms abc
19 January 2011

Analyst briefing highlights

Mobile
 c90% of postpaid net adds take up smartphones; 55% of total postpaid base are smartphone users
with the bulk iPhones

 iPhone accounting treatment suppressing revenue growth but boosting EBITDA margins hence the
positive impact of smartphone higher ARPUs is not translating to overall revenue growth

 Final agreements have not been made on roaming rate cuts between Singapore and Malaysia but
profit growth guidance assumes changes within this year

 c12%-15% of service revenues are generated by roaming revenues and Malaysia is a significant
portion of such.

 Currently M1 is a net outpayer on roaming. Comment: Roaming rate cuts may have negative
revenue impact but all other things equal, M1 would enjoy net benefit from lower net outpayment.

National broadband network (NBN)

 NBN subscribers not yet meaningful in number due to coverage issues but growing rapidly

 M1 will primarily cross carry pay TV content rather than bid on its own for content once the Media
Development Authority (MDA) cross carriage rule is implemented. Pay TV will not be a stand alone
business but an enhancement to its existing service bundle of mobile, fixed broadband (BB).

2011 guidance
 Profit growth is expected but management would not give indication of magnitude. It did say that
roaming rate changes and improving NBN subscriptions were part of the drivers.

 Capex targeted at SGD100MM for: (1) bulk would be for LTE/4G network upgrade; (2) setting up
their own Operating Company (OpCo) as a wholesaler for the NBN; (3) fixed line backhaul; and (4)
maintenance and upgrade of existing 3.5G network.

 Dividend policy maintained at 80%. Management and the board prefer to review the capital structure
and decide later on special dividends if warranted.

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 M1 LTD (M1 SP)
Diversified Telecoms abc
19 January 2011

M1 Ltd: 4Q10 Results table

P&L 4Q09 3Q10 4Q10A 4Q10e Cons Vs. HSBC Vs. cons q/q y/y
Post-paid Revenue 124.7 124.2 127.8 128.9 -1% 2.9% 2.5%
Pre-paid Revenue 18.4 19.7 19.6 19.2 2% -0.5% 6.5%
International Call Revenue 31.9 32.0 33.1 34.0 -3% 3.4% 3.8%
Fixed Network Revenue 5.2 6.1 7.7 6.3 22% 26.2% 48.1%
Total Service Revenue 180.2 182.0 188.2 188.4 0% 3.4% 4.4%
Handset Sales Revenue 36.0 63.7 74.5 47.5 57% 17.0% 106.9%
Revenue 216.6 245.7 262.7 235.9 234.3 11% 12.1% 6.9% 21.3%
Cost of sales 99.5 123.8 136.9 113.3 21% 10.6% 37.6%
Staff costs 20.2 21.6 25.5 21.3 20% 18.1% 26.2%
Other G&A 11.6 4.7 10.7 15.1 -29% 127.7% -7.8%
Advertising and promotion 7.5 5.6 8.9 9.4 -5% 58.9% 18.7%
Allowance for doubtful debts -1.5 2.8 3.4 3.0 12% 21.4% nm
EBITDA 79.3 79.2 77.3 73.7 78.8 5% -1.9% -2.4% -2.5%
EBITDA Margin - gross 36.6% 32.2% 29.4% 31.3% 33.6% -2% -4.2% -2.8% -7.2%
EBITDA Margin - service 44.0% 43.6% 41.4% 39.1% 2% -2.3% -2.6%
Depreciation and amortisation 33.0 29.9 30.6 29.9 2% 2.3% -7.3%
EBIT 46.3 49.3 46.7 43.8 49.2 7% -5.1% -5.3% 0.9%
EBIT Margin 21.4% 20.1% 17.8% 18.6% 21.0% -1% -3.2% -2.3% -3.6%
Net interest 1.6 1.5 1.4 1.6 -11% -6.7% -12.5%
Taxes 7.5 8.4 7.8 7.6 3% -7.1% 4.0%
Net Income 37.2 39.4 37.5 34.6 39.2 8% -4.2% -4.8% 0.8%
NI Margin 17.2% 16.0% 14.3% 14.7% 16.7% 0% -2.4% -1.8% -2.9%
EPS (SG cents) 4.2 4.4 4.2 3.9 4.4 8% -5.2% -5.1% 0.3%
DPS (SG cents) 7.2 0.0 11.2 7.5 8.5 50% 31.8% nm 55.6%
Operating Stats
Subscribers (000s) 1,758.0 1,892.0 1,911.0 1,929.1 -1% 1.0% 8.7%
Prepaid Subs 846.0 916.0 910.0 939.7 -3% -0.7% 7.6%
Postpaid subs 912.0 976.0 1,001.0 989.4 1% 2.6% 9.8%
Net adds (000s) 42.0 43.0 19.0 37.1 -49% -55.8% -54.8%
Prepaid net adds 22.0 21.0 -6.0 23.7 -125% -128.6% -127.3%
Postpaid net adds 20.0 22.0 25.0 13.4 87% 13.6% 25.0%
ARPUs
Post-paid (exclude Data plan) 61.2 59.6 65.0 69.1 -6% 9.1% 6.2%
Data plan 21.4 21.6 22.0 21.0 5% 1.9% 2.8%
Pre-paid 14.4 14.4 14.1 14.0 1% -2.1% -2.1%

Service Revenues 180.2 181.6 186.9 188.4 -1% 2.9% 3.7%

Operating expense 170.4 196.6 216.0 192.0 12% 9.9% 26.8%
Total OpEx as % of sales 78.7% 80.0% 82.2% 81.4% 1% 2.2% 3.6%

Non-voice services as a % of service revenue 27.1% 32.7% 33.3% 32.8% 1% 0.6% 6.2%
Net Profit margin (on service revenue) 20.6% 21.7% 20.1% 18.4% 2% -1.6% -0.6%
SAC (Acquisition cost per postpaid customer) 303 359.0 368.0 na na 2.5% 21.5%
Source: Bloomberg, Company, HSBC

Change in Estimates
We have revised our revenue estimates upwards in line with M1’s robust top line performance in 2010.
Our revenue estimates are now7-8% higher over earlier estimates for 2011e-2012e, while our earnings
estimates are 8-9% higher for the same corresponding period.

M1: Change in estimates table

New vs old 2011e 2012e 2013e
Revenue 7.5% 7.0% 6.2%
EBITDA 5.8% 7.3% 8.1%
EBIT 7.6% 9.1% 9.2%
Net Income 7.8% 9.4% 9.5%
EPS 7.7% 9.3% 9.4%
DPS 7.7% 9.3% 9.4%
Source: HSBC estimates

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 M1 LTD (M1 SP)
Diversified Telecoms abc
19 January 2011

Sensitivity Table
M1 Sensitivity Table
_________________________ +/- 5% change in factors _______________________
Sensitivity Table Impact on __________________ Net Income _________________ DDM target
FY11e FY12e
Mobile subs 3.1% 4.4% 1.5%
BB subs 0.6% 0.6% 0.1%
Mobile ARPU 6.8% 6.3% 0.6%
BB ARPU 0.8% 0.8% 0.1%
2 highest non-depreciation expense items
Cost of sales -12.6% -11.4% -1.3%
Staff costs -2.4% -4.0% -0.5%
Capex -0.1% -0.5% -0.7%
Discount rate - Singapore (+/-1%) na na -4.8%
DPS na na 5.0%
Source: HSBC estimates

Valuation and Risks

M1 trades at a 2011e and 2012e PER of 13.8x and 13.0x; the high end of its 12-month forward PER band.
We continue to remain Neutral on M1 with a slight increase in our target price to SGD2.47 (SGD2.31
earlier) derived by a DDM methodology (risk-free rate of 4.0%, market risk premium of 4.0 and a cost of
equity of 8.0%). Our target price implies 3.7% potential return, which is within the 3-13% range for non-
volatile Singapore stocks. We therefore maintain a Neutral rating. Irrational competition is the main risk
to such target while an even better payout would provide an upside risk

M1 1 year fwd PER band chart M1 1 year fwd EV/EBITDA band chart

3.00 3,000

2.50 2,500

2.00 2,000

1.50 1,500

1.00 1,000
Sep-06
Jan-07

Sep-07
Jan-08

Sep-08
Jan-09

Sep-09
Jan-10

Sep-10
Jan-11
May-07

May-08

May-09

May-10

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11
Sep-06

Sep-07

Sep-08

Sep-09

Sep-10
May-07

May-08

May-09

May-10

Price 7.3x 11.2x 14.1x EV 4.3x 6.3x 8.1x

Source: Thomson DataStream Source: Thomson DataStream

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 M1 LTD (M1 SP)
Diversified Telecoms abc
19 January 2011

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Luis Hilado and Tucker Grinnan

Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,

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 M1 LTD (M1 SP)
Diversified Telecoms abc
19 January 2011

stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 19 January 2011, the distribution of all ratings published is as follows:
Overweight (Buy) 48% (23% of these provided with Investment Banking Services)
Neutral (Hold) 37% (20% of these provided with Investment Banking Services)
Underweight (Sell) 15% (22% of these provided with Investment Banking Services)

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 19 January 2011.
2 All market data included in this report are dated as at close 19 January 2011, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.

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 M1 LTD (M1 SP)
Diversified Telecoms abc
19 January 2011

Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking The Hongkong and Shanghai Banking
Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Corporation Limited
Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus &
Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets Level 19, 1 Queen’s Road Central
(India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Hong Kong SAR
Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Telephone: +852 2843 9111
Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Telex: 75100 CAPEL HX
Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai
Fax: +852 2596 0200
Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg;
'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Website: www.research.hsbc.com
Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul;
HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. -
Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia
Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.
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