TRUE Corporation

TRUE Corporation Plc (TRUE)

TRUE has announced a capital increase via RO and PP schemes to
China Mobile, totaling B65bn; 80% of which would be used to repay
long-term debt to lower interest expense and generate normalized
profit in 4Q14, while 20% of which would be used on the auction for
1800 MHz concession to expand effective data service (4G network)
and promote long-term growth.

- Increasing B65bn capital via RO, PP
TRUE has announced a capital increase, issuing 10 billion new shares via Rights
Offering (RO) and Private Placement (PP) schemes to China Mobile at the exercise
price of B6.45/share. Despite 69% dilution effect, TRUE's capital is expected to
increase B65bn; 1) B52bn (80%) of which would be used to repay long-term debt,
lowering D/E (debt to equity ratio) from 12x to 0.7x, and; 2) B13bn (20%) would be
used on the auction for 1800 MHz concession to expand effective data service (4G
network). Thanks to an alliance with China Mobile (holding 18% stake after the
capital increase), the synergy would greatly benefit TRUE: investment expense would
drop in a long run (aid on equipment purchase), and TRUE's business expansion
would benefit from China Mobile's large subscriber base (China Mobile has 800 million
subscribers, 65% of total mobile phone users in China).

- Solving prolonged problems, reducing debt and boosting profit
This capital increase would be a major turning point for TRUE. Most of the increased
capital would be used to repay long-term debt, solving prolonged debt problem and
lowering interest expense (TRUE faced normalized loss in 1Q14; while TRUE had a
good control on other expenses, interest expense was very high). TRUE's interest is
projected to drop by B4bn/year from 4Q14 on (the capital increase is expected to
complete within August). Also, 2G network (1800 MHz) concession ends on
September 15, so B1.6bn/quarter amortization cost will not be booked from 4Q14 on.
Consequently, normalized loss would reverse to normalized profit from 4Q14 on,
thanks to the capital increase. We revise up TRUE's FY2014-2016 earnings forecast;
expecting net loss to decrease by 22%yoy to B8.6bn in 2014, reverse to B3.9bn
normalized profit in 2015, and revive by 97%yoy in 2016.

- Profit to grow steadily. B9 fair value after XR
TRUE would be able to generate steady normalized profit after the prolonged debt
problem is relieved. After the capital increase, the new fair value (DCF, 10.8% WACC,
1.5% terminal growth) is B9, implying 21% upside. We recommend BUY. XR date is
July 31, 2014. (For more information, see full report today)