True Corporation

Hold, waiting for added value

True Corporation Plc (TRUE)

We revise up 2014-2015 earnings forecast averagely 18% each year. New 2014 fair

value is B10.8, which is now fully valued, but 2015 fair value is B12, while there will

also be synergy from China Mobile (not included in forecast). We recommend HOLD.

- Sluggish mobile business depresses 2Q14 performance

TRUE announced 2Q14 earning result with a net loss of B1.7bn, a reverse from a net

profit of B3.8bn last quarter. Excluding non-recurring revenue of B895m in 1Q14

(versus B5.3bn in 1Q14, mostly gain from asset valuation), the normalized loss was

B2.6bn, rising 35%qoq as a result of increasing normalized loss from the core

business, mobile service. Service revenue (IC excluded) in 2Q14 dropped 1.1%qoq

due to a low season whereas cost of operation (cost of service (IC excluded) + selling

and administrative expense) increased 5.3%qoq from investment on 4G service and

advertising to promote the service. Still, there was compensation from growth of

profit from broadband Internet (TrueOnline) and TV subscription (TrueVisions) as a

result of effective cost control, which is the company’s priority for the next few years.

- Up 2014-2015 forecast by 18% each year

The normalized loss in 1H14 represents 55% of our forecast, while significant

improvement is foreseen in 2H14, especially 4Q14. The company is projected to be

able to post a normalized profit in the fourth quarter from the following contributions:

1) interest expense would decrease B1bn per quarter and 80% of B65bn raised from

the capital increase will be used for repaying long-term debt and 2) amortization

expense on 1800 MHz spectrum equipment will decrease B1.9bn per quarter because

TRUE will book the expense until September 15, 2014 only. Accordingly, we revise up

our earnings forecast for 2014 and 2015 averagely by 18%. Under the new forecast,

TRUE will face a normalized loss of B6.0bn in 2014 but a net profit of B4.3bn if

including non-recurring profit, while B9.0bn net profit is expected in 2015.

- Hold, waiting for 2015 fair value and synergy from China Mobile deal

Under the new forecast, new 2014 fair value using DCF method (WACC of 10.9% and

terminal growth rate of 2.0%) is B10.8, versus B9.0 previously. The current share

price is fully valued, but we will start using 2015 fair value, preliminarily estimated at

B12, after 3Q14 earnings declaration. In addition, added value can be expected from

synergy from China Mobile deal (TRUE holds 18% stake after the capital increase),

which has not yet been included in our forecast. Downgrade from BUY to HOLD.