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TRUE Corporation

Strong turnaround after capital increase BUY

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 18percent 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)


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