Investment Highlights

• Delineated connectivity roadmap. We were at a briefing by the Malaysian Communications and Multimedia Commission’s (MCMC) chairman Al-Ishsal Ishak yesterday with the investment community where the regulatory body reiterated its delineated roadmap to improve fixed and mobile broadband connectivity to West and East Malaysia under a transparent regime. We list below the salient highlights:

• No submission yet on largest domestic telco merger proposal. The MCMC is unable to provide clarity to the proposed Telenor Asia-Axiata merger at this stage as a proposal has not been submitted yet by the related parties, while reaffirming the regulator's emphasis on market competition and affordable service prices.

• Faster mobile broadband growth vs. fixed. Broadband subscriptions have risen by 6% to 41.8mil in 2Q2019 from 39.5mil in 4Q2018, with 3G & 4G mobile users growing at a similar rate to 39.2mil while fixed broadband was flattish at 2.7mil mainly due to the migration of Streamyx customers to Unifi. Fibre users rose 3% QoQ to 1.9mil in 2Q2019 as 4G LTE population coverage nudged upwards to 80.1% from 79.7% in 4Q2018.

• Mobile growth driven largely by postpaid. Mobile subscribers climbed 2% to 43.4mil in 2Q2019 from 42.4mil in 4Q2018 as postpaid subscriber growth of 6.6% outpaced prepaid’s 1%. Prepaid segment remains the largest mobile market share at 72% while postpaid accounts for the rest.

• Low fixed broadband penetration rate at 8.1% per 100 inhabitants. Hence, the MCMC aims to significantly raise fixed broadband rates as a World Bank study has shown that a 10% increase in fixed broadband penetration could raise GDP growth by1.38% in developing countries, which translates to an additional RM19bil based on Malaysia’s 2018 GDP. The implementation of the Mandatory Standard Access Pricing last year has led to broadband prices falling by an average of 49% with entry level prices for 30Mbps dropping to RM79/month from RM139/month.

• Moving the National Fiberisation and Connectivity Plan (NFCP). Presented in October last year, it requires: i) heavy investments which could reach RM22bil, of which half could be provided via the MCMC’s Universal Service Provider fund; ii) sharing access to passive telco and civil infrastructure amongst operators and stakeholders; iii) continuous technology improvements; iv) optimising spectrum allocation for higher quality services; v) improved regulatory framework and policy certainty to support new 5G investments; vi) reduce costly, bureaucratic and uncoordinated state-level right-of-way in building telco infrastructure; and vii) improve regulatory coherence and consolidate action from all stakeholders to address issues on the ground.

• 5 year NFCP targets are: i) Entry level fixed broadband packages at 1% of GNI by 2020; ii) Gigabits availability in selected industrial areas by 2020 and state capitals by 2023; iii) 100% availability at a minimum speed of 500Mbps in state capitals and selected high-impact areas by 2021; iv) 20% availability at up to 500Mbps in sub-urban and rural areas by 2022; v) fibre network coverage at 70% of schools, hospitals, libraries, police stations and post offices by 2022; vi) average speeds of 30Mbps in 98% of populated areas by 2023; and vii) to improve coverage along the Pan Borneo Highway upon completion.

To achieve the NFCP target, the current 1.9mil premises with fibre access have to be increased by 1.5mil by 2021, 502K premises with Gigabits access have to be increased by 3mil by 2023, expand 25 industrial areas for Gigabits access by next year, 121K sub-urban and rural premises have to increase by 1.2mil by 2022, increase 6,195 towers (+18%) by 2023 to expand 4G+ coverage and widen coverage to 1,177 Felda and Orang Asli settlements by 2023.

• Focusing on 5G rollouts with trials involving 39 use cases at a cost of RM115mil in 33 live sites across 5 states will be conducted in 4Q2019. While 5G standards are expected to be finalised in April next year, these trials cover the usage of the 3.5GHz bandwith and 22 millimetre wavelengths.

The MCMC will provide a comprehensive report called “5 Key Challenges and 5G Nationwide Implementation Plan” by 4Q2019, while a strategic review of the communications market will be conducted in 1Q2020, followed by public consultation.

5G spectrum allocation has not been determined pending on the results of the trials, state of the ecosystem and device/equipment availability. The MCMC alluded to a fair price for the spectrum which will facilitate the rollout of this faster service.

• Internet adex rose by an impressive 4-year CAGR of 19%. For Malaysian media, internet adex rose 14% YoY to US$359mil in 2018, overtaking traditional TV which declined 2% YoY to RM263mil and radio which contracted 3% YoY to US$114mil.

• We maintain our OVERWEIGHT call on the sector given multiple synergies from sector consolidation, which will significantly alleviate price competition that has been eroding the sector’s margins over the past 3 years. The GLC restructuring story has reemerged, together with TM’s radical cost transformation.

Source: AmInvest Research - 20 Aug 2019