Investment Highlights

• 5G deployment in targeted sites. The RM7–8bil investment for 5G deployment in Malaysia indicated by the National 5G Task Force of the Malaysian Communications and Multimedia Commission (MCMC) is likely for targeted sites for high data usage given that our channel checks with industry sources have indicated that the capex per square km could be 10x higher than 4G for selected locations. Over the past 5–6 years, we estimate that 4G capex spent by telcos has already surpassed RM15bil to date on a nationwide coverage programme.

• Involving the first 2 pioneer spectrum bands. In our view, this low 5G investment estimate could involve only the initial 700MHz and 3.5GHz bands which are planned to be awarded to a consortium of multiple licensees, including foreign operators. Recall that this single-entity approach is envisioned to minimise costs and prevent duplication of infrastructure against the backdrop of additional spending requirements to enhance 4G networks.
  
  The MCMC has identified 700MHz, 3.5GHz, 26GHz and 28GHz for 5G usage, wherein the two higher 26GHz and 28GHz bands will be assigned through a tender process to licensees and 3rd parties which include non-licensees for the purpose of localised networks. A total bandwidth of 3200MHz for the two higher 5G bands – 26GHz and 28GHz – will be assigned in two methods i.e. i) a tender process (“beauty contest”) for 4 blocks of 400MHz (1600MHz in total) of the 24.9GHz to 26.5GHz frequency bands on a nationwide basis; and ii) first-come-first-served basis for four blocks of 400MHz (1600MHz in total) of the remaining 26.5Hz to 28.1GHz frequency bands and open to any parties which include non-licensees for the purpose of deploying localised or private networks.
  
  While the lower 700MHz band would be better utilised for 4G, the MCMC’s intentions are for operators to deploy dynamic spectrum sharing (DSS) for layering coverage for both 4G and 5G. Similarly, for existing 2300MHz spectrums currently deployed for WiMax and 2600MHz for 4G usage, the MCMC is also open for existing LTE bands to be used for 5G. In China, 2600MHz is currently assigned to China Mobile for 5G.
   
• Yet more capex needed to improve 4G connectivity. Additional spending for 4G is still required given that only 40% of mobile towers in the country are fiberised, which has resulted in sub-optimal speeds and connectivity for 4G services. Evidently, a substantively higher proportion of fiberised mobile towers is needed to deploy 5G services.
   
• Declining capex trend. The MCMC has highlighted that telcos’ capex spending trend has been declining, currently below the industry average. Amongst the 3 main mobile operators, Digi’s capex fell the most by 11% in FY18, Celcom by 6% and Maxis by 5%.
   
• Total mobile subscriber trajectory returned to its downward trajectory in 3Q2019 after a brief uptick in the previous quarter, highlighting that cellular price war competition remains intense. Mobile subscribers decreased by 46K QoQ as prepaid declines of 226K was only partially offset by postpaid additions of 180K. Only Maxis registered a 141K increase while Celcom declined by 153K and Digi by 34K.
   
• Growing postpaid segment stabilising service revenue. Notwithstanding the declining subscriber trends, cellular operators (celco) 3Q2019 service revenues largely stabilised QoQ due to the higher value postpaid segment growth, further supported by average revenue per user (ARPU) rising slightly QoQ to RM47.70 as average postpaid ARPU rose by RM1/month to RM71/month.

• Maintain NEUTRAL outlook on the sector given the escalating capex requirements against the backdrop of governmenttargeted fiberised ARPU reductions under the National Fiberisation and Connectivity Plan (NFCP). Our only BUY currently is Axiata, given its low EV/EBITDA valuations and rising prospects for monetisation of its multiple businesses.

• Sector can be de-rated on resumption of revenue declines against the backdrop of escalated mobile price war intensification and sharp drops in fixed broadband prices next year, driven by NFCP prerogatives. We are also cautious on possibilities of higher-than-expected increase in operating and capital cost requirements as operators need to further upgrade their network infrastructure for 5G rollouts.

• Sector can be upgraded on renewed consolidation prospects amongst the current 6 main cellular operators which could lead to a moderation in mobile price competition, indefinite suspension of the MCMC’s plans to reduce broadband prices this year and significant contraction in operating costs from increased infrastructure-sharing arrangements amongst operators.

Source: AmInvest Research - 8 Jan 2020