Investment Highlights

• Reaching out to the last yet-to-be-connected 8% population. The Communications and Multimedia Ministry has announced a digital infrastructure plan called Jalinan Digital Negara (Jendela) to provide comprehensive high-quality broadband service coverage and prepare the nation for a steady transition to 5G technology under the 12th Malaysia Plan (2021–2025). This will be implemented in phases with Phase 1 between 2020 and 2022. This plan, to be revealed in further details later this month, was discussed via a recently concluded National Digital Infrastructure Lab which commenced on 13 July 2020 between the Malaysian Communications and Multimedia Commission (MCMC) and all service providers and key stakeholders.

• The aims of Jendela, as announced by Prime Minister Tan Sri Muhyiddin Yassin are:
   
  • Expanding 4G mobile broadband coverage from 91.8% to 96.9% in populated areas;
     
  • Increasing mobile broadband speeds from 25Mbps to 35Mbps;
     
  • Allowing broadband gigabit speed fixed line access to 7.5mil premises.
     
• Strengthening 4G access. The programme involves terminating the 3G network in stages up to the end of 2021 by strengthening 4G networks. This lays down the foundation for 5G, which will continue under Phase 2 after a solid platform has been built.
  
  For Sabah, 382 new communication towers are being planned and 924 communication transmitters in existing towers will be upgraded under the Universal Service Provision programme (USP). The private sector’s service providers will be involved in building 35 new towers and upgrading 1,048 communication transmitters in existing towers to increase 4G coverage. Additionally, the state will provide optical fibre access to 251,166 premises.
  
  For Sarawak, the USP will build 636 new towers and upgrade 977 transmitters in existing towers, while the private sector builds 49 new towers and upgrades 825 communication transmitters in existing towers. Sarawak will also provide optical fibre access to 43,013 premises.
   
• Need for higher speed and capacity. The drive towards 5G is aimed at supporting Industry 4.0 which involves the digital transformation of manufacturing/production and its entire value-creation chain. This leverages IoT to transform business processes by emphasizing cost efficiencies and optimising effectiveness. As the Covid-19 pandemic has accelerated digitalization by spurring work-from-home arrangements, virtual conferences, e-commerce and remote working applications, 2QFY20 data demand jumped YoY with Digi registering an increase of 58%, Maxis 54% YoY and Celcom 48%.
   
• Key in collaboration and network sharing. Given the low and potentially negative investment returns to provide 4G connectivity to sparsely populated and remote areas of the country, service providers will be collaborating and sharing resources such as sites, network facilities, fibre connectivity and broadcasting towers to defray their costs. We expect these operators to continue this collaborative model with the rollout of 5G services, which could be more costly than any of the previous 4 generations of cellular technology.

• Differentiation needed to monetise 5G. As Maxis has shown its successful drive to differentiate through superior network quality, customer care and convergence strategy by bundling with fibre solutions, competitors have also begun similar marketing campaigns. Increasingly, operators agree that the ongoing intense competition globally will obviate any attempt to charge premium prices for 5G branding unless the provision of managed services and attractive solutions are offered to customers. As such, we believe that 5G marketing campaigns are likely to follow the earlier 4G models in offering unlimited data limited by speed caps that will depend on the evolution of the ecosystem involving the innovation of new applications, devices and content.

• Consolidation drive remains. As we have highlighted on 11 August 2020, declining data yields, new 5G spectrum fees and capex pressures are likely to drive players to seek consolidation amongst themselves to reduce costs, secure economies of scale and reduce rivalry. While the MCMC has shown a preference for maintaining competitive pressures to provide reduced broadband prices for consumers, we view that the industry’s stagnant revenue trajectory will eventually drive the sector towards more merger and acquisition activities, as reaffirmed by Axiata’s analyst briefing last week.

• Upgrade to OVERWEIGHT. As we have recently upgraded TM to BUY, we are upgrading our recommendation on the sector to OVERWEIGHT from NEUTRAL. Our other BUY call is Axiata due to its low EV/EBITDA valuations which offer multiple opportunities for monetisation as the group leans towards higher dividend payout policies.

Source: AmInvest Research - 1 Sept 2020