Investment Highlights

• Lower risk to wholesale broadband prices. We attended the Malaysia Communications and Multimedia Commission’s (MCMC) 3 nd Quarterly Report on the National Digital Infrastructure Plan (Jendela) last Friday presented by its chairman Dr Fadhlullah Suhaimi Abdul Malek. For us, the highlight of the session was the chairman’s view that fixed broadband prices in the country are relatively affordable compared with the region, bringing a measure of clarity to the mandatory standard access pricing (MSAP) review being conducted currently. He also acknowledged the difficulties of continued investment into unreached areas against the backdrop of uncertainties in wholesale prices.
  
  With an easing of broadband price pressures, this could lower earnings risk to the wholesale segment of Telekom Malaysia (TM) and Time dotCom. Recall that under the Jendela plan, the aim to achieve entry-level fixed broadband packages at 1% of GNI by 2020 could have cut fixed broadband prices to only RM40/month, less than half of unifi’s most affordable plan at RM89/month currently.
   
• Phase 1 on track together with 5G rollout. Jendela’s phase 1 progress is currently on track to reach its national target to fiberise 7.5mil premises while achieving mobile broadband speed of 35Mbps and 4G coverage of 96.9% by the end of 2022. QoQ, fiberised premises have increased by 6% to 6mil while mobile broadband speeds rose by 2% to 26Mbps in 2Q2021. During the quarter, fixed broadband premises increased by 342K, surpassing the MCMC’s target by 85% while new mobile sites rose by 52 (13% above target) and upgraded sites by 2,465 (6% above goal). While the 863K migration of 3G customers to 4G have lagged the MCMC’s target by 2%, the 39K 3G carriers switched off exceeded plan by 13%.
  
  Recently, Digital Nasional, which will own, execute and manage 5G spectrum together with the infrastructure that is expected to cost RM15bil, has appointed Ericsson to design and build the national 5G network at a total cost of RM11bil. This comprises RM7bil for tower rental and fibre leasing costs over a 10-year period and RM4bil for network equipment, deployment services, ongoing maintenance and network management. The government-owned 5G wholesaler expects the launch of its network in areas within Kuala Lumpur, Putrajaya and Cyberjaya by December 2021, with the objective of achieving 80% nationwide population coverage by 2024.
   
• Reducing tower permit costs. Following negotiations with state authorities, the MCMC has lowered the cost of new tower deployments at rural and remote areas in Negeri Sembilan to RM9.7K vs. RM10.4k currently. The regulator has also engaged with the states of Johor and Melaka to review permit costs via workshops with service providers. Recall that state permits for tower deployment in Malaysia currently have a 6-year median cost of RM42K/site with the most expensive in Johor (RM117K) followed by Melaka (RM105K) and Sarawak (RM65K). As such, the MCMC has been engaging with the states to reduce permit costs with the aim of speeding up 4G coverage expansion.
  
  Jendela aims to improve 4G connectivity to all Malaysians and prepare the nation for a steady transition to 5G technology under the 12th Malaysia Plan (2021–2025), which will be implemented over 2 phases. The results of the tender to construct 1,661 new sites, potentially worth RM4.6bil, across unreached areas for 4G expansion have been extended to mid-August 2021 from end-June 2021.
   
• Differentiating 5G. As Maxis has shown its successful drive to differentiate through superior network quality, brand loyalty, 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 additional managed services and attractive content are offered to customers. As such, we believe that 5G marketing campaigns are likely to follow fixed broadband models in offering unlimited data (limited by speed caps) that will depend on the evolution of the ecosystem involving new applications, devices and content.
   
• Maintain OVERWEIGHT on the sector given the consolidation synergies for 2 cellular operators which could partly alleviate intense price competition. We reiterate our BUY call for TM, which has shown significant cost improvements together with compelling dividend yields and HOLD for Maxis given the continuing competition from mobile virtual network operators and affordable segment players like U Mobile constrains revenue growth prospects.

Source: AmInvest Research - 12 Jul 2021