Investment Highlights

• No changes with new minister. We attended the Malaysia Communications and Multimedia Commission’s (MCMC) 4th Quarterly Report on the National Digital Infrastructure Plan (JENDELA) last Friday which was presented by its chairman Dr Fadhlullah Suhaimi Abdul Malek. Notably, he indicated that the new Minister of Communications and Multimedia, Tan Sri Annuar Musa, who was appointed on 30 August 2021, has not changed the MCMC’s JENDELA targets and timelines.

• Expect 5G rates at worst compared to 4G. While 5G wholesale rates are still currently being evaluated by the MCMC, the chairman affirmed that the mandatory standard access pricing (MSAP) between Digital Nasional and telco operators will lead to retail prices that are at least equal or lower than 4G rates per Mbps.
  
  For consumers, this could mean that the all-in prices of mobile plans are likely to remain largely unchanged. Telcos are likely to face a flattish revenue trajectory while bearing the additional wholesale charge from Digital Nasional, partly offset by leasing income from the operators existing network infrastructure that will be needed for 5G connectivity.
  
  Recall that 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 beginning December 2021, with the objective of achieving 80% nationwide population coverage by 2024.

• Reassurance for broadband prices. As in the previous engagement, the chairman reaffirmed his view that fixed broadband prices in the country are relatively affordable compared with the region, bringing a measure of clarity to the MSAP review being conducted currently. He also reiterated the difficulties of continued investment into unreached areas on social prerogatives against the backdrop of uncertainties in wholesale prices
  
  With an easing of broadband price pressures, this reduces longer term 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 provide access to broadband services to 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 6.4mil while mobile broadband speeds rose by 19% to 31.3Mbps in 3Q2021 (Exhibits 2 & 3).
  
  During the quarter, fixed broadband premises increased by 378K, surpassing the MCMC’s target by 2.1x while new mobile sites rose by 67 (3% above target) and upgraded sites by 2,954 (9% above goal). To date, 1.2mil 3G customers have migrated to 4G, with only 413K remaining to reach the year-end target of 1.6mil. The only underperformance came from the slower 79K 3G carriers being switched off vs. a target of 82K due to MCO restrictions which also caused Time dotCom to miss 66% of its 3Q2021 target to fiberise premises.

• Tower permit costs largely unchanged. Currently, all 14 state governments have established their digital infrastructure committees or councils to facilitate the planning and development of new properties, in which 10 states have adopted the MCMC’s Communication Infrastructure Planning Guideline with Selangor and Kelantan currently finalising the process. Even so, the costs to build towers have not changed significantly over the past 6 months.
  
  In September 2021, the median permit cost and fees to build new tower structures in the first year have risen by RM325 or 3% to RM11,250/site from RM10,925/site in March this year (Exhibit 5). However, the first-year median permit cost to build new rooftop structures declined by RM50 or 1% to RM8,150/site from RM8,200/site in March 2021 (Exhibit 6).
  
  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). Hence, 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 (Exhibit 4). 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 the end of this month 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 such as Celcom and Digi have also begun similar marketing campaigns. Even late comer U-Mobile is currently negotiating a wholesale contract with TM to bundle its mobile plans with fibre solutions.
  
  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 expect 5G marketing campaigns 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 and
  5G cost escalations from Digital Nasional’s wholesale arrangement. 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 - 18 Oct 2021