Investment Highlights

• The government’s review on the single wholesale network (SWN) 5G rollout structure will be due by the end of 1QCY23. While there are speculations on the potential changes that could take place, we believe the current structure likely will continue to be the base case scenario. Any abrupt changes to the current SWN model might have negative financial and/or legal repercussions to Digital Nasional (DNB) from the cancellation of its contracts with Ericsson besides disrupting the country’s 5G rollout plan schedule.

• Two is not necessarily better than one. The introduction of a second wholesale network provider also may lead to the unsustainability of DNB’s business model which relies on mobile network operators’ (MNOs) subscriptions. Given the potential longer-term economic multiplier benefit from the rollout of 5G, we believe a supply-led proposition will continue to be the preferred option from the government’s perspective as the shift towards a demand-led structure will delay the rollout. Also, taking the cue from its policy-related decisions over the past few months, we note that the unity government has been adopting a relatively less radical approach in making policy changes compared to Pakatan Harapan’s 2018- 2020 period. While introducing a second equipment provider to DNB is another possibility, the amount of potential savings that could be derived from this is still not clear at this stage.

• The equity subscription of DNB by the telcos is also likely being put on hold as the government is in the midst of reviewing the governance structure of the SWN model. Assuming the review could be finalised by end of March and there are no major changes to the SWN structure, the cash outflow following equity participation will likely be recorded by telcos in 2QCY23.

• 5G offerings are now available. Despite the ongoing review, it does not stop the 5 MNOs that signed the access agreement with DNB in October 2022 from introducing their 5G offerings. Customers of participating MNOs ie. Celcom, Digi, YES, Unifi Mobile and U-Mobile that subscribe to selected plans had their first run of 5G speed in November without any extra charge. While it is still unclear how would the MNOs monetise 5G offerings, the adoption would lead to higher data consumption and encourage consumers to opt for pricier packages.

• Maxis is late, not out. While Maxis has yet to sign the agreement, the company continues to express its commitment to be a part of the country’s 5G journey and reiterate that they are 5G ready. The decision to delay signing the access agreement, we believe, should be viewed as the company taking a more cautious stance on potential changes in the rollout plan structure following the governance review by the government instead of reluctance to adopt 5G. The late adoption is unlikely to have a detrimental near-term impact on the group’s profitability or subscriber base given the absence of a strong value proposition of 5G to mass market consumers at this stage, in our view.

• DNB’s 5G population coverage of 47% (as at end-2022) (or 38% based on on-air sites) is on track to meet its target of 80% by the end of 2024. This is an improvement of 37%-point from 10% as at end-2021. DNB’s network statistics (Exhibit 2) show a healthy pick-up in data consumption after telcos signed the access agreement, likely driven by early adopters.

• Maintain NEUTRAL outlook on the sector as the higher opex from DNB’s fixed 5G annual wholesale capacity charge on telcos could more than offset escalated data demand and easing competition from the consolidation 2 major cellular operators amid a slower economic growth outlook which could depress subscribers’ affordability.
  Reiterate our BUY call for Telekom Malaysia (FV RM7.24) as we continue to see the group as the sole beneficiary for Malaysia’s 5G roll-out given its ownership of the High-Speed Broadband and Sub-Urban Broadband networks. Besides that, the company will benefit from the leveling of the mobile business playing field following the SWN 5G roll out structure.

Source: AmInvest Research - 13 Feb 2023