Investment Highlights

• Rolling out in 2 phases. The Ministry of Communications and Digital announced that the country’s 5G rollout plan will continue in 2 phases The first phase will be focusing on Digital Nasional (DNB) reaching 80% population coverage by the end of 2023 and this will be followed by the second phase of shifting to a dual network structure starting 2024 (Exhibit 2). The 2 phases aim to ensure that the goal of accelerating network rollout and promoting competition can be achieved. Also, note that there were no governance-related issues brought up during the announcement, which implies that DNB has passed governance review.

• Full participation from the telcos is expected during phase 1. The current single wholesale network structure will be kept at status quo during phase 1 and mobile network operators are expected to fully participate in the exercise. However, it is unclear if the telcos will continue to take up an equity stake in DNB, especially after CelcomDigi has terminated its Share Subscription Agreement with DNB as the date to fulfill the conditions precedent has lapsed. Recall that, Celcom (now part of Celcom Digi), Digi, YTL Communications’ YES and Telekom Malaysia previously agreed to take up 65% of DNB’s equity in October 2022 with the remaining 35% held by the Ministry of Finance. Meanwhile, Celcom, Digi, YES, Unifi Mobile and U-Mobile have signed access agreements with DNB which allows them to offer 5G services to subscribers.
  As 5G coverage now stands at 57.8%, achieving the 80% target is plausible, in our view, given that only an additional 2,000 sites need to be rolled out. Separately, with the expectation of DNB continuing to roll out its network, the contract between DNB and Ericsson remains intact. This is in line with our view that the government will avoid any potential negative financial and/or legal repercussions by not honouring the agreement.

• The government and telcos to iron out phase 2 details. The shift to dual networks in phase 2 would see the networks being run by 2 entities i.e., Entity A and Entity B. Entity A will continue to build and operate DNB’s network (NW1) while Entity B will start to roll out the second 5G network (NW2) as early as January 2024. However, the compositions of Entity A and B among the network providers are to be decided from the pending discussions between the government and industry stakeholders.
  The Ministry of Communications and Digital also clarified that the government will not be involved in commercial considerations, i.e., network equipment, staff, and corporate structure, of Entity B. However, to ensure that the market remains competitive, the entity will need to benchmark itself against the DNB’s wholesale pricing. As a reference, DNB’s total cost of rolling out 5G is RM16.5bil, which comprises RM12.5bil for equipment/infrastructure and RM4bil in corporate cost.

• We are neutral on this development pending more details on the 2 entities’ composition and future capital expenditure plans. Nevertheless, with the acceleration of 5G rollout during phase 1, our thesis of Telekom Malaysia (BUY, FV RM6.70) to enjoy a more levelised cellular playing field against the existing incumbents with larger subscriber market shares remains intact. The group will also benefit from 5G roll-outs given its ownership of High-Speed Broadband and Sub-Urban Broadband networks.

• Maintain a NEUTRAL outlook on the sector as rising costs of living and global economic uncertainties are expected to depress subscribers’ affordability in the near term. Furthermore, pending further clarification on the details of phase 2, duplication of costs with the traffic split between 2 competing networks may lead to inefficiencies and potentially affect the sustainability of the country’s 5G infrastructure.

Source: AmInvest Research - 5 May 2023