• The Nordics countries stand out on 5G performance within the European countries because of 5G spectrum availability

• By 2035 there will be circa USD12tn worth of 5G related services globally and this will include mission-critical services

• The SWN model will relief telcos of financial burden to roll out the network and hence, greater value on products and services.

• Going into 2024, we expect local telco players to achieve solid margins propelled by sanguine outlook on B2B segment, reacceleration of economic activities globally and network differentiation among telco players.

• Digi is the real winner in this aspect given the Telenor’s steady hand in navigating their 5G strategy, a win-win pact that has proven to be so valuable to Digi.

• Upgrading the telco sector to Overweight from Neutral with DIGI (BUY; TP: RM4.92) and TM (BUY; TP: RM7.58) remain as our top pick

5G in Nordics countries

Data has shown that the Nordic region performs well in 5G landscape. It is worth to note that only Nordic countries have digital strategies in place and hence, the superiority of their data strategy. The main reason why the Nordics countries stand out on 5G performance within the European countries is because of 5G spectrum availability which have been rolled out extensively. We learnt that all four of the Nordic countries have already assigned a low and mid-band spectrum which is ahead of the rest of Europe.

The boon and bane of 5G network

5G technology is expected to generate 22.2mn jobs in the 5G global value chain alone. In US, 5G technology is already transforming industries as well as kick-starting a 4th Industrial Revolution. GDP-wise, 5G technology is expected to contribute circa USD1.5tn to US GDP from 2021 to 2025. Meanwhile in China, the investment in 5G drove a cumulative economic output of about CNY8.56tn, which indicates the new network great potential to the economic growth in China. However, 5G has limited coverage as we note that the presence of 5G network is only available in selected cities globally that have 5G towers. Aside to that, 5G technology may lead to a larger impact of data exfiltration as greater amount of data being relayed via 5G technology.

Foresee earnings dilution for telco players in the medium term

Zooming into the profitability of the Mobile Network Operator (MNO), with the 5G access from Digital Nasional Berhad (DNB), we opine there will be slight earnings dilution in the medium term. In fact, the government decision to maintain Single Wholesale Network (SWN) model might increase the wholesale pricing. However, going into 2024, we expect our local telco players to achieve a solid margin propelled by sanguine outlook for the B2B segment, reacceleration of economic activities globally and network differentiation among the telco players as they would be able to enhance their products.

Upgrading Sector Call to Overweight

We are upgrading our NEUTRAL call on telecommunication sector to OVERWEIGHT on the back of (i) positive development on 5G rollout in Malaysia, (ii) anticipation of gradual recovery in roaming contribution driven by a surge in migrant workers and tourist prepaid SIM card in line with the reopening of international borders – note that government is anticipating a muti-fold increase in the number of tourist next year, (iii) expectation of positive outcome from Digi-Celcom merger deal which might attract more foreign investors, and (iv) anticipation of healthy earnings potential from our local telco players, thanks to hybrid arrangements for work and learnings apart from the strong take-up rate expected for e-commerce. Our sector top picks are TM (BUY, TP RM7.58) and Digi (BUY, TP RM4.92).

Nordic countries lead on 5G availability

According to Speedtest.net, aka Speedtest by Ookla, a web service that based in the US, Nordic region performs well when it comes to median mobile download speeds. Note that, in June 2022, Norway was leading in terms of median download speed with 129.96 Mbps. Speedtest has compared 5G performance in the Nordic countries against other European countries and the data has shown that the Nordic region performs well in this ranking. It is worth to note that only Nordic countries have digital strategies in place. The main reason why the Nordics stand out on 5G performance within Europe countries is because of 5G spectrum availability. We learnt that all four of the Nordic countries on the continent have already assigned low-band and mid-band spectrum which is ahead of the rest of Europe. Looking at the impact of 5G network in the Nordic countries, we gathered that 5G investment if not only for the sake of commercial purposes for telco players as it has given a positive contribution to society. With 5G network, more new business will be created, we will be able to improve our business operations across all sectors and eventually improve the standard of living.

Source: BIMB Securities Research - 8 Nov 2022