KUALA LUMPUR (Nov 7): BMI, a unit of the Fitch group, predicts challenges in establishing two sustainable 5G networks in Malaysia, emphasising that investment commitments will be crucial for the second network's viability.

The research firm in a Wednesday note said U Mobile's selection as the anchor investor for the second network is unexpected, considering its small size and historical reliance on foreign investment, which it must now reduce.

"It has also never reported operational or financial data, making it difficult for observers to assess its viability for the DNB (Digital Nasional Bhd) project, much less the second 5G player," it said in a note on Wednesday.

Having said that, it believed that the Malaysian Communications and Multimedia Commission (MCMC) would have completed a thorough due diligence in order to reach its decision. "Consequently, we assume that U Mobile has the financial and technical resources needed to sustainably support the new 5G network, provided that additional investors can be brought on board."

Meanwhile, it said other telecommunications companies (telcos) must now decide where to allocate their investments, as few can support both networks.

The risk is that both networks may face financial constraints, potentially hindering the government's digital transformation goals, said BMI.

The research firm said there can be an opportunity for the second network to focus on niche markets like the Industrial Internet of Things (IIoT) and digital content providers, offering differentiation and appealing to DNB shareholders like CelcomDigi Bhd (KL:CDB) and Maxis Bhd (KL:MAXIS).

"This scenario does seem unlikely, however, and we expect the ultimate outcome will be the creation of two separate 5G networks that may struggle to co-exist in a sustainable manner," it added.

U Mobile IPO possible in early 2025

Citing regulatory notes, BMI said U Mobile must reduce its foreign ownership to qualify as the lead investor, as its major shareholder is Straits Mobile Investments, with a 48% stake. Straits Mobile is owned by Singapore's Temasek Holdings.

"A long-planned initial public offering (IPO) of U Mobile stock is likely to be held by early 2025, which should raise considerable funds to both pay down ST Media's existing investment and provide capital for the 5G project. However, it will still need support from local investors and, having lost out to what they consider to be an inferior bid, CelcomDigi and Maxis may choose not to participate," BMI warned.

On Nov 1, MCMC announced that U Mobile had been selected to lead the development of the second open-access 5G network, but details of its structure, financing, and rollout remain vague.

Authorities will need to provide greater clarity on the merits of U Mobile's proposals as well as delineate clear investment guidelines for telcos to consider ahead of striking investment relationships with the new entrant, BMI said.

Telcos to reassess financial commitments if U Mobile withdraws from DNB

U Mobile intends to collaborate with CelcomDigi and Telekom Malaysia Bhd (KL:TM), though CelcomDigi, having submitted its own proposal, seeks clarity from the MCMC on its rejection.

If U Mobile withdraws from DNB, telcos investing in DNB — CelcomDigi, Maxis, and YTL Power International Bhd (KL:YTLPOWR) — must reassess their financial commitments and decide whether to invest in the new 5G network or continue with DNB, BMI noted.

"To an extent, the short-term outlook rests on Telekom Malaysia's response; although it signed contracts to invest in DNB, shareholder approval was delayed and it ultimately was dropped from DNB. It may now consider joining the U Mobile-led operator, but if its hesitancy over joining DNB was due to concerns over the extent of its investment obligations, it may well baulk at joining the newcomer if it is part of a smaller group of backers," BMI added.

At the time of writing on Thursday, Telekom Malaysia had shed four sen or 0.6% to RM6.52, translating into a market capitalisation of RM25 billion for the company, Maxis lost three sen or 0.8% to RM3.58, valuing it at RM28 billion, while CelcomDigi slipped two sen or 0.6% to RM3.38, with a market cap of RM39.7 billion.