Highlights

Local daily reported that come Sunday, the authorities will be hunting down an estimated 500k illegal immigrants in the nation’s biggest ever operation to flush out unwanted foreigners.

The operation was targeting those who registered under the Illegal Immigrant Comprehensive Settlement Programme or 6P but did not turn up for further processing, including legalization and voluntary deportation. This exercise will be a three-month non-stop operation throughout the country.

The operation will be led by Immigration Department involving some 135k personnel with assistance from the police, Armed Forces, Rela, Civil Defense, National Registration Department and local councils.

Raids will be conducted mainly in Kuala Lumpur, Selangor, Penang and Johor which have been identified as the dens for illegals.

Once arrested, they will be deported immediately from Pasir Gudang Port in Johor as the Immigration Department does not want its 12 detention centres around the county, each with a capacity of 1k people, to be overcrowded.

Comments

We perceive this newsbreak to be slightly negative to the telco industry as a whole as 500k represents ~1.2% of total cellular subscriptions or ~1.4% of total prepaid subscriptions as of end of 2Q13.

This will impact cellcos in terms of reduced subscriber base, particularly the prepaid segment while the fixed telcos are spared from this operation.

Amongst the incumbent cellcos, DiGi will be impacted the most as we believe that it has the largest market share in the migrant business segment with roughly 60%. With 500k, this may translate into 300k attrition or ~2.8% of its 10.5m subscriber base.

There may be bigger pressure to DiGi’s bottom line as migrant’s ARPU is the highest among the prepaid segment (on par with postpaid) and most profitable, partly due to the high IDD and messaging traffics.

Minimal impact to Maxis and Celcom. Only indirect impact through their wholesale segment under the MVNO / domestic roaming contracts.

Catalysts

• Cost savings from partnerships.
• Managed services / outsourcing.
• Increased demand for wholesale bandwidth.

Risks

Irrational competition, regulation of tariffs, FOREX.

Forecasts

Maintained.

Rating

Neutral

Positives – Low beta, defensive, strong cash-generation and dividends should underpin the share price.

Negatives – Potential irrational competition, regulatory risks, unable to monetize data, dumb pipes.

Top Picks

TM (BUY, TP: RM5.82).

TdC (BUY, TP: RM3.99).

Both our top picks are fixed line players who are immune to this negative newsbreak.

Source: Hong Leong Investment Bank Research- 28 Aug 2013