Highlights

Cellcos are eager for the implementation of goods and services tax (GST) which is anticipated to be announced in the upcoming Budget 2014 in Parliament on Oct 25.

They are hoping to leverage on this new policy as a channel to cascade the prepaid service tax to consumers.

All the while, cellcos were paying the prepaid service tax to government although they did not collect from the sales of airtime through prepaid top-ups which in turn, weighed down on their earnings.

Recall that cellcos were initially given the green light to pass on the 6% sales tax to prepaid users in Sept 2011. However, this plan was shelved in response to government’s call not to further burden rakyat’s lifestyle.

GST is touted to materialize in 2015.

Comments

We welcome this development as this will benefits cellcos in terms of cost savings.

We expect DiGi to benefit the most if this materializes considering that it has the highest proportion (84.0%) of prepaid users to total subscriber base, compared to Maxis (74.8%) and Celcom (77.5%).

Based on our estimation using 2Q13 operating data, DiGi will possibly enjoy the most with 13.6% in earning uplift (based on FY15E PAT), followed by Maxis and Axiata with 7.8% and 6.0% respectively, provided competition and usage remain status quo.

However, we would like to highlight the risk of lower usage (MOU) from prepaid subscribers after the pass through is enforced considering the highly price sensitive nature of this market segment, especially migrants who are the major contributor of the prepaid segment. Hence, this may dwarf our bullish estimation above in the short term as usage declines.

We also do not discount that cellcos may use this opportunity to intensify competition by introducing new packages to compensate the higher cost of service with extra air time or download quota to prepaid subscribers which may also neutralize part of the gain from the tax savings.

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

We maintain our top picks for now due to the uncertainty of GST implementation while it is still a distance away in 2015, if realized.

• TM (BUY, TP: RM5.82).
• TdC (BUY, TP: RM3.99).

Source: Hong Leong Investment Bank Research - 13 Sep 2013