Highlights

Last week, the much anticipated new iPhone 5S and 5C were launched nationwide concurrently by all three cellcos under our coverage.

3 variants (16GB, 32GB and 64GB) of 5S were offered while only 1 model (16GB) of the more colorful 5C was introduced, except that Celcom also supply 32GB 5C model.

Celcom and Maxis merely extended their existing iPhone 5 bundles to these new devices with minor adjustments on subsidies.

However, DiGi’s new packages were a major deviations from the current concept of “less subsidy, less monthly fee” to the opposite of “more subsidy, more monthly fee”, trailing rivals’ concept but with even heavier subsidy (see Figure #1).

To compensate that, DiGi hiked the prices of all 3 bundles by ~48%, available for 24-month contract only.

Other changes in packages, includes:

1. Maxis terminated the high end “iValue4” (RM375 per month) which come with 10GB download quota.

2. Celcom reduced the WiFi quota for “First Premier” from 4GB to 1GB.

Comments

We are rather disappointed with this development from the perspectives of device subsidy rationalization and data monetization.

After 7 generations of iPhones, we believe that the market of this premium segment is already saturated. As the smart device penetration rises, the next subscribers are always “poorer”. As such, the current data growth driver lies in the mid and low end segments. This is also evidently observed in DiGi’s ASP per device trend (see Figure #5). Thus, we believe that the subsidy strategy is more impactful if applied to the more targeted segments.

Offering discounts on products which are not selfmanufactured will be particularly costly to cellcos, especially for DiGi who recognized subsidy as direct costs, muting any potential bottom line growth.

To improve data margins / monetization, we opine that cellcos should take this opportunity to reduce download quotas (both mobile and WiFi) and enforce fair usage policy in return for better service quality and connection speed (4G LTE and HSPA+).

Catalysts

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

Risks

Irrational competition, regulation of tariffs, FOREX.

Forecasts

Unchanged.

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 not involve in mobile device subsidy.

Source: Hong Leong Investment Bank Research - 6 Nov 2013