Highlights

Yield compression euphoria – absent in 2013 and would not repeat in 2014 without the confluence of unfavorable external macroeconomic factors and domestic political risk.

Commitment to APT’s 700 MHz harmonization is a long term catalyst for the sector. However, this is highly dependent on DTTB project under Puncak Semangat’s implementation.

The prolonged deliberation and pending decision on 900MHz and 1800MHz reallocation have undoubtedly created risks buoyed amongst the telcos as guessing game continues to predict the ultimate beneficiaries.

3G QoS under regulatory scrutiny but should be a concern.

Electricity tariff revision would not impact telcos materially as it only accounted for 3%-5% of overall cost base.

Expectation of OPR hike of 25bps in 2H14 would exert pressure on share price while FOREX volatility would send telcos with USD debt exposures into doldrums.

GST – positive but may not enjoy the full boost due to lower MOU, intensified competition and regulated pricing.

Budget 2014 – win-win but TM is the major beneficiary.

2014 smartphone penetration expected to reach 44.5% as ASP plummet and continue to drive data revenue. Newer smartphone models also stimulate higher data usage.

Device subsidy erodes earnings while there is no sign of cellcos improving data monetization.

OTT threat gaining traction and SMS became the first casualty with traffic plunging below 20bn SMS per quarter.

G.fast – 1Gbps over traditional copper network suggests great potential and value in TM.

Sector’s next phase of growth lies in IoT / M2M and telcos has begun to tap into the market.

LTE yet to be a catalyst due to unfavorable market dynamics, absence of 4G service premium, lack of awareness, limited availability of affordable devices and opportunity eroded by HSBB and WiFi.

Emphasis on cost thanks to technological advancement. Outsourcing is a more sustainable business model.

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

Prefer fixed over mobile as it is an inevitable pre-requisite to cellcos who are seeking growth in data.

Fixed has healthy market landscape - monopoly in retail segment and duopoly in wholesale and enterprise segment.

TdC (BUY, TP: RM4.03) and TM (BUY, TP: RM5.82).

Source: Hong Leong Investment Bank Research - 13 Jan 2014