Highlights

Based on industry statistics published by MCMC for 1Q14, penetration rate for mobile subscriptions registered a second consecutive quarterly drop (see Figure #1), albeit the quantum is much smaller compared to the previous quarter.

This happened despite population continue to grow steadily and healthily (see Figure #2) to reach 30m.

Recall that postpaid net adds in 4Q13 surpassed prepaid’s for the first time since 4Q10 (see Figure #2). The trend continues in 1Q14 whereby postpaid sustained its outperformance against prepaid net adds.

Comments

After checking with several cellcos, none revealed any major subscriber database cleanup or force churn due to indebtedness in 4Q13. Thus, this may be attributed to SIM card deactivation as legacy prepaid plans expired.

In 1Q14, there were some small scale cleanups which caused the total net adds’ 0.27% qoq growth to lag behind population’s 0.30% qoq growth. In turn, this has led to a drop in penetration rate.

This may be an early indication that Malaysian’s cellular penetration rate has already hit the ceiling and would probably plateau at around this level going forward.

We do not foresee Malaysian market to follow the footsteps of Hong Kong or Macau where penetration rates are above 200%.

This oversaturated retail market reinforced our thesis that cellco’s next phase of growth lies in government and corporate markets focusing on internet of things (IoT), industrial internet, machine-to-machine (M2M) or telemetry.

Postpaid’s strong net adds is a positive surprise (under contract with higher and stable ARPU). Given the subdued penetration rate, we believe that this is due to upgrades by prepaid subscribers in order to take advantage of fixedcommitment- data bundles (which comes with free voice and messaging quotas) in order to avoid bill-shocks.

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 prices.

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

Top Picks

Prefer fixed over mobile as it is an inevitable pre-requisite to cellcos who are seeking growth in data while it is not faced with the issue of saturation.

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

TdC (BUY, TP: RM4.87).

Source: Hong Leong Investment Bank Research - 10 Jul 2014