Highlights

During  the  Industry  Performance  Report  2013  last  week, MCMC revealed that it is looking at ways to optimize the use of the 700MHz spectrum for LTE services.

Currently, the entire television space is occupying frequencies ranging from  470MHz to 742MHz  and with the introduction of DTTB  (digital  terrestrial  television  broadcasting),  the  range will be reduced to 470MHz to 698MHz.

This will free up spectrum ranging  from 698MHz to  742MHz for LTE once analogue TV broadcasting is fully migrated.

MCMC will also review the 900MHz and 1800MHz spectrums awarded  to various cellcos to strengthen service quality.   It is looking  at  a  variety  of  options,  including  auction,  “beauty contest”,  allocation  for  frequency  refarming.  However, decision will be made after consulting all players.

MCMC  aims to rebalance all cellcos’ spectrum by  narrowing the gap of spectrum awarded to the big and small players.

MCMC is finalizing the tender of first round USP tower project (400 out of planned 1k) and two more rounds of 300 towers each will come later.  Furthermore, MCMC has also employed a  tender  for  an  undersea  cable  system  connecting  Sabah, Sarawak and Peninsular Malaysia.

Comments 

Following  our report  entitled “4G LTE  on 700MHz” dated 20 June  2013,  we  continue  to  be  positive  with  the  planned allocation  of  700MHz  for  mobile  broadband  providing  wider coverage, improved indoor quality (lower CAPEX and OPEX), universal 4G spectrum adopted worldwide enhancing service roaming, device compatibility and economy of scale.

On the contrary, the reallocation of 900MHz and 1800MHz for refarming  was  a  negative  surprise  and  this  may  lead  to reduced ownership by the big 3 (although DiGi may get more on the 900MHz).  Any  spectrum auctions will put pressure on cellcos’ generous dividend payout as well as gearing ratio.

Apart  from  the  big  3,  all  NFP  license  holders  including REDtone, OCK and Instacom (NOT RATED) stand a chance to clinch the tower deal.

We also understand that TM has participated in the undersea cable system tender.

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 

Although we prefer fixed over mobile, both TM and TdC share prices  have  rallied  in  tandem  with  our  calls,  leaving  limited upside to our fair values. Fixed has healthy market landscape -  monopoly  in  retail  segment  and  duopoly  in  wholesale  and enterprise segment.  Fixed is still  an inevitable pre-requisite to cellcos who are seeking growth in data.

Top pick remains DiGi (TRADING BUY, TP: RM5.85) due to well execution and business trust potential.

Source: Hong Leong Investment Bank Research - 18 Sep 2014