Highlights

• Outstanding in 2014 and proven again to be investors’ safe haven. Average return of 22.8% outpaced KLCI’s -10.5%.

• The reallocation of 900MHz and 1,800MHz bands will benefit DiGi the most at the expense of the incumbents. Any airwave auction will not be well received. A single 2G network may be the best solut ion to push this agenda forward.

• Access pricing is due for another review by year end. It is expected to be reduced by the same quantum gradually every year. Focus will be regulation on fibre to promote transparency and fair market competition.

• 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.

• GST – positive with DiGi enjoy the most, but may not enjoy the full boost due to lower MOU, int ensified competition and regulated pricing.

• BNM to stand pat on OPR throughout 2015 but any US Fed hike surprises may trigger major sell down. Maxis has the low est foreign shareholding. FOREX volatility could send telcos with USD debt exposures into doldrums.

• Budget 2015 - government’s investment commitment which is win-win for all with TM being the main beneficiary.

• 2015 smartphone penetration ex pected to reach 54.3% as ASP plummet and continue to drive data revenue.

• OTT threat gaining traction and SMS fell as victim with volume plunging more than half from historical peak.

• 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.

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

Catalysts

• Cost savings from partnerships.

• Managed services / outsourcing.

• I ncreased demand for wholesale bandwidth.

Risks

• Irrational competition, regulat ion of tariffs, FOREX.

Forecasts

• Unchanged.

Rating

• Neutral

Positives

• Low beta, defensive, strong cash-generation anddividends should underpin share prices.

Negatives

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

Top Picks

• Axiata (BUY, TP: RM7.59) - Celcom’s recovery after prolonged IT transformation, full integration of XL-Axis and strong growth of OpCos in emerging markets.
• Time.com (BUY, TP: RM5.73) – 4G LTE rollouts will continue to boost demand for node fiberization and exposure to regional data boom benefiting both global bandwidth sales and data centre businesses.

Downgrade DiGi from BUY to HOLD (TP: 6.30) due to the limited upside and near term catalysts are fully priced in.

Source: Hong Leong Investment Bank Research - 19 Jan 2015