Highlights

• Based on MCMC’s 1Q15 statistics, SMS traffic plunged 45.1% yoy and 23.3% qoq to 7.8bn SMS per quarter (see Figure #1), first time slipping below the 10bn mark. This can be translated into less than 2 SMSs per subscriber per day.

• Mobile penetration rate continued to plateau, ended with 146.2% (+2.0-ppt yoy and -2.1-ppt qoq) with 44.4m SIMs on the back of 30.4m Malaysian population (see Figure #2).

• Postpaid base grew resiliently to 8.3m subs (+5.1% yoy and +1.3% qoq) without breaking the positive net add trend since 1Q11. For the past 4 years, it has been expanding healthily at circa 1.2% qoq.

• Prepaid base also expanded yoy with 2.2% but swung qoq, whereby it fell 1.7% sequentially in 1Q15.

Comments

• SMS’ nine consecutive quarterly declines since 1Q13 is not surprising to us and believe it will be the first service to be officially substituted by OTT players, recoding its first victory (refer to our sector report titled “2015 Outlook” dated on 19 January 2015).

• Big 3’s smartphone penetrations were at 53-57% at the end of 1Q15 and there is more room to grow (see Figure #3). As adoption increases, the weakness of SMS will linger as subs can easily migrate to app-based OTT. This will deteriorate even further when bulk / enterprise SMS traffic continue to make the switch to digital.

• Expect postpaid base to gain further due to prepaid switching as postpaid offers more attractive data bundles. Furthermore, postpaid packages are becoming more affordable, such as Celcom’s FIRST Basic 38 which is priced equivalent to existing prepaid ARPU.

• GST confusion may impact prepaid base negatively in 2Q15 which eventually may cause a drag in cellco’s results.

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

• Axiata (BUY, TP: RM7.52) - Celcom’s recovery after prolonged IT transformation, full integration of XL-Axis and strong growth of OpCos in emerging markets.
• TdC (BUY, TP: RM6.78) – 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.

Source: Hong Leong Investment Bank Research - 19 Jun 2015