Highlights

• Underperformed in 2015 with average return of -5.94% vs. KLCI’s +1.27% due to GST, price war and stronger USD.

• GST boost did not materialize due to confusions, delays and changes in requirements. Cellcos incurred higher expenses due to the 3-month reimbursements and network preparation costs. No clarity on source of funding for 2016 rebate and charging mechanism for 2017 and beyond.

• MSAP expired in 2015 without revision, a boon to the sector. But indications that fibre access pricing will be regulated in near future, a bane to fixed telcos.

• Weakening MYR led to falling foreign shareholding due to capital flight. Also led to inflated IDD-related costs along with higher finance cost for telcos with USD debt exposure.

• Competition subsided towards end of 2015 and expected to be more rational in 2016 considering the uncertainties ahead including GST, access pricing, FOREX and SMS erosion.

• TM-P1 is not expected to be overly value destructive to the overall market as it focuses on high value market. Wholesale DR rate for P1 may not be attractive.

• Weighted average smartphone penetration based on the big 3’s subscriber base exceeded expectation at 61.6%, bodes well for the telcos who are betting on data revenue to sustain organic growth.

• More spectra in the pipeline but untouchable in near term. Increasing indications that regulators may allocate spectrums based on auction.

• Overcrowded with 8 players in a small market and ripe for consolidation. M&A may be a way to grasp more spectra.

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 share prices.

Negatives

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

Top Picks

• Axiata (BUY, TP: RM7.59) – (1) Ncell will be an earning accretive acquisition; (2) Celcom’s recovery; (3) XL’s fruitful strategy transformation; (4) OpCos strong growth in other emerging markets; (5) Tower listing; and (6) Possible merger between Robi and Airtel Bangladesh.
• DiGi (BUY, TP: RM6.22) – (1) Return to growth in a rational market; (2) Lean operation with prudent management; (3) Under-leveraged balance sheet for possible M&A and spectrum auction.

Source: Hong Leong Investment Bank Research - 7 Jan 2016