Highlights

• Underperformed in 2016 with average return of -11.7% vs. KLCI’s -3.0% chiefly due to airwave reallocation.

• Rational rivalry returned in 2016 as cellcos raised prices for unprofitable products. We are not overly concerned on their generosity to offer larger data allocations since price levels were firmly unchanged protecting any ARPU downside.

• Market intensity is expected to remain in 2017 and do not foresee the repeat of the previous bloodshed. Telcos to differentiate by product differentiation instead of price. We reiterate our stance that webe is not destructive to the sector.

• Progressively higher data quota offerings in postpaid and mobile broadband may erode fixed lines’ value propositions and post a legitimate threat in the long term.

• Regional data demand is underserved due to inadequate international bandwidth infrastructure. Internet penetrations are still very low but are gaining at lightning pace. This mismatch will sustainably drive submarine cable operators into a multi-year growth.

• Weakening RM 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.

• Positive on the recent spectrum reallocation due to more equitable outcome. DiGi was a clear winner. Pricing for other spectra unlikely to deviate much. A balance must be struck to yield a win-win situation.

• Cost focused in 2017 with opportunities in device subsidy reduction and via outsourcing.

• Overcrowded with 8 players in a small market and ripe for consolidation.

Catalysts

• Cost savings from partnerships.

• Managed services/outsourcing.

• Increased demand for wholesale bandwidth.

Risks

• Irrational competition, regulation of tariffs, FOREX.

Forecasts

• Unchanged.

Rating

NEUTRAL ( ↔ )

• Maintain NEUTRAL on the sector due to the lack of positive catalyst in the near term. However, telco remains stable supported by resilient domestic demand. Their dependable dividend yield will be a plus point in a volatile market.

Top Picks

• TdC (BUY, TP: RM8.79) – (1) Wholesale is poised to return to strong growth trajectory after more undersea cables are ready for service; (2) data centre’s steady expansion; (3) potential for higher dividend payout.

• DiGi (BUY, TP: RM5.70) – (1) Return to growth in a rational market; (2) Low frequency band enhancing efficiency; (3) Under-leveraged balance sheet to support spectrum fee while committed to dividend payout.

Source: Hong Leong Investment Bank Research - 9 Jan 2017