Fixed fibre wholesale price regulation came into effect on 8 June. The objective is to stimulate more affordable retail products with at least 25% cheaper versions by year end. We think that this will hit hardest on TM and mildly on TdC. However, this will benefit the cellular players. In turn, TM’s earnings and fair value are revised lower with HOLD call while others remain. We are Neutral on the sector.

MSAP enforced. Last week, the Communications and Multimedia Minister, Gobind Singh Deo, announced that Mandatory Standard on Access Pricing (MSAP) has come into effect on 8 June. This MSAP is to regulate fixed fibre wholesale pricing.

Materializing PH’s manifesto. The relevant parties (access providers and seekers) are currently in commercial discussions to finalise the wholesale prices. The process is scheduled to be concluded in July or August, after which, new lower priced broadband packages will be rolled out to consumers. Fixed broadband prices in Malaysia are expected to drop by at least 25% by year end.

Not a surprise. We had highlighted this concern multiple times, first in 2016 and the most recent in our 2018 sector outlook report dated on 10 Jan 2018. Taking 2018 as the base, Layer 2 / 3’s pricings are bound to decline substantially by 12% / 10% and 21% / 18% in 2019 and 2020, respectively (Figure #2 and #3). Going forward, this price regulations may impact TM’s Internet and Data revenues which account for 36% and 22% of group’s 1Q18 top line, respectively.

Milder impact on TdC. As the second largest fixed operator, TdC is not spared from MSAP. However, TdC regards this price erosion as a norm and believes that volume growth can offset this impact. This explains the muted growth in recurring wholesale revenue for the past many quarters. As for retail segment, TdC is confident that their products are price-competitive and will only adjust based on market condition and competition. Unlike TM, TdC is not an access provider to rivals in retail market. As such, price pressure should not be intense. TdC does not expect this development to derail their business strategy or CAPEX investment.

Cheers for cellcos. On the contrary, the cellcos should be trumpeting this move as it promotes pricing fairness and transparency given that TM’s webe is also competing in the same space. Furthermore, a cost-effective wholesale fibre would allow mobile operators to reduce expenditure on high speed transmission backhaul (part of traffic costs which account for 20-30% of revenue), a paramount ingredient for the success of 4G and beyond.

Forecast. Unchanged for all except TM. Cut TM’s FY19-20 earnings by 32% and 33%, respectively to reflect lower ARPU for retail subscribers. As such, TM’s TP has been reduced by 30% from RM4.29 to RM3.02. Maintain HOLD call.

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.

Source: Hong Leong Investment Bank Research - 26 June 2018