Our earlier full year outlook remains intact for 2H18. 700MHz spectrum may be awarded via price auction but we do not expect any bidding war even if this materializes. Reiterate our stance on MSAP that the wireless will benefit at the expense of wired. SST2.0 will not result in any impact but tax holiday may lift 3Q18 results. Competition is BAU as players are cost-focused. Reiterate NEUTRAL with Digi and TIME as top picks.

Outlook intact: Our sector outlook since early this year remains intact with the tax holiday window (zero-rating of GST) being the only exception. In this report, we revisit and provide updates on those themes.

Spectrum: Although all major cellcos had submitted their bids, there is no news from the regulator pertaining to the award of 700MHz airwave. This may be due to the (i) delay of broadcasting’s analogue switch off (ASO) which was initially targeted to take place on 30 Jun 2018; and (ii) change in government post GE14. As highlighted in our Strategy report entitled “2H18 outlook: New Malaysia” dated 27 Jun, we do not discount the possibility of this prized airwave being retendered based on price in view of the government’s efforts to improve its fiscal position. Even if auction materializes, we do not expect exorbitant fees (the likes of Thailand and India) because (i) there are enough to go around assuming 8 blocks are available as before; and (ii) to prevent spectrum cost being passed through to subscribers.

MSAP: We had envisaged and highlighted this concern multiple times, first in 2016 and the most recent in our 2018 sector outlook report dated on 10 Jan 2018. This price regulation is a 3-year step down exercise and based on the traditions for voice and SMS, every 3-year renewal will be see further price reductions. We expect TM’s Internet and Data revenues to be negatively impacted and to a lesser extent, TIME dotcom (TdC) as well. 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. On the contrary, the cellcos should be trumpeting this move as a cost-effective wholesale fibre would allow mobile operators to reduce expenditure on high speed transmission backhaul, a paramount ingredient for the success of 4G and beyond.

SST2.0: The migration from GST to SST2.0 would not have any major impact since the rate stays the same at 6%. Although input service taxes (advertising, auditing, cleaning, etc) are not claimable anymore, we expect these additional levies to be immaterial (<0.5% of sales) and manageable. The only risk is cellcos are instructed to absorb domestic prepaid SST which was subsidized by the government under the GST regime, but we believe this would not reoccur. Cellcos may experience a stronger 3Q18 as the tax holiday will temporarily spur usage among prepaid migrant segment and reloads prior to the re-introduction of SST.

Competition: Business as usual as Big-3 telcos remain discipline and cost-focused. Pre-to-postpaid migration continues to be motivated by voice-to-date substitution. Gradually, wireless to erode wired’s market share with WTTx solution leveraging on matured 4G and 5G in the future.

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: Digi.com (BUY, TP: RM5.10) and TIME dotCom (BUY, TP: RM9.75).

Source: Hong Leong Investment Bank Research - 31 Jul 2018