Airwave. 700MHz is the most sought after thanks to its superior propagation feature yielding operational efficiency (see Figure #2-#5). Based on MCMC’s final report, 5G pioneer spectra identified are 700MHz, 3.5GHz and 26/28GHz (mmW). We opine that they present a good mixture of coverage, hybrid and capacity bands. MCMC will make available 2×30MHz of 700MHz (FDD), 100MHz of 3.5GHz (TDD), 1600MHz each for 26GHz and 28GHz (TDD), respectively. 700MHz and 3.5GHz bands planned to be awarded to a consortium formed by multiple licensees. The spectra will be assigned via tender process (700MHz and 3.5GHz), beauty contest (26GHz) and first-come first-served basis (28GHz) based on apparatus assignment fee structure. Meanwhile, existing allocations for 2.3GHz and 2.6GHz will be extended till Dec 2021.

Fibre is king. Its role as backhaul to transfer data at the speed of light has become ever more critical and a mandatory pre-requisite in 5G deployment. Demand will spike not only in terms of capacity, but also coverage in order to compensate for 5G spectra (especially mmW) shortcoming in propagation. Surge in wholesale bandwidth demand will boost margins even under MSAP regime. Also, new fibre rollouts are commercially negotiated (price not regulated) and fixed telcos will command more lucrative returns.

SST2.0. Cellcos may be instructed by the government to absorb domestic prepaid subs’ 6% levy. However, if the compensation is done in the form of freebies instead of cash outlay, we believe the negative impact will be more manageable. On the flip side, this may reduce the intensity of the competition in the market as telcos grapple to contain this new cost item.

Yield play. Despite global central banks turning dovish, telcos’ dividend yields which average circa 2.5% (see Figure #6) is not attractive enough to spur domestic and foreign buying interests. Telcos’ foreign shareholdings had been hovering at low levels in 2017-18 and some upticks are observed in recent months (see Figure #7).

Stronger greenback. HLIB expects USD to be stronger in 2020 averaging RM4.15- 4.20/USD compared to 2019’s YTD average of RM4.15/USD (see Figure #8). This may lead to higher IDD traffic costs and foreign debt financing. TIME’s IRU sales proceeds will be higher as majority is dominated in USD.

Competition. Business as usual as Big-3 telcos remain discipline and cost-focused. Prepaid-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 with greater emphasis on fixed over mobile as they are the prime beneficiaries in 5G and broadband infrastructure build up. Our top picks are TM (BUY, TP: RM5.03) and TdC (BUY, TP: RM10.14).
 

Source: Hong Leong Investment Bank Research - 2 Jan 2020