• Malaysia has launched the MyDIGITAL initiative and Malaysia Digital Economy Blueprint. Key highlights include the implementation of 5G nationwide by a government-owned SPV and RM12-15bn investment by cloud service providers over the next 5 years
   
• The establishment of a government-owned 5G asset co may erode cellcos’ long-term profitability but in the short-term, the cellcos will benefit from savings in 5G-related capex. Key beneficiaries from MyDIGITAL initiative are the fixed broadband provider (TM) and telecom engineering companies, contractors, service providers
   
• Elsewhere, the government has identified 48 national initiatives in the Malaysia Digital Economy Blueprint. To achieve these targets, the government may engage the digital service providers and we see business opportunities for companies such as MYEG and Scicom

Malaysia Launched MyDIGITAL and Malaysia Digital Economy Blueprint

Malaysia’s Prime Minister Tan Sri Muhyiddin Yassin had on 19th February 2021 launched the MyDIGITAL initiative. In his speech (LINK), Muhyiddin said the MyDIGITAL initiative, which includes the Malaysia Digital Economy Blueprint, will complement the national development policies such as the Twelfth Malaysia Plan and the Vision for Shared Prosperity 2030. MyDIGITAL sets out a number of initiatives and targets across three phases of implementation (2021-2030). Some of the targets are: (i) the digital economy to contribute 22.6% of the country’s GDP by 2025; (ii) to provide 500,000 job opportunities in the digital economy; (iii) to encourage 875,000 micro, small and medium enterprises to accept the use of ecommerce; and (iv) to attract new investments worth RM70bn in the digital sector.

Four Important Types of Digital Infrastructure to be Built First

To create an effective digital ecosystem, Muhyiddin said four important types of digital infrastructure under MyDIGITAL need to be built first. Development efforts will be jointly undertaken by the government and the private sector. These include:

(i) RM21bn will be invested over the next five years through the National Digital Network (JENDELA) project to strengthen the existing connectivity. The fixed line optical fibre network will cover almost 100% populated areas in stages;

(ii) A total of RM1.65bn will be invested by several telcos to strengthen connectivity to the international submarine cable network until 2023;

(iii) RM15bn will be invested over a period of 10 years for the implementation of 5G nationwide. This effort will be carried out by a special purpose vehicle under the Malaysian government. This entity will then be given the appropriate spectrum to own, implement and manage the 5G infrastructure;

(iv) RM12-15bn will be invested by Cloud Service Provider (CSP) companies over the next 5 years. Four CSP companies – Microsoft, Google, Amazon and Telekom Malaysia – to build and manage hyper-scale data centres and cloud services. Appointment of three local ICT companies as Manage Service Providers to work with CSPs to manage their services in the public sector. These are Enfrasys Solutions, Prestariang System and Cloud Connect.

The government will strengthen the ecosystem via regulatory changes, sharing of public data resources and facilitate changes in labour market

The construction of a digital infrastructure forms the backbone for a sustainable digital ecosystem and the government will continue to help strengthen this new ecosystem through various ways, including: (i) by creating a regulatory environment that can support digital use while protecting the privacy of citizens; (ii) by administering public data resources so that they can be jointly utilised by public and private organisations; and (iii) by facilitating the evolution of labour market in potentially disruptive industries through automation and digital technology.

Malaysia Digital Economy Blueprint spells out the efforts and initiatives to deliver aspirations of MyDIGITAL

MyDIGITAL has set the direction of a digital economy and built the foundation to drive digitalisation across the nation. To realise these aspirations, the Malaysia Digital Economy Blueprint (LINK) is formulated as the action plan to outline the efforts and initiatives which will be implemented in three phases over 2021-2030. The Malaysian Digital Economy Blueprint has 6 strategic thrusts, 22 strategies, 48 national initiatives and 28 sectoral initiatives.

The plan looks well-conceived, devil is in the details and execution is the key

Broadly, MyDIGITAL blueprint looks well-conceived. We agree that Malaysia must digitalise quickly and there is a need to move fast, including building its 5G network. Under the blueprint, the government will be the catalyst through policy framework that will create the environment for the private sector to drive our digital economy. We concur that digital infrastructure and a good regulatory framework are essential in attracting higher private sector’s investment into the digital economy. In addition, good incentives and large talent pool are also of great importance, and we will keenly wait for further details on these areas. Also, the 10-year investment period for the implementation of 5G nationwide looks lengthy – a protracted infrastructure rollout may discourage private sectors to jump-start their investments.

Positive of TM and the telecoms engeering companies / contractors, slightly negative of the cellcos

The largest surprise for us is the plan to carry out 5G implementation via a government-owned special purpose vehicle (SPV) and the target to introduce 5G Internet connectivity in Malaysia by end of 2021. The plan is, in our view, slightly negative to the long-term business prospects of the cellular operators (cellcos). In the short-to-medium term, the cellcos will benefit from some savings in 5G related capex, but the cellcos may see higher competition and margin erosion in the long-run, as 5G services become mainstream and the cellcos having the need to fork out more expenses for their access. On the other hand, the fixed broadband providers (ie. TM) should benefit from the faster implementation of 5G network. TM’s extensive fibre network is an essential asset in achieving a nationwide 5G rollout and we expect the group to see higher demand for its fibre infrastructure.

The largest beneficiaries from MyDIGITAL initiatives are, in our view, the telecoms engineering companies and contractors. The rollout of the RM21bn JENDELA project, RM15bn investment in 5G network, and establishment of data centres should stir demand for their services. The Malaysian-listed telecoms engineering companies / contractors / service providers are Binasat Communication (Not Rated), REDtone (Not Rated), OPCOM Holdings (Not Rated), Cahya Mata Sarawak (Not Rated), OCK Group (Not Rated) and Rohas Tecnic (Not Rated).

More Opportunities for the Digital Service Providers

Under the Malaysian Digital Economy Blueprint, the government has listed a numbers of key targets for its 48 national initiatives (Fig 1), these include: (i) to provide cashless payment options by 2022; (ii) to achieve 80% end-to-end online government services by 2025; (iii) to increase the electronic payment transactions per capita (to 400 by 2022); (iv) to achieve 36 EFTPOS (electronic funds transfer at point of sale) terminals per 1,000 inhabitants by 2022; and (v) to focus on digital education and upskilling / reskilling of existing workforce. To achieve these targets, we believe the government may engage the private sectors with specific skill sets, such as the e-government service providers, the payment service providers, ewallet companies, education service providers, and others.

Maintain NEUTRAL, TM Is Our Sector Top Pick

All in, we maintain our NEUTRAL rating on the telecom sectors. While the establishment of the government-owned 5G infrastructure company may affect the cellcos’ long-term earnings outlook, the plan has nevertheless eased the cellcos’ short-to-medium term capex requirement, lowered the risk of cash-call and provide more capex flexibility for the cellcos to develop their enterprise business and / or fixed broadband business. For exposure to the sector, TM (BUY, TP RM6.75) remains our top pick for its extensive fibre infrastructure, growing demand for the fixed broadband services and attractive valuation vis-à-vis peer and its historical PER. In the e-service providers segment, we have BUY ratings on MYEG (TP RM2.70) and Scicom (BUY, TP RM1.15).

Key Risks to Our Neutral Rating on the Telco

Key upside risks: (i) sector consolidation; (ii) strong quarterly earnings; and (iii) strong investor demand that could further re-rate valuation multiples. Downside risks: (i) low consumer / business spending that leads to lower service revenue; (ii) higher price competition that erode ARPUs; (iii) weak quarterly earnings; and (iv) country / regulatory risks for Axiata’s overseas operations.

Source: Affin Hwang Research - 22 Feb 2021