• MCMC Chairman Dr. Fadhlullah Suhaimi reiterated that the plan for JENDELA is to enhance domestic connectivity, with “no one left behind”
   
• For 5G, the establishment of a government-owned SPV is to roll out the 5G network faster, for the country to stay competitive and to address the digital divide. The SPV will utilise 3 spectrum bands (700MHz, 3.5GHz and 28GHz) and is to provide wholesale services only. Also, the SPV will seek its own funding for the capex, without tapping into MCMC’s USP fund
   
• Maintain Neutral on the sector. TM (BUY, TP RM6.75) is our top sector pick for its extensive fibre infrastructure that is essential for the deployment of 5G nationwide. We expect TM to benefit from higher wholesale revenue from leasing its fibre infrastructure to the SPV

JENDELA to provide all Malaysian quality access to digital connectivity

Dr. Fadhlullah Suhaimi, chairman of the Malaysian Communications and Multimedia Commission (MCMC) shared further details on the MyDIGITAL initiatives during an MCMC briefing titled: “Accelerating 5G deployment in Malaysia”. He reiterated that the plan for the National Digital Network (JENDELA) project is to provide all Malaysians quality access to digital connectivity nationwide, with national aspirations of 9m premises passed, 100 Mbps mobile broadband speed (by adopting 5G) and 100% 4G coverage in populated areas by 2025.

Malaysia to Deploy 5G by 4Q21; SPV to Provide Wholesale Services Only

Key highlights for the briefing presentation on Malaysia’s 5G plan and details on government owned-special purpose vehicle (SPV) that is entrusted to deploy the 5G network and infrastructure nationwide:

(i) Government targets to offer the full range of commercial 5G services by 4Q21;

(ii) RM15bn investment on 5G infrastructure and network includes leasing fees for existing infrastructure from the telcos;

(iii) The capex will be funded by the SPV, and will not utilise MCMC’s Universal Service Provision (USP) fund;

(iv) Continued investments in 4G (by existing telcos) are still required to ensure seamless coverage and quality, and to address urgent digital divide concerns; (v) Investing in 5G network will cost between 25%-75% more than 4G;

(vi) MCMC will allocate 200MHz of 3.5GHz spectrum, 1,600MHz of 28GHz spectrum and unspecific bandwidth of 700MHz spectrum to the SPV;

(vii) SPV is to provide wholesale services only, charges will be regulated and fair access and non-discriminatory terms will be imposed;

(viii) SPV must own all assets and the ownership of the SPV cannot be changed for the duration;

(ix) Spectrum bands already allocated to existing mobile operators cannot be used for 5G, thereby ensuring continued focus on expansion of 4G; and

(x) MCMC to study and recommend telecoms sector taxation to promote viable network rollout and availability of high quality mobile devices / peripherals.

The Market Demand for 5G and Circumstances Have Changed

When asked about the reasons for the acceleration in Malaysia’s 5G deployment and the change to government-owned asset co. model, Dr. Fadhlullah explained that investors’ demand for 5G services has grown these days and Malaysia has to catch up quickly (to its regional peers) to remain competitive and continue to attract investors. The government also aims to narrow the digital divide via the SPV model. If the government was to leave it to the telcos to develop the 5G network, the digital divide in the country may remain due to relative unattractive rate of returns in the less-populated area.

Maintain NEUTRAL, TM Is Our Sector Top Pick

All in, we maintain our NEUTRAL rating on the sector. We reiterate our view that the government’s 5G deployment plan (via SPV) should be slightly negative to the long-term business prospects of the cellular operators (cellcos), as the cellcos may see higher competition and margin erosion when 5G services become mainstream and the cellcos have the need to fork out more expenses for their access. The plan has nevertheless eases the cellcos’ short-to-medium term capex requirements, lowers the risk of cash-calls and provides more capex flexibility for the cellcos to develop their enterprise business and / or fixed broadband business. Also, the cellcos may receive some leasing revenue should they lease their network (ie, telco towers) to the SPV.

On the other hand, the fixed broadband providers (ie, TM) should benefit from the faster implementation of a 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 leasing / wholesale revenue for its fibre network. For exposure to the sector, TM (T MK, RM6.48, 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.

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 - 23 Feb 2021