Strengthening the Prepaid registration. Beginning 1 January 2018, new prepaid customers would need to provide more information during the registration process, according to MCMC’s recent statement. With mobile phones being a significant tool in our daily life, there is a need to curb misuse of the prepaid public cellular services and further strengthens and protects personal information to avoid unauthorized usage by a third party. Therefore, with the aim to empower the consumer in ensuring identification information provided during registration are valid and to ensure the integrity of data, MCMC has strengthened the Guidelines for Prepaid Registration, which will be fully enforced by 1st January 2018.

Who needs to register? All users regardless of their nationality (Malaysian or NonMalaysian) are required to register as long as they are subscribers of Malaysian Prepaid Services. This includes (i) Malaysian citizens/permanent residents; (b) Foreigners (workers or students); and (iii) Tourists. Registration is compulsory for all single prepaid mobile numbers that a user has with the respective service provider. Apart from the usual identification document, all applicants would need to provide documents to verify the mailing address (for Malaysian citizens/permanent residents/foreigner's workers/students) and hotel/temporary residential address (for foreigners/tourists). Please refer to the overleaf page for details. Besides, the authority is also lowering the maximum number of prepaid SIM cards (per customer/user) to 5 instead of 10 previously under the same service provider.

Original documents needed during the registration and reload. Registration must be done using the secure automated platform such as Optical Character Recognition (OCR) application, Biometrics or MyKad Reader. During registration, photocopy of documents are not allowed and the verification must be based on original documents only. On the prepaid reload front, MCMC and Service Providers are still in the process of identifying the best method to implement the reload with ID mechanism currently. However, when the system is ready and in place, the users must provide partial ID number to reload the mobile phone’s credit via the platform which will be determined later, according to MCMC.

Opportunity or Threat to Telco Incumbent? While we concur with the government’s initiative, the strengthening of prepaid SIM cards guideline could lead for tougher operating environment over the short-term, especially for the prepaid reload services. With this new guideline, users would need to provide an ID for verification before they allowed to perform a reload, which requires incumbents to install new systems to all point-of-sales (i.e. convenient stores, grocery shops, e-commerce/banking, etc.) for document verification purpose. The process may discouraged consumers resulting in less credit top-up and trigger another clean-up exercise in each Cellco’s prepaid segment moving forward. On the flip side, there is a likelihood some prepaid users may consider converting their service to the postpaid to avoid the hassle, which bodes well for Cellcos to up-sell their value-added services and provide brand stickiness in the future.

Prepaid segment landscape. Despite the Postpaid subscribers continued to trend upwards in recent years, the overall subscriber base is still dominated by the Prepaid users. There are 71.8%/70.6%/80.9% of MAXIS/CELCOM/DIGI’s subscribers (out of the total subscribers base of 10.4m/9.9m/12.0m) coming from the Prepaid segment and contributed 46%/c.45%- 50%/63% to their respective service revenue as of end-2Q17; thus, suggesting that DIGI may face higher challenging time should there is any hiccup in the Prepaid SIM registration/top-ups.

Still prefer fixed-line players overall. We made no changes to all our Telco’s FY17-FY18E earnings estimates as well as their respective target prices. TM (MP, TP: RM6.70) remains as our favourite big cap pick for the sector although we do not have any convincing buy call. On the mobile operators front, we favour MAXIS (MP, TP: RM5.90) over its peers (due to its extensive network infrastructure and more importantly, signs of operational improvement in its latest quarter) but downgraded our AXIATA rating to UDERPERFORM (from MARKET PERFORM call previously) per our rating definition with an unchanged SoP-driven target price at RM4.80. OCK (OP, TP: RM1.05), on the other hand, remains our preferred pick for the mid-cap telecom in view of: (i) its healthy cash flow on the back of escalating recurring income trend, (ii) its ability to ride with the passive infrastructure sharing trend, and (iii) its expanding EBITDA margin trend.

Source: Kenanga Research - 9 Oct 2017