On 20th January 2020, we attended the 5G Malaysia International Conference 2020 in Langkawi, hosted by the MCMC. Tag lined “Progressing Humanity”, the conference hosted several speakers from international telcos and prestigious organisations to present on the potential impact of deploying 5G towards the nation’s socioeconomic ambitions and its implications to the country. Subsequently, we were invited to partake in a tour to witness several live 5G demonstrations for various applications such as agriculture, civil services, tourism as well as traffic control. Post-conference, we maintain our NEUTRAL call on the sector. While we are convinced of the need for 5G to bring the nation towards developed status, much more details need to be addressed if investors are to be sold on 5G as a profitable endeavour for the incumbent telcos, these being: (i) the 5G consortium framework, (ii) capex commitments, (iii) commercial reception, and (iv) pricing. Additionally, we believe that 5G demand will likely be driven by enterprise instead of consumer in the near-term. Our preferred picks are AXIATA (OP, TP: RM4.80) and TM (OP, TP: RM4.30) for their projected earnings recovery.

(The points in this report are not reflective of their sequence at the conference)

5G for all. During the conference, the Minister of Communications and Multimedia, Gobind Singh pressed for the commercialisation of 5G to start by 3QCY20. With the ultra-high speed (defined to be up to 10GBits or 1.25GB data per second) and low latency offered by 5G, various new technologies and capabilities could materialise which present 4G technology could not keep up with. As part of the event, we visited several live demonstrations site to witness such possibilities, with applications in: (i) agriculture, (ii) healthcare, (iii) security, (iv) tourism, and (v) traffic control. The Malaysian Institute of Economic Research studied that this could open up an estimated 39k new jobs in the economy.

Too soon for something so good? According to Julian Gorman, Head of APAC, Global System for Mobile Communication Association (GSMA), Malaysia would be among the first 24 Asian Pacific countries to adopt 5G technologies. Other invited speakers shared views on the impact of 5G technologies, mostly leading towards a significant boost in enterprise and industrial needs. High data capacities could make split-second decisions by artificial intelligence through machine learning a reality, delivering the most optimum outcome or processes. This could also supplement high-resolution video feeds for more accurate surveillance and monitoring functions. Though this would also accelerate the introduction of internet-of-things (IoT) appliances to the country, we believe that consumer demand for 5G networks may be quite limited in the near future mainly as price points may be beyond the consumers’ affordable levels. This resonates with the President of the Global Mobile Suppliers Association (GSA), Joe Barrett’s findings that currently, only 30% of 5G devices announced are smartphones.

Holding hands for the shared vision. In a fireside chat with the chiefs of the nation’s leading telcos, we gathered a common commitment that they would see the commercial rollout by 3QCY20. As of now, it appears that MCMC’s consortium proposal is well accepted, especially since it greatly reduces the capex strain from any one entity while also minimising duplication and wastage of infrastructure. Though certain members may bolster certain strengths, the eventual consortium would need to find even ground as to prevent a dominant party of holding a commanding position, as what MCMC wishes to avoid. At least for now, the players are studying possibilities before considering renouncing the consortium path all together. In hindsight, other issues participants could face are: (i) allocating capex in addition to their non-5G commitments, (ii) initial demand in early days, (iii) wholesale pricing to nonparticipants and consumers, as well as (iv) differentiating offerings between participants when operating under a shared network.

Maintain Neutral on Telecommunications. Overall, we are positive and excited for the 5G deployment and benefits it could bring to the country. However, we are cautious about its implications to the incumbent telcos especially in the near-term. Though no details are available about its structure, we reckon the consortium would need to ramp up on infrastructure very soon to achieve the 3QCY20 timeline and this could stress the financial positions of its participants. Additionally, there could be no immediate payoff to justify such investments if reception is lukewarm. Hence, our preferred picks for the sector is AXIATA (OP, TP: RM4.80) and TM (OP, TP: RM4.30). AXIATA has been stirred recently by talks of Telenor looking to buy over Khazanah’s stake in the company, which could (partially) reignite the failed merger plans last year. That said, our call is premised on the stock riding on earnings recovery from its regional operations (i.e. XL Axiata), expected to post a 20% YoY growth in FY20. For TM, we see its position as an interesting one, as it could be the most relied-upon telco in rolling out 5G thanks to its vast fibre network. Even if it does not participate, it could continue to ride on the fruits of its cost saving endeavours seen through FY19.

Source: Kenanga Research - 24 Jan 2020