At this juncture, we believe that industries and enterprises are the early beneficiaries and adopters of 5G. However, there is a lack of awareness on 5G’s capabilities amongst the business community in Malaysia. Therefore, monetization of 5G will take time and eventually take place when awareness, consumer offerings and coverage are ramped up. We maintain our forecasts, TP of RM5.07 and OUTPERFORM call.

We came away from CDB’s MY5G Conference & Showcase feeling largely neutral on 5G mobile technology in Malaysia at this juncture. The key takeaways are as follows:

1. This conference reinforced the role of telco companies as an enabler of advanced technologies via 5G infrastructure. The latest equipment, devices and solutions require high-speed 5G networks to transmit large amounts of data at ultra-low latency. Modern devices and machinery that utilize advanced artificial intelligence (AI), internet of things (IoT), etc. are unable to function effectively on legacy 4G networks.

2. There are copious and diverse applications of 5G technology for industries and enterprises. These include: (i) automation via drones and robots, (ii) remote surveillance, broadcasting or tele-medicine via high-definition cameras that transmit visuals in real time, and (iii) supply chain and logistics fleet management via the analysis of vast amounts of data on cloud AI. Such applications result in the transformation of business processes that enable organizations to scale up, enhance efficiency and achieve breakthrough innovations.

3. A recent use case is the implementation of an AI autonomous inventory system at DHL’s Integrated Logistics Centre in Shah Alam. This system comprises a combination of robots and drones equipped with high-resolution cameras that are connected to CDB’s 5G network. Following its installation, efficiency is boosted by 20-fold and precision is enhanced following the elimination of human errors.

4. Whereas for consumers, applications that require 5G services at this juncture include: (i) interactions within the metaverse, (ii) high-speed streaming services for gaming, (iii) virtual reality experiences, (iv) autonomous driving for passenger vehicles etc. Nevertheless, we believe that consumer applications will progressively expand as hardware, software and content developers harness 5G’s capabilities.

5. Based on remarks by Huawei Technologies’ advisor to president and former chief technology officer, Kees Lemmens, we understand that the greatest challenge for 5G currently is the lack of awareness on its potential and benefits. Additionally, some members of the business community are averse to transformation and prefer systems and processes to remain status quo. This could be demonstrated by their reluctance to commit to hefty technology investments, and hence may present hurdles to the adoption of 5G services. On top of that, we understand that there is some resistance from telco carriers to realign their marketing strategies to focus on enterprises instead of the traditional consumer when selling 5G services.

6. According to SK Telecom’s (SKT) head of strategy, Will Cho, 64% of its customers (15.7m) are 5G users. Nevertheless, he believes that 5G adoption is still at its infancy in Korea despite SKT having first commercialized 5G back in Jan 2019. This corresponds with Lemmens’ view that 5G is here to stay until 2030 at the least.

7. We commend CDB’s efforts to promote knowledge on 5G applications to businesses via this conference and other initiatives. Given the current backdrop, we believe that industries and commercial enterprises are the early beneficiaries of 5G at this juncture. Hence, they will likely be the early adopters of 5G ahead of the traditional individual consumer. Nevertheless, monetization of 5G will take time, as reflected by its subdued take-up rate. Evidently, only 15% of CDB subscribers have signed up for 5G, and out of this, merely 11% are active users.

Forecasts. Maintained.

We also maintain our TP of RM5.07 based on 12x FY24 EV/EBITDA. There is no adjustment to our TP based on ESG for given a 3- star rating as appraised by us (see Page 4).

We like CDB for the following reasons: (i) merger synergies are expected to amount to NPV of RM8b over 5 years – emanating from network (RM5.5b), IT (RM1.1b) and others (RM1.4b), (ii) robust FCF yield of more than 6% in FY23F−24F implies capacity to pay steady dividends, and (iii) leading subscriber base share of 39% and 20% in the postpaid and prepaid segments, respectively, translating to pricing power and economies of scale. Maintain OUTPERFORM.

Risks to our call include: (i) slower-than-expected realization of merger synergies, (ii) unfavourable outcome to the implementation of the dual wholesale network by the government, and (iii) competition between telco players turns irrational.

Source: Kenanga Research - 26 Oct 2023