We maintain OVERWEIGHT on the sector. For the mobile segment, we are cautiously optimistic on the implementation of the new 5G dual network (DN) model. This is underpinned by: (i) a more accommodative regulatory environment following the withdrawal of government intervention, (ii) removal of unfair pricing as DNB’s monopoly is dismantled, and (iii) enhanced network roll-out efficiencies for the second 5G network. Therefore, we are hopeful that earnings and dividends for mobile players remain intact after DN takes effect. Meanwhile, in the case of fixed players, we believe that sentiment has improved after revised tariffs for wholesale and retail services were unveiled. Hence, this removes earnings uncertainty and quells earlier concerns of irrational retail competition. Our sector top picks comprise CDB (OP; TP: RM5.34) and TM (OP; TP: RM6.76).

1. Mobile

Generally weak ARPU trends… Except for Celcom’s prepaid segment, YoY ARPU was weaker across the board for all segments in 3QCY23, particularly for Digi. For the latter, blended ARPU declined by 8% YoY, which was attributed to weakness at the postpaid segment. This emanates from: (i) dip in interconnect rates (effective: Mar 2023), and (ii) slower traction for ondemand offerings. Hence, this had further exacerbated the decline in CDB’s postpaid ARPU, which was as high as RM71 in 1QFY22 before the start of its sequential rout. Meanwhile, in the case of MAXIS (OP; TP: RM5.30), we believe that weaker postpaid ARPU (-7% YoY) was due to drag from new users on its affordable entry level Hotlink Postpaid plans. This was in-line with its strategy to upsell products and upgrades its low margin prepaid subscriber base. On the bright side, sequential prepaid ARPUs for MAXIS remained resilient in spite of the introduction of affordable MADANI prepaid packages in 3QCY23. This was attributed to effective ARPU management via personalised promotions on Hotlink MU app.

…but strong YoY subscriber net adds. On a rosier note, there was a 3% YoY subscriber base expansion for the top three mobile players in 3QCY23. For CDB, this emanates from total subscriber net adds of 636k on the back of sustained traction across the board. However, QoQ net adds for the prepaid segment slowed down to 22k in 3QFY23 after averaging an impressive 140k in 1HCY23. Whereas for MAXIS, as mentioned above, the YoY expansion in subscribers (+257K) was underpinned by sustained momentum in its strategy to upsell and offer fixed-mobile convergence. On the back of this, net adds for postpaid (+262k) and home connectivity (+90k) more than surpassed net churn for prepaid (-146k) and wireless broadband (-12k).

5G monetization remains sluggish. In terms of 5G adoption, take-up remains sluggish given that it is still early days, and availability appears lacking. According to OpenSignal, 5G availability in Malaysia was just 21% during the May-July period. As such, the current 5G infrastructure seems inadequate to accommodate more users and traffic. Hence, this further supports the case for deployment of a second new network to boost 5G service quality. Evidently, the small 5G subscriber base of 1.4m in Malaysia dwarfs in comparison with 43m 4G subscribers. Moreover, out of the 74% CDB subscribers that have provisioned (activated) their 5G devices, merely 11% are active users. However, we acknowledge that 5G monetization may materialize in future to provide a boost to ARPUs and earnings. In the meanwhile, we wait for awareness, capacity and usage to ramp up.

Lack of awareness on 5G’s advantage and benefits. We believe that Malaysian users are generally not cognizant of 5G’s potential and benefits. In particular, there are abundant and diverse applications of 5G technology for industries and enterprises. These include: precise automation, long distance remote surveillance, real time high-definition broadcasting, analysis of vast amounts of data on cloud AI, and so forth. Such applications result in the transformation of business processes that enable organizations to scale up, enhance efficiency and achieve breakthrough innovations.

Hesitation in embracing new 5G technology. Unfortunately, for enterprises that recognize 5G’s advantages, some are averse to transformation. This is underpinned by their inclination for systems and processes to remain status quo. This is understandable given the requirement to uproot current systems and fork out hefty technology investments in order to harness 5G. Moreover, they also need to be prepared to trim their workforce to enable AI automation to take over via robots and advanced machinery. A recent use case for 5G in the corporate context is implementation of an AI autonomous inventory system at DHL’s Integrated Logistics Centre in Shah Alam. This is a system that combines robots and drones equipped with high-resolution cameras. According to DHL, efficiency is boosted by 20-fold and precision is enhanced following installation of this system

Telcos are also trying to figure out 5G marketing strategies. On top of that, a major 5G technology provider revealed that some telco carriers are reluctant to realign their marketing strategies. This is because telco carriers now need to aim for corporations instead of the traditional consumer when selling 5G services. Therefore, they need to educate their sales staff to shift their focus and target large multinational corporations instead. On the bright side, in 3QCY23, we observed positive traction in these efforts from telco players. For instance, CDB achieved enterprise revenue growth of 1.5% YTD emanating from the SME segment, ICT and connectivity solutions.

Individuals are no longer the target market when it comes to 5G. Whereas for consumers, applications that require 5G at this juncture include: (i) virtual reality experiences or interactions within the metaverse, (ii) ultra high-speed streaming services for gaming in real time, and (iii), autonomous driving for passenger vehicles etc. Moreover, we believe that consumer applications continue to progressively expand as hardware, software and content developers harness 5G’s capabilities. However, at this juncture, these applications are still at the nascent or prototype developmental stage. On top of that, the pricing of high-tech 5G consumer devices are inhibitive for an average consumer to afford. Therefore, the typical individual does not feel compelled to upgrade to 5G unless consumer applications are refined and become widely accessible.

Details on 5G dual network may be finalized soon. In terms of material developments for the sector in 1QCY24, we believe that the the Ministry of Communications and Digital (KKD) will finally issue the highly anticipated official 5G dual network (DN) policy directive. To recap, in May 2023, the Government announced the implementation of the 5G network in 2 phases. Under Phase 1, Digital Nasional Berhad (DNB) will continue its rollout of 5G to meet 80% Coverage of Populated Area (CoPA) by end 2023 (end-Oct: 73%). Meanwhile, under Phase 2, the Single Wholesale Network (SWN) will transition to a DN.

Source: Kenanga Research - 3 Jan 2024