We maintain OVERWEIGHT on the sector as we are cautiously optimistic that earnings and dividends will remain intact post implementation of the new 5G Dual Network model. As we wait for this to unfold, telcos have revamped their postpaid plans to monetize 5G and boost ARPUs. This is via introduction of tiered speed plans, fair usage policies, speed caps and 5G data quotas. On top of that, there are sustained efforts to compel enterprises to implement 5G systems that will boost data demand. Meanwhile, Digital Nasional Bhd (DNB) is now placed under the newly set-up Digital Ministry. Therefore, we believe that execution of 5G policies may be more efficient as it is now streamlined under a specialized ministry.

5G take-up ramps up following MAXIS’s 5G launch. 5G adoption in Malaysia more than doubled sequentially in 3QCY23 to 3.1m subscriptions (2QCY23: 1.0m, 3QCY22: 107k). We attribute this to: (i) launch of MAXIS’ 5G services in August, and (ii) ramp up in awareness of 5G as marketing campaigns bear fruit. This alludes to encouraging traction, although it remains a small fraction (7%) of total 4G subscriber base of 41.6m.

5G availability remains sketchy. Meanwhile, 5G availability in Malaysia ranged between 16% (Celcom) to 32% (U Mobile) in June-Aug 2023, according to OpenSignal. This is largely unchanged versus the prior period’s (Dec 2022 to Feb 2023) range of 15% (Digi) to 34% (YES). In contrast, global leaders T-Mobile USA and Puerto Rico 5G scored significantly higher at 56% and 65% in Aug 2023. Therefore, this reinforces the case for deployment of a second new 5G network to boost service quality.

Faster speeds attract users and trigger an investment loop. On the bright side, OpenSignal believes that Malaysians are benefitting from the relatively light load on our 5G single wholesale network (SWN). Hence, Unifi Mobile is able to deliver the fastest average 5G download speeds (407-423 Mbps) globally, in a tie with Telenor Sweden. Meanwhile, other Malaysian players also rank top 10 globally in terms of 5G speeds. Hence, this is expected to boost 5G take-up, and resolve the industry’s chicken-and-egg dilemma. This is via creation of a self-reinforcing loop of investments and user growth. As an illustration, as adoption expands, this triggers more investments in 5G infrastructure, leading to improved network quality that drives further user growth.

5G plans reflect inclusivity for all income brackets. Nevertheless, in the near term, we believe that 5G monetization in the retail segment will likely be limited. To recap, Communications Minister, Fahmi Fadzil recently announced that there would be no additional access charges for 5G services. This is consistent with populist policies that translate to oversight of pricing for telco services. Correspondingly, new plans introduced by the telcos do not impose additional fees for 5G access. Nevertheless, this does not inhibit telcos from extracting higher ARPUs from users with higher spending power. At the same time, telcos are also offering affordable entry level 5G plans that cater to lower income customers.

5G may boost ARPUs. Evidently, telcos have launched new product plans or revamped existing plans to monetize 5G and provide a boost to ARPUs. For CDB’s new postpaid plans (launch: Dec 2023), it has implemented tiered speeds and caps, including fair usage policies (FUP). Based on the latter, speeds on data services will be throttled to 10Mbps once usage exceeds FUP caps. Therefore, this may compel customers to upgrade to more expensive plans, given faster speeds and higher FUP limits.

Meanwhile, MAXIS has segregated its data quotas to 4G and 5G speeds for its current postpaid plans. Therefore, on the same note, MAXIS may be able to derive higher ARPUs given that higher 5G data limits correspond to more expensive price plans.

The prize is enterprise adoption of 5G. Encouragingly, telcos are sustaining efforts to compel enterprises to implement systems that leverage on 5G. For instance, CDB announced a strategic partnership with Japan-based SoftBank Corp and SCNEX (part of Sumitomo Group). This is to formulate IR 4.0 solutions that apply artificial intelligence (AI) in robotics and analytics. To kick this off, it will focus on solutions such as: (i) agritech: utilization of drones for plantation operations and security, and (ii) smart city: application of integrated building management software and internet of things (IoT) sensors to control building access and security. This collaboration is aligned with our belief that current 5G monetization opportunities lie in enterprises that consume copious amounts of data.

Awaiting the last piece of the puzzle. On the regulatory front, market participants are awaiting the highly anticipated official 5G dual network (DN) policy directive. This is expected to shed clarity on the final equity stake for each telco in either entity A or B. To recap, as part of Malaysia’s transition from the 5G SWN model to DN, two entities will be established, namely A and B, which will own DNB and the new second 5G network, respectively. Given that DNB has finally achieved its target of 80% population coverage in end-Dec 2023, the time is ripe for the shift into DN. To recap, in Dec 2023, the major telco players (i.e. CDB, MAXIS, TM, YTLPOWR and U Mobile Sdn Bhd) have each entered into conditional share subscription agreements (SSA) to acquire 14% of DNB. The SSAs are targeted for completion in February-April 2024, which will result in all five players collectively owning 70% stake in DNB. Hence, this clears the first step in enabling the 5G DN transition.

Expecting the new Digital Ministry to be more efficient. To recap, following the recent split of the Communications and Digital Ministry in Dec 2023, DNB and CyberSecurity Malaysia will be placed under the newly set-up Digital Ministry. The latter will be helmed by Gobind Singh Deo, whom has prior experience as Minister of Communications and Multimedia in 2018-20. Given this shift, we do not discount the possibility that execution of 5G policies or regulation may be accelerated. This is given enhanced efficiency as decisions and functions are streamlined to a specialized ministry. However, we believe this would only materialize after the new ministry scales the initial learning curve during its start-up period.

We maintain our OVERWEIGHT recommendation on the sector as we are cautiously optimistic that earnings and dividends for telco players will remain intact post implementation of 5G DN. Our sector top picks comprise CDB and TM.

Source: Kenanga Research - 23 Jan 2024