Highlights

In his progress updates on the Economic Transformation Programme (ETP), the PM announced that telco is one of the 6 sub-sectors that are newly liberalized in effort to boost the service industry. The move is expected to attract more participation from foreign players.

The telco industry was one of the 17 sub-sectors that were identified for liberalization during the 2012 Budget.

The liberalization in telco sub-sector is meant for network facilities providers (NFP) and network service providers (NSP). NFP and NSP class and individual licenses with up to 70% foreign equity will be permitted to enter the country.

Comments

Post-liberalization, NFP’s foreign ownership restriction will be increased from 30% to 70% while NSP’s will be elevated from 49% to 70% (see Figure #2).

This new policy paves way for MCMC’s to achieve its objective of consolidating the overcrowded industry, especially amongst the smaller players such as U Mobile and the WiMAX players including P1, Yes, REDtone and Asiaspace. Besides that, more investment into the country will create healthier competition which eventually leads to cheaper and better service quality to the consumer at large.

DiGi, Maxis, U Mobile and P1 are owned by substantial foreign shareholders (see Figure #3) whose core businesses are also in telco industry which make them as the possible prime targets due to this new ruling.

Among all, we think that Telenor may be the first to take advantage of this new development to raise its current 49% stake in DiGi. It was reported that Telenor has been in talks with government in this regard since last year and always view Asian operations as the main growth engine of the group. Furthermore, DiGi’s last closing share price of RM4.86, a retraction of 12.7% from its historical high of RM5.57, might be considered as a good entry point.

Catalysts

• Cost savings from partnerships.
• Managed services / outsourcing.
• Increased demand for wholesale bandwidth.

Risks

Irrational competition, regulation of tariffs, FOREX.

Forecasts

Unchanged.

Rating

Neutral

• Positives – Low beta, defensive, strong cash-generation and dividends should underpin the share price.
• Negatives – Potential irrational competition, regulatory risks, unable to monetize data, dumb pipes.

Top Picks

We re-iterate our BUY call on TIME dotCom (TP: RM4.66).

Source: Hong Leong Investment Bank Research - 19 Nov 2012