• The Government is defending the 5G single wholesale network (SWN) with mobile network operators (MNOs) accorded direct equity participation in Digital Nasional (DNB). While ending the sector impasse, queries remain on the shareholding structure, wholesale rates, and operational execution. Preference: Fixed line players on their stronger earnings catalysts and resilient earnings. Top Picks: Telekom Malaysia, Time dotCom, and OCK Group. Key risks: Stake selldown completion delays, regulatory setbacks, and higher-than-expected wholesale charges. Still NEUTRAL.

• SWN in, Dual Wholesale Network (DWN) out. After months of uncertainties amid mounting rhetorics and resistance from the MNOs, the Government has decided to retain the SWN model for 5G deployment. It has, nonetheless, acquiesed to the industry’s request for greater inclusion in the country’s 5G rollout with a decision made to divest up to 70% in DNB to the MNOs. The equity divestment is to be completed by end June with an independent valuer appointed.

• Taking the middle path with MNOs having “skin in the game”. We view the outcome as a middle ground and policy trade-off, considering the: i) Supply-driven mandate extended to DNB with the 5G rollout already in motion, ii) MNO’s reluctance to ink wholesale agreements with DNB (which has contributed to the SWN stalemate), and iii) MNO’s DWN proposal would – in theory – run DNB into the ground with serious ramifications on foreign direct investments (FDIs) and investor perception. Having direct onwership in DNB would allow MNOs to more effectively collaborate and expedite their 5G network deployments, but this may come at the expense of its mandate to cover the less economically viable/rural areas in our view. Without a DWN, the risks associated with network duplication and spectrum constraints are eliminated. We believe concerns over punitive wholesale rates levied by DNB should be allayed with the MNOs having a greater say on actual terms and the firm being partly equity funded. A further review of the reference access offer or RAO document is to be expected with DNB extending complementary trials to end June from end March previously.

• More details and clarification needed. There was little clarity on the mechanics of the selldown to the MNOs. Specifically, how the combined stake of up to 70% in DNB would be split among the MNOs, ie Celcom, DiGi.Com, Maxis, and U-Mobile, which form the new SWN consortium. Based on media statements, the shareholdings of the MNOs and valuations would be subject to discussions between DNB and the MNOs, which we think could be protracted. We note that disagreements over shareholding structure was one of the stumbling blocks of the previous 5G network consortium mooted by the Pakatan Harapan Government, with each MNO having their own vested interest. Other key considerations include the telcos’ ownership of DNB creating a conflict of interest situation – as the underlying principle of an independent access network calls for structural separation from retail activities – and if telcos are able to procure 5G spectrum directly.

Source: RHB Research - 17 Mar 2022