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The Malaysian Telecommunications Industry Analysed
Malaysia Perspective | 07 March 2011
By:

By Joshua Lim

According to the Malaysia Communications and Multimedia Commission (MCMC) that acts as the regulator for the telecommunications industry, there were a total of 30.794 million cellular telephone subscribers in Malaysia at the end of March 2010. This represented a quarter-on-quarter (q-o-q) rise of 2.2% and a Y-o-Y improvement of 9.2%. The regulator also believes that mobile penetration rose from 100.1% in March 2009 to 107.1% a year later (estimated latest figures are circa 109%). However the three main operators indicate the figures to be around 31 million as of March 2010; a q-o-q rise of 2.9% and a Y-o-Y rise of 12.4%. The figures would be higher if the figures of 2G reseller/3G operator U Mobile and YES were included.

Major mobile Telco’s share of mobile broadband revenue is expected to grow from between 3 to 6% in FY- 2009 to between 10 to 18% in FY-2010, driven by the continued growth of broadband subscribers. Green Packet’s revenue is projected to jump 35% Y-o-Y in 2011 on the back of a 46% increase in broadband revenue, while TM’s share of internet revenue (against total retail revenue) is projected to inch up to 24% from 23% in FY09.

It is therefore expected that Telcos’ profits and cash flows will be sustained this year as a growing broadband subscriber base should drive broadband revenue and offset weak voice ARPUs. In turn, this should support dividend yields. Since YTL’s YES entered the telecom landscape recently, many Telco players have been aggressively promoting low-end broadband packages.

For instance, Maxis is promoting its RM48 per month plan, DiGi with RM38 per month and Green Packet with RM69 per month. Despite the incumbents defending market shares at the expense of ARPUs, the pie is large enough to be shared. Broadband (fixed and wireless) subscribers’ base is expected to continue to grow beyond the current figure of about 9% of total subscribers’ base, and should continue to drive Telcos’ revenues.

Malaysia’s current household broadband penetration rate of about 55% is still lower than countries such as Singapore, which has a penetration rate of close to 100%, despite the figures in the island republic reflecting lower voice and SMS revenues in the last four quarters. Overall, it is not anticipated that data revenue will cannibalise voice and SMS revenues substantially in Malaysia in the near term as the broadband market is still in its infancy. It is believed that data offerings in Malaysia are more complementary and increasingly bundled with mobile voice plans to attract data centric users.

Wireless To Lead The Way
However there is a possibility that the Wireless broadband (“WBB”) subscribers’ base would overtake the fixed broadband base soon given the strong double-digit growth in WBB subscriber numbers q-o-q, although fixed broadband demand will continue to grow but at a slower rate. The fixed broadband subscriber base accounts for 56% of total broadband subscribers, and is currently dominated by Telekom Malaysia (TM) with an 85% market share. Other fixed broadband players include Green Packet’s P1 and TIME dotCom.

The problem for fixed broadband is compounded by the fact that the country has a low PC penetration (around 26%) relative to the estimated 109% mobile phone penetration. This indicates that subscribers may increasingly choose to access broadband through mobile phones, and smartphones such as the iPhone and Blackberry. In the fixed broadband sector, TM’s Streamyx Blockbuster Deal packages have made them attractive with low monthly commitment (RM110-140) coupled with extensive coverage compared to players’ like TIME and TM’s high speed broadband package, UniFi.

WiMAX Players Pushing 4G Forward
The 20MHz blocks of 4G spectrum (2.5GHz and 2.6GHz band) allocated to each of the nine Telco players are only available for usage in Jan 2013 (now available for trial), but WiMAX players are already busy expanding network coverage to meet current demand. Green Packet targets to raise the number of base stations (currently at around 1000) to expand its coverage to some 65% by 2012 from the 45% it has now, while YES is hoping to expand its coverage to 80% by end-2011 from 65% now. The big 3 mobile Telco players – Maxis, Celcom and DiGi – are also expected to expand network coverage respectively. As WiMAX coverage widens, subscriber numbers are expected to leap, and WiMAX players may gain market share in the broadband big screen segment. At the moment, Celcom dominates this segment with a 50% share, followed by Maxis with 31%.

Segment wise, the prepaid segment is the biggest revenue contributor for the big 3 Telcos at 50-70% of total revenue and 75-85% of total subscribers’ base. Maxis’ prepaid subscriber net adds have picked up sharply since 3Q-2009 and is currently ahead of Celcom’s and DiGi’s, but this was at the expense of ARPUs which had fallen 10-15% Y-o-Y in 3Q2009 to its lowest of RM35 in 3Q2010. Moving forward, it is expected that Celcom and DiGi will follow with aggressive promotions of low-end prepaid plans to gain market share.

Overall post paid ARPUs fell slower than prepaid ARPUs, but MOUs had declined rapidly in the past 4 quarters (despite a larger subscriber base), unlike prepaid MOUs which are increasing. This might have been partly due to data cannibalizing voice because of the growing popularity of Smartphones, which we understand are mostly on post paid plans. Post paid voice ARPUs could drop further as Telcos strive to stay competitive in the market. The post paid subscriber base in Malaysia is still relatively small at 15-25% of the major mobile Telco’s’ subscriber base, but ARPUs are 1.5-3.0x that of prepaid ARPUs, making it the second largest revenue component for the Telcos (20-40% of total mobile revenue).

Ringgit & Sen Talks
The increasing shift away from desktops to laptops and smartphones, as well as rising dependency on the internet with the emergence of social networks (e.g. Facebook and Twitter) and various online resources are expected to drive demand for data. This also presents growth opportunities for TM – as it could benefit from more fibre leases as mobile Telcos seek to address backhaul requirements to meet growing data traffic. It is expected that the share of mobile broadband revenue will grow from 3-6% in FY-2009 to 10-18% in 2010 for Maxis, DiGi and Celcom, likely driven by the continued growth of the broadband subscriber base. Green Packet’s 2011 revenue is also projected to jump 35% Y-o-Y on the back of a 46% increase in broadband revenue (accounts for 65% of group revenue in FY11F), premised on rising quarterly subscriber net adds as P1’s network coverage gradually expands. But P1’s broadband ARPUs are likely to remain stable despite the expected rise in data usage. Meanwhile, TM’s share of internet revenue (against total retail revenue) is also projected to inch up to 24% this year (from 23% in FY09), supported by a growing subscriber base.

Valuations
Top pick is Axiata; stronger-than-expected broadband revenue could re-rate Maxis, DiGi and TM. Analysts have a “Buy” call and SOP derived RM5.10 TP for Axiata. The Group is set to record strong 48% FY-2009F-12F earnings CAGR. Its Malaysian unit (Celcom) continues to do well especially in the broadband segment, and it has exposure in fast-growing overseas markets including Indonesia, Sri Lanka and Bangladesh. We expect XL in Indonesia to continue to gain market share while keeping costs under control.

There’s also a “Buy” call for Green Packet with a RM1.40 SOPTP. Apart from benefiting from growing broadband demand in Malaysia, the stock also offers exposure to regional WiMAX growth (via modem sales). Meanwhile, DiGi (DCF TP RM22.90), Maxis (DCF TP RM5.10) and TM (DCF TP RM3.35) offer limited upside to their respective target prices. Analysts believe the expected strong broadband revenues have been priced in, but the stocks are supported by decent 6-7% net dividend yields. Therefore it’s a “Maintain Hold” call for these counters.

* This article is based on research material from various research houses


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