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Smart Devices And Mobile Broadband Penetration Still ‘Low’ In Malaysia
Malaysia Perspective | 22 February 2012
By:

By Michael Tee

The Malaysian telecommunications industry can still be considered a ‘growing’ market compared to its closest neighbour, down south. While 3G penetration rose from 2 percent in 2006 to 35 percent in the third quarter of 2011, it still pales compared with Singapore’s 107 percent penetration rate in September 2011*.

There are several reasons for that. Most notably is the competitive pricing and family plans offered in Singapore which has resulted in customers switching from conventional voice plans to data plans. Furthermore, Singapore offers several ‘bundling’ device packages which are attractive for family smartphone purchases at much discounted prices. Currently, most Malaysian plans are still expensive when taken into account the deposit that customers need to pay in addition to smartphone device prices. Also, there are no packaged family purchase plans which are affordable in the marketplace.

As a result of this and the effective promotion plans, the penetration rate of 19 percent is lower compared to Singapore, which has a 90 percent penetration rate*. Another reason is the lower postpaid-to prepaid ratio. Malaysia currently has a 0.24 times postpaid-to-prepaid subscription ratio, which is still far below Singapore’s 1.08 times. Although postpaid services has improved tremendously over the years, it is still seen as a ‘premium’ offering in Malaysia, therefore shied away by the general consumer. This could be due to the basic package price, which is still perceived as more expensive compared to the pre-paid offerings.

Broadband Penetration Still At Low Levels

Although large strides have been made in increasing broadband penetration levels in the last two years, the figure is still relatively low compared with our regional neighbours. Broadband penetration based on a total population basis in Malaysia is still at just 54 percent compared to Singapore, which has a 148 percent mobile wireless broadband (WBB) penetration rate**. This indicates strong growth potential for both fixed line and mobile WBB operators, although it remains to be seen if the expansion in mobile WBB would be at the expense of fixed line broadband. A major contributing factor is the pricing for data downloads. Currently a user of YES broadband will need to pay RM30 for 1gigabyte (GB) worth of data, which the price is about RM10 to RM16 for a DiGi dongle-based broadband plan. Comparatively fixed broadband packages such as Unifi, Maxis Home and Streamyx packages are cheaper because of lower price per GB as currently there are no data caps on these packages.

Data Revenues Increasing

Although the rates of penetration of smart devices are still rather low in Malaysia, data revenues are increasing. This is largely due to the higher charges imposed for data calls in Malaysia compared with its southern neighbour. Based on statistics for the third quarter of 2011, data revenues contributed between 28 percent to 41 percent of total revenues of Malaysian mobile Telcos. This compares with between 30 percent to 39 percent in Singapore and 40 percent in the US. In addition to the pricing factor, data revenues have been further supported by growth in dongle-based broadband subscriptions and stability in their accompanying average revenue per user (ARPU).

Maxis is currently the biggest beneficiary of data usage. This is because it has the largest 3G coverage of 81 percent, compared with the other Telcos. In addition to this, its non-SMS revenues form the largest portion of data revenues (Note: Maxis’ non-SMS services contributed 59 percent of data revenue in 3Q11 compared with 40 percent by DiGi). In addition, Maxis boasts the largest subscriber base for both prepaid (3.3 million subscribers) and postpaid plans (9.4 million subscribers) in Malaysia. DiGi has the fastest growing prepaid growth base, although it is still in third place among the three Telcos in terms of subscriptions. Celcom is currently in second position in both the prepaid and postpaid markets.

Growth In Dongle-Based Wireless Broadband

Dongle-based broadband should see encouraging growth in the near term despite some substitution by cellular 3G subscriptions on small and medium screen devices (iPad2, Samsung Galaxy Note), as notebook PC demand should still be strong in emerging markets such as Malaysia. This should be due to comparatively low income levels and affordability for a fully-fledged PC (netbooks). Furthermore, technological advances in notebook conventions such as convertible netbooks and ultrabooks should drive notebook demand going forward and subsequently dongle-based WBB. Dongle-based broadband packages should also remain attractive for users who are highly mobile but still require applications that can only be used on conventional notebook/netbook PCs. As such, mobile WBB growth as a whole should retain its resilience.

Fixed Broadband Still Growing Strong

Fixed broadband is still strong in Malaysia growing at 17 percent in the third quarter of 2011. The primary growth drivers for fixed broadband would be Telekom Malaysia’s (TM) high-speed broadband (HSBB) Unifi (fixed line broadband) and fixed wireless subscriptions such as P1 WiMAX. Going forward, HSBB Unifi should continue to build a strong following as the convergence of broadcasting technologies and internet subscriptions, such as Triple Play Services (bundles Internet Protocol Television (IPTV), Voice over Internet Protocol, and Broadband subscription), become more popular due to convenience and accessibility. Meanwhile, fixed wireless broadband should still have its place in areas without Streamyx (or Maxis equivalent) or HSBB Unifi coverage or where users seek supplementary broadband subscriptions.

Therefore, TM and Maxis’ fixed broadband services should still remain strong. TM’s HSBB UniFi service and Maxis’ fledgling HSBB Home service are likely to capitalise on stronger demand for higher speeds and convenient triple-play packages. Growth momentum should be sustainable in the near term as both providers are starting from a relatively low base compared to ADSL offerings. Meanwhile, Maxis, Axiata and DiGi will all benefit (through their respective dongle-based wireless broadband segments) from growing popularity in nomadic behaviour through more diverse and affordable offerings for large screen mobile devices such as laptops and netbooks. In this space, Celcom Axiata should maintain its market dominance as its packages offer the most flexibility compared to DiGi and Maxis packages.

Valuations

Rising data revenues should support cash flows. Greater smartphone and tablet adoption should create robust demand for data subscriptions, offering a buffer against declining voice ARPUs. This in turn should supplement the cellular Telcos’ operating cash flows and subsequently, dividend distributions. Maxis’ dividend yield is currently the highest at 6 percent (CY12 dividend per share (DPS)), while DiGi’s and TM’s are hovering at 4 percent after a price rally in 2011.
DiGi currently has a network collaboration agreement with Celcom Axiata in the sharing of telecommunication sites, access transmission, aggregation transmission and trunk fibre transmission, which is targeted to see combined capital expenditure savings of RM100 million to RM200 million and RM200 million to RM250million from 2012 and 2015, respectively.

Meanwhile, Maxis entered into a radio access network (RAN) sharing agreement with U-Mobile for 10 years, providing an avenue for higher revenues for both parties. The sharing of 4G LTE spectrum also poses further upside for both parties, which would have a combined 40MHz (20MHz each) of spectrum on the 2.6GHz band. These network sharing arrangements could lead to higher dividends from the Telcos in the near term and subsequently, higher yields.

Maxis still tops the other Malaysian Telcos with an estimated 50 percent EBITDA margins. DiGi a close second at 48 percent, although it is believed that this is due to its higher marketing expenses, at 9 percent of service revenue compared to Maxis’ 4 percent to 5 percent. However, Maxis is racking up marketing expenses in the fourth quarter of 2011, to woo new subscribers and generating greater awareness of its superior network coverage.

Among the cellular Telcos, Maxis still leads with around 40 percent market share and the highest EBITDA margin of 50 percent. It also boasts the widest 3G coverage at 81 percent, and 95 percent 2G coverage nationwide. There could be upside from its Maxis HSBB Home service, although that is still a small segment with only 2,000 subscribers. It is understood that Maxis is targeting some 25,000 to 30,000 subscribers in 2012, but it is premature to estimate when this segment will be EBIT (or EBITDA) positive.

However, the recent rally of TM and DiGi shares has turned Maxis into an attractive yield play, offering 6 percent on FY12F DPS, and possibly capital gains in a market with shrinking risk appetite. Additionally, Maxis may be re-rated if and when Maxis HSBB Home takes off with support from Astro for IPTV services (Note: Maxis and Astro have common major shareholder). Given these prospects, its FY12-13F earnings have been raised upwards by between 1 percent to 4 percent to around RM2,220 million to RM2,340 million, on the back of stronger ARPUs supported by data services, solid postpaid and prepaid subscriber growth, and persistently robust dongle-based WBB contributions. Analysts have therefore upgraded the stock to ‘Buy’, with discounted cash flow-derived target price raised to RM6.60 after revisions to earnings.

TM remains a ‘Buy’ despite its share price having surged 55 percent to RM4.82 (since 1 Jan 2011) for strong growth potential of its UniFi HSBB. On an EV/EBITDA metric, TM is still cheaper at 7 times CY12 EBITDA as opposed to Maxis’ and DiGi’s 10 times, respectively. There is also potential for higher dividend yields if it distributes proceeds from the Axiata stake sale (RM284 million or 7.9sen per share) as special dividends, which could take CY11E distribution to 27.5sen per share, or 5.5 percent yield at current price. Meanwhile, UniFi’s subscriptions will continue to rise as TM rolls out its exchanges and expand coverage (it plans to cover 1.3 million premises by end 2012 compared to the 1.1 million, it has currently).

* Data and research from HwangDBS Vickers Research
** According to Infocomm Development Authority of Singapore and Organisation for Economic Co-operation and Development Broadband Statistics


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