• Despite telco players facing with short-term profit margin challenges due to increased investments, there is optimism for future monetization opportunities through attractive 5G packages, supported by ongoing regulatory backing.

• We anticipate better earnings potential for telco players driven by higher 5G network adoption in 2H24, supported by positive developments in the 5G rollout in Malaysia.

• Maintain Overweight call on Telco sector with a BUY rating for TM (BUY; RM7.00) and TIME (BUY; RM6.09) which emerge as our top pick.

Foresee a meaningful 5G contribution in 2H24. To recap, five local mobile network operators (MNOs) on 1st of December have agreed to acquire up to 70% equity in Malaysia's state-owned 5G agency, Digital Nasional Berhad (DNB). We are positive about the current progress of 5G development in Malaysia, providing local telco players with a clearer path to enhance their offerings. While telco players may face with profit margin risks in the near term due to higher 5G-related investments, including a RM233mn injection into DNB and the development of new 5G products, we see potential for MNOs to explore 5G monetization through attractive packages. Despite existing doubts within the business community about 5G implementation, ongoing updates from the Malaysian Communications and Multimedia Commission (MCMC) and the Ministry of Communications and Digital, are expected to encourage significant contributions from the business community in the medium term. As of 30th November 2023, Malaysia has achieved adoption rate of circa 11.0%. Looking ahead, we anticipate increased momentum in 5G development, leading to a higher adoption rate. Consequently, we believe MNOs will experience improved 5G related products contributions by the second half of 2024.

We think that TM and CelcomDigi are leaning towards Entity A. The details of the 5G Dual Network transition are uncertain, with MCMC indicating that wholesale prices for 5G will not increase in the second network rollout. Based on insights gathered from the industry players, it seems unlikely that CelcomDigi and Maxis will merge into a single entity. Given their pivotal roles as the backbone players in the telco industry with a substantial number of mobile subscribers, we opine that CelcomDigi is better suited for Entity A. As the largest mobile network operator with significant subscriber base, by excluding CelcomDigi from any risks associated with the transition from Entity A to Entity B is a prudent approach. Conversely, Maxis is expected to align with Entity B. As for TM, we think TM is leaning towards Entity A, as the group is considered as a primary beneficiary in providing services for the public sector, such as MyGovNet.

Maintain OVERWEIGHT. Maintain Overweight call on telecommunications sector, driven by (i) positive developments in the 5G rollout in Malaysia, (ii) expectations of a gradual recovery in roaming contributions linked to increased usage by migrant workers and tourists following the reopening of international borders, (iii) optimism over CelcomDigi synergy, the largest telco player in the local industry, potentially attracting more foreign investors, and (iv) the anticipation of improved earnings potential for local telco players due to an expected higher adoption rate of 5G in the 2H24. Our preferred picks are (i) TM (BUY, TP RM7.00) – considered the main beneficiary in providing services for both public and private sectors, and (ii) TIME (BUY, RM6.09) – with a positive long-term business outlook and an attractive stance on strong demand for data and data centers.

Source: BIMB Securities Research - 12 Jan 2024