• MCMC announced that U Mobile Sdn Bhd has been chosen to implement Malaysia's second 5G network. While we are surprised with the announcement, we think the company will be able to implement the initiative successfully by tapping on Huawei’s expertise in 5G.

• As U Mobile and other anticipated MNO partners take on the responsibility of developing the second 5G network, we believe their focus will be on densely populated areas. Meanwhile, MNOs under the first 5G network (i.e. DNB) will also be working to enhance local 5G coverage in rural regions.

• We think this turn of event will see U Mobile solidifying its role in Malaysia’s telco landscape, paving the way for a successful IPO listing ahead.

• Maintain Overweight call on Telco sector. Our top picks are TM (BUY; RM7.77) and TIME (BUY; RM6.09).

U Mobile to Lead Malaysia’s Second 5G Network. On 1st November 2024, Malaysian Communications and Multimedia Commission (MCMC) announced that U Mobile Sdn Bhd has been chosen to implement Malaysia's second 5G network. To recap, back in August, the country's four major mobile network operators (MNOs) namely Maxis, CelcomDigi, TM, and U Mobile have submitted their bids to the government, competing for the role of establishing Malaysia's second wholesale 5G network. Subject to MCMC’s approval, U Mobile is permitted to collaborate with other mobile network operators (MNOs) for the network’s rollout. MCMC will monitor the implementation closely to ensure full compliance with the Communications and Multimedia Act 1998 (Act 588)

Our View. The announcement came as a surprise with MCMC selecting U Mobile, the country’s youngest telecommunications operator to lead Malaysia’s second 5G network. However, note that according to Opensignal, U Mobile achieved a leading position in 5G Availability in 2023 with a score of 31.9%, indicating that users with 5G devices spend nearly a third of their time connected to a 5G network. Aside to that, we think the company will be able to implement the network’s rollout successfully by tapping on Huawei’s global expertise in 5G following the Memorandum of Understanding (MoU) signed with Huawei Technologies (Malaysia) Sdn Bhd previously.

Given that U Mobile and other anticipated MNOs (with expectations that the government will soon announce additional collaborators) will be responsible for developing the second 5G network, we expect them to focus on densely populated areas. In contrast, MNOs under DNB, associated with the first 5G network, will work to enhance 5G coverage, including in rural regions. In terms of financial impact, it is important to note that U Mobile's selection to lead the second network will not affect existing MNOs’ 5G customers, who will continue to access and enjoy 5G services as usual.

In terms of financial capacity, we think U Mobile will ride on its planned IPO listing as an avenue to raise funds necessary for the network rollout. Subsequently, this will help it to reduce foreign shareholding to below 20% as per requirement by MCMC. We expect the related capex to remain substantial though it could be lower than the first network given that DNB has already established 5G coverage in major cities in Malaysia, particularly in Kuala Lumpur and Putrajaya. To recap, DNB previously indicated that the total cost for the 5G network rollout is expected to be RM16.5bn over the next ten years, with RM12.5bn allocated for 5G network equipment. We estimate that approximately RM2.5bn has been spent so far as the 5G rollout has been underway for two years.

Maintain OVERWEIGHT. We maintain an OVERWEIGHT call on the telecommunications sector, driven by (i) the anticipated improvement in 5G monetization due to clarity on the final 5G network structure and attractive 5G-related bundling packages, (ii) increased investment in data centers, which will enhance 5G deployment and unlock greater monetization potential for data-intensive businesses in the enterprise segment, (iii) expectations of a rising 5G adoption rate, and (iv) the anticipated gradual recovery in roaming revenue, supported by increased usage from migrant workers and tourists, as Malaysia targets 27.3mn tourists in 2024. Our top picks are (i) TM (BUY, TP RM7.77) – a key provider of services to both public and private sectors, and (ii) TIME (BUY, TP RM6.09) – benefiting from a strong long-term outlook and robust demand for data and data centers.
 

Source: BIMB Securities Research - 5 Nov 2024