• KLTC's underperformance is primarily attributed to the ongoing uncertainty surrounding the finalization of the 5G dual network model. The KL Telecommunications & Media Index (KLTC) is currently trading at a PER of 19.4x, slightly below its 5-year average of 30.0x. The index has underperformed relative to broader market indices and we believe one factor contributing to this is the ongoing uncertainty surrounding the finalized structure of the 5G dual network model. While the Malaysian Communications and Multimedia Commission (MCMC) has announced that U Mobile Sdn Bhd has been chosen to implement Malaysia's second 5G network, this decision has not eliminated the uncertainties surrounding 5G deployment in the country. We expect U Mobile to leverage its planned IPO as a means to raise funds for the network rollout. We also anticipate that Maxis is likely to partner with U Mobile for the second network, as we believe CelcomDigi is better suited for Entity A. As the largest mobile network operator with a significant subscriber base, excluding CelcomDigi from any risks associated with the second network makes strategic sense. From our observation, FDI inflow from the Information and Communication sector contributed less than 2% of total FDI inflows between 2018 and 2022. However, its contribution increased significantly to 4.4% in 2023 and further to 9% for 9M24. In terms of total FDI inflow for this sector, there was a substantial rise of over 100% YoY to RM16.6bn in 2023 (refer Chart 2), marking the highest YoY growth since 2010 and a further 65.9% YoY increase to RM27.8bn in 9M24. We believe much of this FDI is linked to the data center business. Looking ahead, we remain bullish on the prospects for fixed players.

• Anticipate Slow Progress in 5G Monetization. As of the end of October, Malaysia's 5G coverage in populated areas reached 82.1%, up from 80.2% the previous year, while internet coverage in populated areas rose to 98.38%, compared to 97.07% in 2023. While this is a commendable improvement, Malaysia still lags behind global leaders such as Singapore, South Korea, Taiwan, Hong Kong and Australia in terms of geographic coverage. Hence we think that monetizing 5G remains a complex challenge. The government's decision to avoid imposing additional charges aims to optimize service usage and enhance the standard of living, shifting the focus of 5G monetization towards the enterprise segment. However, we anticipate that it will take longer to fully realize the potential of enterprise 5G at the current pace. CelcomDigi’s Enterprise Business has shown solid growth in core connectivity, with an increase in high-quality subscribers and a promising expansion in ICT solutions. Maxis also reported a 7.0% increase in enterprise business revenue, driven mainly by 2G and 4G wholesale arrangements and higher corporate mobile subscriptions. However, these gains have yet to see significant contributions from 5G services. Meanwhile, some regional countries are already moving towards 5.5G (5G-Advanced) and 6G. South Korea recently unveiled the K-Network 2030 plan, targeting a 6G launch around 2028, while Japan has allocated USD450mn for 6G research. On the local front, Maxis and Huawei successfully conducted the first 5GAdvanced technology trial in Malaysia and Southeast Asia, achieving peak speeds of up to 8 Gbps, demonstrating the potential of 5.5G to deliver ultra-fast connectivity. Therefore, we believe Malaysia is on the right track. However, we think the government needs to expedite the finalization of the Dual Wholesale Network (DWN) model as connectivity is evolving rapidly.

• ARPU Growth Constrained by Market Saturation. Looking at Charts 3 and 4, Prepaid ARPU has exhibited a declining trend, while Postpaid ARPU has remained relatively stable. Prepaid users, being more price-sensitive, tend to opt for affordable plans with high data quotas, driving ARPU down. In contrast, Postpaid customers, typically from middle and higher-income groups with predictable monthly spending patterns and fixed contracts, ensure more stable ARPU and are less impacted by short-term pricing trends. Moving forward, we think that inflationary pressures are likely to affect ARPU as consumers cut back on spending and gravitate towards more basic data services. While high-value postpaid plans may provide some ARPU growth, their contribution remains limited due to the maturity and saturation of Malaysia's mobile market, which has a penetration rate nearing 150%. In the prepaid segment, minimal ARPU improvement is expected in the near term, given current telco strategies. While further monetization in the mobile segment appears constrained, converged plans and cost optimization efforts are expected to support earnings growth. CelcomDigi's Converged ONE plans have contributed to growth in Postpaid and Home & Fibre subscribers, while Maxis continues to enhance its customer base through convergence and bundling strategies. As for TM, the group aims to stabilize ARPU through the UniVerse campaign and the new UNI5G WOW plan, which are expected to improve adoption for Unifi Mobile. On the cost optimization front, Maxis has embarked on a threeyear program since December 2022, including workforce rightsizing. CelcomDigi achieved a 6.3% QoQ cost reduction in 3QFY24, while TM’s ongoing cost optimization has resulted in improved EBIT for the first nine months.

• Fixed Players Poised for Growth Amid 5G and Broadband Expansion. We maintain a favorable view of fixed players such as TM and TIME, as their efforts to deploy their own 5G networks and expand fiber backhaul align with government initiatives under JENDELA Phase 2. This phase emphasizes robust 4G coverage as a foundation for full 5G deployment, supporting the goals of the 12th Malaysia Plan (RMK-12) to enhance digital connectivity nationwide. Notably, Communications Minister highlighted that 105 towers under JENDELA Phase 1 are yet to be installed, while Phase 2 targets 2,700 new locations. While the government has yet to announce the timeline for Phase 2, the Deputy Minister has indicated that they are assessing the most suitable technologies for each location. This evaluation aims to ensure the implementation of the latest technologies when JENDELA Phase 2 is launched, with a decision expected in 2025. Looking ahead, we foresee continued growth in the fixed broadband segment, supported by Asia’s expanding data center market, which presents significant opportunities for telco players amid stagnant mobile monetization. TM’s joint venture with Nxera to develop data centers up to 200MW, expected to complete by 2Q26. The group guided that it is confident in achieving competitive EBITDA margins, on par with international standards. Meanwhile, TIME continues to expand its fiber footprint, particularly in single dwelling units, with fiber broadband premises passed now at 1.73mn. Additionally, the XL Axiata-Smartfren merger, expected to conclude by 1H25 under the XLSmart brand, is poised to capitalize on broadband growth potential in Indonesia. With mobile users increasingly spending more time on fixed broadband, rising from 33% in 1Q22 to 37% in 3Q24 in Indonesia, the merger is anticipated to drive better revenue contributions in the broadband segment.

• Enhancing Data Governance. The local telco sector is increasingly prioritizing data governance and cybersecurity as data privacy concerns grow. Cybersecurity remains a major focus, with telco companies investing in advanced threat detection systems and incident response protocols. This ensures transparency, customer trust, and aligns with international privacy standards, especially with the growth of 5G technology. According to KROLL’s 2022 State of Incident Report, 76% of businesses in Malaysia reported cybersecurity incidents, significantly higher than in other Asia-Pacific regions, highlighting a gap in preparedness. In response, telco players are bolstering their cybersecurity measures, with strategies such as continuous monitoring (83% adoption), cloud solutions (78%), and increased budgets (77%). Yet, areas like cyber insurance and specialist hiring (both 49% adoption) remain underinvested. TM, for example, has developed a strong cybersecurity framework, including a 24/7 Security Operations Center and partnerships with global cybersecurity firms. CelcomDigi has also adopted advanced threat detection systems and policies, aligning with best practices for network security. These initiatives reflect the sector's shared commitment to protecting customer data, improving cybersecurity, and supporting broader ESG goals. As the sector shifts towards broader 5G adoption, the potential for groundbreaking applications in smart cities and IoT is immense. However, we believe this potential must be paired with sustainable practices to mitigate the environmental impact of expanded connectivity, through energy-efficient solutions and greener network operations. By focusing on these initiatives, telco players can strengthen their leadership in sustainability and drive meaningful change within the communities they serve. This strategic approach will not only foster a more resilient and inclusive digital economy but also position the sector as a key player in the global effort to reduce emissions.

• Maintain NEUTRAL on telco sector. We maintain a NEUTRAL call on the telco sector due to limited potential for ARPU growth, slower-than-expected 5G monetization, uncertainties surrounding the finalized structure of the 5G dual network model and a lack of catalysts within the industry. However, we do anticipate improvement in 5G monetization over the long term. Additionally, increased investment in data centers is expected to enhance 5G deployment and unlock greater monetization potential for dataintensive businesses in the enterprise segment. Our top pick is TM (BUY, TP: RM7.78), as the primary beneficiary of providing services to both public and private sectors.

Source: BIMB Securities Research - 8 Jan 2025