Despite the relative saturation in the mobile telecommunications market, new subscriber additions remain surprisingly robust in the latest quarter.
The third quarter saw subscriber signings with the three largest cellular operators, Maxis, Celcom and DiGi, surging to some 1.2 million, compared with the combined 1.52 million added in the two preceding quarters.
Last quarter’s strong net addition brings the total subscriber base to 32.87 million at end-September. Even excluding the 1.5 million subscribers for mobile broadband, the number of cellular subscribers has exceeded our country’s total population of about 27.6 million. Clearly, Malaysians are, increasingly, taking on multiple phone lines, including separate lines for work and personal use.
Celcom and Maxis, in particular, recorded strong take-up for their pre-paid packages even though their post-paid subscribers dropped slightly — thus boosting their overall market share. Maxis continues to lead with 41.2% share of the market at end-3Q2010 (up from 40.8% at end-2009) while Celcom’s market share inched higher to 33.8% from 33.6% over the same period — at the expense of DiGi.
Nevertheless, DiGi is having better success in the post-paid market, being the only operator of the three to register positive subscriber growth. We believe this is due to its relatively small post-paid base and focus on offering packages for a widening range of smartphones, including the iPhone, BlackBerry, HTC and Samsung.
Pricing pressure is still evident
While total subscriber numbers increased by about 12.3% over a 12-month period, turnover for the industry grew by just over half that pace at about 6.7% — suggesting that pricing pressure remains.
Widening product range to support growth
Amid keen price competition, the trend is for cellular operators to expand their product offerings, beyond the traditional voice service, in order to keep growing. 
Case in point, Maxis recently inked a deal with Telekom Malaysia for the use of the latter’s HSBB fibre-to-the-home network. The last-mile access will connect Maxis to 700,000 households currently — and 1.3 million by 2013 — and allow the company to add IP-based services such as IPTV, VoIP, video on demand and high-speed Internet to its existing product range. This is the longer-term strategy.
The more immediate focus for the cellular operators is the smartphone and mobile broadband market segments. All have been busy expanding their 3G network coverage and capacity to cater to the robust growth in data consumption.
The smartphone market is among the fastest-growing segments; some estimate it accounts for one in every three of all handsets sold today. Take for instance, the iPhone 4 — demand has far exceeded that for the older model (3GS) this time last year and remains in short supply three months after its launch in Malaysia.
Smartphone subscribers are valuable customers paying higher average revenue per user (ARPU) for their voice-cum-data plans. Estimated to make up less than 10% of all handsets currently in use, the gradual migration of customers to smartphones offers telcos the prospect of stabilising, if not improving, ARPU, amid rising competition.
Subscribers for mobile broadband up 83% so far this year
In addition to bundling voice-data plans for smartphone users, telcos are also tailoring data plans for netbooks, laptops and tablet computers. The tablet, in particular, is expected to be one of the most rapidly growing market segments, having been reinvigorated by another Apple product, the iPad this year.
Mobile broadband subscribers are up 83% in the first nine months of this year. Both Maxis and DiGi have added more than their fair share of subscribers in the mobile broadband market during this period. As a result, their market share increased to 35% and 11%, respectively, at end-3Q2010, up from 32% and 5% at end-2009. Celcom saw its share of the mobile broadband dip to 54% from 62% over the same period.
The entry of YTL Communications — launched in November under the brand name ‘Yes’ — into the mobile broadband market will further intensify competition. Its WiMAX platform is designed for high bandwidth data transmission and boasts three to five times the speed on 3G networks.
Having said that, the cellular operators have the advantage of being able to leverage their huge subscriber base. For instance, Maxis is offering its existing customers a low RM48 per month plan for 3GB of data usage instead of the regular price of RM68. Similar data usage for Yes will cost about RM67. It remains to be seen if and how YTL will change the current landscape.
Industry profits up 8.9% y-o-y
Earnings-wise, the industry has fared better — with combined net profit up 8.9% in the first nine months of the year over the previous corresponding period — suggesting greater cost savings and efficiency from economies of scale.
Net profit for Celcom grew the strongest, by some 24.2%, while DiGi recorded 12.2% growth. Despite adding the most number of subscribers during the nine-month period, Maxis’ net profit declined about 2.6% year-on-year due, in part, to its aggressive marketing and promotion activities as well as subscriber acquisition costs.
Going forward, we remain fairly upbeat on the outlook for the telecommunications sector. As mentioned above, the number of new subscribers signing up is still growing strong despite the relative saturation. More importantly, consumers, increasingly, own multiple devices and require them to be connected to the Internet anytime, anywhere. This demand for data is expected to underpin growth for the cellular operators.
Earnings are expected to be quite resilient while strong operating cashflow would support higher-than-market average dividend yields. The combined growth and yields should give investors fairly good returns at relatively low risks. We will discuss the companies in greater detail in our next article.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 29, 2010.