KUALA LUMPUR: There is unlikely to be any let-up in the challenges faced by telecommunication companies or telcos in Malaysia this spanking new year, no thanks to the hefty spectrum fees charged by the government and prevailing cut-throat competition, according to analysts who spoke to The Edge Financial Daily.
Against such a backdrop, JF Apex Securities Bhd senior analyst Lee Cherng Wee said dividend payout from telco operators may be affected as they try to manage their gearing and capital expenditure (capex) to improve service quality.
“[There is] no immediate catalyst [for telco operators]. Only organic growth from population growth that will support subscriber growth,” he said in an email response, adding that the industry has been competing more intensely in terms of pricing recently.
“[They have been] offering more data, trying to protect and gain market share,” he observed.
However, Hong Leong Investment Bank’s research analyst Tan J Young said competition in 2016 was not as bad as 2015. “In 2015, the competition was triggered by U Mobile [Sdn Bhd]. Last year, despite the launch of Webe, we don’t see major market shifts,” he said over the phone.
Nevertheless, Tan maintained that the industry is very crowded and that one should not discount the possibility of consolidation among the operators in 2017.
“Maybe it is about time, we never know. Our market is too small for so many players, including the MVNOs (mobile virtual network operators),” he said.
Another bank-backed research house’s analyst concurred, and expects competition in 2017 to worsen in the industry, which would lead to further margin erosion.
“Not only that, operators still need to prepare for another round of spectrum reallocation, which will not come in cheap, especially the 700MHz band. The allocation available for distribution among operators is very limited,” he said.
The Malaysian Communications and Multimedia Commission (MCMC) had, earlier last year, announced the reallocation of spectrum for the 900MHz and 1800MHz bands, which costs the four biggest Malaysian telcos a total RM2.7 billion upfront payment, and a combined RM238 million in annual fees for the next 15 years of usage.
The reallocation resulted in bigger telcos like Maxis Bhd and Celcom Axiata Bhd having to sacrifice portions of their original allocations to smaller players like U Mobile.
Payment for this spectrum was made on Nov 1, 2016 while the re-farming of the spectrum will be fully implemented by Jan 1, 2017 for the 1800MHz band, and July 1 for the 900MHz band.
All four telcos, that is including DiGi.Com Bhd and U Mobile, opted to cough up the upfront payment in full instead of staggering the cost, with most announcing that the financing would come from internally generated funds and borrowings.
The MCMC was originally expected to review the allocation of the 700MHz, 2300MHz and 2600MHz bands by the end of last year, but there has been no update so far.
As U Mobile is gaining more share of the 900MHz and 1800MHz bands, AllianceDBS Research analyst Toh Woo Kim expects the company to be more aggressive going forward to expand its market share. It currently has about 10% versus the 25% to 28% stake each controlled by Digi, Maxis and Celcom, according to MCMC statistics as at the second quarter of 2016.
“If history is any indication, we think market share could eventually converge between the four players in the long run, similar to what happened after Digi acquired its 3G spectrum in 2008,” Toh said in a note to investors dated Dec 15, 2016.
“As the number of mobile subscribers in Malaysia increased from 30 million in 2009 to 44 million in 2015, Digi managed to capture most of the growth and maintained its market share, while Maxis and Celcom lost market share as they just barely increased their subscriber counts over the period,” he added.
In a statement sharing his industry outlook on Dec 6, 2016, U Mobile chief executive officer Wong Heang Tuck said he sees 2017 as an “interesting” year.
“2016 was a competitive year for telcos in Malaysia with customers growing increasingly discerning and vocal about what they want and need,” he said.
“The momentum will continue to intensify in 2017 for the industry as competition will only heighten. It is still in the early days for us to ascertain the impact that new entrants like Webe will have on the market, but one can only imagine that next year (2017) will definitely get more interesting,” he added.
On public listed players, while analysts do not seem to favour the telco industry, most of them still recommend Telekom Malaysia Bhd (TM) as their preferred exposure.
Lee, for instance, said he likes the counter due to the company’s dominant position in the fibre broadband segment, where there is little competition, unlike the mobile segment.
Regardless, TM still has its own problems, as Affin Hwang Capital Research’s analyst Kevin Low pointed out in his note dated Dec 6, 2016: The telco giant’s future earnings are expected to be negatively affected by the government’s commitment in Budget 2017 to enhance connectivity, which requires broadband service providers to offer services at double the current speed for the same price.
“Furthermore, TM’s convergence ambitions, which led to the roll-out of its wireless service — Webe — would see this unit take a toll on earnings over the near term. In our view, despite TM having a ready customer base and scope to upsell its wireless service (Webe), we find that cellular service providers are already offering competitive and equally compelling propositions. Even upcoming U Mobile has found it difficult to sustain a turnaround,” Low said.