This article first appeared in The Edge Financial Daily, on December 9, 2015.

KUALA LUMPUR: The pricing war that has characterised most of 2015 for telecommunication companies (telcos) should wind down next year because profit margins have been sliced too thin, while the threat of Packet One Networks (Malaysia) Sdn Bhd’s (P1) imminent entry into the market will likely remain just a threat for now as there are no clear indicators if it could launch next year, according to analysts.

“So far, we have no details on P1 yet. What we know is that it is still in the testing stage. We are not sure what their strategy is,” JF Apex Securities Bhd senior analyst Lee Cherng Wee told The Edge Financial Daily.

P1’s imminent entry into the 4G long-term evolution (LTE) space has been widely viewed as a factor that may trigger a new round of price war, but another analyst, who declined to be named, think the threat has been overplayed.

“There is an idea to launch P1’s LTE in a bundled package with maybe HyppTV or broadband services, but these types of offering would not come cheap,” said the analyst.

Further, he opined that P1, a 57%-owned subsidiary of (TM), would likely delay its mobile network offering, and would not enter the market aggressively.

Meanwhile, average revenue per user (ARPU) growth has largely been flat for local telcos in the third quarter ended Sept 30, 2015 (3Q15), said Lee, who noted that only Maxis Bhd’s saw a slight increase.

“There are limited margins to sacrifice. The [telco] industry will continue to be challenging because operators cannot raise prices. None of them can afford to lose any market share since the smartphone market in Malaysia is so saturated,” said Lee.

In 3Q15, Maxis saw its blended ARPU rise 4% quarter-on-quarter (q-o-q) to RM53, while Axiata Group Bhd and DiGi.Com Bhd’s blended ARPU was flat at RM45.

Maxis’ market share has also improved, at the expense of DiGi’s. In a Dec 4 note by CIMB Research, Maxis’ mobile revenue market share rose 0.6 percentage point q-o-q to 37.8% in 3Q15, the third consecutive quarter of gains, driven by strong growth in prepaid revenue (+6% q-o-q) on improved traction in the migrant worker and youth segments.

In contrast, Celcom’s market share contracted 0.2% to 32.1%. DiGi, meanwhile, was the most impacted by intense competition; its market share fell 0.5% to 30.1%.

Earnings before interest, taxes, depreciation and amortisation (Ebitda) margin for the Big Three telcos fell across the board in 3Q15, with DiGi seeing the biggest q-o-q margin drop (down 2.8% points; Maxis down 1.3% and Celcom fell 0.7%), as international traffic cost rose substantially due to the 16.5% q-o-q weaker ringgit versus the US dollar, it said.

It has maintained a “neutral” rating on the sector after noting that Malaysian telco share prices have slid 6.1% on average year to date, outpacing the FBM KLCI’s 4.9% decline.

The tepid reception was also shared by Lee, who thinks there does not seem to be any immediate catalyst in the saturated mobile telco sector in 2016, though the outlook is a bit warmer for TM, due to the finalisation of the High-Speed Broadband Phase Two (HSBB2).

“Other than HSBB2, the group has remained dominant in the broadband market,” he noted. AllianceDBS Research telco analyst Toh Woo Kim shared Lee’s view on TM, and has a ‘buy’ call on it, with DiGi and Axiata both on ‘hold’, and ‘fully valued’ for Maxis.

“We are optimistic about the eventual roll-out of HSBB2, SUBB (Sub Urban Broadband project), and wireless services that would drive further growth for TM as it expands the coverage of its high-speed broadband network to more areas,” according to Toh’s research report dated Oct 27.

Toh also expects competition among operators to intensify with the entry of P1 next year, provided P1 could launch its offering successfully. “But they will have to enter into a roaming agreement with an existing telco operator first, which could be hard, even with Celcom (Axiata),” he said.

He said this was because although TM and Axiata share a similar substantial shareholder — Khazanah Nasional Bhd — from Axiata’s perspective, paving the way for P1 to enter the LTE industry would be arming a competitor to contend with its already-stretched market share.

AmResearch telco analyst Alex Goh, meanwhile, thinks that with or without P1, the Big Three and U Mobile will continue to scramble for each other’s market share in 2016.

“We are left with one month for 2015, yet we can still see a lot of promotions by operators. Marketing strength aside, I think investors should really look at operators’ bottom line quality,” he said, adding that Axiata has gained competitiveness after it resolved its network infrastructure issue last year.

“Celcom (Axiata) has been quite aggressive after it came out from bad times last year and we continue to like it. That is why we re-initiated our coverage and have a ‘buy’ call on Axiata,” he said.

While Celcom is gaining traction, Goh also noted that Axiata’s 66.43%-owned Indonesia-based mobile telco subsidiary PT XL Axiata Tbk (XL) has shown encouraging signs of improvement.

“Celcom and XL have the biggest impact on Axiata’s bottom line. XL’s subscriber base actually fell in 3QFY15, but ARPU and revenue improved. It means that they have improved their subscriber quality,” he said.

Axiata’s third financial quarter ended Sept 30, 2015 (3QFY15) saw a 40.19% rise in its net profit to RM891.39 million from RM635.85 million a year ago on higher revenue from foreign operations, while revenue rose 8.86% to RM5.07 billion from RM4.65 billion.

Another analyst, who wished to remain anonymous, said telco stocks would still remain as investors’ favourites given that the counters are known to have stable dividend yields. “Their competition may hurt earnings in 2016, but it won’t be in a drastic manner,” he said.