Telecommunications sector
Maintain neutral: We maintain our neutral call on the sector following our downgrade from overweight on Dec 7. Valuations are fair for half the stocks in our coverage — DiGi.Com Bhd and Axiata Group Bhd.

Also, the mobile market is increasingly saturated with penetration exceeding 100% in 1QCY09, whereby earnings growth will likely be modest next year as industry players are still going through a gestation period from rolling out and expanding their broadband coverage.

Industry revenue growth for the mobile market has tapered off as mobile penetration breached 100% in 1Q09. Growth is expected to return in FY11 when revenue contributions from broadband gain traction.

Household broadband penetration in Malaysia is still low at only 27% in 3Q09. Broadband penetration will be supported by the proliferation of netbooks bundled with broadband plans. The government recognises that the country’s broadband penetration lags considerably behind its regional peers and had proposed several measures during the recent budget to boost broadband take-up rate.

Industry wireless broadband subscriber growth has been relatively strong in the last few quarters, averaging circa 30% (+103,000) quarter-on-quarter since 1Q08. As industry players continue expanding and upgrading their networks, we expect the subscriber growth momentum to sustain in the medium term.
The frontrunner is Celcom which has managed to garner a substantial wireless broadband subscriber base of 475,000 due to wider 3G coverage and aggressive advertising and promotion. Unless there are major quality or other network issues, Celcom should sustain its aggressive growth in broadband.

Green Packet has also shown respectable growth in its WiMAX subscriber base, almost doubling in a quarter to 100,000 in 3Q09. It has set an ambitious target of 200,000 subscribers by year-end, which is we believe is unlikely. The company needs 200,000 subscribers to break even at Ebitda level.

DiGi is understandably behind the curve given that it only secured the 3G licence from Time dotCom Bhd in 4Q07. With a wireless broadband subscriber base of only 26,000, DiGi expects broadband to be a key revenue growth driver only in two years.

Maxis’ growth in its wireless broadband subscriber base has been relatively subdued as the company is gearing up to relaunch its broadband services in 2H10 once its network modernisation plan is completed in 1H10. By doing so, Maxis is preparing itself to ensure that quality is maintained by having adequate capacity to cope with high demand for bandwidth.

Contribution from wireless broadband towards total revenue is still currently small, even for Celcom which currently has the largest wireless broadband subscriber base. In developed countries with mature mobile markets such as Singapore, revenue from broadband contributes circa 20% to total revenue.

With potential growth in the broadband market given low household penetration, there is room for mobile operators to grow in the medium term once their wireless broadband subscriber base gains critical mass.

Telekom Malaysia’s (TM) growth in its fixed line broadband subscriber base has been declining due to stiff competition from wireless broadband.

Nonetheless, we expect TM to re-ignite growth in its fixed line broadband subscriber base with progressive rollout of its RM11.3 billion high-speed broadband (HSBB) network. Given the hunger and pent-up demand for high bandwidth in the country, we expect take-up rates approximate the number of premises passed unless the HSBB retail services are not competitively priced. — ECM Libra Investment Research, Dec 21