Sector Update

20 August 2018

Telecommunication OVERWEIGHT
Broadband Puzzle ↔
By Cheow Ming Liang l cheowml@kenanga.com.my

We are keeping our OVERWEIGHT call on the telecommunication sector as current share price
weakness could still provide a great bargain hunting opportunity for investors. Broadband
connectivity has been in the limelight recently with the authority planning to widen the coverage
through the implementation of the National Connectivity Plan via a combination of fibre-optic and
wireless connectivity. Our recent 5G study suggested that many elements of 5G technology are
expected to leverage on the current 4G networks. Active network sharing, pooling spectrum and
equipment shall be the new mantra of telecom to lower the investment cost under the 5G era. All in,
we made no changes to our Telcos’ earnings forecasts and target prices (except MAXIS, where our
rating has lowered to MARKET PERFORM with an unchanged target price of RM6.05), pending their
upcoming results review. DIGI (OP, TP: RM4.90) and OCK (OP, TP: RM0.850) remains our preferred
pick for the big/mid-cap telecom.
All about broadband. While the country has a relatively high broadband penetration rate of
115.9% (per 100 inhabitants) as of end 1Q18, the contribution was mainly from the mobile
rather than the fixed-line segment. Indeed, the mobile broadband users base has continued
to climb and hit 81% penetration rate (based on the subscription basis) in 1Q18 vs. 6.9% in
the fixed-broadband space. With the mobile market reaching saturation with growth easing,
the broadband, particularly the mobile broadband, is seen as a growth engine to drive the
sector moving forward.
The Internet – basic rights for all Malaysians. The authority has highlighted its intentions
to treat the Internet as one of the basic rights for all Malaysians through the National Connectivity Plan, which set to increase
internet access throughout the nation via a combination of fibre-optic and wireless connectivity. The move is expected to open
up fixed broadband competition where Tenaga National Bhd is likely to join the party. Nevertheless, we believe, Telekom
Malaysia, being the pioneer and infrastructure owner of the HSBB projects, will still able to defend its fixed broadband territory
via its vast technical-know-how and last mile connectivity experience. On the wireless connectivity front, we reckon the authority
will encourage more active network sharing within the industry and to leverage on the operators’ current 3G/4G networks,
especially in the rural areas. Besides, we also do not discount that the government may aspire to speed-up the investments in
5G once the international spectrum framework is cloudless.
5G – the future network. A number of mobile 5G commercial launches are expected over the next three years with China, the
US and Japan set to be the leading countries in 2025, according to GSMA. To support customer migration and further drive
consumer engagement in the digital era, GSMA is predicting that mobile operators will invest USD0.5 trillion in mobile capex
worldwide between 2018 and 2020. While many things along the journey to 5G are still uncertain for now, many elements of 5G
technology are expected to be build on the current 4G networks and allow operators to optimise its infrastructure investment. On
the 5G spectrum front, ITU (International Telecommunications Union) has identified 3.4-3.8GHz and 26GHz (of which 3.5GHz
and 26/28GHz were the most popular bands under the recent trial) as the pioneer bands for the upcoming technology. Celcom
had run Malaysia’s first-ever 5G trial in partnership with Ericsson in mid-2017 while Digi’s parent, Telenor Group, has conducted
its first 5G test since March last year with technology partner Huawei, and will start with offering 5G in Norway before expanding
to other countries.
Mobile World Congress 2018 Shanghai. Our recent trip to the Mobile World Congress 2018 in Shanghai also suggested a
similar trend where the MWC highlighted various key developments that are set to shape the mobile industry, which include 5G,
IoT, Artificial Intelligence (AI), and automotive.
2Q18 report cards – so far so good. Both MAXIS and DIGI have delivered a decent set of results in 1H18. Although their
service revenues came under pressure (on a year-on-year basis) as a result of the weaker prepaid segment coupled with the
adoption of MFRS 15 accounting standard, both companies have managed to sustain or even enhance their normalised EBITDA
(in an absolute term) as a result of better operational efficiencies. AXIATA, TM and OCK, meanwhile, are set to release their
numbers by the end-August. While we do not expect any drastic changes to our full-year core PATAMI estimates, we do expect
short-term operational hiccups in 2Q18 at the reported earnings basis –AXIATA (technical impairment in its investment in India);
TM (lower sales and profit as a result of the recent cabinet reshuffle post the general election) and OCK (lower local sales amid
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cautious mode adopted ahead of the 14 GE and unrealised forex losses arise from its USD loan).
Mainained OVERWEIGHT rating for now. We made no changes to all our telecom companies’ FY18-19E earnings as well as
their respective target prices, pending their respective upcoming results releases. We continued to favour DIGI (OP, TP:
RM4.90) under the big-cap space due to its relatively resilience earnings and decent dividend yield. OCK (OP, current TP:
RM0.850) remains as our preferred pick under the mid-cap telecom in view of its: (i) healthy cash flow on the back of escalating
recurring income trend, (ii) ability to ride with the passive infrastructure sharing trend, and (iii) expanding EBITDA margin trend.
While we are keeping our MAXIS’ TP unchanged at RM6.05, its rating, however, has lowered to MARKET PERFORM (vs.
OUTPERFORM previously) as the share price had performed well since our last upgrade (dated 4-July) and now provided <10%
upside from here. Our OUTPERFORM ratings on AXIATA (current TP: RM5.00) and TM (current TP: RM4.00) are currently
under review, pending the upcoming results review.

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2Q18 result performance. Thus far, MAXIS and DIGI were the only two companies that had released their 2Q18 financial
report cards while AXIATA, TM and OCK’s results are set to be unveiled by the end-August. Both MAXIS and DIGI have
reported decent sets of results in 1H18 with core PATAMI of RM900m (-0.2% YoY) and RM770m (+5.2% YoY), respectively.
Despite their service revenues coming under pressure on a year-on-year basis (MAXIS: RM4.0b (-3.7% YoY); DIGI: RM2.9b (-
0.4% YoY), as a result of the weaker prepaid revenue (due to continued SIM consolidation and migration to Postpaid) coupled
with the adoption of MFRS 15 accounting standard), both companies have managed to sustain or even enhance their
normalised EBITDA (in absolute term) as a result of better operational efficiencies. Moving forward, both companies are aiming
to pursue sustainable growth opportunities ahead with efficient operations and digital transformation.
AXIATA’s reported earnings is expected to be dampened by its sizeable loss arising from the ‘de-recognise and reclassify’ of its
investment in India’s Idea (from associate to a simple investment) post the completion of Idea-Vodafone merger. Although the
merger could provide a robust value creation platform for the consolidated businesses, it will dilute Axiata’s effective stake in
Idea from 16.33% to 8.17% and thus will incur a technical non-cash accounting adjustment of c.RM3.0b. On a net basis, we
expect the group to deliver a fairly decent report card and meet our full-year core PATAMI estimate of c.RM1.1b.
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On the other hand, TM’s 2Q18 result is expected to face some hiccups due to the recent cabinet reshuffle post the 14 General
Election where the balance of 13 new ministers (note that the first batch of 13 ministers were sworn-in on May 21) only took their
oath of office in early July. Thus, the deferral of minister appointment is expected to cause some operational interruptions within
the ministry as well as the private sector. Having said that, while we expect TM to face some setbacks (from its GLC clients) in
2Q18, its performance is expected to be skewed towards to the 2H18 and meet our full-year core PATAMI estimate of RM672m.
Besides, OCK’s 2Q18 top-line is also likely to come in slightly lower in contrast to a year ago given the cautious mode adopted in
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the local market ahead of the 14 General Election. Its reported PATAMI, meanwhile, is likely to be weak as a result of the
estimated RM7m unrealised forex loss arises from its USD loan in Myanmar. Stripping off the unrealised forex impact, we expect
the group’s core PATAMI to come in c.RM3m in 2Q18.
Malaysia’s broadband market generally comprises the fixed and mobile broadband. Although the fixed broadband subscribes'
base has been relatively stable at 2.6-3.1m range since 2014, its market share (in terms of the overall broadband market) has
continued to deteriorate (from 15% in CY14 to 6.9% in 1Q18) as a result of the strong growth in the mobile subscribers’ base.
Indeed, the mobile subscription penetration rate has continued to surge and reached the peak at 148.3% in the year 2014 before
tapering off marginally since then (to 132.9% in 1Q18) as a result of the continued SIM consolidation and heightened
competition.
Despite lower mobile subscriber base, the adoption of the mobile broadband has continued to surge (from 17.6m subscribers in
the year 2014 (implied penetration rate of 39%) to 35.3m (or 81% penetration rate) in 1Q18), thanks to the strong and mature
mobile subscriber market as well as incremental data caps. All in, with the mobile market reaching saturation with growth easing,
the broadband, particularly the mobile broadband, is seen as a growth engine to drive the sector moving forward.
Figure 1: Malaysia’s Broadband Market Figure 2: M’sia Broadband Penetration Rate

Source: MCMC, Kenanga Research Source: MCMC, Kenanga Research

Figure 3: Penetration Rates Figure 4: Mobile Subscriptions and Penetration Rate

Source: MCMC, Kenanga Research Source: MCMC, Kenanga Research

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Fixed Broadband
On the fixed broadband front, the true broadband experience is mainly rely on the access of the fibre-optic internet
connectivity. Although the HSBB project (powered by fibre-optic) was introduced during the year 2010 followed by the HSBB2
and SUBB plans thereafter, the number of subscribers have consolidated to 2.6m (in 1Q18) vs. 3.1m in end-2014. The
uninspiring trend, we believe, was mainly due to the consolidation in the fixed broadband space and fixed-to-mobile migration.
Telekom Malaysia’s (TM) broadband base experienced a strong 4-year CAGR of 7% to 2.2m in end-CY14 (thanks to the
continued traction and wider coverage in HSBB); however, the progression has been slow since then and merely secured 2.3m
subscribers in 1Q18 due to a stagnant number of fixed lines and the growing dominance of mobile broadband.
The other smaller fixed broadband player -Time Dotcom (TIME) is playing a vital role in the multi dwelling unit segment. The
group has officially launched its broadband service in early 2010 with speeds up to 500Mbps. While the detail of the group’s
broadband subscriber base is uncertain, our channel check with the industry player indicated that the group’s network has
expanded its premises passed to c.450k in end-CY17 and set to surpass the 1m mark in 2-3 years.

Figure 4: Building Type Figure 5: Mobile Subscriptions and Penetration Rate

Source: MTSFB, Kenanga Research Source: MTSFB, Kenanga Research

Figure 6: In Building Fibre Cabling Figure 7: Internal Building Requirement for Fibre Cabling

Source: MTSFB, Kenanga Research Source: MTSFB, Kenanga Research

Fibre Optics. Fibre optics connectivity was adopted since the launched of the High-Speed Broadband Initiatives in the year
2010 to make high-speed Internet accessible and affordable to the Malaysia’s citizens. Since then, the deployment of HSBB
services has been implemented in stages and divided into three zones via using fibre-optics as the backhaul vs. copper cables
previously.
Fibre to the x (FTTX) or fibre in the loop is a generic term for any broadband network architecture using fibre-optic to provide all
or part of the local loop used for the last mile telecommunications. FTTX is a generalization for several configurations of fibre
deployment arranged into two groups – (i) FTTP/FTTH/FTTB (fibre laid all the way to the premises/home/building) and FTTC/N
(fibre laid to the cabinet/node, with copper wires completing the connection), according to Wikipedia.

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Figure 8: DSL vs Fibre Optics Figure 9: Internal Building Requirement for Fibre Cabling

Source: Openface, Kenanga Research Source: Wikepedia, Kenanga Research

National Connectivity Plan (NCP). To accelerate national broadband reach, the previous BN-led government introduced the
2017-2019 Nationwide Fiberisation Plan (NFP) which aims to connect some six million premises, including an estimated two
million premises in the rural areas to a fibre network. The plan, however, came under review post the newly formed PH
government. Recent press has reported that the minister may replace the previous government’s NFP with the National
Connectivity Plan (NCP) to increase Internet access throughout the nation. The minister also highlighted that he plans to treat
the Internet as one of the basic rights for all Malaysians whilst ensuring that the speed is high but priced low and backed by
quality services. While the details of the NCP has yet to be unvielved, we understand that the new government plans to combine
fibre optic and wireless connectivity to solve the fibre-optic dependent NFP hiccup given the latter has been affected by the
topographical issue, especially in the rural areas.
Opening up fixed broadband competition. The authority has recently asked Tenaga Nasional Bhd (TNB) to open its fibre-
optic network; and potentially ducts and poles to telecom players. Should TNB agree, it could provide another access option
(apart of TM’s ducts) for telecom players to deploy broadband services under the fibre space. The process of opening the ducts
to all telecom palyers could speed up the deployment stage as players will no longer need to dig the ground to lay fibre, which is
costly and subject to various state/local council's approvals. Having said that, the talk of a second fixed broadband network
player is not new. Many players in the past have obtained licences, but few have fully capitalised on it.
TNB has over 12,000km of fibre-optic cables (implied c.2% of TM’s fibre capacity) across the country. Based on our channel
check, TNB’s fibres are connected via the overhead earth wires and run parallel to the power cables at between the generating
transformer and transmission stations (Figure 10-11) and is said to have spent RM10b over the years. The bulk of TNB’s fibre is
on its high-voltage lines of 275KV and 132KV, and built along the North-South highway as well as interconnected to a grid. The
missing puzzle is the connection to homes, where TNB would need to plant more fibre cables, especially on the 11KV lines to
provide the last mile connectivity.
All in, while we believe TNB is well-capable to roll-out its broadband services on it own, we do not discount that the group may
look into monetarise their fibre infrastructures and collaborate with other technical know-how players to build the last mile
connectivity as well as to reduce execution risk given the group’s core business is in the power rather than the communication
sector. Based on our channel check with the other industry player, laying fibre into the ground could cost as high as RM100k
(excluding the cost of fibre) per kilometre but will be 50% cheaper or more for aerial option, depend on the location and other
factors.

Figure 10: Basic Structure of the Electricity Distribution

System Figure 11: Electricity Supply Map - 2

Source: US-Canada Power System Outage, Kenanga Research Source: Kenanga Research

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Figure 12: Electricity Supply Map - 3 Figure 13: Grid System In Peninsular Malaysia

Source: US-Canada Power System Outage, Kenanga Research Source: TNB, Kenanga Research
TM, on the other hand, has over 540,000km of fibre nationwide and access to more than 190,000km submarine cables
worldwide. The group has increased its broadband coverages over time from the High-Speed Broadband Project (HSBB) to
HSBB2 and Sub-Urban Broadband (SUBB) projects. HSBB was introduced in early year-2010 to boost broadband penetration
(at c.33% in early 2010) and providing an increased capacity for electronic commerce as well as offering more government
services on line. Deployment of HSBB services has been announced to implement in stages and divided into three zones with
priority on the high economic zone followed by urban and semi-urban areas.
The ten-year HSBB2 project encompasses the deployment of additional access and core capacity covering state capitals and
selected major towns throughout the country. Under the project, 95 additional exchanges will be made HSBB ready, providing
access to 390k premises in other priority's economic areas, including state capitals and selected major towns by 2017.
Meanwhile, the SUBB infrastructure will be rolled out over a period of ten years, involving the upgrading of existing Cooper lines
to deliver broadband at downlink speeds of up to 20Mbps, or up to 100Mbps in those areas where FTTH technology is utilised.
In total, c.420k premises in sub urban and rural areas will benefit from the SUBB project by 2019.
As at the end-2017, TM has approximately 5.3m broadband ports deployed nationwide, of which 2.6m support speeds of
10Mbps and above, while over 7.5k WiFi access points were rejuvenated with high-speed backhaul for enhanced customer
experience. Management has earlier highlighted its aspiration to become a one-stop converged solution's provider and will
continue to offer relevant convergence propositions to its customers. From a convergence perspective, Unifi’s service coverage
is nationwide and encompasses service delivery via various technologies – fixed (fibre, copper), wireless (LTE and domestic
roaming) and WiFi. As at end 2017, 42% of TM’s households are with a convergence portfolio of 3 services or more (a
combination of phone, broadband, mobile, TV) and the number is expected to climb to 50% by end-2018 followig the
implementation of a convergence Go-To-Market strategy on targeting households.
On the other hand, Unifi Mobile 4G LTE network coverage had reached 74% of the population (with 1.1m subscribers or c.10%
of TM’s household) at the end of 2017. Although still below the mobile key competitors (such as Maxis, Digi and Celcom, which
covered 92%/87%/87% of the population areas, respectively, as of the end CY17), it had made respectable progress since the
service was launched 2 years ago.
With existing mobile players and perhaps, new fixed-line players come into play, the fixed broadband packages are expected to
be more competitive moving forward. Nevertheless, TM being the pioneer and infrastructure owner of the HSBB projects will still
be able to defend its fixed broadband territory via its first-mover advantage as well as vast technical-know-how and last mile
connectivity experiences.
Figure 14: TM’s Intl & Domestic Trunk Fibre Optic Network

Source: TM, Kenanga Research

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Figure 15: TM’s Nationwide Broadband Coverage

Source: TM, Kenanga Research

Figure 16: TM’s Unifi Mobile LTE Coverage

Source: TM, Kenanga Research

Mobile Broadband
Malaysia’s mobile broadband has experienced an exponential growth since 2014 where the penetration rate surged from 39%
(with 17.6m subscribers) to 81% (35.3m subscribers) in 1Q18, thanks to the affordable handsets and continued widening 4G
coverage (where Maxis, Digi and Celcom’s 4G’s coverages reached 92%/87%/87% of the population areas, respectively, as of
the end CY17). While we expect the mobile broadband subscribers base will continue to climb; the growth rate, however, is
expected to be moderate in view of the current high penetration rate. While 4G network is expected to continue playing a vital
role, at least for the next couple of years, to lure mobile broadband subscribers, the local incumbents have started to take a
proactive step to trial the upcoming 5G technology. Celcom had run Malaysia’s first-ever 5G trial in partnership with Ericsson in
mid-2017. Apart from Celcom, Digi’s parent Telenor Group has also started its first 5G test since March last year with technology
partner Huawei, and will start with offering 5G in Norway before expanding to other countries.
5G - The future network. 4G has become the leading mobile network technology worldwide since the launch of early
commercial services approximately 10 years ago. While the 4G technology is set to remain as the key network for the next
couple of years, the mobile industry continues to make progress with 5G, including trials and the approval of the non-standalone
5G new radio specifications in December 2017. A number of mobile 5G commercial launches are expected over the next three
years with China, the US and Japan set to be the leading countries in 2025, according to GSMA. The research outfit also
expected two-thirds of mobile connections (excluding cellular IoT) across the world will operate on high-speed networks by year
2025, with 4G accounting for 53% of total mobile SIMs and 5G at 14%. To support customer migration and further drive
consumer engagement in the digital era, GSMA is predicting that mobile operators will invest USD0.5 trillion in mobile capex
worldwide between 2018 and 2020.

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Figure 17: 5G use cases Figure 18: 5G Main Requirements

Source: ITU, Kenanga Research Source: ITA, Kenanga Research

Figure 19: Planned 5G network commercial launch date Figure 20: Global mobile adoption by technology

Source: GSMA Intelligence, Kenanga Research Source: GSMA Intelligence, Kenanga Research

Figure 21: 5G Connectivity – Asia Pacific Figure 22: Technology Mix – Global, Asia Pacific, Malaysia

Source: GSMA Intelligence, Kenanga Research Source: GSMA Intelligence, Kenanga Research

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5G- Capex. GSMA estimated that between 2018 and 2020, mobile operators in Asia Pacific are expected to invest 14% of
revenue or c.USD188b in mobile capex (excluding one-time spectrum acquisitions) with key focus still on upgrading 4G
networks to faster speeds and lower latencies. Moving forward, network investments are set to shit to the 5G progressively,
although there are little guidance on the potential necessary investment. While the network investments will depend on a number
of factors (such as business model, targeted coverage area, the range of spectrum bands and the availability of fibre
infrastructure), 5G is expected to cost less per unit of data than 4G given the better network and equipment efficiencies (as a
result of newer technology) as well as the potential cost savings arising from network optimisation.
Based on our understanding, network deployment strategies have firmed up to involve the dual use of standalone and non-
standalone architectures. Standalone builds refer to a new network, including sites, RAN and core (contigent on NR standars)
while the non-standalone depoloyment would piggyback 5G RAN on existing LTE sites. If a lower frequency spectrum is
available for use, operator indications are that deployment would use a standalone model in urban centres, according to GSMA.
Alternatively, should lower frequency spectrum is not available; a dual-use strategy could be used where standalone networks
are deployed in dense urban centers with non-standalone builds in suburban and rural areas.
While many things along the journey to 5G are still uncertain, many elements of 5G technology are likely to be build on the
current 4G networks to optimise the infrastructure investment, according to Mckinsey. That said, mobile operators can take an
evolutionary approach to infrastructure investment, where operators could begin by upgrading the capacity of their existing 4G
macro network by refarming a portion of their 2G and 3G spectrum, or by acquiring additional spectrum when available.
Figure 23: Asia Pacific Capex & Coverage Outlook Figure 24: 5G – Investment in Network Domains

Source: GSMA Intelligence, Kenanga Research Source: Mckinsey, Kenanga Research

5G- Spectrums. 5G is expected to be the heart of the future communications from virtual reality to autonomous cars and smart
cities. The success of the technology, however, is highly dependent on a harmonised mobile spectrum across three categories
of frequency bands: sub-1 GHz, 1-6 GHz, and above 6 GHz, according to GSMA. The former band is expected to provide large-
area coverage and better indoor penetration while the latter range is aimed to provide operators greater bandwidth and
consequential increase in air capacity with ultra-high speeds. Having said that, we understand that ITU (International
Telecommunications Union) has identified 3.4-3.8GHz and 26GHz as the pioneer bands for the 5G but will only define 5G bands
above 6GHz during the World Radiocommunication Conference 2019 (28 October to 22 November 2019).
At present, there are c.77 operators across 49 countries globally that have conducted pre-commercial trials in 5G technology of
which 45 operators have announced plans to launch 5G services. Majority or 53% of the said operators have trialed their 5G
services through 3-6GHz and 6-30GHz spectrum bands (of which 3.5GHz and 26/28GHz were the most popular bands) with
China, Japan, Korea and the US expected to take the lead during the initial rollout.
Figure 25: 5G Spectrums Figure 26: 5G – A Tale of Two Spectrums

Source: GSMA, Kenanga Research Source: InterDigital, Kenanga Research

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Figure 27: Overview 5G Spectrums Figure 28: 5G Spectrums Strategies

Source: Docomo, Kenanga Research Source: Docomo, Kenanga Research

5G developments – thus far. On the Asia Pacific ground, Korea Telekom has successfully deployed 5G services during the
Winter Olympic in February 2018 (in Pyeong Change, Korea) with the use of the 28GHz millimetre wave spectrum. The type of
5G services provided during the said deployment includes synchronised real-time first-person view, 360 virtual reality with
augmented reality information, and 5G autonomous vehicles, which provided the Olympic attendees with immerse
entertainment. Following through the first 5G debut in Asia Pacific, Japan's telecom incumbent, Docomo is also counting down to
its targeted commercialisation of 5G services in 2020 for Summer Olympic game in Tokyo, Japan.
Moving on to China's forefront, mobile operators, i.e. China Telecom, China Unicom and China Mobile are pursuing standalone
model for 5G, which allows 4G and 5G services to run in parallel and removes the complexity of LTE integration, while providing
economies of scale. In order to better manage the more financially demanding implementation model, the operators are also
collaborating via various network optimisation, spectrum sharing and open network initiatives to reduce the cost per unit of 5G.
Based on the target road map of these mobile operators, 5G is expected to begin its commercialisation in China in the year 2020
and to account for a third of the Chinese market by 2025 spanning from automotive, drones to manufacturing.
Hence, it appears that the persistent drive by major global industry players coupled with various collaborations within and across
industries is turning the earlier aspirational goal of 5G into a feasible target for many mobile incumbents. Having said that,
overall cost of deployment remains exceptionally high, where sharing of infrastructure becomes a critical aspect for success in
5G. Active network sharing, pooling spectrum and equipment shall be the new mantra of telecom to lower costs under the 5G
era.
Mobile World Congress 2018 Shanghai. The Mobile World Congress 2018 in Shanghai which we attended also suggested a
similar trend where it highlighted various key developments that are set to shape the mobile industry including 5G, IoT, Artificial
Intelligence (AI), and automotives.
(i) 5G – Discover a better future. Fifth-generation wireless, or more commonly known as 5G, is the latest iteration of cellular
technology, engineered to greatly increase speed and responsiveness of wireless networks. Moreover, the focus on 5G also
includes reengineering ways of interaction between mobile devices and mobile connected devices or user-centric connectivity
thus providing better experience and greater functionality to users. According to Vodafone, first wave of 5G use cases will likely
be for NB-IOT services, for example, smart utilities, followed by some autonomous machines.
Presently, numerous major telco incumbents are racing into 5G trials and deployments as it is believed to be the future which
could reshape the mobile industry. The benefits that 5G entail are greater than a mere boost to one’s phone data, instead it is
believed to be an enabler towards connected autonomous vehicles, telemedicine, virtual reality, augmented reality, among
others. According to HUAWEI, 5G is expected to increase maximum speed of data transmission to 20GBps from current 4G
network’s speed of 150MBps and reduce latency to as low 1 milliseconds from 4G’s average of 50 milliseconds. The
requirement for 5G in delivering speed and capacity is critical to support future data demand that expect to be overwhelming, as
pointed by Intel.
Figure 29: Evolution toward 5G speed Figure 30: Intel : Future Expectation of Data Requirement

Source: Huawei, Kenanga Research Source: Intel, Kenanga Research

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(ii) Scaling the Internet of Things (IoT). IoT is the network of physical devices embedded with electronics, sensors, actuators
and connectivity, which enables these things to connect and exchange data. An established network of IoT shall eventually
create an opportunity for more direct integration of the physical world into computer-based systems of manufacturer, operator
and or others, resulting in efficiency improvements, economic benefits and reduced human exertions. IoT can be broadly
categorised into consumer IoT (wearables, vehicles, smart TVs, games consoles, set-top boxes, smart homes) and industry IoT
(manufacturing, smart cities, retail, fleet management, smart buildings and utilities).

Figure 31: IoT-Powered Offering Figure 32: Advantage of IoT

Source: Huawei, Kenanga Research Source: Intel, Kenanga Research

Figure 33: IoT Application : Smart Home Figure 34: IoT Application : Smart Metering

Source: Huawei, Kenanga Research Source: Huawei, Kenanga Research

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With various smart city initiatives across the region (for example, the 13 Five-Year Plan in China, Smart Nation in Singapore
and India’s 100 Smart Cities Mission) and focus on factory automation, the number of IoT connection in Asia Pacific is
increasing at a tremendous rate. GSMA forecasts that the number of connected things in Asia Pacific will increase from 2.7b in
2017 to 11.0b by 2025 underpinned by industrial IoT connections, that are set to grow twice as fast as consumer IoT
connections. In terms of IoT revenue, GSMA further estimates that Asia Pacific’s IoT revenue may rise at an average rate of
28% during 2017-2025 to reach USD386b; thus, expected to overtake Europe (in 2018) and North America (in 2023) that ae
currently experiencing more mature IoT ecosystem.
Figure 35: Asia Pacific IoT Connection Figure 36: Asia Pacific IoT Revenue

Source: GSMA, Kenanga Research Source: GSMA, Kenanga Research

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(iii) Revving up Connected Vehicles. Connected vehicles are catching unprecedented attention by investors, companies and
governments given their potential to change consumer mobility behaviours and transform the automotive sector. Recent
progress in artificial intelligence (AI), autonomous driving technology and legislation suggest that truly connected vehicles (level
4 autonomous car – fully automated with human backup driver and level 5 autonomous cars – fully automated without steering
wheels, pedals and drivers) may materialise within the next 10 years, based on targeted roadmap of major automakers and
technology players.
Considering the new technology trend, many OEMs and disruptive market players are incorporating car intelligence and
autonomous driving into their innovation strategies. In March 2018, Baidu completed the country’s first autonomous driving road
test based on 5G, and aims to get self-driving cars onto the roads by 2019. Moreover, automakers, Audi and Huawei have
recently inked a strategic cooperation on connected vehicles, focusing on safety and optimising traffic flows.
Figure 37: Autonomous Vehicle : Test Journey Figure 38: Autonomous Vehicle : Test Journey

Source: South China Morning Post, Kenanga Research Source: China Daily, Kenanga Research

Figure 39: Autonomous Vehicle : IoT Capabilities Figure 40: Baidu: Apollo’s Road Map

Source: GSMA, Kenanga Research Source: Apollo, Kenanga Research

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Peer Table Comparison

Core Earnings ROE Net Div
Name Last Price @ Revenue Growth PER (x) - Core Earnings PBV (x)
Market Cap Shariah Current Growth (%) Yld (%) Target Price
17-Aug 2018 Rating
(RM'm) Compliant FYE 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 1-Yr. 1-Yr. (RM)
(RM) Hist. Hist.
Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd.

Stocks Under Coverage

AXIATA GROUP BHD 4.35 39,366 Y 12/2018 -1.2% 4.7% -4.3% 10.3% 32.6 34.2 31.0 1.5 1.6 -8.8% 2.3% 4.95 OP
DIGI.COM BHD 4.54 35,299 Y 12/2018 3.0% 1.2% 2.4% -0.3% 23.9 23.4 23.4 68.0 66.5 287.9% 4.2% 4.90 OP
MAXIS BHD 5.75 44,945 Y 12/2018 -3.3% 1.7% -5.9% 1.3% 21.2 23.0 22.7 6.3 6.1 27.2% 3.5% 6.05 OP
OCK GROUP BHD 0.640 558 Y 12/2018 10.6% 13.8% 6.4% 27.5% 21.7 21.7 17.0 1.3 1.3 6.2% 0.5% 0.850 OP
TELEKOM MALAYSIA BHD 3.62 13,604 Y 12/2018 -3.0% 1.8% -22.1% 11.5% 15.8 20.3 18.2 1.7 1.7 9.2% 5.1% 4.00 OP
Simple Average 1.2% 4.6% -4.7% 10.1% 23.1 24.5 22.5 15.8 15.4 64.3% 3.1%

Stocks Not Under Coverage - Consensus

TIME DOTCOM BHD 8.13 4,744.7 Y 12/2018 10.7% 14.7% 32.5% 20.8% 27.1 20.4 16.9 2.1 1.9 9.9% 1.3% 9.07 BUY

Source: Kenanga Research

AXIATA – SoP Valuation

Equity
Valuation Effective Per Share
Companies Valuation Earnings Multiple Methodology
(RMm) Stakes (%) (RM)
(RMm)

Celcom (Malaysia) 27,958 27,958 100.0% WACC:7.3%, TG: 1.5% 3.09 DCF
XL (Indonesia) 13,563 9,000 66.4% WACC:9.9%, TG: 2.5% 0.99 DCF
Dialog (Sri Lanka) 4,652 3,876 83.3% 4.8x 0.43 EV/EBITDA
Robi (Bangladesh) 5,562 3,821 68.7% 7.4x 0.42 EV/EBITDA
Ncell (Nepal) 8,706 6,965 80.0% 6.0x 0.77 EV/EBITDA
Smart (Cambodia) 3,593 2,964 82.5% 6.0x 0.33 EV/EBITDA
Idea Cellulur (India) 12,924 1,056 8.2% 0.12 Market Price
Mobile One (Singapore) 4,552 1,306 28.7% 0.14 Market Price

TOTAL EV 56,946
(-) Net Debt 12,371
Total Equity Value 44,575
No. of Axiata Shares 9,048
SOP/Share 4.93 Round up 4.95
Source: Kenanga Research

PP7004/02/2013(031762) Page 12 of 13
Telecommunication Sector Update
20 August 2018

Stock Ratings are defined as follows:

Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10%

MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5%

Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10%

NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5%

***Sector recommendations are defined based on market capitalisation weighted average expected total
return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not
make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the
specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This
document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees.
Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document
or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or
otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by:

KENANGA INVESTMENT BANK BERHAD (15678-H)

Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Chan Ken Yew
Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: research@kenanga.com.my Head of Research

PP7004/02/2013(031762) Page 13 of 13