There is no better time than the New Year to highlight the point that times are changing.
Technology is rapidly growing to better our lives, and sectors such as information communications stand to gain from this growth.
Malaysia is not left out from this wave of change: Its three largest mobile network operators Celcom Axiata Bhd (Celcom), DiGi.Com Bhd (DiGi), and Maxis Bhd (Maxis) were the first ones to make an impact in the mobile telecommunications industry in both the prepaid and postpaid segments.
All three started out providing traditional voice call, short message service (SMS), and multimedia message services (MMS), heating up the market with constant rivalry in terms of prices and packages offered.
Despite the fact that traditional mobile services are slowly losing its edge to data bundles today, most are still confident that this is still a profitable market.
Earlier last year, DiGi had highlighted in its 2012 Annual Report that voice and messaging would still remain important revenue contributors, and that the mobile carrier would continue to work on strengthening its market positions in these two segments.
Similarly, Maxis has not given up entirely on this market, having designed a menu of tariff plans to choose from for customers who like to communicate primarily via voice and SMS.
Also available with smartphones, are bundled packages of voice minutes and SMS to all local operators, and customers can enjoy up to 60 per cent discount off the our normal rates, it said in its 2012 Annual Report.
Celcom too, has taken up the challenge to revive the traditional services market. It had in 2012 executed successful voice and SMS resuscitation programmes that led to a 3.6 per cent year-on-year (y-o-y) growth in the voice segment, against a declining global trend.
Despite the 3G and 4G network launch, Celcom will not compromise on the quality of voice and SMS as it believes these services are still key to its customers.
However, it is a fact that mobile carriers have shifted from just providing traditional voice, SMS, and MMS services packages, to now providing data bundle packages with smartphones and apps.
They have made a successful transition in a bid to keep up with the increasing trend of communicating via the internet is debatable. The transition for Celcom has been very successful.
“We took advantage of the upward trends in data usage adoption and growth by offering innovative and attractive data bundle plans with smartphones and apps.
“This has resulted in increased smartphone and tablet adoption on our network and contributed to Celcom’s revenue growth,” said Datuk Seri Shazalli Ramly, chief executive officer (CEO) of Celcom.
As a result, Celcom’s smartphone users now stand at almost 3.7 million, making up 28 per cent of its total subscribers.
The same could be said about DiGi and Maxis, with both constantly offering new and improved data bundle plans with smartphones and apps.
“Data is a significant growth area for DiGi. Our internet customers have increased steadily from 5.8 million a year ago to almost 6.8 million today.
“With the final completion of our network modernisation nationwide, we believe our customers will now be able to fully enjoy a network that delivers greater stability and quality, over a larger footprint,” said DiGi’s CEO Henrik Clausen.
For Maxis, it is also evident that there has been an increase in internet and data usage by its customers.
This is indicated in its nine months ended September 30, 2013 financial results, which had shown revenue and profit growth, largely driven by higher mobile internet and data usage which recorded an increase of 14.6 per cent.
Maxis believed that mobile operators are operating in a competitive environment where customer behaviour and needs are increasingly data and internet centric.
It noted that to remain relevant and profitable, mobile operators need to have a robust network, drive innovation to create distinctive customer value propositions and have a strong cost efficiency focus.
Releasing the 4G wave
Fourth generation long term evolution (4G LTE) services has been the talk of the town in recent years.
Although, the service still a long way to go in terms of consumer adoption, there is no doubt that there are a number of 3G users out there who are ready to embrace the faster speeds offered by 4G LTE.
Leading the pack is Maxis which first launched its 4G LTE services early this year, making it available in West Malaysia at several prominent locations.
Not long after, it made its mark in Borneo, by being the first to provide 4G LTE in Peninsular Malaysia, starting with Kuching and Kota Kinabalu.
“We know our customers value extensive coverage and reliable data speeds. We are putting a lot of work to further enhance our leading 3G infrastructure and expand the reach of our 4G LTE network.
“Our 4G LTE footprint is the widest in the country and is now available to close to one third of the population in the Klang Valley. This will progressively be extended to other parts of the country,” said Maxis CEO Morten Lundal.
Celcom followed suit shortly after, with the rollout of its own 4G LTE network, introducing promotions with plans and bundles such as the Celcom First Data Pro Plus, which bundled 10 gigabytes of data volume with 50 megabits per second (Mbps) in speed with a price of RM138 per month.
In Sarawak itself, Celcom has already launched the LTE network and will continue to invest in the state’s data services network as part of its continued commitment towards providing the fastest and widest network in Malaysia.
“Like all telcos, data is the way forward and Celcom has put into place device bundles and superior plans that offer the best balance of data and traditional services for our customers’ needs,” Shazalli reaffirmed.
Celcom has been installing LTE sites in Sarawak since November 2013 and it expects to have over 120 LTE sites in the state by March 2014.
“These efforts will continue to grow in order to create the best network and user experience for the people in Sarawak,” he said.
Last but not least is DiGi, which had in early July, added LTE services at high traffic locations in the Klang Valley as part of its overall suite of internet service offerings, and an extension of its ambition of delivering ‘Internet For All’.
“We will be investing approximately RM650 million in capex in the next three years to gradually expand our LTE coverage to key urban centers nationwide, and target 1,500 sites at end 2014,” Clausen said.
To date, although, there has been no word on when it will be launching its 4G LTE services in Sarawak, it is evident that the carrier is currently trying to increase its current 3G footprint across the country.
Clausen had said earlier on that DiGi’s aim to increase the 4G LTE coverage througout the country “will be done in tandem with the expansion of its 3G population coverage to more than 75 per cent of populated areas by end 2013, upgrade its network to high-speed packet access plus (HSPA+), and further roll-out its fibre build to enable the efficient delivery of high-speed mobile internet services to its customers.”
DiGi has proven itself to be successful in achieving most of the above due to the fact that as of the third quarter of 2013 (3Q13), it had equipped its network nationwide with HSPA+, and exceeded the rollout of its 3G footprint to 76.1 per cent from approximately 60 per cent a year ago, while driving continuous improvements on network quality and customer focus throughout the organisation.
“A strong data network is a necessary building block to ensure we deliver the right internet experience to our growing base of customers, and will give us the impetus to drive stronger data adoption in the longer term.
“To this end, our focus on driving significant enhancements to our network performance has resulted in improvements in Drop Call Rate and Minutes Per Drop by 33 per cent and 59 per cent respectively,” Clausen explained.
He added that on the back of significant improvements in network quality and 3G footprint, growth for the quarter was strongly buoyed by DiGi’s focus on driving adoption and usage of mobile internet through affordable smart plans and device bundles.
No shortage of investments
Clearly, there has been no shortage of investments in the relevant mobile segments by the three mobile telecommunication giants as they continued to upgrade their current 3G networks while also attempting to increase their coverage of 4G LTE networks throughout the country.
For DiGi, the expansion of 3G coverage which has been ahead of schedule has resulted in higher capex in the current quarter at RM234 million, though full year capex commitment remained intact at 11 per cent to revenue.
With the modernised network and wider 3G coverage, DiGi noted that it will be in a better position to ride on the growth momentum to achieve its revenue guidance albeit pressure on top line margins due to higher handset bundles demand.
As for Maxis, in 2012, it had operationalised its pioneering active network sharing arrangement with U MobileSdn Bhd, enabling the former to monetise its network capacity and bring forward returns on its infrastructure investments.
It had also signed an infrastructure and spectrum sharing agreement with REDtone. Maxis’ overall capital expenditure (capex) spending in the year logically came down to RM803 million following three years of intensive 3G roll-out and network modernisation.
For the year to date (YTD) 2013, in its 3Q13 financial results, Maxis had highlighted that its capex had amounted to about RM548 million, with the second half of 2013 (2H13) capex spending as planned, supporting network and major IT initiatives.
With this amount of capex, Maxis has been able to maintain having the widest 4G LTE coverage footprint and device offerings, while also having continuous expansion and enhancements of 3G infrastructure.
Regarding Sabah and Sarawak, Maxis chairman Raja Tan Sri Arshad Raja Tun Uda noted that these states represent long-term opportunities for the mobile carrier’s business and has thus continued to expand its presence in this region during the year 2012, adding new 2G and 3G sites and improving network speeds for faster broadband and mobile Internet access.
“We also invested significantly in 4G LTE and in cuttingedge technologies such as NanoBTS and Femtocell to connect rural communities,” Arshad Raja added.
He further added that Maxis had invested significantly to improve connectivity for underserved communities. In 2012, Maxis had extended coverage and lowered broadband costs in Sabah and Sarawak.
Similarly, Celcom has done the same in Sarawak itself, constantly attempting to improve connectivity in the state. In terms of overall investment in the state, since 2011, Celcom has invested over RM125 million in capex in Sarawak for its mobile RAN (radio access network).
Around RM85 million in capex and RM160 million in operational expenditure (opex) will be invested in East Malaysia between June 2013 to the end of 2014 for LTE rollouts, with a total capex and opex allocation of RM130 million for Sarawak alone.
“As of November 2013, Celcom has over 870 network sites in Sarawak of which over 75 per cent are 3G enabled. We will have upgraded 68 sites in 2013 which includes the construction of 42 new sites,” Shazalli said.
He added with confidence that Celcom has the widest coverage in Sarawak and it has undertaken various initiatives to enhance its strength, competitiveness, position and growth in the state.
“Our efforts include carrying out segmented marketing, localised promotions, and expanding our marketing and retail presence in this region/state.
“Most importantly, we have made and will continue to make significant investments in Sarawak to provide wider coverage, faster speed and better quality service on our 3G and 4G network,” Shazalli emphasised.
Moving forward, Celcom is looking at exploring additional inter-industry partnerships and collaborations with over-the-top (OTT) players to meet and exceed its customers’ expectations.
A recent collaboration involving players from the same industry was when Celcom and DiGi Telecommunications Sdn Bhd entered into the TM Next-Gen Backhaul Services agreement with Telekom Malaysia Bhd (TM) this mid-December.
This is a move which will support their transmission requirements for the rollout of 4G LTE, while enabling the two companies to optimise the cost and efficiently utilise TM’s infrastructure.
Analysts had welcomed this tripartite agreement, with Cheow Ming Liang from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) citing that the two cellular companies will be able to further enhance their network quality as well as capacity.
As such, despite the high level of competition present, it should not come as a surprise if there are more of such collaborations involving the different telecom or mobile players this new year 2014.
An analytical view on the telco sector
As the top three mobile carriers in the country, many would expect that there will always be ongoing competition among them as they aim to claim bigger shares of the market.
According to the research arm of CIMB Investment Bank Bhd (CIMB Research), competition in the mobile space should heat up, with Maxis plotting a comeback to reverse its market share decline.
“We expect the new entrants to compete aggressively for a share in the mobile data wallet of the youths, while the more discerning users will stay with the big three carriers,” the research arm opined.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), Altel Communications Sdn Bhd (Altel) is expected to create ripples in the local arena.
“With an investment of RM1 billion spanning over a period of five years to deployits LTE network, we foresee Altel posing a threat to existing telco giants. The company is likely to target enterprise consumers as the consumer market is saturated,” it observed.
The research arm further pointed out that for the consumer segment, Altel will still be a threat to existing players although the impact on DiGi would be the least as the latter has a stronghold in the prepaid segment.
In contrast, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) expected that competition among the cellular major palyers to remain rational in the next 12 months. This comes after the new CEO of Maxis made a statement of there being no competing on pricing.
With rational competition in the market, Maybank IB Research thus projects that this would allow the major mobile carriers to continue to focus on further monetising data.
In terms of revenue growth, CIMB Research projected that it will be driven by small- and mid-screen data on the back of higher smart device adoption coupled with wider 3G and 4G service coverage.
“However, these will be almost offset by sharp declines in SMS revenues, which make up 11 to 13 per cent of service revenues, cannibalised by data messaging on smartphones.
“Similarly, voice revenues, which comprise 50 to 60 per cent of service revenues, should continue sliding,” it said.
In terms of mobile phone subscribership, it is likely to continue rising too, thus leading to higher data revenue for the mobile carriers.
MIDF Research expected subscriber base to expand by approximately five per cent to six per cent in 2014.
“This will be partly fueled by the offering of more affordable and wider range of smartphone and tablets to tap into the middle and lower income group,” MIDF Research opined.
As with CIMB Research, MIDF Research also expected LTE expansion to continue into 2014. Although LTE services were first introduced in the beginning of 2013 through Maxis, with the incumbents following suit, it is still in its infancy.
The latter noted that all telco providers are rigorously expanding their respective LTE coverage. With an increasing number of LTE-based smartphones available in Malaysia, it expected more subscribers, especially upgraders to take up the service.
All in, most research arms maintained ‘neutral’ ratings on the telco sector while choosing DiGi as the top pick.
While MIDF Research foresees stable growth in the subscriber base, competition among telco players could intensify following the entrance of Altel, which may slightly dampen the growth of individual players.
DiGi was chosen by the research arm as the top pick in the sector due to it improving its service quality.
“Coupled with better operating margin, we expect stronger earnings ahead. This would also translate to higher dividend payout.
“There could also be further upside in shareholder’s returns in view of he upcoming business trust proposal,” MIDF Research projected.
In terms of dividend play, however, the research arm opined that Maxis would be the preferred choice, offering higher dividend yield of more than five per cent.
Similarly, Maybank IB Research chose DiGi as one of its preferred big-cap picks, given its 2013 YTD underperformance and the emergence of potential rerating catalysts in the near term.
As for Alliance Research Sdn Bhd (Alliance Research), it chose DiGi as it believed it is just a matter of time before the mobile operator decides to convert into a business trust structure, enabling the company to undertake capital management initiatives and optimise its balance sheet that is grossly under-geared relative to peers.
With CIMB Research, it focused mainly on two of the major mobile carriers in Malaysia, DiGi and Maxis. On DiGi, the research arm expected the operator’s growth to be driven by the expansion of its 3G network coverage from 75 per cent today to 95 per cent by end-2015, matching that of its existing 2G network. The wider 3G coverage would enable it to gain new customers and grow its subscriber base.
“We also expect it to drive the adoption of mid- to high-end smartphones to stimulate data consumption. It is also expanding its 4G coverage, which wil help it capture large-screen data users,” it opined.
In terms of the potential business trust structure, the research arm explained that DiGi will have greater flexibility with paying out dividends and it is expected to unlock RM0.40-RM0.60 per share if it targets a gearing of 1.5 to two-fold net debt/earnings before interest, taxes, depreciation, and amortisation.
As for Maxis, it noted that the carrier’s road to recovery is not without obstacles. DiGi, whihch has gained the most market share in the last three years, is equipped with a brand-new 4G-enabled network. In addition, Celcom is challenging Maxis in its stronghold of urban users.
Even raising mobile data prices could prove difficult for Maxis, given the fairly stiff competition, especially from smaller players such as U Mobile Sdn Bhd, which has been aggressive on this front.
The research arm futher added that it is concerned about the very rapid fall in Maxis’s SMS revenue which has dropped 38 per cent in the last two years as compared to 24 per cent for Celcom and 18 per cent for DiGi.
“We do not see this trend slowing down with the rising adoption of smartphones. That said, small- a nd large-screen data revenue has grown, compensating for SMS’s decline,” CIMB Research noted.
Overall, what we can take away from this is that Maxis has much to do for the new year 2014 as it will need to revive the mobile carrier’s revenue which has been found to be stagnant and regain its market share after years of ceding the shares to its peers.
As Maxis will be focusing mostly on the prepaid segment to regain its market share, which as CIMB Research pointed out is DiGi’s stronghold, this will pose as a challenge to the latter especially now that Maxis has a new CEO, Lundal, leading the company.