Industry Outlook

Malaysia Telecom Sector

Refer to important disclaimers at the end of this report

DBS Group Research . Asian Insights Office 24 September 2019

Macro Outlook
Malaysians are the heaviest users of mobile data in South East Asia but data-revenue growth prospects are mediocre. Data usage
in Malaysia has grown tremendously at a 3-year CAGR of 76%, reaching a monthly average usage of c. 12GB per user in 1H19, and is
among the highest in the region.

While average data usage per user in Malaysia has grown by leaps and bounds in the past three years, monetisation has been poor
given the generous amount of data quota and freebies allocated to subscribers. Essentially, mobile players in Malaysia are still
reaping what it sowed in 2015-2016, where intensified competition led to a series of pricing adjustments to data plans. Price points
were maintained, but data quota was raised substantially beyond the average usage level at that time. For instance, typical entry-
level RM50 postpaid plans would have 2GB of base data allocation in 2015. By 2016, similar plans would easily have had 5GB of base
data, without counting the additional free data given for weekend/off-peak usage, video streaming, social media, etc.

We expect relatively stable market share for the incumbents witnessed over 1H19 to continue in 2020 given the lack of overly
aggressive marketing campaigns as incumbents maintained data-pricing discipline. We think competitive pressures from smaller
players on the data front also should continue to remain stable in 2020 with U Mobile potentially facing network quality issues post
the termination of network sharing with Maxis and relatively less aggression shown by MVNOs. Mobile data remains as the key
driver of growth, cushioning the effects of lower voice and SMS revenue. Backed by moderate growth in data usage and
expectation of rational industry wide data pricing, we project Malaysia to witness high single-digit to low double-digit growth in
data revenues over 2020.

Malaysia records moderate growth in data revenues Remarks

1. Growth in mobile data

revenues in Malaysia is
largely in line with the
regional average in
1H19.

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Data consumption in Malaysia is amongst the highest in the region Remarks

Data consumption in Asia - Average MBs per User 1. Data consumption in Malaysia
far outpaces the regional
12,495
11,500 average, reaching a monthly
10,794
average usage of c. 12GB per
9,567 8,900 user in 1H19, and is among
7,587 7,328 the highest in the region.
6,848
5,300 5,610 5,171 4,939
4,200 4,232 4,730 4,275 3,891
3,500
2,408 2,305 1,607 2,150
1,715
1,245

Singapore* Malaysia India* Indonesia Thailand* China** Philippines* Hong

2Q17 2Q18 2Q19 Kong***
*Singtel for Singapore, Bharti Airtel for India, AIS for Thailand, Globe Telecom for Philippines. ** - 1H data for
China. *** - Data consumption per capita for Hong Kong
Sources: Companies, DBS Bank

Malaysia’s data yields are in par with the regional average Remarks

Data pricing trends in Asia (USD per GB) 1. Data prices are seen to be
5.1 2Q17 2Q18 2Q19 stabilising in 2Q19, with
4.8 4.6 rational data pricing in place.
3.6

1.99
1.6 1.6
1.0 1.1 1.18
0.7 0.6 0.8 1.0 0.8 0.8 0.86
0.5 0.4
0.2 - *

Singapore* Malaysia India* Indonesia Thailand* China** Philippines*

All figures are in USD. Denotes the cost per GB
*Singtel for Singapore, Bharti Airtel for India (4Q18 data), AIS for Thailand, Globe Telecom for Philippines, ** 1H
data for China

All figures are at constant US$ rates of Singapore Dollar – 1.36, Malaysian Ringgit – 4.15, Indian Rupee – 69.50,
Indonesian Rupiah – 14,234, Thai Baht – 31.52, RMB – 6.82

Sources: Companies, DBS Bank

Malaysia has ample room to growits 4G coverage and penetration. Following the allocation of 2.6GHz spectrum to provide 4G LTE
services in December 2012, Malaysia has made steady progress in increasing its 4G coverage and penetration rates. However,
Malaysia witnessed a slowdown in 4G LTE buildouts in 2018 with service providers focusing more on investing, enhancing,
maintaining and upgrading existing network infrastructures. With 4G coverage hovering at c. 80%, and a 4G penetration rate of c. 71%,
Malaysia has ample ground to cover.

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Malaysia has ample room to grow 4G coverage Remarks

4G population coverage in Asia

1. 4G population coverage in
120%
Malaysia hovers at c. 80%,
98% 99% 99% suggesting ample room for
100% 97%
network expansions by
82%
80% 80% telecom operators.
74%

60%

40%

20%

0%
India Malaysia Indonesia Australia Thailand Singapore China

Sources: Info-communications Media Development Authority of Singapore, Malaysian Communications

and Multimedia Commission, Kemkominfo Indonesia, DTAC, AIS and TrueMove for Thailand, Optus for
Australia, China Mobile and China Telecom for China

Malaysia has ample room to grow 4G penetration Remarks

4G Penetration (% of Subcribers) in Asia

1. 4G penetration in Malaysia
80% 76%
74% 75% still remains below peer
71%
70% averages
62%
60%
49%
50%
40% 38%
30%
20%
10%
0%
India Thailand Indonesia Malaysia Australia Singapore China

Sources: China Mobile, China Telecom and China Unicom for China, Singtel for Singapore, Optus for Australia,
Digi.com for Malaysia, XL Axiata for Indonesia, DTAC for Thailand, Bharti Airtel for India

Growth in 2020 to come from non-mobile service revenue. Core mobile service revenue growth was relatively flat year-on-year
(y-o-y) in 1H19, if not for the reduction in mobile termination rate and lower wholesale revenue at Celcom (revised rates with TM), as
well as Maxis (termination of network sharing with U Mobile). Amid rational industry-wide data pricing and less aggressive
competition from MVNOs, this is likely to remain the same going to 2020, as growth in data revenue continue to cushion the effects of
declining voice and SMS revenue.

From a 1.4% decline in 2019, we forecast the mobile incumbents to achieve a minor 2.6% growth in 2020 predominantly driven by non-
mobile service revenue. We expect wholesale revenue at Celcom to recover when data traffic from the 4G domestic roaming
agreement with TM’s Unifi mobile ramps up more meaningfully. Meanwhile, we expect Maxis to continue to be aggressive in growing
its Home fiber broadband as well as Enteprise services, in line with its goal to achieve RM10bn service revenue by 2023 (from RM8bn
in 2018).

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Malaysia mobile players’ service revenue could see some growth in 2020 Remarks

Service revenue growth

3.0% 2.6% 1. Service revenue to
decrease by 1.4% in 2019
2.0%
largely due to lower
1.0% wholesale revenue and
mobile termination rate
0.0%
2016 2017 2018 1H19 2019 2020
-1.0% 2. We forecast a growth of
2.6% in 2020 due to
-0.6%
-2.0% growth in non-mobile
-1.4%
revenue such as enterprise
-3.0% -2.3%
services (Maxis) and
-4.0% -3.8% wholesale (Celcom)
-4.3%
-5.0%

Sources: Companies. DBS Bank

Key Mobile Industry Trends

Mobile service revenue fell 3.8% in 1H19. Mobile service revenue saw a decline of 3.8% in 1H19, which was largely affected by the
reduction in mobile termination rate and lower wholesale revenues. In particular, Maxis was winding down its network sharing
agreement with U Mobile, while Celcom had revised its domestic roaming contract with TM (presumably at a lower rate) since 1Q19.

Excluding these factors, we estimate core mobile service revenue for the three incumbents were actually relatively flat y-o-y in
1H19. SIM consolidation and prepaid-to-postpaid migration remain the key trends shaping the mobile market, as data pricing
became much more affordable over the past 2-3 years. On average, incumbents are registering 8-10% growth in data revenue in
1H19, but this was offset by the 20-23% decline in legacy voice and SMS revenues. As of 2Q19, we estimate data contributes about 65%
of incumbents mobile service revenues.

Mobile service revenues contracted in 1H19 Remarks

1. Mobile service revenue

5,000
(3.2)% 1H18 1H19 declined 3.8% y-o-y in
3,993 3,865 1H19, mostly due to
4,000 reduction in mobile
(4.1)% (4.1)%
3,017 2,893 2,915 2,795 termination rate and
3,000 lower wholesale revenues.

2,000

1,000

0
M axis Celcom DiGi
Source: Companies, DBS Bank

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Malaysian subscribers are consuming more data than ever. Data usage in Malaysia has grown tremendously at a 3-year CAGR of
76%, reaching a monthly average usage of about 12GB per user in 1H19, and is among the highest in the region.

However, incumbents have seen very little ARPU growth since 2016, with any increase likely to do with SIM consolidation rather
than actual increase in spending by subscribers. This is despite the strong growth in data usage, where the average
consumption of 12GB per user is already ahead of the base data allocation for all prepaid and postpaid plans. The key issue lies
with the very generous free data given, which have not been scaled back since the industry price war in 2016 and remains
prevalent until today.

Average data usage in Malaysia is on the rise Remarks

Average data usage in Malaysia (GB/month)

14.0
12.1 1. Data usage in Malaysia is
12.0 among the highest in the
10.7
region and has grown
10.0 tremendously at a 3-year
8.3
CAGR of 76%, reaching a
8.0 6.8 monthly average usage of
about 12GB per user in 1H19.
6.0 4.9

4.0 3.2
2.2
2.0

-
1H16 2H16 1H17 2H17 1H18 2H18 1H19

Source: Companies, DBS Bank

All quiet on the mobile front. Much so like 2018, incumbents have not made any significant changes to their plans so far in 2019. The
only key difference this year is the smaller players and MVNOs are also not doing anything major that could disrupt the market. 4th
player U Mobile is currently busy with expanding and upgrading its own network, after terminating the network sharing agreement
with Maxis. To showcase confidence in its network, the company is running a campaign that offers customers a chance to try out its
mobile services over a 7-day money-back-guarantee period.

Digi, Celcom and Maxis continue to be the market leaders by subscriber market share Remarks
Estimated mobile subscriber market share in 1Q19
Others/MVNOs 1. Competition remained rational
14% Maxis over 1H19, much like 2018,
23%
leading to subscriber market
share largely remaining
U Mobile* unchanged.
(estimate)
16%

Celcom
21%

DiGi
26%
Source: Companies, DBS Bank

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Malaysia Telecom

5G is still a long way away. Malaysia Communications and Multimedia Commission (MCMC) formed a 5G Task Group in 2018 to make a
recommendation on spectrum for 5G to the Malaysian Government. At present, the task force is focusing on the 3.5 GHz, 26 and 28
GHz ranges with plans to fully adopt 5G by 2023. In July 2019, MCMC launched a public inquiry to collate industry views on proposals
for the time-frame and spectrum fees for the allocation of the 700 MHz, 2300 MHz and 2600 MHz bands in Malaysia. The findings will
be considered for a 5G spectrum roadmap for Malaysia which is expected to be finalised by 1Q20.

Key Industry trends – Broadband

Significant improvement in speed and affordability. The fixed-line segment has undergone major structural changes in 2018,
following the implementation of MSAP (Mandatory Standard on Access Pricing) that successfully drove significant reduction in
broadband prices and huge boost in speed. This is clearly reflected in the statistics by MCMC, where subscribers with speed faster
than >50Mbps more than doubled in 1Q19 since 2017 – of which a majority are TM Unifi fibre broadband subscribers who received free
speed upgrade (up to 10x faster) starting from 2H18. Since then, an entry-level fibre broadband in the market now comes with
minimum 100Mbps speed (vs. only 10Mbps previously).

Subscribers in the 10-50Mbps category should largely comprise high-rise buildings household where existing internal
infrastructure are still copper-based. As such, the availability of higher speed is constrained by technological limitation of VDSL and
quality of the copper wire.

On the other hand, those households with less than 10Mbps speed are likely to be predominantly TM’s Streamyx customers, which
still run on the old ADSL technology. The company has recently unveiled several initiatives aimed at solving the issues with
Streamyx; including a reduction in subscription price from September 2019 as an interim measure. Over the longer term, TM intends
to address the copper network challenges via various technologies (such as fibre, wireless and GigaWire) in a network rollout that
will involve phased customer migration from now until 2021. TM expects that 70% of its Streamyx subs will be able to migrate to the
faster Unifi services by end-2020.

Significant improvement in broadband speed and affordability in Malaysia Remarks

Breakdown of household fixed-line subscriptions by speed (‘000)

1. Subscribers with speed
1,400 2017 1Q19 faster than >50Mbps
1,170 more than doubled in
1,200
1,050 1Q19 from 2017.

1,000

800 725 687

600 514

400 361

200

-
<10 M bps 10-50 M bps >50 M bps
Source: Companies, DBS Bank

Maxis and TIME gaining market share. Since the cut in broadband prices, we saw increased take-ups of Maxis and TIME broadband
plans. Maxis has been aggressive in cross-selling plans to its mobile customers and enticing TM’s Unifi subscribers to switch.
Although TIME is still focusing on its own coverage, it is also likely to increase capex for network expansion going forward to fulfil
pent-up demand for high-speed broadband.

As at end-1Q19, TM still commands a leading market share with 82% of the fixed broadband market in Malaysia (Unifi + Streamyx). We
estimate that TIME and Maxis’ market share are relatively close to each other at 7-9%, hovering at around 200-250k subscribers.

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Malaysia Telecom

Maxis and TIME gainingbroadband market share Remarks

Fixed-line subscriptions in Malaysia (‘000)
3,000 Streamyx (ADSL) Unifi (fiber) Maxis (fiber) 1. Subscribers with speed
faster than >50Mbps more
118 146 172
2,500 52
226 251 than doubled in 1Q19 from
80
2017.
2,000
635 729 839 949
1,126
1,500 1,298 1,323

1,000
1,580 1,502 1,501 1,421
1,207
500 936 872

0
2013 2014 2015 2016 2017 2018 1Q19

Source: Companies, DBS Bank

Risks and Regulations

Better clarity on spectrum allocation by MCMC. The Malaysian Communications and Multimedia Commission (MCMC) has officially
launched its public inquiry on spectrum allocation in July 2019. The 700MHz spectrum process is expected to start in 4Q19,
coinciding with the analogue TV switchoff. Eight blocks of 2x5MHz are up for tender with the selection process via beauty contest.
In order to encourage development and improve broadband services in Malaysia, we believe MCMC is unlikely to consider
spectrum as a revenue source by increasing the fees. Additionally, the regulator is also looking to re-allocate the 2.3GHz and
2.6GHz spectrum bands after their expiry by end-2019. This process is expected to take place in 2020.

MCMC proposals to allocate these spectrum bands are generally consistent with market expectations. We believe the eventual fee
set would be reasonable, helping to achieve MCMC’s aim of: 1) efficient use of spectrum, 2) promote investment in network
deployment; and 3) ensure affordable prices to consumers ultimately.

Current spectrum holdings by mobile operators in Malaysia Remarks

MHz
1. Better clarity on
Spectrum Band 900 1800 2100 2300 2600
spectrum allocation by
MCMC expected
following the end of the
Maxis 20 40 30 - 20 public inquiry.

Celcom Axiata 20 40 30 - 20

DiGi 10 40 30 - 20

UMobile 10 30 30 - 20

P1/TM - - - 30 20

YTL e-Solutions - - - 30 20

RedTone - - - 25 20

PuncakSemangat - - - - 40

Source: MCMC, Companies, DBS Bank

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Malaysia Telecom

Potential merger between DiGi-Celcom called off. Despite reassuring that merger remains on track a few weeks ago, Axiata and
Telenor ASA have recently agreed to end discussions regarding the non-cash merger between their telecom and infrastructure
assets in Asia. Both parties attributed the termination to some undisclosed ‘complexities’, though they still acknowledge the strong
strategic rationale for the proposed merger. Based on news report, these stumbling blocks could be: 1) Telenor’s concerns on
commercial issues; 2) Axiata’s concerns on national and staff interest; and 3) Regulatory hurdles, especially in Indonesia.

Our In-House Expert

Toh Woo Kim

wookim@alliancedbs.com
+60 32604 3917

Sachin Mittal
sachinmittal@dbs.com
+65 6682 3699

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