Challenges facing telco sector


  • Business
  • Saturday, 01 Mar 2003

BY TEE LIN SAY

IN the early 1990s, the cellular phenomenon took place with glowing industry fundamentals; strong surge in phone sales, subscribers and coverage. Investors simply could not get enough of these stocks. 

Ten years later, the hype seems all but over and telco stocks are down from their record peak. And the most positive call that the sector seems to be currently drawing is a neutral with some others calling it an underweight. 

Following the major consolidation in the industry, investors are wondering if they should perhaps disconnect telco stocks from their portfolio even.  

Last year, TELEKOM MALAYSIA BHD and Maxis Communication Bhd signed conditional sales and purchase agreements with Celcom (M) Bhd and TimeCel Sdn Bhd respectively.  

The merger with Celcom (M) Bhd, it is hoped, will give Telekom an advantage in terms of a bigger market share. It has also been proposed that TM Cellular Sdn Bhd be disposed of to Celcom for RM1.68 billion which will be satisfied by the issue of new Celcom shares. 

 

Merger challenges  

 

Earlier this year, Energy, Communications and Multimedia Minister Datuk Amar Leo Moggie had said the telecommunications sector was expected to register an average annual sales growth of 10 per cent while growth momentum in both the cellular and fixed-line sectors will be maintained at 12.5 per cent and 8.3 per cent respectively over the next 12 months. 

ING Financial Markets regional telecoms analyst Syed Razif Al-Idid (he has a neutral outlook on the sector) says the industry is moving away from a competitive environment to a less competitive environment with average revenue per user (ARPU) expected to stabilise in 2004.  

“We don't see any incentive for the big boys to destroy the market by cutting starter pack prices or aggressive promotions to gain market share. Their focus now is to retain the high-end customers and ways to improve ARPU, for example, via loyalty programmes etc,” he says. 

Aside from merger challenges, mobile operators would have to grapple with slowing subscriber growth as the industry nears saturation, declining ARPU with the entry of marginal users, and narrowing margins as competition pressures rates lower. 

The number of cellular users is expected to reach nine million this year, and out of this figure, approximately six million will constitute prepaid users.  

By the end of the year, the penetration rate for the cellular service is expected to exceed 40 for every 100 population.  

In addition, fixed line is not expected to record a major increase in subscriber number.  

ING Financial Markets reports that Malaysia is a maturing market with a 13 per cent subscriber growth rate expected over the next three years. The industry is consolidating from five to three players, which should mitigate the pressure to lower tariffs or raise promotions ahead of the introduction of 2.5 generation. Also, new entrants are unlikely as the government is fostering three strong players ahead of a (3G) rollout. 

Maxis  

 

Maxis remains the premier mobile operator in Malaysia, with close to 2.77 million subscribers at end September 2002. In terms of market share, Maxis is the largest pre-paid and post-paid operator in Malaysia. 

For the financial year ended Dec 2002, it posted a net profit of RM949.7 million from RM600.9 million in 2001 while sales rose to RM3.8 billion from RM3 billion. 

On the merger between Maxis and TimeCel Sdn, an analyst says: “Although TimeCel has a subscriber base of less quality, with lesser usage and lower ARPU, the merger will add spectrum and capacity for Maxis in terms of operations,” he says. 

Post merger, Maxis will have captured a rough market share of 42 per cent compared to 34 per cent. Its new post-paid subscribers recorded ARPU of around RM132, as compared to RM93 for users who had churned over that period. The better ARPU figure reflected the fact that Maxis had captured some of Celcom's higher-end post-paid customers. 

 

Good news 

 

Telekom Malaysia Bhd released its results for FY02 over the week. Of particular interest is that its cellular arm TM Cellular for the first time reported a profit of RM9.8 million due to significant increase in subscriber numbers. In 2001, TM Cellular made a loss of RM150.3 million. 

Telekom Malaysia's sales rose 1.7 per cent to RM9.83 billion. However, group pre-tax profit fell 35.7 per cent to RM1.57 billion. 

Also, in the year under review, Celcom reported a net profit of RM32.93 million from a net loss of RM62.2 million in 2001. 

However, turnover fell to RM2.40 billion from RM2.56 billion. 

Positive news came from niche player, Digi.com Bhd, which posted a net profit of RM100.87 million for the financial year ended Dec 31, 2002. Subscriber base also surged from about 1.63 million as at end September to an estimated 1.85 million at end December.  

Surf88.com feels that there is a place for this niche player, especially one that has demonstrated its ability to gain market share. DiGi's focus on strong operational growth is particularly impressive in the competitive environment.  

In that sense, DiGi's strategic positioning as a Mobile Virtual Network Operator is not altogether negative. As at end 2002, it had more that 18 per cent market share. 

 

Growth potential 

 

Can subscriber growth remain buoyant even as penetration rate has reached 36 per cent?  

According to one analyst, yes. He says: “True, we have a penetration rate of about 36 per cent in Malaysia. Nevertheless, in most developing countries, the rate is about 50 per cent. There is definitely room for more users.”  

ING Financial Markets expects the Malaysian market to continue growing from 7.9 million subscribers, with a penetration rate of 31 per cent at December 2001 to 14.1 million subscribers with a penetration rate of 53 per cent by December 2005.  

 

Pre-paid to surge 

 

Moving forward, analysts agree that pre-paid will have the louder ring. Already, all players in the wireless industry are ruthlessly trying to outdo one another by offering cheaper packages with more talk time.  

Prices of pre-paid starter packs have also come off significantly. This has led to a drastic increase in the number of pre-paid subscribers over the past two years. 

The demographics help too. Over 52 per cent of the country's population fall below the 24 years old category that are relatively lower ARPU users and would opt for pre-paid phones.  

Also, based on ING's projection in the Eighth Malaysian Plan, 56 per cent of the Malaysian population would consist of middle- to high-income group. This would equate to a total population of 26.9 million by 2005, which is higher than ING's mobile penetration rate forecast of 53 per cent in 2005. 

 

Cellular vs. fixed 

 

Another concern in this industry is that the entrance of cellular operators has undeniably cannibalised the growth of fixed-line operators. Currently, fixed-line phones only have a market share of 25 per cent. 

Furthermore, this year, the cellular sector is forecasted to overtake fixed line in terms of annual revenue, which will represent 52 per cent or RM9.1 billion of the total telecommunications revenue. 

ING's Syed says that growth in business and residential fixed-line telephony in Malaysia is muted. Telekom's total number of fixed-line users remained flat at 4.63 million in September 2002, with a slight decline in residential users compensated by a marginal increase in business users.  

The contraction in residential users is due to the fact that working professional renting high-rise apartments or condominiums would prefer to use mobile phones rather than going through the perceived hassle of applying and paying for a fixed line. 

More importantly, the distinction between wired and wireless technology is blurring. Whatever fixed-line operators’ pull off, cellular operators are just as capable of offering. Increasingly also, investors are leaning towards cellular over fixed line for greater growth opportunities. 

Fortunately, Telekom's merger with Celcom will enable the former to tap into this growth area, particularly given that annual growth in fixed-line telephony is expected to remain flat at less than 5 per cent. 


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