Industry Trend Analysis - Network Investment To Support U Mobile's Expansion - SEPT 2017

BMI View : U Mobile's decision to stop using Maxis' network capacity signals a greater focus on expanding its own network and gearing up to gain market share amidst intense competition. Coupled with its new spectrum allocation and more aggressive pricing, U Mobile could cannibalise existing user bases and make quicker gains than previously anticipated.

U Mobile has decided to end its 3G network sharing and alliance agreement (NSA) with Maxis Broadband to focus on expanding its own network. The agreement, which allows U Mobile to offer 3G coverage for voice and data to its customers via Maxis' radio network, will be fully unwound by December 27 2018. This development will allow U Mobile to focus on network expansion and will free up some of Maxis' network capacity, potentially impacting its revenues.

U Mobile's plan to focus on expanding and upgrading its own network to support growth may be more cost-effective than relying on Maxis, and could put U Mobile in a better position to gain market share from incumbents Maxis, Celcom and, especially in the enterprise segment. All three players saw their spectrum allocations reduced in 2016 to allow U Mobile to acquire new spectrum for effective use in July 2017 (2x5MHz of the 900MHz band and 2x15MHz of the 1,800MHz band), giving the operator the wide coverage area it needs to expand to rural areas.

Over the past 12 months, U Mobile has been aggressively building its own network infrastructure in areas covered by the Maxis sharing agreement. Its capital expenditure and plans to deploy 5,000 more new sites across the country (60% 3G and 40% 4G) over the next four years will give the operator more weight in Malaysia's competitive market.

New Spectrum To Support U Mobile Expansion
Spectrum Holdings July 2016
Source: Malaysian Communications And Multimedia Commission

As a newer licensee, U Mobile faces strong competition in a sophisticated market and we expect the three incumbents will continue to dominate over our forecast period. Market saturation and volatile q-o-q growth means we forecast barely more than 1mn new subscriptions will be added to the market through to 2021. So far, U Mobile has been a minor disruptive influence in the largest business and urban centres. However, as new spectrum assignment kicks in, U Mobile is adopting a more aggressive tone by introducing attractive packages. We believe that greater investment in its network and competitive pricing could allow U Mobile to cannibalise existing user bases and make quicker gains than previously anticipated. It also makes the operator more attractive as a potential acquisition, and provides the base upon which a more aggressive player could build and take control of the mobile broadband market. Finally, investing in its own network will put U Mobile in a position to lease its own capacity to smaller players, replicating the agreement it had with Maxis.

Challenges Ahead For Maxis

This development is likely to impact Maxis' EBITDA and earnings negatively in FY2018, as U Mobile contributed around MYR335bn to Maxis' revenues in FY2016, with the 2G and 3G sharing agreement accounting for around 5% of Maxis' revenue for Q117. The agreement termination also comes shortly after Maxis announced in May 2017 a sizeable private placement of 300mn shares at RM5.52 a piece to raise RM1.66bn. Maxis could seek to attract smaller players to replace U Mobile, but any single deal would not match the size of U Mobile's.

Maxis remains Malaysia's leading LTE operator by a thin margin and the second-largest operator by revenue. However, data pricing has fallen substantially after severe price competition began in 2016, placing pressure on ARPUs even when data consumption is rising rapidly. The operator faces intense competition from Celcom and DiGi, which overtook it as overall market leader by subscriptions in Q116, and more spectrum for U Mobile makes it a greater threat to Maxis. Nonetheless, the freed up capacity also gives Maxis an opportunity to focus on improving its network for its own subscribers. More emphasis on the quality of its services and a step towards normalisation of prices by removing free data services would enable Maxis to offset losses from the NSA termination.