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Clearing up the mixed signals

KUALA LUMPUR: The selection of U Mobile Sdn Bhd as Malaysia's second 5G network operator may have spelled the end of a single wholesale network era and the start of the dual network model.

But some analysts believe the uncertainties in the national 5G implementation may drag on.

Key areas requiring clarifications include specific mobile network operators (MNOs) that will team up with U Mobile and the terms of their partnerships.

Affin Hwang Investment Bank Bhd analysts Isaac Chow said the MNOs' press releases suggest that things are still fluid and hence, the uncertainties in the 5G implementation may drag on and continue to weigh on their share prices.

The firm noted that the Malaysian Communications and Multimedia Commision's (MCMC) announcement on U Mobile clinching the network was largely within expectations.

However, Affin Hwang said it was surprised by the ensuing press releases by three MNOs namely U Mobile, CelcomDigi Bhd and Maxis Bhd.

"In particular, we are surprised to read that U Mobile is excited to collaborate with various stakeholders such as MCMC, CelcomDigi and Telekom Malaysia Bhd, and Maxis said the group will engage with MCMC to understand the rationale of the commission's decision and will consider its options after discussions with all stakeholders.

"We were earlier anticipating U Mobile and Maxis to form a partnership to develop the second 5G network, based on our expectation that the government would prefer Digital Nasional Bhd (DNB) and the second 5G network to have similar size and user base," Chow wrote in a report.

Kenanga Research said while the development signifies progress, it remains neutral until further details emerge that will address ongoing uncertainties.

Besides U Mobile's telco partners and terms of their partnerships, other areas needing clarifications are the final ownership structure of DNB, and revised terms of DNB's 10-year 5G access agreement with other MNOs after the second 5G network was launched.

The authorities also need to clarify the coverage and timeline targets for the new network, as well as the state of the first 5G network financial and operational health, Kenanga Research added.

Given that neither CelcomDigi nor Maxis will lead the second 5G network, Kenanga Research analyst Kylie Chan Sze Zang expects reduced commitments in terms of capital expenditure and resources such as manpower and fundraising efforts.

This capex light model is dependent upon the specific stake the MNOs will hold in the second 5G network, and their level of involvement.

With U Mobile now responsible for the second network, Chan expects a restructuring of DNB's ownership to reflect the divestment of shares by U Mobile shareholders.

The restructuring will likely occur either via a put option (allowing U Mobile shareholders to sell their shares to DNB within a month of MCMC authorising U Mobile), or a call option to enable DNB shareholders to buy the shares within the following month if the put option is not exercised.

U Mobile, CelcomDigi, Maxis and YTL Power International Bhd currently hold a cumulative stake of 65.1 per cent in DNB after finalising a share sale agreement (SSA) and a conditional SSA with the Finance Ministry and DNB in June.

The remaining 34.9 per cent stake as well as a redeemable preference share in DNB is held by the ministry.

U Mobile' is nearly half-owned Straits Mobile Investments Pte Ltd, a subsidiary of Singapore's ST Telemedia Pte Ltd, which is backed by Temasek Holdings.

Straits Mobile holds slightly over 48 per cent stake in U Mobile. Other major shareholders include Berjaya Group founder Tan Sri Vincent Tan and Magnum Bhd with a 7.84 per cent stake.

Meanwhile, CGS International said the exclusion of Maxis from U Mobile's 5G partnership could have a negative impact on Maxis, while favouring CelcomDigi

CGS International's new base case is that Maxis implements the first network, with the remaining shareholder Yes Communications (unlisted subsidiary of YTL Power), while CelcomDigi and U Mobile partner on the second network.

"Our view is that any cost mismatch (the reason we believe Network 1 is negatively perceived by the market) arising from integrating a separate network versus building afresh into an existing network will be mitigated by the existing operating cashflows from Network 1 as well as potential tax breaks or grants.

"In the longer term, these cost mismatches will also be neutralised as existing contracts end."

It added that the clear beneficiary from the ultimate resolution of the issue and the likely ramp-up in 5G network spend is Telekom Malaysia, which has an extensive fibre network that is likely to see higher demand from 5G base station connectivity requirements.

"For CelcomDigi, having a role in Network 2 should be taken as a positive, although the financial impact is unclear until details on shareholding structures are resolved," CGS International said.

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