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Merger talks, fintech, IoT to spell exciting year
Ho Chung Teng 
Worldwide sales of semiconductors reached US$37.1 bil (RM151.37 bil) in October
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Moving into 2018, the telco and technology sectors will see major developments, which will likely spur further growth as well as consolidation. This is likely due to merger prospects among telcos and the tremendous growth of fintech (financial technologies) and the Internet of Things (IoT).

To begin with, speculation of a re-merger of Telekom Malaysia Bhd and Axiata Group Bhd started as early as March. If the exercise comes to pass, it could ignite investor interest in an already saturated and competitive sector.

In addition, the new year could well see the emergence of more fintech applications, which will mean improved consumer banking, as well as the adoption of various IoT applications.

Kay Yen says with everything going digital, there has been a huge growth in demand for data connectivity and digital services 

The year 2018 will likely be an exciting one for the ICT sector. “In the areas of fintech and IoT, they are poised to set the new age of a connected lifestyle – essentially saving time and cost and ultimately providing a better life experience,” says Green Packet Bhd group CEO Tan Kay Yen.

Fintech and IoT solutions will lead the growth in the ICT sector. This is further backed by the improving local economy, which is forecast to grow between 5% and 5.5% in 2018. “Sectors like ICT will see a boom as technology evolves and progresses,” Kay Yen adds.

Despite a challenging economy, the telecommunication (telco) and technology sectors have performed above the expectations of most analysts in 2017. The telco sector appears to have recovered from the slump experienced in 2016. The technology sector, on the other hand, continues with its growth rally, supported by the strong US dollar and demand.

 

Pragmatism in a challenging environment

According to Hong Leong Investment Bank analyst Tan J Young, the telco sector has recovered after hitting the bottom in 2016. Competition remains healthy and less intense. He adds that the additional cost of acquiring telco spectrum bands had led to more pragmatism in terms of pricing.

However, a spokesperson for Axiata Group says 2017 has been a challenging year. Growth of major global mobile telcos has also shown signs of a plateau with few sparks to ignite the sector.

“This has been trending for many years now, resulting in operators only finding margin growth from cost containment or reduction initiatives. Furthermore, competition has intensified with the entry of new players, even in mature markets,” the spokesperson says.

The situation is further compounded by the fact that there is limited growth catalyst. The Axiata spokesperson says various substitute services and over-the-top (OTT) players are increasingly common as more competitors enter the market given the low entry barrier and low capital expenditure requirements in the space.

OTT services include the delivery of content, services or applications over the internet to mobiles devices such as smartphones and tablets.

 

More collaboration seen

“Smartphone penetration surpassed 50% in developing markets and this will drive data consumption even higher in 2018. In our market, data makes up close to 50% of usage already,” the spokesperson adds.

Amidst a challenging business climate, for the nine months ended Sept 30, 2017, Axiata’s net profit increased to RM884.75 mil from RM813.75 mil in the corresponding period of the previous year, backed by higher revenue of RM18.14 bil against RM15.77 bil.

Next year, convergence of services will continue to present new opportunities for telcos. “There are several opportunities in convergence services as consumers look for more comprehensive connectivity and entertainment offerings. Growth will come from operators pursuing these convergence strategies,” the spokesperson elaborates.

However, such positivity will be impacted by higher capital expenditure as telcos continue with their 4G and 5G network migration, transforming various telco delivery systems.

The Axiata spokesperson says he foresees more market consolidation. Telcos are expected to collaborate with other operators and share networks in order to reduce the cost-to-serve. The spokesperson expects there will also be both inorganic and organic investments for convergence. 

Given the continued intense competition in the mobile telco segment, AmInvestment Bank Bhd analyst Alex Goh has issued a neutral call for the sector. The research house also foresees that the fixed broadband segment could face rising pressure from the government to cut tariffs, in the drive towards a knowledge- and IT-driven economy.

For the near- to medium-term, Goh does not expect any easing in mobile data pricing. Though competition may intensify in the cellular space, with U Mobile and Digi.Com raising the ante against Telekom’s Webe (to be rebranded as UniFi mobile in 2018) via unlimited mobile data, voice and SMS pricing plans.

For fixed broadband players, Goh says Maxis Bhd, Telekom and Time dotCom Bhd are expected to see further price competition. This will likely be the result of Budget 2017, whereby the government declared its intention to double fixed-broadband speed and reduce prices by 50% by 2019. As a result, Goh expects further price revisions next year.

His top picks in the telco sector are Axiata and Telekom, due to the game-changing merger prospects which will significantly enhance their earnings and market share trajectory.

For Maxis and Digi, Goh issued a hold call due to the resistance to revenue gain amid potential loss in competitive advantage under a re-energised Axiata-TM brand.

Telcos have recovered after hitting bottom last year, with competition healthy and less intense


Benefits of digitalisation

The economy advanced 6.2% year-on-year in the third quarter of 2017, compared with 5.8% in Q2, and beating market consensus of a 5.4% expansion.

“With a better economic situation, consumers will have a larger disposal income to spend on ICT-related gadgets,” the analyst says. However, he adds that the downside risks for ICT retailers are the fluctuation of the ringgit against major currencies and the 14th general election, which affect consumer sentiment. Key beneficiaries of the improving economy are likely to be ICT retailers, such as ECS ICT Bhd.

Green Packet’s Kay Yen says with increased digitalisation, there has been a huge growth in demand for data connectivity and digital services for both the telco and ICT sectors.

“Some major moves have been taken in Malaysia’s ICT industry such as the launch of Digital Free Trade Zone (DFTZ) and appointment of Jack Ma as the Digital Economy Adviser for the country,” Kay Yen says. “We can see that Malaysia’s ICT industry will transform in the next few years.”

 

Higher semiconductor sales

Unlike the telco sector, technology players are expected to continue to report increased sales, backed by rising global demand for semiconductors. Locally, the electrical and electronics sector contributes 37.7% of total exports, representing an increase of 16.9% year-on-year.

Analysts say they are expecting semiconductor companies to achieve strong double-digit earnings growth in 2018, underpinned by risks related to the strengthening of the ringgit and higher valuations. The technology sector experienced a “marvellous” bull run in 2017, and it was an exceptionally longer-than-expected rally, supported by the strong US dollar and market demand.

The Semiconductor Industry Association, in a recent report, said worldwide sales of semiconductors reached US$37.1 bil (RM151.37 bil) in October. This is an increase of 21.9% from last year’s US$30.4 bil and 3.2% more than September’s US$36 bil.

The World Semiconductor Trade Statistics, in a report, forecasts annual global market growth to be at 20.6% this year and decline to 7% next year. 



This article first appeared in Focus Malaysia Issue 263.