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Is TM better off exiting DNB?

The Star·09/06/2024 23:00:00
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WHAT are the implications of Telekom Malaysia Bhd (TM) no longer taking up equity in Digital Nasional Bhd (DNB), the country’s first 5G network operator?

The absence of the country’s largest broadband and fixed line operator from the equity structure does seem like a significant blow to DNB.

TM, along with the country’s four other mobile operators – CelcomDigi Bhd, Maxis Bhd, U Mobile Sdn Bhd and YTL Power International Bhd – was set to each acquire a 14% stake in DNB.

What happens now to the block of shares meant to go to TM? They could be redistributed among the remaining four operators.

TM’s exit from the first 5G network could also affect the development of the second network.

Malaysia faces a challenging situation following the establishment of DNB back in 2021 as it was initially set to operate the country’s sole 5G network.

After a change in government, the plan for a single 5G network was revised to introduce two separate 5G networks to foster market competition.

All five major telcos have submitted bids for the second network. Interestingly, the winning bidder or bidders will be allowed to relinquish their equity stake in DNB and focus on building the new 5G network.

Could TM‘s exit from DNB indicate that it is a front runner for the bid to build the second 5G network?

Or is the opposite the case – CGS International Research points out that TM’s absence from DNB would result in a failure to meet a prerequisite to participate as a shareholder for the second 5G network.

Overall, analysts are positive about TM’s exit from equity participation in any 5G network. They think the returns from investing in the 5G networks are questionable and that TM should focus on its core fixed connectivity business.

Analysts also point out that TM will benefit from the overall growth of 5G data usage in the country as the provider of backhaul capacity for the 5G networks.

Furthermore, TM will still have access to the 5G networks as an access seeker, allowing it to provide 5G services to its enterprise customers.

Laws are important to curb anti-competitive mergers

MALAYSIA remains one of the few countries without merger control laws, and there is no assurance that this will change soon.

The government must prioritise this issue, as the country cannot afford to be held back by the absence of a basic law.

Merger control refers to legislation that prohibits anti-competitive mergers. In the United States, it is called antitrust legislation and is widely applied in mergers and acquisitions.

The absence of merger control in Malaysia means that companies can merge freely to achieve dominant market positions.

The Malaysia Competition Commission (MyCC), the country’s competition regulator, is stymied by the absence of merger control measures. It can only act after the fact.

MyCC can only take action after a merger has occurred, which involves receiving complaints, conducting lengthy investigations that may take years, and even then its decision can be challenged in court.

Under merger control, a deal must first get the green light from the regulator, who can issue three determinations: approval without conditions, approval with specific conditions, or a complete rejection of the deal.

Part of the delay in implementing merger control in Malaysia can be attributed to recent changes in governments, delays caused by Covid-19 and the passing of the minister in charge of the matter.

Once merger control laws are in place in Malaysia, MyCC will have its work cut out.

The decision-making process for applications is complex, involving scenario analysis to predict how the merged entity might behave and whether it could gain unfair advantages in the market.

MyCC will be closely scrutinised as its decisions have to align with those of competition regulators in markets with established merger control legislation.

This will put Malaysia on par with advanced markets where anti-competitive practices are kept in check.

Chip sector rebound may take longer than anticipatedIN one of the more candid forward guidance among tech companies, Mi Technovation Bhd (Mi Tech) says it does not see a full recovery for the semiconductor sector this year.

“A full recovery for the semiconductor industry is not only slower than expected. A full recovery is unlikely to happen in 2024,” the company states in the notes accompanying its second-quarter (2Q24) results.

Mi Tech also believes that the growth momentum in artificial intelligence (AI) chips may not be sustainable if earnings from AI applications fail to meet expectations, or if the novelty against the theme cools.

Elsewhere, Genetec Technology Bhd is going through a period of order deferments, largely from its key electric vehicle and automotive customers. This is likely to impact its performance in the first half of 2025.

Technology stocks have rallied on the back of a semiconductor upcycle and the AI theme play.

In the region, Malaysia has been a key beneficiary due to the diversification of global chipmakers’ supply chain beyond North Asia, following the US tech sanctions on China and rising tensions between China and Taiwan.

Approved investment commitments into Malaysia’s electrical and electronics cluster nearly tripled in 2023 from the previous year, according to a recent report.

But the rebound may be losing momentum going by companies’ 2Q24 earnings.

BIMB Research says among tech stocks within its coverage, semiconductor-related counters reported earnings below expectations, while the information technology services sub-sector performed as anticipated.

TA Research, meanwhile, sees lower earnings projections for Malaysian Pacific Industries Bhd and Unisem (M) Bhd, the two leading test and assembly semiconductor players.

Outside the country, shares of Nividia – the bellwether for the AI sector’s trajectory – took a beating this week over concerns that AI-related stocks may have risen far ahead of what the technology can actually deliver in terms of profits.

Key Nvidia suppliers in Taiwan, Japan and South Korea have also seen their share price decline.

To be fair, Malaysia’s semiconductor ecosystem has limited exposure to AI chips and is mostly involved in downstream assembly, testing and packaging.

But being export-oriented, a potential slowdown in the US economy or a weakening of the greenback may impact sales.

As of June, data on global semiconductor sales showed the sector growing 15.9% year-on-year, following an 8.2% contraction in 2023.