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This article first appeared in The Edge Malaysia Weekly on May 1, 2017 - May 7, 2017

WHEN U Mobile Sdn Bhd won a 3G spectrum in 2007, sceptics expected it and other new spectrum owners to go bust or be flipped to one of the Big Three mobile operators.

Ten years and three foreign partners later, the country’s fourth largest mobile operator is near breakeven, has won a more-than 10% subscriber market share and is into the last leg of a marathon towards an initial public offering (IPO) next year.

“What we spoke of last year remains on track — ebitda (earnings before interest, taxes, depreciation and amortisation) positive by this year and IPO by next year. But we cannot specify whether it is early or late 2018, it all depends on the market,” U Mobile CEO Wong Heang Tuck tells The Edge.

To be sure, an IPO would be aided by at least two stalwart backers — Berjaya Group’s Tan Sri Vincent Tan and Singapore Technologies Telemedia (ST Telemedia), Singapore’s Temasek Holdings-controlled active investor in the communications, media and technology space and the largest shareholder of the city state’s mobile and pay-TV operator, StarHub.

ST Telemedia has a 49% stake in U Mobile, followed by Tan (through U Telemedia Sdn Bhd’s 21.44%, a direct stake of 6.2% and Berjaya Infrastructure Sdn Bhd’s 2.01% stake), Sultan Ibrahim of Johor (14.98%) and billionaire Surin Upatkoon’s Magnum Bhd (6.33%). For the record, ST Telemedia entered the picture in March 2010 after buying a 33% stake from South Korea’s KT Freetel and Japan’s NTT DoCoMo.

A public flotation would have happened a few years ago if investors had been prepared to accord the desired valuation to U Mobile, which had yet to achieve ebitda breakeven. But investors are used to dividend-paying telecommunication counters.

To its credit, however, U Mobile is the only newcomer to earn a seat at the league table so far — it was named alongside DiGi.Com, Maxis and Celcom by industry regulator Malaysian Communications and Multimedia Commission (MCMC) when mobile subscriptions were counted in 2015. Other new spectrum owners and mobile virtual network operators (MVNOs) were simply lumped under “others”.

At over five million “active” mobile subscribers (over one million of them postpaid) last year, it is estimated that U Mobile has a market share of up to 13% (assuming a four-player environment) or an 11.5% market share if all the other operators collectively have the same number of mobile subscribers as U Mobile (as was the case in 2015, based on MCMC numbers). U Mobile had an 8.4% market share and 3.7 million subscribers in 2015, MCMC data shows.

Wong declines to provide U Mobile’s 2016 financials and they had yet to be filed with the Companies Commission of Malaysia at the time of writing. However, U Mobile would have had a 7% revenue market share (four-player environment) last year if revenue had grown 13% to 25% — being its latest year-on-year and two-year compound annual growth rates — to between RM1.6 billion and RM1.8 billion from RM1.43 billion in 2015.

U Mobile’s revenue market share would be just over 10%, going by a blended average revenue per user (Arpu) of “around RM40”, which works out to revenue of RM2.4 billion per year.

It is worth noting that in the last four years, 2016 was the first time all the Big Three telcos saw their revenue fall y-o-y. It remains to be seen how much of that was owing to U Mobile.

Wong confirms that U Mobile had a “double-digit” growth in y-o-y revenue last year but refrains from making projections for 2017, apart from its striving for profitability. He acknowledges that webe, or the former Packet One Sdn Bhd, has a strong backer in Telekom Malaysia Bhd, but remains confident that U Mobile will continue to provide a good value proposition for its customers, many of whom are below 40 years old.

U Mobile will sponsor a series of music events this year and utilise targeted marketing to maintain its appeal to customers.

An IPO will allow U Mobile investors to unlock value in what is essentially an investment in a capital-intensive industry.

According to its FY2015 numbers, U Mobile had accumulated losses of RM2.83 billion, making shareholders’ equity a negative RM197.9 million.

Although U Mobile is still loss-making, Wong says its shareholders remain committed to their investment in the company.

“They were willing to invest in us even when we were smaller, and now we have grown bigger and better. For 2017, we may be spending more than RM1 billion on capex (capital expenditure),” he says.

“What we have said about capex previously — that we will be spending up to RM4 billion by 2019-2020 — will still be the case. It is just that we may accelerate the spending to invest in additional spectrum we are getting from the regulator,” he adds.

U Mobile was seen as a winner in MCMC’s spectrum reallocation exercise last year, where it was allocated 2x5MHz of the 900MHz frequency and 2x15MHz of the 1,800MHz frequency for 15 years effective July 1 this year. The spectrum used to belong to Maxis and Celcom.

Before this, U Mobile only had the higher spectrum band of 2,100MHz and 2,600MHz, which is great for high-speed data carriage but does not have as wide a coverage area compared with 900MHz and 1,800MHz.

On top of spending to build its own infrastructure, U Mobile has a 10-year 3G Radio Access Network (RAN) agreement through September 2021 (with an option for a two-year extension) to ride on Maxis’ 2,500 base transceiver stations (BTS) mainly on the east coast and in East Malaysia.

Wong says U Mobile paid RM200 million to RM300 million for the RAN sharing service in FY2015 and he expects the bill to be higher for FY2016 and FY2017 as the company’s subscriber base has grown. Hence, Wong says, U Mobile needs to explore “all alternatives” to keep costs optimal. “U Mobile has grown to a size where it has to evaluate all options.”

With more spectrum comes more capital expenditure, Wong adds, noting that U Mobile has to change the antennas at more than 4,000 BTS because of the new frequency bands.

“It is a lot of spending. Last year, we wrote off RM70 million because of the antennas. The original antenna can only support two frequencies, now, we need to replace them with those that can support four frequencies,” he explains.

However, the benefits outweigh the costs, says Wong, adding that U Mobile expects cost savings of 15% to 20% from the wider coverage afforded by the new spectrum.

Thanks to its relatively small size, Wong says, U Mobile is able to operate in a leaner way but at the same time, offer high-value products. Its status as “challenger” to the Big Three telcos also gives it greater flexibility to offer products at lower price points without worrying too much about defending ebitda margins at the Big Three’s 40% to 50% levels.

U Mobile’s products include the U Mobile Hero P38 plan it launched in early April, which some analysts say could trigger another price war. For RM38 a month, subscribers enjoy unlimited voice calls and data for social media. On top of that, the postpaid plan comes with 4GB of data.

However, Wong says U Mobile is not just throwing prices but also offers greater value. “The response to P38 has been positive so far, but we require more time to analyse an outcome for our products.”

Wong assures that these “value-accretive offerings” will not hinder U Mobile from achieving its target of being ebitda positive this year.

“What I am trying to say is, there is still more room for us to be innovative in our products,” he says, noting how the mature mobile operators are still enjoying sizeable margins after so many years of tough competition.

 

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