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Dissecting YTLe’s RM2.5b WiMAX Plan

The Edge Malaysia, April 27, 2009

By Cindy Yeap

When word got out that Tan Sri Francis Yeah's YTL e-Solutions Bhd (YTLe) would be spending RM2.5 billion to build its Wi MAX-powered mobile Internet network, some observers were taken aback. They pounced on the fact that the amount was more than double the RM1 billion that rival Green Packet Bhd had said it would spend to cover 65 % of the population.

"Can they make money? How?" These were among the questions asked by those interested in the venture's impact on not only YTLe's earnings, but also its parent YTL Corp Bhd's cash flow and RMlO.3 billion cash pile as at end-2008.

Questions on returns on investment (ROI) went unanswered at YTLe's press briefing last Thursday. Still, the company's share price jumped last week. On Wednesday, a day ahead of the briefing, the stock added 13.5 sen or 35.5% to close at 51.5 sen. It continued to hold up for the rest of the week and ended at 55.5 sen last Friday, a level it last saw in January last year, gaining 17 sen or 44.2 % last week. YTL Corp shares, however, fell five sen to RM7.10 for the week.

While there were no ROI figures, there were some other interesting numbers from the briefing. First, Yeoh said the venture would be funded using "internal funds". Going by YTLe's current cash generation ability and its RM161 million cash pile as at end-2008, It is likely that the bulk of the funds will come from YTL Corp, which owns 74.3% of YTLe.

The exact mechanics are uncertain at this juncture. Yeah would not say what is the value of the contract with Samsung Electronics, which will be supplying network equipment, including WiMAX base stations as well as a range of devices, including the world's first WiMAX-enabled handsets.

What's been said is this: the RM2.5 billion is for a five-year plan where "over RM1 billion" is expected to be spent in the first year on a network that can support 14 million customers. YTLe intends to have nationwide coverage when it starts accepting its first paying customer in about 14 months. By nationwide, YTLe means 70% of the population. Rollout is to commence immediately while user trials are slated to begin in the next six to eight months. Some 2,000 sites to put up base stations have been identified throughout the country.

Compare that with rival Green Packet's RM1 billion game plan. Green Packet spent RM170 million last year and expects to spend RM270 million this year, bringing the tally to RM440 million for 40% coverage. It had 220 sites end January and is targeting to attain 700 sites by year-end. That's 480 sites in 11 months and a quarter of what YTLe intends to achieve in 14 months.

YTL Corp's financial muscle could help YTLe achieve its target, but a higher rollout cost means it would be tougher to get returns on its investments. Chances are competition from the incumbent Telekom Malaysia Bhd, three established mobile operators with 3G mobile broadband offerings, as well as three other WiMAX licensees, will limit YTLe's ability to price its services at a premium.

Even with an earlier service rollout and smaller capital expenditure, there is still doubt as to whether Green Packet's Packet One Networks (M) Sdn Bhd (PI) can begin making money next year. PI, which launched its WiMAX broadband service in August last year, expects to turn Ebitda (earnings before interest, tax, depreciation and amortization) positive by the end of this year. This is on the assumption that it can woo 250,000 users to sign up for P1 WiMAX by year-end, a big jump from the 20,000 users it had at end-February.

Nonetheless, Yeoh, YTLe's executive chairman and managing director, says the company's offering would beat what's available in the market today. "If we launch something, Malaysians must not suffer what they are suffering today. After seeing what our partners can do, we are confident we can deliver this whole new experience," Yeoh told reporters last Thursday. With the help of its three key partners - Cisco, Clearwire and Samsung - YTLe will offer "converged mobile Internet service which in¬cludes high-speed data, messaging and voice to Malaysians, any place, anytime and anywhere throughout the country", he said.

Yeoh also said the company was slightly behind its original schedule of a launch by end 2009 as it decided "it would be morally incorrect to not persuade Samsung to be with us on this journey". The insistence is not a real surprise, given that Samsung was one of the parties instrumental in making South Korea's WiBro (what mobile WiMAX services are called in South Korea) the envy of many countries at the Asia Pacific Economic Cooperation (APEC)  summit in Busan in late-2005.

Samsung is already working with YTLe's other two partners in the US. Samsung recently unveiled a new WiMAX-enabled Internet tablet, the Samsung Mondi, for Clearwire.Sprint Nextel's 51%-owned Clearwire already offers WiMAX services in two US cities, Baltimore and Portland, and has plans to expand its reach to 120 million people by end-2010.

The strength of the YTL Group, whose assets span from water and power to real estate and hospitality, is also something that should not be underestimated. Still, it remains to be seen when exactly WiMAX will "provide the group with new and growing revenue streams in the years to come”, as stated in YTL’s interim report dated Feb 27 this year.

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