2008_Pyramid Research_VN Communication Market

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This report forms part of Pyramid Research’s Asia Pacific Country

Intelligence Report Series

June 2008 Edition

Communications Markets in Vietnam



© 2008 Pyramid Research

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Executive summary Pyramid Research expects Vietnam to be one of Asia Pacific’s fastest growing markets, with total

telecommunications service revenue increasing at a CAGR of 12.9% during the 2007-2012 forecast period, againstthe regional average of 5.0%. As such, Vietnam will become equal in size to its wealthier, but smaller, neighbor

Malaysia, with an expected revenue of US$6.1bn by 2012.

The main growth engine will be the mobile sector, both voice and data, while the fixed sector enjoys growth inbroadband services.

Demand for faster Internet connection will keep the market growing as dial-up subscribers switch to DSL services.Despite low incomes, Vietnam’s huge youth segment, (65% of its 86m population is under the age of 30) who aremore tech-savvy than their older generation, will increase demand for connectivity.

In the fixed space, challengers Viettel and FPT are causing headaches for incumbent VNPT, which has been losingsignificant market share in the broadband space.

Increasing mobile penetration will keep revenues climbing, despite falls in ARPS. We expect mobile voice anddata revenue to increase at a CAGR of 10.3% and 29.8%, respectively. As such, mobile operators will generate$4.7bn in service revenue in 2012, almost double 2007 levels of $2.5bn.

Viettel, which became the leader in 2006 after just three years of operation, will continue to maintain its leadover other operators. Despite being a latecomer, Viettel expanded coverage in areas that were underserved byexisting operators, which helped the former gain substantial market share.

The main risks to operators are falling ARPS levels, which will have an impact on margins in the long run. Theupcoming privatization of MobiFone, VinaPhone and Viettel is attracting interest from regional players such asSTT, Telekom Malaysia, NTT and Chunghwa Telecom.



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Market and competitor overview




GDP per capita

T o t a

l s e r v i c e

r e v e n u e

C A G R

2 0 0 7 - 2 0 1 2

Japan

India

Vietnam

Taiwan

China

Hong Kong

THE SIZE OF TELECOM SERVICES MARKETS, 2007 (US$ terms)

With a population of 86m and generating service revenue worth $3.3bn in 2007, Vietnam is one of the smallertelecom markets in Asia-Pacific. However, with mobile and fixed penetration rates of just 42% and 13%,respectively, in 2007, Vietnam offers great opportunities for vendors, regional operators, as well as investors asit will be one of the fastest growing markets in the region. By 2012, Pyramid Research expects Vietnam to

generate $6.1bn in service revenue, recording CAGR of 12.9% during the next five years.

Thailand

PhilippinesMalaysia

Indonesia

New ZealandSingapore

Korea

Australia

Vietnam in a regional context

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Source: Economist Intelligence Unit

The ruling Communist party will remain indifferent to calls for political pluralism and will continue to reject

demands for major political reform in 2008-09. A major challenge that the party will face is the need to manageexpectations of continued strong economic growth. The government is facing a number of challenging policyissues, most notably the need to rein in inflation. Monetary policy will remain tight, while fiscal policy may be lessexpansionary than previously planned. Real GDP growth will decelerate in 2008, owing to tighter controls on creditand weakness in external demand. Annual inflation will soar to 18.2% this year, pushed up by rising food prices, butwill slow again in 2009 to around 9%. The government has shifted its policy focus from rapid growth to economicstability. Thus it has tightened monetary policy and has set a real GDP growth target of 7.5% for 2008, down fromits original target of 8.5-9%.

KEY INDICATORS 2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

Population [000] 83,770 84,858 85,947 87,036 88,128 89,223 90,322 91,638

Households [000] 25,150 25,600 26,340 27,110 27,930 28,780 29,650 30,550

Businesses [000] 1,682 1,877 2,082 2,300 2,538 2,799 3,083 3,393

Nominal GDP [US$bn] 52.8 61.7 70.1 84.3 98.6 114.3 132.6 154.8

Nominal GDP per capita [US$] 631 727 815 968 1,120 1,280 1,470 1,690

PPP-adjusted GDP per capita[US$] 3,010 3,320 3,640 3,970 4,360 4,780 5,230 5,700

Consumer price inflation [%] 8.3 7.7 8.3 18.2 9.0 7.2 7.6 7.2

Exchange rate [LC/US$] 15,858 15,994 16,164 15,990 16,120 16,225 16,286 16,414

Economic, demographic and political context: Policy shiftsfrom breakneck growth to stability

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MAJOR TELECOMMUNICATIONS POLICY ISSUES

3G spectrum licensing Mobile operators are currently submitting their applications for 3G licenses. The ministry is

planning to hold an examination to determine which operators are most fit to provide 3Gservices. The regulator has announced that it will award four licenses. Winners can expect toreceive 15MHz of FDD spectrum and 4MHz of TDD spectrum. We expect all six major operators toparticipate in the examination.

WiMAX spectrumlicensing

The regulator had granted trial licenses in early 2006 for fixed WiMAX that did not lead to anycommercial licenses. The regulator has now licensed four operators — FPT, EVN, Viettel andVNPT — to trial the mobile version of the technology for one year. The former three operatorshave been allocated frequency in the 2.3GHz—2.4GHz band while VNPT was awarded a block inthe 2.5GHz band. These operators are also given geographic boundaries for their trials.

Foreign-ownershiprestrictions

The Vietnamese government remains reluctant to fully open its telecom market to foreigninvestors. With its accession to the WTO, however, the government has committed to open thetelecom sector, albeit gradually. Currently, indirect ownership is allowed in the form of jointventures (JV), where foreign interests are allowed to form a JV with a local licensee. When theJV is a network operator, foreign capital contribution cannot exceed 49% of total capital. Theupcoming privatization is also an opportunity for foreign ownership. MobiFone, which will be thefirst among the three operators planning to list, is willing to offer one-third of the company’s

total stakes to strategic partners.

Universal Service

Obligations (USO)

The Vietnamese government currently levies the following fees to fund its universal service fund:

-5% of the revenue for mobile telecom services, 4% of the revenue for international telephoneservice and international leased-line subscription service, and 3% of the revenue for domestictelephone service and domestic leased-line service.

Tariffs Dominant operators (defined as having more than 30% of market share) are not allowed to freelyadjust tariffs without the permission of the regulator. In 2007, Viettel joined the ranks ofVinaPhone and MobiFone as a dominant mobile operator.

Regulatory environment (cont’d)

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Vietnam demand profile: Revenue doubled in the past two

years and will almost double again in the next five years

$0

$2

$4

$6

$8

2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

R e v e n u e

( U S $ b i l l i o n s

)

VIETNAM COMMUNICATIONS MARKET, US$bn, 2005-2012

The Vietnamese telecom market, excluding traditional pay-TV, generated $3.3bn in service revenue during 2007,

which is more than double the 2005 revenue of $1.6bn. We expect service revenue to continue the strongupward trend and almost double again over the next five years as the fast-growing economy increasesconsumers’ budgets for telecom services. In the midst of growing concerns for basic food supplies in the region,we expect inflation to be of concern as some consumers will have to tighten their budgets. However, we remainneutral on its impact on overall telecom service revenue since Vietnam is one of the region’s main rice exportersand hence will benefit some from the rise in costs. We forecasts the Vietnamese market to generate $6.1bn intelecom service revenue in 2012, representing a CAGR of 12.9% from 2007 levels. Mobile voice, mobile data,broadband Internet and fixed voice revenue from limited mobility services will be the main growth drivers.

Broadband Internet

Dial-up Internet

Fixed VoIP

Fixed circuit-switched voice

Mobile data

Mobile voice

34.6%

-7.7%

71.0%

0.1%

29.8%

10.3%

Total market 16.2%

REVENUE CAGR, 2007-2012



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Vietnam service evolution: Data and mobile continueto gain importance and increase their revenue shares

Voice

75%

Data

25%

Video

0%

SERVICE REVENUE MIX,

VOICE, DATA & VIDEO

2012: US$6.1bn

SERVICE REVENUE MIX,

FIXED & MOBILE

2012: US$6.1bn

2007: US$3.3bn 2007: US$3.3bn

Fixed-mobile substitution (FMS) is a

world-wide trend, and Vietnam is noexception. However, while growth inPSTN lines is modest compared withthat of mobile lines, it is still positiveand will remain so during theforecast period. Mobile penetrationhas exploded in the past few years,doubling in 2005, 2006 and again in2007. However, we suspect that thenumber of subscribers is inflated by

25-35%. Even if we discountsubscriber figures, however, growthhas been impressive, and we expectthe proportion of service revenuefrom mobile to increase to 77% of thetotal pie in 2012, from 74% in 2007.

On the data front, late 3Gdeployments and aggressive ADSLcampaigns from fixed operators have

put the emphasis on fixed broadbandgrowth. Mobile and fixed data, whichcombined represented only 25% oftotal revenue in 2007, will grow togenerate 37% of total revenue by2012.



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Competitive landscape: Challengers increase their marketshare at the expense of fixed and mobile incumbent VNPT Vietnam’s telecom market is concentrated with VNPT dominating both the fixed market as well as the mobile

market through its mobile operators VinaPhone and MobiFone. However, VNPT started seeing its dominancegradually erode with Viettel’s entrance into the fixed and mobile markets. Viettel has especially been successfulin the mobile arena, where it now claims to be the market leader with 14m subscribers. This statement,however, is challenged by MobiFone, which also claims that it has the highest number of subscribers. PyramidResearch’s forecasts currently show Viettel leading the market, although even if Viettel’s numbers are inflatedand MobiFone is, in fact, the market leader, we believe that VNPT will continue giving up market share asVinaPhone struggles to add subscribers in a rapidly developing market. Smaller operators S-Fone and EVN willalso see their market shares increase, despite being CDMA operators. HT, which was the least successful inpromoting CDMA services, is currently shifting to GSM in an attempt to increase subscribers.

VNPT

66%

Viettel

20%

S-Fone

5%

EVN

3%

Others

6%

REVENUE BREAKDOWN, 2007: US$3.3bn

VNPT

41%

S-Fone10%

Viettel

28%

EVN

11%

Others

10%

REVENUE BREAKDOWN, 2012: US$6.1bn



COMPANY OWNERSHIP LINES OF BUSINESS REVENUE (US$bn) WHAT’S IN STORE?

VNPT State owned Local telephony, longdistance, IP-based

services, leased lines,GSM mobile services

Revenue: US$2.1bn*

(including revenue fromVinaPhone and

MobiFone)

Privatization ofmobile arms

MobiFone andVinaPhone; WiMAX

trial

Viettel Ministry of Defense Local telephony, longdistance, IP-based

services, leased line,

GSM mobile services

Revenue: US$796m* Privatization;coverage expansion;

JV with Taiwan’s

Chunghwa Telecom;WiMAX trial

SPT(Parent ofS-Fone)

VNPT(18%), private investors Local telephony, IP-based services, leased

line, CDMA mobileservices

Revenue: US$191m*(mobile only)

Coverage expansion;WiMAX trial

Hanoi Telecom Private investor Local telephony, longdistance, IP-based

services, leased line,mobile service

N/A Coverage expansion;migration to GSM

EVN Wholly owned by state-runElectricity of Vietnam Group

Local telephony, longdistance, IP-based

services, leased line,CDMA mobile services

Revenue: US$127m*

(mobile only)

Coverage expansion;WiMAX trial

Vietnam’s major market players

* Pyramid Research estimate

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Segment analysis

2008_Pyramid Research_VN Communication Market

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