7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT
PROTEGE AssoCiATES SDN BHD ‘67516Hfl SUITE (-06-06, PLAZA MONT’ I(JARA 2 JALAN KIARA, MONT’ KIARA 50480 KUALA LUMPUR, MALAYSIA GEN +603 6201 9301 FAX +603 6201 7302
www.protege.com.my ____________________________—,–8 RAN D I FIN A N C ( I ~I ARK ET t B JUN 2012 Board of Directors, OCK Group Bhd, 11 & 13, Jalan Puteli 2/6, Bandar Puteri, 47100 Puchong, Selangor .Darul Ehsan
Dear Sirs, Executive Summary of the Telecommunications Network Services Market in Malaysia This Executive Summary of the Telecommunications Network Services Market in Malaysia is prepared by Protege Associates Sdn. Bhd. (“Protege Associates”) for inclusion in the Prospectus of OCK Group Bhd (“OCK Group” or “the Company”) in relation to the proposed listing of and quotation for the entire issued and paid-up share capital of OCK Group on the ACE Market of Bursa Malaysia Securities Berhad. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
“” ~ ,.” l •I,.,” “<• Malaysia Economic Overview After rebounding strongly in 2010, the Malaysian economy grew at a more moderate pace in 2011. Real GDP during the year expanded by 5.1 percent to RM558.3 billion, supported by the strength of domestic economic activity and spending, as well as firm regional export demand attributable to strong domestic demand across emerging Asia’s economies. Nevertheless, growth momentum was weighed down by the continued structural weakness and finandal volatility in advanced economies, political uprisings in the Middle East, and natural disasters headlined by the Japanese earthquakes during the first half of 2011. Despite the moderately positive results revealed in most of Malaysia’s key economic indicators for 2011, and the continued strength of the domestic economy, the Malaysian Government remains mindful of the high level of uncertainty in the international environment, which can dampen the local economy’s growth. Besides that, it has continued to grapple with volatile capital inflows and rising inflationary pressures against the backdrop of large swings in global finandal mar1<ets and rising food and commodity prices. Nevertheless, the local economy can take heart in the fact that it has continued to remain robust under such volatile global conditions, as evidenced by its resilience during what was a globally challenging year both economically and politically. Moving into 2012, projects and initiatives launched by the Economic Transformation Programme (“ETP”) (initiated 26 October 2010) are expected to begin taking effect. Strong capital inflows encouraged through the ETP, which seeks to propel Malaysia towards becoming a high-income developed nation with a RM1.7 trillion gross national income (“GNI”) economy by 2020, are expected to eventuate and now have more Visible and pronounced effects on the local economy, and consumer income. Under the ETP, private-sector driven projects with an investment value of RM1.3 trillion are to be undertaken to spearhead Malaysia’s economic growth over the next ten years. In 2012, the Malaysian economy is projected to continue in a vein of steady, moderate growth. Domestic demand is expected to remain in high momentum, and is a likely anchor of growth for the economy. Private investment is expected to increase as a direct result of ETP measures, while the public sector will also remain supportive of economic growth through higher capital expenditure. The economy is expected to remain fairly resilient despite uncertain economic times globally. The Malaysian economy is expected to expand of between 4-5 percent in 2012. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
Market Segmentation Telecommunications network services can be referred as activities of designing, planning, and building, supporting and maintaining as well as enhancing interconnected telecommunications systems. They are essentially divided into six main segments as shown below Figure 1: The Main Segments of Telecommunications Network Services . –. . -._-~. (‘ Telecommunications “. \ ”- Networ~
Nlli!twork ;! NetworkPlannina. Netwark , ‘ Energy” Operations &Dlli!slgn& Deployment Management iI,’ ~ Ii jiIi Maintenance “Optimigtj~n’ . jI, J l ,/ ….. ‘J Infr.ilslrudure I Professional ! ManagemQnt . I Services J ~-‘-‘-“~~ Source: Protege Associates 1) Network planning, design and optimisation -Planning, design and optimisation services particularly on network engineering design in the wired and wireless domain for customers. This segment is an important precursor to a desired economical telecommunications network with optimal quality of service C’QoS”) 2) Network deployment -roll-out of the earlier planned telecommunications network which can include the likes of active (telecommunications network equipment) and passive (civil, mechanical and electrical) infrastructure. 3) Network operations and maintenance -starts once the planned network is successfully deployed in order to ensure its continuity and keep the operational expenses under control. 4) Infrastructure management -Continued efforts to optimise network infrastructure for better utilisation of capacities. 5) Energy management -planning and imprOVing the level of energy efficiency and optimise energy usage in order to reduce energy costs 6) Professional services -project management services, prOVision of skilled personnel from all the related disciplines to provide specific or end-to-end expertise to the customers, and the provision of other logistics services for project purposes 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
• I”:,” ” ‘ .~ ~ “”I, Telecommunications Network Services & the Telecommunications Industry The key end-users for telecommunications network servioes market mainly comprise ICT companies that include telecommunications carriers or operators as well as telecommunications technology original equipment manufacturers (“OEMs”), Figure 2: The End-users of the Telecommunications Network Services Market 1fl1J,1L Carrien;! • [)[J[J[j~ Opera,on;…… __ ,_ ~~~~:~onal ~~ -:::=::-;j_. Technology~ , iii”,: Network OEMs.L ‘.&:1 ~anag.m.n’•
Telecommunications End-Users Dth.”,
Network Infrastructure Source: Protege Associates Telecommunications carriers or operators are the main end-users of the telecommunications network services market in Malaysia. These telecommunications carriers or operators can be operating in all, anyone or a combination of the four telecommunications segments namely wired, wireless, satellite and other telecommunications. The other end-users of the telecommunications network services market are the telecommunications technology OEMs. Telecommunications network services market players generally complement the technology expertise and knowledge of the telecommunications technology OEMs with their wide array of network services to offer a comprehensive telecommunications network solution to customers (carriers and operators). I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Overview of the Telecommunications Services Market in Asia Pacific Over the last decade, the Asia Pacific region has seen extensive shifts in the telecommunications network services market, mainly from wired to wireless platforms and from narrowband to broadband services. Due to high population densities and initiatives to catch up on connectivity in rural areas, the region has posed much potential for telecommunications growth, especially in the developing countries such as China, India, and Indonesia. Capital investments on telecommunications reached a high of USD103.25 billion in 2010, shoWing a remarkable CAGR of 8.1 percent from 2005. Within the region, China reported the highest capital investment on telecommunications, at USD40.04 billion, followed by Japan at USD21.39 billion and India at USD17.88 billion. As connectivity picks up in the region, total telecommunications revenues have also increased at a CAGR of 9.1 percent from 2005 to 2010, growing to a total of USD491.88 billion in 2010. Since its establishment, wireless telecommunications has been the main driver for rural and urban connectivity, increasing connectivity rates across the region. In 2009, mobile phone lines contributed over 96 percent of Asia Pacific’s total connection growth. On a global level, Asia Pacific records the second fastest growth of mobile phone subscriptions, rising by 209.8 percent between 2004 and 2009. In developing markets such as India, Indonesia, Thailand and Vietnam, the demand for connectivity has been growing, especially in the underserved rural areas. As the construction of Wireless infrastructure is more cost effective compared to wired fixed line infrastructure, mobile telephone lines have been leading the demand in the developing regions. With high fixed line to mobile substitution rates, the demand for fixed line communication has been on a slight decline throughout Asia Pacific. In areas with high growth potential, mobile services remain highly voice-focused, and voice remains the main revenue generator for service operators. Due to poor infrastructure and unattractive ROI projections, service providers in developing countries have been reluctant to introduce 3G services on a full scale nationWide. While most countries in developing countries are still operating on 3G technology, service operators in Japan and South Korea have already developed a newer generation, 4G technology based on Long Term Evolution C’LTE”) networks, both due to launch commercially by 2015. Following successful roll-out plans for LTE-based 4G networks, 4G subscribers in the Asia Pacific region are expected to amount to 126 million by 2015. The region had 177 million broadband subscribers in 2009, exhibiting a remarkable CAGR of 22.9 percent from 2004. It is estimated that mobile broadband revenues in developed Asia 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Pacific nations will reach USD7.1 billion by 2015, with mobile broadband subscriptions rising from 6.2 million in 2009 to 27.2 million in 2015. In a region where the demand for telecommunications and connectivity is rapidly growing, service operators are facing the challenge of building high-cost infrastructure in rural areas. At the same time, the service prOViders have to remain competitive in developed markets by constantly upgrading their infrastructure to support value-added mobile broadband services. In a bid to reduce capital expenditures and improve their time-to-market, telecommunications service operators in Asia Pacific have turned towards new business models. One of the most common models is infrastructure sharing, which is prevalent in India, China and Indonesia. This model enables service operators to moderate both capital and operating expenses, while reducing their time-to-market as the cost of developing new infrastructure is spread across partidpating operators. Another common model is the asset-light model, where service operators opt to rent telecommunications equipment, instead. of purchasing them outright. It is also common for service operators in Asia Pacific to outsource the construction of telecommunications infrastructure. Some of the prominent telecommunications infrastructure technology companies in the region are Ericsson, Nokia Siemens Networks, Huawei and Alcatel-Lucent. Within this model, these technology proViders partner with telecommunications network services providers to construct and implement infrastructure. In order to prolong their relationship with service operators, these infrastructure developers are offering managed capacity and managed services operating models. Instead of incurring significant upfront capital expenditure, service operators are charged for the capacity of the network and operations services on a unit of usage basis. China, Japan and South Korea are poised to propel the Asia Pacific telecommunication sector, with high capital investments in telecommunications, and development of new generation telecommunications gateways. Collectively, the 3 nations spent USD68.00 billion in capital investments for telecommunications investments in 2010. In developing nations where mobile service markets are highly saturated, service operators are differentiating their offerings by investing resources in enhancing mobile broadband services. With high expansion rates for broadband services, data revenue is poised to uphold financial performance for service operators as voice revenue reaches a plateau. With such high development rates in the telecommunications sector, telecommunications infrastructure developers are expected to remain highly involved in both developing and developed markets. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Performance of Selected Telecommunications Markets in Malaysia The Performance of the DEL Market in Malaysia The Malaysian Communications and Multimedia Commission (“MCMC”) defines DEL as fixed line that connects a customer’s equipment to the Public Switched Telephone Network (“PSTN”) and has a dedicated port on a telephone exchange. Figure 3: The Trend in DEL Subscriptions in Malaysia, 2001-2011 5,000
o “,.4;000 3,400
·g’3,500’0. . ReSidential (/)’•.25000,1._
8 .’ -‘ .;2;000 1;.699 ~_..cu……..Q’..!””!””~~=~·s.··c
‘1;500 “,,~~…. C Busines.s 1000. I … 2001 2002 .2003 2004 2005 2005 .20072008 2009 2010 2011 -.:.tR.esldentlal -=–Bl13ir.)eSs ~Total.· Source: MCMC The performance of the DEL market in Malaysia in 2011 weakened and is expected to continue weakening in the wake of the persistent substitution threat posed by the cellular telephones and broadband internet market. The continuing efforts to bundle the DEL services with the broadband and Internet services may help to spur further growth in this market, although the bundling of VoIP services with broadband internet services may catalyse the drop in DEL service demand especially among residential consumers. Business DEL SUbscriptions are expected to play a vital role in spearheading any future growth in the market. As the performance of the DEL market suggests, continuous demand for telecommunications network services such as maintenance and upgrading works, as well as rural expansion programs are expected in the near to medium term. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
The Performance of the Cellular Telephones Market in Malaysia The performance of the cellular telephones market in Malaysia remains promising and is clearly heading in the right direction. The total number of cellular telephone subscriptions already surged to more than 36 million in 2011. Figure 4: The Growth of Cellular Telephone Subscriptions in Malaysia, 2001-2011 35,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 –.–Postpald -.·….Prepald Source: MCMC The number of cellular telephone subscriptions increased by 9.8 percent year-on-year from 33,859,000 in 2010 to 36,662,000 in 2011. 3G has also been making significant inroads into the Malaysian cellular telephone market. The number of 3G subscriptions in 2010 grew by 17.1 percent to 8,602,000 as compared to 7,347,000 in 2009. All the performance indicators for the cellular telephone market in Malaysia have been positive so far and point to a sustained growth for the market in the near term future. It can also count on the rising demand for 3G to boost its growth and expand the size of its market. The rise in demand for 3G is expected to accordingly generate greater demand for various telecommunications network services as telecommunications carriers or operators spend to boost network coverage. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Coni ‘d)
The Performance of the Broadband and the Internet Market in Malaysia Recognising broadband as an important value generator for the ICT industry and a key driver towards a k-economy, the Malaysian Government introduced its National Broadband Plan (“NBP”) in 2003 to catalyse broadband penetration among all rungs of the Malaysian population. The NBP was set to achieve broadband household penetration rate of 50 percent by 2010. In September 2007, the broadband market in Malaysia reached another milestone when the Malaysian Government announced plans to roll out High-Speed Broadband (“HSBB”) across the country covering 2.2 million premises with investments to cost about RM11 billion over a period of 10 years. Figure 5: The Number of Broadband Subscriptions in Malaysia from 2007 to 2011 6,000 5,686.9 5,000 Ul c .9 4,000 ~ ‘;: u B 3,000 ~ III Q Q 2,000 Q 1,000 0 Source: MCMC The impressive performance of the fixed and wireless broadband markets in recent years has fuelled optimism over its future prospect. Total number of broadband subscriptions in Malaysia surged from 755,500 in 2006 to more than 5.6 million in 2011. The broadband market is expected to receive more attention from the Malaysian Government given its role as a key economic enabler after a study by World Bank has shown that GDP growth can be increased by more than one percent with a 10 percent increase in household broadband
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
penetration. This focus is expected to boost demand for telecommunications network services for this highly-critical telecommunications segment. Historical Market Performance and Growth Forecast The performance of the local telecommunications network services market is positively correlated with the level of new investment involving capital expenditure and other network services related operating expenses such as maintenance and repair works by the local telecommunications carriers or operators in Malaysia. Higher level of investment as well as other network services related expenses are expected to translate into higher market size for the local telecommunications network services market Figure 6: The Estimated and Forecast Market Size of Malaysia’s Telecommunications Network Services Market, 2010-2016
——————–.—.—–.-_.-.—-\ Market Size (RM , ,Year I Annual Growth (%)billion) , —–_. ———–~ -~—>._-_._-~~~ ” 2010 2011 2012 2013 2014 2015 2016 5.53 5.80 5.97 6.15 6.33 6.51 6.70 -4.9 2.9 3.0 2.9 2.8 2.9 CAGR (2011 Note: -2016) = 2.9 percent 1) 2) All figures are rounded; the base year is 201T71e above figures indude the costs infrastructure, hardware and equipment 1. Ibr the re quired telecommunications network Source: Protege Associates
The market size of Malaysia’s telecnmmunications network services market in 2011 is estimated at RMS.80 billion. The market size of the local telecommunications network services market is projected to grow by 2.9 percent year-on-year in 2012. Overall, the CAGR during the 2011-2016 period for the investment in the Malaysian telecommunications subsector is projected to be 2.9 percent. 99 I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Competitive Analysis The number of telecommunications network services market players in Malaysia is relatively small with an estimated of less than 200 market players (with majority of their revenues coming from this market) that are based here. Of these, it is estimated that 10 percent can be classified as Tier-l market players, while the remaining market players can be categorised in Tier-2. Given the large industry size, wide service scope, rapid telecommunications demand growth, Wide geographical service area, and asset-heavy business of telecommunications network service provision, there is a potential for many market players to operate within various niches and segments of the Malaysian telecommunications network services market. However, the relatively low level of fragmentation in the local telecommunications network services market at present is understandable given relatively high barriers to entry particularly with regards to relatively high technical competency and capital requirement. Telecommunications infrastructure, hardware and equipment expenditure accounts for a large proportion of infrastructure capital expenditure by telecommunications operators on an annual basis. Examples of major global suppliers of telecommunications network infrastructure, hardware and equipment include Ericsson, Huawei, Motorola, Nokia Siemens Networks and ZTE. Protege Associates’ best estimate is that hardware and equipment expenditure is likely to account for around 65 to 75 percent of total market size, with much of the required products imported from overseas. The global revenue of selected major global suppliers of network infrastructure hardware and equipment is depicted below. Figure 7: The Revenue of Selected Major Global Suppliers of Telecommunications Network Infrastructure, Hardware and Equipment .’0 Ma~~r’GI~~~;~UPPIi’~r : i=J~;~~~~j~;;’ ::~.-.” ,_. -;~~~~~~ -‘” –_..; ———-,—–~.-~ ~——–~—~ —-~ “.~ Huawei Technologies Co., Ltd 31 December 2010 CNY185.18 billion ZTE Corporation 31 December 2010 CNYlO.26 billion Ericsson 31 December 2010 SEK203.35 billion Motorola Solutions, Inc. 31 December 2010 USD7.87 billion
Note: CNY denotes Chinese Yuan SEL denotes SWedish Krona USD denotes Umled States Dollar Revenue breakdown of each supplier for the Malaysian marke~ specific to the telecommunications segment Was’ not possible based on publidy available finandal records Source: Company Annual Reports 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
l’ ” ~ ” TJ ‘,”.'”, I Telecommunications network services market players operate in one or more than one segments of the telecommunications network services. As such, they may not offer the types of services that are completely similar with each other. The number of segments that they may participate in is subject to various factors such as technical competency, capital, manpower resources and project size. Besides, each telecommunications network services market player in Malaysia may operate their business in certain areas only and hence has different geographical presence than others. Protege Associates estimates that 25 to 35 percent of the total estimated market size of RM5.80 billion in 2011 can be attributed to telecommunications network service prOViders involved in the areas of network planning, design and optimisation, network deployment, network operations and maintenance, infrastructure management, energy management and professional services The market players in the local telecommunications network services market contribute to this portion of the market size for the telecommunications network services market in Malaysia. They can be divided into two groups namely Tier-1 and Tier-2 marker players based on the size of their revenue. 1) Tier-1 market players Tier-1 market players consist of market players with an annual revenue of at least RM25 million. The market players that belong to this group are typically well capitalised with technology knowledge and technical competency that are higher than their other counterparts. They are likely to have strategic alliances or partnership with their principal suppliers. The services offered by Tier-1 market players are also generally more extensive than their other counterparts, usually comprehensively offering the whole spectrum of telecommunications network services from network planning to infrastructure management. Examples of Tier-1 market player are OCK Group Berhad and its subsidiaries (“OCK Group”), Instacom Engineering Sdn Bhd (“Instacom”), and R&A Telecommunication Sdn Bhd (“R&A”). other notable Tier-1 players based on their current extensive portfolio of telecommunication network services may include Common Tower Technologies Sdn Bhd, Elabram Systems Sdn Bhd, Fiberail Sdn Bhd, Pernec Corporation Bhd, sacofa Sdn Bhd, Sediabena Sdn Bhd, Silver Ridge Holdings Bhd and Weida (M) Bhd. However, these companies’ total revenue includes revenues derived from the provision of other goods and services outside of telecommunications network services, thus the accurate 12 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
breakdown of revenues attributable to telecommunication network services is not possible. 2) Tier-2 market players Tier-2 market players consist of market players with an annual revenue of less than RM25 million. As compared to Tier-1 market players, Tier-2 market players are relatively less capitalised and face a tough challenge in gaining recognition from telecommunications carriers or operators. They are likely to focus on a smaller range of services such as network deployment, network maintenance or infrastructure management according to their core expertise. They include GTL Network Services Malaysia Sdn Bhd, Next Horizon Communication Sdn Bhd, Ostel Sdn Bhd and Telestructure Sdn Bhd, Medan Armada Sdn Bhd, and Bina Sat Sdn Bhd. Comparison between OCK Group and Selected Market Players OCK Group was incorporated on 14 October 2000 under the Companies Act 1965 as a telecommunications network service provider. It is involved in telecom equipment implementation, managed services and field maintenance, resource and manpower and material sourcing, mechanical and electrical as well as full turnkey deployment. OCK Group provides telecommunications network services at both East and West Malaysia. The full turnkey solutions for telecommunications clientele, encompasses network planning, deployment and management works. OCK Group can be engaged for individual services or for full turnkey deployment solutions. OCK Group also offers post-deployment, where managed services are available for operating and maintaining telecommunication infrastructure. Its technical teams are familiar with all current and upcoming telecommunications technologies and networks including fixed line networks, cellular telecommunications, wired and wireless broadband modes. Currently, it focuses on services for cellular telecommunications networks in line with current market demand. In this respect, OCK Group has completed implementation works for major cellular network operators including MaXis, Celcom DiG; and U-Mobile. For its financial year ended 31 December 2011, OCK Group registered revenue of RM88.3 million. As OCK Group is considered a Tier-1 market player, Protege Associates has selected two of its peers namely Instacom and R&A for comparison purposes. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Instacom was incorporated on 8 May 2001 under the Companies Act 1965 as a telecommunications engineering and services provider. The company has a strong foothold in providing telecommunications network services to the telecommunications carriers or operators in East Malaysia.
R&A was incorporated in 1993 under the Companies Act 1965 as a site infrastructure engineering company. It has since grown into a full-fledged solutions provider for the telecommunications industry. It currently provides network planning, optimisation, building and installation works, as well as related civil, mechanical and electrical engineering works. Figure 8: Comparisons between aCK Group and Selected Market Players ~-~.,—0—–‘,r—-.. -.-.-.. –…—. .—-~~,—–“,” ;,
OCKGroup Instacom R&A i. ___ -‘”. ._. __ J_ _”-“./.~__ “___ -<-__~~t ~ ___ ~ _____~ ~.l~, . Indicator . _ ,_~____ ._~~~_’–~.__ Type of Market Player -– Rnandal Year Ended Revenue (RM) Market Share (%) Gross Profit (RM) GroSs Profit Margin (%) Profit before Tax (RM) Profit before Tax Margin (%) Profit after Tax (RM) Profit after Tax Margin (%) CUrrent Assets (RM) CUrrent Uabilities (RM) Current Ratio (limes)
Tier-l 31 Dec 2011′ 88,325,000 1.5 22,413,000 25.4 12,330,000 14.0 9,200,000 10.4
51,055 000«) , 9200000«),, 1.32«) lier-1 Tier-l 31 Dec 2010 31 Dec 2011 47,402,310 42,042,011 0.9 0.7 7,860,161 20,518,821 16.6 48.8 4,310,764 11,220,807 9.1 26.7 3,473,806 8,016,167 7.3 19.1 122,083,426 57,295,421 82,017,253 31,490,485 1.49 1.82
Note: The above figures only provide an indication and are not considered directly comparable due Iv the fbI/owing reasons: (a) Thefinancialfiguresmaybe atgrouplevelthatindudesother businesssegments’contributions.
(b) Product! serviceofferingofselectedmarketplayersarenotidentical
(c)Anandalinformation representslatestpublidy availableinformation asat 31 May 2012 Source: CompaniesCommission ofMalaysia andProtegeAssociates 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Coni’d)
Based on revenue generated by OCK Group for its financial year ended 31 December 2011 of RM88.3 million, and the telecommunications network services market estimated at RM5.80 billion in 2011, OCK Group’s estimated market share stood at 1.5 percent. Of the RM5.80 billion, Protege Associates estimates that approximately 65-75 percent is attributable to revenue from telecommunications infrastructure, hardware and network equipment. The remaining approximate of 25-35 percent accounts for telecommunications network services such as network planning, design and optimisation, network deployment, network operations and maintenance, infrastructure management, energy management and professional services. OCK Group’s revenue contributes mainly to this portion of the market. However, as Protege Associates is unable to accurately breakdown the value of these two segments, OCK Group’s estimated market share is therefore calculated based on the total market sizing. Figure 9: OCK Group’s Market Share of the Malaysian Telecommunications Network Services Market, 2011
“. Others .•… ‘. “97:8o/~
R&A 0.7% Note: Othermarketplayersconstituting therest ofthe market’sshare include: 1) Major global suppliers of telecommunications network infrastrudule, hardware and equipment who participate in the Malaysian market including those disclosed in Figule 7. 2) Market RJnking and accurate statement ofmarket share for other telecommunications network services providers within the diagRJm was not possible due to: a. Differing financial year-end among companies
b. Absence of publicly available segmental information; publicly available numbers for these other companies may reflect sizable contributions from non-related business activities.
Source: Protege Associates 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
, Ir.” ” ” I'” ~ ” … , Figure 10: OCK Group’s Market Share within the Services Portion of the Malaysian Telecommunications Network Services Market, 2011 Others· 92.7%
Note: 1) Based on estimate that services portion constitutes 25 percent of the telecommuications networkservicesmarket Sizeofservicesportion estimated to value at RM1.45 billion in 2011 2) Marketshare ofmarketplayersbasedongrouprevenue Source: Protege Associates [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Demand and Supply Conditions Figure 11: Demand and Supply Conditions Affecting Malaysia’s Telecommunications Network Services Market, 2012 Demand Conditions
Advancement in Technology for ICT Products • The Inherent Need for Continued Capitill Expenditure by Telecommunications O~lCItol”5 Increasing Population and Young Demographic Profile in Malaysia • A Rebounding Malaysian Economy Increasing Importance of ICT in BusIness Activities I Replacement of Physh::al Functions with Virtual Possibilities Improving Interconnection of Global Telecommunications Networks• Relatively Low Technology Sophistication among Rural Consumel”5
Continuing Support from the MalaYsian Government Prevalent Strategic Alliances with Principal Product and Equipment Suppliel”5 Sharing of Telecommunications Network Infrastructure
Geographical and Infrastructure Challenges In East Malaysia
Supply Conditions Source: Protege Associates Demand Conditions • The Growing Prominence of Broadband Internet -The broadband penetration in Malaysia is expected to continue its strong growth momentum in the near future. The MOICC and MCMC have a healthy growth forecast on the future household penetration rate in Malaysia. The household broadband penetration rate in Malaysia is projected to reach 75.0 percent in 2015. The growing prominence of the broadband market in Malaysia bodes well for the growth in the local telecommunications network services market as operators need to constantly maintain and upgrade networks to provide services of acceptable quality to customers. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
• Advancement in Technology for ICT Products -The advancement in technology has allowed the lCT industry to improve its product offerings or create new products with visible commercial appeal which can lead to more demand. It helps to create and drive technology trends for lCT products that can be assimilated with the latest consumers’ needs. Any growth in the usage of lCT products can also increase the propensity to utilise telecommunications services. lCT products provide the means for consumers to access telecommunications services. Advancement in technology for lCT products also hasten the replacement cycle for telecommunications network to conform with the latest technological standards -necessitating the needs for the presence of telecommunications network service market players to upgrade or replace old telecommunications networks.
• The Inherent Need for Continued Capital Expenditure by Telecommunications Operators -capital expenditure is an important business cost component to the telecommunications carriers and operators in order for them to sustain their existing business and support future growth. Part of the capital expenditure by the telecommunications carriers or operators involves undertaking the necessary telecommunications network services. For existing infrastructure, telecommunications network services are reqUired to continue prOViding the necessary support and maintenance. As the lCT industry is often characterised by a rapid change in technology, the telecommunications carriers and operators are also likely to constantly upgrade their network infrastructure and hardware or install newer ones with the latest technology. The continued upgrade of mobile data networks from 3G to 4G LTE networks is expected to bring the next wave of telecommunications infrastructure and equipment investments especially in the short to medium term future.
• Increasing Population and Young Demographic Profile in Malaysia -Malaysia’s population has continued to be on an upward trend, growing to 27,565,821 people in 2010 from 13,745,241 people in 1980. A growing population represents an enlarge pool of potential demand for telecommunications related services. Besides that, Malaysia also has a young demographic profile, with a higher affinity to telecommunications technology. This development is expected to lead to higher capital expenditure among the telecommunications carriers or operators for their existing network build-up to cope with the potential increase in demand for their services -indirectly driving the local telecommunications network services market.
• A Rebounding Malaysian Economy -According to BNM, the Malaysian real GDP at 2000 prices is expected to grow between 4.0 to 5.0 percent in 2012. A rebounding
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
Malaysian economy helps to boost consumer sentiment and fuel the usage of the services offered by the end-user markets for telecommunications network services. Further growth in the economy beyond 2012 is expected to positively affect the market for telecommunications network services as well. • Increasing Importance of ICT in Business Activities -ICT such as the Internet is becoming more commonly applied to everyday business activities. As business Internet users increase in sophistication, more bandwidth and Internet connections with greater speeds wili become a necessity. As a result, existing telecommunications networks need to be upgraded or new telecommunications networks need to be installed. This development bodes well for the overall growth in the local telecommunications network services market.
• Replacement of Physical Functions with Virtual Possibilities -The Internet Age has allowed the virtualisation of many physical functions including payments, shopping, accessing services, and learning. The proliferation of these advanced virtual functions creates a need for fast, reliable Internet connections. As such, capital expenditure on telecommunications network services is expected to remain relevant in the near future.
• Improving Interconnection of Global Telecommunications Networks -The thirst for data by Malaysian consumers has never been stronger judging from the rapid growth registered in broadband subscriptions in recent years. As such, it is not surprising that telecommunications operators or carriers seem to be keener than ever in developing and improving the speed and capacity of data transmission particularly with regards to the development and improvement in the interconnection of telecommunications networks between countries.
• Relatively Low Technology Sophistication among Rural Consumers -The relatively low technology sophistication among rural consumers in Malaysia can hinder the progress of the broadband penetration from growing at an optimal level. The lack of sophistication among Malaysian rural consumers, and the unWillingness to migrate may inhibit the growth of telecommunications services in the short term, thus affecting the telecommunications network services market negatively as well.
Supply Conditions • Continuing Support from the Malaysian Government -The Malaysian Government has been providing the necessary leadership in spearheading the growth in the local ICT industry which includes the local telecommunications network services market via 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
supportive government policies and strong institutional support. As one of the participants of the local ICT industry, the local telecommunications network services market players can also expect to reap the benefits from the continuous support given by the Malaysian Government. • Prevalent Strategic Alliances with Principal Product and Equipment SuppliersThe telecommunications network services market players tend to enter into strategic alliances or partnerships with their respective principal suppliers of products and equipment. Such co-operations allow both parties to share resources and tap into each other’s technological expertise and knowledge to offer a more comprehensive network solution for potential customers. This development bodes well for the future growth in the local telecommunications network services market.
• Sharing of Telecommunications Network Infrastructure -several different elements of telecommunications network infrastructure can be shared by telecommunications carriers or operators. Telecommunications carriers or operators in Malaysia have relied on a common core network to varying degrees for the provision of mobile, fixed line and international gateway services. The sharing of telecommunications network infrastructure makes business sense as such a move leads to lower roll-out costs and lower multiple infrastructure. However, as more telecommunications network infrastructures are shared, the pools of potential demand for telecommunications network services may reduce accordingly, although opportunities related to site consolidation, cross-operator integration will surface.
• Geographical and Infrastructure Challenges in East Malaysia -The geography of East Malaysia has been one of the major factors hindering the supply of telecommunications network services. The region is still populated by a large tract of forests and jungles. Nevertheless, the condition is expected to be improved in the near future as ‘improVing rural basic infrastructure’ has been earmarked as one of National Key Result Areas (“NKRAs”) under the Government Transformation Programme (“GTP”).
Markets’ Reliance on and Vulnerabilitv to Imports Most of the network equipment are highly specialised in nature and cannot be sourced locally. As a result, these network equipment need to be imported. International network equipment manufacturers such as Ericsson, Huawei, Motorola, Siemens A.G., ZTE and their respective Malaysian affiliates are examples of the principal supplier for the required network 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
“‘, r, J.’. , I.”‘” “,’ , equipment. Hence, the equipment and consumables used cost component is considered to be vulnerable to imports. As for related skilled personnel, they can be sourced locally. These skilled personnel are likely to undergo extensive trainings offered by their principal suppliers to handle the imported network equipment. However, the pool of local highly skilled and experienced personnel is relatively small and they typically command higher wages -making it challenging for market players to hire them or fend-off interest from their competitors. Substitute Products or Services There are no known direct substitutes for telecommunications network services yet. However, telecommunications network services with older technologies are typically replaced with newer innovations as the market is often characterised by rapid advances in technology. The techniques and implementation methods used by telecommunications network service providers will adapt to these technological changes from time to time. The existing hardware used in telecommunications networks may also be replaced with newer hardware. Relevant Laws and Regulations Governing the Markets • Malaysian Communications and Multimedia Commission (“MCMC”) -MCMC was established to regulate the converging communications and multimedia industry in Malaysia by regulating the communications and multimedia industry based on powers prOVided for in the Malaysian Communications and Multimedia Act 1998 and the Communications and Multimedia Act 1998. Following these Acts, the role of MCMC is to implement and promote the Government’s national policy objectives for the communications and multimedia industry.
• Communications and Multimedia Act 1998 lCMA 1998’1 -The CMA 1998 establishes a framework to promote stronger technical regulation by fadlitating the technical interoperability of networks. It also encourages efficient allocation of resources as well as promoting the safety, security and integrity of network services and application services. Activities regulated by under the purview of CMA 1998 include traditional broadcasting, telecommunications and online services including facilities and networks employed in proViding such services, and content supplied through facilities and networks.
• Approval from SIRIM QAS International Sdn Bhd -SIRIM QAS International Sdn Bhd (‘SIRIM QAS International”) has been appointed as a certifying agency by MCMC to
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
” ~, ‘.(;( ;.; I I’. carry out the certification program for all communications and multimedia equipment. Hence, a local telerommunications network services market player that intend to imports telecommunications products into Malaysia need to apply to SIRIM for product certification approval. If the imported telecommunications products are for sale in Malaysia, they also reqUired to apply for SIRIM-certified labels. • Registration as Contractor -Telecommunications network services market players need to register as a rontractor with the Construction Industry Development Board (“aDB”) Malaysia to undertake construction activities particularly under the mechanical and electrical category. Figure 12: Examples of Contractor Registration Categories and SpeciaIisation ——,~———~,————-Cate~~ry J_!>_I’~~iali~a~~I1__I~__.. _ .. Description CE21Ovil Engineering General civil engineering works, including earthworks, Construction General Civil subsoil drainage, etc. (CE) Engineering Works Building automation, industrial and process control E03 systems. Includes installation and maintenance of Automation SyStem . Building microprocessors or computer based building aintrol and Energy systems and industrial process Control systems. Generation System Indudes installation and maintenance of energy generation systems. General wiring and control system wiring works not exceeding 1 kilovolts (“KV”).E04 Installation and maintenance of low tension overhead Low Voltage lines and underground cabling not exceeding lKV.Installation Includes installation and maintenance of generating plant and equipment not exceeding lKV. Mechanical and Installation and maintenance of high voltage equipment 8ectrical (ME) and underground cabling, high-tension overhead line EOS including transmission tower exceeding lKV. High Voltage . Includes instaliation and maintenance of generatingInstallation plant and equipment exceeding lKV. Neon lights. Telephone cabling and internal ducting, radio based communication system, Private Automated Branch EO? Exchange (“PABX”), microwave system, multiplex and Telecommunication signalling, tropo-scatter system, satellite system, radar Installation surveillance system, data communication equipment, remote subscriber system, vessels and navigational specialised system, etc. E08 Telecommunication cabling (undergrouncl/ overhead), manholes, underground ducting/ pipes.External I 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
E09 Installation, commlsslonmg and maintenance of surgicalf operating theatre table and lights, radiographyMiscellaneous equipment, radiotherapy equipment, nurse call system,5pedalised electronic scorecard, uninterruptible power supply (“UPS’? system, etc. M15 Installation, testing commissioning, maintenance and repair of mechanical based systems such as pumpingMiscellaneous installation, sewerage ‘treatment plant installation,Mechanical water treatment plant installation, rotary pumps,Equipment redprocating pumps, centrifugal pumps and special purpose pumps, etc. 50urce:aD8 There are different Contractor Grades with different tendering capacity. Figure 13: Registration Requirements and Procedures
G7 No limit 750,000.00 Group A and 1 Group B (both minimum 5 years’ experience) or 2 Group A (one of whom must have minimum 5 years’ experience) G6 Not exceeding 10 million 500,000.00 Group A and 1 Group B (one of whom must have minimum 3 years’ experience) G5 Not exceeding 5 million 250,000.00 1 Group A or 1 Group B (minimum 5 years’ experience) G4 Not exceeding 3 million 150,000.00 1 Group B. G3 Not exceeding 1 million 50,000.00 Course Certificate! experience G2 Not exceeding 500,000.00 25,000.00 Course Certificate! experience Gl Not exceeding 100,000.00 5,000.00 Course Certificate! experience
Note: *Paid Up CapilEl (for Pn”vate Limited Q)mpany! Public Q)mpany) oooo Net Capital Worth (for sole proprietDrship/ partnership) in the form of current account bank
statement (average balance considered)! balance from savings account! overdraft fadlilies,! uncharged fixeddepositstatement!Amanah Saham 8umiputera (:458′;VAmanah Saham Nasional(:45N”)shares # Group A -Degree holder in construction related fields Group 8-Diplomaholderin construction relatedfields orotherdegree holder with expen’encein construction works 50urce:aD8 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
• Network Facility Provider (nNFP”) Ucenses -NFP licenses govern the ownership and operations of telecommunications facilities. NFP licensees are allowed to bUild, own and operate satellite stations, broadband fibre optic networks, telecommunications towers and other infrastructure. Typical NFP licensees include radio and television broadcasters, cellular network operators, as well as broadband ISPs. Nevertheless, there is an increasing inclination by the MCMC to award NFP licences to parties other than telecommunications operators and media broadcasters, thus encouraging infrastructure ownership among third parties including telecommunications network service providers.
This is in line with regional trends in telecommunications services, where operators are increasingly consolidating infrastructure costs through infrastructure sharing and renting from third-party owners. Within Malaysia, the award of NFP licences to non-traditional licensees opens up opportunities for telecommunications network service providers to gradually shift towards a business model of telecommunications infrastructure ownership, receiving rental revenue from operators interested in increasing network reach without directly inaming heavy infrastructure development costs.
• Quality and Safety Standards -COmpliance to national and international standards seems to be gaining prominence among market players in the local telecommunications network services market Besides meeting the requisite regulatory requirements set by the Malaysian Government, compliance can also go a long way towards boosting the confidence of potential end-user markets. It reinforces the market players’ commitment in prOViding acceptable quality services and products to their end-users. In addition, compliance with international standards is vital for penetration into the international market.
Other Trends • Rapid Technological Changes -The telecommunications network services market is still subjected to rapid technological changes driven by evolving industry standards and changing market trends particularly on its customers’ changing needs. Market players in the local telecommunications network services market typically strive to be at the forefront of competition in terms of obtaining new technology-based products from new or existing suppliers and knowing the latest market trends and demands in advance to cater for their customers’ changing needs. Any inability to do so can lead to their products and technical know-how being rendered obsolete. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
• Relatively High Barriers to Entry -In order to participate in the market, potential entrants need to clear regulatory hurdles such as successfully registering as a contractor with the aDB Malaysia to undertake construction activities. The telecommunications network services market is considered specialised in nature and is characterised by rapid change in technology. Hence, potential entrants need to possess sufficient related technical expertise and updated technology to participate in this market. They also need to have a pool of relatively high skilled and experienced personnel. Potential entrants also need to come out with relatively high capitallay-out to invest in software, equipment and machineries, storage facilities, labour as well as the upfront procurements for project related items.
• High Concentration Risk for Demand -Telecommunications network services market player generally depend heaVily on the local leT industry as the majority of their revenues are derived from there. In other words, the local telecommunications network services market is highly positively correlated with the local leT industry. Any growth in the local leT industry is likely to bring positive spill over impacts to the growth in the local telecommunications network services market. However, telecommunications network services market players are equally vulnerable to any downturns in the local leT industry and do not have many options of diversifying away their existing offering to other industries.
Prospect and Outlook of Malaysia’s Telecommunications Network Services Market The outlook for the telecommunications network services market in Malaysia remains positive and steady growth is projected throughout the forecast period of 2012 to 2016 as reflected in its forecast market size and growth. The market is projected to grow from its estimated market size of RMS.80 billion in 2011 to RM6.70 billion in 2016 -registering a CAGR of 2.9 percent. Given the relatively large scale nature of capital expenditure for new technology such as HSBB, the amount of investment is projected to slightly taper down after the initial large investment outlay as the telecommunications carriers or operators are expected to spread the costs over a longer period and continue to monitor the level of demand for such services before committing further capital expenditure. Meanwhile, the leT industry in general is expected to continue playing an important role in the Malaysian economy by helping to raise the nation’s overall productivity and competitiveness. The Malaysian Government expects the industry to contribute 10.2 percent 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
of the nation’s GDP by 2015. The expected implementation of strategic reT related plans under 10MP such as the formulation of a National Creative rndustry Policy and the roll-out of the National DTIB project as well as the HSBB and BBGP under the on-going National Broadband initiatives is anticipated to propel the industry closer to the target. The selection of communications content and infrastructure sector as one of the NKEAs under the ErP has also boosted the outlook for the local telecommunications network services market. Given that the telecommunications network services market as well as its end-users belongs to the reT industry, the continued proliferation and expansion projected for the reT industry is expected to drive demand for telecommunications network services market. Within the reT industry, steady demand for telecommunications network services such as maintenance and upgrading works, as well as rural expansion programs are expected from the DEL market in the near to medium term. Meanwhile, for the cellular telephone market, the rise in demand for 3G services (and future mobile data services) is expected to generate greater demand for various telecommunications network services as telecommunications carriers or operators spend to boost network coverage. rn addition, the continued capital expenditure for telecommunications network bUild-up for broadband is expected to be a key growth catalyst as well. Moving forward, the telecommunications network services market in Malaysia is expected to continue benefiting from various factors driving demand for such services including the growing prominence of the broadband market in Malaysia, advancement in technology for reT products, inherent needs for capital expenditure by telecommunications carriers or operators to sustain or grow their businesses, increasing population and young demographic profile in Malaysia, a rebounding Malaysian economy, increasing importance of reT in business activities, replacement of physical functions with virtual possibilities as well as development and improvement in the interconnection of telecommunications networks between countries. 7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and/ or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Thank you. Yours Sincerely,
SEr CHEOW SENG Managing Director Protege Associates Sdn Bhd