Spotlight on Vietnam - Understanding the opportunities

With smartphone usage soaring and demand for data reaching new heights, Vietnam’s telecoms industry and infrastructure are starting to attract international attention. The restructuring of Vietnam’s MNO market is still a ‘work in progress’, but the government has announced that LTE will be rolled out in 2015 and the first licenses will be awarded in early 2016. The stage is set for sustained telecoms and tower market growth in Vietnam.

More than half of Vietnam’s 93mn population are aged under 25, with population density concentrated in the country’s two largest cities, Hà N?i (~6.5mn) and H? Chí Minh City (over 7mn population, and which generates around half the country’s GDP). According to GSMA Intelligence statistics for Q4 2014, SIM penetration is 150%, although multi-SIMing is common. 89% of the market is prepaid, with mobile broadband penetration at 21%. According to Appota, smartphone penetration was a corresponding 23.25%. All three leading MNOs offer unlimited 3G data for VND70,000 per month (a little over US$3).  ARPU was reported at US$3.38 per month in Q1 2014 and has remained relatively stable. Mobile data speeds in Vietnam are among the slowest in the world, at an average of 1.48Mbps, ranking 112th out of 113 countries surveyed by NetIndex.

What is clear is that Vietnam is one of the fastest growing and most attractive mobile markets in Asia. Smartphone ownership doubled to 23.25% from 2013 to 2014. As a result, data demand is rising rapidly, even prior to the rollout of 4G, driving capacity requirements for network planners at Vietnam’s MNOs and creating demand for Vietnam’s many small towercos.

The MNOs in Vietnam are continuing to invest in new infrastructure to expand their coverage. The three market leaders Viettel, MobiFone and VinaPhone have been rolling out new sites steadily to continue to meet increasing demand, requiring approximately 11,000 new towers or tenancies per year.

 

Vietnam is host to five incumbent operators, with potential new entrants to be attracted by the 4G auction, and all are potentially creditworthy tower tenants, representing an atypically deep pool of prospective counterparts for towercos. As of Q4 2014 Viettel had 46.6% of the market, MobiFone 31.5% and VinaPhone 15.4%. The smaller market players Vietnamobile and GTel Mobile had 3.8% and 2.8% respectively. Viettel has an estimated tower portfolio of ~20,250, MobiFone has ~9,000, VinaPhone has ~11,000 and Vietnamobile and GTel own the other ~4,750 towers between them. A further ~10,000 are owned by towercos and other smaller holding companies.

During FY2014, Viettel reported worldwide revenues of over US$9bn, up 20% YOY, and a base of 55.5mn domestic mobile subscribers. Viettel typically builds over 1,000 new towers every year in Vietnam, but to date has kept their towers on their own balance sheet. Viettel is also market leader in Cambodia and Laos, has rolled out successfully in Mozambique and Haiti, and recently acquired licenses in Cameroon and Tanzania. While Viettel has a track record of swiftly rolling out their own low cost towers, they have recently embraced co-location, becoming tenants on IHS’s towers in Cameroon and opening discussions with Golden Towers about co-location in Vietnam. TowerXchange have even heard rumors that Viettel might consider selling the ~1,600 towers they have rolled out in Mozambique.

Ministry-owned #2 and #3 players MobiFone and VNPT (Vinaphone) are in the process of being formally separated, with the former currently under the management of Vietnam’s Ministry of Communications and seeking foreign investment ahead of an IPO scheduled for late 2015. Axiata and Telenor, both infrastructure sharing enthusiasts, have been linked with MobiFone, which could attract a valuation of US$2-3bn. Telstra and Sweden’s Comvik International, which held a 45% stake in MobiFone from 1995-2005, are also believed to be interested. Approximately a third of MobiFone’s substantial tower portfolio are third party owned – indeed the majority of independent towers in Vietnam have MobiFone as an anchor tenant.

VNPT is also believed to be in discussions with foreign investors, and has submitted its own restructuring plan, proposing to separate the company into three businesses; VNPT-Net, specialising in network infrastructure, VNPT-Vinaphone, the mobile services business, and VNPT-Media. VNPT had historically relied on MobiFone’s towers, so represent the highest prospective volume of new business for the co-location and build-to-suit markets.

The restructuring of #4 MNO Vietnamobile will be critical to financing their customer acquisition efforts, and to improving their credit worthiness as tenants or build-to-suit partners. The operator is currently subject to a build-operate-transfer type agreement within a partnership between Hutchison and Hanoi Telecom. Protracted negotiations continue which could result in the operator being more conventionally structured and financed.

Despite being the fifth ranked operator in Vietnam, GTel Mobile (formerly known as Beeline when owned by VimpelCom) owns a portfolio of around 3,700 towers. GTel are now owned by the Ministry of Public Security, and are believed to be seeking LTE spectrum, so have an expansive mindset.

There have also been rumors of the prospective entry into the Vietnamese market of Japan’s SoftBank as a sixth MNO, potentially via participation in the forthcoming 4G spectrum auction.

 

At a conference in March, Deputy Minister Le Nam Thang strongly hinted at a 2016 timeframe for the auction of 4G spectrum in Vietnam. The auction is expected to include spectrum in the 2.3GHz and 2.6GHz bands, as well as refarmed spectrum on the 900MHz band.

4G had been piloted in Vietnam as long ago as 2010, with Viettel, VNPT and leading ISP FPT Telecom among those granted limited test licenses.

Fibre is extensively available in Vietnam and easy to connect to – few towers are burdened with microwave dishes.

While MNOs retain almost 82% of the country’s towers, Vietnam is home to over thirty towercos and small independent players with double and triple digit tower counts. The most acquisitive towerco seems to be Golden Towers which recently closed title on over 400 towers with over 1,000 more pre-closing and in the pipeline. Golden Towers markets their sites more aggressively than most independent towercos in Vietnam, where the prevailing tenancy ratio is in the 1-1.3 range. Golden Towers has had success acquiring and rolling up some of Vietnam’s smaller tower portfolios, most of which have sprung up as a function of a family’s ownership of a critical piece of real estate, or as a function of towers acquired by or awarded to current or former employees, particularly of VNPT.

The largest towerco in Vietnam is currently Southeast Asia Telecommunications Holdings (SEATH), itself the product of rolling up three smaller towercos. SEATH is a holding company owned by VNI (VinaCapital’s Vietnam Infrastructure Limited). According to the company’s Q3 report, on 30 September 2014, they had “close to 1,930 towers” in Vietnam with a tenancy ratio of 1.2, an EBITDA margin of 50.3% and net margin of 20% over the first nine months of 2014.

Grid power is extensively available and fairly reliable, thus Vietnam’s towercos operate a ‘steel and grass’ business model, with energy costs passed through to the tenant and the operator’s retaining their own backup power solutions.

Towercos have the same three options to achieve growth which they have everywhere else; let’s examine those scenarios to see how the market might evolve in Vietnam.

1. Organic growth through build-to-suit: Permitting and building towers a handful at a time in response to search rings issued by Vietnam’s MNOs might enable towercos to zero-in on sites attractive to additional tenants, to negotiate long leases on favorable terms with landlords, and to build more robust, higher value structures. However, it’s a slow process, typically taking four to six months to permit a new tower. With the fragmentation of Vietnam’s towercos, and with Viettel not using towercos for their build projects to date, no-one is going to get to scale fast on build to suit contracts alone.

2. Rolling up small towercos: At his roundtable at the TowerXchange Meetup Asia 2014, Golden Towers’ Patrick Tangney talked about a “buy to suit” market in Vietnam. With a substantial pool of over 10,000 independently owned towers in Vietnam, Golden Towers have often been able to buy towers in desired locations, at times acquiring entire portfolios. Some of the world’s largest towercos, including American Tower, SBA Communications, Crown Castle, Viom Networks, Tower Bersama and Protelindo, started out by rolling up smaller towercos. “Buy to suit” might not propel a towerco to 10,000 towers overnight, but it might enable a towerco to reach the scale where they can be the most credible bidder in the event of a substantial sale and leaseback opportunity coming to market in Vietnam.

3. Sale and leaseback (SLB): A substantial SLB in Vietnam would require a substantial capital raise, but TowerXchange believes there would be no shortage of private equity firms interested in putting several hundred million dollars of capital to work in Vietnamese towers. As for the prospects of a large scale SLB, there’s nothing on the near-term horizon until the dust settles on Vietnam’s protracted MNO restructuring saga. However, in a 12-24 month window we could see a portfolio of towers brought to market, most likely from the MobiFone-VNPT axis. One note of caution around SLBs in Vietnam: the quality of MNO-captive towers varies significantly in Vietnam, with lots of guide wire towers with finite capacity, and inevitably a degree of deferred maintenance, which will both have implications for post acquisition improvement capex if a deal does come to market.

As the restructuring of Vietnam’s operator market finally nears conclusion, the next boom in this attractive Southeast Asian telecoms market could be found in telecom towers. A diverse ecosystem of incumbent towercos exists, but the business is not conducted as formally as in more established tower markets, for example MLAs can be as short as three pages. The most sophisticated and active player seems to be Golden Towers (whose MLA is 300 pages!), whose current strategy of rolling up selected independent towers on a “buy to suit” basis could see them well positioned to be the most credible local counterparty should a substantial sale and leaseback opportunity emerge from the restructuring of MobiFone and VNPT.