Axiata Group Berhad - Annual Report 2016

MANAGEMENT DISCUSSION & ANALYSIS

Axiata Group Berhad | Annual Report 2016

019

2016 IN REVIEW:

GROUP PERFORMANCE

•

Operators moved to compete on data-led bundles with quotas

doubling for the same price, while voice is increasingly included

at no perceived incremental price

•

Customer data usage grew to approach 4GB per user in

Malaysia and Cambodia, with an average across the footprint of

approximately 2GB per user per month on mobile

In some markets, the impact of data cycle interdependence are

being compounded by hypercompetition and unbalanced market

structures. In Malaysia, the presence of six players with the emergence

of a disruptor has caused the overall telecommunications market value

to shrink. While in India, there is a wave of anticipated consolidation

among competitors. In both Indonesia and Bangladesh, the dominance

of the incumbent number one players has increased throughout 2016.

In Bangladesh, this led to consolidation with the merger of Robi and

Airtel Bangladesh Limited (Airtel) to secure a strong number two

position. In Indonesia where XL operates, there were price-led battles

among the second and third players.

In Sri Lanka, Nepal and Cambodia, Axiata's Operating Companies

(OpCos) Dialog, Ncell and Smart respectively operate as number

one players. Dialog, Ncell and Smart have compounded their market

positions while improving profitability. This has led to renewed

aggressive retaliatory responses from competitors in the form of data

price cuts, even where regulatory floor pricing exists.

Regulatory

Operating in ten markets across Asia, the Group faces a shifting and

risk-biased regulatory environment which includes:

•

New spectrum allocations and reassignment of existing spectrum

such as was witnessed in Malaysia

•

Development of new regulations, including the wholesale

modernisation of regulatory frameworks in some markets

•

Increased levels of general, industry-targeted and opportunistic

taxes, as witnessed in Sri Lanka, Bangladesh and Nepal

•

Weak competition regulations to address market sustainability

and imbalanced competition in some markets, and

•

An uneven regulatory playing field with unlicensed and Over-the-

Top (OTT) digital service operators.

Axiata continues to proactively engage with regulators, government

ministries, industry associations, non-governmental bodies and other

industry players in order to further the understanding of the challenges

and opportunities facing the industry in these times of digitisation and

structural change to the sector.

Addressing regulatory challenges is a key priority not only for Axiata, but

for the entire telecommunications industry and the economies of several

emerging markets in which we operate, where the Group is the leading

Foreign Direct Investor, employer and tax payer. Therefore, in the past

year, Axiata has increased its regulatory engagement activities with

government ministries and regulators outside the telecommunications

sector, so as to further the understanding of the need to create and

maintain sustainable and rational telecommunications markets and

market structures.

OPERATING ENVIRONMENT

2016 was a challenging year on multiple operating fronts. Geopolitical and

macroeconomic headwinds coupled with heightened market competition

and regulatory factors imposed material negative pressures on Axiata’s

operating environment.

Global Economy

Global economic growth was characterized by stagnant global trade,

subdued investment and heightened policy uncertainty. According to

the World Bank

, 2016 growth was estimated at 2.3%, its lowest since

the 2008 global financial crisis.

The regional economies of Axiata’s countries of operation in the

Southeast Asia and South Asia regions mirrored the global economic

struggle. Reflecting heightened global volatility, regional currencies like

the Ringgit Malaysia were under pressure against the US Dollar, which

prompted authorities to introduce additional measures to enhance

liquidity in the foreign exchange (forex) market.

The Organisation for Economic Co-operation and Development

(OECD) noted that in the ten countries within ASEAN, the average

real Gross Domestic Product (GDP) growth in 2016 was an estimated

4.8%, a decline of 0.1% from 2015 GDP growth of 4.7%

. Within the

Group’s Southeast Asian markets, real GDP growth in Malaysia was

at an estimated 4.2% in 2016, while in Indonesia it was 5.1%, and in

Cambodia, 7%.

In South Asia, which is now the world’s fastest-growing emerging

market and developing economy (EMDE) region, growth is estimated

at 6.8%. Excluding India, which represents 80% of South Asia’s GDP,

the region grew 5.3%. There were wide variations among countries –

growth in post-earthquake Nepal was an estimated 0.6%, while in Sri

Lanka it was 4.8% and in Bangladesh, 7.1%.

Competition and Market Dynamics

In 2016, Axiata witnessed intensified competition in several markets,

especially with regards to data pricing. Mobile customers have been

increasing their data usage, driven by the increased consumption

of video which became more widely integrated into social media

platforms and the emergence of Streaming Video on Demand (SVOD)

players. Data usage in Axiata's markets increased by close to 100%,

while data yields and unit price per Gigabyte fell by approximately 50%.

Over the past year, the data cycle interdependence is driving usage up

and pricing down, in a virtuous interdependent cycle, across Axiata's

markets:

•

Smartphone penetration tipped over 50% on average, including

in emerging markets, with sub-USD50 large screen 4G devices

becoming available in the market

•

Heightened investment in 3G and 4G networks improving the data

service experience and feeding demand

•

Social media effectively evolved to a video-led proposition,

coupled with the emergence of several SVOD players which were

subsidised or hard-bundled

Source : “Global Economic Prospects : Weak Investment in Uncertain Times” published by the World Bank Group in January 2017

Source : “Economic Outlook for Southeast Asia, China and India 2017 Addressing Energy Challenges” published by the Organisation for Economic Co-operation and Development

(OECD) in January 2017