Vietnam information technology report q3 2015

BMI Industry ViewBMI View: The key component for our forecast for Vietnamese IT market growth outperformance over the medium term is our view that broad based economic growth will substa

Q3 2015 www.bmiresearch.com

VIETNAM

INFORMATION TECHNOLOGY REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

Q3 2015

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: June 2015

© 2015 Business Monitor International Ltd

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BMI Industry View 7

SWOT 9

IT SWOT 9

Political 11

Economic 12

Operational Risk 14

Industry Forecast 16

Table: IT Industry - Historical Data And Forecasts (Vietnam 2012-2019) 16

Macroeconomic Forecasts 24

Economic Analysis 24

Table: Economic Activity (Vietnam 2010-2019) 29

Industry Risk Reward Index 30

Table: Asia Pacific IT Risk/Reward Index - Q315 32

Market Overview 33

Hardware 33

Software 40

Cloud Computing 47

Services 51

Industry Trends And Developments 58

Regulatory Development 63

Table: Government Authority 63

Regulatory News 66

Competitive Landscape 69

International Companies 69

Table: Samsung Electronics 69

Table: Intel 70

Table: LG Electronics 71

Table: Global CyberSoft 72

Local Companies 73

Table: Sara Vietnam 73

Company Profile 74

FPT Software 74

Table: FPT Group Financials By Segment (VNDbn) 78

Regional Overview 80

Demographic Forecast 83

Table: Population Headline Indicators (Vietnam 1990-2025) 84

Table: Key Population Ratios (Vietnam 1990-2025) 84

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 85

Table: Population By Age Group (Vietnam 1990-2025) 85

Table: Population By Age Group % (Vietnam 1990-2025) 86

Methodology 88

Industry Forecast Methodology 88

Sources 89

Risk/Reward Index Methodology 90

Table: It Risk/Reward Index Indicators 91

Table: Weighting Of Components 92

BMI Industry View

BMI View: The key component for our forecast for Vietnamese IT market growth outperformance over the

medium term is our view that broad based economic growth will substantially deepen the retail hardware market This view is supported by the introduction of a household growth forecast for Vietnam in the forecast section of the Q315 update We forecast a compound annual growth rate (CAGR) of 11.6%

2015-2019, with total spending expected to increase from 1.52% of GDP in 2014 to 1.57% in 2019.

Meanwhile, Vietnam's development as an outsourcing destination is a significant medium-term factor, with the services segment expected to expand rapidly There is also increasing momentum towards Vietnam becoming a global centre for electronics production as wages rise in China and manufacturers look to protect margins by moving to Vietnam, where wages are as little as a third of those in China.

Headline Expenditure Projections:

■ Computer Hardware Sales: VND37.0trn in 2014 and VND40.8trn in 2015, rising to VND57.5trn in

2019, CAGR of +10.1% in local currency terms Forecast upgraded in Q315 after strong sales reported bylocal retailers in H115 for the Tet New Year holiday season

■ Software Sales: VND9.0trn in 2014 and VND9.9trn in 2015, rising to VND16.1trn in 2019, CAGR of

+12.4% in local currency terms The enterprise software market as a whole set for strong growth, withsecurity solutions a particularly strong sub-segment for vendors willing to accept narrow margins in aprice-sensitive market

■ IT Services Sales: VND13.7trn in 2014 and VND16.0trn in 2015, rising to VND29.8trn in 2019, CAGR

of +16.8% in local currency terms IT services forecast to outperform 2015-2019 as increased domesticdemand for cloud computing and outsourcing services expected to drive strong growth

Key Trends And Developments: In addition to our positive outlook for IT market growth, BMI also has a

bullish outlook for the development of Vietnam's IT industry - particularly electronics manufacturing andoutsourcing provision A key factor helping to attract significant inward investment to electronics

manufacturing is the government's Hi-Tech Parks policy In June 2015, the plan was extended - with newparks set to be constructed between 2015 and 2030 through a combination of central government direction,local government funds and private capital In addition to creating new parks, it also plans to furtherdevelop existing facilities including Hoa Lac Hi-Tech Park in Hanoi City, Saigon Hi-Tech Park in Ho ChiMinh City and Danang Hi-Tech Park The expansion is based on recent success in Vietnam's developmentgoal of promoting high tech manufacturing as a source of higher productivity employment, as well asbenefiting Vietnam through technological transfer

Meanwhile, the Vietnamese outsourcing industry was boosted in July 2014 when the prime minister ofVietnam enabled state agencies to use outsourced information technology providers for the first time, a

ruling that came into effect in February 2015 It enables IT firms to provide software and technologysystems as service packages to the public sector FPT Information Systems CEO Do Cao Bao stated that themain IT services in Vietnam are system management, cloud software leasing and maintenance services asthe largest component at around VND4-5trn a year It is these areas that are expected to generate the most

demand in the public sector, which BMI believes represents a significant new area of growth for vendors.

However, confidence remains a major impediment to adoption Managers are unsure of the benefits of IToutsourcing, as well as having concerns about security and a loss of control over key processes A report

from Grant Thornton International stated that only 12% of enterprises in Vietnam are open to outsourcing BMI expects outsourcing adoption to accelerate once awareness of the benefits is more widely spread, and

vendors ease manager concerns

as well as bilateral agreements with Japan and China.

■ The domestic IT market is in a rapid growth phase, with trade liberalisation andgrowing affordability driving increased adoption among enterprises and consumers

■ Expanding local hardware production industry with major international players such

as Samsung, Nokia, LG and Intel making large investments.

■ Vietnam is a preeminent global outsourcing destination, with a particular strength inthe software development industry

Weaknesses ■ IT spend per capita is much lower than in neighbouring Thailand, reflecting a much

lower GDP per capita

■ Highly price-sensitive market, putting pressure on vendor margins

■ High level of software piracy, with a stall in the reduction 2011 to 2013

■ Cybersecurity measures by the government have been pushed through with statesecurity measures, with potential human rights implications

Opportunities ■ Broad based economic growth forecast to drive retail hardware market growth as

household incomes increase markedly 2015-2019

■ Decision in July 2014 to enable state agencies to use outsourced informationtechnology providers for the first time opens a new growth channel for vendors

SWOT Analysis - Continued

■ Low PC penetration means there is scope for vendors to tap first-time buyer market

as well as the upgrade/replacement market Due to low penetration desktop andnotebook sales continue to increase despite competition from tablets

■ Low-cost tablets are proving popular with consumers, with significant medium-termsales growth potential as incomes continue to rise

■ Vietnam is a popular destination for software development and IT servicesoutsourcing, with particularly strong growth potential from Japanese enterprises thatare turning away from Chinese based providers

■ National IT Plan will drive sector development, as well as public spending on ITutilisation in areas such as e-government, e-taxation and education

■ Small- and medium-sized enterprises have much potential to increase spending onbasic solutions, including customer relationship management and security

■ The government's drive to create an IT services industry over the next 1520 years including the NATIF fund - is expected to be accelerate the development of localenterprises

-■ Cloud computing awareness has risen fast and adoption is expected to acceleratethrough 2014 and 2015, with virtualisation expected to be a significant growth trend inthe short-to-medium term

Threats ■ Low-cost tablets from own-brand Chinese vendors a particular threat to low- and

mid-range notebook vendors Falling prices may further undermine margins andprofitability after steep discounting

■ Cybersecurity issues could undermine confidence in IT solutions and services, withbig data and cloud computing vulnerable

■ Yen depreciation has hit the software outsourcing market by making exports lesscompetitive and eroding Vietnam's cost advantages

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the coming years The one-partysystem is generally conducive to short-term political stability

■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive stance over disputed islands in the South China Sea

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 6.5% annually between 2000 and 2014

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 17.2% in 2012

■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports anddiversify its export sector

Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global

economic uncertainties The fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high

Opportunities ■ WTO membership and the ASEAN economic integration in 2015 should give Vietnam

greater access to both foreign markets and capital, while making Vietnameseenterprises stronger through increased foreign competition

■ The government has continued to move forward with market reforms, includingprivatisation of state-owned enterprises, addressing the high level of bad loans in thebanking sector as well as liberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 32% of the population in 2013 to more than 50% by theearly 2040s

Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam

on this front could result in a decline in investment

■ The potential for an escalation of political tensions with China over sovereign claims

to parts of the South China Sea could have a negative impact on the economy

SWOT Analysis - Continued

■ Market reforms could progress at a much slower pace as the government remainscautious about ceding ownership to foreign investors

Operational Risk

SWOT Analysis

Strengths ■ Vietnam has a high number of university graduates with skilled degrees and a high

literacy rate for its income level

• In addition to a number of regional and international flight options, Vietnam has anextensive inland waterway system

• Growing levels of foreign investment encourage further trade and spin-off industries

• Vietnam's rate of violent crime is generally low, and foreigners are unlikely to betargeted

Weaknesses ■ High labour costs increase overall operating costs, and difficulty in hiring foreigners

creates shortages of skilled labour

• Underdeveloped rail capacity overburdens the road network

• An underdeveloped banking sector decreases the options for keeping money in thestate

• Vietnam's military forces are only a quarter the size of China's, meaning that Beijingwould probably prevail in any naval battle over maritime disputes in the South ChinaSea

Opportunities ■ Explosive growth in demand for tertiary education will increase the number of highly

skilled graduates in the medium term

• Vietnam is easily accessible from the main shipping routes, and growth in the number

of port facilities will provide adequate capacity

• Increased foreign participation in the banking sector will increase the availability offunds for loans

Threats ■ Dysfunctional labour-management relations increase the risk of disruption and strike

action

SWOT Analysis - Continued

• Vietnam's reliance on imported oil poses risks in the form of energy and fuelshortages

• Corruption and inefficiency in the legal system

• Anti-Chinese violence, as seen in May 2014, could be a harbinger of wider politicaland social unrest

e/f = BMI estimate/forecast Source: BMI

BMI upgraded the forecast for IT spending in Vietnam in 2015 in the Q315 update after local retailers

reported very strong sales in the retail market in H115, particularly in the Tet New Year holiday season.This is strengthened by our long-held view that the Vietnamese IT market holds the potential for medium-term outperformance, in the Asia Pacific region and globally We derive our bullish outlook from thesupportive government policy environment, our in-house Country Risk team's view for robust and broadbased income growth, declining device prices at the global and regional level, enterprise modernisation andthe shift towards higher productivity activities such as manufacturing and outsourcing, Vietnam's large andgrowing population, and finally investments in telecoms and retail infrastructure

The IT market in Vietnam is relatively undeveloped compared to most Asia Pacific markets, but as itoutperforms with rapid 'catch-up' growth the IT sector will account for a growing share of GDP over theduration of our five-year forecast to 2019 We also highlight the development of Vietnam's local IT

industry, with software development and outsourcing services firms developing rapidly and positioned to

the IT market in Vietnam will expand at a compound annual growth rate (CAGR) of 11.6% forecast for2015-2019 and the market expected to reach a value of almost VND103.4trn in 2019.

e/f = BMI estimate/forecast Source: BMI

2015 Outlook: After a tightening of credit conditions in Vietnam in H214 saw retail spending slow, retail

hardware spending in 2015 accelerated in a stronger economic climate, with an added boost from deferredpurchases in 2014 While our core scenario is for robust growth in IT market spending in 2015, there isdownside risk for further credit tightening, a traditional drag on market development in Vietnam, thoughone which had become a less significant factor as a result of partnerships between banks and retailersformed in 2013 Further tightening is not however our core scenario, with the wider Vietnamese economystill on track to record strong growth We forecast real GDP growth of 6.4% in 2015 and real growth ofprivate final consumption of 6.5%, growth rates that will support a buoyant retail hardware market given therelatively broad based complexion of economic growth in Vietnam

We forecast the PC market trend from 2014 will continue into 2015, with growth forecast for desktop,notebook and tablet shipments as rising incomes and declining device prices promote first-time buyer and

upgrade sales Reports from retailers in H115 indicate sales grew even faster than our forecast in the Q215update, resulting in a hardware spending growth forecast upgrade to 10.1% in 2015 in local currency terms.Tablets will again see strong growth, extending the trend dating back to the influx of low-priced Chineseown-brand tablets in 2012 that deepened the market Meanwhile, notebook sales are recovering after theinitial impact of the tablet boom, aided by lower prices There was also evidence in 2014 that hybridnotebooks carved out a niche and by H214 were beginning to challenge tablets by offering multi-use cases,

a potentially significant trend in emerging markets where consumers are focused on value for money morethan the fashion cache of tablets However, hybrid notebook prices remain sufficiently elevated to precludemass market appeal in 2015 in Vietnam, where incomes are still heavily weighted towards the low end

Government demand is becoming a more important source of sales to IT market vendors, and BMI expects

an extension of this trend in 2015 The Ministry of Information and Communication's released a proposal inAugust 2013 to allocate at least 2% of the state budget to boosting the IT sector each year The government

is actively promoting IT market development in several areas including PC subsidy programmes, licensingsoftware used by government agencies and enabling state agencies to use outsourced information

technology providers for the first time in 2014

Another important role of the government is in promoting the development of local IT industry in Vietnam

An important component is the government's Hi-Tech Park policy, which was extended in June 2015, withnew parks set to be constructed between 2015 and 2030 through a combination of central governmentdirection, local government funds and private capital Investors in Vietnam's Hi-Tech Parks benefit from acorporate tax rate of 10% for the first 15 years, plus a complete exemption from corporate income tax in thefirst four years and a 50% reduction for the subsequent nine years In addition to creating new parks, it alsoplans to further develop existing facilities including Hoa Lac Hi-Tech Park in Hanoi City, Saigon Hi-Tech

Park in Ho Chi Minh City and Danang Hi-Tech Park BMI expects the growth of Hi-Tech Parks will

generate demand for IT products and solutions directly, as well as contributing to the broader dynamic ofeconomic modernisation.these p

In terms of the enterprise sector in Vietnam, the outsourcing market continues to develop rapidly, anddomestic demand for outsourcing services should be boosted in 2015 by the government decision to allowpublic authorities to outsource IT functions from February 2015

Drivers: Positive economic fundamentals over the medium term and declining device prices will drive

retail hardware market growth Another supporting development is the investment taking place in the

upgrading capacity of urban infrastructure and improving backbone networks Additionally, telecoms

operators such as Viettel are emerging as significant distribution channels for notebooks as vendors seek

tie-ups In a country where PC penetration remains low, particularly in rural areas, government digitaldivide programmes to boost internet and digital utility in rural areas underpin addressable market growthand open PC ownership to a growing number of rural inhabitants

BMI's income stratification forecast provides additional insight for vendors operating in Vietnam's retail

hardware market We expect economic growth in Vietnam to be relatively broad base, with all incomegroups forecast to record income growth at a CAGR of 12% or more 2015-2019 However, we caution that

as a frontier market, incomes are very low for the majority of the population We expect the middle 60% ofVietnamese will have average incomes of USD1,423 in 2019, up from USD869 This is strong growth butwill predominantly boost demand for low-end and mid-range computing devices

In the Q315, update we introduced an analysis of household income distribution and medium term growthtrends This clearly illustrates both the low income status of the Vietnamese economy in 2015 and the hugemigration of households to higher income levels envisaged by our in-house Country Risk team 2015-2019

(see chart below) In 2015, BMI estimates 82.6% of Vietnamese households had incomes of USD5,000 or

less - the level at which we consider them external to the retail hardware market due to a lack of purchasingpower in global markets - one of the highest in the region

We expect there to be far-reaching change over the medium term, with nearly 5.5mn households forecast torise above USD5,000 annual income by 2019, reflecting the broad based nature of economic growth inVietnam This will be of huge benefit to retail hardware vendors as households acquire their first PCs andindividuals begin to acquire personal devices The outlook is one of the strongest globally for a deepening

of the mass market, and is key to our view for Vietnam IT market outperformance over the medium term Itshould additionally be noted that broad based economic growth is derived from the government promoteddevelopment of higher productivity economic activities such as electronics manufacturing and outsourcing,which will deliver opportunities for enterprise focused IT vendors

Vietnam Household Income Distribution (%) LHS And Change ('000) RHS

2015f (LHS) & 2015-2019f (RHS)

f = BMI forecast Source: National sources, BMI

Investment in networking infrastructure, including international connectivity, will catalyse faster adoption

of cloud computing services over the medium term In March 2015, VMWare reported the results of its

virtualisation survey found that 91% of Vietnamese enterprises expected to virtualise at least 30% of their

IT infrastructure in the next two years VMWare estimates that cloud adoption is growing faster in Vietnamthan the wider region as a result of an absence of legacy on-premises systems due to Vietnam's late-

developer status Meanwhile, in May 2015 Malaysia-based high-speed broadband and datacentre operator

TIME dotCom has agreed to acquire 25% of Vietnamese telecommunications infrastructure company CMC Telecom for USD12mn TIME dotCom owns and operates high-capacity cable systems linking Malaysia with numerous neighbouring countries and the global Internet while its Global Transit

subsidiaries offer international bandwidth services across the Asian region BMI believes the acquisition

will help to accelerate improvements in Vietnam's international connectivity, which will be a boon toVietnam's emerging broadband and cloud computing services markets

The government is a major supporter of the development of the IT market in Vietnam through policyinitiatives and financing Policies include promoting the use of IT by government agencies, citizens andenterprises - as well as promoting the development of local industry, particularly in software and

(NATIF) in early 2015, with VND1trn (USD50mn) of registered capital The government has set NATIFthe goal of fostering innovation and promoting commercialisation in the technology sector The areas thatwill be provided funding include IT, new materials research, biotechnology and automation.

A specific IT development initiative is the government's drive to grow the IT services industry over the next15-20 years The initiative is off to a strong start - in March 2015 Vietnam was awarded first position in theworld outsourcing location rankings in annual research from Cushman & Wakefield Vietnam moved ahead

of China based on growth of its software development industry, but India remains the world's largestbusiness process outsourcing (BPO) destination The momentum that could be garnered from Japaneseenterprises shifting business process and software development outsourcing to Vietnam could see medium-term increases from European and North American demand Meanwhile, with a report from Grant ThorntonInternational stating that only 12% of enterprises in Vietnam are open to outsourcing, there is also hugegrowth potential domestically - particularly after the Prime Minister of Vietnam enabled state agencies touse outsourced information technology providers for the first time in February 2015

However, growth will depend on government progress on various business environment issues, includingcopyright protection and combating cyber security threats Further progress in combating software piracy,which is still reported to be at higher levels than in China, India and Thailand in 2013, and progress seems

to have stalled since 2011 It is also taking steps to increase the penetration of information security

certification by distributing funds to enterprises and in September 2014 the Department of Network Securitywas officially opened in Hanoi, with the remit of securing Vietnam's internet traffic The key focus is oncomprehensively improving the standards of network security officials and officers However there are

elements of the remit that have concerned political risk analysts (see Regulatory Developments section).

Segments: As a developing market with a large agricultural sector, BMI believes there to be considerable

scope for vendors to market productivity-enhancing products and solutions The agricultural sector

accounted for an estimated 18.7% share of GVA in 2015 - a figure BMI expects to increase marginally to

19.2% in 2019 - and its share of labour is considerably higher Mobile operator Viettel is a world leader inpioneering smart agricultural products, including IT services such as information packages about produceprices, disease warning, weather reports and analysis of coffee and cashew nut markets These productsgenerated VND7bn a month in revenue - a far higher figure than that generated from the much hyped gameapplication development market The success of Viettel's model has attracted interest from IT services

providers, for instance Hanel has stated its intention to develop smart agriculture products BMI expects the

agriculture vertical in Vietnam has medium-term growth potential as vendors innovate real-time updates forproducers

Large Vietnamese companies are the most likely to buy packaged software from multinationals, which haveonly around 25% of the local software market In the large corporate sector, growing demand for digitalinfrastructure projects in segments such as banking, telecoms and energy has attracted global IT services

leaders, such as IBM, to invest in Vietnam Foreign investment, particularly by Japanese companies, in call

centres and other areas will help to grow the market

Large state enterprises are also increasing spending on IT products and solutions, a trend that shouldcontinue over the medium-term For instance, in August 2014 FPT won a major IT services contract for the

development of a new ticket distribution system for the Vietnam Railway Corporation FPT will build a

modern e-ticket distribution system, enabling customers to purchase tickets either online, via email orthrough sale agents The project is expected to take place over seven years, with three development stages,and a total cost of around VND200bn

Vietnam GVA By Vertical (%)

2015f

f = BMI forecast Source: National statistics, World Bank, UN, BMI

Meanwhile, smaller enterprises have a lower penetration of enterprise software, including ERP and security

market is an area of the market in which vendors can achieve growth as SME awareness of the benefits of

IT utilisation increase, encouraged by government initiatives to modernise firms and improve internationalcompetitiveness However, vendors will have to face the challenge of enterprises that are constrained bylow budgets and lack of access to credit Promising SME verticals include discrete manufacturing andconsumer packaged goods, as well as hotels and property management The solution areas with mostdemand currently include security software and key applications such as customer relationship

management, enterprise resource planning and human resources management

Macroeconomic Forecasts

Economic Analysis

BMI View: We hold a positive view of the Vietnamese economy on the back of rising foreign investor

interest, continued efforts by the government to improve the country's business environment, and the potential for greater private sector participation As such, we maintain our forecast for real GDP growth of 6.4% in 2015, up from 6.0% in 2014.

In line with our positive outlook for the Vietnamese economy, real GDP growth came in at 6.0% year (y-o-y) in Q115 While the latest reading represented a slowdown from the 7.0% headline figure in theprevious quarter, the economy nevertheless remains on a very strong growth trajectory The Q115 real GDPgrowth number also surpassed the Bloomberg consensus estimate of 5.7% Looking ahead, we expect theeconomy to continue growing robustly, on the back of greater foreign direct investment (FDI) inflows andongoing efforts by the government to improve the country's business conditions Some of these effortsinclude privatising the state-owned enterprises (SOEs), strengthening the banking sector and ensuring thatinflation remains manageable over the coming years Owing to a solid start to the year, which has

year-on-undoubtedly reinforced our bullish view of the Vietnamese economy, we maintain our forecast for thecountry's real GDP growth to accelerate to 6.4% in 2015 from 6.0% in 2014

Strong Growth Trajectory

Vietnam - Real GDP Growth, %

2007 2008 2009 2010 2011 2012 2013 2014 2015f

0 2 4 6 8

e/f = BMI estimate/forecast Sources: BMI, GSO

Broad-Based Growth Across Various Key Sectors

From a production perspective, the strong showing in the first quarter was rather broad-based In theindustry category, which accounted for 30.3% of nominal GDP in Q115, the manufacturing sector grew by

a robust 9.5% y-o-y, while construction growth came in at 4.4% y-o-y We expect the manufacturing sector

to remain a key driver of growth over the coming quarters The still relatively low labour costs in thecountry despite the recent wage hike, the generous tax incentives the government has to offer, as well as theready supply of a young and dynamic workforce will greatly entice foreign manufacturing firms to investand set up their production plants in Vietnam In a sign that the manufacturing sector has the capacity tosustain its current strong growth momentum, the Purchasing Manager's Index (PMI) came in at 50.7 inMarch, marking the 19th consecutive month of industrial output expansion (PMI figure above 50 representsexpansion)

19 Straight Months Of Expansion

Vietnam - Purchasing Managers' Index (PMI)

Source: Bloomberg, BMI

Relaxation Of Foreign Property Ownership Rule A Catalyst For Greater FDI Inflows

At the same time, we believe there is also strong upside potential for the real estate and construction sectors.The easing of foreign property ownership rules, due to take effect from July 2015, will allow greater foreign

participation in the country's property market, which has struggled over recent years (see 'Easing Of

Foreign Property Ownership Rules A Positive Step Forward', December 2, 2014) Looser monetary policy

by the State Bank of Vietnam (SBV) amid rapidly falling inflation (we are forecasting a total of 50 basispoints (bps) worth of cuts to the refinancing rate, taking it to 6.00% in 2015) would lend support to theproperty and construction sectors Meanwhile, regarding the other major categories, the services sector rose

by 5.8% o-y while the smaller 'agriculture, forestry and fishery' category posted positive gains of 2.1% o-y

y-Rapid Inflation Declines Provide Room For Further Easing

Vietnam - Headline Inflation, % chg y-o-y

Source: BMI, GSO

Strong Growth, Stable Inflation Work Wonders For Investor Confidence

Continued efforts by the Vietnamese government to foster macroeconomic stability will also help thecountry to attract greater foreign direct investment (FDI) inflows, and hence accelerate gross fixed capitalformation (GFCF) growth over the coming quarters and years We forecast GFCF to grow by 12.0% in realterms in 2015 from an estimated 9.5% in 2014 Indeed, following several economic missteps wherein thegovernment was fully focussed on boosting real GDP growth at the expense of inflation, efforts by theadministration to work towards achieving a balance between the two have since yielded positive results.The economy is currently resting on a growth-inflation sweet spot, with consumer price inflation (CPI)coming in at just 0.9% y-o-y in March (in part owing to the slump in global oil prices) versus the peak of23.0% in August 2011 Price stability and positive economic growth prospects will lend support to theVietnamese dong The confluence of these factors will restore and shore up investor confidence, enhancingVietnam's attractiveness as a place to invest and do business in

Improving Macroeconomic Fundamentals To Lend Support

Vietnam - Exchange Rate, VND/USD

Source: Bloomberg, BMI

Vietnam's Rising Stature As An Attractive Place For Investment

While total registered capital of newly licensed projects contracted 14.3% y-o-y to USD712.3mn in the firsttwo months of 2015 despite the 85.8% y-o-y increase in January, we believe the weak February

performance will likely be transient Informing our still positive outlook for investment growth are thereported plans by several large foreign enterprises to develop big projects in the country in 2015 Notably,

Samsung (one of the leading foreign investors in Vietnam) has plans to invest in energy, shipbuilding and

other infrastructure developments in the country through its various subsidiaries, with total investmentreported to be around USD20.0bn It is also looking to expand its mobile phone production capacity over

the coming quarters In addition, another multinational company, Procter and Gamble, will expand its

footprint in Vietnam through setting up a USD100.0mn factory at the Vietnam-Singapore Industrial Park inthe Binh Duong province that will manufacture razors for its Gillette brand

SOE Reform To Crowd In The Private Sector

The government has also sent a strong signal to investors that it will seek to accelerate the privatisation ofSOEs For instance, a working group will be established to simplify the privatisation process, while the list

of state companies that will be selling government shares and the size of those share sales will be madepublic in a bid to attract foreign investors Crucially, we believe continued efforts to reform state enterprises(which have burdened the banking system with a large amount of bad debts) will improve the health ofdomestic banks, and at the same time free up resources that can be re-allocated to the private sector

Considering that Vietnam is running a current account surplus despite suffering from a fiscal shortfall, thisimplies that the private sector has a large pool of savings Unlocking these savings would result in greaterprivate sector participation in the country's economic development, providing an immense boost to growthover the long term

Table: Economic Activity (Vietnam 2010-2019)

2010 2011 2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f

Nominal GDP, USDbn 112.9 134.6 155.5 170.4 185.8 199.3 220.6 248.4 280.0 314.9

GDP per capita, USD 1,267 1,496 1,712 1,859 2,007 2,133 2,341 2,616 2,925 3,266

Industry Risk Reward Index

BMI's IT Risk/Rewards Index has been updated for Q315, incorporating the latest macroeconomic and

industry data Although a number of countries saw minor revisions to their scores in various categories,these have had no impact on their ranking relative to one another Singapore and Hong Kong lead thefield; Vietnam and Sri Lanka continue to languish at the bottom The most significant change to the Indexthis quarter is the addition of Japan to our analysis, extending our coverage to 13 markets Unsurprisingly,

as one of the largest producers of advanced technology, Japan scores very highly and enters the Index infirst position

As we have remarked in the past, high-spend markets that are home to large international companies tend tofare best, relying on established connectivity to support ongoing growth Emerging economies suffer fromweaker telecommunications infrastructure, which underpin the growth of IT services in particular

Consumers and companies may own hardware without the requirement of internet access, but it is datausage that supports much of the ongoing growth of the IT market

It is therefore no coincidence that Sri Lanka remains at the bottom of our indices, below Vietnam Whileboth have vibrant mobile markets, the broadband sectors lag behind in both countries Mobile broadbandservices offer some opportunities but the markets' growth will be towards the end of our forecast period.Both are starting from a low base of PC penetration, and weak consumer spending capability compared withregional peers also limit prospects These markets still require hardware growth to take off in order toencourage the growth in IT services and software that denote more developed IT sectors

India, the Philippines and Thailand hold similar scores India and the Philippines in particular have

generated strong revenues from business process outsourcing (BPO) Although the spending on theseservices largely takes place in other markets, the development of BPO sites requires spending on hardwareand software in the local market to support the development of these platforms India's IT market hasboomed, but largely as through selling services overseas

Thailand has benefited from investment in data centres by several international companies and local usershave turned to cloud computing quickly Although the segment remains comparatively small, it will drivemuch of the overall market growth, starting from a low base Thailand pulled ahead of its lower rankedpeers with a brightening economic outlook and greater political stability combining to improve the country's

India saw no change to its score with the country remaining one of the key global BPO destinations.However, IT spending among local companies remains low and the country's limited reach of PCs meanshardware does not exist in many regions to support the growth of IT services The trend is similar in thePhilippines, which has built a strong BPO presence also, but lacks India's scale The internal market for ITservices is weak in both countries although companies present in the markets have increased spending ontechnology.

As seen in the emerging market economies of our Asia Pacific Risk Reward Indices there is growingdemand for cloud computing among small- and medium-sized enterprises (SMEs) in order to cut costs andintroduce technology in a cost-effective manner Indonesia in particular has encouraged the growth in datacentres to serve international companies and drive more investment into IT services In all cases, a lack ofhardware in smaller companies limits the reach of these products As desktops and notebooks are madeincreasingly affordable, enterprises will spend more on IT service products

In the centre of the table, Malaysia is separated from Indonesia by more than four points, marking a

considerable difference in outlook Only China joins Malaysia in the top half of the table with China's sheerscale the key determining factor in its high position China shares the characteristics of its emerging marketpeers - low PC penetration, limited spending on IT services - but the large government sector and growinginterest in developing businesses in the country encourage greater spending By adding Japan to the

analysis, the regional averages have been raised and China only just attains the new industry average scorefor the region, of 57.3 points

The large 11.3-point gap between the top five markets and China, the highest-ranked emerging market,reflects the maturity of IT development in Japan, Singapore, Hong Kong, South Korea and Australia Thesecountries have high PC penetration rates with growth over 2011-2014 focused on tablets sales as additionaldevices rather than alternatives to notebooks IT services and software comprise the bulk of enterprisespending, pushing the markets' growth rates Services such as enterprise resource planning and customerrelationship management are gaining ground as companies seek to automate processes and learn from datagenerated internally

The relative position of the markets is based principally on the size of the economies, and the ease ofreaching businesses City states Singapore and Hong Kong have a number of advantages in this, allowingthem to place highest in our Index Japan, too, is highly urbanised, yielding a very high Country Rewardsscore and it is on a par with South Korea in terms of Industry Risks as both countries host numeroustechnology-dependent multinational businesses and pro-technology governments

Japan's Country Risks score is lower than those for Singapore and Hong Kong, and this is linked to its lessattractive economic growth outlook Our Country Risk team has a bearish 2015 real GDP growth forecast of0.8% (compared with consensus expectations of 1.0%); Japan is facing upside risks as the economy appears

to be slowly emerging from recession The ongoing decline in oil and gas prices should provide significantsupport for Japan's manufacturing industries, while incipient reforms as part of Prime Minister Shinzo Abe's'Third Arrow' initiative are boosting corporate profitability These positive developments could help Japanstave off the worst-case scenario of a fiscal and financial crisis, allowing the economy to 'muddle through'over the coming years That said, woeful demographics, huge levels of fiscal debt, and excessively easymonetary policy will prevent any sustainable acceleration in real GDP

Table: Asia Pacific IT Risk/Reward Index - Q315

Rewards Risks Country Industry

Rewards Rewards Country Industry Risks Country Risks IT Score Rank Previous Rank

Market Overview

Hardware

BMI upgraded the IT hardware spending growth outlook for Vietnam in 2015 to 10.1% annual growth in

the Q315 update after local retailers reported very strong sales growth in H115, particularly around the TetVietnamese New Year holidays This has helped to strengthen our view that the Vietnamese hardwaremarket will be a regional outperformer in terms of spending growth in 2015 and over the medium term Acombination of low penetration rates across all PC device categories, with strong broad based economicgrowth forecast, which will increase disposable income for households to spend on PCs

The hardware market is forecast to stay on a strong growth trajectory over the medium term, with a CAGR

of 9.2% forecast for 2015-2019 in local currency terms A host of favourable trends including rising

incomes, declining device prices, enterprise modernisation and ongoing investments to upgrade telecoms

and retail networks are behind our bullish outlook Meanwhile, Microsoft's decision to slash operating

system licensing fees on low-cost notebooks (sub-USD250) will make notebooks more cost competitiveversus Android tablets, which is expected to translate into volume growth

There is however downside risk to our outlook for hardware spending growth in 2015 - based on tighteningdomestic credit conditions in Vietnam as a result of a build up of bad debt over recent years This has thepotential to dampen demand for PCs, which are big-ticket items for the majority of Vietnamese consumers,although not our core scenario

Market Drivers: A longer-term trend supportive of IT hardware market expansion is the spread of network

infrastructure, including fixed and wireless broadband, which is boosting demand for devices for both

productivity and content consumption Telecoms operators such as Viettel are also emerging as significant

distribution channels for notebooks as vendors seek tie-ups

Government spending has remained supportive of the IT hardware market through initiatives in sectors such

as education and healthcare It is also providing credit programmes to raise household PC penetration inrural areas, which is estimated to still be below 10%, compared with 50% in higher income urban areas Themost potential being in rural areas where penetration is lower, however for the time-being Hanoi and HoChi Minh City are thought to account for around 85% of notebook sales

Hardware Market

(2012-2019)

Personal computer sales, VNDmn Servers sales, VNDmn

2012 2013 2014e 2015f 2016f 2017f 2018f 2019f 0

20,000,000 40,000,000 60,000,000

e/f = BMI estimate/forecast Source: BMI

PC Market: BMI estimates total PC (desktop, notebook and tablet) unit sales increased 27.5% to 3.57mn

in 2014 Sales of desktops and notebooks continued to grow, with volumes boosted by rising incomes andthe low penetration rates, as well as by XP support withdrawal We estimate unit growth in all devicecategories, but it is tablets that are forecast to outperform with 86.2% growth to 1.19mn units as lower costtablets flooded the market at price points accessible for a far larger pool of Vietnamese households,

substantially deepening the market Another emerging opportunity is hybrid notebooks which we estimategrew strongly in 2014 as prices declined, based on reports from retailers

We forecast another strong year of volume growth in 2015, with unit growth of 11.8% forecast for PC sales,with the total expected to reach to 3.99mn units The main shift in 2015 will be markedly slower growth inthe tablet market due to a diminished pool of consumers in the market after strong growth in 2014, while

notebooks will account for a larger share of total sales after OS licensing fee cuts by Microsoft on low-end

devices in 2014 and the growing popularity of hybrid notebook designs

The core reason for the positive medium term outlook for PC sales in Vietnam, which is in stark contrast to

there is considerable potential for vendors to tap into the first-time buyer market in Vietnam as PC

ownership is still relatively limited Data from the regulator, the Ministry of Information and

Communications (MIC) show a base of 5.5mn installed PCs at the end of 2011, equal to individual

penetration rate of 6.1% Household PC penetration data also reflects the low level of PC ownership inVietnam, at 16% in 2011, and was estimated to be around 20% for the country as a whole by the end

of 2013 This is considerably lower than other emerging markets in Southeast Asia, reflecting the mediumterm opportunity for vendors

Given these low penetration rates there is a sizeable opportunity for vendors in terms of the first-time buyermarket However, with GDP per capita estimated at USD2,007 in 2014 and forecast to reach just

USD3,266 in 2019, vendors will need to be aware of the consumer patterns in Vietnam The poorest 20%will offer little prospect to vendors, with annual incomes forecast at around USD300 in 2015, and USD486

in 2019 There will however be growing demand from the richest 20% of Vietnamese, whose incomes weforecast to increase from USD2,750 in 2015 to USD4,493 in 2019

With a large number of first-time buyers, consumer choice in terms of form factors is uncertain Whileproductivity devices such as desktops and notebooks will remain popular for education and enterprisepurchasers, the availability of cheap tablets from China could see large numbers of consumers move straight

to tablets, and have little or no experience with more traditional form factors

There is however an opportunity for hybrid notebook devices to capture share by offering the mobilityadvantages of tablets while also meeting the broader functionality required for a sole household device.Press reports from Vietnam in 2014 indicate there was a surge in demand for lower-priced hybrid

notebooks, as price sensitive consumers are aware of the productivity trade-off from owning tablets as asole device The notebook segment received an additional boost in H114 when Microsoft announced it wasslashing operating system licensing costs on sub-USD250 devices, enabling partner vendors to competemore equally with Android tablet vendors

Looking ahead over the medium term, two factors limit the potential boost to desktop sales First is thecompetition from mobile computing, as consumers and enterprises will likely shift towards greater usage ofnotebooks and tablets when upgrading A second factor is the prevalence of pirated software in Vietnam,meaning the loss of Microsoft support for XP is less of a push factor to upgrade than in most other APACmarkets

Meanwhile, the data from retailers indicates demand for notebooks remains strong, with consumers optingfor notebooks in the VND8-10mn range, particularly university students requiring more advanced

functionality However they also reported that demand for low cost VND3-5mn tablets was strong

Vietnam PC Installed Base

2008-2011

Source: MIC

Tablets: Despite being a global leader in the tablet market, Apple - unsurprisingly given its premium price

orientation - has had limited success in Vietnam where its devices are not affordable for the vast majority ofthe population That said, it has still been able to concentrate on a large number of high-income consumersgiven Vietnam's large population, meaning it has become an important market

However, it was the proliferation of affordable tablets running Android and the entry to the market ofvendors producing Windows 8 devices that allowed the tablet market to enter a much faster phase ofgrowth In early 2013, reports of an influx of own-brand Chinese made tablets indicate growth at the lowvalue end, but we also expect price competition between international vendors to boost sales of mid-range

A victim of the surge in tablet sales will be the notebook market - especially netbooks Netbooks saw asteep decline in popularity in 2011, with a number of leading vendors, such as former netbook segment

leader Sony, withdrawing models from the market Netbooks initially suffered under competition from

lower priced notebooks, however tablets are now squeezing them further

With tablets making gains at the low end of the market the notebook category is becoming a primarily range device category in Vietnam as vendors are unable to compete against own brand Chinese tablets onprice Although notebook sales are being cannibalised by tablets, with PC penetration low in Vietnam, alarge number of first time buyers are still opting for the functionality of notebooks This has helped sustainunit growth, in contrast to developed markets where consumers are more likely to opt of tablets as

mid-supplementary devices to their existing desktops and notebooks

The release of Windows 8/8.1 has also spurred the creation of hybrid devices, which had little impact in

2013 in Vietnam as early examples are priced as premium products However price competition will reducethe cost to consumers and hybrids have emerged as a growth area in 2014, and we expect this to continueinto 2015 Windows has a traditional strength in productivity use cases and software, with the OS beingcentral to the enterprise market and Microsoft's Office Suite ubiquitous

There is therefore an opportunity for vendors to leverage this strength over rival iOS and Android devices

by designing tablets with strong productivity functionality alongside the passive media consumption

features Early examples have been hybrid devices such as Microsoft's own Surface (RT & Pro), Packard (HP)'s Envy, Lenovo Miix 2 (eight-inch), Lenovo IdeaPad Yoga 2 Pro, Lenovo ThinkPad Yoga and Dell Venue 11 Pro.

Hewlett-Although design innovation has some way to go and prices of hybrids will need to decline, the multi-usedevice has scope to capture a share of the tablet market by offering a stronger value proposition to

consumers while not compromising on user experience Such devices, along with ultra-slim notebooks, arealready regaining share of sales from tablets in more developed Asia markets in H113 - eg, in South Korea -and we believe the same phenomenon could affect Vietnam as prices decline over the medium term

1,000 2,000 3,000

e/f = BMI estimate/forecast Source: BMI

Vendor Developments: The Vietnamese PC market is surprisingly competitive, with most of the major laptop vendor players having below a 10% local market share In 2014, IDC reported that Dell maintained its leadership of the Vietnamese PC market, ahead of a strong challenge from ASUS Meanwhile, Lenovo and Acer are the third and fourth largest vendors, but some distance behind Dell and ASUS.

Volumes have benefited from retailers cutting prices and cooperating with banks to offer credit to boost

sales in mid-2013 Dienmay.com cut prices for notebooks from Dell, Sony and HP, as well as enabling

consumers to test and return or exchange products within 10 days Meanwhile Nguyen Kim cut prices on

HP, Toshiba, Acer, Asus and Sony notebooks, as well as offering free accessories worth up to VND2mn.The most important strategy for boosting sales of products from international vendors has been cooperation

with banks such as HSBC, VietinBank, ANZ and Sacombank to make interest-free credit

available However, demand in 2014 is expected to be dampened by the tighter domestic credit environment

as banks reassess in light of the high levels of bad debt in Vietnam

As already noted, ASUS has benefited from efforts to strengthen its distribution channel In 2011, ASUS

Group, which has a nationwide network of 400 dealers FTP also distributes a portfolio of other leading PC brands, including Dell, Lenovo and Acer ASUS, which first entered the Vietnamese market only three

years ago, is also focusing on service as a competitive differentiator

In July 2014, FPT was forced to refute rumours it was subject of an acquisition attempt by Apple It was

reported that Apple was considering acquisition to expand its local presence and gain a stronger foothold in

a fast growing market FPT is already a premium reseller for Apple in Vietnam, and in 2012 FPT builtF.Studio stores modelled on Apple reseller designs in developed markets

While foreign vendors dominate sales of notebook, local manufacturers have a strong position in the, albeitdeclining, desktop market Vietnam's top five computer companies, as selected by the Ho Chi Minh City

Computer Association in 2011, were FTP, CMS, Robo, Viettronics Tan Binh and the Khai Tri

Technology Trading Co The total turnover of these top five companies was around VND1tn in 2011

(USD48.1mn), down 25% from the previous year

In November 2012, local press reported dealers were pushing cheap tablets from China as a result of themargins they could generate on the devices It has been reported that wholesale dealers are able to sell thetablets for double the market price in China in Vietnam Examples include the Hipad Mid A13 and Ondan

V971, as well as other own-brand Chinese manufacturers such as Teclast and Ampe - as well as

counterfeits of foreign products

As in many other markets, telecoms carriers have also emerged as a significant channel option for PCvendors Dell has launched a partnership with Viettel, which will distribute Dell PCs Viettel has a

substantial presence in rural areas, which have big PC market growth potential, as PC penetration is

currently low Dell has also partnered with local retail leader The Gioi Di Dong to sell both online and

through the company's 40 retail outlets

Meanwhile, leading global chipset vendor Intel announced the launch of its first central processing unit

(CPU) manufactured at its factory at the Saigon Hi-tech Park in July 2014 The CPU is from the fourth'Haswell' generation of CPUs By the end of 2014 Intel stated it expects 80% of its CPU for desktopsglobally will be produced in Vietnam Intel has been producing notebook and mobile chipsets in Vietnamsince 2010, and in 2013 the company contributed around USD2bn to Vietnam's export turnover

Vietnam PC Browsing Traffic By OS (%) And y-o-y chg

June 2015

Source: Statcounter

Software

BMI forecasts software sales in Vietnam will increase 9.9% to VND9.86trn in 2015, a slight deceleration

from 2014 when software sales were boosted by the withdrawal of official support by Microsoft for

Windows XP We expect strong growth will be maintained over the medium term with compound annualgrowth rate (CAGR) of 12.4% 2015-2019, with total software spending expected to reach VND16.13trn in2019

Market Trends: The Vietnamese software market is cost-sensitive, with around 75% of the market served

by lower-cost local software vendors Local software is particularly dominant in the market for governmentand small- and medium-sized enterprise (SME) segments However, larger Vietnamese companies are morelikely to buy higher-priced software from multinationals, which have around 25% of the market

Vietnamese customers are demanding a higher level of support for software compared with a few yearspreviously Another reflection of the price sensitivity of end-users is the fact Vietnam is home to a high