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DBS Group Research • November 2017DBS Asian Insights54n

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SECTOR BRIEFING

Data Centre & Cloud: Divestments and M&As

to Accelerate in 2018

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DBS Asian Insights SECTOR BRIEFING 5302

Data Centre & Cloud: Divestments and M&As to Accelerate in 2018

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Goh Chien Yen Editor-in-ChiefJean Chua Managing EditorGeraldine Tan EditorMartin Tacchi Art Director

Sachin MITTAL Telecom, Media and Technology AnalystDBS Group Research [email protected]

Tsz Wang TAM Telecom Media and Technology AnalystDBS Vickers (Hong Kong) [email protected]

TOH Woo Kim Telecom, Media and Technology AnalystAllianceDBS Research [email protected]

Chris KO CFAEquity Research AnalystDBS Vickers (Hong Kong) [email protected]

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Executive Summary

Introduction

DC Market in AsiaSingapore: Oversupply Till 2018

Hong Kong: Right Supply for Rising Demand

Australia: Oversupply in Key Markets

Indonesia: Favourable Demand-Supply Dynamics

Malaysia: Oversupply May Lead to Consolidation

Thailand: Supply Could Outstrip Demand in the Future

India: Balanced Demand and Supply Dynamics

Theme 1: Telcos divesting DC assets

Theme 2: Private cloud players moving into (i) Cloud ancillary services and (ii) Industry-specific solutions.

mid surging growth in the public cloud market and changing dynamics of data centre (DC) businesses, we explore three emerging trends in the DC and cloud markets.

• Indonesia – top-tier DC players secure double-digit return on invested capital (ROIC), higher than the rest of the region. Based on our estimates, we believe that Indonesia offers the best ROIC in the region coupled with favorable supply-demand dynamics. Australian DC operators, on the other hand, recorded the lowest ROIC in the region due to the high cost of acquiring facilities in key metropolitan areas, and pricing pressure on rentals due to oversupply. Singapore, the largest DC market in South-East Asia, offers moderate ROIC and new supply is set to enter the market at a much reduced pace over the next 24 months.

• Telcos are better off divesting their DC assets. DC assets have traditionally been undervalued by being pooled in with telecommunication companies (telcos). The better cashflow visibility and more focussed operations of DC businesses have resulted in pure-play DC operators being valued by investors over DC assets run by telcos. Pure-play DCs are typically valued at 20-25X EV/EBITDA whereas telcos tend to be valued at 5-10x EV/EBITDA. In more mature markets such as the US, telcos have begun to divest their DC businesses in a bid to realise the true value of DC assets. Funds released from DC operations will potentially be diverted to enable cloud services or invested in high-growth areas such as Big Data analytics.

Executive Summary

A


Diagram 1. Indonesia – attractive returns for top-tier retail DC operators

Source: DBS Bank

Return on Invested Capital

Country Retail DC Wholesale DC

Singapore 9.5% 7.2%

Hong Kong 7.0%

Australia 3.8% 5.1%

Indonesia 11.6% -

Malaysia 7.1% 6.9%

Thailand 8.2% -

India 6.4% -

• Private cloud players moving to cloud ancillary services and industry-specific solutions. With more and more corporates adopting public cloud services, the share of new business going to private cloud is slowing down, encouraging private cloud players to expand into new areas. Telcos could leverage their cloud expertise to provide ancillary cloud services such as Cloud Security services, multiple cloud management, and cloud monitoring services to benefit from the booming demand for cloud services. The key challenge in offering cloud security services is low operating margins due to high R&D costs, coupled with high staff and marketing costs. Multiple cloud management services are in high demand due to the constantly changing nature of public clouds but retaining these experts can be a challenge too due to the high demand. Cisco’s acquisition in March 2017 of AppDynamics, a company which allows companies to monitor the performance of applications in real time, reflects the importance of cloud monitoring services. Telcos could also consider partnering with large-scale cloud service providers to provide backup and continuity solutions. Players like IBM have also started to specialise in the provision of industry-specific solutions.

Publ

ic C

loud

Smaller players looking for alternatives

Cloud Security Strategic areas for Telcos

Cloud Security

Backup and Continuity

Cloud Integration

Cloud Integration

Cloud monitoring

Cloud Storage Solutions

Backup and Continuity

Ancillary Cloud services and Vertical Specific Solutions are

top candidates


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Diagram 2. Potential impact of DC divestment at 15x-20x EV/EBITDA on the share price

Diagram 3. Private cloud players moving to cloud ancillary services

Source: DBS Bank

Source: Companies, DBS Bank

Return on Invested Capital

Country Retail DC Wholesale DC

Singapore 9.5% 7.2%

Hong Kong 7.0%

Australia 3.8% 5.1%

Indonesia 11.6% -

Malaysia 7.1% 6.9%

Thailand 8.2% -

India 6.4% -

DC Space (sqft) Potential Share Price Impact

Singtel 1,375,000 5% - 7%

Telekom Malaysia 200,000 5% - 9%

Telekomunikasi 1,076,390 2% - 3%

XL Axiata 219,580 6% - 9%

PCCW 400,000 6% - 10%

Citic Telecom 135,000 8% - 12%

Time DotCom 59,755 0% - 4%


ublic cloud is increasingly adopted in developed markets such as the US and Europe amid easing concerns surrounding security and expansion of services that better fit large-scale enterprises. For example, 48 of Fortune Global 50 companies have publicly announced plans to integrate cloud into their operations. A recent cloud computing

survey by the consultancy firm, Bain 1in the cloud from 1% in 2010 to 16% by 2015, spending over US$17b in the process. Hybrid cloud adoption has also improved over the past year, rising from 19% in 2015 to 57% in 2016, according to a survey conducted by the security service provider, McAfee2.

Amazon Web Services continues to lead the public cloud market with a market share of 34%, according to the Synergy Research Group3. Microsoft and Google come in at distant 2nd and 3rd places with market share of 11% and 5%. In terms of cloud infrastructure, private cloud is expected to record plateauing growth over the short term. According to Cisco4, only 32% of cloud workloads will be run on private clouds by 2020, down from 51% recorded in 2015.

Against this backdrop, we explore the ROIC of DC operations in key Asian markets and other key emerging trends in the global DC market. We are seeing more telcos divesting their DC businesses as they face intense competition in local markets from global DC operators. We believe that by doing so telcos could also unlock the true value of their DC assets which remain undervalued compared with pure-play DC operators. Secondly, we examine how private cloud operators have shifted their focus from the provision of private cloud services to focus on cloud ancillary services catering to hybrid cloud implementation and maintenance in addition to the development of high-value-adding industry-specific solutions.

Diagram 4. The interplay between data centres and cloud services

Introduction

PEvolution of Data Centres – US is at Stage 3; Asia is at Stage 2 transitioning to Stage 3

Source: DBS Bank


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Singapore: Oversupply Till 2018

Singapore’s DC market is driven by international demand, which makes up 65-75% of total demand5. The city is increasingly being chosen as the most preferred location in Asia by major information-technology services, infrastructure and outsourcing providers. In fact, Singapore accounts for ~60% of DC capacity in the South East Asia region, according to the BroadGroup Consulting Group6.

Singapore’s DC market is expected to grow 9% from an estimated US$811m (S$1.1b) in 2016 to US$884m (S$1.2b) in 2017, according to Structure Research7. The research firm expects the DC market in Singapore to generate US$1.2b (S$1.6b) by 2020, recording a compound annual growth rate (CAGR) of ~9% over 2016-2020.

There was about 248.5 megawatts (MW) of supply across roughly 50 DCs in Singapore at the beginning of 20168 and at least six new DCs were completed in 2016, including the 1-Net North DC, DC West by Singtel, and DCs by ST Telemedia, Telin, and Digital Realty adding close to 100MW in capacity. According to the BroadGroup Consulting9 Group, close to ~100MW of DC capacity will be added from 2017 to 2020, with demand increasing ~106MW over the same period. Whilst supply additions are expected to exceed demand in 2017 with resultant dips in utilisation, demand is expected to overtake supply from 2018, restoring balance in demand-supply of DC capacity.

Diagram 5. Key DC operators in Singapore

DC Market in Asia


Company Country of Origin Floor Area (sqft)

Singtel Singapore 1,375,000+

Equinix USA 370,000+

Global Switch USA 270,000+

Keppel DC REIT Singapore 196,000+

Digital Realty USA 547,000+

Ascendas REIT Singapore 889,000+

AIMS Malaysia 45,000+

Cyxtera USA 88,000+

ST Telemedia Singapore 220,000+

Racks Central Singapore N/A


Increased compliance requirements on data security from the financial industry, as well as exponential growth in data storage and management in a digital economy, should underpin medium-term growth. Availability of high-quality facilities at competitive prices has also motivated enterprises seeking better DCs or migrating from ageing facilities.

Due to the asset-intensive nature and stable rental properties, DC ownership generally carries relatively moderate yields. Keppel DC REIT, for example, generates a ROIC of ~7% from its two wholesale DCs and one retail DC in Singapore.

Wholesale operators enjoy better margins compared to retail DC operators as wholesale lease agreements are often structured in a manner in which the tenant bears costs of power, utilities, and other direct maintenance expenses.

Wholesale operators also enjoy higher utilisation of their facilities whilst utilisation rates of retail operators depend on aspects such as competition, quality of the facility, and other services on offer. At higher levels of utilisation (>80%), retail operators tend to enjoy better ROIC than wholesale operators. Hence, based on average ROIC differentials between retail and wholesale operators in regional markets, we estimate that retail DC operators in Singapore may enjoy 2%-3% higher ROIC than wholesale DC operators.

Hong Kong: Right Supply for Rising Demand

Hong Kong is set to be one of the major DC hubs in Asia. It is a gateway for Chinese internet and multi-media content providers as well as telecom operators to connect to the rest of the world. The city is one of the few locations in Asia that has (i) a safe

Diagram 6. Return on Investment relatively low on Keppel DC’s Singapore DCs

* Carrying values of the properties as of 31 December 2016 of the properties have been considered as Invested Capital. REITs are not subject to corporate taxes. Exchange Rate – US$ 1 = S$ 1.367

Source: Company, DBS Bank

In US$m 2015 2016

Invested Capital* 332 333

Lettable Area (in sqft) 146,462 146,809

Gross Revenues 30.6 30.1

Average Occupancy 89.3% 88.6%

Revenue Per Sqft 234 232

EBIT Margin 80% 80%

Operating Income 24.4 24.1

ROIC 7.4% 7.2%


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environment sheltered from natural disasters, (ii) reliable and stable supply of electricity, and (iii) advanced telecom infrastructure.

Overall DC supply in Hong Kong is constrained by the limited supply of land in Hong Kong. There are mainly two sources of DC supply in Hong Kong, namely (i) conversion of old industrial buildings and (ii) greenfield DC projects. According to Innovation and Technology Bureau (ITB) of Hong Kong Government, DC capacity will increase by 32% to 7.1m sqft in terms of Gross Floor Area (GFA) by the end of 2017 from 5.4m sqft by the end of 2015, thanks to the completion of a number of government-supported greenfield projects. The government has two dedicated land parcels with GFA of c.500k sqft each in Tseung Kwan O for auction in 2018. We believe that the supply will come into the market in 2022-2023 respectively. Before that, we expect steady supply of c.500-600k sqft per annum from industrial building conversion to continue meet the demand in 2018-2020.

We expect Hong Kong DC market to grow at 15% p.a. for the coming 3-5 years. This is consistent with Frost & Sullivan’s earlier forecast of 15% p.a. for 2013-2019. The demand for DC in Hong Kong used to come from the banking and financial segment. New demand in recent years has come from content hosting by multi-media content providers such as Letv, as well as internet players such as Tencent. The demand is also fuelled by the rising adoption of cloud technology by business enterprises. Industry practitioners also shared with us that Chinese telecom operators are also expanding their footprint into Hong Kong to serve multinational customers.

Based on our interview with DC operators, utilisation rate of existing DCs currently stands at about 80-90%, in terms of GFA, which is considered satisfactory for the industry. The unutilised capacity is mostly newly established capacity or locked-in by existing tenants. We expect overall utilisation to remain at healthy level in the next few years.

The key market players in Hong Kong include (i) local telecom operators such as PCCW (8 HK), HGC GlobalCentre Limited (Hutchison Telecom [215 HK]), (ii) local carrier-neutral DC operators such as SUNeVision (8008 HK), Grand Ming (1271 HK), Telehouse HK CCC (HKCOLO) and Citic Telecom (1883 HK), (iii) international DC operators such as NTT communications, Pacnet (Telstra), Global Switch and Equinix, (iv) Chinese telecom operators such as China Mobile (941 HK), China Telecom (728 HK) and China Unicom (762 HK). The top two players in terms of GFA are NTT Communications and SUNeVision.


Hong Kong DC operators yield ROIC on par with regional peers such as Singapore and Malaysia.

Diagram 7. Key DC players in Hong Kong

* Market shares are as of 2015.Source: Companies, DBS Bank

* Carrying values of the properties as of FY6/16, appraised to the movement of industrial property prices in Hong Kong

have been considered as Invested Capital. Exchange Rate – US$ 1 = HK$ 7.8


Diagram 8. Return on Investment on SUNeVision’s DC (Mega-I, Mega ONE and Mega Jumbo)

Company Country of Origin

Floor Area (sqft)

Market Share*

NTT Communications Japan 992,464 18.4%SUNeVision Hong Kong 750,000 13.9%PCCW Hong Kong 400,000 7.4%Telehouse HK CCC (HKCOLO) Japan 396,000 7.3%

HKEX Hong Kong 337,987 6.3%Grand Ming Hong Kong 287,972 5.3%China Mobile China 258,334 4.8%Towngas Telecom Hong Kong 236,806 4.4%Equinix USA 236,000 4.4%Digital Realty & Savvis USA 193,750 3.6%HGC GlobalCentre Limited (Hutchison Telecom)

Hong Kong 175,000 3.2%

Super Effort Hong Kong 170,000 3.1%Citic Telecom Hong Kong 135,000 2.5%Pacnet (Telstra) Australia 60,278 1.1%New World Telecom Hong Kong 50,000 0.9%China Telecom China 27,000 0.5%IBM USA 15,000 0.3%Others 677,803 12.6%

Retail

In US$m SUNeVision

Invested Capital* 482.8

Lettable Area (in sqft) 490,000

Gross Revenues 62.2

Average Occupancy 90%

Revenue Per Sqft 141

EBIT Margin 65%

EBIT 40

Tax 17%

Operating Income 33.8

ROIC 7.0%


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Australia: Oversupply in Key Markets

Australia’s DC market is centred on three main clusters, Sydney, Melbourne, and Brisbane. Sydney, the largest DC market, is home to 42 DCs with a capacity of ~140MW and generated US$390m (A$500m) in revenues in 2016, according to Structure Research10. Melbourne housed nearly 30 DCs with a capacity of ~57MW and generated US$127m (A$163m) in revenues. The DC market in Sydney is expected to record 12% growth in DC revenues in 2017. DC revenues in Sydney is also expected to grow at a CAGR of 13% from 2016-2021. Melbourne is expected to record 9% growth in DC revenues in 2017 with a CAGR of 16% by 2021. According to Frost & Sullivan,11the overall DC market in Australia is expected to grow at a CAGR of 12.4% from 2015-2022, reaching US$1.6b (A$2.05b) by 2022.

However, much of the supply still remains underutilised in Sydney and Brisbane. According to BroadGroup Consulting group12, utilisation rates in 2016 in Sydney and Brisbane hovered around 78% and 83% respectively. Sydney is expected to add 80MW capacity in 2017-18 according to Structure Research which may further exacerbate demand-supply dynamics in the market.

Diagram 9. Key DC players in Australia


DC Operator Key Markets DC Capacity (sqft)

Equinix Sydney 165,000

Melbourne 26,000

Global Switch Sydney 786,000Metronode Melbourne 94,500

Sydney 91,000Perth 15,450

Brisbane 9,300Adelaide 5,900

Fujitsu Sydney 197,000Melbourne 41,000

Perth 35,000Brisbane 8,600

Keppel DC REIT Sydney 179,000Brisbane 12,400

NextDC Melbourne 65,000Sydney 62,000Perth 32,000

Canberra 24,000Brisbane 17,800


Much of the demand in the Australian market is driven by domestic enterprises, which tend to prefer outsourcing than other Asia-Pacific markets, according to Structure Research. Stringent data laws that require all firms dealing with personal data of customers to abide by and maintain standards put forth by the Australian regulator regardless of the location of the data, is also encouraging firms to retain data in domestic DCs. Demand from large-scale cloud players is also on the rise. Alibaba Cloud opened its first DC in Sydney in the latter half of 2016, joining Amazon and Microsoft which are already operating DCs in the country. Google Cloud also expanded its coverage to Australia with a cloud DC in Sydney opened in June 2017. Further regional expansion from Microsoft, which remains a key partner in the Australian government’s cloud strategy, and other cloud service providers could lead to an increase in demand for wholesale DC space in key markets, in turn leading to improving demand-supply dynamics in major DC markets in Australia.

The higher cost of acquiring facilities in key DC hubs, which are also centred around key metropolitan areas, and pricing pressure, due to the supply glut of DC capacity, has resulted in fairly low yields for Australian DC operators on their DC properties. Based on our analysis of Keppel DC’s and NextDC’s DC operations, we estimate that DC operators yield ROIC hovering around 4%-6% in Australia.

Indonesia: Favourable Demand-Supply DynamicsAccording to Indonesia’s General Directorate of Applied Informatics, the DC market in the country is expected to grow at a CAGR of 20% in financial years 2015-2017 from 2014’s IDR4.4t (US$338.5m).

Diagram 10. Low yields on DC operations in Australia

* Carrying values of the properties as of 31 December 2016 of the properties have been considered as Invested Capital for Keppel DC REIT. Exchange Rates – US$ 1 = S$ 1.367, US$ 1 = A$ 1.28


Wholesale Retail

In US$m Keppel DC NextDC



Gross Revenues 20.7 91.7Occupancy 100% n/aRevenue Per Sqft 108 642 EBIT Margin 80% 25%EBIT 16.5 22.9 Tax 30% 30%Operating Income 11.6 16.1 ROIC 5.1% 3.8%


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Indonesian laws mandating financial organisations to keep financial data within the country have served to increase domestic demand for DCs. Banking, financial services, and insurance will continue to be the biggest spender on information, communications and technology (ICT) services, while manufacturing and transportation will show steady growth with respect to the adoption of ICT services. Concerns around security and resiliency are also expected to drive government demand for data-connectivity services especially for disaster recovery, according to Frost & Sullivan.

Supply growth depends on infrastructure development. The Indonesian DC industry is still in its infancy, with 60% of centre located in the Greater Jakarta area. The General Directorate of Applied Informatics believes that the current expansion can meet demand until 2017.

The largest player now is Telkomsigma, a subsidiary of Telkom Indonesia. It has 100 cloud computerised clients, ranging from small- and medium-sized enterprises (SMEs) to large corporations.

Key challenges and barriers of entry include connectivity (infrastructure), reliability (track record), sustainability (execution), and affordability (competitive pricing). Cloud services may still be too expensive for Indonesian companies and the infrastructure is not yet stable enough to support reliable cloud services. So far, there has not been any significant issue surrounding regulation as the Indonesian government sees the DC industry as part of the ICT ecosystem. For example, there is no hurdle for foreign investors to invest in the industry, as seen in NTT Communications’ acquisition of Cyber CSF.

Diagram 11. Key DC operators in Indonesia


Wholesale Retail

In US$m Keppel DC NextDC



Gross Revenues 20.7 91.7Occupancy 100% n/aRevenue Per Sqft 108 642 EBIT Margin 80% 25%EBIT 16.5 22.9 Tax 30% 30%Operating Income 11.6 16.1 ROIC 5.1% 3.8%

Company Country of Origin Floor Area (sqft) Remarks

Telkom Sigma Indonesia 1,000,000+

XL Axiata Indonesia 219,000+

NTT Japan 80,000+

Biznet Indonesia 75,000+

Equinix USA 20,000+

PT CBN Nusantara Nex Indonesia 19,000+

Faasri Utama Sakthi Indonesia 13,000+

Elitery Indonesia 13,000+

Aplikasi Lintasarta Indonesia 8,000+

Moratelindo Indonesia N/A Operates 6 DCs across Medan, Batam, Palembang, Jakarta, Surabaya, Bali

Soluis Media Semesta Indonesia N/A


Based on our analysis of TelkomSigma’s operations, we believe that retail colocation players in Indonesia can realise 8%-10% ROIC on their DC operations. We attach a discount to the higher ROIC enjoyed by TelkomSigma as TelkomSigma is likely to be able to price its services at a premium due to the greater footprint and location of its DCs in key business hubs and its relationship with Telkom Indonesia, the largest telecom and fixed operator in Indonesia.

Malaysia: Oversupply May Lead to Consolidation

The Malaysian DC Alliance (MDCA) estimates that there is a total of one million sqft of DC space available in Malaysia across 17 players13. The Malaysia Digital Economy Corp14 expects DC revenues in Malaysia to exceed US$235m (MYR1b) in 2017 and expects this figure to double by 2020. Malaysia currently has around 20 DCs, 90% of which are operated by domestic firms.

It is a well-known fact that Malaysia has an oversupply of DC space. According to BroadGroup Consulting15, Cyberjaya, which remains a key DC hub in Malaysia, is expected to record utilisation levels hovering at around 69% in 2016. The market is expected to improve in 2018-19, as capacity additions stall amid lower utilisation and pricing while growing demand for colocation and cloud services is expected to consume additional capacity.

Diagram 12. Indonesian operators yield higher ROIC to comparable regional peers

Retail

In US$ m TelkomSigma

Invested Capital* 357

Lettable Area (in SqFt) 1,076,390

Gross Revenues 185Occupancy* 80%Revenue Per SqFt 214.84 EBIT Margin 30%EBIT 55.5Tax 25%Operating Income 41.63ROIC 11.6%

* Revenues and invested capital are as of FY15. Invested capital is

based on the total asset value of PT Sigma Cipta Caraka (TelkomSigma) appraised based on the movement

of office property prices in the Greater Jakarta region. Occupancy

and EBIT margins have been assumed based on regional averages and competition in the local market. Exchange Rates US$ 1 = Rp 13,513.

Source: Company, Bank Indonesia, DBS Bank


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Current oversupply of capacity has resulted in depressed prices as players are forced to engage in a price war to attract customers. In fact, these issues have driven out some players, including Malaysia’s first internet service provider (ISP) Jaring, which went into liquidation in 2015 and was acquired by AIMS, a subsidiary of Time dotCom. Another case in point is London AIM-listed CSF Group, the largest wholesale supplier of DC space in Malaysia with a total net floor area of 405,000 sqft. Due to high rents and operational costs, the company was forced to negotiate with building owners to restructure rental rates in 2015. Following further losses and deterioration of financial position, CSF agreed to dispose of two its largest DCs with a capacity of 357,000 sqft (accounting for 88% of CSF’s total DC capacity) to a private equity fund of Bain Capital for a nominal consideration of MYR2.

Top players are doing well despite overcapacity AIMS recorded healthy sales growth of 24% for its DC business in 2016, outpacing the industry. AIMS alluded that the oversupply of DC space is not a huge concern and is achieving utilisation rates 85-90% for its DCs. This is because most of the smaller players in Malaysia mainly provide only colocation services, due to lack of connectivity and value-added services, which put them in a weak position to compete against the top DC players. In fact, the top players in Malaysia such as VADS (owned by Telekom Malaysia), NTT MSC, and AIMS have been expanding their DC capacity to cater for growing demand, a testament that they are not worried about the oversupply situation.

Diagram 13. Key DC players in Malaysia

Company Country of Origin Floor Area (sqft) Remarks

CSF* Malaysia 405,000

VADS Malaysia 89,000+

Strateq DCs Malaysia 100,000+

Keppel DC REIT Singapore 48,193

HDC Data Centre Malaysia 50,000 Provides DC design and development services

AIMS Malaysia 59,755

HeiTech Padu Malaysia 17,000

Basis Bay Malaysia N/A

Aktif Setegap Malaysia N/A Operates two DCs in Kuala Lumpur and Bandar Utama

MyTelehaus Malaysia N/A Wholesale DC Operator. Specialises in DC design and development

*CSF has announced that it will divest CX2 and CX5 DCs accounting for 357,000 sqftSource: Companies, DBS Bank


Consolidation among Malaysian players has yet to pick up, with the only case so far being the acquisition of Jaring’s assets by AIMS after the former went into liquidation in 2015. We see Tier-2 Malaysian players such as Strateq, Skali, Freenet, and Basis Bay as potential acquisition candidates as they have the technical capabilities to provide managed services but are lacking in connectivity compared to Tier-1 players.

Despite the tighter competitive environment, top players are yielding ROIC comparable to that in developed regional markets such as Singapore. Based on our analysis of DC operations of Keppel DC REIT and AIMS, we estimate that players with quality facilities and service offerings are capable of realising ROIC of around 6%-8%.

Thailand: Supply Could Outstrip Demand in the Future IDC projects that by the end of 2017, DC space in Thailand will have grown over 180%, from 2015. Based on analysis by DC Dynamics, 16the Thai DC market is expected to grow 25%-30% in 2017. At the beginning of 2017, there were around 30 DC operators in the country but total DC capacity remained at less than 500,000 sqft. Thai government’s Digital Economy plan, increasing cloud adoption by domestic enterprises, and Thailand’s location as an access hub to the Greater Mekong Subregion are expected to drive demand for DCs in the future. Key players in Thailand providing DC services include CS Loxinfo, TCC Technologies (56,000 sqft in capacity across three DCs), Switch, NTT, True Corporation, and KIRZ.

Diagram 14. Key players enjoy attractive yields

* Carrying values of the properties as of 31st of December 2016 have been considered as Invested Capital for Keppel DC REIT. Invested Capital of AIMS was determined based on the cost of acquisition of AIMS by Time DotCom (RM 128m in 2012) and DC

Capex from FY13-16, appraised based on the movement of industrial property prices in Malaysia. Exchange Rates – US$ 1 = S$ 1.367, US$ 1 = RM 4.24

Source: Company, National Property Information Centre Malaysia, DBS Bank

Wholesale Retail

in US$ m Keppel DC Basis Bay* AIMS

Invested Capital** 25.5 71.3

Lettable Area (in SqFt) 48,193 59,755

Gross Revenues 2.9 22.3Occupancy 100% 90%Revenue Per SqFt 61 416 EBIT Margin 80% 30%EBIT 2.34 6.70 Tax 25% 25%Operating Income 1.76 5.03 ROIC 6.9% 7.1%


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Several local and international players are taking advantage of the lenient investment policies by the government such as tax privileges and preferential electricity rates. For example, US-based DC operator Switch, recently opened the largest DC in Thailand, a Tier-IV DC with a capacity of around 60MW. As Thailand garners the attention of global DC operators, supply of DC space could lag growth in demand over the medium term, leading to price competition among DC operators. Amid tightening competition, local operators may need to upgrade their service offerings and facilities to match those of international operators as customers will likely be willing to pay premiums for reliability, security, and other add-on services on offer by international operators.

Retail colocation and cloud DC operators in Thailand are yielding ROIC on par with regional peers such as Malaysia and Singapore. Based on our estimates, CS Loxinfo, one of the largest DC providers in the country, yields ROIC of around ~8%-9%.

India: Balanced Demand and Supply Dynamics The Indian DC market is centred around two key hubs, Mumbai and Chennai, which provide easy access to submarine lines connecting India to the east (Chennai) and Mumbai (West). According to Gartner17, the Indian DC IT infrastructure spend is expected to grow 1.5% in 2017 to US$2.2b and will reach US$2.4b by 2020. According to the research firm18, India was the second fastest-growing DC infrastructure market in the APAC region in 2016. Indian DCs account for ~5.2% of the APAC DC market.

The Indian DC market (including DC services and infrastructure) is expected to reach US$4.5b by 2018 according to Cyber Media Research19. India housed ~3.7m sqft of DC

Wholesale Retail

in US$ m Keppel DC Basis Bay* AIMS

Invested Capital** 25.5 71.3

Lettable Area (in SqFt) 48,193 59,755

Gross Revenues 2.9 22.3Occupancy 100% 90%Revenue Per SqFt 61 416 EBIT Margin 80% 30%EBIT 2.34 6.70 Tax 25% 25%Operating Income 1.76 5.03 ROIC 6.9% 7.1%

Diagram 15. DC yields on par with regional peers

Retail

In US$m CS LoxInfo

Invested Capital* 25.5

Gross Revenues 8.7

EBIT Margin 30%EBIT 2.6Tax 20%Operating Income 2.1ROIC 8.2%Tax 25%Operating Income 41.63ROIC 11.6%

* Invested Capital is based on estimates of investment per Rack. Exchange Rate US$ 1 = THB 33.3



space in 2013 and total DC capacity is expected to reach 9.14m sqft by 2018, with a number of large-scale DCs coming online in 2017-1820.

Much of the demand for DCs is expected to be driven by the banking and financial services industry, government, retail, and telecom operators. Data residency laws are pushing banks and financial firms to retain data within the country while the booming e-commerce industry in India is driving demand for DC space from online retailers. Increasing use of data with the proliferation of high-speed 4G services is also driving demand for DC space from telecom and media operators.

Data-intensive campaigns by the government such as the Aadhaar digital ID system has already made the Indian government a key player in the Indian DC industry. The “Digital India” campaign launched by the Indian government is also expected to drive demand from state government enterprises for regional DC space. The Indian government has already approved an outlay of Rs. 1623.20 crores (~US$250m) to be expended over a period of five years to beef up DC operations of state enterprises as the government plans to offer most government services digitally in the future.

With booming demand, India has garnered the attention of a number of DC and cloud operators from around the world. NetMagic, a fully-owned subsidiary of NTT Communications, is investing heavily to expand its DC footprint and plans to double its DC capacity to over 1.3m sqft by 2018. NetMagic is currently constructing two DCs in Mumbai and Bangalore. Oracle, Google, and Alibaba have revealed plans to open DCs in India in 2017-18. Amazon, IBM, and Microsoft already have DC operations in the country and have expressed intentions on expanding in the future.

Diagram 16. Key DC players in India

* Pi has a capacity of 5,000+ racks Source: Company, DBS Bank

Company Country of Origin

Floor Area (sqft)

Reliance India 1,100,000+ ST Telemedia Singapore 902,000+NTT (NetMagic) Japan 600,000+CtrlS Datacenters India 370,000+

Sify India 200,000+ Bharti Airtel (Nxtra) India 164,000+ BSNL NxtGen India 63,000+ Pi* India N/ASpectra Solutions India N/ANet4 India N/A


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Despite the attractive demand-supply dynamics, Indian DCs yield poor ROIC in comparison to regional markets. High cost of power and connectivity as well as expensive maintenance have led to poor ROIC for most DC operators. Second-tier operators like NXT Data, the DC arm of Bharti Airtel, and Net4 India are currently operating on losses. Expectations for a fast-expanding DC industry in India is likely to attract the attention of international operators, who may look to consolidate with struggling operators. Tata Communications for example, once one of the largest DC operators in the country, sold a 74% stake in its DC business (~17 DCs) to Singapore-based ST Telemedia in 2017.

Diagram 17. Relatively low ROIC yield on DCs in India

Retail

In US$m Sify

Invested Capital* 69

Lettable Area (in sqft) 201,000

Gross Revenues 30Occupancy** 85%Revenue Per Sqft 173 EBIT Margin 20%EBIT 5.9Tax 25%Operating Income 4.4ROIC 6.4%

* 40% of the invested capital base of the company was assumed to be allocated for DC operations.

Occupancy rates have been assumed based on demand-supply dynamics. Exchange Rate US$ 1 =

INR 66.67Source: Company, DBS Bank


Theme 1: Telcos divesting DC assets

With the demand shift towards public cloud increasing, the demand for retail colocation space has started to slow down. While growth forecasts for colocation service and workloads on private cloud remain more or less in line, with the former expected to grow at a CAGR of 14.6% from 2017-2022, according to Markets and Markets, 21and the latter growing at a CAGR of 15% from 2015-2020, according to Cisco22, it should be noted that wholesale colocation services would be the key driver of growth in the colocation market and is expected to record the highest CAGR in colocation services. This has prompted escalating competition in the retail colocation space, where telcos are visibly active.

Regional telcos tend to be the leading DC providers in most of the important APAC markets. According to Frost Sullivan, NTT, China Mobile, and Singtel were among the five largest DC providers in terms of revenue in 2016 within the APAC region.

Telcos that are in the DC space have started to find it difficult to compete with pure-play DC players like Equinix and Digital Realty as these companies provide better coverage, costs, and overall quality. According to Synergy Research Group, Equinix and Digital Realty grew 26% and 25% year-on-year, respectively, in 2016 compared to 10-15% for the overall market23. Pure-play DCs have heavily invested in cost-effective technologies such as renewable energy and efficient DC designs while also improving quality of connectivity for their DCs.

As a result, a number of telcos have looked to exit this market so they can focus their capital on more core businesses and other potential growth opportunities. Verizon and

Diagram 18. Revenue share of leading DC providers in APAC in 2016

Source: Frost and Sullivan


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CenturyLink, in two of the largest deals in the DC space, divested much of their DC portfolios over the past 12 months.

However, due to the growing demand for edge DCs, certain regional players such as NTT have continued to grow in the near term. Colocation clients are increasingly looking to store and process their data nearer to the source due to latency issues. In addition, regulations such as data sovereignty laws also have limited enterprises to local DCs in certain geographies. As a result, some regional DC players have had success in capturing growth.

For example, players such as NTT and China Mobile have had success in capturing growth in the fast-growing APAC regional markets. Similarly, in the US$3.6b acquisition of Verizon’s DC assets, one of the key motivations for Equinix was Verizon’s presence in the Latin American region, as regional companies look for local servers.

Why divest or spin off DC assets? Telcos should look to divest out of their DC assets for two key reasons:

a) Unlock value in DC Assets – DC assets of telcos often tend to be undervalued as the valuations attached to the core business of providing network services eclipse the real value of DC assets held by telcos. Pure-play DC operators fetched an average EV/EBITDA valuation of ~23x while telcos fetched a valuation of ~7x, suggesting a potential undervaluation of DC assets held by telcos of over 15x. The difference in valuations is partially attributable to the different operating structures of the DC businesses between telcos and pure-play DC operators. Pure-play operators tend to structure their business in the form of real estate investment trusts (REITs), yielding tax efficiencies and higher distributions for its owners. This creates a natural premium due to higher cashflow transparency boosting the marketable value of these businesses. On the other hand, telcos valuations are largely driven by consumer demand and other external factors, and are unable to realise these benefits as their DC businesses remain part of their regular business operations. Hence, the divestment of DC assets could potentially allow telcos to realise the fair value of their undervalued DC assets.

Diagram 19. Major DC divestment announcements by telcos over the past 12 months

Source: DBS Bank

Operator No. of DCs

Buyer Price (US$)

CenturyLink 57 PE funds including Medina Capital Advisors and Longview Asset Management

2.3b

Verizon 29 Equinix, Cincinnati Bell, Windstream and AT&T

3.6b

Tata Communications 17 ST Telemedia 634m


In addition, DC businesses tend to be capex-intensive due to their real estate nature. This makes pure-play DC asset bases comparatively high and ROICs relatively low. As a result, by divesting or spinning off DC assets to REITs or other pure-play structures, telcos have the ability to improve their overall ROICs.

Source: Reuters, DBS Bank


Diagram 20. Standalone DC operators fetch much higher valuations than telcos

Diagram 21. Lower ROIC yields of standalone DC operators

DC REIT

DC REIT

Group

Group


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b) Pure-play DC players have competitive advantages in running DCs – Telcos have been constantly in battle with large-scale DC operators like Equinix and Digital Reality, who inherently hold a competitive advantage over telcos as the provision of DC services remains their core business. Pure-play DC players are capable of offering enterprises with i) better pricing due to the large-scale nature of their operations and expertise in running DCs helping them realise cost efficiencies and, ii) global coverage for multi-national operations. From the point of a global corporate, by procuring services from a global DC player, it is able to fulfil its global DC requirements through one party. In addition, with strong inter-connection networks of global DC players, corporates are able to efficiently operate in multiple regions without the need for several service-level agreement. With pure-play DC operators looking to further improve their competitiveness through investing in renewable energy and establishing partnerships with original equipment manufacturers to improve DC design efficiencies, telcos would find it increasingly difficult to compete with pure-play DC operators in the future.

By divesting out of non-core businesses such as the provision of DC services, telcos could free up capital, which could then be redirected to improve the necessary supporting network services, focusing on factors such as improving latency issues, connectivity and network bandwidth, necessary for cloud and other technological developments such as Internet of Things (IoT) and virtual reality (VR) to flourish. CenturyLink for example has said that it will utilise the proceeds from the sale of its 57 DCs to partially fund the acquisition of Level 3 Communications, which would provide CenturyLink with a significant advantage in the enterprise fixed broadband segment. Redirecting capital from a non-core operation like DCs, where telcos hold no significant competitive advantage in, to focus on core network services would help telcos improve their return on capital, making them more attractive to investors. Telcos could also use these funds to expand into high-growth segments such as Big Data analytics or mobile advertising, where telcos have a natural advantage in.


Diagram 21. Lower ROIC yields of standalone DC operators cont.


Divestment impact on regional telcosGiven higher EV/EBITDA multiple DC assets generally carry, we believe telcos can spin off or divest of DC assets at a premium if they wish to do so. We have evaluated the DC assets of leading telcos in the ASEAN region that have their own DC space to evaluate the value creation that can happen through such a spinoff. In our estimates, we have assumed the 15-20X EV/EBITDA for DC valuations and ~40% EBITDA margins for DC assets.

Diagram 22. Estimated share price impact of DC divestments by regional telcos

Diagram 23. Impact of DC divestment on valuation, assuming 20x EV/EBITDA for DC assets

Source: DBS Bank

Source: Companies, Reuters, DBS Bank

DC Space (sqft) Potential Share Price Impact

Singtel 1,375,000 5% - 7%Telekom Malaysia 200,000 5% - 9%Telekomunikasi 1,076,390 2% - 3%XL Axiata 219,580 6% - 9%

PCCW 400,000 6% - 10%Citic Telecom 135,000 8% - 12%Time DotCom 59,755 0% - 4%

Singtel Telekom Malaysia

Telekomunikasi Indonesia

XL Axiata PCCW Citic Tel Time DotCom

Floor space 1,375,000 200,000 1,076,390 219,580 400,000 135,000 59,755 Rev per sqft US$ 385 539 215 194 128 128 416 DC Revenue (US$ m) 530 108 231 42 51 17 25 DC EBITDA Margin 40% 40% 40% 40% 55% 55% 40%

DC EBITDA 212 43 93 17 28 10 10 Divestment value (US$ m) 4,237 862 1,851 340 564 190 199

Market Cap (US$ m) 44,846 5,716 35,143 2,691 4,236 1,027 1,260 Enterprise Value (US$ m) 52,726 7,140 37,503 3,879 8,865 1,862 1,199 EBITDA (17F US$ m) 3,713 925 4,909 623 1,626 272 79EV/EBITDA (X) 5.42 7.72 7.64 6.23 5.45 6.85 15.11EBITDA post-divestment (US$ m) 3,501 882 4,816 606 1,598 262 69EV post divestment (US$ m) 55,814 7,669 38,647 4,113 9,275 1,987 1,248Market Cap post divestment 47,934 6,245 36,287 2,925 4,646 1,152 1,309Change in share price 7% 9% 3% 9% 10% 12% 4%


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In addition, with the divestment, telcos could potentially maintain network-related exposure, which is the core competency of their business. For example, Verizon recently joined the bandwagon of telcos including CenturyLink and AT&T to divest of its cloud services in a bid to refocus resources on providing managed services.

The company divested the cloud assets it acquired from Terremark back in 2011, selling 29 DCs to Equinix as well as its private cloud and managed hosting business to IBM. By exiting the DC and cloud businesses, Verizon has focused on strengthening its networking and security capabilities. Its value-add lies in its ability to connect the various enterprise IT infrastructure, on the premises and cloud, efficiently and seamlessly to enable the smooth functioning of enterprise applications and workloads. Hence, upon the sale of DC assets to Equinix, Verizon entered into an agreement with the company to resell Equinix’s colocation and interconnection services, bundled with its own managed security, network, and communications services. The agreement provides Verizon the ability to access several of Equinix’s International Business Exchange DCs and sell interconnection and connectivity solutions to enterprise customers, coupled with other managed services such as advanced communication solutions and managed security that Verizon specialises in. Verizon has established a similar agreement with IBM to provide “strategic initiatives involving networking and cloud services”. Details of what services the company was looking to deploy were not disclosed.

Theme 2: Private cloud players moving into (i) Cloud ancillary services and (ii) Industry-specific solutions. With the dominance of the Big 3 players in the public cloud space, Amazon Web Services (AWS), Google Cloud, and Azure, other players in the cloud space have had to focus more on the slower-growing private cloud and exit the public cloud segment. As a result, smaller private cloud players are looking into (i) industry-specific solutions and (ii) public cloud ancillary services.

For example, Rackspace, , a cloud service provider, shut down its infrastructure-as-a-service (IaaS) public cloud service in 2014 as it was unable to compete with the likes of AWS and Google. Similarly, in 2015, HP shut down its Helion public cloud service while telcos, Verizon, and AT&T both exited the public cloud space over the past 12-18 months. With their exit from the public cloud and the slowing growth in private cloud markets, these cloud players have had to look to differentiate themselves from competitors.

Cloud ancillary services These include areas where companies can avoid competing with large public cloud players while benefiting from changing industry trends brought upon by the popularity of public cloud.


Corporates are increasingly shifting their workloads to the public cloud. However, this does not mean corporates have completely given up their legacy IT infrastructure and private cloud platforms. The shift is a process, with private cloud platforms remaining key components of enterprise IT systems in the long term due to various reasons including regulatory issue and autonomy.

As a result, we are seeing a growing appetite for hybrid cloud, which promises to give the best of both worlds to corporates. Corporates are also increasingly interested in hybrid cloud due to the higher flexibility these platforms offer. For example, an organisation can use a private cloud to store and process sensitive data while using a public cloud service to store less-sensitive data. In times of increasing processing requirements (think Black Friday and Cyber Monday for an online retailer), organisations can easily shift some of the workloads to public clouds without needing to invest in internal systems and tie up capital. Similarly, organisations can also gain the flexibility of procuring services from multiple competing public cloud players, depending on the task at hand.

As a result, the growth of the hybrid cloud market is outpacing that of public clouds, expanding at a CAGR of 22.5% between 2016 and 2021 to reach US$92b, according to Markets and Markets24.

However, hybrid clouds tend to create a number of challenges for enterprises. The organisation’s private cloud will need to interact and transfer data within multiple public clouds systems. These transmissions will need to be secure and encrypted while the organisation will also have to put in place policies to determine which sensitive pieces of data should not be transferred from private clouds. Similarly, areas such as data integrity and access rights for data will need to be policed. Furthermore, costs relating to running hybrid clouds will become more complex, with a mix of public cloud and private utilisation.

Public-Cloud Evolution – Asia is catching up with the US in public-cloud adoption

Source: DBS Bank

Diagram 24. Public cloud adoption has reached a tipping point in Asia in 2017


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In addition, transmission of data between multiple public clouds and the private cloud would also add to the overall complexity monitoring and cost management.

As a result, there is a significant market in facilitating organisations to implement and maintain hybrid clouds.

By looking at the acquisitions and mergers in the cloud computing world, we have tried to understand which areas cloud providers and related service providers are looking at in terms of development and investments. These areas include

• Security• Cloud integration – multi cloud and systems integration with public cloud providers• Cost management and monitoring• Storage solutions• Backup and continuity solutions

Source: DBS Bank

Diagram 25. Latest acquisitions of cloud service providers

Acquirer Target Sector

Rackspace Datapipe Cloud IntegrationDXC Technology Tribridge and Concerto Cloud Services Cloud IntegrationOakley Capital Plesk Cloud IntegrationOracle Wercker Cloud Integration

Deloitte Day1 Cloud IntegrationHPE Nimble Storage Cloud IntegrationStratoscale Tesora Cloud IntegrationCitrix Unidesk Cloud IntegrationFreshdesk Pipemonk Cloud IntegrationHPE Cloud Technology Partners Cloud IntegrationMicrosoft Cloudyn Cost monitoring & managementSolarWinds Scout Server Monitoring Cost monitoring & managementMicrosoft Deis Cost monitoring & managementCISCO AppDynamics Cost monitoring & managementHPE Cloud Cruiser Cost monitoring & managementOracle Dyn Cost monitoring & managementThoma Bravo Continuum Disaster Management & ContinuityIBM Sanovi Disaster Management & ContinuitySolarWinds SpamExperts SecurityCISCO Observable Networks SecurityDatto Open Mesh SecurityAWS Harvest.ai SecurityRed Hat Permabit Technology Corporation Storage


SecurityData transfers, access rights, data integrity, and duplication all become a lot more complex with the use of hybrid cloud systems. Connecting to public and private clouds increases an enterprise’s vulnerability to security threats and hence cloud security services play a large role in hybrid systems. According to Zion Market Research, hybrid cloud security accounted for almost 43% of the total share of the cloud security market in 2014 and is the fastest growing sub-segment in the cloud security market25. Overall, the cloud security market is set to grow from US$1.5b in 2017 to US$3.5b in 2021, according to Forrester26.

Companies in the hybrid cloud space has been looking to boost their cloud security capabilities over the past couple of years. In June 2016, Cisco acquired CloudLock for US$293m. CloudLock makes technology that allows companies to watch the security of their apps in the cloud, ensuring employees aren’t sharing sensitive data even with cloud apps that are not built or managed by internal IT departments. This acquisition was on top of its purchase of Lancope for US$452.5m in 2015. Lancope focuses on behaviour analytics, threat visibility, and security intelligence to detect malicious activity on corporate networks.

Similarly, Oracle acquired Palerra, a vendor of software for securing cloud services in 2016. Palerra’s Cloud Access Security Broker product called Loric offers a combination of visibility into cloud usage, data security, user behaviour analytics, and security configuration, with automated incident responses.

Telcos, being the gatekeepers of access points to private and public clouds, have significant influence over networks and cloud accessibility. Hence, telcos possess a natural competitive advantage over other operators in providing cloud security services. However, telcos do need to invest heavily in developing the core competencies required to provide cloud security services while such investments are likely to take long periods of time to turn profits. Telcos such as Verizon and Singtel are already investing in these areas.

However, managed cyber security services tend to carry relatively low margins due to their high manpower costs. For example, Dell Secureworks, a managed security service provider in the US is yet to record EBITDA margins above 10%. Cyber security firms need to continually invest in R&D to keep themselves relevant against new threats and techniques used by hackers. It is also expensive to hire, train, and retain cybersecurity professionals, who are short in supply, and managed security services often require top security talent in numbers to make an offering that is attractive to clients. In addition, most players also invest heavily in marketing and sales to maintain and increase penetration, which also directly impacts margins heavily. General overheads often account for 50%-80% of revenues for cybersecurity firms. As a result, cybersecurity firms need to reach scale efficiencies over long periods of investment to achieve profitability.


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Cloud IntegrationAs discussed above, enterprises often tend not to restrict themselves to a single cloud provider or method of deployment (private, public and hybrid) in a bid to avoid vendor lock-ins and realise operational efficiencies as applications tend to perform differently in different IT environments. According to a survey by Rightscale27, a cloud management software provider, 85% of enterprises with over 1000 employees surveyed mentioned that they are using a multi-cloud strategy, running applications on two private and two public clouds on average.

Source: Dell Secureworks

Source: Rightscale 2017 State of the Cloud Report

Diagram 26. Depressed EBITDA margins due to high personnel and R&D costs

Diagram 27. 85% of large-scale enterprises on multiple clouds


Managing multiple clouds and multiple methods of deployments (public, private, and hybrid) requires an in-depth understanding of the different cloud environments to ensure seamless operation and integration with legacy infrastructure. Maintaining and retaining an in-house cloud team with this level of expertise often tends to be costly. Furthermore, constant changes in features of public cloud environments require these experts to be continuously updated and train themselves. As a result, enterprises tend to look for a third-party service provider to help them integrate and manage operations in multiple cloud environments. Enterprises like Rackspace, Dell, Accenture, and Rightscale excel in the provision of services of this nature.

The multi-cloud management market is expected to grow at a CAGR of ~30% from 2016 to 2021, according to Research and Markets, reaching US$3.4b by the end of 2021. This offers attractive growth prospects for telcos with experience in providing cloud services as they are well-equipped with the expertise to understand the nitty-gritty of providing and managing cloud systems of all forms of deployment. Whilst the global market for multiple cloud management remains competitive with a number of established operators like Rackspace and Dell, telcos could focus on their regional markets. As multi-cloud management is likely to require constant communication and interaction with the service provider, telcos, with their regional networks and customer bases, are likely to have an advantage over global operators.

Cost monitoring and managementAnother area where complexities become hurdles for enterprises is the monitoring and managing of hybrid cloud systems. Companies that do not want to spend resources on monitoring and managing cloud systems tend to look for managed service providers to take up the burden. The cloud managed services market is expected to grow from US$27b in 2017 to US$54b by 2022, according to Research and Markets, which is a CAGR of 14.6%28. Companies needing to focus on core businesses and SMEs looking to adopt managed services are among the key drivers of demand.

For example, Rackspace, a cloud platform provider has focussed on collaborating with players such as Amazon and Microsoft to provide enterprise clientele with support in the public cloud platforms while also providing services in private cloud environments. Players such as Rackspace are better able to compete in the segment than in the public cloud segment due to their expertise in the cloud segment. The company focuses on providing specialised expertise, tools, and its dedicated customer support (known in Rackspace as Fanatical Support) for leading technologies developed by AWS and Microsoft.

For example, if a client is running an outdated version of, say, Linux, which could potentially lead to gaps in the environment’s security, Rackspace is there to notify the client and proactively address the issue. If a business suddenly has millions of additional hits to its web servers, Rackspace is also there to help scale the needs of the business to withstand this surge.


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The move has paid off, with significant growth in the quarters following their decision to move out of public cloud, along with increased returns on invested capital.

Other large managed service providers have also looked at investing heavily in this area due to the growing complexity in managing costs related to the use of cloud. Cisco completed in March 2017 the acquisition of AppDynamics, whose software allows companies to monitor in real time the performance of applications they are developing to understand the IT workload and the eventual cost of the application to the company. This allows companies to optimise the usage of their IT resources as well as make IT-related costs more visible and manageable. Similarly, Cisco acquired Cloud Cruiser to enable enterprises to easily monitor its cloud usage.

Despite the massive market opportunity and growth, one key obstacle for telcos when it comes to developing and implementing cost management and monitoring tools is the limited access they have to cloud services. To develop and implement cloud monitoring tools, access to operations of cloud services is necessary but telcos would only have minimal exposure in this area.

Cloud storage Cloud storage, which refers to the storage of data on the servers of a cloud storage service provider to be accessed remotely, is another area that is garnering the attention of enterprises as they shift operations to the cloud. Markets and Markets forecasts the cloud storage market to grow at a CAGR of 25.8% from 2016 to 2021, reaching US$75b by 202129. Despite the attractive growth prospects, the sector is dominated by established cloud providers such as AWS, Microsoft, and Google as well as storage hardware developers like IBM, HPE, and Dell EMC. Telcos lack the network effect of large-scale cloud service

Diagram 28. ROIC of Rackspace

Source: Company


providers and the lack of expertise in storage hardware makes it difficult for telcos to yield efficiencies through optimising storage hardware, which remains a key determinant of profitability and competitiveness in the cloud storage market. Furthermore, deploying cloud storage service solutions would also require telcos to maintain infrastructure-heavy large-scale DCs, which, as we have discussed above, tends to be a value trap for telcos.

Backup and continuity solutionsThe global cloud backup market is expected to grow from US$1.3b in 2017 to US$4.13b by 2022, at a CAGR of 26.1%, with APAC growing the fastest, according to Markets and Markets30. The demand for cloud backup is expected to be driven by the higher volume of data generated by enterprises, the efficiencies created by cloud-related backup, as well as recovery such as faster recovery times and real-time back up. In addition, the decreasing cost trends also make cloud backup options very attractive for enterprises. Furthermore, cloud backup solutions also make it simpler to manage and monitor backup activity than traditional IT systems with limited data duplication. For telco players, this gives an interesting opportunity in terms of generating cross-selling opportunities due to the constant communication required in real-time backup and recovery as well as the potential data volume required to be transferred over the network. However, telcos may find it difficult to compete with large scale public cloud players due to the lack of scale advantage when offering backup and storage solutions. As a result, it is likely that telcos would be required to partner with potential cloud players to provide a competitive backup solution for enterprises.

Industry-specific solutions

A key area of interest is business intelligence and analytics. According to Gartner31, global revenue in the business intelligence and analytics market is forecast to reach US$18.3b in 2017, an increase of 7.3% from 2016. Gartner predicts that the BI and analytics market is in the final stages of a multiyear shift from IT-led, system-of-record reporting to business-led, self-service analytics. Companies such as IBM, having invested in their business intelligence tools such as the Watson Analytics platform, could see great benefit from this growth. Similarly, telcos with their data on subscriber usage and behavioural patterns, could potentially benefit from the segment, in our view.

IBM’s foray into analyticsIBM, on the other hand, has started to focus on cloud enhanced by industry-specific solutions, leveraging its cognitive Watson Analytics platform. According to IBM, the company has already had major success in certain industry verticals such as banking, airlines, and retail where nearly every top global player (10 of the 10 largest global banks, nine of the world’s top 10 retailers, and eight of the world’s top 10 airlines) uses their solutions.


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The analytics platform has been bolstered by a number of acquisitions over the past 1-2 years too, adding significant analytics capabilities as well as industry-specific data and insight to IBM’s knowledge base.

Diagram 29. IBM has been an active buyer in the analytics segment

Company Description

The Weather Company The Weather Company has a proprietary global forecasting model, which includes more than 195,000 personal weather stations. IBM revealed its first joint product with The Weather Company: a hyperlocal weather forecasting tool to provide enterprise clients with short-term customised forecasts. This would be enable IBM’s clients such as retailers to manage the effects of weather.

IRIS Analytics IRIS Analytics applies cognitive computing models to combat payment fraud. Companies making the transition to newer forms of payment technology need to be able to detect and counter fraud as quickly as it starts, and so companies which provide real-time analytics of payment patterns are proving to be valuable. This technology will be used to serve IBM’s financial-sector clients such as banks.

Truven Health Analytics Truven Health Analytics is a leading provider of cloud-based healthcare data, analytics, and insights. Truven brings more than 8,500 clients to the Watson Health portfolio, including US federal and state government agencies, employers, health plans, hospitals, clinicians, and life sciences companies. Data and insights from Truven inform “benefit decisions” for one in three Americans.

Resilient Systems Resilient Systems is a privately held cybersecurity firm with 100 employees. Resilient specialises in incident response, which helps IT security teams bolster their defences against data breaches.

EZSource EZSource an Israel-based application discovery company, to help developers quickly and easily understand and change mainframe code based on data displayed on a dashboard and other visualisations. EZSource provides a visual dashboard to quickly and easily show developers which applications have changed to ease the process of modernising applications, exposing APIs and more efficiently leveraging development resources.

Promontory Financial Group

Promontory Financial Group is a global market-leading risk management and regulatory compliance consulting firm. Promontory’s professionals will train Watson, which will learn by continuously ingesting regulatory information as it is created and through interaction with real-world applications. It will help accelerate IBM’s development of cognitive solutions for risk and compliance.


In terms of IBM’s revenues, the analytics segment is starting to account for a greater share, contributing 25%-26% and growing faster than its other revenue segments.

Diagram 30. IBM Analytics’ revenues on an upward trend

Source: IBM


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2. https://www.mcafee.com/us/solutions/lp/cloud-security-report.html

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4. https://www.cisco.com/c/dam/m/en_us/service-provider/ciscoknowledgenetwork/files/622_11_15-16-Cisco_GCI_CKN_2015-2020_AMER_EMEAR_NOV2016.pdf

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8. Data Centres: The New Frontier – Cushman & Wakefield

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13. http://www.banking-gateway.com/contractors/core-banking-systems/multimedia-development-corporation-mdec/pressmalaysian-DC-alliance-to-play-key-role-in-transforming-malaysia-into-a-DC-hub.html

14. http://www.thestar.com.my/business/business-news/2017/01/12/DC-revenue-forecast-to-surpass-rm1bil-this-year/



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16. http://www.datacenterdynamics.com/content-tracks/design-build/thailand-prepares-for-fast-growth/97695.fullarticle

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20. Data Centres Market in India - Alchemy Research and Analytics

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28. http://www.prnewswire.com/news-releases/5378-billion-cloud-managed-services-market-2017---global-forecast-to-2022---research-and-markets-300469536.html

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30. http://www.marketsandmarkets.com/PressReleases/cloud-backup.asp

31. https://www.gartner.com/newsroom/id/3612617


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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


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