Risk Factors

dtac risk management objective is to earn competitive returns from its various business activities at acceptable risk levels and without compromising dtac Way. Risk Management supports the business in achieving its objectives by actively identifying and managing potential threats and opportunities to avoid issues arising or a situation where benefits can no longer be realised.

Key risks that may affect the operation of the Company and its subsidiaries are as follows:

1. Risks from the concession agreement, changes in laws, regulations and regulator or government policies

1.1 Risk from the termination of the Concession Agreement before its term

The Company’s core business is the operation and provision of cellular system radio telecommunications services under the Concession Agreement with CAT Telecom Public Company Limited (CAT), which has a term of 27 years and will expire on 15 September 2018. In addition, the Company is currently in a number of disputes with CAT and it cannot be predicted whether CAT will exercise its rights to terminate the Concession Agreement before its term or not. Therefore, if CAT exercises its right under the Concession Agreement to terminate the Concession Agreement before its term and the Company is not granted an injunction to prevent such action from CAT, such action may result in a material effect on the result of business operations and business opportunity of the Company.

However, dtac TriNet (a subsidiary in which the Company holds 99.99% of its shares) has obtained a licence for international mobile telecommunications in the frequency band 2.1 GHz and a licence for Type III telecommunications from the NBTC on 7 December 2012, which enables dtac TriNet to continue to provide the telecommunications services after the expiration of the Concession Agreement in 2018 or after the termination of the Concession Agreement before its term.

1.2 Risk from spectrum acquisition

The term of office of the National Telecommunication Commission (“NTC”) is expired on 7 October 2017. The NTC is currently acting of the National Broadcasting and Telecommunications Commission (“NBTC”) in accordance with the Frequency Allocation Act (n.2) 2017, which is in the process of selection. It is currently uncertain regarding the terms and timing of the auction. Therefore, it is unlikely that the auction will take place before the expiration of the Concession Agreement. In this case, the NBTC notification on remedial measures for customers (“Remedial Measures Notification”) requires the Company to continue the mobile services until the end of remedial period but not over one year after the concession ended. During such period, the Company shall pay its revenue to NBTC in the amount not less than the percentage of revenue sharing paid to CAT at the end of Concession Agreement.

If dtac TriNet cannot obtain sufficient spectrum in the future, it may result in a material effect on the result of business operations and business opportunity of the Company.

1.3 Risks from changes in laws, regulations and regulator or government policies

1. Uncertainties on regulation and enforcement of related laws and regulations in the telecommunications industry

The telecommunications business is governed by two main acts, namely the Frequency Act and the Telecommunications Act.

The NBTC is empowered to issue regulations to regulate the telecommunications business, such as organizing the spectrum auction, fixing service fees and tariff structure and issuing rules and measures for consumer protection, etc. Such regulations might reduce the Company’s and its subsidiaries’ ability to make profits and/or might increase the cost of operation of the Company and its group companies (as the case may be). On the contrary, despite the fact that the NBTC has issued various notifications to enable the infrastructure sharing or interconnection and network access between the telecommunications operators, the enforcement of such notifications is unclear in practice. If such kind of obstructions happened, the ability of dtac TriNet to roll out the 2.1 GHz network may be affected.

2. Legal implications concerning the amendments to the Concession Agreement

Under the Act on Private Sector Participation in State Undertaking B.E. 2535 (1992) (the “Private Participation Act”), a governmental agency wishing to engage a private entity to join or undertake a government project with a capital investment of THB 1,000 million or more must comply with the process set out in the Private Participation Act.

After the Private Participation Act became effective, the Company entered into three amendment agreements with CAT which amended, among others, the term of the agreement and the rates of the revenue share payable by the Company to CAT.

Subsequently, the Council of State gave its opinion (No. 292/2550) had not been made in accordance with the process set out under the Private Participation Act. The above mentioned opinion of the Council of State is merely a legal opinion, which has no binding effect on the Company.

At present, the Private Participation Act has been revoked and replaced by the Private Investment in State Undertaking Act B.E. 2556 (2013) (the “Private Investment Act”), which has become effective on 4 April 2013. The Private Investment Act specifies that if it appears to the State Enterprise Policy Office that any project is not executed duly in accordance with this Act, the State Enterprise Policy Office must seek factual clarification from the project owner and request that appropriate procedure be proposed to the Committee on Private Investment in State Undertaking Policy. If such Committee deems that the private investment agreement should be terminated or amended, the Committee must submit its proposal to the Cabinet for approval.

In case the Cabinet resolves to revoke the amendment agreement to the Concession Agreement, or requires the Company to pay additional consideration, even if the Company has made an objection to the Cabinet resolution pursuant to the applicable legal process, this could have a material adverse effect on the business, financial condition and results of operations of the Company.

3. Uncertainty on the dispute relating to payment of the access charge

TOT Public Company Limited (TOT) and the Company entered into the Access Charge Agreements in 1994 and 2001. The Access Charge Agreements require that the Company pay an access charge to TOT at a flat rate per number in respect of a post-paid customer and a fixed percentage of the value of the prepaid vouchers in respect of a pre-paid customer.

However, after the announcement of the Telecommunications Act, the use and interconnection of networks between operators must be in accordance with the Telecommunications Act and the NTC Notification on Interconnection, which require that the interconnection charge be determined on a fair, cost-oriented and non-discriminating basis.

In this regard, on 17 November 2006, the Company informed TOT and CAT that it would pay the access charge pursuant to the criteria and at the rate prescribed by the applicable laws, instead of the access charge prescribed in the Access Charge Agreements.

TOT argued that the Company is obliged to pay the access charge at the rate originally specified in the Access Charge Agreements and submitted a claim against the Company requesting CAT and the Company to be jointly liable for the access charge payment in the total amount of approximately 245,638 million (calculated until 10 July 2014). The case is being considered by the Administrative Court.

Based on the opinion of the legal counsel of the Company, the Company believes that the Company has no obligations to pay the access charge as requested by TOT. This is because the Access Charge Agreements are not in compliance with the current law, and the Company has already submitted a notice to terminate the Access Charge Agreements.

However, if the court issues a final order or judgment requiring the Company to pay the access charge as requested by TOT, this may cause a material adverse effect on the financial condition and results of operations of the Company.

4. Risk from changes to the accounting guideline which may affect the Company’s accounting method regarding the calculation of the access charge

After the Company notified TOT of the termination of the Access Charge Agreements on 8 November 2007, the Company has changed its accounting method regarding the access charge. The Company has ceased to record the access charge in its financial statements because the Company viewed that its obligations to pay the access charge had already been terminated. The Company has recorded its revenues and expenses using the rates of the interconnection charge set out in the Reference Interconnection Offers (RIO) of the Company and TOT, which have been approved by the NTC.

However, there is currently no guideline relating to the accounting method for recording revenues and expenses accrued in such manner, and there has been no final court judgement on the issue relating to the access charge. If subsequently there is an accounting guideline on this issue, or if the court has rendered a final judgement on the issue relating to the access charge, the Company may have to change its accounting method in relation thereto. The change of the accounting method may have a material effect on the profits and financial condition of the Company. (See further details in “uncertainty on the dispute relating to payment of the access charge” above.)

5. Risk from unclear enforcement of laws governing foreign ownership

Several laws have restricted foreign shareholding, such as (i) the Land Code (ii) the Foreign Business Act and (iii) the Telecommunications Act. Also the Concession Agreement requires that the Company maintain its qualifications pursuant to the requirements under the Foreign Business Act.

The violation of such foreign shareholding limit may result in the revocation of the telecommunications license or termination of the Concession Agreement. The Company and/or its subsidiaries may not be able to continue the telecommunications business.

The Company believes that the Company is not a “foreigner” under the definitions of the above law, and has correctly and completely followed the practices applicable in Thailand. The Company is of the opinion that the Government has no clear policy on the interpretation and enforcement of the Foreign Business Act in relation to foreign shareholding issue, resulting in the Company having to take such risk in undertaking its business. Although the Foreign Business Act has been in force for more than 10 years, there has been no Supreme Court precedent or clear practices of the Ministry of Commerce regarding a “nominee” arrangement under Section 36 of the Foreign Business Act in order for the Company to evaluate or assess the impact of the enforcement or interpretation of such provisions under the Foreign Business Act that may have over the Company and its subsidiaries.

Due to such unclear factors, on 14 June 2011, a telecommunications operator submitted an allegation to the Royal Thai Police to take a criminal action against the Company (including its directors, certain shareholders of the Company and their directors) alleging that the Company is in breach of the Foreign Business Act. Furthermore, on 22 September 2011, a minority shareholder of the Company (holding 100 shares in the Company) filed a lawsuit against the NBTC, alleging that the Company is in breach of the above law. Both cases are being considered by the Royal Thai Police and the Supreme Administrative Court.

The Company believes that the Company is not a “foreigner” and has correctly and fully complied with the Foreign Business Act. However, if eventually it is decided (by the final Supreme Court judgment) that the Company is not a Thai company under the Foreign Business Act and the Telecommunications Act and such event is not remedied, it may constitute a ground for CAT to terminate the Concession Agreement or the right of the Company or dtac TriNet to engage in the telecommunications business may be revoked. As a result, the Company and dtac TriNet may not be able to continue the telecommunications business.

6. Risk from unclear enforcement of the law governing foreign dominance

The NBTC has issued the NBTC Notification on Determination of Foreign Dominance Restrictions B.E. 2555 (2012) (the “Foreign Dominance Notification”). The Foreign Dominance Notification defines “dominance” as the scenario where foreigners have the controlling power or influential power in policy making, management and operation of the telecommunications business of the licensee by way of, among others, holding shares with half or more than half of the total voting rights. In this respect, the Company is of the opinion that the Foreign Dominance Notification cannot be applied with the Company which has been a concessionaire prior to the enactment of the said Notification. The legal advisors share the same legal opinion as the Company. However, the NBTC may not agree with the Company’s interpretation.

For dtac TriNet, dtac TriNet has submitted a letter of undertaking to the NBTC that it will comply with the Foreign Dominance Notification at the time when it submitted the application for the 2.1 GHz license. Based on the NBTC’s explanation to the public at the public hearing regarding the aim and objectives of the Foreign Dominance Notification and, in particular, the definition of “dominance” in 2012, the Company believes that the Company and dtac TriNet would not be regarded as a company under foreign dominance pursuant to the definition of “dominance” of the NBTC. Nevertheless, the risk from unclear enforcement of law governing foreign dominance may have a material effect on the business operation and business opportunities of the Company and dtac TriNet.

7. Risk from reduction of interconnection charge rate

The NBTC issued three orders dated 12 March 2013, 23 July 2014 and 6 December 2016 in objective to reduce the interconnection charge rate. It is noticeable that the NBTC has a policy to reduce the interconnection rate continuously. The reduction of Interconnection rate may effect on the revenue of the Company and its subsidiaries from business operation.

8. Risk from disputes over excise tax and revenue sharing

The Government policy is still uncertain on the collection of excise tax from telecommunications services. In addition, in relation to the excise tax issue, CAT submitted a dispute to the Thai Arbitration Institute on 11 January 2008, demanding that the Company pays additional revenue sharing for the concessionary years 12 to 16, including penalty and VAT, in the amount of approximately THB 23,164 million. This was because, during said concessionary years, the revenue sharing was deducted by the excise tax paid by the Company to the Excise Department prior to making the revenue sharing payment to CAT in accordance with the Cabinet resolutions and the letter from CAT. On 28 May 2012, the Arbitral Tribunal rendered its decision to dismiss the dispute raised by CAT on the ground that the Company had fully paid the revenue sharing to CAT and all debts had already been settled. Nevertheless, CAT has appealed the Arbitral Tribunal’s decision before the Central Administrative Court. The Central Administrative Court issued the verdict in favor of the Company and dismissed CAT’s petition. However, CAT may file an appeal with the Supreme Administrative Court.

9. Risk from potential inaccessibility to telecommunications network to provide 2.1 GHz service

The NBT Chasissued the NBTC Notificationon Telecommunications Infrastructure Sharing for Mobile Phone Network B.E. 2556 (2013) (the “Infrastructure Sharing Notification”). The substance of the Notification is the share of telecommunications infrastructure, including buildings and equipment for transmission and transmission system of the base station.

CAT brought a lawsuit to seek revocation of the Notification and also the NBTC resolution which approved the reference access offer proposed by the Company. In addition, CAT filed a claim and required dtac TriNet to uninstall its 2.1 GHz devices and equipment from the Company’s concessionary assets. CAT also demanded that dtac TriNet compensate for damages.

Also, on 1 October 2014, CAT filed a dispute to the Thai Arbitration Institute claiming that the Company is in breach of Clause 2.1 and Clause 2.3 of the Concession and requested for compensation of damages.

If the Courts render a final judgment prohibiting the sharing of telecommunications infrastructure or telecommunications network, the operators who are concessionaires, including the Company, will not be able to share telecommunications infrastructure or telecommunications network with other operators, including dtac TriNet. This could impact revenues and could lead to higher cost on the expansion of the telecommunications network and the provision of the telecommunications service on the 2.1 GHz frequency band of dtac TriNet.

In addition, the Company has an obligation to deliver certain equipment to CAT at the expiration of concession. It could create inaccessibility to certain equipment for dtac TriNet, except dtac TriNet negotiate for the use of equipment with CAT or other telecommunication operators. Otherwise, dtac TriNet has the right to procure its own telecommunication equipment but this could impact revenues and could lead to higher cost.

2. Risks from competition

2.1 The Thai telecommunications industry is highly competitive and sensitive to price competition

The Thai mobile telecommunications industry is highly competitive and sensitive to price competition due to the fact that the telecommunications market has grown considerably especially data service. There are high competition in terms of price, promotions and other marketing campaigns. If the price competition intensifies and the Company and dtac TriNet are unable to respond to such competition in a timely and cost-efficient manner, such competition may have a material effect on the result of business operations and business opportunity of the Company.

2.2 The Company may encounter higher competition with new operators

At present , aperson who wishes to operate telecommunications business is entitled to freely apply for a telecommunications license from the NBTC, either as operator or MVNO. As such, legal reform and liberalisation of the telecommunications business may further intensify the competition in the market. The Company cannot predict the number of new entrants who will be granted licenses from the NBTC. If the NBTC issues the licenses to new operators, the competition in the market could become even more intense as the new operators, who may have lower operation costs, may adopt an aggressive pricing policy or employ a subsidy approach in order to increase their market share. This may affect the ability of the Company and dtac TriNet to compete in the market and may affect the business operations, and business opportunity of the Company.

3. Operational Risks

3.1 Risk from interruption of network service system and other important systems which may have an impact on service users

The Company and dtac TriNet perceive the risks which may occur as a result of a disruption of the network system and other essential systems that could impact the provision of services. Therefore, the Company and dtac TriNet have continuously prepared for and developed plans to support emergency events and disruption of network system as well as other essential systems.

The Company and dtac TriNet have developed a network management system and prescribed maintenance procedures for the network and equipment so that all network and equipment function efficiently in order to provide telecommunications service to customers effectively, especially voice service and data service. The degrees of redundancy in our transmission network have been enhanced through addition of fiber routes and high capacity DWDM (Dense Wavelength Division Multiplexing) network. In addition, the Company and dtac TriNet have also been developing plans to support the disruption of other essential systems, such as information system, billing system and customer services so that the services can be continuously provided to the customers. The Company and dtac TriNet also have a backup plan in case of emergency which covers an additional investment in important equipment and safety system e.g. fire protection system and real-time network and equipment monitoring system. The Company and dtac TriNet regularly conduct trainings for its staff on their responsibilities and relevant procedures, as well as strictly conduct a test run of the backup plans.

Furthermore, the Company and dtac TriNet has procured insurance policies to cover network and equipment damages in order to minimize the impact of such risk against the Company and dtac TriNet.

3.2 The Company has to rely on third parties to maintain telecommunications equipment

The Company provides mobile phone service through complex t e lecommun icat ions equ ipment , includ ing mobi le telecommunications network and 2G/3G/4G base stations nationwide. Therefore, the success of the Company’s and dtac TriNet’s businesses (which may share some of the base stations with the Company to provide 2.1 GHz services) depends on the effective maintenance and repair of the network and equipment.

At present, the Company engages third parties to provide maintenance and repair services for some base station equipment and transmission network of the Company. These service providers had gone through thorough selection process and regular performance reviews to ensure that the service levels are in accordance with the standards. If the third parties are unable to perform their duties under the agreement, or unable to perform their duties in a timely and cost-effective manner, which may affect the speed and quality of the services of the Company and dtac TriNet, the Company and dtac TriNet may choose to switch to alternative suppliers, albeit with potentially higher operating costs, to maintain quality of services.

4. Risks from exchange rate fluctuation

The Company is exposed to the foreign exchange rate fluctuation risk as the principal revenues of the Company are denominated in Thai Baht currency, while parts of the company’s expenditures are denominated in foreign currencies. The majority of expenditures are capital expenditures.

In term of FX risk management, the Company utilizes USD revenue from International Roaming to partially match the USD expense (Natural Hedge). In addition, the company has established an agreement with suppliers to pay part of the capital expenditure in Thai Baht. For the remaining unhedged exposure, the Company will manage such risk by considering the proper of financial instruments.

5. Major shareholders may have influence on decisions of the Company

Telenor and Thai Telco Holdings Co., Ltd. are major shareholders of the Company, holding collectively 65.05 per cent of the total issued shares of the Company (information as at 28 July 2016).

Thai Telco Holdings Co., Ltd. underwent a shareholding restructuring in July 2012, whereby Bencharongkul Group, the founder of the Company, now holds shares in the Company through Thai Telco Holdings Co., Ltd. Bencharongkul Group holds 51 per cent of the total issued shares of Thai Telco Holdings Co., Ltd.

As a result, Telenor and Thai Telco Holdings Co., Ltd. (including Bencharongkul Group) may exert influence over corporate decisions of the Company, except for matters which they are not eligible to vote due to any special interest or conflict of interest relating thereto.