Global Research Sector-Telecommunication August 2011

GCC Telecom Sector Quarterly - 2Q11

Virgin Mobile shown the exit door Iraq parliament rejects five-year plan Etisalat renews its management pact with Mobily

GCC Telecom
Faisal Hasan, CFA Head of Research [email protected] Tel: (965) 2295-1270 Chandresh Bhatt Vice President [email protected] Tel.: (965) 22951282 Umar Faruqui Financial Analyst [email protected] Tel.: (965) 22951438 Global Investment House www.globalinv.net

Virgin Mobile on its way out The telecom regulator in Qatar has asked Qatar Telecom to wind up its Virgin Mobile services. Virgin Mobile has been part of a controversy since its launch as it was seen as a third mobile operator rather than as part of Qatar Telecom. Opponents advocated that Virgin Mobile shouldnt be allowed to operate as it is effectively a third mobile operator which has evaded paying license fees. Qtel will now have to transfer its existing Virgin Mobile customers to the other similar services it offers or will have to give cash refund for the value of the SIM card and credit balance. The decision will have a negative impact on Qatar Telecom which is facing tough competition from Vodafone Qatar. Iraq parliament asks telecom operators to pay license fees and fines within a month Iraqi parliament has now asked telecom operators to pay license fees and fines within a month. This is a turn-around from the previous agreement where the companies were required to pay the fees over a five-year time horizon. The operators are Zain, Qtels affiliate Asiacell and Korek which is partly owned by France Telecom. Asiacell, Zain and Korek are required to pay USD625mn, USD803mn and USD768mn respectively. Batelco, Kingdom Holding enter into a non-binding agreement with Zain Saudi Batelco and Kingdom holding have entered into a non-binding agreement with Zain Saudi to buy a 25.0% stake. According to media reports the deal is worth around USD1.2bn. However, because its a non-binding agreement any or both of the partners can withdraw. There has been no further update since the last announcement in July 2011. Etisalat renews its management pact with Mobily UAEs Etisalat which holds a stake in Etihad Etisalat (Mobily) of Saudi Arabia has renewed its management pact with Mobily for a period of five years. The details of the agreement havent been disclosed. However, we believe that Mobily is likely to focus on the Saudi market while any overseas expansion will be undertaken by Etisalat directly, Etihad Atheeb Telecom gets permission to cut capital Etihad Atheeb Telecom, which is a fixed line operator, has decided to cut its capital from SAR1.0bn to SAR400mn. The company is seeking to increase its capital to SAR1.57bn through a rights issue. The company has previously filed a lawsuit against STC for alleged violation of antimonopoly laws.
Global Research Telecom Coverage
Ticker Country Mkt Cap (USD m n) Price* (in LC) Stock Perform ance 1m 3m 12m Div. Yield P/E (x) 2011E 2012E P/BV (x) 2011E 2012E

Zain Wataniya Telecom Saudi Telecom Mobily Etisalat Qtel Vodafone Qatar Omantel Batelco

Kuwait Kuwait KSA KSA UAE Qatar Qatar Oman Bahrain

14,860 3,552 19,093 9,847 21,956 6,885 1,730 2,143 1,566

0.94 1.92 34.10 52.80 10.20 142.40 7.45 1.10 0.40

-6.0% -5.9% -3.4% -0.01% -2.8% -8.8% -3.9% -1.6% -4.3%

-9.6% -4.0% -5.0% 2.9% 1.9% -9.1% -5.0% 3.4% -8.9%

-8.4% 8.7% -1.6% 9.4% 7.4% 4.7% -5.7% -0.3% -20.5%

8.5% 2.6% 5.5% 4.7% 5.9% 3.9% 9.1% 9.4%

11.5 10.3 9.1 7.7 11.3 9.0 nm 7.7 7.8

10.2 9.8 8.6 7.2 10.9 8.5 nm 7.8 7.0

11.5 1.2 1.4 1.9 2.0 1.2 0.9 1.7 1.1

10.2 1.1 1.3 1.7 1.8 1.1 1.0 1.6 1.0

Source: Global Research, Zawya & Bloomberg * Market Price as of 24th August 2011. In case of Vodafone Qatar financial year ends in March.

Global Research

GCC Telecom Quarterly Report

Bahrain GSM Sector Indicators

Bahrain Cellular Subscriber base (in mn)
1.72 1.68 1.64 1.60 1.56 1.52 1.48 Q2-2010 Q3-2010 -2.2% Q4-2010 Q1-2011 Q2-2011 Q-o-Q growth 1.60 1.60 0.2% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%

Bahrain Quarterly Customer Additions (in 000)

80.0
60.0

4.2%

63.99

67.4 47.2

4.3% 1.63

1.68 2.9%

40.0 20.0 (20.0)

1.57

3.00

(40.0) Q2-2010 Q3-2010

Bahrain Cellular Subscriber base (in mn) - LHS

(34.6) Q4-2010

Q1-2011

Q2-2011

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of June 2011, Bahrains total mobile subscriber base was at 1.68mn, registered a YoY increase of 5.2%. 2Q11 witnessed a QoQ growth of 2.9% in subscriber base. Operator-wise Subscriber Base (in 000) Operator-wise Customer Additions (in 000)
115.4

1,000
800

869 604

836

770

745

760

565

600

499

476 413

467

454

400
200 200 Q2-2010 Q3-2010

297 125

Q4-2010

Q1-2011

Q2-2011

120.0 100.0 80.0 60.0 40.0 20.0 (20.0) (40.0) (60.0) (80.0)

97.4 75.0 31.0 14.9 (9.0) 75.0 41.3

(42.0)

(33.0) (39.0) (66.0) (66.0)

(25.0) (23.0)

Q2-2010

Q3-2010

Q4-2010 Batelco Zain

Q1-2011 Viva

Q2-2011

Batelco

Zain

Viva

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 2Q11, Batelco and Zain have witnessed YoY decline of 12.6% and 22.7%, respectively, in their subscriber base. Quarterly Market Share based on Subscribers
Q3-2010
Q4-2010

Zain lost 9k subscribers while Batelco & Viva gained 14.9k & 41.3k subscribers, respectively, during the nd 2 quarter.

Q1-2011

Q2-2011

12.5%

25.3%
18.6%

27.0%
45.6%

45.2%

52.2% 35.3%
32.0%

49.4%

29.1%

27.8%

Batelco

Zain

Viva

Batelco

Zain

Viva

Batelco

Zain

Viva

Batelco

Zain

Viva

Over the last few quarters, Batelco and Zain are gradually losing their subscriber market share. The entry of the third operator, STC (Viva) resulted in stiff competition in Bahrain and it gained market share of around 27% at the end of 2Q11.

August 2011

Global Research

GCC Telecom Quarterly Report

Kuwait GSM Sector Indicators

Kuwait Cellular Subscriber base (in mn)
4.95 4.80 4.65 4.50 4.35
4.20 4.05 3.90 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011
Q-o-Q growth

Kuwait Quarterly Customer Additions (in mn)

5.8%
4.6%

0.25
0.21 0.20 0.17

4.80 4.59
4.45 4.1% 4.27 3.1%

4.3%

0.15
2.8%

0.12
0.06

0.14

3.0% 4.21 1.4%

0.10
0.05

1.3%

0.00 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011

Kuwait Cellular Subscriber base (in mn) - LHS

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of June 2011, Kuwaits total GSM subscriber base was at 4.80mn, registered a YoY increase of 13.9%. 2Q11 witnessed a QoQ growth of 4.6% in subscriber base, added 211.3k new subscribers during the quarter. Operator-wise Subscriber Base (in mn)
1.89 1.67 1.87 1.72 1.87 1.78 1.89
2.02

Operator-wise Customer Additions (in 000)

140.0 120.0 100.0 69.2 133.0 116.0 92.3

2.00 1.50
1.00

1.87

1.92

0.66

0.68

0.80

0.83

0.86

80.0
60.0 40.0

60.0 48.9
27.7 30.0 17.0

45.6
8.0

48.3
30.0

0.50
-

20.0 -

(16.0)
(1.0)

Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011

Zain Wataniya Viva

(20.0) Q2-2010 Q3-2010

Zain

Q4-2010

Q1-2011
Viva

Q2-2011

Wataniya

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 2Q11, Zain achieved a QoQ subscribers growth of 7% and Wataniya reported a growth of 2.6%.

In 2Q11, Zain took the higher share of new subscriber additions, added 133k new subscribers, followed by Wataniya which added 48.3k subscribers during the quarter.

Quarterly Market Share based on Subscribers

Q3-2010
Q4-2010
Q1-2011
2Q-2011

18.1%
16.0%

17.9%

18.0%
43.8%

42.0%

41.1% 40.8%
40.0%

42.1%

40.2%

40.0%

Zain

Wataniya

Viva

Zain

Wataniya

Viva

Zain

Wataniya

Viva

Zain

Wataniya

Viva

On YoY basis, Zain witnessed decline in subscriber market share from 44.8% in 2Q10 to 42.1% in 2Q11. In this quarter Wataniya & Viva have almost maintained their market share at 40% & 18% respectively. Vivas market share increased from 15.6% in 2Q10 to 17.9% in 2Q11.

August 2011

Global Research

GCC Telecom Quarterly Report

Oman GSM Sector Indicators

Oman Cellular Subscriber base (in mn)
5.00 4.50 4.00 3.50 3.00 2.50 2.00 4.53 3.0% 1.8% -2.9% 4.58 6.0% 3.0% 2.3% 0.0%
-3.0%

Oman Quarterly Customer Additions (in mn)

0.20 0.15 0.10
0.05

0.18
0.13 0.08

4.39 4.3%

4.61

4.47

0.10

0.00 -0.05 -0.10 -0.15

-0.20 (0.13) Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011

-6.0% Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011

Q-o-Q growth

Oman Cellular Subscriber base (in mn) - LHS

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of June 2011, Omans total mobile subscriber base was at 4.58mn, registered a YoY increase of 4.2%. 2Q11 witnessed a QoQ growth of 2.3% or 104.7k subscribers during the quarter. The subscriber growth has been slowed down due to implementation of new regulation on active subscribers. Operator-wise Subscriber Base (in mn) Operator-wise Customer Additions (in 000)
145.0

3.00 2.50

2.41 1.99

2.49 2.04

2.49 2.11

2.45 2.02

2.57 2.01

150.0
100.0

120.9

77.4
35.3 50.7 81.0

2.00 1.50 1.00 0.50 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011

50.0
-

3.0
(16.2) (50.0)

(42.9)
(89.3) Q1-2011

(100.0)
Q2-2010 Q3-2010 Q4-2010 Omantel

Q2-2011

Nawras

Omantel

Nawras

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 2Q11, Omantels mobile subscriber base grew marginally by 4.9% QoQ while Nawrass subscriber base declined marginally by 0.8%. Quarterly Market Share based on Subscribers
Q3-2010
Q4-2010

In 2Q11, subscriber base of Nawras declined by 16.2k QoQ while Omantels subscriber base increased by 120.9k.

Q1-2011

Q2-2011

45.0% 55.0%
54.1%

45.3%
45.9%

43.9% 56.1%

54.7%

Nawras

Omantel

Nawras

Omantel

Nawras

Omantel

Nawras

Omantel

Over the last few quarters sub. market share for both the operators, Omantel & Nawras, remained almost unchanged at 55% & 45% respectively. However, in 2Q11 Omantels market share increased a bit to 56%.

August 2011

Global Research

GCC Telecom Quarterly Report

Qatar GSM Sector Indicators

Qatar Cellular Subscriber base (in mn)
2.90 2.85 2.80 2.75 2.70 2.65

Qatar Quarterly Customer Additions (in mn)

3.0%
0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0.00 0.07 0.08

2.8%

2.8%

2.83 1.7% 2.73 2.69 0.8% Q2-2010 Q3-2010 Q4-2010 Q1-2011 2.81

2.84

2.5%
2.0%

1.5%
1.0%

0.05 0.02
0.01

0.5% 0.2% Q2-2011 Q-o-Q growth

0.0%

Qatar Cellular Subscriber base (in mn) - LHS

Q2-2010

Q3-2010

Q4-2010

Q1-2011

Q2-2011

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of 2Q11 Qatars total GSM subscriber base was at 2.84mn, registered a YoY increase of 5.6%. 2Q11 witnessed a QoQ growth of 0.2% in subscriber base, added 5k new customers during the quarter. Operator-wise Subscriber Base (in mn) Operator-wise Customer Additions (in 000)
110.3

2.50 2.00 1.50 1.00 0.50 0.00

2.15

2.13

2.10

120.0

2.08

2.08

100.0 80.0 60.0 69.5 66.4 45.6

0.53

0.60

0.71

0.76

0.76

40.0

20.0
(20.0) (40.0)

4.5

0.8 4.2

(20.3) Q2-2010 Q3-2010 Qtel

(33.7) Q4-2010

(23.7)
Q1-2011 Q2-2011

Q2-2010

Q3-2010 Qtel

Q4-2010

Q1-2011

Q2-2011

Vodaf one

Vodaf one

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 2Q11, Qtels mobile subscriber base increased marginally by 0.04% QoQ while Vodafones subscriber base grew by 0.6%.

In 2Q11, Vodafone added 4.2k new subscribers while Qtel added 0.77k subscribers during the quarter. After 3 consecutive quarters of subscriber loss, Qtel ended the quarter in positive.

Quarterly Market Share based on Subscribers

Q3-2010
Q4-2010

Q1-2011

Q2-2011

22.0%

25.3%

26.7%

26.8%

78.0%

74.7%

73.3%

73.2%

Qtel

Vodaf one

Qtel

Vodaf one

Qtel

Vodaf one

Qtel

Vodaf one

Since last two quarters, subscribers market share remained constant with Qtels share at 73% and Vodafones share at 27%.

August 2011

Global Research

GCC Telecom Quarterly Report

Saudi GSM Sector Indicators

Saudi Cellular Subscriber base (in mn)
54.0 52.0 50.0 48.0 46.0
44.0 42.0

Saudi Quarterly Customer Additions (in mn)

8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

7.5%
51.60

53.30 3.9% 45.73 3.4% 47.31

48.01

3.3%

1.5%

40.0 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Saudi Cellular subscriber base Q1-2011 Growth

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

3.6

1.7

1.6 0.7

1.7

Q1-2010

Q2-2010

Q3-2010

Q4-2010

Q1-2011

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

Saudi cellular subscriber base grew by 3.3%QoQ to 53.3mn in 1Q11 after a 7.5%QoQ increase in 4Q10. As anticipated, subscriber growth slowed down after the Haj season in 4Q10. Typically the Haj season which has recently been falling in 4Q10 sees a surge in new subscribers as pilgrims start flocking to Saudi Arabia. Operator-wise Subscriber Base (in mn)
25.00 20.00 15.00 10.00 5.00 Q1-2010 Q2-2010 Bravo Q3-2010 STC Q4-2010 Zain Q1-2011 0.20 5.64 0.20 6.91 0.20 7.31 0.20 8.39
0.21 18.10

Operator-wise Customer Additions (in mn)

24.71
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 1.27
1.08

21.80 18.13

22.07 18.16

22.34 19.01

24.00
19.94

1.66

8.44

0.80
0.49 0.40

0.85

0.93

0.71

0.01 Q1-2010

0.40 0.27 0.27 0.03 0.00 0.03 0.00 0.00 Q2-2010

Bravo

0.01

0.05

Q3-2010
Mobily STC

Q4-2010
Zain

Q1-2011

Mobily

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

Saudi Telecom managed to increase its subscriber base to 24.7mn at the end of 1Q11 compared to 21.8mn at the end of 1Q10. Meanwhile, Mobily increased its subscriber base to 19.9mn. Quarterly Market Share based on Subscribers
Q2-2010
0.4%

The growth was driven by Mobily and STC as they managed to increase their subscriber base by an estimated 0.93mn and 0.71mn respectively in 1Q11 on the back of aggressive advertising campaigns.

Q3-2010
0.4%

Q4-2010
0.4%

Q1-2011
0.4%

14.6%
38.3%

15.2%
37.8%

16.3%
36.8%

15.8%
37.4%

46.7%

46.5%

46.5%

46.4%

Bravo

Mobily

Saudi Telecom

Zain

Bravo

Mobily

Saudi Telecom

Zain

Bravo

Mobily

Saudi Telecom

Zain

Bravo

Mobily

Saudi Telecom

Zain

Over the last three quarters, Saudi Telecom market share has stabilized at around 46.5%. Meanwhile, Mobily managed to increase its market share to 37.4% at the end of 1Q11 from 36.8% at the end of 2010.

August 2011

Global Research

GCC Telecom Quarterly Report

UAE GSM Sector Indicators

UAE Cellular Subscriber base (in mn)
12.50

UAE Quarterly Customer Additions (in mn)

12.28
2.8% 2.0% 1.3% 0.5%
0.30 0.25 0.20 0.15 0.10 0.05
0.00 0.17

0.27 0.24 0.20

12.00 11.50 11.00

2.4% 11.72

12.09 11.89 1.4% 1.7%

12.04

2.0%

-0.5%
10.50

-0.3% -1.0%

-0.05 -0.10 Q2-2010 Q3-2010 Q4-2010 -0.06 Q1-2011 Q2-2011

Q2-2010

Q3-2010

Q4-2010

Q1-2011

Q2-2011

UAE Cellular Subscriber base (in mn) - LHS

Q-o-Q growth

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of June 2011, UAEs total GSM subscriber base was at 12.28mn, registered a YoY increase of 4.7%. 2Q11 witnessed a QoQ increase of 2.0% or 241k subscribers during the quarter. Operator-wise Subscriber Base (in mn) Operator-wise Customer Additions (in 000)
252.1 182.1 90.0 159.8 10.0 70.0 272.0

8.50 7.50 6.50 5.50 4.50 3.50 2.50 1.50

7.80

7.81

7.76

7.43

7.50

300.0

200.0
100.0

171.0

3.92

4.08

4.33

4.61

4.78

(100.0)

(50.0)

(200.0)
(300.0) (330.0) Q2-2010 Q3-2010 Q4-2010
DU

Q2-2010

Q3-2010

Q4-2010
Etisalat DU

Q1-2011

Q2-2011

(400.0)

Q1-2011

Q2-2011

Etisalat

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 2Q11, Etisalats mobile subscriber base grew marginally by 0.9% QoQ while DUs subscriber base grew by 3.7%. Quarterly Market Share based on Subscribers
3Q10
4Q10

In 2Q11, Etisalat added 70k subscribers while DU added 171k subscribers.

1Q11

2Q11

34.3%

35.8% 64.2%

38.3%

38.9%
61.7%

65.7%

61.1%

Etisalat

DU

Etisalat

DU
Etisalat DU

Etisalat

DU

DU achieved significant mileage in terms of subscribers market share which increased from 31% at the end of 4Q09 and 35.8% in 4Q10 to 38.9% at the end of 2Q11.

August 2011

Global Research

GCC Telecom Quarterly Report

Sector Universe Outlook

Global Research Telecom Universe 2Q11 Performance Key Factors

Wataniya Telecoms revenue grew by 35.2% YoY and 7.4% QoQ to KWD182.3mn. The group EBITDA grew by 52.1% YoY and 11.9% QoQ to KWD2.1mn, resulting in EBITDA margin of 45.0% which increased from 40.1% in 2Q10. Net profit att. to equity holders of the parent co. (ex-revaluation gain) was at KWD23.3mn, registered a YoY growth of 18.7% and QoQ growth of 18.9%. In the 1H11, top-line grew by 35.2% YoY to KWD352.1mn, Group EBITDA grew by 54.6% to KWD155.5mn and net profit (exrevaluation gain) grew by 19.8% to KWD43.0mn. The consolidated net profit in 1H11 was at KWD308.5mn which also includes a fair value gain of KWD265.5mn recorded due to revaluation of existing stake held in Tunisiana following the increase in the shareholding from 50% to 75%.

In 2Q11, customer base in Kuwait increased to 1.92mn, an increase of 14.9% YoY & 2.6% QoQ. In Kuwait, ARPU declined marginally 0.6% YoY and 1.6% QoQ to US$36 at the end of 2Q11. EBITDA margin in Kuwait increased from 46% in 2Q10 to 48.4% in 2Q11. Due to stake increase 2Q numbers for Tunisiana are not comparable YoY. In Tunisia subscriber growth would be the key growth driver, which was at 2.8% QoQ. ARPU improved significantly by 18.8% QoQ to USD10.1 while on YoY it declined marginally by 1%. In 2Q11, EBITDA margin improved to 57.4% from 52.1% a year before and 54% in 1Q11. In Algeria subscriber base declined marginally by 0.3% while on YoY it increased marginally by 0.4% to 8.05mn. ARPU improved significantly by 12.3% QoQ & 38.9% YoY to USD8.2. In 2Q11, EBITDA margin improved to 39.6% from 37.8% in 1Q11 and 39.3% in 2Q10.

Zain groups revenue declined by 2.3% YoY and grew 3.3% QoQ to KWD335.1mn. The group EBITDA declined by 1.8% YoY and 1.6% QoQ to KWD145.4mn, resulting in EBITDA margin of 43.4% which increased marginally from 43.1% in 2Q10. The group finance cost declined during the quarter by 56.1% YoY to KWD8.5mn from KWD19.3mn in 2Q10. Net profit att. to equity holders of the parent co. was at KWD70.3mn, grew marginally by 0.5% QoQ. In the 1H11, groups revenue declined by 2.2% YoY to KWD659.4mn. The Group EBITDA increased by 2.1% to KWD293.1mn, resulting in EBITDA margin of 44.5%. Net profit att. to equity holders of the parent co. was at KWD140.2mn, registered a YoY growth of 12.2% on 2Q10 adjusted profit (excluding capital gain from the sale of Zain Africa). The group customer base stood at 39.6mn at the end of June 2011, up 16% YoY. During the quarter the company received remaining USD700mn from the sale of Africa assets to Bharti Airtel.

Out of total seven countries operations, Kuwait, Iraq, Sudan and Jordan are the key markets as these operations jointly account for about 93% of the group revenue for 1H11. During 1H11, Jordan, Bahrain and Sudan have recorded declining revenue and profitability. In 1H11 revenues from Kuwait grew marginally by 1.1% YoY to KWD172.7mn. Going forward, we expect that revenue from Kuwait is likely to remain under pressure as ARPU and market share is on decline due to increasing competitive pressure. The customer market share is on decline ever since third operator Viva started its operations. With regard to Iraq operation, it has high growth potential and its margins are also strong. In 1H11 subscriber base & revenue grew by 5.2% & 5.1% YoY to 12.3mn and KWD219.6mn respectively. Zains Sudan operations continue to be the largest mobile operator in the country, accounted for 57% market share. It increased its customer base by 23.8% YoY to 11.4mn. The operation was affected in USD financial performance as local currency decreased during the first half. In local currency, Zain Sudan reported an increase of 14% and 18% in revenues and EBITDA respectively. In KWD terms, Zain Sudan reported a YoY decline of 6.9% in revenues and net profit declined by 41.9% YoY which was impacted to some extent due to a tax increase from 3% to 15% from February 2011.

August 2011

Global Research 2Q11 Performance

GCC Telecom Quarterly Report Key Factors

Qatar Telecom (Qtel)s revenue grew by 18.0% YoY and 7.0% QoQ to QAR7,985.1mn in 2Q11. The group EBITDA grew by 12.8% YoY and 2.9% QoQ to QAR3,654mn, resulting in EBITDA margin of 45.8% which increased from 47.9% in 2Q10. In 2Q11, net profit att. to equity holders of the parent co. was at QAR673.3mn, registered a YoY growth of 17.9% and declined QoQ by 11.7%. In 1H11, top-line grew by 16.6% YoY to QAR15,446mn, EBITDA grew by 14.8% to QAR7,204mn and net profit (att. to equity holders of the parent co.) was at QAR1,435.5mn, registered a YoY growth of 16.7% on 1H10 normalized profit (excluding the one-off gain from reduced royalty payment).

In Qatar GSM subscriber growth is under pressure due to stiff competition. At the end of 2Q11, customer base in Qatar remained almost same QoQ to 2.08mn and registered a YoY decline of 3.6%. In 1H-2010, Qatar operation witnessed a marginal YoY growth of 0.8% in revenue to QAR2,862.3mn. EBITDA margin in Qatar improved from 53.2% in 1H10 to 54.4% in 1H11. On the back of improved margin, EBITDA grew by 3% from QR1,511.3mn in 1H10 to QR1,556.1mn in 1H11. In 2Q11, Indosat witnessed a YoY growth of 23.7% & QoQ growth of 3.1% in subscriber base to 47.6mn in 2Q11. Revenue and EBITDA grew by 9.3% and 2.8% YoY in 1H11. In Oman, subscriber base declined marginally YoY & QoQ by 0.2% and 1.8%, respectively, to reach 1.9mn. In Oman, YoY growth in revenue was 5.8% while EBITDA declined by 4.4%. EBITDA margin declined to 48.8% in 1H11 from 54% in 1H10. In Iraq YoY subscriber growth was at 7.4% and QoQ growth was at 2.4% in 2Q to reach 8.5mn. In Iraq, YoY revenue and EBITDA growth was 17.8% and 12.4%, respectively in 1H11. Revenue from Wataniya Telecoms group operations grew by 40.7% to QAR4,647mn and YoY EBITDA growth at 61% to stood at QAR2,050mn. This revenue & EBITDA growth was mainly aided by the full consolidation of Tunisiana. In June 2009 it launched its mobile services and in a span of around 21-months achieved significant mileage with 26.8% customer market share and 23.4% mobile revenue market share for the June 2011 quarter. In March 2010, Vodafone Qatar was awarded the countrys second fixed line license for QAR10mn. It launched its commercial broadband service at the Pearl on 14th July 2010. Vodafones entry in Qatar has changed landscape of Qatars telecom market as it was served by the only operator Qatar Telecom (Qtel). Vodafone has provided one more option to customers in terms of offer, pricing and customer service. To some extent it was also benefited from dual SIM effect as till now customers were not having second choice. Vodafone Qatar will be able to capitalize on several levels from its strong affiliation with Vodafone Group, including international roaming agreements, network purchasing, billing platforms and also handset purchasing. We expect Vodafone Qatar to report a YoY growth of 159.3% in total revenue to QAR937.6mn for FY2010-11 and estimate a revenue CAGR of 30.5% during FY2010-11 to FY2013-14. We estimate the operations to turn EBITDA positive on a cumulative basis in FY2011-12.

Vodafone Qatar follows April-March as its financial year. In 1Q11-12, Vodafones revenue grew by 65.3% YoY to QAR290.6mn. Mobile customer base increased by 42.5% YoY to 761k which gives it a customer market share of 26.8% & mobile revenue market share of 23.4%. ARPU increased 11% YoY to reach QAR116 (USD31.9) for quarter ended 30-June-11. It achieved positive EBITDA of QAR30.9mn in 1Q11-12 as compared to negative EBITDA of QAR8.8mn reported in 1Q1011. Net loss reduced by 17.4% YoY to QAR122.3mn.

August 2011

Global Research 2Q11 Performance

Saudi Telecom Company net profit increased by 9.4%YoY to SAR2.26bn in 2Q11 driven by increase in broadband revenue. According to the press release, mobile subscriber base increased by 8.0% from a year earlier and broadband customers exceeded 11mn by the end of 2Q11. The increase in subscriber base was reflected in the increase in sales revenue by 10.2%YoY to SAR13.9bn.Contribution of international operations to total revenue increased to around 34.0% in 1H11 compared to around 31.0% in the corresponding period last year. Meanwhile EBITDA grew by 12.9%YoY to SAR5,085mn in 2Q11 due to increase in higher margin broadband revenues and efforts by group companies to cut down on costs. There was also an improvement in EBITDA margins to 36.6% in 2Q11 compared to 35.7% in same quarter last year. The company announced an interim dividend of SAR0.5 per share which was lower than our expectation of SAR0.75 per share. This is the second consecutive time that the company announced a dividend of SAR0.5 per share indicating that it might be a policy change keeping in mind the capital expenditure requirements.

GCC Telecom Quarterly Report Key Factors

Refinement and consolidation of overseas portfolio. Effective market, promotional and operational strategies to retain and attract new customers in the face of growing competition in the domestic market. Expansion of 3G services to encourage use of value added services which will provide support to ARPUs. Tapping into the high growth broadband market in Saudi Arabia. Streamlining of the organization in view of the new competitive environment.

Etihad Etisalat announced net profit growth of 29.2%YoY. The net profit growth was driven by increase in revenues by 29.1%YoY. According to the press release, higher revenue was attributable to higher minutes of usage, data transmission and increase in Smartphone sales. As anticipated, data revenues increased to 20.0% of total revenues in 1H11 while post-paid revenues increased by 32.0%YoY in 1H11. We expect the strong growth in profitability to continue in 2H11 as the broadband demand remains strong. Mobily is the market leader in mobile broadband market with an estimated market share of 75.0%. Meanwhile, EBITDA margins increased to 35.0% in 1H11 compared to 34.0% in 1H10 reflecting the impact of high margin data revenue. Oman Telecommunication Co. (Omantel)s group revenue grew marginally by 3.8% YoY and 0.3% QoQ to OMR111.8mn. During the quarter, Group expenses rose 8.7% YoY and declined 1.7% QoQ to OMR81.3mn. In 2Q11, the group EBITDA grew by 0.4% YoY and 4.8% QoQ to OMR52mn while EBITDA margin declined to 46.5% from 48.1% in 2Q10. Net profit att. to equity holders of the parent co. was at OMR29mn, registered a YoY increase of 1.5% and QoQ increase of 11.6%. In the 1H11, topline grew by 2.2% YoY to OMR223.3mn, group expenses increased by 9.4% YoY to OMR164mn and net profit declined by 9.8% YoY to OMR55.0mn. The company's total customer base increased by 3.2% YoY to 3.348mn, while its mobile business-Oman Mobile--continued to see significant growth with the mobile network's market share increasing to 56.1%.

Acquisitions in the broadband market, such as that of Bayanat Al-Oula will provide exposure to the high-growth broadband market in Saudi Arabia. Targeting of high ARPU post-paid customers. Tie-ups with popular international cell phone brands such as Blackberry and I-Phone will continue to prop up mobile subscriber base. Expansion of network coverage along with focus on quality. Mobily has invested heavily to increase its coverage area. Increasing the portfolio of government and private sector contracts.

As indicated by the management, the company is reaping benefits of its investments made in 3.5G and Next Generation Network in terms of addressing potential growth of broadband services. Currently it has over 274k broadband customers, which is an increase of 67% YoY. Revenue growth was impacted by decline in international gateway revenues as Nawras (the 2nd operator) started its own international gateway. With competition in fixed line segment and commissioning of international gateway operations by Nawras beginning May10, the international origination traffic has been switched to their own network impacting wholesale revenues of Omantel (declined by 23.2% YoY in 2Q11). During 2Q, mobile revenue grew 6.1% YoY and 8.1% QoQ to OMR64.3mn. In 2Q mobile ARPU remained resilient at OMR9.8. We expect it to come under pressure due to competitive pressure.

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Global Research 2Q11 Performance

GCC Telecom Quarterly Report Key Factors

Etisalats group revenue declined by 1.5% YoY and 1.4% QoQ to AED7,929.5mn. The net profit att. to equity holders of the parent co. declined by 14.9% YoY and 12.3% QoQ to AED1,594mn. Its operating expenses grew by 7.6% YoY to AED4,991.7mn. Operating expenses as a percentage of total revenue grew to 63% in 2Q11 from 57.7% in 2Q10. The subdued overall performance for 2Q was mainly due to intense competitive pressures in its home market UAE In 1H11, groups revenue grew marginally by 0.3% YoY to AED15969.4mn. Net profit att. to equity holders of the parent co. was at AED3,411.5mn, registered a YoY decline of 11.8%. In 1H11, the revenue and profit from UAE witnessed a YoY decline of 4% and 14.9% to AED12,175.6mn and AED6,020.5mn respectively. In 1H11, revenue from international operations grew by 17.4% YoY to AED3,933.9mn.

Etisalat group has withdrawn its offer to buy a 46% stake in Kuwaits Zain for US$11.7bn (at a price of KD1.7 per share). We believe that UAE would still be the main revenue driver for Etisalat, however, the key growth area in the UAE would be data and internet services. But since last few quarters, we have seen that both revenue and profitability from UAE are under pressure, mainly due to competitive pressure. UAE is becoming a matured telecom market (pen. 200% plus) therefore top-line growth from UAE will slowdown going forward. Amongst international operations, we are optimistic about Etisalats operations in Egypt and Saudi Arabia. These markets will be the key value drivers in the short to medium term. Etisalat is a net cash positive company, which enables it to continue pursuing its expansion strategy and eye strategic acquisitions. We believe that going forward overseas expansion would be the key for further growth.

Batelcos net profit declined by 4.7%YoY to BHD21.3mn in 2Q11 as intense competition in the domestic market continued to erode profitability, particularly with the entry of the third mobile operator Viva Bahrain. However, the net profit was 13.3% higher than our estimate of BHD18.8mn as the share of profit from associates turned positive to BHD4,000 compared to our estimate of a loss. Meanwhile, operating profits suffered a decline of 13.6% to BHD22.9mn as a result of decline in revenues by 2.9%YoY to BHD82.4mn and increase in costs. Network operating costs and staff costs increased to 33.9% and 16.0% of revenues respectively in 2Q10 compared to 32.6% and13.9% of revenues respectively in 2Q10.

The companys Jordan operations will be the mainstay for the company in the medium-term with the decline in market share in the domestic market and required time for Indian operations to turn around. The Saudi market will become an important cornerstone of the companys growth if the planned acquisition of Zain KSA goes ahead. Management of operations in India will be a key growth driver for the company in the long term. S Tel has mobile licenses to operate in 6 states of India which includes Himachal Pradesh, Orissa, Bihar, Jharkhand, Jammu and Kashmir and Assam circles.

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Global Research

GCC Telecom Quarterly Report

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