Global Research Sector-Telecommunication May 2011

GCC Telecom Sector Quarterly - 1Q11

Batelco seeks Zain KSA management rights SITC IPO received huge response Technical glitch delays MNP in UAE

GCC Telecom
Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) 2295-1270 Chandresh Bhatt Vice President cbhatt@global.com.kw Tel.: (965) 22951282 Umar Faruqui Financial Analyst ufaruqui@global.com.kw Tel.: (965) 22951438 Global Investment House www.globalinv.net

Batelco seeks Zain KSA management rights Batelco and Kingdom Holdings joint bid for a stake in Zain Saudi may face some hurdles over management rights. In March, Zain Group said it would sell its 25% stake to Batelco and Kingdom Holdings consortium. However, Batelco wants the right to manage Zain Saudi if the deal goes through, or it will lower its bid. The issue appears to revolve on whether or not the Saudi stakeholders will accept Batelcos proposal. In the event the request is declined, Batelco is expected to make Zain Kuwait a revised, lower offer, which is not expected to be acceptable to Zain. Kingdom Holding and Batelco however felt the need to issue a statement saying that recent news surrounding the acquisition of the Zain stake was unsubstantiated and speculative in nature. They added that negotiations between all parties are still on-going and all are committed to starting the due diligence process and to conclude this transaction successfully. SITC IPO received huge response Saudi Integrated Telecommunications Co.'s (SITC) SAR300mn (USD80m) IPO received huge response with a coverage of 294%. The issue raised SAR880.7mn from around 1.1mn subscribers. The telecoms company had offered 30mn shares, or 30% of its capital, at SAR10 each to Saudi investors. Another 5mn shares were allocated to the General Organization for Social Insurance. SITC's capital is SAR1bn divided into 100mn shares with a nominal value of SAR10 per share, including 65mn shares for the founding shareholders representing 65% of the company's share capital. The company will use the proceeds of the IPO to pay off the license fees. SITC will be the third to offer fixed services in Saudi Arabia along with Atheeb Telecom and state-run Saudi Telecom Co. Technical glitch delays MNP in UAE The UAE Telecommunications Regulatory Authority (TRA) had confirmed that it is running a bit late on schedule in launching the mobile number portability (MNP), after unforeseen technical hurdles delayed the launch which was planned to be available in 1Q11. The launch of MNP will give mobile users the choice to migrate to another service provider while retaining their existing numbers. In January, the regulator announced 1Q11 as the revised date for launching the service, which has been delayed on a number of occasions since it was first announced in 2009. Previous delays were understood to have occurred because of the time taken to resolve several technical issues between the regulator and the telecoms operators, Etisalat, and du.
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

16,240 3,590 19,999 9,706 22,161 7,491 1,832 2,136 1,666

1.04 1.96 37.50 52.00 10.30 155.00 7.89 1.10 0.436

-13.3% -3.0% 3.3% -2.8% -0.5% -1.6% -0.9% -1.6% -9.9%

-11.9% 14.7% 4.5% 12.3% -2.4% 31.2% 3.3% 3.4% -7.6%

2.3% 21.6% 12.8% 9.6% 3.4% 25.6% -3.8% -0.3% -17.9%

4.8% 2.6% 8.2% 4.8% 5.8% 3.5% 9.1% 6.8%

9.9 10.6 9.0 7.6 10.6 9.8 nm 7.6 7.4

9.1 10.0 9.1 7.1 10.0 9.3 nm 7.7 6.9

1.3 1.2 1.6 1.9 2.0 1.3 1.0 1.7 1.1

1.3 1.1 1.5 1.6 1.8 1.2 1.0 1.6 1.0

Source: Global Research, Zawya & Bloomberg * Market Price as of 31st May 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)
1.68 1.64 1.60 1.56 1.52 1.48 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q-o-Q growth 1.53 0.2% -2.2% 3.4% 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 40.0 20.0 (20.0) (40.0) Q1-2010 Q2-2010 Q3-2010 (34.6) Q4-2010 3.00 50.01 63.99 67.4

4.2% 1.60 1.60 1.57

4.3% 1.63

Bahrain Cellular Subscriber base (in mn) - LHS

Q1-2011

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of March 2011, Bahrains total mobile subscriber base was at 1.63mn, registered a YoY increase of 6.5%. 1Q11 witnessed a QoQ growth of 4.3% in subscriber base. Operator-wise Subscriber Base (in 000) Operator-wise Customer Additions (in 000)
115.4
1,000 800 600 400 200 200 Q1-2010 Q2-2010 Q3-2010 Batelco Zain Q4-2010 Viva Q1-2011 125 50 838 646 869 604 836 770 745

565

499 297

476 413

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

97.4 75.0 50.0 16.0 31.0 75.0

(16.0) (42.0) (33.0) (39.0)

(25.00) (23.00) (66.00) (66.00)

Q1-2010

Q2-2010

Q3-2010 Batelco Zain

Q4-2010

Q1-2011

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 1Q11, Batelco and Zain have witnessed YoY decline of 11.1% and 26.3%, respectively, in their subscriber base. Quarterly Market Share based on Subscribers
Q2-2010

Batelco lost 25k & Zain lost 23k subscribers during the 1st quarter.

Q3-2010

Q4-2010

Q1-2011

7.8%

12.5%
18.6%

25.3% 45.6%

37.8%

54.4%
35.3%

52.2%
32.0%

49.4%

29.1%

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 25.3% at the end of 1Q11.

May 2011

Global Research

GCC Telecom Quarterly Report

Kuwait GSM Sector Indicators

Kuwait Cellular Subscriber base (in mn)
4.65 4.50 4.35 4.20 4.05 3.90 3.75 Q1-2010 Q2-2010 1.4% Q3-2010 Q4-2010 Q1-2011
Q-o-Q growth

Kuwait Quarterly Customer Additions (in mn)

4.59 7.3% 5.8%

0.25 0.20 0.15 0.10

0.23 0.17 0.12 0.06 0.14

4.45 5.9% 4.21 4.09 3.0% 4.27 4.1% 3.1% 4.3% 2.8% 1.3%

0.05 0.00 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011

Kuwait Cellular Subscriber base (in mn) - LHS

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of March 2011, Kuwaits total GSM subscriber base was at 4.59mn, registered a YoY increase of 12.2%. 1Q11 witnessed a QoQ growth of 3.1% in subscriber base, added 139.3k new subscribers during the quarter. Operator-wise Subscriber Base (in mn)
1.88 1.62 1.89 1.67 1.87 1.72 1.87 1.78 1.89

Operator-wise Customer Additions (in 000)

120.0 100.0 80.0 116.0 99.2 86.8 69.2 60.0 41.0 45.6 48.9 27.7 30.0 17.0 (1.0) (16.0) Q3-2010 Q4-2010
Viva

2.00 1.50 1.00 0.50 -

1.87

92.3

0.59

0.66

0.68

0.80

0.83

60.0 40.0 20.0 -

8.0

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

Zain Wataniya Viva

(20.0) Q1-2010 Q2-2010

Zain

Q1-2011

Wataniya

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 1Q11, Wataniya achieved a QoQ subscribers growth of 5.2% and Viva reported a growth of 3.7% whereas Zains subscriber base grew marginally by 0.9%. Quarterly Market Share based on Subscribers
Q2-2010
Q3-2010

Wataniya took the higher share of new subscriber additions in 1Q11, posing stiff competition to Zain and Viva.

Q4-2010

Q1-2011

18.1%
15.6% 44.8% 39.6%
40.2% 16.0% 43.8%

18.0% 42.0% 40.0%

41.1% 40.8%

Zain

Wataniya

Viva

Zain

Wataniya

Viva

Zain

Wataniya

Viva

Zain

Wataniya

Viva

Zain witnessed significant decline in subscriber market share from 45.9% in 1Q10 to 41.1% in 1Q11. Since last few quarters Wataniya witnessed gradual increase in market share from 39.7% in 1Q10 to 40.8% in 1Q11. Vivas market share increased from 14.4% in 1Q10 to 18.1% in 1Q11.

May 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 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q-o-Q growth 9.0% 6.0% 3.0% 0.3% -3.0% 0.0% -3.0% -6.0%

Oman Quarterly Customer Additions (in mn)

0.30 0.25 0.20 0.15 0.10 0.05 0.00 -0.05 -0.10 -0.15 -0.20 0.23 0.17 0.13 0.01 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011

4.20 5.8%

4.37

4.50 3.0%

4.52

4.38

4.1%

Oman Cellular Subscriber base (in mn) - LHS

-0.14

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of March 2011, Omans total mobile subscriber base was at 4.38mn, registered a YoY increase of 4.3%. 1Q11 witnessed a QoQ decline of 3.0% or 135k subscribers during the quarter. Decline in subscriber numbers was mainly attributed to reclassification of active subscribers in-line with the regulatory changes, whereby the period of subscriber inactivity has been reduced from 12 to 6 months apart from some other measures as well, where subscribers with more than ten SIMs needed to be reduced to maximum of ten. Operator-wise Subscriber Base (in mn)
2.26 1.94 2.41 1.97 2.49 2.01 2.49 2.03 2.45 1.93

Operator-wise Customer Additions (in 000)

200.0 150.0 145.0 100.0 50.0 (50.0) (43.0) Q1-2010 Q2-2010 Q3-2010 Omantel Q4-2010 (92.0) Q1-2011 76.8 27.4 81.0 49.4 11.1 3.0

2.50 2.00 1.50 1.00 0.50 -

153.0

Q1-2010

Q2-2010

Q3-2010

Q4-2010

Q1-2011

(100.0)

Nawras

Omantel

Nawras

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 1Q11, subscriber base of Nawras declined by 92k QoQ while Omantels subscriber base declined by 43k.

Nawras took the higher hit in subscriber loss accounted for 68.2% of total sector subscriber loss in 1Q11 while Omantel accounted for the rest 31.8%.

Quarterly Market Share based on Subscribers

Q2-2010
Q3-2010
Q4-2010

Q1-2011

44.1%

44.9% 55.1%
55.3%

44.7%

44.8% 55.2%

55.9%

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 1Q11 Omantels market share increased a bit to 56%.

May 2011

Global Research

GCC Telecom Quarterly Report

Qatar GSM Sector Indicators

Qatar Cellular Subscriber base (in mn)
2.85 2.80 2.75 2.70 2.65 2.60 2.55 2.50 2.81 2.73 5.8% 2.61 2.69 2.8% 2.8% 1.7% Q1-2010 Q2-2010 Q3-2010 Q4-2010 0.8% Q1-2011 Q-o-Q growth 6.0% 3.0% 0.0% 2.83 9.0%

Qatar Quarterly Customer Additions (in mn)

0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 0.07 0.05 0.02 0.08 0.14

Qatar Cellular Subscriber base (in mn) - LHS

Source: Industry Sources & Global Research Source: Industry Sources & Global Research

At the end of 1Q11 Qatars total GSM subscriber base was at 2.83mn, registered a YoY increase of 8.4%. 1Q11 witnessed a QoQ growth of 0.8% in subscriber base, added 21.9k new customers during the quarter. Operator-wise Subscriber Base (in mn) Operator-wise Customer Additions (in 000)
111.4 110.3

2.50 2.00 1.50 1.00 0.50 0.00

2.15

2.15

2.13

2.10

2.08

120.0 100.0 80.0 60.0

69.5 31.2 4.5

66.4 45.6

0.46

0.53

0.60

0.71

0.76

40.0 20.0 (20.0)

Q1-2010

Q2-2010 Qtel

Q3-2010

Q4-2010

Q1-2011

(40.0) Q1-2010 Q2-2010 Qtel

(20.3) Q3-2010

(33.7) Q4-2010

(23.7) Q1-2011

Vodaf one

Vodaf one

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 1Q11, Qtels mobile subscriber base declined marginally by 1.1% QoQ while Vodafones subscriber base grew by 6.4%. Quarterly Market Share based on Subscribers
Q2-2010

In 1Q11, Vodafone added 45.6k new subscribers while Qtels subscriber base declined by 23.7k. Since last 3-quarters Qtels subscriber base is on decline.

Q3-2010

Q4-2010

Q1-2011

19.9%

22.0%

25.3%

26.7%

80.1%

78.0%

74.7%

73.3%

Qtel

Vodaf one

Qtel

Vodaf one

Qtel

Vodafone

Qtel

Vodaf one

In Qatars mobile segment, Vodafone is gradually gaining the subscribers market share which increased from 0.8% at the end of 2Q09 (when it started its operation) to 26.7% at the end of 1Q11.

May 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 40.0 Q4-2009 Q1-2010 Q2-2010 Q3-2010 Saudi Cellular subscriber base Q4-2010 Growth 44.03 4.8% 3.9% 45.73 3.4% 47.31 1.5% 48.01 51.60 7.5% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Saudi Quarterly Customer Additions (in mn)

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3.6

2.0

1.7

1.6 0.7

Q4-2009

Q1-2010

Q2-2010

Q3-2010

Q4-2010

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

Saudi cellular subscriber base grew by 17.2%YoY to 51.6mn in 2010. As anticipated subscribers additions shot up by 3.6mn in 4Q10 due to the Haj season. However, we expect the underlying trend of slowdown in growth to continue in 2011. Operator-wise Subscriber Base (in mn)
25.00 20.00 15.00 10.00 5.00 Q4-2009 Q1-2010 Bravo Q2-2010 STC Q3-2010 Zain Q4-2010 0.19 5.23 0.20 5.64 0.20 6.91 0.20 7.31 0.20 8.39 21.00 17.61 21.80 18.10 22.07 18.13 22.34 18.16 24.00 19.01
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 1.27 1.08 0.86 0.83 0.33 0.00 Q4-2009 0.01 Q1-2010 Bravo 0.80 0.49 0.40 0.27 0.03 0.00 Q2-2010 Mobily STC 0.85 0.40 0.27 0.00 0.000.03 Q3-2010 Zain Q4-2010

Operator-wise Customer Additions (in mn)

1.66

Mobily

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

Saudi Telecom managed to increase its subscriber base to 24mn at the end of 2010 compared to 21mn at the start of the year. Meanwhile, Mobily increased its subscriber base to over 19.0mn. Quarterly Market Share based on Subscribers
Q1-2010
12.3% 0.4%

The growth was driven by Zain KSA and STC as they managed to increase their subscriber base by 60.4% and 14.3% respectively in 2010 on the back of aggressive advertising campaigns.

Q2-2010
0.4% 14.6%

Q3-2010
0.4% 15.2%
38.3%

Q4-2010
0.4% 16.3%
37.8%

39.6%

36.8%

47.7%

46.7%

46.5%

46.5%

Bravo

Mobily

Saudi T elecom

Zain

Bravo

Mobily

Saudi Telecom

Zain

Bravo

Mobily

Saudi Telecom

Zain

Bravo

Mobily

Saudi Telecom

Zain

Over the last two quarters, Saudi Telecom market share has stabilized at 46.5%. Meanwhile, Zain KSA managed to increase its market share to 16.3% at the end of 2010 from 12.3% at the end of 2009.

May 2011

Global Research

GCC Telecom Quarterly Report

UAE GSM Sector Indicators

UAE Cellular Subscriber base (in mn)
12.50 12.09 12.00 11.50 11.00 -0.7% 10.50 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 UAE Cellular Subscriber base (in mn) - LHS Q-o-Q growth 2.1% 11.45 2.4% 11.72 11.89 1.4% 1.7% 12.01 3.0% 2.3% 1.5% 0.8% 0.0% -0.8% -1.5%

UAE Quarterly Customer Additions (in mn)

0.30 0.25 0.20 0.15 0.10 0.05 0.00 -0.05 -0.10 -0.15 0.27 0.23 0.17 0.20

-0.09 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

At the end of March 2011, UAEs total GSM subscriber base was at 12.01mn, registered a YoY increase of 4.9%. 1Q11 witnessed a QoQ decline of 0.7% or 88k subscribers during the quarter. Operator-wise Subscriber Base (in mn) Operator-wise Customer Additions (in 000)
252.1 262.0 182.1 90.0 159.8 10.0 (30.0) (50.0) 272.0

8.50 7.50 6.50 5.50 4.50 3.50 2.50 1.50

7.71

7.80

7.81

7.76

7.40

300.0 200.0 100.0

3.74

3.92

4.08

4.33

4.61

(100.0) (200.0) (300.0) (360.0) Q1-2010 Q2-2010 Q3-2010 DU Q4-2010 Q1-2011

Q1-2010

Q2-2010

Q3-2010 DU

Q4-2010

Q1-2011

(400.0)

Etisalat

Etisalat

Source: Industry Sources & Global Research

Source: Industry Sources & Global Research

In 1Q11, Etisalats mobile subscriber base declined by 4.6% QoQ while DUs subscriber base grew by 6.3%. Quarterly Market Share based on Subscribers
Q2-2010

In 1Q11, Etisalat lost 360k subscribers while DU added 272k subscribers.

Q3-2010

Q4-2010

Q1-2011

33.5%

34.3%
66.5%

35.8% 64.2%

38.4%

65.7%

61.6%

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 38.4% at the end of 1Q11.

May 2011

Global Research

GCC Telecom Quarterly Report

Sector Universe Outlook

Global Research Telecom Universe 1Q11 Performance
Wataniya Telecoms revenue grew by 35.2% YoY and 22.5% QoQ to KWD169.9mn. The group EBITDA grew by 57.5% YoY and 21.3% QoQ to KWD73.4mn,resulting in EBITDA margin of 43.2% which increased from 37.1% in 1Q10. In 1Q11, the company reported net profit of KWD285.1mn which includes oneoff fair value gain of KWD265.5mn on revaluation of existing stake in Tunisiana following the stake increase. Excluding this gain, net profit grew by 21.0% YoY to KD19.6mn in 1Q11.

Key Factors
In 1Q11, customer base in Kuwait increased to 1.87mn, an increase of 15.2% YoY & 5.1% QoQ. Revenue from Kuwait grew by 18.4% YoY & 7.7% QoQ to KWD62.6mn. EBITDA margin expanded by 666 bps YoY & 95 bps QoQ to 47.7% in 1Q11. On the back of significant margin expansion in 1Q11, EBITDA grew 37.8% YoY and 10.3% QoQ to KWD29.9mn. In the last few quarters, though Kuwait witnessed margin expansion, we expect ARPU as well as margin to come under pressure as competition is likely to intensify going forward. In January 2011 Wataniya Telecom increased its stake in Tunisiana to 75% from 50% while Princesse Holding holds the remaining 25% stake. Therefore, from 1Q11 onwards (starting from the date of acquisition), there has been a full consolidation of Tunisiana in Wataniyas consolidated financials as compared to proportionate consolidation till 2010. In Tunisia subscriber growth would be the key growth driver as ARPU is under pressure. Due to stake increase 1Q numbers for Tunisiana are not comparable YoY & QoQ. Revenues for 1Q11 were KWD44.7mn, EBITDA was at KWD24.1mn and net att. profit to Wataniya Telecom was KWD6.8mn. In 1Q11, EBITDA margin improved to 53.9% from 52.0% a year before. On 1Q10 adjusted financials (if we take full results of Tunisiana) revenue declined by 14% in 1Q11, EBITDA declined by 11.4% & net att. profit declined by 16.4%. In Algeria also growth in subscriber base would be the key growth driver. In 1Q11, subscriber base in Algeria declined to 8.08mn, a decline of 2.4% YoY and 2.1% QoQ. Revenue grew by 33.6% YoY & 5.6% QoQ to KWD50.5mn. EBITDA margin expanded by 338bps YoY & squeezed 172bps QoQ to 37.8% in 1Q11. On the back of significant margin expansion in 1Q11, EBITDA grew 46.9% YoY & 1.1% QoQ to KWD19.1mn. The net attributable profit to Wataniya Telecom for 1Q11 was KWD3.7mn compared to a net attributable loss of KWD0.7mn for the same period in 2010. On June 8th 2010, the Zain group disposed its entire shareholding in Zain Africa BV, Netherlands, (Africa Operations) to Indias Bharti Airtel International for an enterprise value of US$10.7bn. Now Zain group has Middle Eastern portfolio with operations in Kuwait, Bahrain, Saudi Arabia, Iraq, Jordan, Lebanon and Sudan. Currently, Zain KSA is going through a due diligence process with respect to Zain groups 25% stake sale to the Batelco/Kingdom holding consortium. 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 1Q11. During the quarter Jordan, Bahrain, Lebanon and Sudan have recorded declining revenue and profitability. In 1Q11 revenues from Kuwait declined marginally by 0.3% YoY to KWD85.5mn. Going forward, in Kuwait we expect that margins are likely to remain under pressure 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

Zain groups consolidated revenues declined by 1.6% YoY in 1Q11 to KWD324.4mn. The group revenues were dominated and led by 3 operations namely Iraq, Kuwait and Sudan. The group customer base stood at 37.6mn at the end of March 2011, up 20% from the same period a year earlier. The Group EBITDA increased by 6.1% to KWD147.7mn, resulting in EBITDA margin of 45.5%. The group finance cost declined during the quarter by 76.6% YoY to KWD5.5mn from KWD23.6mn in 1Q10. Net profit att. to equity holders of the parent co. was at KWD69.9mn, registered a YoY growth of 35.6%. During the quarter Zain recorded a loss of KWD23.5mn on currency revaluation whereas in 1Q10 there was a gain of KWD9.3mn towards this. During the quarter the group reversed an amount of KWD16.3mn as reversal of provisions (from the transaction and other costs related to sale of Zain Africa).

May 2011

Global Research 1Q11 Performance

GCC Telecom Quarterly Report Key Factors

and its margins are also strong. In 1Q11 subscriber base & revenue grew by 13.7% & 7.6% YoY to 12.06mn and KWD108.2mn 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 21.3% YoY to 10.7mn. Zain Sudan reported an increase of 13% and 11% in revenues and EBITDA respectively. The operation was affected in USD financial performance as local currency decreased by 7.4% against the dollar. Net profit was also impacted by currency variance; the operation reported an FX loss of USD52mn in 1Q11 versus an FX gain of USD32mn in 1Q10.

Qatar Telecom (Qtel)s revenue grew by 16.5% YoY and 4.3% QoQ to QAR7.5bn in 1Q11. The group EBITDA grew by 17% YoY and 21.5% QoQ to QAR3.6bn, resulting in EBITDA margin of 47.5% which increased from 47.3% in 1Q10. In 1Q11, net profit att. to equity holders of the parent co. was at QAR762.2mn, registered a YoY growth of 15.7% on 1Q10 normalized profit (excluding the one-off gain of QAR554mn from reduced royalty payment).

Vodafone Qatar follows April-March as its financial year. As the company launched its commercial operation in July 2009, the financial year 2009-10 was the companys first year of operation in which it reported a revenue of QAR361.5mn. In FY2010-11, Vodafones revenue grew by 158.6% YoY to QAR934.9mn. Mobile customer base increased by 62.8% YoY to 756.8k which gives it a 45% mobile population share, customer market share of 26.7% & mobile revenue market share of 22.9%. ARPU increased 14% over the year to reach QAR115 (USD31.6) for quarter ended 31-Mar-11. The company's EBITDA loss declined to QAR27.1mn in FY2010-11 from QAR225.3mn reported in the previous fiscal. It achieved positive EBITDA of QAR4.8mn for the last six months of 2010-11. Net loss reduced by 10.8% YoY to QAR600.7mn.

In Qatar GSM subscriber growth & ARPU are under pressure due to stiff competition. At the end of 1Q11, customer base in Qatar declined to 2.08mn, registered a YoY decline of 3.4% and 1.1% QoQ. Revenue from Qatar grew by 4.6% YoY and 5.6% QoQ to QAR1.4bn. EBITDA margin expanded by 214 bps YoY and 466 bps QoQ to 54.4% in 1Q11. On the back of significant margin expansion in 1Q11, EBITDA grew 8.9% YoY and 15.5% QoQ to QAR776.2mn. The growth in EBITDA primarily driven by cost efficiency efforts. Iraq, Oman and Indonesia are likely to drive further growth in group revenues & EBITDA. Indosat has growing subscriber base, strong margins and stronger currency (in 2010 Indonesian rupiah improved by 3.6% against USD and in 1Q11 by 3.1%). In 1Q11, Indosat mobile subscriber base increased by 21.2% YoY to reach 45.7mn. In 1Q11 revenue grew by 7.3% YoY to QAR2bn and EBITDA grew by 3.3% YoY to QAR954.3mn, resulting in EBITDA margin of 47.8% which declined from 49.6% in 1Q10. Going forward we are positive on Iraq and Oman as both these operations are performing well with growing revenue and strong margins. In Iraq & Oman strong ARPU is the main revenue driver. In Oman YoY subscriber base declined marginally by 0.2% in 1Q. In Oman, YoY growth in revenue was 9.5% while EBITDA declined by 3.6%. EBITDA margin declined to 51.2% in 1Q11 from 58.1% in 1Q10. In Iraq, YoY revenue and EBITDA growth was 17.0% and 13.9%, respectively in 1Q11. Revenue from Wataniya Telecoms group operations grew by 39.2% to QAR2.2bn which 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 26.7% customer market share and 22.9% mobile revenue market share for the March 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.

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Global Research 1Q11 Performance

GCC Telecom Quarterly Report Key Factors

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 and to achieve positive cash flow in FY2012-13. The operations are likely to achieve positive bottom-line in FY2013-14 with estimated full year net profit of QAR23mn.

Saudi Telecom Company net profit was is in-line with our forecasts, if the impact of two month salary of SAR375mn as part of Honorable Royal Decree is excluded. Our net profit estimate was SAR1,889mn for 1Q11 compared to before special salary profit of SAR1,948mn, a deviation of 3.0%. The net profit before special salary increased by 10.0%YoY driven by increase in revenues by 4.0% to SAR13,076mn. The company cited increase in contribution of international operations to total revenue to 34.0% compared to 31.0% in the corresponding period last year as the factor behind the increase. Meanwhile EBITDA grew by 8.0%YoY to SAR4,814mn 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 36.8% in 1Q11 compared to 35.6% in same quarter last year. The company announced an interim dividend of SAR0.5 per share which is lower than our expectation SAR0.75 per share possibly due to capital expenditure requirements relating to overseas operations. Etihad Etisalat Company witnessed a steep rise in profitability. The results were slightly lower than our estimate of SAR1,059mn, nevertheless it was a strong YoY performance. The company is leveraging its position as the leader in high-margin and under penetrated mobile broadband segment. The increase in proportion of higher margin segments can be gauged from the increase in EBITDA margins to 35.0% in 1Q11 from 33.0% in the corresponding quarter last year. We expect the strong performance to continue in the next three quarters as data revenue is expected to increase to 20.0% of the overall revenue in 2011. Our net profit estimate for 2011 is SAR4,815mn. Meanwhile, the decline of 32% in net profit on a QoQ basis is largely seasonal with the Haj season falling in 4Q10. The company also cited a big increase in sale of smart phones and tablets which carry low margins during the 1Q11 along with increase in interconnections costs compared 4Q10 as the reason behind the decline.

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.

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.

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Global Research 1Q11 Performance

Etisalats revenue grew marginally by 2.1% YoY & declined by 6.6% QoQ to AED8bn in 1Q11. The profit att. to equity holders of the parent co. declined by 8.9% YoY and 10.3% QoQ to AED1.8bn. Its operating expenses grew by 11.3% YoY to AED4.7bn. Operating expenses as a percentage of total revenue grew to 58.9% in 1Q11 from 54.1% in 1Q10. Its finance income declined by 35.6% to AED181.4mn while finance costs increased significantly to AED144.5mn from AED9.8mn in 1Q10. In 1Q11, the groups revenue and profit from UAE witnessed a YoY decline of 1.2% and 9.6% to AED6.3bn and AED1.5bn respectively. In 1Q11, revenue & profit from international operations grew by 15% to AED1.9bn. At the end of 1Q11, the companys mobile subscribers in UAE declined marginally to 7.4mn which was at 7.76mn at the end of 4Q10. In 1Q, internet subscriber base in UAE also declined to 1.2mn from 1.33mn at the end of 4Q10.

GCC Telecom Quarterly Report Key Factors

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. 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 (dec. by 3.6% YoY). Apart from this with intense competition in the GSM segment we expect revenue growth to remain on check going forward. Mobile ARPU is likely to come under pressure due to competitive pressure. Since last few quarters Omantel witnessed gradual increase in mobile subscribers market share which increased from 52.8% in 3Q09 to 55.9% at the end of 1Q11.

Oman Telecommunication Co. (Omantel)s revenue grew marginally by 0.8% YoY and 10.6% QoQ in 1Q11 to OMR111.5mn while net profit (att. to shareholders of parent co.) fell 19.8% YoY and 7.1% QoQ to OMR26mn. Group expenses rose 10% YoY to OMR82.7mn due to large-scale infrastructure investments. In 1Q11, the group EBITDA declined by 7.8% YoY to OMR49.6mn while EBITDA margin declined to 44.5% from 48.6% in 1Q10. The company's total customer base rose 4% YoY to 3.258mn, while its mobile business--Oman Mobile--continued to see significant growth with the mobile network's market share increasing to 55.9%.

Batelcos net profit was 17.8% lower than our forecast of BHD21.3mn. The discrepancy has been due to larger than expected losses from its Indian operations. The share of losses from associates more than doubled to BHD4.26mn in 1Q11 from BHD2.1mn in 1Q10. The net profit was also affected by increase in network operating expenses which increased to 33.7% of sales revenue in 1Q11 from 31.0% of sales revenue in 1Q10. The company is also suffering from intense competition in its domestic market as evidenced by the fall in revenue by 6.0%YoY to BHD80.8mn.

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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GCC Telecom Quarterly Report

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