December 16, EITC (du) 12-Month Fair Value: AED Recommendation: Buy - Risk Level**: 4. Reason for Report: Initiation of Coverage

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1 December 16, 2008 Key Data * Price as of close on December 15, Sources: Reuters, Zawya, and NBK Capital Rebased Performance Sources: MSCI, Reuters, and NBK Capital Key Ratios a = actual, f = forecast. Sources: Reuters and NBK Capital Analysts Closing Price* AED week High AED week Low AED 2.34 Reuters DU.DU 1 Dec-07 Apr-08 Aug-08 Dec-08 2Q2008 EBITDA a AED mln 3Q2008 EBITDA a AED mln ownership Structure Diala Hoteit Direct: diala.hoteit@nbkcapital.com MSCI UAE Lisa Fernandes Direct: lisa.fernandes@nbkcapital.com Avg. Value Traded per Day du AED 34.5 mln Market Cap AED 11.4 bln Current Number of Shares 4 bln Bloomberg DU DB Govt.:40% Mubadala Dev.Co.:20% ECT:20% Public:20% 2008 f 2009 f 2010 f 2011 f 2012 f P/E nmf EPS Growth nmf nmf 62% 56% 22% EV/ EBITDA nmf EBITDA Margin 7% 22% 29% 36% 40% EBITDA Growth nmf 353% 49% 36% 16% Dividend Yield 0.0% 0.0% 0.0% 5.3% 6.4% ROAE nmf 18% 23% 28% 27% 4Q2007 EBITDA f AED mln 1Q2009 EBITDA f AED mln Highlights EITC (du) 12-Month Fair Value: AED 4.53 Recommendation: Buy - Risk Level**: 4 Reason for Report: Initiation of Coverage It was only in February 2006 that the TRA ended the monopoly of Etisalat by granting a second mobile, fixedline, and Internet license to EITC, branded as du. Even though du is a startup company, it was able to grab 19% of the market by capturing 64% of the net additional subscribers within 10 months. As of 9M2008, du had a market share of 23%. With two mobile operators competing in the UAE, and taking into consideration the minor effect of the current financial crisis on the growth of the telecom market, we forecast that the penetration rate (using active subscribers) will increase from the current 141% to 163% in We forecast that du s mobile subscribers will grow at a CAGR of 11% over the next five years, while its market share will stabilize at 38% in The fixed-line penetration rate stands at 30% as of 9M2008, and we are forecasting it to increase to 35% by 2013, with du having a market share of 20%. As a startup company, du has been growing rapidly; its revenues reached AED 2.7 billion during 9M2008, compared to AED 1.5 billion in the first 10 months of operation in It was able to break even in terms of EBITDA in the 2Q2008, and it showed a positive profit in the 3Q2008. We forecast du s revenues to grow at a CAGR of 14% from and its EBITDA margin to continue growing to reach 42% in As for the net profit, we believe it will grow at a CAGR of 35% from We arrived at a 12-month fair value for du of AED 4.53 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison based on forward price-to-earnings ratio growth (PEG) and EV/EBITDA multiples. ** Please refer to the last page for recommendations and risk ratings.

2 Executive summary 3 Valuation 4 Discounted Cash Flow Valuation 4 Peer Group Comparison 6 Bull VS. Bear 7 Overview of UAE Telecom Market 8 Regulatory Environment & Potential New Licenses 8 Effect of the Current Financial Crisis 8 Mobile Market 9 Fixed-line Market 12 Internet and Data Services 13 EITC (du) Overview 15 Basic Information 15 du s Services 15 du s strategy 17 du Financial Analysis and Forecast 18 Mobile Market Forecast 18 Fixed-line Market Forecast 18 Revenues 19 EBITDA 21 Capital Expenditure 22 Financial Health 23 Financial Statements 24 NBK Capital Page 2 of 25

3 Executive summary Although the UAE is known as the most liberalized country in the GCC, it was late to fully liberate the telecom sector. In February 2006, the UAE Telecommunication Regulatory Authority (TRA) ended the monopoly of Emirates Telecommunications Corporation (Etisalat) by granting a second mobile, fixed-line, and Internet license to Emirates Integrated Telecommunication Company (EITC), branded as du. Even before the entry of du, the mobile penetration rate was already one of the highest in the GCC. Even though du is a startup company that is competing with Etisalat and does not have the support of an established operator as a strategic partner, the company grabbed 19% of the market by capturing 64% of the net additional subscribers within 10 months. With two mobile operators competing in the UAE, and taking into consideration the minor effect of the current financial crisis on the growth of the telecom market, we forecast that the penetration rate (using active subscribers) will increase from the current 141% to 163% in We forecast that du s mobile subscribers will grow at a CAGR of 11% over the next five years, while its market share will stabilize at 38% in According to management, du currently provides fixed-line services throughout the UAE and is the sole provider of fixed-line services in the free zones. The fixed-line penetration rate stands at 30% as of 9M2008 and we are forecasting it to increase to 35% by 2013, with du having a market share of 20%. As a startup company, du has been growing rapidly; its revenues reached AED 2.7 billion during 9M2008, compared to AED 1.5 billion in the first 10 months of operation in It was able to break even in terms of EBITDA in the 2Q2008, and it showed a positive profit in the 3Q2008. We forecast du s revenues to grow at a CAGR of 14% from and its EBITDA margin to continue growing to reach 42% in As for the net profit, we believe it will grow at a CAGR of 35% from From a valuation standpoint, using a combination of discount cash flow (DCF) and peer comparison based on forward PEG and EV/EBITDA multiples, we believe that du s fair value per share is AED 4.53, representing a 59% upside potential from the December 15, 2008, close. Hence, we placed a Buy recommendation on the stock. Based on our subjective criteria for rating risk, we have assigned du a risk rating of 4 over 5. The major risks we see that could affect the value of the company s stock are as follows: The global economic downturn is expected to have a slight effect on the telecom market in the UAE. The growth in the telecom sector is expected to slow down. The majority of du s subscribers are prepaid customers, who are characterized by low ARPU and high sensitivity to pricing. This leaves the company exposed to churn threats. Etisalat and du are competing head to head and are providing very competitive products and pricing. Thus, more pressure is expected on prices, and ARPU is likely to be negatively affected. NBK Capital Page 3 of 25

4 Valuation The purpose of this valuation exercise is to arrive, through the use of fundamental analysis, at a fair value estimate of the share price that should prevail for du in the next 12 months. However, this does not represent a guarantee that this value is achievable within that time frame, as a wide range of variables and market dynamics affect the market price of an asset. Each investor must use his or her favorite mix of fundamental research, technical analysis, and market intelligence to arrive at an investment decision that matches his or her objectives and tolerance for risk. We arrived at a 12-month fair value for du of AED 4.53 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison based on the forward price-toearnings-to-growth ratio (PEG) and EV/EBITDA. We specified a weight for each method, as shown in Figure 1. The greater weight is assigned to DCF, as this method examines the fundamentals of the company to determine its future cash-generating ability. The 12-month fair value of AED 4.53 represents a 59% upside potential from the December 15, 2008, close, hence our Buy recommendation. Figure 1 Fair Value per Share Our 12-month fair value per share for du is AED 4.53 Valuation Method Value weight Discounted cash flow AED % Peer comparison AED % weighted average fair value AED % Source: NBK Capital Discounted Cash Flow Valuation Our DCF valuation (Figure 2) is based on the forecasted financial results through The DCF valuation is a function of the following major variables, which have been estimated by our model: Future net operating profit less adjusted taxes (NOPLAT), which is driven primarily by expectations of sales and operating expenses. Future changes in working capital. Future net expenditures on fixed assets. The weighted average cost of capital (WACC), which is a weighted average of our estimated cost of equity and the after-tax cost of debt. The long-term expected growth rate in NOPLAT and the expected rate of return on net new invested capital (RONIC). NBK Capital Page 4 of 25

5 From the forecasted financial results, we extracted the free cash flows that were used in our valuation. We discounted those cash flows to a point in time that is 12 months in the future to obtain an estimate of the value of the company s operations. After subtracting net debt and minority interest and adding the value of non-operating assets, we arrived at a total equity value of AED 18 billion. In order to estimate the value of du s operations, we incorporated a varying WACC into our model. The chosen cost of equity (12.75%) is mainly a function of interest rate levels, risks in the operating environment, and a subjective assessment of the equity risk premium. Figure 2 DCF Valuation Figures in AED Thousands* Forecast Fiscal year Ends December Using the DCF valuation method, we arrived at a fair value per share of AED 4.57 Net Operating Profit after Tax 679,386 1,185,231 1,740,571 2,056,920 2,223,437 Add: Depreciation and Amortization 523, , , , ,464 Gross Cash Flow 1,202,591 1,795,095 2,438,491 2,836,387 3,079,901 (Incr.)Decr. in Working Capital (610,705) (744,377) (525,886) (13,611) (12,117) (Incr.)Decr. in Operating Fixed Assets (2,641,419) (1,299,273) (1,278,126) (1,113,952) (997,487) Free Cash Flow from Operations (2,049,533) (248,556) 634,479 1,708,824 2,070,297 Terminal Value ,410,942 Value of Operations in 12 Months 22,292,459 Add: Excess Cash 0 Add: Value of Long-Term Investments - Add: Value of Other Long-Term Assets - Less: Total Debt (3,996,273) Less: Minority Interest - Value of Equity in 12 Months 18,296,186 Per Share Value in AED 4.57 Source: NBK Capital Sensitivity Analysis We performed a sensitivity analysis (Figure 3) on two important inputs for our DCF valuation model: the cost of equity and the perpetual growth rate used in computing the terminal value. Figure 3 DCF Sensitivity We performed a sensitivity analysis on two major inputs for the DCF model Cost of Equity* Growth 4.50% 4.75% 5.00% 5.25% 5.50% 11.75% AED 5.12 AED 5.30 AED 5.50 AED 5.72 AED % AED 4.70 AED 4.84 AED 5.01 AED 5.18 AED % AED 4.32 AED 4.44 AED 4.57 AED 4.72 AED % AED 3.98 AED 4.08 AED 4.20 AED 4.32 AED % AED 3.68 AED 3.77 AED 3.86 AED 3.96 AED 4.07 *Variations in the cost of equity result in variations in WACC. Source: NBK Capital NBK Capital Page 5 of 25

6 Peer Group Comparison We compared du with publicly traded companies that operate in countries with mobile penetration rates similar to the UAE (Figure 4). We obtained the consensus forward earnings per share (EPS) and the consensus earnings growth estimates for each of the companies. The simple average PEG for the sample, excluding the highest and lowest values, was du, in contrast, currently trades at a lower PEG of 0.88, based on our 2009 forecasted EPS and next-three-years earnings growth rate. We also valued du against the EV/2009 EBITDA of the same sample. The simple average EV/2009 EBITDA for the sample, excluding the highest and lowest values, was du, in contrast, currently trades at an EV/2009 EBITDA of 6.16, based on our 2009 forecasted EBITDA and net debt levels. Using the simple average of the two multiples, excluding the outliers among the five companies in the sample, we estimate the value of a du share at AED This implies that du is currently undervalued, considering the current market price of AED Figure 4 Forward PEG and EV/2009 EBITDA Multiples Comparison Company Price* (Local Currency) Market Data Market Cap (usd Millions) EV / 2009 EBITDA 2009 Forecast EPS PEG The average EV/ EBITDA for the sample, excluding the outliers, stands at 4.34 True Corporation MTN Group Ltd 9,600 22, , Softbank Corp 1,408 14, Taiwan Mobile 45 4, Turkcell 6 12, Etisalat 12 19, ,203 weighted average Simple average Simple average excluding outliers Median *Prices as of last close. Sources: Reuters Knowledge and NBK Capital NBK Capital Page 6 of 25

7 Bull VS. Bear Bull Story du was awarded the second fixed-line, mobile, and Internet license; thus, it is competing with Etisalat on all business levels, and the company is able to provide integrated packages to its customers. Before the liquidity dried up, du was able to secure an AED 3 billion facility from local banks. Thus, we are not worried about du s future network rollout throughout the UAE. Since the mobile launch in February 2007, du has been able to prove itself in the telecom market by providing innovative pricing and products. As of 9M2008, the company was able to grab 23% of the mobile market share, and we expect du s mobile market share to reach 38% in du is using per-second billing, making the company a more attractive option for pricesensitive customers. Bear Story The global economic downturn is expected to affect the telecom market in the UAE. We believe that subscribers growth will be slower compared to previous years, as we are expecting a slowdown in tourism activities and in the population growth of expatriates working in the UAE. During , mobile subscribers in the UAE grew at a CAGR of 28%; for the years , we are expecting mobile subscribers to grow at a CAGR of only 4%. du is a startup company that is operating in a highly penetrated market. The company does not have the support of an established operator as a strategic partner to help it in growing its business. We believe a strategic partner would have brought more expertise and synergy to du. The majority of du s subscribers are prepaid customers (81%), who are characterized by low ARPU and high sensitivity to pricing; this leaves the company exposed to churn threats. Etisalat and du are competing head to head and are providing very competitive products and pricing. Thus, more pressure is expected on prices, and ARPU is likely to be negatively affected. While the majority of the operators in the region are expanding beyond their borders, du is still trying to establish itself in its home market. Like any startup, du faced some mobile connectivity problems including congestion in major areas like Dubai and Sharjah. NBK Capital Page 7 of 25

8 Overview of UAE Telecom Market Regulatory Environment & Potential New Licenses The increased interest of many countries in the region in joining the World Trade Organization (WTO) has led to a new wave of liberalization and reforms in the telecom sector. The TRA was established in 2004 as an independent body to oversee the telecom sector in the UAE as well as the issuance of new licenses. The TRA ended the monopoly of Etisalat by granting, in February 2006, a second mobile, fixed-line, and Internet license to du. At the beginning of 2008, the TRA compelled telecom operators to follow a price control policy procedure: Telecom operators must seek the approval of the TRA before changing the prices of their existing services or providing new services and marketing offers. The TRA banned VoIP in the country in order to protect telecom companies from losing the highmargin business of international calls. The TRA is also making progress on introducing mobile number portability (MNP), a service that allows customers to easily switch between operators. Figure 5 Liberalization of Telecom Operations in the UAE 1976 Entry of Etisalat 2004 Establishment of TRA 2006 License awarded to du 2007 Entry of du The UAE is currently a duopoly market Feb 2007 Launch of mobile services July 2007 Launch of fixed-line Source: NBK Capital Effect of the Current Financial Crisis For the past few years, the UAE, especially Dubai, has fascinated the world with its innovative developments, particularly in real estate projects. Dubai was able to transform itself into a world financial hub by opening up its markets. However, with the current financial crisis, we believe that the UAE telecom sector will be affected. The slowdown in economic growth is expected to lead to a) slowdown in tourism activity, b) slowdown in the population growth of expatriates, especially since large real estate companies have started laying off employees, c) tighter liquidity, and d) higher cost of borrowing. We assessed the impact of the financial crisis on both operators in the UAE, and the following conclusions were established: Voice services: A drop in minutes of usage is not expected; rather, we believe that subscribers growth will be slower compared to previous years. During , NBK Capital Page 8 of 25

9 mobile subscribers in the UAE grew at a CAGR of 28%; for the years , we are expecting mobile subscribers to grow at a CAGR of only 4%. Data services: We believe that revenue growth from data services will be the hardest hit. We expect a slow growth in data services. Roaming services: As previously mentioned, the expected slowdown in tourism activity will lead to a slowdown in the growth of roaming revenues. Expansion plan: The financial crisis will mainly affect operators acquisition plans, as banks will be more conservative in providing finances. Mobile Market Mobile Operators Etisalat has been the sole telecommunications services provider in the UAE since 1976 and introduced GSM services in In 2006, the TRA decided to end the company s 30 years of monopoly and granted a new telecom license to du. Profiting from the excess cash generated from the domestic market, Etisalat started aggressively expanding abroad in Some of Etisalat s major expansions are the following: Saudi Arabia Etihad Etisalat (Mobily) Pakistan Pakistan Telecommunications Company West Africa Atlantique Telecom Egypt Nile Telecom Egypt Zanzibar Zanzibar Telecom Limited Sudan Canar Telecommunications Company Limited India Swan Telecom At the end of 2007, Etisalat total revenues reached AED 21.3 billion, a growth of 31% compared to the same period last year. Mobile services contributed to 63% of total revenues in In terms of market capital, Etisalat is the second-largest telecom company after STC. Etisalat s market capital reached AED 73.3 billion on December 15, Penetration Rate and Subscriber Split The TRA recently set a definition for active subscribers in the UAE. A mobile customer who has made a call, or sent an SMS or MMS, or received a call within the last 90 days is considered an active subscriber. Thus, we estimate the number of inactive subscribers to be 20% of the total subscribers for Etisalat and du. However, in the beginning of 2008, du started to disclose the active number of subscribers, per the TRA definition. The UAE is one of the most penetrated mobile markets in the GCC (Figure 6).The penetration rate reached 121% at the end of 2007, with active subscribers growing at a CAGR of 28% from 2003 to This leap in the subscriber base was mainly due to the strong growth in the GDP fueled by the surge in oil prices, the rise of Dubai as a regional hub in the Middle East, and the social aspect of owning more than one mobile phone. NBK Capital Page 9 of 25

10 Figure 6 UAE Mobile Penetration Rate vs. GCC Countries Country The UAE is one of the most penetrated markets in the GCC Bahrain* 50% 72% 86% 100% 130% Kuwait* 65% 72% 74% 77% 81% Oman* 18% 24% 40% 54% 73% Qatar* 44% 54% 76% 115% 136% Saudi Arabia* 27% 32% 47% 68% 92% UAE* 59% 69% 79% 90% 121% Average 44% 54% 67% 84% 106% *Based on the estimated active penetration rate. Sources: Annual Reports and NBK Capital In 2006, before the introduction of competition, the penetration rate was 90%; it grew to 142% by the end of 9M2008. Figure 7 Penetration Rate* Evolution Entry of du In 2007, after the entry of du, the growth in total subscribers doubled 121% 142% 59% 69% 79% 90% M2008 *Based on the estimated active subscribers. Sources: Annual Reports, Informa database, IMF, and NBK Capital However, when considering countries comparable to the UAE on a GDP per capita level, we find that the active penetration rate in the UAE is above the average prevailing for the peer group, which currently stands at 113% at the end of 9M2008 (Figure 8). NBK Capital Page 10 of 25

11 Figure 8 UAE Mobile Penetration Rate vs. Peer Countries Country M2008 Mobile penetration in the UAE is above the peer-group average Belgium 82% 85% 92% 101% 107% HongKong 110% 108% 114% 119% 124% Korea 76% 79% 83% 89% 93% Singapore 89% 97% 105% 124% 142% Taiwan 97% 93% 95% 99% 101% Average 91% 92% 98% 107% 113% uae* 69% 79% 90% 121% 142% *Based on the estimated active penetration rate. Sources: Moody s Statistical Handbook (Country Credit) May 2007, Informa database, and NBK Capital Currently, Etisalat is the market leader in the UAE with a 77% market share. du grabbed 19% of the market share in the first year of operation and had reached a market share of 23% at the end of 9M2008. As in other GCC countries where expatriates constitute a large segment of the population, in the UAE, a large majority of Etisalat s and du s subscribers are inclined toward prepaid services (Figure 9). Prepaying is common due to the flexible and affordable terms of owning a prepaid line. Figure 9 Subscriber Split as of December 2007 Etisalat du Prepaid subscribers dominate the market in the UAE Postpaid 38% Postpaid 19% Prepaid 62% Prepaid 81% Sources: Informa and NBK Capital ARPU: We estimate that the total monthly blended ARPU in the UAE at the end of 2007 stood at USD 50, which is 51% higher than the peer countries average (Figure 10). NBK Capital Page 11 of 25

12 Figure 10 UAE Monthly Blended ARPU in Countries Comparable vs. Peer Countries Country (All figures in USD) The UAE s monthly blended ARPU is 51% higher than the average in peer countries Belgium HongKong Korea Singapore Taiwan Average uae Sources: IMF, Informa database, and NBK Capital Fixed-line Market Fixed-line services were launched in the UAE in Currently, the fixed-line penetration rate in the UAE is the highest in the MENA region. Figure 11 MENA Fixed-line Penetration Rate in 2007 The fixed-line penetration rate for the UAE is around 26% 15% 16% 16% 18% 18% 25% 26% 26% 8% 8% 10% 10% Morocco Algeria Jordan Oman Egypt Kuwait Saudi Arabia Syria Lebanon Bahrain Qatar UAE Sources: ITU, IMF, and NBK Capital Fixed-line services grew at a very modest rate of 5% between 2003 and 2007, with a penetration rate of around 26% at the end of After the entry of du, the fixed-line penetration rate had increased to 30% by the end of 9M2008. NBK Capital Page 12 of 25

13 Figure 12 Fixed-line Subscribers in the UAE du s fixed-line subscribers accounted for 85% of the net additions 1,136 1,188 1,237 1,310 1,325 1, M2008 Etisalat Fixed-line Subs ('000s) du Fixed-line Subs ('000s) Sources: Annual Reports, TRA, and NBK Capital Etisalat is known to have a modern fixed-line network and has upgraded it with the latest technology. By establishing the Next Generation Networking (NGN), Etisalat will be able to offer voice, video, and data over a single source. du offers Triple-Play services in the UAE; this involves delivering TV, high-speed Internet, and fixed-line telephone over the same line. This reduces redundant infrastructure as well as the cost of each of those services if they had to have different lines and billing. Internet and Data Services Internet and data services were provided solely by Etisalat before the entry of du. According to the TRA, the number of Internet subscribers grew from 308,000 in 2002 to 904,000 in Dial-up connections grew at a CAGR of 13% between 2002 and 2007, while broadband connections grew at a CAGR of 84% during the same period. NBK Capital Page 13 of 25

14 Figure 13 UAE Internet Subscribers and Growth 58% 380 Demand for broadband outpaces that for dialup connections 67% % % 15% % 10% % 11% % Dialup Broadband Dialup Growth Broadband Growth Sources: TRA and NBK Capital NBK Capital Page 14 of 25

15 EITC (du) Overview Basic Information Emirates Integrated Telecommunications Company (EITC) was incorporated in December From Tecom Investments, it acquired the business, human capital, and assets of Sama Communications Company, the international operations from DIC Telecom, and the technology division from Tecom Investments. In addition, the company acquired a subscriber base of 19,100 business and consumer customers. In February 2006, the UAE government granted a 20-year telecommunication license to EITC, branded as du, to offer fixed-line, mobile, and Internet services; it paid an upfront license fee of AED million (USD 33.9 million). In April 2006, 20% of the company was sold through an initial public offering, for AED 3.03 per share (Figure 14). Figure 14 du s Ownership Structure Public 20% In April 2006, 20% of the company was sold in an initial public offering Emirates Communications & Technology Co. 20% UAE Federal Government 40% Mubadala Development Co. 20% Sources: Annual report and NBK Capital du s Services Mobile The commercial launch of du was in February The mobile market at that time was fully saturated, with a penetration rate of 90%, and was served only by Etisalat. In 10 months, du grabbed 19% of the market share by capturing 64% of the net additional subscribers. du mobile s active subscribers reached 2.08 million by the end of 9M2008. NBK Capital Page 15 of 25

16 Figure 15 du s Active Subscribers per Quarter 13% 31% After 21 months of operation, du captured around two million active subscribers 66% 38% 44% 1,406 1,840 2, % Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 Active Subscribers in '000's Growth Sources: du Press Release, Informa, and NBK Capital Fixed-line Following the purchase of Tecom Investments telecom assets, du started providing landline services in some areas of the free zones in Dubai. du signed an agreement with Etisalat to use its network to provide fixed-line services across the UAE, until it establishes its own network. After initial delays in launch due to technical problems, Call Select services were launched in July 2007 for customers outside the free zone. According to management, du currently provides fixed-line services throughout the UAE and is the sole provider of fixedline services in the free zones. At the end of 2007, du had 46,000 fixed-line subscribers. Internet and Data Services Following the purchase of Tecom Investments telecom assets, du launched its Internet and pay TV services in some of the free zones in Dubai. du currently provides broadband services in certain areas of Dubai; it is still in discussions with the TRA and Etisalat regarding using Etisalat s existing broadband structure to provide broadband services across the UAE. du uses fiber optic cables to provide broadband for business and commercial customers. At the end of 2007, du s Internet subscribers reached 29,000. du also has plans to build a WiMAX network in the UAE. du recently deployed a Motorola-supplied broadband wireless access system based on WiMAX technology. Moreover, du has its own submarine capacity on the FLAG cable systems, which stretches from Suez to Mumbai. du is one of 16 companies participating in the Europe India Gateway (EIG) (Saudi Telecom and Omantel are also participating). The EIG is expected to be complete in 2Q2010 at a cost of USD 700 million. It will have a maximum capacity of 3.84 Tbps. This would allow du to offer higher capacities at more affordable prices. NBK Capital Page 16 of 25

17 International and Wholesale du s international and wholesale division provides voice and data connectivity to international telecom operators around the globe. It also manages international relations covering roaming, data, IP, and voice interconnect. Broadcasting du owns and operates Samacom, the biggest teleport in the region. Samacom holds 90% of the market share in the Middle East and provides world-class broadcasting services to media companies worldwide. It currently uplinks more than 165 TV channels on different DTH platforms. du s strategy To continue to pioneer new services and evolve existing ones. To aggressively increase market shares in the mobile market, as well as focus on value creation. To drive ARPU through a mix of segmented acquisition and targeted base offers. To provide seamless connectivity, allowing their customers in the UAE to have enhanced communications capability. To have better customer focus. To stimulate acquisitions and usage with the ultimate goal of engineering loyalty. NBK Capital Page 17 of 25

18 du Financial Analysis and Forecast Mobile Market Forecast Although the UAE s mobile market was served by only one operator, the market was distinguished by its high penetration rate compared to other GCC countries. The entry of du in the beginning of February 2007 stimulated the mobile market. Both operators are trying to attract existing and potential subscribers by introducing new offers and packages. We forecast that the penetration rate in the UAE (based on active subscribers) will reach 163% in 2013 and will surpass the penetration rates of peer countries, primarily because the UAE, especially Dubai, is considered the financial hub of the Middle East (Figure 16). Figure 16 Mobile Market in the UAE (000's) 2006a 2007a 2008f 2009f 2010f 2011f 2012f 2013f We expect the active penetration rate to reach 163% in 2013 Penetration Rate* 90% 121% 145% 151% 156% 159% 161% 163% Peers' Penetration Rate 98% 107% 115% 120% 123% 125% 126% 127% Total Active Subscribers 4,416 6,298 7,966 8,490 8,895 9,074 9,310 9,474 Market Share: du 0% 19% 26% 29% 34% 36% 37% 38% Etisalat 100% 81% 74% 71% 66% 64% 63% 62% du's ARPu (usd) Total Blended* na *Based on the estimated active subscribers. Sources: Annual reports, IMF, Informa database, and NBK Capital We forecast that the total active subscribers will grow at a CAGR of 4% in the next five years, while du s market share will increase to 38% by du started its mobile operation just a year ago; for this reason, the ARPU level achieved in 2007 cannot be taken as a benchmark to forecast the ARPU level in coming years. Thus, based on our own experience and on the peer countries ARPU levels, we forecast that the total blended ARPU will decrease gradually from USD 38 in 9M2008 to stabilize at USD 31 in Fixed-line Market Forecast Figure 17 Fixed-Line Market in the UAE (000's) 2006a 2007a 2008f 2009f 2010f 2011f 2012f 2013f At the end of 2013, we forecast the fixed-line penetration will reach 35% Penetration Rate 27% 26% 30% 31% 32% 33% 34% 35% Total Fixed-Line 1,310 1,371 1,650 1,767 1,888 1,980 2,075 2,172 Market Share: du 0% 3% 15% 16% 17% 18% 19% 20% Etisalat 100% 97% 85% 84% 83% 82% 81% 80% Sources: Annual reports, EIU, and NBK Capital NBK Capital Page 18 of 25

19 The entry of du ended Etisalat s monopoly over the fixed-line sector. We forecast that the fixed-line penetration rate will increase from 30% in 2008 to 35% in 2013, with du s fixedline subscribers growing at a CAGR of 12% from Since du does not split the revenue from fixed-line and Internet services, we were not able to calculate the ARPL based on voice. Revenues As a start-up, du has been growing rapidly. Its revenues per quarter grew from AED 183 million during 1Q2007 to AED 1,060 million at the end of 3Q2008. This growth was the result of an aggressive strategy set by du s management to capture market share. Figure 18 shows the quarterly growth in du s revenues. As of 3Q2008, du s revenues had reached AED 1,060 million, an increase of 157% compared to the same period last year. This growth was primarily due to growth in the number of subscribers in its mobile segment. Figure 18 du s Revenue by Quarter in Millions of AED 17% 20% 18% du s per quarter revenues grew from AED 183 million in 1Q2007 to AED 1,060 million in 3Q % 36% 55% , Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 Revenue by Quarter in AED million Growth Sources: Financial Statements and NBK Capital Fixed-line Fixed-line revenue includes revenue from fixed-line, Internet, and TV services. The contribution of the fixed-line revenues decreased in 9M2008 to 22% of the total revenue from 34% of the total revenue at the end of Mobile Mobile revenue is the highest contributor to total revenue. During du s first year of operation, mobile revenue contributed to 58% of the total revenue; whereas for the 9M2008, it contributed to 75%. This growth is attributed to the increase in the number of subscribers by 73% in 9M2008. NBK Capital Page 19 of 25

20 Broadcasting Revenue from the broadcasting segment reached AED 113 million at the end of 2007 and contributed to 7% of du s total revenue. In 9M2008, broadcasting revenue contributed to 3% of du s total revenue. Figure 19 Dissection of Revenues 7% 3% Revenue from the mobile sector is the highest contributor 59% 75% 34% 22% FY2007 9M2008 Fixed-line Mobile Broadcasting Sources: Press Release and NBK Capital Forecasted Revenues We forecast du s total revenues through 2013 by separately projecting the revenues of its different lines of business: fixed-line, mobile, and broadcasting. Figure 20 presents a summary of our revenue forecast, which projects a CAGR of 14% from 2008 through We forecast that the contribution of the fixed-line and Internet segment to total revenue will grow to 22% by We forecast that the contribution of the mobile segment to total revenue will stabilize at the current level of around 75% over the forecast horizon. We forecast that the contribution of the broadcasting segment to total revenue will grow at a CAGR of 5% from 2008 to NBK Capital Page 20 of 25

21 Figure 20 Segment Revenue Forecast in Billions of AED a 2008e 2009e 2010e 2011e 2012e 2013e Mobile Fixed-line Broadcasting Source: NBK Capital Ebitda After less than two years of operation, in 2Q2008, du reported positive earnings before interest, taxes, depreciation, and amortization (EBITDA). EBITDA reached AED million in 9M2008 with an EBITDA margin of 4.5%. As for the net profit, du reported a negative profit for six quarters; however, du s net profit was positive in 3Q2008 and reached AED 31.5 million. As du has started to report positive profits, it will have to pay certain royalty fees to the government. Etisalat is paying 50% of its annual net profit as royalty fees. With the entry of competition, this percentage is expected to decline; we expect du to pay 40% of its annual net profit as royalty fees. Figure 21 shows the quarterly growth in net income and EBITDA. NBK Capital Page 21 of 25

22 Figure 21 EBITDA and Net Income by Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q du achieved positive net profit during 3Q2008 (216) (201) (281) (243) (242) (190) (147) (79) (62) (2) (44) Net income in AED millions EBITDA in AED millions Sources: Annual Reports and NBK Capital With time, we expect du to become more efficient at the operating level. Hence, we are forecasting a rise in EBITDA at a CAGR of 63% between 2008 and 2013, which translates into an EBITDA margin of 42% by We expect net profits to reach AED 1,588 million in 2013, a CAGR of 35% from 2009 to 2013 (Figure 21), with a net profit margin of 22%. Capital Expenditure du is still working on expanding and improving its network. According to management, du plans to invest more than AED 2 billion on 2009 in CAPEX infrastructure. We believe that CAPEX will increase to meet subscriber growth; thus, we expect CAPEX to be around 65% and 41% of total revenues during 2008 and 2009, respectively, and then to stabilize at 8% of total revenues by Our total CAPEX estimate from 2008 to 2013 is approximately AED 7.8 billion. NBK Capital Page 22 of 25

23 Figure 22 Capital Expenditure % of Total Revenue CAPEX to total revenue is expected to stabilize at 8% by % 65% 41% 15% 13% 10% 8% 2007a 2008e 2009e 2010e 2011e 2012e 2013e Sources: Annual Reports and NBK Capital Financial Health Borrowing Facilities In 1H2007, du secured a long-term financing facility of AED 3 billion. At the end of September 2008, AED billion remains undrawn. The three-year loan pays a margin of 125 basis points over LIBOR and is to be paid in full three years from the date of the first drawdown. This loan will help finance du s fixed-line and mobile network expansion. NBK Capital Page 23 of 25

24 Financial Statements Balance Sheet (AED Thousands) Historical Forecast Fiscal year Ends December ASSETS Cash and Short-Term Investments 89,226 94, , , , , ,327 Total Receivables, Net 578, , , ,497 1,016,038 1,063,645 1,099,965 Total Inventory 36,423 68,192 76,528 83,565 84,670 85,092 84,331 Prepaid Expenses 50,816 95, , , , , ,063 Other Current Assets, Total Total Current Assets 754, ,808 1,140,448 1,283,980 1,388,766 1,445,324 1,485,874 Property/Plant/Equipment, Total - Net 2,465,877 4,799,490 6,782,793 7,341,343 7,805,536 8,054,232 8,145,024 Intangibles, Net 578, , ,407 1,105,268 1,221,280 1,307,070 1,357,301 ToTAL ASSETS 4,348,072 7,014,844 9,446,699 10,279,640 10,964,632 11,355,675 11,537,248 LIABILITIES & EQuITy Accounts Payable 1,495,905 2,045,759 1,530, , , , ,322 Short-term Debt (Balancing Debt) - 748,441 2,096,172 3,751,678 4,647,040 4,126,441 3,422,719 Accrued Expenses 65, , , , , , ,324 Other Current Liabilities 130, , , , , , ,979 Total Current Liabilities 1,692,498 3,286,697 4,337,364 5,392,023 5,866,286 5,388,633 4,713,344 Long-term Debt - 1,100,000 2,000,000 1,000, Other Liabilities, Total 149, , , , , , ,659 Total Liabilities 1,842,262 4,539,457 6,493,178 6,550,954 6,028,396 5,553,985 4,882,003 Total Equity 2,505,810 2,475,388 2,953,521 3,728,686 4,936,237 5,801,690 6,655,245 ToTAL LIABILITIES AND EQuITy 4,348,072 7,014,844 9,446,699 10,279,640 10,964,632 11,355,675 11,537,248 Income Statement (AED Thousands) Historical Forecast Fiscal year Ends December Total Revenue 1,537,368 3,788,442 5,466,321 6,189,983 6,773,587 7,090,968 7,333,097 Cost of Revenue 678,904 1,363,839 1,530,570 1,671,295 1,693,397 1,701,832 1,686,612 Gross Profit 858,464 2,424,603 3,935,751 4,518,688 5,080,191 5,389,135 5,646,485 Selling/General/Admin. Expenses 862,757 1,363,839 1,585,233 1,547,496 1,354,717 1,276,374 1,319,957 Depreciation/Amortization 216, , , , , , ,464 Other Operating Expenses 708, ,573 1,147,927 1,176,097 1,286,982 1,276,374 1,246,626 operating Income (929,829) (110,422) 679,386 1,185,231 1,740,571 2,056,920 2,223,437 Interest Income (Exp), Net Non-Operating 44,562 (60,000) (150,000) (100,000) (50,000) - - Other, Net - 140,000 (51,253) (310,066) (483,020) (587,692) (635,268) Net Income (885,267) (30,422) 478, ,165 1,207,551 1,469,229 1,588,169 Cash Flow (AED Thousands) Sources: Annual Reports and NBK Capital Historical Forecast Fiscal year Ends December Cash from Operating Activities (528,376) 1,044, ,833 1,068,809 1,927,195 2,830,711 3,073,837 Cash from Investing Activities (1,028,676) (2,887,351) (2,839,617) (1,706,223) (1,807,968) (1,698,401) (1,629,448) Cash from Financing Activities - 1,848,441 2,247, ,506 (104,637) (1,124,375) (1,438,336) Net Change in Cash (1,557,052) 5,485 41,947 18,092 14,590 7,935 6,053 NBK Capital Page 24 of 25

25 NBK Capital Kuwait Head Office 17th Floor, Dar Al-Awadi Building Ahmed Al-Jaber Street, Sharq P.O. Box 4950, Safat Kuwait Tel: Fax: International Network United Arab Emirates NBK Capital Limited Precinct Building 3, Office 404 Dubai International Financial Center P.O. Box , Dubai United Arab Emirates Tel: Fax: Turkey NBK Capital Arastima ve Musavirlik AS SUN Plaza, 30th Floor Dereboyu Sk. No.24 Maslak 34398, Istanbul, Turkey Tel: Fax: NBK Capital MENA Research Tel: Fax: menaresearch@nbkcapital.com Disclaimer This document and its contents are prepared for your personal information purposes only and do not constitute an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. The information and any views expressed are given as of the date of writing and are subject to change. While the information has been obtained from sources believed to be reliable, we do not represent that it is accurate or complete and it should not be relied on as such. Watani Investment Company (NBK Capital), its affiliates and subsidiaries accept no liability for any direct, indirect or consequential loss arising from use of this document or its contents. At any time, the employees of NBK Capital and its affiliates and subsidiaries may, at their discretion,hold a position, subject to change, in any securities or instruments referred to, or provide services to the issuer of those securities or instruments. NBK Kuwait National Bank of Kuwait SAK Abdullah Al-Ahmed Street P.O. Box 95, Safat Kuwait City, Kuwait Tel: Fax: Telex: NATBANK International Network Bahrain National Bank of Kuwait SAK Bahrain Branch Seef Tower, Al-Seef District 428 P.O. Box 5290, Manama Bahrain Tel: Fax: United Arab Emirates National Bank of Kuwait SAK Dubai Branch Sheikh Rashed Road, Port Saeed Area, ACICO Business Park P.O. Box 88867, Dubai United Arab Emirats Tel: Fax: Saudi Arabia National Bank of Kuwait SAK Jeddah Branch Al-Andalus Street, Red Sea Plaza P.O. Box Jeddah 21444, Saudi Arabia Tel: Fax: Jordan National Bank of Kuwait SAK Amman Branch Shareef Abdul Hamid Sharaf St P.O. Box , Shmeisani Amman 11194, Jordan Tel: Fax: Risk and Recommendation Guide Low Risk Lebanon National Bank of Kuwait (Lebanon) SAL BAC Building Justinian Street, Sanayeh P.O. Box , Riyad El Solh Beirut , Lebanon Tel: / Fax: / Iraq Credit Bank of Iraq Street 9, Building 178 Sadoon Street, District 102 P.O. Box 3420 Baghdad, Iraq Tel: / / Fax: Egypt Al Watany Bank of Egypt 13 Al Themar Street Gameat Al Dowal AlArabia Fouad Mohie El Din Square Mohandessin, Giza, Egypt Tel: / Fax: United States of America National Bank of Kuwait SAK New York Branch 299 Park Avenue New York, NY 10171, USA Tel: Fax: United Kingdom National Bank of Kuwait (International) Plc Head Office 13 George Street London W1U 3QJ, UK Tel: Fax: NBK Investment Management Limited 13 George Street London W1U 3QJ, UK Tel: Fax: France National Bank of Kuwait (International) Plc Paris Branch 90 Avenue des Champs-Elysees Paris, France Tel: Fax: Singapore National Bank of Kuwait SAK Singapore Branch 9 Raffles Place #51-01/02 Republic Plaza Singapore Tel: Fax: Vietnam National Bank of Kuwait SAK Vietnam Representative Office Room 2006, Sun Wah Tower 115 Nguyen Hue Blvd, District 1 Ho Chi Minh City, Vietnam Tel: Fax: China National Bank of Kuwait SAK Shanghai Representative Office Suite 1003, 10th Floor, Azia Center 1233 Lujiazui Ring Road Shanghai , China Tel: Fax: Associates Qatar International Bank of Qatar (QSC) Suhaim bin Hamad Street P.O. Box 2001 Doha, Qatar Tel: Fax: Turkey Turkish Bank Valikonagl CAD. 7 Nisantasi 34371, Istanbul, Turkey Tel: Fax: Recommendation Upside (Downside) Potential Buy more than 20% Accumulate between 10% and 20% Hold between -5% and 10% Reduce between -10% and -5% Sell less than -10% Risk Level High Risk Copyright Notice: This is a publication of NBK Capital. No part of this publication may be reproduced or duplicated without the prior consent of NBK Capital.