GCC EQUITY REPORT NEUTRAL RESEARCH. Zain (ZAIN.KW) Quarterly Update. CMP KWD Target KWD Upside 6.3% Overview

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1 RESEARCH GCC EQUITY REPORT Zain (ZAIN.KW) Quarterly Update NEUTRAL CMP KWD Target KWD Upside 6.3% Kuwait Stock Exchange Index 5, Key Stock Data Sector Telecom Reuters Code ZAIN.KW Bloomberg Code ZAIN KK Equity Net Out. Shares (bn) Market Cap (KWD bn) Market Cap (USD bn) Avg. 12m Vol. (mn) Volatility (30 day) Volatility (180 day) Stock Performance (%) 52 week high / low (KWD) / M 3M 12M Absolute (%) Relative (%) Shareholding Pattern (%) Corporate Government Public ZAIN and KSE Index movement Zain reported revenues of KWD million for 1H11, down 2% YoY. Net profit plunged 84.3% to KWD million from KWD 895 million in 1H10, due to a one-time gain of KWD 742 million during 1H10, from the sale of its African assets. Excluding this, net profit declined 8.7% YoY, due to currency fluctuations. Factoring in 1H11 results, we have revised our revenue estimate lower to KWD 1,435 million. Our net profit estimate stands at KWD 401 million. We are maintaining our earlier NEUTRAL recommendation on Zain with a revised DCF target price of KWD 1.010, implying an upside of 6.3%. Overview KWD Million 2009A 2010A 2011E 2012E 2013E Revenue 1,263 1,352 1,435 1,516 1,590 EBITDA EBITDA Margin 195 1, Net Profit NPM 46.4% 46.0% 46.2% 46.5% 46.7% Adj.EPS (KWD) 15.4% 78.6% 28.0% 28.3% 28.5% Total Assets 5,697 3,710 4,099 4,212 4,542 RoAE 8.6% 43.0% 16.7% 18.8% 17.9% Revenue During 1H11, Zain recorded consolidated revenues of KWD million, reducing 2% from KWD million in the same period last year. Revenue from Kuwait rose by a marginal 1.1% to KWD million with contribution to total sales increasing 80 bps to 26.5% from 25.7% in 1H10. Iraq posted 5.1% increase in revenues to KWD million with contribution to total sales expanding 224 bps to 33.3% from 31.1% in 1H10. Lebanon generated revenue of KWD 14.9 million, up 0.1%. However, revenue from Sudan decreased 6.9% to KWD million with the share in total revenues narrowing 124 bps to 23.4% from 24.7% in 1H10. Revenue from Jordon reduced 6.7% to KWD 66.9 million, while the same from Bahrain fell 24.6% to KWD 29.1 million from KWD 38.6 million in the same period last year. Expenses Cost of revenue declined 0.7% to KWD 177 million from KWD 178 million during 1H10. However, as a percentage of total revenue, costs increased 34 bps to 26.9% from 26.5%. Distribution, marketing, and operating expenses were up 1.1% to KWD million, expanding as a percentage of revenue by 64 bps to 21% from 20.3%. On the other hand, general and administrative expenses declined 32% to KWD 46.3 from KWD 68.1 million. Further, finance costs plunged 67.4% to KWD million from KWD 42.9 million in 1H10. Net Profit and Margins Call us on or us at research@taib.com

2 Net Profit and Margins Gross profit reduced by 2.4% to KWD million due to lower revenues. Consequently, gross margin narrowed 34 bps to 73.1%. On the other hand, operating profit rose 1.6% to KWD 210 million from KWD million in the comparable period prior year. Share of loss from associates declined 28.4% to KWD 18.1 million from KWD 25.4 million. Zain booked KWD 20.9 million loss from currency revaluation as against KWD 33.5 million gain from forex revaluation in 1H10. Net profit plunged 84.3% to KWD million from KWD 895 million in 1H10, due to a one-time gain of KWD 742 million during 1H10, from the sale of its African assets. Excluding this, net profit declined 8.7% YoY, due to currency fluctuations. In fact, Zain reported that its net profit got impacted by over USD 75 million due to currency fluctuations during 1H11. Peer Comparison We have considered National Mobile Telecommunication Company (NMTC) as Zain s core competitor in Kuwait. Financial Performance of Telecom Companies NMTC ZAIN H H11 (KWD Million) Sales YoY change 13.5% 35.2% 7.0% 5.7% EBITDA YoY change -11.1% 49.1% 6.0% 2.9% Net Profit YoY change -28.0% 760.4% 445.0% 10.6% Total Assets 1,005 1,510 3,710 3,262 YoY change 13.1% 70.4% -34.9% 2.8% Shareholders' Equity YoY change 11.2% 72.3% 15.3% 9.4% Ratios: Total Assets Turnover Ratio (x) * * EBITDA Margin 37.5% 40.0% 46.0% 45.2% Net Profit Margin 14.5% 87.6% 78.6% 21.3% RoAE 16.3% 13.4%* 43.0% 12.3%* RoAA 8.2% 6.8%* 22.6% 8.0%* Market Indicators: Adj. EPS (KWD) * * P/E (x) Adj. BVPS (KWD) * * P/BV (x) Current Market Capitalisation (KWD Million)** ,688 3,688 *Annualised, ** Price as on September 07, 2011 Source: Zain & NMTC s financial Statements

3 New Projects and Updates In August 2011, Zain and Motorola Mobility launched Motorola XOOM in Jordon, through distributor Haidar Murad Group (HMG). In July 2011, Zain Group accepted the non-binding agreement from Kingdom Holding Co. and Bahrain Telecommunications Co. in respect of the proposed acquisition by the consortium of its 25% stake in Zain KSA. During June 2011, Zain received the final payment of USD 700 million from the sale of its African assets to India's Bharti Airtel Ltd. Although the payment will strengthen the company s financial position, it must be noted that the amount (USD 700 million) was calculated as profits in the financial statements of the second quarter of 2010 and, therefore, will not have any impact on the current quarter results. Risks and Concerns to Valuation: As a multi-country operator, Zain is exposed to political and regulatory regimes in different countries and is vulnerable to foreign currency fluctuations as well. Valuation Methodology: We have used the DCF valuation method to arrive at the fair value of Zain, as explained below: Assumptions: (i) Risk free Rate (Rf) of 3.05%, equivalent to 12-months average yield on a 10-year US T-bill; (ii) Levered Beta of 1.7; (iii) Terminal growth rate of 2.0%. Based on the above and using the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 12.23% and a WACC of 11.00%. DCF Calculation DCF Valuation (FCFF Model) (KWD Million) 2011E* 2012E 2013E 2014E 2015E Operating Profit Zakat on EBIT Effective Zakat Rate -13% -13% -13% -13% -13% NOPAT Add: Depreciation and Amortization Less: Capex Less: Change in Net Working Capital Operating Free Cash Flows to Firm Non-Operating Income Tax on Non-Operating Income Add: Non-Operating cash flows Free Cash Flow to Firm WACC (Ko) 11.00% 11.00% 11.00% 11.00% 11.00% Present Value / Discount Factor Long-Term Growth Rate (g) 2.00% Terminal Multiple Nominal Terminal Value 5,170 Present Value of Free Cash Flows * 2011E excludes 1H11A

4 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 1,426 Terminal Value: Residual Cash Flow (FCFF of 2015E) 456 WACC 11.00% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 9.00% Equals Nominal Terminal Value 5,170 Implied Multiple of 2015E EBITDA 6.76 Times PV/Discount Factor 0.63 Present Value of Terminal/Residual Value 3,232 Enterprise Value 4,657 Implied Multiple of 2015E EBITDA 6.09 Less: Market Value of Long-term Debt 391 Less: Minority Interest 105 Add: Surplus Cash -241 Equity Value 3,921 Net shares outstanding (Million) 3,882 Fair Value Per Share (KWD) * figures in KWD Million unless specified Sensitivity Analysis The following tables present a sensitivity analysis and indicate the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate and WACC assumptions. The shaded areas represent the most probable outcomes. Sensitivity Analysis of Nominal Terminal Value (KWD Million) Long-Term Growth Rate Discount Factor 1.00% 1.50% 2.00% 2.50% 3.00% 9.00% 5,759 6,173 6,646 7,192 7, % 5,119 5,447 5,816 6,233 6, % 4,607 4,874 5,170 5,500 5, % 4,189 4,410 4,653 4,922 5, % 3,840 4,026 4,230 4,453 4,698 Sensitivity Analysis of Discounted Terminal Value (KWD Million) Long-Term Growth Rate Discount Factor 1.00% 1.50% 2.00% 2.50% 3.00% 9.00% 3,907 4,188 4,509 4,879 5, % 3,333 3,547 3,787 4,059 4, % 2,880 3,047 3,232 3,439 3, % 2,515 2,648 2,794 2,955 3, % 2,215 2,323 2,440 2,569 2,710

5 Sensitivity Analysis of Enterprise Value (KWD Million) Long-Term Growth Rate Discount Factor 1.00% 1.50% 2.00% 2.50% 3.00% 9.00% 5,399 5,680 6,001 6,372 6, % 4,792 5,005 5,245 5,517 5, % 4,306 4,472 4,657 4,864 5, % 3,909 4,042 4,188 4,349 4, % 3,579 3,686 3,804 3,933 4,074 Investment Opinion Zain is one of the largest mobile operators in the Middle East with nearly million customers, as of June To increase its operational capacity, Zain has adopted the latest standard in mobile telephony and has achieved data transmission speeds of 150 mbps during LTE (Long-Term Evolution) trials. It is the first telecom company to start work on LTE trials in Kuwait and has already conducted pre-launch tests in some of its other markets, including Bahrain and Saudi Arabia. Despite the competitive landscape, the group s customer base grew ~16% (5.4 million new customers) within one year, driven by technology upgrades and innovative product launches across its operations. Zain s Kuwaiti operations reached 99.6% and 1,763 network sites. Furthermore, to expand its post-paid client base in Kuwait, the operator introduced new post-paid data packages for voice and data. In May 2011, Zain launched its USSD service in Kuwait, representing a qualitative leap in mobile phone marketing. Going forward, Zain intends to continue to invest in providing value-added services domestically. Iraq is the group s largest revenue contributor, at 33.3%. During 1H11, Zain s subscriber base in Iraq grew 5%, reaching a milestone 12.3 million customers, while revenues soared 5.1% YoY to KWD million. Net profit from Iraq increased 11.2% YoY to KWD 41.8 million.. The telco s strategy is to tap fresh sources of funds to finance its infrastructure spending in Iraq. However, Zain is likely to face stiff competition in northern Iraq, as France Telecom-Orange and its partner Agility recently announced plans to buy a 44% stake in Korek Telecom. Moreover, the Iraqi government plans to award the fourth mobile phone operator licence, which could pressure the company s average revenue per user (ARPU). Zain continues to be the largest mobile operator in Sudan with a market share of 57% and customer base growing 24% YoY, serving 11.4 million customers. However, revenues declined 6.9% YoY to KWD million in 1H11, hit by stiff pricing pressure. Zain is expanding its 3G voice and data services in Sudan and is investing in the fibre and core networks, to meet the expected triple digit growth in the upcoming years. Revenues from Jordan declined 6.7% to KWD 66.9 million as the telco s market share contracted to 37%, impacted by strong competition and the pressure of lower voice prices. In addition, Zain Jordan has launched several new promotions and services including Mish Tabee3i, Minutes Plus and the Al Zarqa line. Further, Zain Jordan has won the prestigious Global Telecoms Business Innovation Award for its E-mal mobile financial services platform. Zain has signed a landmark agreement with Apple to launch the iphone 4 in Kuwait, Jordan and Bahrain. Zain Saudi Arabia has signed a refinancing agreement for a USD 600 million Murabaha loan with a syndicate of regional banks to fund future growth plans. Going forward, the company expects to expand its customer base to 52 million subscribers by 2014, from over 39.6 million customers, as of June 2011, and guides total revenue of USD 6.3 billion and net profit of USD 2.1 billion by Given the strong balance sheet, following the disposal of its African assets, Zain is poised for future acquisitions. Recently, Zain received the balance USD 700 million from the sale of its African assets (with the exception of Morocco and Sudan) to India s Bharti Airtel Ltd. last year. However, as this amount reflected in the second-quarter 2010 financial statement, it will not have any impact on the current quarter results. Excluding the gain from discontinued operation in 1H10, net profit decreased 8.7% to KWD million during 1H11, as compared to KWD million in 1H10. Factoring in 1H11 results, we have revised our net profit estimate lower to KWD 401 million. We had updated Zain on July 03, 2011 with a NEUTRAL recommendation (target price of KWD and upside of 2.0%). The stock is trading at a P/E multiple of 9.19x and 8.61x on 2011E and 2012E earnings, and at a P/BV multiple of 1.71x and 1.54x on 2011E and 2012E BVPS, respectively. Meanwhile, the stock has dropped 6.9% since our last update as compared to a 0.8% gain posted by the Kuwait Stock Exchange Index. Factoring in 1H11 results, we have our revised price target to KWD 1.010, implying a 6.3% upside over the closing price of KWD (as on September 07, 2011). We are reiterating our earlier NEUTRAL rating on the stock.

6 Financial Statements Consolidated Income Statement (KWD Million) 2009A 2010A 1H10A 1H11A 2011E 2012E 2013E Revenue 1, , , , , Cost of sales Gross Profit , , , Operating expenses General and administrative expenses Provision for doubtful debts Depreciation and amortization Operating Profit EBITDA Investment income Share of (loss)/ profit of associates (net) Other income Gain from currency revaluation Board of Directors remuneration National labour Support Tax Contribution to Kuwait Foundation Interest income Finance cost Profit before tax Income tax expense Profit from continuing operations Profit/loss for the year from discontinued operations Profit for the year , Minority interest Profit to the shareholders ,

7 Consolidated Balance Sheet (KWD Million) 2009A 2010A 1H10A 1H11A 2011E 2012E 2013E ASSETS Current Assets Cash and bank balances , , , Trade and other receivables Inventories Investment securities at fair value Loan to an associate Assets of disposal classified as held for sale Total Current Assets , , , , , Non-Current Assets Deferred tax assets Investment securities available for sale Investment in associates SMTC Interest in a jointly controlled entitiy Loan to an associate Property and equipment 2, , Intangible assets 2, , , , , , , Other financial assets Total Non-Current Assets 4, , , , , , , Total Assets 5, , , , , , , LIABILITIES AND EQUITY Current Liabilities Trade and other payables Due to banks Liabilities of disposal group classified as held for sale Total Current Liabilities 1, Non-Current Liabilities Due to banks 1, Deferred tax liabilities Other non-current liabilities Total Non-Current Liabilities 1, , , Total Liabilities 3, , , , , , Minority interest Equity Share capital Treasury shares Share premium 1, , , , , , , Legal reserve Voluntary reserve Foreign currency translation reserve Treasury shares reserve Equity issue transaction cost of associate Investment fair valuation reserve Share based compensation reserve Hedge reserve Retained earnings , , Shareholders' Equity 2, , , , , , , Total Liabilities and Equity 5, , , , , , ,542.24

8 Consolidated Cash Flow Statement (KWD Million) 2009A 2010A 1H10A 1H11A 2011E 2012E 2013E Cash Flows from Operating Activities Profit for the year before income tax , Adjustments for: Depreciation, amortization and goodwill written off Interest income Investment income Share of loss/ (profit) of associates Finance cost Loss on sale of property and equipment Gain from disposal of subsidiary Share of loss of Jointly controlled entity Gain from currency revaluation Operating profit before working capital changes (Increase)/decrease in trade and other receivables Increase in inventories Increase in trade and other payables Deferred Tax considerations Payments: Income tax Board of Directors remuneration Kuwait Foundation for Advancement of Sciences National Labour Support Tax Net cash from operating activities , Cash flows from investing activities Proceeds from sale of investment securities Acquisition of investments Proceeds from sale of subsidiaries , , Other financial assets Acquisition of property and equipment (net) Acquisition of intangible assets Interest received Dividend received Net cash used in investing activities , , Cash flows from financing activities Proceeds from bank borrowings (net) , , Loan to an associate Proceeds from issue of share capital Capital contribution - employees stock option Dividends paid Dividends paid to minority shareholders Finance cost paid Net cash from financing activities , , Net increase/(decrease) in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents (opening balance) , , Cash and cash equivalents (closing balance) , , ,272.31

9 Financial Ratios 2009A 2010A 1H10A 1H11A 2011E 2012E 2013E Liquidity Ratios: Current Ratio (x) Quick Ratio (x) Inventory Conversion Period (Days) Average Collection Period (Days) Length of Operating Cycle (Days) Average Payment Period (Days) Length of Cash Cycle (Days) Activity Ratios: Inventory Turnover Ratio (x) * 28.24* Debtors Turnover Ratio (x) * 4.96* Creditors' Turnover Ratio (x) * 0.69* Total Assets Turnover Ratio (x) * 0.36* Net Fixed Assets Turnover Ratio (x) * 1.80* Capital/Equity Turnover Ratio (x) * -4.05* Profitability Ratios: Gross Profit Margin 74.2% 73.7% 73.5% 73.1% 73.4% 73.4% 73.4% EBITDA Margin 46.4% 46.0% 43.0% 45.2% 46.2% 46.5% 46.7% Operating Profit Margin 34.3% 33.3% 30.7% 31.8% 31.6% 31.4% 30.2% Net Profit Margin 15.4% 78.6% 133.1% 21.3% 28.0% 28.3% 28.5% RoAE 8.6% 43.0% 73.2%* 12.3%* 16.7% 18.8% 17.9% RoAA 3.5% 22.6% 37.7%* 8.0%* 10.3% 10.3% 10.3% Leverage Ratios: Debt to Equity (D/E) Ratio (x) Shareholders' Equity to Total Assets Ratio (x) Total Liabilities to Total Assets Ratio (x) Current Liabilities to Equity Ratio (x) Growth Rates: YoY Growth in Revenue -36.9% -19.4% 6.1% 5.7% 6.1% 5.7% 4.8% YoY Growth in Net Operating Income 13.9% -0.5% 0.8% 5.1% 0.8% 5.1% 0.8% YoY Growth in Net Income -39.4% 231.7% -62.2% 6.7% -62.2% 6.7% 5.6% YoY Growth in Total Assets 3.3% -15.0% 10.5% 2.8% 10.5% 2.8% 7.8% YoY Growth in Shareholders' Equity 3.5% 67.3% -18.3% 10.8% -18.3% 10.8% 10.8% Ratios used for Valuation: EPS (KWD) * 0.07* BVPS (KWD) P/E Ratio (x) P/BV Ratio (x) Current Market Price (KWD)** *Annualised **Price as on September 07, 2011

10 TAIB Securities WLL Tel: TAIB Tower, Diplomatic Area Fax: Post Box 20485, Manama, Kingdom of Bahrain DISCLAIMER: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication, but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing contained herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the investment to increase or diminish. Consequently, investors may not get back the full value of their original investment