GCC Telecom. GCC Telecom Sector Quarterly - 2Q12. Global Research Sector-Telecommunication 14 August 2012

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1 GCC Telecom Global Research SectorTelecommunication 14 August 2012 GCC Telecom Sector Quarterly 2Q12 seeking to increase exposure to sound operations Capital restructuring completed for Zain Saudi Zain group stake increases to % in Zain Saudi eyes further stake in Wataniya Telecom is looking to increase its stake in Kuwaitbased Wataniya Telecom to 100.0% from 52.5% currently. The deal is subject to approval from the regulator. Around 23.5% stake is held by KIA while around 23.9% is held by the Public, according to Zawya. Assuming the company buys the stake at the last traded price of KWD2.2, the total outlay will be around KWD526.6mn (USD1.87bn). Does the company have enough cash? has sufficient cash to go for the acquisition. In May 2012, raised USD1.87bn through a rights issue. The cash and cash equivalents for is USD7.3bn as at the end of 2Q12. wants to increase its exposure to sound operations is looking to increase its stake in operators which have been performing well. Therefore, increasing its stake in Wataniya Telecom makes sense as it has continued to show strong performance due to its presence in growth markets. Kuwaiti, Algerian and Tunisian operations are the main growth drivers for Wataniya Telecom. As part of its strategy, is also looking to increase its stake in Asia cell, the Iraqi operator. Zain group stake increases in Zain Saudi Zain s stake in Zain Saudi has increased to % from 25.0% postrestructuring. Although the company s share of Zain Saudi loss will increase, we believe it is positive for Zain group in the medium to longrun, as Zain Saudi restructuring will allow it to expand and leverage the huge Saudi market more effectively. The company had been struggling as its performance was being constrained by high debt levels (Debt/equity ratio was 3.1 at the end of 30 March 2012 and interest coverage ratio was 0.83x in 1Q12) and consequently high financing charges. Restructuring involved setting off accumulated losses against share capital to avoid being unlisted as the proportion of accumulated losses reached 72.0% in 1Q12. In Saudi Arabia, if accumulated losses reach 75.0% of share capital then the company is required to delist. Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) Umar Faruqui, ACCA Financial Analyst ufaruqui@global.com.kw Tel.: (965) Global Investment House Zain Saudi managed to raise SAR6.0bn from the rights issue. The increase in stake was always on the cards as Zain guaranteed the rights issue. The company will use the money to settle some debt and invest in network expansion which will allow it to compete more effectively against the larger players and extend its reach. However, it should be kept in mind that Zain KSA had a debt of around SAR12.5bn on its balance sheet at the end of 2Q12. Thus even after the repayment of some of the debt, financial charges are likely to form a large component going forward. Global Research Telecom Coverage Ticker Country Mkt Cap Price* Stock Performance Div. Yield P/E (x) P/BV (x) (USD mn) (in LC) 1m 3m 12m 2012E 2012E 2013E 2012E 2012E Zain Kuwait 10, % 10.8% 30.5% 9.8% Wataniya Telecom Kuwait 3, % 10.0% 2.5% Saudi Telecom KSA 20, % 2.5% 14.9% 5.1% Mobily KSA 12, % 3.1% 27.6% 6.3% UAE 19, % 4.0% 11.6% 6.6% Qatar 9, % 10.6% 4.8% 3.1% Qatar Qatar 2, % 0.2% 23.0% nm nm Oman 2, % 3.0% 26.6% 7.6% Batelco Bahrain 1, % 14.1% 2.0% 9.8% Source: Global Research, Zawya & Bloomberg * Market Price as of 13th August Market price of Wataniya is it s last traded price as the trading is suspended due to the pending offer of acquisition. Note: Qatar financial year ends in March.

2 Bahrain GSM Sector Indicators Bahrain Cellular Subscriber base (in mn) Bahrain Quarterly Customer Additions (in 000) % % 1.9% 1.4% 0.3% Bahrain Cellular Subscriber base (in mn) LHS QoQ growth 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Bahrain saw continuation of modest growth in its subscribers. Subscriber base increased by 0.3%QoQ to 1.72mn The slow growth is not surprising as Bahrain has the highest mobile penetration rate in GCC. Operatorwise Subscriber Base (in 000) Operatorwise Customer Additions (in 000) () () 14.9 (23.0) (25.0) (9.0) (1.2) (7.5) (13.2) (12.9) Batelco s subscriber base remained more or less flat with a decline of 0.2%. Meanwhile, Zain saw a healthy growth of 3.9% in its subscriber base. Batelco continues to lose its customers. However, the pace of decline has slowed down significantly. Q22011 Q32011 Q42011 Q % 45.8% 26.9% 44.5% 27.3% 43.1% 26.5% 42.9% 28.1% 28.7% 29.6% 30.7% STC (Viva) has managed to increase its market share to 26.5% since it started operations in 1Q10. Since the entry of Viva, Batelco has seen its market share come down to 42.9% in 1Q12 from 54.6%. August

3 Kuwait GSM Sector Indicators Kuwait Cellular Subscriber base (in mn) Kuwait Quarterly Customer Additions (in mn) % % % 2.0% 1.7% 5.4% 3.9% 2.4% 0.9% Kuwait Cellular Subscriber base (in mn) LHS QoQ growth 0.00 Kuwait s total GSM subscriber base grew by 1.7%QoQ to 5.1mn in Q The subscriber growth rate has been steadily declining since the past four quarters, which is not surprising considering a mobile penetration rate of 160.0%. Operatorwise Subscriber Base (in mn) Operatorwise Customer Additions (in 000) () () (27.7) Zain and Viva continued to add to their subscriber base. Zain and Viva subscribers increased to 2.15mn and 1.02mn respectively. Wataniya saw a decline in its customer base by 27,700 subscribers QoQ in Q12012 apparently due to competition in the Kuwaiti market. 2Q2011 3Q2011 Q42011 Q % 42.1% 18.7% 41.9% 19.1% 41.9% 20.1% 42.1% % 39.4% 39.0% 37.8% Zain and Viva managed to increase their market share slightly at the expense of Wataniya. Zain market share increased to 42.1% while Viva market share increased to 20.1%. On the other hand, Wataniya market share declined to.37.8%. August

4 Oman GSM Sector Indicators Oman Cellular Subscriber base (in mn) Oman Quarterly Customer Additions (in mn) % % 2.7% 2.6% 3.0% 3.3% 0.0% 3.0% 3.0% 6.0% Oman Cellular Subscriber base (in mn) LHS QoQ growth (0.05) (0.10) (0.15) (0.20) (0.13) Oman subscriber base continued to increase at a steady pace. The subscriber base increased by 3.3%QoQ in Q Around 0.16mn customers were added during Q12012 and around 0.53mn have been added in the last four quarters. Operatorwise Subscriber Base (in mn) Operatorwise Customer Additions (in 000) (50.0) (4.6) (41.9) 0.00 (100.0) (92.0) In 1Q2012, s mobile subscriber base increased by around 134,000 subscribers which accounted for 85.6% of total mobile growth in Oman. has benefited from its enhanced network and effective promotions. Meanwhile, Nawars is facing a difficult challenge with the entry of resellers. Q22011 Q32011 Q42011 Q % 42.7% 41.4% 39.8% 56.1% 57.3% 58.6% 60.2% Unlike other GCC countries where incumbent operators continue to lose market share, has actually increased its market share to 60.2% in Q12012 from 53.7% in Q The movement in subscriber market share is also getting influenced by ongoing cleanup of subscriber base mandated by the Regulator. August

5 Qatar GSM Sector Indicators Qatar Cellular Subscriber base (in mn) Qatar Quarterly Customer Additions (in 000) % 1.2% 0.8% 0.2% Q12011 Q22011 Q % Q42011 Q12012 Qatar Cellular Subscriber base (in mn) LHS QoQ growth 3.5% 2.5% 1.5% 0.5% 0.5% Mobile subscriber growth picked up pace again growing by 2.5%QoQ in Q Qatar s total GSM subscriber base was at 2.94mn as at the end of Q Around 71,000 customers were added during Q Operatorwise Subscriber Base (in mn) Operatorwise Customer Additions (in 000) (10.0) () (30.0) (23.7) (22.0) Vodaphone Qatar managed to add around 40,000 new customers due to enhancement in mobile network and effective promotions. also performed well during the quarter by increasing its subscribers by around 30,000. lost 22,000 customers in the previous quarter. Q22011 Q32011 Q42011 Q % 27.2% 27.8% 28.5% 73.2% 72.8% 72.2% 71.5% Vodaphone Qatar has increased its market share to 28.5% in a span of three years. The company made its entry in the Qatari market in Q We expect the company to slowly increase its market share going forward. August

6 Saudi GSM Sector Indicators Saudi Cellular Subscriber base (in mn) Saudi Quarterly Customer Additions (in mn) % % % % % % 2.0% 0.0% 2.0% 4.0% Saudi Cellular subscriber base Growth 6.0% Saudi cellular subscriber base increased by 1.0%QoQ to 54.2mn in Q The decline in the previous quarter by 4.2%QoQ was due to adjustment for inactive subscribers. The adjusted numbers are of higher quality as they will remove the distortion introduced by inactive subscribers which tend to inflate penetration rate. Operatorwise Subscriber Base (in mn) Operatorwise Customer Additions (in mn) Bravo Mobily STC Zain 1.00 () (1.00) (1.50) (2.00) (2.50) Q12011 Q22011 Q32011 (0.05) Q42011 Q12012 (1.05) (2.38) Bravo Mobily STC Zain Zain KSA saw a large adjustment to its numbers with its subscriber base coming down to 6.52mn in Q12012 compared to 9.95mn subscribers in Q Zain KSA has adjusted numbers as part of a group wide policy. As the third operator with large proportion of prepaid customers, Zain was most likely to have the highest number of inactive subscribers. Q % 16.7% 37.4% Q % 17.7% 37.0% Q % 12.0% 39.5% 45.5% 44.9% 48.2% Bravo Mobily Saudi Telecom Zain Bravo Mobily Saudi Telecom Zain Bravo Mobily Saudi Telecom Zain After the adjustments, STC remains the market leader with a market share of 48.2%. Meanwhile, Zain KSA has seen its share coming down to 12.0% in Q August

7 UAE GSM Sector Indicators UAE Cellular Subscriber base (in mn) UAE Quarterly Customer Additions (in mn) % % % 0.7% 1.3% UAE Cellular Subscriber base (in mn) LHS QoQ growth 6.8% 6.0% 5.3% 4.5% 3.8% 3.0% 2.3% 1.5% 0.8% 0.0% UAE s GSM subscriber base increased by a healthy 6.0%QoQ in 1Q12 to 12.43mn. The growth rate in subscribers has picked up in the last two quarters after a sluggish first three quarters of Operatorwise Subscriber Base (in mn) Operatorwise Customer Additions (in 000) (100.0) (200.0) (57.9) (80.0) (131.3) In Q12012, s mobile subscriber base grew by 6.4% QoQ while s subscriber base grew by 5.4%. In Q12012, carried on the good performance of witnessed in 4Q11 by adding 418,600 customers. 2Q11 3Q11 4Q11 1Q % 43.8% 44.5% 44.2% 57.3% 56.2% 55.5% 55.8% managed to increase its market share slightly to 55.8% in Q12012 compared to 55.5% in Q42011 on the back of customer growth in Q August

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