2009 - falcom.com.sa · swot analysis 28 financial analysis 29 future outlook 35 ... turkey 1,730...

FALCOM Research Saudi Telecom Company 1

Saudi Telecom Company

Tadawul Code 7010 PE (x) 9.7 Sector Telecom

Close Price (SAR) 51.0 PBV (x) 2.7 Index PE 13.4

52 week high (SAR) 71.3 Div Yield (%) 7.4% Index PBV 1.8

52 week low (SAR) 33.7 Outstanding Shares (million) 2,000.0 Index Div Yield 3.9%

YTD 2009 3.9% Market Cap (SAR million) 102,000.0 Sector PE 12.2

30 Day Avg Vol ('000) 5,801.8 % of TASI 9.7% Sector PBV 2.2

Beta 0.8 % of sector 70.0% Sector Div Yield 5.5%

Financials (SAR '000) 2007 2008 2009E 2010E 2011E 2012E

Revenues 34,457,807 47,469,368 49,368,143 50,849,187 52,374,663 54,469,649

EBITDA 16,544,500 18,449,868 19,129,699 20,994,796 22,007,345 22,726,293

Net Profit 12,021,733 11,037,846 11,274,566 12,733,383 13,349,276 13,726,933

Total Assets 68,811,246 99,762,135 100,986,513 104,038,296 106,539,013 114,325,180

Total Liabilities 32,919,364 57,200,258 55,716,384 54,311,483 52,139,953 55,121,693

Shareholders' Equity 35,876,253 37,637,978 40,346,230 44,802,914 49,475,161 54,279,587

EPS (SAR) 6.0 5.5 5.6 6.4 6.7 6.9

BVPS (SAR) 17.9 18.8 20.2 22.4 24.7 27.1

Ratio Analysis

Profitability Ratios (%)

Net Profit Margin 34.9% 23.3% 22.8% 25.0% 25.5% 25.2%

EBIDTA Margin 46.9% 41.4% 39.7% 40.3% 40.0% 39.7%

Return on Avg. Equity 34.3% 28.1% 25.7% 26.8% 25.6% 24.2%

Return on Avg. Assets 20.9% 13.1% 11.2% 12.4% 12.7% 12.4%

Growth (%)

Revenues 6.4% 37.8% 4.0% 3.0% 3.0% 4.0%

Net Income -6.1% -8.2% 2.1% 12.9% 4.8% 2.8%

Shareholders’ Equity 5.0% 4.9% 7.2% 11.0% 10.4% 9.7%

Total Assets 49.2% 45.0% 1.2% 3.0% 2.4% 7.3%

Liquidity/Turnover/Leverage Ratios

Current Ratio (x) 0.8 0.8 0.8 0.8 0.9 1.1

Total Asset Turnover (x) 0.5 0.5 0.5 0.5 0.5 0.5

Cash Conversion Cycle (days)

9.4 3.7 2.9 5.5 5.7 6.8

Total Debt/Total Equity 0.4 0.8 0.7 0.6 0.5 0.5

Valuation Ratios

PE (x) 13.9 8.9 9.0 8.0 7.6 7.4

PBV (x) 4.7 2.6 2.5 2.3 2.1 1.9

PEG (x) -13.8 -6.0 4.2 0.6 1.6 2.6

Dividend Yield (%) 16.8 13.1 7.2 8.1 8.5 8.7

Earnings Yield (%) 7.2 11.2 11.1 12.5 13.1 13.5

EV/Revenues (x) 5.0 2.6 2.6 2.4 2.3 2.2

(Source: STC, Tadawul, FALCOM Research; Note: Stock Market Data and Prices are as of 6th July 2009)

FALCOM RESEARCH Saudi Telecom Company 1

(Source: Tadawul, FALCOM Research)

Price - Volume Chart

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FALCOM ResearchSaudi Telecom Company2


Contents

Executive Summary 3

Company Profile 5

Operations 11

Marketing Mix 22

Strategy 24

Competitive Advantages 26

SWOT Analysis 28

Financial Analysis 29

Future Outlook 35

Valuation 38

Company Financials 42

Glossary 46

Rating Rationale 47

Disclosures 48



Established in 1998 as a joint-stock holding company, STC is the only fully integrated telecommunications service provider in the kingdom and the largest telecom operator in the MENA region. Over the last two years, cash-rich STC has emerged as a telecommunication holding company with operations in ten different countries, including Saudi Arabia. The international operations of STC contributed for 21% of total revenues in 2008 and the contribution increased to 27% by the end of first quarter of 2009. STC’s role has been instrumental in establishing and developing the telecom industry in the kingdom and it has re-invented and re-aligned itself with the changing landscape of the industry. STC was awarded as the Best Wholesaler in the Middle East in 2008 by Telecoms World, for operating the most sophisticated, fastest-growing network with quality and sustainability across the region. In order to position itself as a global telecom operator and further manage and expand its operations locally and internationally, STC recently undertook an organizational restructuring plan creating separate management committees for its domestic and international operations.

In spite of intense competition in the local GSM market with the entry of two new players, STC remains the market leader with around 53% market share in terms of number of subscribers and 82% market share in terms of revenues (as on 31st December 2008). The company has maintained a blended ARPU of around SR 115-120 which is considerably higher than its competitors. STC’s network covers around 98% of the populated areas and highways within the kingdom and at the end of 2008, STC had 19 million mobile subscribers, 4.1 million fixed-line subscribers and over 1 million broadband subscribers. In order to tap the increasing penetration level in GSM market, STC plans to continue offering value-added services to its customers and sustain its high ARPU levels. STC’s share of the total addressable GSM subscriber base in 2008, including all its subsidiaries was 28.6 million, of which 66% were local subscribers.

STC's share of total addressable market in GSM for 2007 and 2008

Subscribers (000’s)

2007 2008 % in 2007 % in 2008

Saudi Arabia 17,300 19,000 68.5% 66.4%

Malaysia 2,451 2,848 9.7% 10.0%

India 2,377 3,208 9.4% 11.2%

Indonesia 116 140 0.5% 0.5%

Turkey 1,730 1,816 6.8% 6.4%

Kuwait 0 76 0.0% 0.3%

South Africa 1,288 1,513 5.1% 5.3%

Bahrain 0 0 0.0% 0.0%

Total 25,262 28,602 100.0% 100.0%

(Source: STC, ITU, CITC, FALCOM Research, Telecom Regulatory Authorities of respective countries)

STC’s monopoly in the wireline segment has also ended recently, when CITC issued licenses to three new operators, STC plans to remain competitive by offering more value-added services to its fixed-line subscribers and leverage its strong position to develop its internet

EX

EC

UT

IVE

SUM

MA

RY



business by providing bundled services to its customers. STC’s DSL subscribers touched the benchmark figure of 1 million in 2008.

On the technology front, STC is working on the deployment of NGN (Next Generation Network) which will help it utilize economies of scale further and reduce the capital expenditure going forward.

Continuing with the FORWARD strategy adopted in 2007, STC plans to foster its organic and inorganic growth by enhancing its customer-centric business model, operational efficiency and international growth. With acquisitions in the under penetrated markets of India and Indonesia and the growing domestic demand for broadband, STC’s future potential for growth looks robust.

Financially, 2008 was not a very profitable year for STC, is spite of 38% increase in revenues, its net income declined by 7%, mainly due to the loss of market share in the domestic market, decline in consumer expenditure, start-up costs in Kuwait and currency losses related to international operations. However, in Q1 2009, in spite of 1.3% q-o-q decline in revenues, STC reported 113% increase in net profits, mainly due to decline in access charges and administrative and marketing expenses. According to our forecasts, STC’s net profit margin and EBITDA margin are expected to be 23% and 40% respectively in 2009, and 25% and 40% by 2012. The contribution from international segment is expected to increase in coming years. Company’s return on average equity and average assets is expected to be steady around 25% and 12% respectively in the coming four years.

Historically, STC’s stock has outperformed the TASI and Telecommunications sector index and has shown relatively lower volatility over the last one year (in terms of coefficient of variance). The company has consistently paid quarterly dividends to its shareholders and is expected to do so in the coming years. STC’s stock is currently trading at lower P/E multiples but higher PBV and dividend yields as compared to that of the TASI or the telecom sector.

FALCOM Research is releasing the updated report with amendments in valuation that has resulted in a fair value of SR 64.7 which is at 26.9% premium to its price of SR 51.0 on 6th July 2009. FALCOM Research maintains “Strong Buy” recommendation on the stock. The fair value of the stock is based on FCFE, DDM and comparable valuation methods. For our valuation we have assumed the perpetual growth rate of FCFE and dividend to be 2%.

Valuation Ratios

2007 2008 2009E 2010E

PE (x) 13.9 8.9 9.0 8.0

PBV (x) 4.7 2.6 2.5 2.3

PEG (x) -13.8 -6.0 4.2 0.6

Dividend Yield (%) 16.8 13.1 7.2 8.1

Earnings Yield (%) 7.2 11.2 11.1 12.5

EV/Revenues (x) 5.0 2.6 2.6 2.4

(Source: FALCOM Research)



Background

Saudi Telecom Company (STC) was established as an independent joint-stock company in 1998, when the government separated the telecommunication services from the Post, Telegraph and Telephone Ministry. In 2002, the government sold its 30% stake in the company via an IPO. STC was the only company offering telecommunication services in the Kingdom until 2003, when the VSAT (Very Small Aperture Terminal) market was liberalized. STC’s monopoly in GSM (mobile) market was ended in 2004, when the second mobile license was granted to Etihad Etisalat Company (Mobily); in March 2007, the third license was granted to a consortium led by Zain of Kuwait for USD 6.1 billion. STC’s monopoly in fixed line market was ended in April 2007, when three fixed line licenses were granted to the consortia led by Bahrain Telecommunication (Batelco), Hong Kong’s PCCW and US based Verizon Communications respectively. In spite of increasing competition in the GSM and fixed line markets, STC remains the only integrated telecom operator in Saudi Arabia offering mobile, landline, internet services, data transmission, leased lines and public telephones.

Shareholding Structure

In 2002, the Saudi government reduced its stake in STC to 70% by floating 20% on Tadawul and offering 5% each to Public Pension Fund and General Organization for Social Insurance. Following chart shows the shareholding structure of STC in 2002 and today.

(Source: Tadawul, STC)

CO

MPA

NY

PRO

FILE

Shareholding Structure in 2002 (after IPO)

70%

5%

5%

20%

Government of Saudi Arabia

General Organization for Social Insurance - Saudi Arabia

Public Pension Fund

Public

Shareholding Structure as in March 2009

70.0%

6.5%

6.5%

17.0%

Government of Saudi Arabia

General Organization for Social Insurance - Saudi Arabia

Public Pension Fund

Public



STC Group in The Kingdom

Saudi Telecom currently has four subsidiaries based in the Kingdom of Saudi Arabia.

(Source: STC)

Arabian Internet and Communications Services (AwalNet)

Established in April 2002, AwalNet is a limited liability company fully owned by STC. The company provides various internet services; communications projects operation services and other services for transmission and processing of information.

Tejari Saudi Arabia

Formed in November 2006, Tejari Saudi Arabia is also a limited liability company in which STC has 50% ownership. The company is a part of Tejari International and deals with establishment, operation and management of electronic markets and platforms, and provides various services related to e-commerce dealings in Saudi Arabia. Currently, the parent company Tejari has operations in fourteen different emerging markets covering Middle East and South East Asia. Tejari partners with different companies in emerging nations through its franchisee model, wherein, the franchisees receive Tejari’s business model, technology, training, and support.

Arab Submarine Cables Company Ltd.

Arab Submarine Cables Company Ltd. was established in September 2002 for constructing, leasing, managing and operating the submarine telecommunication cable connecting the Kingdom and the Republic of Sudan. The company became operational in June 2003.

Arabsat

Arabsat was established in April 1976 by 21 member-states of the Arab League. With four operational satellites, it is the only operator in the region offering the full range of Broadcasting (television and radio), Telecommunication (voice, data, fax and telex) and Broadband services.

STC

Arabian Internetand

CommunicationsServices Co.

(100%)

Tejari Saudi Arabia(50%)

Arab SubmarineCables Company

Ltd. (47.1%)

Arab Satellite Communications

Organization (36.66%)

Arabian Internet and Communications

Services Co. (100%)

Tejari Saudi Arabia

(50%)


(47.1%)



STC




(Source: STC)



Tejari Saudi Arabia




Arabsat


STC

Arabian Internetand


(100%)



Ltd. (47.1%)





STC International

In the last two years STC has acquired operations in nine different countries across the globe. The international segment contributed for 21% of the total revenues in 2008 and 27% in first quarter of 2009. STC has plans to diversify its international operations further in future.

(Source: STC, Maxis, Oger Telecom, VIVA, FALCOM Research)

STC

Binariang GSM SDN

BHD (Malaysia)

VIVA (Kuwait)

Oger Telecom Ltd.

(U.A.E.)

Maxis(Malaysia)

Cyberia(KSA)

Cell C (South Africa)

Ojer Telekomuni

kas yon Anonim Sirketi

NTS- Axis(Indonesia)

Aircel(India)

Cyberia(Lebanon)

Cyberia(Jordan)

Virgin Mobile (South Africa)

Turk Telekom(Turkey)

TTNET

INNOVA

ARGELA

sebit

assistt

ALBTELECOM Sh. A.

IVEA(Dubai)

ARGELA (USA)

25% 26% 35%

100%

51%44%

74%

95% 75% 99%

100% 100%

55%50%

AVEA

50%

50%

100%

STC Bahrain

100%

Content Provider

(STC, Astro,SRMG, CTV)

51%

Connecting the World…

100%

100%

100%

15%

81%

100%

100%




(Source: STC)



Tejari Saudi Arabia




Arabsat


STC

Arabian Internetand


(100%)



Ltd. (47.1%)





Binariang GSM SDN BHD “Binariang” – Malaysia

Binariang is an investment holding company, owning 100% of Maxis. Its shareholders include Utaha Tegas (45% ownership), Bumiputera Trustee (30% ownership) and STC (25% ownership). STC acquired 25% stake in Binariang in September 2007 for USD 3.1 billion.

Maxis, Malaysia

Established in 1993, Maxis Communications Berhad (Maxis), formally known as Binariang is a wholly owned subsidiary of Binariang. The company went public in July 2002 and was listed on Bursa Malaysia (Malaysian Stock Exchange), however, as a result of the acquisition of 25% stake by STC through Binariang; it delisted its shares in 2007. In addition to mobile operations in Malaysia, Maxis has international presence through its subsidiaries NTS (AXIS) in Indonesia (Maxis has 44% stake) and Aircel in India (Maxis has 74% stake). Maxis is the largest telecom operator in Malaysia with 42% market share (as of 2007) and a subscriber base of 10.1 million (as on first quarter 2008).

Aircel, India

Aircel, the fifth largest GSM service provider in India with subscriber base of 7.6 million, is jointly held by Maxis Communications Berhad, Malaysia (74% stake) and Apollo Hospital Enterprise Ltd., India (26% stake). Maxis acquired stake in Aircel in March 2006.

AXIS – PT Natrindo Telepon Seluler NTS, Indonesia

NTS is a national GSM and 3G cellular service provider in Indonesia. The company is 51% owned by STC directly, 44% by Maxis and 5% by Indonesian shareholders. STC acquired its total effective stake of 62% in September 2007. The deal value of STC’s direct stake in NTS was around USD 3.1 billion. NTS offers its GSM services under the brand name of “Axis” and had around 1.6 million subscribers as on October 2008.

VIVA – Kuwait Telecom Company, Kuwait

Founded in June 2008, Kuwait Telecom Company is the third telecommunication service provider in Kuwait. The company offers its services under the brand name of ‘VIVA’. STC acquired a 26% stake in the company in November 2007 for SR 3.37 billion.

Oger Telecom, UAE

Oger Telecom is a Dubai based telecommunication group investing in emerging markets telecom industry and is controlled by the Saudi Oger group. The company is a full service telecom conglomerate offering fixed line, mobile and internet services. In Turkey, the company has a 54.5% stake in the leading fixed-line and broadband telecom operator, Turk Telekom, and 75% stake in the mobile operator Cell C. Oger also has 95% stake in Cyberia, an internet service provider in Saudi Arabia, which in turn has wholly owned subsidiaries in Lebanon and Jordan. STC finalized the acquisition of 35% ownership in Oger Telecom for SR 9.6 billion.

…With Global Connections



Turk Telekom, Turkey

Turk Telekom is the largest telecommunication services provider in Turkey with 58% market share. The company is listed on the Istanbul Stock Exchange with 15% of shares freely floated in the market, the rest 85% is shared between Oger Telecom (55%) and Turkish government (30%). As of December 31, 2008, Turk Telekom group companies had 17.5 million fixed access lines, 5.8 million ADSL connections and 12.2 million GSM subscribers. Turk Telekom group comprises of various subsidiaries which are mentioned in the organization chart shown earlier.

Cell C, South Africa

The third mobile operator of South Africa, Cell C is a wholly owned subsidiary of 3C Telecommunication. 3C Telecommunication is 60% owned by Oger Telecom South Africa, a division of Saudi Oger; 25% owned in an unencumbered holding by CellSAf, (a Broad-Based Black Economic Empowerment entity representing over 30 black empowerment companies and trusts), and 15% by Lanun Securities SA (Lanun is a wholly owned subsidiary of Saudi Oger Ltd). The company began its operations in 2001 and currently has a network covering 95% of South African population. It also has 50% stake in Virgin Mobile (South Africa), the rest 50% of which is owned by Virgin Group (UK).

Cyberia, Lebanon, KSA, Jordan

Cyberia, Transmog Inc. was established in Lebanon in 1996 to provide internet access, online publishing and online services in the country. Currently, the company owns more than 50% of the Lebanese internet services market. Cyberia started its operations in Saudi Arabia and Jordan in 1999 and 2001 respectively.

STC, Bahrain

STC got the license to operate in Bahrain as third telecom operator in January 2009. The financial bid for the license was worth USD 230 million.

Business Units

With an employee base of more than 20,000, Saudi Telecom offers its services to its customers through the following four business units.

1. Personal Business Unit 2. Home Business Unit 3. Enterprise Business Unit 4. Wholesale Business Unit

Return to Shareholders

Historically, STC’s stock has outperformed the TASI and Telecommunications sector index and has shown relatively lower volatility over the last one year (in terms of coefficient of variance). The company consistently paid dividends to its shareholders, STC was the first company in the kingdom to start paying quarterly dividends to its shareholders and it plans to continue with this policy going forward. As per our estimates, the earning per share for STC is expected to increase slightly in 2009 to SR 5.6 and grow steadily thereafter to reach SR 6.9 in

Personal

Home Enterprise

Wholesale

STC



2012. We expect STC to continue with its dividends and have steady dividend payout ratio of 65% till 2012. STC’s dividend per share is expected to decline to SR 3.7 in 2009 and reach SR 4.5 in 2012.

Return to Shareholders (Capital Gains + Cash Dividends)

2004 2005 2006 2007 2008

Price 95.33 139.2 83.0 83.8 49.1

Dividends 5.2 6.2 5.8 5.0 3.8

Returns 52.5% -36.2% 6.9% -36.9%



(Source: STC, FALCOM Research)

Historical and Expected EPS and Dividends per share

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EPS Dividends

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TASI STC Telecom and IT



Being an integrated telecommunication service provider, Saudi Telecom has operations in mobile, fixed line and internet services. The STC group has identified the following main operating segments.

1. GSM (Global System for Mobile communications) – The main services offered under this segment are mobile telecom, third generation services, prepaid cards, international roaming and messages.

2. PSTN (Public Switched Telephone Network) – This segment includes services such as fixed lines, card telephones, interconnect and international calls.

3. DATA – Main services in this segment are leased data transmission circuits, DSL and internet.

4. Un-allocated – This segment includes items which could not be linked with the three main operating segments mentioned above.

The following chart and table illustrate the segment-wise financials of STC Group for the fiscal year 2008.

Segment-wise Revenue Distribution (2008)

68.8%

19.1%

12.0%

0.1%

GSM PSTN DATA Un-allocated

(Source: STC)

Segment Information for 2008

(SR ‘000) GSM PSTN DATA Un-

allocated Total

Key Income Statement Items

(Annual) (Annual) (Annual) (Annual) (Annual)

Operating Revenues 32,643,526 9,070,011 5,689,993 65,838 47,469,368

Interconnect Revenues 1,384,637 6,991,613 377,003 (8,753,253) 0

Interconnect Expenses (6,079,756) (1,321,851) (1,351,611) 8,753,218 0

Net Operating Revenues 27,948,407 14,739,773 4,715,385 65,803 47,469,368

Depreciation and Amortization

(2,850,537) (3,249,148) (287,825) (20,004) (6,407,514)

Net Income 11,346,107 57,791 1,545,489 (1,911,541) 11,037,846

OPE

RA

TIO

NS










68.8%

19.1%

12.0%

0.1%


(Source: STC)



allocated Total








(2,850,537) (3,249,148) (287,825) (20,004) (6,407,514)

Net Income 11,346,107 57,791 1,545,489 (1,911,541) 11,037,846

OPE

RA

TIO

NS




19.1%

68.8%

12.0%

0.1%









68.8%

19.1%

12.0%

0.1%


(Source: STC)



allocated Total








(2,850,537) (3,249,148) (287,825) (20,004) (6,407,514)

Net Income 11,346,107 57,791 1,545,489 (1,911,541) 11,037,846

OPE

RA

TIO

NS




Balance Sheet Items (SR ‘000)

GSM PSTN DATA Un-

allocated Total

Total Assets 37,750,591 36,856,022 3,815,708 21,339,814 99,762,135

Total Liabilities (19,769,837) (13,741,086) (1,018,688) (22,670,647) (57,200,258)

Key Ratios

Net Income Margin 34.8% 0.6% 27.2% -2903.4% 23.3%

Asset Turnover 0.9 0.2 1.5 0.0 0.5

Total Assets to Total Liabilities

1.9 2.7 3.7 0.9 1.7


For 2008, GSM was the most contributing and profitable business. STC offers its services locally as well as internationally through its subsidiaries. Following are the detailed description of the countries in which STC has operations.

GSM (Global System for Mobile Communications)

GSM segment is the most contributing and profitable business for STC. The segment contributed for 69% of the revenues for STC in 2008 and had a net income margin of 35%. STC has direct or indirect GMS operations in Saudi Arabia, Malaysia, India, Indonesia, Turkey, Kuwait, South Africa and Bahrain. Following are the description of the GSM market in various countries and STC’s presence in those markets.

Saudi Arabia

Saudi Arabia is the largest GSM market in the region with more than 100% penetration levels. Currently, there are three GSM service providers in the Kingdom namely, STC, Etihad Etisalat (Mobily) and Zain. The industry is regulated by Communications and Information Technology Commission (CITC) established in 2001. Following table provides information about the GSM market in KSA.

GSM Segment Indicators for Saudi Arabia

000’s 2004 2005 2006 2007 2008E

Cellular Subscribers 9,176 14,164 19,663 28,381 34,545

Cellular Penetration 40.5% 61.3% 83.0% 116.0% 139%

Pre paid subscribers (%)

53.3% 67.4% 76.6% 83.1% 85.0%

Post paid subscribers (%)

46.7% 32.6% 23.4% 16.9% 15.0%

Blended ARPU (US$) 48.9 43.8 37.2 35.2 31.6

(Source: ITU, EIU, FALCOM Research)

Till 2004, STC was the only provider of GSM services in the kingdom, however, after the liberization of mobile segment, two new licenses were granted to Etihad Etisalat (Mobily) and Zain in 2005 and 2008 respectively. Currently, STC is having the maximum market share and continues to be the market leader.



GSM Operators in Saudi Arabia (Market Share as per Subscriber base)

2004 2005 2006 2007 2008E

STC 100.0% 89.0% 69.0% 61.0% 55.0%

Mobily 0.0% 11.0% 31.0% 39.0% 40.0%

Zain 0.0% 0.0% 0.0% 0.0% 5.0%

(Source: Zawya, FALCOM Research, STC)

Malaysia

STC has indirect access to the Malaysian telecommunication market through its 25% ownership in Binariang, which in turn has 100% ownership of Maxis, a leading telecommunication service provider in Malaysia. The telecommunication sector in Malaysia is regulated by Malaysian Communications and Multimedia Commission, which also regulates the multimedia sector. The commission was created in 1998. The GSM subscriber base in Malaysia has grown at a CAGR of 16.7% from 2005 to 2008 and the penetration levels have increased from 56.5% (in 2004) to 96.8% (in 2008).

GSM Segment Indicators for Malaysia

000’s 2004 2005 2006 2007 2008

Cellular Subscribers 14,611 19,545 19,464 23,347 27,125

Cellular Penetration 56.5% 74.1% 72.3% 85.1% 96.8%


82.5% 85.0% 82.7% 83.3% 79.4%


17.5% 15.0% 17.3% 16.7% 20.6%

(Source: Malaysian Communications and Multimedia Commission, FALCOM Research)

Maxis Communication Berhad (Maxis) commenced its mobile operations in August 1995, after receiving licenses to operate a nationwide GSM900 mobile network, a domestic fixed network and an international gateway in 1993. In July 2005, Maxis launched its 3G service called Maxis3G and in September 2006 became one of the world’s first to use HSDPA, a high-speed upgrade of the 3G network, for a large scale rollout of residential broadband services. Maxis is the largest Malaysian telecommunication service provider with a subscriber base of 10.1 million as of first quarter 2008. Maxis also has significant operations in India and Indonesia through its subsidiaries Aircel (74% ownership) and NTS (44% ownership) respectively. The GSM market in Malaysia is dominated by three players, the following chart shows their market shares.

The subscriber base of Malaysia is close to that of KSA with lower penetration levels



Market Share in 2007

42.0%

31.0%

27.0%

Maxis Telekom Malaysia (Celcom) DiGi


India

STC has indirect exposure to the Indian telecommunication market through Maxis’s 74% ownership of Aircel. Given the high population, gorwing GDP and underpenetrated telecoom market, India has huge potential of growth. It is one of the fastest growing and comprehensive mobile market in the world. The wireless market in India has two different technologies namely CDMA and GSM. Following table depicts the telecommunication sector indicators for India. The Indian cellular subscriber base increased at a CAGR of 75% from 2004 to 2008 and penetration level increased from 3.2% to 27.3% during the same period.

GSM Segment Indicators for India

000’s 2004 2005 2006 2007 2008*

Cellular Subscribers (GSM + CDMA)

33,690 75,940 149,620 233,620 315,310


Pre paid subscribers % (GSM)

74.0% 80.5% 86.0% 90.0% 92.0%

Post paid subscribers % (GSM)

26.0% 19.5% 14.0% 10.0% 8.0%

Minutes of Usage for GSM(/subscriber/month)

322 393 454 464 499

ARPU only GSM (INR/subscriber/month)

436 362 316 261 221

(Source: Telecom Regulatory Authority of India, FALCOM Research)*September end 2008

Currently in India there are nine GSM mobile operators and Aircel ranks fifth among them (in terms of subscriber base) as on third quarter end, 2008. With operations in 10 of the 23 telecom circles in India, Aircel had a subscriber base of 12.5 million as on July 2008. Aircel plans to increase

The subscriber base of India is 10 times the subscriber base of Saudi Arabia with 4 times lesser penetration

31.0%

27.0%

42.0%

Maxis Telecom Malaysia (Celcom) DiGi

Market Share in 2007



its coverage to the rest of the 13 regions as well. Aircel currently also provides WiMax services in the top 30 cities of India.

GSM Operators in India (Market Share on the basis of number of subscribers)

2004 2005 2006 2007 2008*

Bharti Group 26.3% - 30.3% 32.2% 33.2%

Vodafone/Hutchison Group

19.2% - 22.1% 22.9% 23.4%

BSNL 22.6% - 22.4% 18.8% 16.8%

IDEA Group 12.6% - 11.8% 12.5% 13.0%

Aircel Group 4.4% - 4.3% 5.5% 5.9%

Relaince 2.8% - 3.5% 3.6% 3.9%

MTNL 1.6% - 2.3% 1.7% 1.6%

Spice Group 4.0% - 2.3% 2.2% 1.5%

BPL Group 6.6% - 1.0% 1.3% 0.7%

(Source: Telecom Regulatory Authority of India, FALCOM Research)*September end 2008

Indonesia

Indonesian telecommunication market is accessed by STC through its 62% stake in PT Natrindo Telepon Seluler NTS (51% of direct ownership and 11% indirect ownership through Maxis). The mobile market of Indonesia is underpenetrated with significant growth potential. Following table illustrates the mobile telecom indicators for Indonesia.

GSM Segment Indicators for Indonesia

000’s 2004 2005 2006 2007 2008*

Cellular Subscribers (CDMA+GSM)

30,337 46,971 63,803 93,387 113,211


Pre paid subscribers % 93.7% 94.9% 95.4% 96.7% 97.1%

Post paid subscribers % 6.3% 5.1% 4.6% 3.3% 2.9%

(Source: IMF, General of Post and Telecommunication of Republic Indonesia, FALCOM Research) *Till June 2008

NTS is a licensed third generation mobile network operator in Indonesia and was offered the license three years back, however, it was able to start operations only in June 2008. The company offers its GSM services under the brand name of “Axis” and had 1.6 million subscribers as of October 2008. The Indonesian telecommunication market consists of 5 mobile operator and 6 CDMA-based fixed-wireless operators. Currently, NTS is not having a significant market share, however, it targets to achieve 15% market share within next 15 years.

Aircel subscriber base in India is 67% of STC’s subscriber base in KSA

Low penetration levels increase attractiveness of Indonesian cellular market



Indonesian Telecom Market Share (CDMA+GSM) in June 2008

46.3%

28.6%

0.0%0.3%

20.2%

1.8%0.1%2.7%

Telkomsel Indosat Excelcomindo (XL)Mobile-8 Fren Sampoerna Ceria NTS - AxisHCPT - Three Smart Telecom

(Source: General of Post and Telecommunication of Republic Indonesia, FALCOM Research)

Turkey

STC has 35% ownership in Oger Telecom which in turn has 55% stake in Turk Telekom which is a leading broadband and fixed line provider in Turkey. Turk Telekom also owns 81% of Turkey’s third mobile operator Avea. Founded as “Postahane-i Amirane” in 1840, the company is listed on the Istanbul stock exchange with a 15% free float, 55% ownership with Oger Telecom and rest 30% with Turkish government. Avea was founded in 2004 as a result of the unification of Aycell and Aria brands. The telecommunication sector in Turkey is regulated by Information and Communications Technologies Authority. Following table shows the telecommunication sector indicators for Turkey.

GSM Segment Indicators for Turkey

000’s 2004 2005 2006 2007

Cellular Subscribers 34,707 43,609 52,663 61,976

Cellular Penetration 48.5% 60.1% 71.7% 87.8%

Pre paid subscribers % 75.9% 78.7% 81.1% 81.1%

Post paid subscribers % 24.1% 21.3% 18.9% 18.9%

Minutes of Usage per subscriber per month

39 55 61 60

Blended ARPU (US$) 1,374 147 128 167

(Source: Information and Communications Technologies Authority, Turkey, FALCOM Research)

The mobile services sector in Turkey is dominated by three players namely, Turkcell, Vodafone and Avea, the following chart shows their market shares as of the third quarter of 2008.



Turkish Mobile Telecom market as of third quarter 2008

55.5%26.6%

17.9%

Turkcell Vodafone Avea

(Source: Turk Telekom website, FALCOM Research)

Kuwait

STC acquired 26% stake in Kuwait’s third mobile telecommunication operator, Kuwait Telecommunication Company (KTC), in November 2007 for SAR 3.37 billion. Kuwait Telecommunication Company floated 50% of its stock through IPO in August 2008; the remaining 24% of the company is owned by the Kuwaiti government. The company offers its services under the brand name of “VIVA”. After beign awarded the license, STC had announced its objective to capture 10% of the mobile market in first year of operation and 30% of the mobile market within 10 years. However, given the low population and already high penetration levels in the Kuwaiti telecommunication sector, capturing a substantial market share will be a challenge for the new company. Following are some of the performance indicators for the telecommunication sector in Kuwait.

GSM Segment Indicators for Kuwait

000’s 2004 2005 2006 2007

Cellular Subscribers 2,110 2,277 2,530 2,774

Cellular Penetration 76.6% 76.1% 79.5% 81.6%

Pre paid subscribers % 80.1% 79.5% 79.6% 78.3%

Post paid subscribers % 19.9% 20.5% 20.4% 21.7%

Blended ARPU (US$) 46.8 45.7 56.3 60.4

(Source: ITU, FALCOM Research)

Before the entry of KTC, the Kuwaiti mobile market was a duopoly with Zain and Wataniya dominating the entire market with market shares of 57% and 43% respectively.

Turkish Mobile Telecom market as of third quarter 2008

Turkcell Vodafone Avea

55.5%

17.9%

26.6%



South Africa

STC has access to the South African mobile market through its 35% stake in Oger Telecom which in turn owns 75% stake in Cell C, the third largest mobile operator of South Africa. Cell C started its operations in 2001 and its network currently covers more than 95% of the South African population. Cell C also has a 50% ownership in the fourth mobile operator, Virgin Mobile, a joint venture between Cell C and Virgin Group.

GSM Segment Indicators for South Africa

000’s 2004 2005 2006 2007 2008*


20,839 33,960 39,662 42,300 49,692


(Source: ITU, Vodacom Annual Presentation, FALCOM Research) *September end 2008

The currnet South African mobile market consists of four operators namely, Vodacom, MTN, Cell C and Virgin Mobile.

Market Share of Mobile Customers as on September 2008

53.5%34.3%

11.1%

1.0%

Vodacom MTN Cell C Virgin Mobile

(Source: Vodacom Annual Presentation, FALCOM Research)

Bahrain

In January 2009, STC acquired the license to operate in Bahrain as third telecom operator for USD 230 million. The mobile market in Bahrain has high penetration levels and is dominated by Batelco (with 59.86% market share in 2007).


South Africa

STC has access to the South African mobile market through its 35% stake in Oger Telecom which in turn owns 75% stake in Cell C, the third largest mobile operator of South Africa. Cell C started its operations in 2001 and its network currently covers more than 95% of the South African population. Cell C also has a 50% ownership in the fourth mobile operator, Virgin Mobile, a joint venture between Cell C and Virgin Group.

GSM Segment Indicators for South Africa

000’s 2004 2005 2006 2007 2008*


20,839 33,960 39,662 42,300 49,692


(Source: ITU, Vodacom Annual Presentation, FALCOM Research) *September end 2008

The currnet South African mobile market consists of four operators namely, Vodacom, MTN, Cell C and Virgin Mobile.

Market Share of Mobile Customers as on September 2008

53.5%34.3%

11.1%

1.0%

Vodacom MTN Cell C Virgin Mobile

(Source: Vodacom Annual Presentation, FALCOM Research)

Bahrain

In January 2009, STC acquired the license to operate in Bahrain as third telecom operator for USD 230 million. The mobile market in Bahrain has high penetration levels and is dominated by Batelco (with 59.86% market share in 2007).

Market share of mobile customers as on September 2008

Vodacom MTNL Cell C Virgin Mobile

34.3%53.5%

11.1%

1.0%



GSM Segment Indicators for Bahrain

000’s 2004 2005 2006 2007 Q2 2008

Cellular Subscribers 650 749 907 1,116 1,244



75.0% 75.0% 75.0% 75.0% 83.0%


25.0% 25.0% 25.0% 25.0% 17.0%

Blended ARPU (US$) 46 49 47 50 N/A

(Source: ITU, Telecommunication Regulatory Authority, Kingdom of Bahrain, FALCOM Research)

STC’s Consolidated Global Presence in GSM

Following table summarizes STC’s presence in various GSM markets in terms of the total number of subscribers.

STC's share of total addressable market in GSM for 2007 and 2008

Subscribers (000’s) 2007 2008 % in 2007 % in 2008

Saudi Arabia 17,300 19,000 68.5% 66.4%

Malaysia 2,451 2,848 9.7% 10.0%

India 2,377 3,208 9.4% 11.2%

Indonesia 116 140 0.5% 0.5%

Turkey 1,730 1,816 6.8% 6.4%

Kuwait 0 76 0.0% 0.3%

South Africa 1,288 1,513 5.1% 5.3%

Bahrain 0 0 0.0% 0.0%

Total 25,262 28,602 100.0% 100.0%


PSTN (Public Switched Telephone Network)

Saudi Arabia

Saudi Arabia is the largest regional fixed line market in terms of number of subscribers, however, the current low penetration levels are expected to increase given the bundling of fixed line and internet services (broadband) and increasing internet penetration in the kingdom. Till April 2007, STC was the only provider of fixed line services in the kingdom, following which three fixed line licenses were granted to the consortia led by Bahrain Telecommunication (Batelco), Hong Kong’s PCCW and US based Verizon Communications respectively.



PSTN Segment Indicators for Saudi Arabia

000’s 2004 2005 2006 2007 2008E

Fixed Line Subscribers 3,695 3,844 3,951 3,996 4,200

Fixed Line Penetration (%)

15.4% 15.6% 15.7% 16.2% 16.2%


Malaysia

STC has access to the Malaysian fixed line segment through its 25% ownership in Maxis, an integrated telecommunication operator in Malaysia. Maxis was granted the license to offer fixed line services in early 1996. The fixed line penetration levels in Malaysia are relatively higher, however, they have declined over the last four years.

PSTN Segment Indicators for Malaysia

000’s 2004 2005 2006 2007 2008

Fixed Line Subscribers 4,446.0 4,366.0 4,342.0 4,350.0 4,292.0


52.3% 49.5% 48.3% 47.8% 44.9%


Turkey

STC has exposure to the Turkish fixed line market through its indirect stake in Turk Telekom, a leading fixed line and broadband services provider in Turkey with 17.8 million PSTN customers. Turk Telekom is the Turkey’s largest, the Europe’s 5th and the world’s 13th largest fixed telephone operator. The fixed line penetration in Turkey is low and has been almost constant over years.

PSTN Segment Indicators for Turkey

000’s 2004 2005 2006 2007

Fixed Line Subscribers 19,125 18,978 18,831 18,201

Fixed Line Penetration (%) 26.7% 26.2% 25.6% 25.8%


DATA (Leased Data Transmission Service, DSL and Internet)

STC offers data services in Saudi Arabia and has access to the broadband markets in Turkey and Malaysia through its stake in Turk Telekom and Maxis respectively. STC also has an indirect stake in Cyberia through Oger Telecom, Cyberia offers various internet services in Saudi Arabia, Lebanon and Jordan. Following are the broadband indicators for Saudi Arabia, Turkey and Malaysia.



Broadband Segment Indicators for Saudi Arabia

000’s 2004 2005 2006 2007 2008E

BroadbandSubscribers

69 68 218 600 741

BroadbandPenetration (%)

0.3% 0.3% 0.9% 2.4% 3.0%


Broadband Segment Indicators for Malaysia

000’s 2004 2005 2006 2007 2008

BroadbandSubscribers

971 1,310 2,017

BroadbandPenetration (%)

- - 10.8% 14.4% 21.1%


Broadband Segment Indicators for Turkey

000’s 2004 2005 2006 2007

Broadband Subscribers 452 1,540 2,724 4,346

Broadband Penetration (%) 0.6% 2.1% 3.7% 6.2%


Low penetration levels increase attractiveness of Broadbandsegment



Given the consumer centric nature, relatively high price elasticity and brand consiousness of the telecommunication industry, marketing plays a major role in this sector. In order the better understand STC’s marketing initiatives and strategic position in the sector, we looked at the marketing mix of the company.

Product

The product in this case will be the telecommunication services which STC offers to its customers. STC offers exclusively structured products to its individual and business segment customers through various brands thus attaining customer segmentation and generating brand consiousness.


Jawal – Includes range of mobile services like prepaid (offered under the brand name “Sawa” and “Lana”), postpaid services, family Al Jawal (for families), messaging services, 3G services, roaming services and entertainment services (under brand names “Sada” and “Shabik”) related to sports, music and messaging. This brand offers services to both individual and business segments. Hatif – Includes services such as card phones, landline services, prepaid card services, public telephones and business services offered to both individual and business segments. Saudi Net – Includes internet services through broadband, DSL and internet cards. Saudi Data – Includes services such as IP-VPN, VSAT, Sky IP service and other value added services mainly for business segment.Wholesale – Includes national and international telecommunication infrastructure solutions.

Pricing

STC was able to charge higher tarriffs prior to 2004, when it had a monopoly in the Saudi telecommunication market, however, after the entry of Mobily in 2005 and Zain in 2008, there has been an increase in price competition among the three players, thus increasing the price

Products

Individual Segment Business Segment

Jawal Hatif Saudi Net

Saudi Net Saudi Data

Whole sale

Jawal HatifMA

RK

ET

ING

MIX

PR

OD

UC

T, P

RIC

E, P

LAC

E, P

RO

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Product




Pricing


Products




Whole sale

Jawal HatifMA

RK

ET

ING

MIX

PR

OD

UC

T, P

RIC

E, P

LAC

E, P

RO

MO

TIO

N

Products




Whole sale

Jawal Hatif



Product




Pricing


Products




Whole sale

Jawal HatifMA

RK

ET

ING

MIX

PR

OD

UC

T, P

RIC

E, P

LAC

E, P

RO

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TIO

N



elasticity of demand. Also, prior to 2004, only post paid and fixed line services were offered in Saudi Arabia and the customer base was concentrated towards high usage customers, however, with the launch of pre paid services, the customer base has expanded and price competition has increased further. The cellular penetration in Saudi Arabia in 2004 was 40.5% which increased to 61.3% in 2005 and 139% in 2008. STC has been actively revising the prices of its services to gain an edge over its competitors. In 2007, STC changed the tariffs for IP-VPN service, Filtered Internet International Access Service, Filtered Direct International Internet Service, the basic tariff for the National Backbone Access Service and DIA.

Placement

Placement refers to the distrbution channels and strategies undertaken by the company. STC mainly distributes its services through its retail outlets as well as through direct channels like internet and tele-services. STC has distribution agreements with the biggest dealers across all cities of Saudi Arabia. STC also has an online portal which allows customers to undertake several services such as bill payment, service setting modifications and upgradation etc.

Promotion

For promoting its services in the market, STC advertises its products across the kingdom through public banners, media and e-channels; offers various discount offers (both on price and volumes) and shopping vouchers to its customers; and has developed various brands for creating brand loyalty among its customers.

STC’s advertising expenses and sales commissions were SR 1.85 billion in 2008 (227% higher than 2007 levels) and represented 4% of 2008’s operating revenues.

Advertising Expenses and Sales Commissions

100,000

300,000

500,000

700,000

900,000

1,100,000

1,300,000

1,500,000

1,700,000

1,900,000

2005

2006

2007

2008

1%

2%

3%

4%

5%

Advertisubg expenses and sales commissions (SR '000) As a % of Total Revenues

(Source: STC Annual Report, FALCOM Research)



In 2006, STC undertook an investment strategy called “10X10” which aimed at generating 10% of the total service revenue from inorganic growth by 2010. However, given the strong performance and strategy driven approach of the company, it outperformed its target in 2008 itself with foreign revenues accounting for around 21% of the total operating revenues.

In 2007, STC defined its strategy focus for the coming years along the seven main axes, each deriving its significance from the letters of the word “FORWARD”. STC has coined this customer-centered strategy as “FORWARD”.

Fulfill Personal Communication Potential

In order to pursue this strategy of attaining 100% personal communication potential, STC through its ALJAWAL brand developed the third generation communication network not only locally but internationally. As on 31st December 2008, AlJawal had a subscriber base of around 19.1 million. In 2008, ALJAWAL designed and offered several services and schemes to its local and international clients.

42 new services and packages offered to clients 30% increase in 3.5G customer base in 2008 987 roaming services in total, with more than 428 operators in 164 countries. Low roaming tariff rates for 30 countries

Offer Wholesale Services

With the objective to harness the wholesale opportunity, STC aims to expand its international network and continue offering quality services and operations to its national and international clients.

STC was awarded as the Best Wholesaler in the Middle East in 2008 by Telecoms World, for operating the most sophisticated, fastest-growing network with quality and sustainability across the region. STC entered into strategic partnerships with a number of international operators to establish regional and continental marine cables that are projected to raise the capacity of STC’s global network by more than 400%. The cables are established between India and Western Europe, “MENA”, “EIG”, and “EASSY”.The Company possesses four international voice and data MPLS, connected via more than 460 direct paths to international operators.

Re-invent Home Communication

With the pursuit of providing high-speed internet and integrated internet solutions (e.g. visual services, IPTV and games), STC continued to foster its DSL network by using fibre-optics network and advanced MSAN. For the first time in KSA, Afaq DSL customers were able to achieve internet speeds as high as 20 Mbps. STC has also launched the “fiber to the home” service offering internet speeds upto 100 Mbps.

STR

AT

EG

Y F

OC

US

FOR

WA

RD

12% annual increase in international circuits to more than 150,000 in 2008 …

67% annual increase in Broadband clients to over 1 million



Win Enterprise Customers

Leveraging its integrated presece in telecommunications industry, STC offers bundled services to its enterprise customers. In 2008, STC deployed optic-fibre network in 700 new buildings and 50 schools. STC is also involved in establishing communication infrastructure in 5 new economic cities.

Achieve External Growth

2007 marked the beginning of STC’s international expansion era. In September 2007, STC acquired 25% stake in Binariang (Maxis), Malaysia and 51% stake in NTS, Indonesia. In order to foster the regional presence, STC acquired 26% stake in Kuwait’s third licensed telecom operator (in early 2008), Kuwait Telecom Operator (VIVA) and recently (2009) received the license to offer telecommunication services in Bahrain. During 2008, Saudi Telecom established a content providing company, in collaboration with the Saudi Research and Marketing Group (SRMG) and ASTRO All Asia Networks plc., the leading multimedia interactive services in Malaysia, Brunei and India. STC owns 51% of the new company, SRMG owns 20% and ASTRO 29%.

Re-align for Customer Excellence

Assessing the increased role of customer in the current demand-driven, customer-centric and competitive industry, STC has adopted the following four broad level approaches to enhance customer excellence.

True Shared Services Customer Segmentation to match the need of each segment Organizational Excellence Strategic Human Resources

Drive Operational Efficiency

Operational efficiency is critical parameter for an operation-driven service industry like telecommunication. Increased operational efficiency leads to lower costs and higher margins. STC aims to achieve operational efficiency both at the consumer end and within the organization. It has launched various value added services like STC online portal and customer service options which increase the efficiency of service delivery on the consumer front. In order to improve the efficiency level of its employees, STC has staff-oriented plans and offers various in-house training courses to its employees.

STC employees’ productivity on the basis of the average income per employee rose by 10% totaling SR 1.78 million per employee.

Internal Growth Complemented withInternational Expansion

STC has an employee-base of more than 20,000

Total lines per employee increased from 1,026 in 2007 to 1,176 in 2008



The telecommunication industry in Saudi Arabia was a monopoly till 2004, with only STC offering its services. However, the GSM sector landscape has transformed with the entry of Etihad Etisalat Company (Mobily) in 2005 and Zain in 2008 and so has the fixed-line segment with the issuance of operating licenses to Batelco, PCCW and Verizon Communications. The GSM segment is still concentrated with only three players, though the competition has increased due to the consumer centric nature and relatively higher price elasticity of the industry.

Porter’s Five Forces Framework is presented to develop better understanding of the industry.

Bargaining Power of Customers - Medium

Saudi Arabia happens to be the biggest telecommunication market in the GCC with a population of over 27 million (24 million in 2007), mobile phone penetration of around 120% and fixed line penetration of over 16%. With youth forming a major portion of the demographic profile and increasing levels of per capita income, the industry is expected to grow at steady pace in future. With the entry of new players in GSM and PSTN segments, the bargaining power of customers has increased, however, we have assigned medium rating due to the fact that the industry is still consolidating and the penetration levels are significantly high, especially for mobile segment.

Bargaining Power of Suppliers - Medium

The suppliers for the telecommunication services industry are the telecom network and infrastructure providers. The relatively fragmented structure of the supply-side industry and increasing technical innovation reduces the bargaining power of suppliers; however, they form an integral part in the set up of telecommunication network and infrastructure.

Threat of Substitutes - Low

Telecommunication industry includes mobile, fixed line and internet services, which in turn happen to be substitutes among themselves; so given the diversified nature of telecommunication industry and its importance in the social and economic development, the threat of substitutes tends to be low. However, within the industry, with increasing popularity and low cost of internet and mobile services, the popularity and demand for fixed-line segment is expected to decline.

Threat of New Entrants - Low

Given the capital intensive nature of the industry with high sunk costs (which include license costs and other initial setup costs), the entry barriers are high and subsequently the threat of new entrants is low. Also, the mobile and fixed line market in Saudi Arabia are relatively saturated with high penetration levels, however, the internet penetration is low and has potential to expand in future. Internet based services such as broadband, IPTV, E-governance, Voice IP are expected to grow further in future and are good sectors to venture for new entrants.

CO

MPE

TIT

IVE

AD

VA

NTA

GES



Industry Rivalry - High

Though the telecommunication industry in Saudi Arabia is relatively concentrated, the level of competition in the mobile segment among the three players is high; with the increase in number of fixed line service providers, rivalry in this segment is also expected to be relatively high.



Strengths

Sole integrated telecommunication services provider in KSA and market leader in both mobile and fixed line segments Strong and expanding international presence and increasing revenue contribution from international operations Robust brand recognition due to strategic focus on marketing, advertisement and branding Professional management team Good corporate governance policies in place Technologically advanced operations Focus on consumer acquisition and retention practices

Weaknesses

High currency losses in FY 2008 and Q1 2009 signifying exposure to exchange rate risks arising from international operations Goodwill charges for 2008 indicating overpayment for licenses and acquisitions Declining profitability ratios Increasing leverage

Opportunities

Increasing population and favorable demographic profile of KSADeveloping IPTV and VoIP marketsPotential demand from the ICT infrastructure development in economic citiesHigh revenue potential from under-penetrated telecommunication markets of India and Indonesia (through its direct and indirect subsidiaries)Further expansion of operations through international acquisitionsBetter placed than rest of the competitors to offer bucketed offers and to cross sell its products

Threats

Decline in market share due to increasing competition in both GSM and fixed-line marketMore than 100% penetration levels in local GSM marketDecline in margins due to price erosionMobile number portabilityDecline in growth of fixed line segmentFurther appreciation of USD with respect to operational currencies like Turkish Lira.

SWO

TA

NA

LYSI

S



Top Line Analysis

In 2008, STC reported a 37.8% increase in its operating revenues which was substantially higher than the corresponding 2007 figure of 6.4%. The increase was mainly due to the revenues from its subsidiaries outside the kingdom. Usage charges and subscription fees increased by 31% and 73% respectively in 2008, as opposed to activation fees which declined by 9%.

Operating Revenue Distribution

81%

17%

77%

21%1% 1%

1% 1%

Usage Charges Subscription Fees Activation Fees Other


Bottom Line Analysis

In spite of 37.8% growth in revenues, STC’s net income for 2008 fell by 6.7% mainly due to 53.7% increase in operating expenses, large losses related to foreign currency fluctuations (SR 2.3 billion in 2008 as opposed to 6.9 million in 2007) and high tax provisions (SR 456.8 billion in 2008 as opposed to SR 42.02 billion in 2007). The increased currency losses and tax provisions were mainly due to increased international operations of STC through its subsidiaries.


2008

2007FIN

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2007 2008 Growth (2007-08)


Top Line Analysis



81%

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77%

21%1% 1%

1% 1%






2008

2007FIN

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2007 2008 Growth (2007-08)


Top Line Analysis



81%

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2008

2007FIN

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(40,000,000)

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2007 2008 Growth (2007-08)



2008

21%

1% 1%

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17%

81%

77%

2007



ARPU and Minutes of Usage

STC had fairly high blended ARPU of SR 115 – 120 in 2008 which was slightly lower than the 2007 figure of SR 125. The low decline in ARPU was mainly due to the launch of various value added services by STC in 2008.

Credit Ratings

STC has an investment grade rating by both Standard and Poor’s and Moody’s. It has been assigned ‘A+’ long term rating by Standard and Poor’s and A1 long term local and foreign currency issuer ratings by Moody’s.

Financial Risk Management

STC faces several risks owing to its operations in capital intensive industry and its international exposure. Following are some of the risks faced by STC and the policies it undertakes to reduce such risks.

Commission rate risk – Given the fact that commission income comprised of 13.6% of STC’s net income in 2008, changes in commission rates can have significant impact on STC’s financial position and cash flows. The company manages its cash flows by checking the cash inflows and outflows timings, also, it invests the surplus cash in short-term and long-term bank deposits. Currency risk – Since STC has subsidiaries in various countries outside the kingdom, the consolidated financials are subject to currency exchange movements. Management monitors the foreign currency exchange rates, however, the high currency exchange losses of 2008 is indicative of the exposure to exchange rate risks arising from international operations. Credit risk – This is the risk which STC faces from counterparty defaults on its cash balances and accounts receivables. The group has deposits with various financial institutions and tries to limit its exposure to any particular institution. Also, given the diverse customer base of STC (residential, professional, large business and public entities), the risk of default on receivables is also reduced. Liquidity risk – It is the risk related to raising adequate funds for meeting current and future commitments. Though currently most of the developed nations are facing liquidity crunch, Saudi Arabia has not been hit hard by the global crisis. STC is 70% owned by the government and is in good financial position, so the exposure to liquidity risk is minimal for the company.



Ratio Analysis Ratios 2006 2007 2008 2009E 2010E 2011E 2012E


Operating Profit Margin 39.0% 36.6% 29.3% 27.6% 27.9% 27.4% 27.0%

Net Profit Margin 39.5% 34.9% 23.3% 22.8% 25.0% 25.5% 25.2%

EBIDTA Margin 49.3% 46.9% 41.4% 39.7% 40.3% 40.0% 39.7%

Return on Avg. Equity 38.2% 34.3% 28.1% 25.7% 26.8% 25.6% 24.2%

Return on Avg. Assets 28.2% 20.9% 13.1% 11.2% 12.4% 12.7% 12.4%

Growth (%)

Revenues -0.4% 6.4% 37.8% 4.0% 3.0% 3.0% 4.0%

Operating Income -5.3% -0.2% 10.2% -1.9% 4.0% 1.0% 2.7%

Net Income 2.8% -6.1% -8.2% 2.1% 12.9% 4.8% 2.8%

Fixed Assets -1.3% 14.1% 29.1% 4.0% 3.0% 3.0% 4.0%

Shareholders’ Equity 4.0% 5.0% 4.9% 7.2% 11.0% 10.4% 9.7%

Total Assets 3.1% 49.2% 45.0% 1.2% 3.0% 2.4% 7.3%

Liquidity / Turnover Ratios (x)

Current Ratio (x) 1.4 0.8 0.8 0.8 0.8 0.9 1.1

Quick Ratio (x) 0.7 0.7 0.7 0.6 0.7 0.8 1.0

Total Asset Turnover (x) 0.7 0.5 0.5 0.5 0.5 0.5 0.5

Fixed Asset Turnover (x) 1.1 1.0 1.1 1.1 1.1 1.1 1.1

Current Assets Turnover (x) 2.4 2.5 2.5 2.7 2.6 2.5 2.1

Receivables Turnover Ratio (x) 8.6 7.7 7.3 6.0 6.1 6.1 6.1

Inventory Turnover Ratio (x) 130.3 84.4 58.6 45.6 45.9 46.3 46.2

Payables Turnover Ratio (x) 8.6 8.7 6.9 5.6 5.9 5.9 6.0

Working Capital Cycle (days)

Receivables Outstanding (days) 42.6 47.2 50.3 60.4 59.9 59.7 60.2

Inventory Outstanding (days) 2.8 4.3 6.2 8.0 8.0 7.9 7.9

Payables Outstanding (days) 42.2 42.1 52.9 65.5 62.4 61.9 61.3

Cash Conversion Cycle (days) 3.2 9.4 3.7 2.9 5.5 5.7 6.8

Leverage Ratios (x)

Shareholder's Equity/Assets 0.74 0.52 0.38 0.40 0.43 0.46 0.47

Total Debt/Total Equity 0.00 0.38 0.75 0.70 0.60 0.50 0.50

Debt/Capital Employed 0.00 0.27 0.43 0.41 0.38 0.33 0.33

Debt/Total Assets 0.00 0.20 0.32 0.31 0.29 0.26 0.26

Debt/EBITDA 0.00 0.82 1.73 1.66 1.42 1.24 1.30

Total Liabilities/Shareholders' Equity 0.35 0.92 1.52 1.38 1.21 1.05 1.02

Total Liabilities/Total Assets 0.26 0.48 0.57 0.55 0.52 0.49 0.48

Current Liabilities/Total Liabilities 0.80 0.52 0.40 0.43 0.44 0.45 0.44

Per Share Data

EPS (SR) 6.4 6.0 5.5 5.6 6.4 6.7 6.9

BVPS (SR) 17.1 17.9 18.8 20.2 22.4 24.7 27.1

Cash Dividend/Share (SR) 5.8 5.0 3.8 3.7 4.1 4.3 4.5

Sales/Share (SR) 16.2 17.2 23.7 24.7 25.4 26.2 27.2




Valuation Ratios 2006 2007 2008 2009E 2010E 2011E 2012E

PE (x) 13.0 13.9 8.9 9.0 8.0 7.6 7.4

PBV (x) 4.9 4.7 2.6 2.5 2.3 2.1 1.9

PEG (x) 29.3 -13.8 -6.0 4.2 0.6 1.6 2.6

Dividend Yield (%) 14.4% 16.8% 13.1% 7.2% 8.1% 8.5% 8.7%

Earnings Yield (%) 7.7 7.2 11.2 11.1 12.5 13.1 13.5

EV/Revenues (x) 3.8 5.0 2.6 2.6 2.4 2.3 2.2

Dividend Payout Ratio 89.9% 83.2% 67.9% 65.0% 65% 65.0% 65.0%


Profitability Ratios and Growth

Over the last three STC’s operating profit, net profit and EBIDTA margins have declined by around 10, 16 and 10 percentage points respectively mainly due to declining net income and increasing revenues. Going forward STC is expected to maintain its margins at or slightly above its current levels mainly due to increasing top-line and bottom-line contributions from international operations and surging growth in broadband segment. Return on average assets and average equity are expected to grow to 12.4% and 24% in 2012 respectively from their 2008 levels of 13% and 28% repsectively.

Liquidity / Turnover Ratios

STC reported declines in current ratio in 2008 from 2006 levels mainly due to greated increase in current liabilities (mainly payables) as compared to current assets. The turnover ratios have also been declining, however, the decline in 2008 was mainly attributed to the contributions from recent acquisitons. Going forward, STC is expected to maitain sufficient liquidity and to operate close to the current turnover ratios.

Leverage Ratios

STC had a debt-free balance sheet till the end of 2006, in 2007, STC took loans for acquiring Maxis and Oger Telekom. The increase in debt levels for 2008 are mainly due to the contributions from STC’s subsidiaries which it acquired in 2007 and 2008.

Valuation Ratios

In 2008, STC’s PE and PBV ratios declined due to fall in stock prices. At current levels, STC’s stock is trading at PE level which is less than that of the TASI and telecommunications industry of Saudi Arabia.

Quarterly Performance

STC’s revenues have grown at a quarterly CAGR of 4.8% over the last eight quarters from Q1 2007 to Q1 2009, over this period the company reported highest revenue in Q3 2008 and a highest q-o-q fall of 9% in Q4 2008 mainly due to increasing competition in the domestic GSM market. STC’s international operations contributed for 21% and 27% of the total revenues in Q4 2008 and Q1 2009. In Q1 2009, the revenues from international operations increased by 27% (q-o-q) whereas the



revenues from domestic operations declined by 9% (q-o-q) which can be mainly attributed to the erosion in market share in the GSM segment.

(Source: STC Quarterly Report, FALCOM Research)

STC experienced fairly high and steady net income till second quarter of 2008, after which the net income declined by 22% and 61% in the next two quarters respectively. The sharp decline in net profits in Q4 2008 was mainly due to foreign exchange losses, increase in marketing and administrative expenses, employee costs (Human Resources structure change) and start-up costs in Kuwait and Indonesia. Instead of 1% q-o-q decline in revenue in Q1 2009, STC’s net income in Q1 2009 increased by 113%, mainly due to 29% decline in access charges and 34% decline in administrative and marketing expenses.

Quarterly Ratio Analysis

Ratios Q1’08 Q2’08 Q3’08 Q4’08 Q1’09


Operating Profit Margin 35.5% 32.5% 31.0% 19.3% 31.6%

Net Profit Margin 31.6% 31.9% 22.3% 9.5% 20.5%

Return on Avg. Equity 8.3% 9.6% 6.8% 2.7% 5.7%

Return on Avg. Assets 4.4% 4.4% 2.9% 1.1% 2.5%

Growth (%)

Revenues -0.6% 25.6% 12.5% -9.1% -1.3%

Operating Income 13.6% 15.0% 7.4% -43.3% 61.2%

Net Income -0.8% 26.8% -21.6% -61.3% 113.4%

Shareholders’ Equity 0.9% 4.6% 1.7% -2.9% -1.0%

Liquidity / Turnover Ratios (x)

Current Ratio (x) 0.8 0.8 0.8 0.8 0.8

Total Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1

Leverage Ratios (x)

Equity/Assets 0.5 0.4 0.4 0.4 0.4(Source: STC, FALCOM Research)

Quarterly Revenues and Net Income

8,000

9,000

10,000

11,000

12,000

13,000

14,000Q

1'0

7

Q2'0

7

Q3'0

7

Q4'0

7

Q1'0

8

Q2'0

8

Q3'0

8

Q4'0

8

Q1'0

9

Revenues

(SR

mill

ion)

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Net

Inco

me (

SR

mill

ion)

Operating Revenues Net Income



After recording sharp q-o-q declines in operating and net profit margins in Q4 2008, STC reported significant increase in margins in Q1 2009 due to increase in operating and net income attributed to decline in expenses. Over the last five quarters, the return on average assets and equity has declined, however, in Q1 2009, the performance was better than that in Q4 2008. STC has maintained steady liquidity, turnover and leverage ratios over the last five quarters.



Industry Outlook

Increase in subscriber base and penetration levels

As per Economist Intelligence Unit estimates, the mobile subscriber base, the number of fixed lines and the number of broadband subscribers in Saudi Arabia are expected to grow at a CAGR of 5.7%, 1.2% and 29.1% from 2008 to 2012. The broadband market is still very thinly penetrated with penetration levels of 3.0% in 2008 which is expected to grow to 9.4% by 2010. The penetration level in fixed line market is expected to decline slightly whereas the mobile penetration is expected to improve gradually from its 2008 level of 139% to 148% by 2012.

Telecom Industry Indicators for Saudi Arabia

000’s 2008E 2009E 2010E 2011E 2012E

Fixed Lines 4,200 4,300 4,450 4,450 4,450


16.2% 16.7% 16.7% 16.3% 15.8%

Mobile Subscribers 34,545 36,272 38,086 39,038 40,014

Mobile Penetration (%)

139% 142% 145% 147% 148%

Broadband Subscriber Lines

741 1,123 1,560 2,071 2,651

Broadband Subscriber Penetration (%)

3.0% 4.4% 5.9% 7.6% 9.4%

(Source: Economist Intelligence Unit, FALCOM Research)

Changing demography

Currently under-15s represent around 33% of the Saudi population and the proportion is expected to be constant in future as the birth rates in the kingdom are expected to be high. With the 3% expected growth rate of the population, the increasing young population will drive the demand for mobile phones. Also, the broadband connection is expected to rise due to better infrastructure and service provisions.

Increase in affluence and brand-consciousness

The relatively high income levels, spending habits and brand consciousness of Saudi population is expected to drive the demand for high-end mobile phones, fashionable models, smart phones, internet and third generation mobile services.

Telecommunication infrastructure development for “economic cities”

The Saudi General Investment Authority (SGIA) has plans to turn seven major Saudi cities into “smart cities” with universal wireless broadband access and build six new economic cities across the kingdom. All these economic cities will require strong telecommunication infrastructure development, thus, generating more business for the telecom players in the region.

FUT

UR

EO

UTL

OO

K



Increase in levels of computer ownership

As per the 2007 CITC survey, only 43% of the individuals in the kingdom own a computer, however, with the high disposable income, the ownership of personal computers is expected to increase in future, thus increasing the demand from retail customers. Also, as per the survey, around 24% of the companies did not have a computer (as opposed to government sector where the figure stands at 1%); this percentage is expected to decline in future thus fueling the demand from business customers as well.

Increasing popularity of E solutions

The coming future is expected to see increase in investments towards developing e solutions. The e-government initiative undertaken by the Saudi government and the increase in e-commerce solutions are expected to boost the demand for internet infrastructures and services. The survey conducted by Arab Advisors Group found that 48% of the Saudi Internet users did online shopping for the year 2008.

Technical developments on the supply side will support the increasing demand for internet

According to 2007 CITC report, more than 50% of the ADSL (Asymmetric Digital Subscriber Line) applications were rejected by STC due to the fact that the applicants were located at a distance of more than 5 km from the exchanges. However, with the development of 3G mobile network, the entrance of three new fixed line service providers; the supply of required technically improved infrastructure is expected to improve.

Company Outlook - Forecast

Revenues, Gross Profit and Net Profit Margins


According to our forecasts, STC’s revenues and net income are expected to grow at a CAGR of 3.5% and 5.6% from 2008 to 2012 due to increasing contributions from the international operations, increasing expected demand of broadband and decline in capital expenditures and marketing and administrative expenses. Continuing with the momentum gained in Q1 2009, the margins (operating profit, net profit and EBIDTA

Forecast Revenue and Margins

45,000

50,000

55,000

60,000

2008

2009E

2010E

2011E

2012E

Revenues

(SR

mill

ion)

20%

25%

30%

35%

40%

45%

50%

Marg

ins

(%)

Operating Revenues Operating Profit Margin Net Profit Margin EBIDTA Margin



margins) for STC are expected to slightly decline in 2009 and increase steadily attaining a plateau by 2011-12.

Returns


Assuming constant paid-up capital, STC’s return on average equity, average assets and capital employed are expected to decline in 2009 and increase steadily thereafter till 2012 mainly due to lower increase in net income in 2009.

Capital Structure


According to our forecasts, STC’s total asset base and total equity are expected to grow at a CAGR of 3.5% and 8.6% respectively from 2008 to 2012. As per our forecast, STC’s leverage is expected to decline from 2008 levels to around 50% by 2012 as most of the debt is currently held by the subsidiaries and going forward with increasing involvement of STC management in their operations, STC will advocate lower debt levels for them.

10%

15%

20%

25%

30%

35%

2008

2009E

2010E

2011E

2012E

Retu

rns

(%)

Return on Avg. Assets Return on Avg. Capital Employed Return on Avg. Equity

40,000

60,000

80,000

100,000

120,000

140,000

2008

2009E

2010E

2011E

2012E

Tota

l A

ssets

and E

quity (

SR

m

illio

n)

40%

50%

60%

70%

80%

90%

100%

Debt/

Equity (

%)

Total assets Total Equity Total Debt/Total Equity



FALCOM Research has valued STC using the following three valuation methods.

1. Free Cash Flow to Equity Model 2. Dividend Discount Model 3. Comparable Method

Free Cash Flow to Equity Model

Due to the lack of information regarding the capital structure and cost of debt of some of the privately held subsidiaries of STC, FALCOM Research has used Free Cash Flow to Equity method for DCF calculation.

Following are the assumptions used to determine the present value of Free Cash Flow to Equity.

1. Beta is calculated to be 0.76 on the basis of daily return with respect to TASI for the period from 6th July 2008 to 6th July 2009.

2. Cost of equity on the basis of above assumptions is calculated to be 8.92%.

3. The terminal growth rate of 2.0% has been assumed from 2012 onwards for FCFE

The Free Cash Flow to Equity (FCFE) has been calculated using the following formula.

FCFE = Net Income + Depreciation + Amortization – Change in Net Working Capital – Capital Expenditures + Net Borrowings

The FCFE for the years 2009 to 2012 have been discounted using the calculated cost of equity of 8.92%.

The number of shares outstanding has been assumed to be constant at 2 billion.

The Fair Value of STC’s share using the DCF Model is calculated to be SR 69.4.

Following table provides the sensitivity analysis for fair value of STC stock with respect to cost of equity and terminal growth rate of FCFE.

VA

LU

AT

ION



Sensitivity Analysis for the Fair Value (SR per share)

Perpetual Growth Rate

1.5% 1.8% 2.0% 2.3% 2.5%

7.9% 76.0 78.8 81.8 85.2 88.8

8.4% 70.1 72.5 75.1 77.9 80.9

8.9% 65.1 67.2 69.4 71.7 74.3

9.4% 60.7 62.5 64.4 66.4 68.6

C

ost

of

Eq

uit

y

9.9% 56.9 58.4 60.1 61.8 63.7


Dividend Discount Method (“DDM”)

STC has historically been very consistent in its dividend payments and we assumed the same to continue in future. Following assumptions have been made for DDM calculations.

1. Cost of Equity at 8.92%; as calculated under the DCF method. 2. Target dividend payout ratio has been assumed to be 65% till

2012. 3. Dividend growth rate has been assumed to be 2.0% after 2012.

Based on our calculations the Fair Value of STC stock using the DDM approach comes out to be SR 62.9.

Following table provides the sensitivity analysis of the fair value of STC stock with respect to cost of equity and terminal growth rate of dividend.

Sensitivity Analysis for the Fair Value (SR per share)

Perpetual Growth Rate

1.5% 1.8% 2.0% 2.3% 2.5%

7.9% 68.4 70.7 73.3 76.0 79.0

8.4% 63.5 65.5 67.7 70.0 72.5

8.9% 59.3 61.0 62.9 64.8 66.9

9.4% 55.7 57.2 58.7 60.4 62.2

Co

st o

f Eq

uit

y

9.9% 52.4 53.7 55.1 56.6 58.1


Comparable Model

FALCOM Research identified the following six companies in the region (GCC) operating in the same sector as STC.

1. Bahrain Telecom Company (Batelco), Bahrain 2. Etisalat, UAE 3. Mobily, Saudi Arabia 4. Zain Group, Kuwait 5. Qatar Telecom, Qatar



6. Oman Telecom, Oman

Following chart compares the profitability ratios of the above mentioned companies with corresponding financials of STC.

(Source: Zawya, FALCOM Research)

Note – Size of the Bubble represents Return on Equity for 2008

We have considered the price to earnings and price to book value multiples for calculating the fair value for STC.

P/E and P/B ratios for Comparable Companies

As on 6th July 2009 Comparable Companies

P/E P/BV

Batelco, Bahrain 8.18 1.92

Etisalat, UAE 8.32 2.32

Mobily, Saudi Arabia 11.10 2.57

Zain, Kuwait 14.48 2.21

Qtel, Qatar 8.29 1.85

Omantel, Oman 8.32 2.93

Average 9.8 2.3

(Source: Zawya, FALCOM Research)

Based on comparable P/E of 9.9x, STC’s stock fair value is calculated as SR 52.0 and on the basis of P/B of 2.3x, it comes out to be SR 43.0. We calculated the weighted average fair value by assigning 60% weight to

Size of the Bubble is Return on Equity for 2008

Comparison of Regional Telecommunication Companies

STC

Mobily

Zain

Qtel

Omantel

Batelco

Etisalat

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

8.0% 13.0% 18.0% 23.0% 28.0% 33.0% 38.0%

Net Profit Margin (2008)

EB

ITD

A M

arg

in (

2008)

STC Batelco Etisalat Mobily Zain Qtel Omantel



P/E ratio and 40% weight to P/B multiple and calculated the fair price to be SR 48.4.

Recommendation – Strong Buy

FALCOM Research is releasing the updated report with amendments in valuation that has resulted in a fair value of SR 64.7 which is at 26.9% premium to its price of SR 51.0 on 6th July 2009. FALCOM Research maintains “Strong Buy” recommendation on the stock. The fair value of the stock is based on FCFE, DDM and comparable valuation methods. For our valuation we have assumed the perpetual growth rate of FCFE and dividend to be 2%.



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71

1,8

79,7

71

1,8

79,7

71

1,8

79,7

71

Bor

row

ings

- cu

rren

t0

0

560,4

48

3,9

04,7

14

6,3

37,8

18

5,9

67,2

18

5,4

39,9

06

5,9

20,3

49

Tota

l cur

rent

liab

ilitie

s9

,45

4,7

31

9

,52

3,4

63

1

7,2

19

,66

0

22

,89

8,8

35

2

3,9

20

,84

5

23

,73

5,3

75

2

3,3

98

,74

8

24

,14

1,0

64

0

0

0

0

0

0

0

0

Bor

row

ings

0

0

13,0

19,3

03

28,0

81,2

20

25,3

51,2

72

23,8

68,8

70

21,7

59,6

24

23,6

81,3

94

Em

ploy

ees’

end

of s

ervi

ce b

enefi

ts1,6

12,5

40

1,8

20,4

02

1,9

32,2

97

2,7

38,0

25

2,9

62,0

89

3,0

50,9

51

3,1

42,4

80

3,2

68,1

79

Oth

er p

ayab

les

0

0

310,8

64

3,4

82,1

78

3,4

82,1

78

3,6

56,2

87

3,8

39,1

01

4,0

31,0

56

Def

erre

d R

even

ues

821,1

68

623,5

69

437,2

40

0

0

0

0

0

Tota

l non

-cur

rent

liab

ilitie

s2

,43

3,7

08

2

,44

3,9

71

1

5,6

99

,70

4

34

,30

1,4

23

3

1,7

95

,53

9

30

,57

6,1

08

2

8,7

41

,20

5

30

,98

0,6

30

0

0

0

0

0

0

0

0

Tota

l lia

bilit

ies

11

,88

8,4

39

1

1,9

67

,43

4

32

,91

9,3

64

5

7,2

00

,25

8

55

,71

6,3

84

5

4,3

11

,48

3

52

,13

9,9

53

5

5,1

21

,69

3

Aut

horiz

ed, i

ssue

d an

d ou

tsta

ndin

g sh

ares

15,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

Sta

tuto

ry re

serv

e4,5

38,5

68

5,8

18,4

58

7,0

20,7

10

8,2

33,1

41

9,3

60,5

98

10,6

33,9

36

11,9

68,8

64

13,3

41,5

57

Ret

aine

d ea

rnin

gs13,3

20,2

12

8,3

39,2

23

8,6

58,7

04

9,7

83,3

01

12,6

01,9

42

15,7

85,2

88

19,1

22,6

07

22,5

54,3

40

Unr

ealiz

ed G

ain/

loss

on

inve

stm

ents

(3,3

42)

(3,3

42)

0

0

0

0

0

0

Fina

ncia

l sta

tem

ents

` tra

nsla

tion

diffe

renc

es0

0

196,8

39

(378,4

64)

(1,6

16,3

10)

(1,6

16,3

10)

(1,6

16,3

10)

(1,6

16,3

10)

Tota

l sha

reho

lder

s’ e

quity

32

,85

5,4

38

3

4,1

54

,33

9

35

,87

6,2

53

3

7,6

37

,97

8

40

,34

6,2

30

4

4,8

02

,91

4

49

,47

5,1

61

5

4,2

79

,58

7

Min

ority

inte

rest

0

0

15,6

29

4,9

23,8

99

4,9

23,8

99

4,9

23,8

99

4,9

23,8

99

4,9

23,8

99

Tota

l Equ

ity3

2,8

55

,43

8

34

,15

4,3

39

3

5,8

91

,88

2

42

,56

1,8

77

4

5,2

70

,12

9

49

,72

6,8

13

5

4,3

99

,06

0

59

,20

3,4

86

Tota

l lia

bilit

ies

and

Equi

ty4

4,7

43

,87

7

46

,12

1,7

73

6

8,8

11

,24

6

99

,76

2,1

35

1

00

,98

6,5

13

1

04

,03

8,2

96

1

06

,53

9,0

13

1

14

,32

5,1

80

Bala

nce

Sh

eet

as

on

(in

'0

00

SR

)

(Sou

rce:

STC

, FA

LCO

M R

esea

rch)

Annual Balance Sheet


(Sou

rce:

STC

, FA

LCO

M R

esea

rch)

Annual Income Statement

Sta

tem

en

ts o

f In

com

e f

or

the p

eri

od

en

din

g2

00

52

00

62

00

72

00

82

00

9E

20

10

E2

01

1E

20

12

E

(An

nu

al)

(An

nu

al)

(An

nu

al)

(An

nu

al)

(An

nu

al)

(An

nu

al)

(An

nu

al)

(An

nu

al)

Ope

ratin

g R

even

ues

32,5

39,9

4332

,393

,571

34,4

57,8

0747

,469

,368

49,3

68,1

4350

,849

,187

52,3

74,6

6354

,469

,649

Gov

ernm

ent c

harg

es(5

,175

,322

)(4

,446

,169

)(4

,825

,002

)(5

,541

,955

)(5

,763

,633

)(5

,936

,542

)(6

,114

,638

)(6

,359

,224

)A

cces

s ch

arge

s(2

,519

,941

)(3

,809

,662

)(4

,426

,666

)(6

,130

,577

)(6

,743

,635

)(7

,417

,998

)(8

,308

,158

)(8

,723

,566

)E

mpl

oyee

cos

ts(3

,883

,083

)(4

,283

,758

)(4

,274

,597

)(6

,164

,272

)(6

,780

,699

)(7

,594

,383

)(8

,505

,709

)(8

,930

,995

)D

epre

ciat

ion

and

amor

tizat

ion

(3,8

36,2

11)

(3,8

35,7

92)

(4,0

98,2

87)

(6,4

07,5

14)

(6,7

27,8

90)

(7,0

64,2

84)

(7,4

17,4

98)

(7,7

14,1

98)

Adm

inis

trativ

e an

d m

arke

ting

expe

nses

(2,1

40,7

81)

(1,9

32,4

12)

(2,4

42,4

72)

(7,1

94,2

89)

(7,4

82,0

61)

(6,3

05,2

99)

(5,2

37,4

66)

(5,4

46,9

65)

Rep

airs

and

mai

nten

ance

(1,6

22,5

52)

(1,4

37,6

33)

(1,7

72,8

82)

(2,1

27,8

21)

(2,2

34,2

12)

(2,3

45,9

23)

(2,4

63,2

19)

(2,5

86,3

80)

Tota

l Ope

ratin

g Ex

pens

es(1

9,17

7,89

0)(1

9,74

5,42

6)(2

1,83

9,90

6)(3

3,56

6,42

8)(3

5,73

2,12

9)(3

6,66

4,42

9)(3

8,04

6,68

9)(3

9,76

1,32

7)

Ope

ratin

g In

com

e13

,362

,053

12,6

48,1

4512

,617

,901

13,9

02,9

4013

,636

,013

14,1

84,7

5814

,327

,974

14,7

08,3

22

Cos

t of e

arly

retir

emen

t pro

gram

(519

,903

)(5

00,0

00)

(547

,580

)(6

75,0

00)

(740

,522

)(7

62,7

38)

(785

,620

)(7

85,6

20)

Com

mis

sion

s20

7,27

441

6,61

333

3,14

51,

501,

375

493,

681

508,

492

523,

747

544,

696

Oth

er, n

et(3

10,3

14)

576,

720

42,7

47(2

,686

,961

)(9

87,3

63)

052

3,74

754

4,69

6O

ther

inco

me

and

expe

nses

, net

(622

,943

)49

3,33

3(1

71,6

88)

(1,8

60,5

86)

(1,2

34,2

04)

(254

,246

)26

1,87

330

3,77

3

Net

Inco

me

befo

re M

inor

ity in

tere

st, Z

akat

and

Tax

12,7

39,1

1013

,141

,478

12,4

46,2

1312

,042

,354

12,4

01,8

1013

,930

,512

14,5

89,8

4715

,012

,095

Pro

visi

on fo

r Zak

at(2

92,2

49)

(342

,577

)(3

84,6

31)

(375

,513

)(3

86,7

22)

(434

,391

)(4

54,9

51)

(468

,118

)P

rovi

sion

for T

ax0

0(4

2,02

0)(4

56,8

29)

(493

,681

)(5

08,4

92)

(523

,747

)(5

44,6

96)

Net

Inco

me

befo

re M

inor

ity in

tere

sts

12,4

46,8

6112

,798

,901

12,0

19,5

6211

,210

,012

11,5

21,4

0712

,987

,629

13,6

11,1

5013

,999

,281

Com

issi

on E

xpen

se /

Mur

abah

a an

d S

ukuk

Fin

anci

ng c

omm

issi

ons

--

0-

--

--

Min

ority

inte

rest

--

2,17

1(1

72,1

66)

(246

,841

)(2

54,2

46)

(261

,873

)(2

72,3

48)

Net

Inco

me

12,4

46,8

6112

,798

,901

12,0

21,7

3311

,037

,846

11,2

74,5

6612

,733

,383

13,3

49,2

7613

,726

,933

(in ‘0

00 S

R)


Quarterly Balance Sheet

(Sourc

e: S

TC)

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

Cas

h an

d ca

sh e

quiv

alen

ts8,4

02,9

22

5,4

96,4

58

5,0

57,9

91

7,6

17,1

27

6,6

40,9

81

7,5

34,1

75

7,6

31,5

79

8,0

63,5

20

9,0

14,3

87

Acc

ount

s re

ceiv

able

, net

3,8

41,2

08

4,2

36,8

74

4,7

00,6

91

4,9

73,0

90

5,0

94,0

62

7,9

48,4

16

8,5

60,5

34

8,1

35,5

93

8,9

95,2

65

Inve

ntor

ies

166,9

91

249,1

83

369,8

85

367,6

75

497,0

04

678,3

37

696,0

07

0

0

Pre

paym

ents

and

oth

er c

urre

nt a

sset

s4,0

32,8

79

3,2

91,3

49

1,0

02,0

12

1,0

21,3

81

1,3

29,8

00

2,3

22,3

43

2,2

57,7

47

2,7

88,4

51

2,7

76,3

81

Tota

l cur

rent

ass

ets

16

,44

4,0

00

1

3,2

73

,86

4

11

,13

0,5

79

1

3,9

79

,27

3

13

,56

1,8

47

1

8,4

83

,27

1

19

,14

5,8

67

1

8,9

87

,56

4

20

,04

7,4

62

Pro

perty

, pla

nt a

nd e

quip

men

t, ne

t30,4

45,6

42

31,1

54,9

21

33,0

23,2

62

34,3

57,2

51

35,1

39,7

69

44,7

59,4

65

45,2

74,1

13

44,4

11,6

14

48,0

61,9

01

Inta

ngib

le a

sset

s, n

et722,3

44

712,9

22

13,6

01,1

85

13,7

56,9

09

14,1

27,2

48

31,7

94,7

42

30,4

76,1

11

31,7

67,1

86

28,2

83,4

70

Equ

ity m

etho

d an

d ot

her i

nves

tmen

ts1,1

42,4

53

1,2

57,5

43

1,2

53,5

71

2,7

55,2

07

2,4

34,9

31

2,4

36,1

92

2,4

58,0

41

2,4

65,5

36

2,4

52,9

10

Oth

er n

on-c

urre

nt a

sset

s789,3

80

759,1

06

754,9

64

4,2

00,8

54

4,1

53,8

83

5,7

18,0

84

5,6

99,0

87

2,2

77,4

26

2,1

84,5

16

Tota

l non

-cur

rent

ass

ets

33

,09

9,8

19

3

3,8

84

,49

2

48

,63

2,9

82

5

5,0

70

,22

1

55

,85

5,8

31

8

4,7

08

,48

3

83

,90

7,3

52

8

0,9

21

,76

2

81

,72

1,3

68

Tota

l ass

ets

49

,54

3,8

19

4

7,1

58

,35

6

59

,76

3,5

61

6

9,0

49

,49

4

69

,41

7,6

78

1

03

,19

1,7

54

1

03

,05

3,2

19

9

9,9

09

,32

6

10

1,7

68

,83

0

Acc

ount

s pa

yabl

e2,4

60,0

39

2,6

23,5

02

3,3

34,0

20

3,2

11,1

19

3,2

28,1

37

5,5

48,5

90

5,9

48,0

14

6,5

55,2

56

6,9

47,8

58

Oth

er p

ayab

les

2,6

27,6

25

2,3

44,8

29

2,7

79,6

99

6,2

25,0

22

2,9

27,6

96

4,8

79,1

14

4,2

42,8

99

4,3

78,0

18

6,3

19,3

57

Acc

rued

exp

ense

s3,7

27,3

78

3,7

27,3

91

3,7

95,9

44

5,2

82,0

30

6,0

25,8

61

6,2

41,5

31

6,3

49,8

25

5,7

67,4

90

5,1

97,6

37

Div

iden

ds P

ayab

le3,0

47,2

17

53,0

65

56,3

39

56,8

60

2,5

57,6

48

72,4

01

47,0

37

0

0

Def

erre

d re

venu

es –

cur

rent

1,3

81,2

52

1,4

97,2

26

1,4

61,8

34

1,7

73,1

07

1,4

54,4

83

1,9

44,3

64

1,7

37,3

75

2,3

98,8

46

1,8

79,7

71

Bor

row

ings

- cu

rren

t0

0

5,4

53,6

40

560,4

48

1,0

90,9

43

3,8

56,8

81

4,7

36,6

81

3,8

27,2

20

4,0

15,4

42

Tota

l cur

rent

liab

ilitie

s1

3,2

43

,51

1

10

,24

6,0

13

1

6,8

81

,47

6

17

,10

8,5

86

1

7,2

84

,76

8

22

,54

2,8

81

2

3,0

61

,83

1

22

,92

6,8

30

2

4,3

60

,06

5

Bor

row

ings

0

0

5,1

04,3

71

13,0

19,3

03

12,8

99,7

61

29,4

33,1

57

28,1

91,8

74

28,0

81,2

20

26,7

63,0

82

Em

ploy

ees’

end

of s

ervi

ce b

enefi

ts1,8

50,4

45

1,9

08,3

44

1,8

69,5

38

1,9

32,3

09

1,9

60,2

42

2,9

98,8

56

2,9

93,6

94

2,6

82,2

81

2,7

71,7

10

Oth

er p

ayab

les

0

0

308,5

57

313,8

95

305,7

00

4,2

46,8

77

4,0

00,5

86

3,5

15,6

66

3,7

82,7

27

Def

erre

d R

even

ues

573,0

11

524,3

92

479,9

81

437,2

41

395,7

55

355,4

51

324,4

40

0

0

Tota

l non

-cur

rent

liab

ilitie

s2

,42

3,4

56

2

,43

2,7

36

7

,76

2,4

47

1

5,7

02

,74

8

15

,56

1,4

58

3

7,0

34

,34

1

35

,51

0,5

94

3

4,2

79

,16

7

33

,31

7,5

19

Tota

l lia

bilit

ies

15

,66

6,9

67

1

2,6

78

,74

9

24

,64

3,9

23

3

2,8

11

,33

4

32

,84

6,2

26

5

9,5

77

,22

2

58

,57

2,4

25

5

7,2

05

,99

7

57

,67

7,5

84

Bala

nce

Sh

eet

as

on

(in

'0

00

SR

)

0

0

0

0

0

0

0

0

0

Aut

horiz

ed, i

ssue

d an

d ou

tsta

ndin

g sh

ares

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

20,0

00,0

00

Sta

tuto

ry re

serv

e6,0

90,3

76

6,4

00,6

51

6,7

18,8

28

7,0

20,7

10

7,3

28,8

57

7,6

30,9

90

7,9

62,8

83

8,2

33,1

41

8,5

40,8

12

Ret

aine

d ea

rnin

gs7,7

86,4

77

8,0

78,9

57

8,4

00,8

11

8,6

56,5

27

8,8

91,1

65

10,4

12,1

14

11,1

09,3

50

10,0

04,6

69

10,4

65,7

14

Unr

ealiz

ed G

ain/

loss

on

inve

stm

ents

0

0

0

0

0

0

0

0

0

Fina

ncia

l sta

tem

ents

` tra

nsla

tion

diffe

renc

es0

0

0

549,1

92

338,3

20

202,3

79

(180,4

17)

(471,4

68)

(1,6

16,3

10)

Tota

l sha

reho

lder

s’ e

quity

33

,87

6,8

53

3

4,4

79

,60

8

35

,11

9,6

39

3

6,2

26

,42

9

36

,55

8,3

42

3

8,2

45

,48

3

38

,89

1,8

16

3

7,7

66

,34

2

Min

ority

inte

rest

0

0

0

11,7

32

13,1

11

5,3

69,0

50

5,5

88,9

79

4,9

36,9

88

6,7

01,0

30

Tota

l Equ

ity3

3,8

76

,85

3

34

,47

9,6

08

3

5,1

19

,63

9

36

,23

8,1

61

3

6,5

71

,45

3

43

,61

4,5

33

4

4,4

80

,79

5

42

,70

3,3

30

4

4,0

91

,24

6

Tota

l lia

bilit

ies

and

Equi

ty4

9,5

43

,82

0

47

,15

8,3

57

5

9,7

63

,56

2

69

,04

9,4

95

6

9,4

17

,67

9

10

3,1

91

,75

5

10

3,0

53

,22

0

99

,90

9,3

27

1

01

,76

8,8

30

37

,39

0,2

16

(Sourc

e: S

TC)


Quarterly Income Statement

(Sou

rce:

STC

)

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

(Qu

art

erl

y)

Ope

ratin

g R

even

ues

8,32

0,05

58,

444,

002

8,05

8,58

09,

635,

159

9,57

4,70

712

,030

,462

13,5

37,7

5612

,302

,072

12,1

42,7

84

Gov

ernm

ent c

harg

es(1

,179

,983

)(1

,240

,672

)(1

,077

,910

)(1

,326

,437

)(1

,218

,035

)(1

,432

,694

)(1

,501

,345

)(1

,384

,246

)(1

,389

,414

)A

cces

s ch

arge

s(1

,090

,740

)(7

97,7

31)

(1,1

52,0

71)

(1,3

86,1

24)

(1,1

43,8

79)

(1,5

02,9

80)

(1,6

43,7

04)

(1,8

31,7

58)

(1,3

02,6

47)

Em

ploy

ee c

osts

(1,1

03,1

50)

(1,0

94,6

38)

(884

,835

)(1

,191

,790

)(1

,146

,602

)(1

,589

,755

)(1

,585

,201

)(1

,890

,138

)(1

,664

,524

)D

epre

ciat

ion

and

amor

tizat

ion

(922

,877

)(9

60,2

49)

(970

,230

)(1

,244

,695

)(1

,335

,380

)(1

,446

,555

)(1

,877

,222

)(1

,747

,200

)(1

,774

,477

)A

dmin

istra

tive

and

mar

ketin

g ex

pens

es(6

23,7

88)

(763

,216

)(1

34,1

95)

(902

,089

)(8

89,9

89)

(1,6

16,8

25)

(2,2

10,6

15)

(2,4

39,8

63)

(1,5

97,9

54)

Rep

airs

and

mai

nten

ance

(479

,160

)(3

60,8

16)

(340

,045

)(5

92,8

78)

(443

,173

)(5

33,0

02)

(523

,202

)(6

29,1

52)

(577

,277

)To

tal O

pera

ting

Expe

nses

(5,3

99,6

98)

(5,2

17,3

22)

(4,5

59,2

86)

(6,6

44,0

13)

(6,1

77,0

58)

(8,1

21,8

11)

(9,3

41,2

89)

(9,9

22,3

57)

(8,3

06,2

93)

Ope

ratin

g In

com

e2,

920,

357

3,22

6,68

03,

499,

294

2,99

1,14

63,

397,

649

3,90

8,65

14,

196,

467

2,37

9,71

53,

836,

491

Cos

t of e

arly

retir

emen

t pro

gram

(125

,000

)(1

25,0

00)

(295

,648

)(1

,932

)(1

50,0

00)

(225

,112

)(2

40,6

25)

(59,

263)

(150

,000

)C

omm

issi

ons

109,

646

88,5

9676

,898

57,6

4133

,251

775,

887

87,5

8460

5,91

5(2

66,5

98)

Oth

er, n

et(4

3,25

3)42

,422

(56,

996)

77,0

14(7

8,28

0)(2

51,0

09)

(371

,303

)(1

,927

,932

)(7

55,1

52)

Oth

er in

com

e an

d ex

pens

es, n

et(5

8,60

7)6,

018

(275

,746

)13

2,72

3(1

95,0

29)

299,

766

(524

,344

)(1

,381

,280

)(1

,171

,750

)

Net

Inco

me

befo

re M

inor

ity in

tere

st, Z

akat

and

Tax

2,86

1,75

03,

232,

698

3,22

3,54

83,

123,

869

3,20

2,62

04,

208,

417

3,67

2,12

399

8,43

52,

664,

741

Pro

visi

on fo

r Zak

at(1

42,5

78)

(129

,943

)(8

3,51

7)(2

8,59

2)(9

6,05

0)(9

4,01

5)(9

8,73

6)(8

6,71

2)(1

03,3

67)

Pro

visi

on fo

r Tax

--

-(4

2,02

0)(7

8,21

3)(1

16,0

23)

(232

,836

)(6

9,11

3)(1

16,7

32)

Net

Inco

me

befo

re M

inor

ity in

tere

sts

2,71

9,17

23,

102,

755

3,14

0,03

13,

053,

257

3,02

8,35

73,

998,

379

3,34

0,55

184

2,61

02,

444,

642

Com

issi

on E

xpen

se /

Mur

abah

a an

d S

ukuk

Fin

anci

ng c

omm

issi

ons

--

--

--

--

-M

inor

ity in

tere

st-

--

-91

2(1

58,4

97)

(328

,222

)32

2,96

743

,107

Net

Inco

me

2,71

9,17

23,

102,

755

3,14

0,03

13,

053,

257

3,02

9,26

93,

839,

882

3,01

2,32

91,

165,

577

2,48

7,74

9

Inco

me S

tate

men

t as

on

(in

'0

00

SR

)



CAGR Compounded Annual Growth Rate

EBITDA Earnings Before Interest, Tax (zakat), Depreciation and Amortization

EPS Earnings Per Share

EV Enterprise Value

LTM Last Twelve Months

PBV Price to Book Value ratio

PEG Price Earnings to Growth

PE Price to Earnings ratio

ROE Return On average Equity

ROA Return On average Assets

ROCE Return On average Capital Employed

WACC Weighted Average Cost of Capital

GSM Global System for Mobile Communications

PSTN Public Switched Telephone Network

ADSL Asymmetric Digital Subscriber Line

ARPU Average Revenue Per User

HSDPA High Speed Downlink Packet Access

CDMA Code Division Multiple Access

DSL Digital Subscriber Line

IPTV Internet Protocol Television

VoIP Voice Over Internet Protocol

ICT Information and Communications Technology

CITC Communications and Information Technology Commission of Saudi Arabia

pp Percentage Points

GL

OSS

AR

Y



Rating Rationale

FALCOM Research assigns ratings based on the calculated fair value of a stock. Recommendation assumes, unless specifically mentioned, the holding period of 2 years for a stock to get closer to its fair price.

We assign Strong Buy if Fair Value > 20% of the Current Market Price Buy if Fair Value > 10% of the Current Market Price Hold if Fair Value is between +10% and -10% of the Current Market Price Sell if Fair Value < 10% of the Current Market Price Strong Sell if Fair Value < 20% of the Current Market Price

Rat

ing

Rat

iona

le



Analyst certification The views expressed herein accurately reflect the personal views of the analyst provided in good faith and with reasonable due care and diligence. No part of the analyst’s compensation was, is or will be directly or indirectly be related to the specific recommendation(s) or views contained in this research report. The analysis contained herein is based on number of assumptions and investor should be aware that different assumptions could result in materially different results. Analyst/s covering the report may take investment decisions inconsistent with the recommendations in this report.

Corporate FALCOM Financial Services did not receive any compensation for the preparation of this report. FALCOM Financial Services was not involved in the management of public issue of the company in the last 12 months. FALCOM Financial Services does not hold equity shares of the researched company. FALCOM Financial Services may provide oral or written market commentary or trading strategies to FALCOM clients and proprietary trading desks that reflect opinions that may be contrary to the opinions expressed in this research report. FALCOM asset management, FALCOM proprietary funds management desk, FALCOM brokerage division and FALCOM investment banking may take decisions that are inconsistent with the recommendations or views expressed in this research report. No employee of FALCOM Financial Services serves on the Board of Directors of the company.

Others This report is prepared after meeting the management of the Company. The report represents the final views of the analyst which may or may not match with the views of the management. All stock price data included in this report are dated as at close of July 6, 2009 and market data for the nearest available period, unless otherwise indicated in the report. FALCOM Financial Services has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research reports. Chinese wall procedures are in place between the different business units to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

DIS

CL

OSU

RE

S

All rights reserved. This research document is prepared for the use of clients of FALCOM Financial Services and may

not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express

written consent of FALCOM Financial Services. Receipt and review of this research report constitutes your

agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information

contained in this report (including any recommendations, estimates or price targets) prior to public disclosure of such

information by FALCOM Financial Services. The information herein was obtained from various sources believed to be

reliable but we do not give any representation or warranty as to its accuracy or completeness.

FALCOM Financial Services makes no representations or warranties whatsoever as to the data and information

provided in this report, nor does it represent that the information content of this document is complete or free from

any errors or omissions.

This report is for general information only. Neither the information nor any opinion expressed constitutes an offer or

an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or

investments. It is not intended to provide personal investment advice and it does not take into account the specific

investment objectives, financial situation and the particular needs of any specific person who may receive this report.

Investors should seek a specialized financial advice regarding the appropriateness of investing in any securities, other

investment or investment strategies discussed or recommended in this report and should understand that

statements regarding future prospects may not be realized. Investors should note that income from such securities

or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall.

Accordingly, investors may receive back less than originally invested. Any investment action based on the contents

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