FY08 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW 2008 was a continued favorable year with a decent 6.5% organic revenue growth, stable market share of revenue, and improved margin. During the first nine months, revenue grew strongly at 8.6% amidst the high inflation, well above the guidance of 7-8%, before the blow of abnormally weak 4Q08 affected by political pressure and economic slowdown. The key growth drivers for 2008 were healthier subscriber net additions supported by AIS's strength in upcountry market and revamped distribution channels, as well as the strong growth in data usage and subscription on EDGE technology. Leading with the superior network coverage and quality, AIS implemented a more efficient distribution structure by expanding sub-dealer penetration with improved compensation scheme, instead of relying primarily on main dealers. This turned subscription into strong net additions particularly in the rural area where the penetration remained low. Through the year, AIS also encouraged more prepaid refill transactions via electronic refill. The contribution of e-refill increased significantly to 30% of total refill in 2008 from the low-single digits in 2007. The convenience and the small-denomination of e-refill not only enhanced the airtime sales but also reduced production cost of scratch cards. On postpaid market, AIS remained committed to leading position and therefore managed a more prudent acquisition with a stringent credit screening policy. Subscriber acquisition was more targeted to the qualified consumers that fit in on both usage behaviors and lifestyles. The postpaid net additions were therefore improved in quality which reflected in lower churn and bad debt provision. Meanwhile, price competition continued to ease from the introduction of interconnection regime that fostered change toward rational pricing. The impact was two folds, the termination rate provides cushion for tariff reduction and consequently protects margin, and the capex requirement was lower as excessive incoming traffic was eliminated. AIS utilized its large-scale advantage to promote the intra-network usage and off-peak price plans, resulted in more efficient capacity utilization and was able to reduce capex for capacity expansion. Brand activities were another key focus for long-term growth. Toward the end of the year, AIS made a major revamp to its corporate brand, introducing new theme and corporate icon under the concept "With you, Always". The aim was to strengthen and communicate the brand values with focus on five key areas: best network quality, excellence service, more privileges, service innovation, and CSR. 2008 balance sheet remained strong with low gearing of 0.5x D/E and high liquidity. Strong operating performance, contributed by solid revenue growth and effective cost control, helped support the sustainability in cash flow generation, consequently led to AIS's ability to retain committed return to shareholders and readiness for future investment. OPERATIONAL HIGHLIGHTS Subscriber growth continued in upcountry market with improved quality, supported by more efficient distribution ARPU continued to fall from multi-SIM and new users with lower ARPUs but at a slower rate Usage increased from the success of off-peak packages while put less pressure on capex Subscriber base as of December 2008 reached 27.3m, grew 13% from the previous year. Net additions were 3.2m during 2008, slow down from 4.6m in 2007, following the less aggressive subscriber acquisition and the slower growth of multiple SIMs. Subscriber market share slightly declined to 45% from 46% in 2007 while revenue market share was stable at 51%. This reflects an improved quality of subscribers, partly attributed by the development in efficiency of distribution channels, as well as AIS' strong brand presence in particular for the rural markets. Postpaid market was a turnaround from 2007, when the aggressive acquisition resulted in higher bad debt and increased churn. In 2008, the more prudent acquisition with a stringent credit screening policy resulted in improved subscriber quality. Churn was also reduced to 2% in 4Q08, compared to 4.7% in 4Q07. Prepaid market continued to expand into the upcountry, especially in northeastern regions, where penetration remains low and potential demand is supported by increased income and purchasing power. With AIS's network strength and efficient distribution channels, Northeast area increased its contribution in terms of net additions as well as revenues. ARPU continued to fall from the previous year due mainly to a higher penetration into the upcountry areas, where ARPUs was lower compared to urban areas, while the multiple-SIM users still prevail. ARPU in 2008 declined 11%, at a slower pace, compared to the 20% decline in 2007 as the growth of multiple SIMs slow down. MOU in 2008 increased 9% from the previous year due to the higher usage on off-peak buffet packages as well as on-top promotions. Despite higher minutes, more efficient network utilization helped decreased the actual CAPEX spending to Bt12.6bn in 2008, from the initial budget of Bt16-17bn. SIGNIFICANT EVENTS Impairment loss from DPC goodwill of Bt3,553m recognized in 4Q08 As at 31 December 2008, the Group recorded in the Income Statement for the period a Bt3,553m impairment loss of goodwill on DPC, a subsidiary operating mobile service on GSM 1800MHz. Such item is not tax deductible, unrecoverable and is non-cash expense. The goodwill impairment arises from change in Thai Accounting Standard (TAS 43) that take effect from 1 January 2008, under which the amortization of goodwill was discontinued, while the impairment loss is recognized when the carrying value of goodwill exceeds its estimated recoverable value, or present value of the estimated future cash flow from the asset. (details of impairment method is available in note to financial statement) The effects on the Group's consolidated financial statements ending 31 December 2008 are as following: - Discontinue of goodwill amortization of Bt1,167m per annum on the Income Statement - Recognized impairment loss on DPC goodwill of Bt3,553m, by discounting expected future cash flow method and compared with its carrying value of Bt6,655m. After the impairment, DPC goodwill left on the balance sheet is equivalent to Bt3,102m. DPC settlement of Bt3,000m cash outflow with Bt1,739m before-tax gain on income statement in 2Q08 Referring to the dispute between DPC and DTAC on the "Unwind Agreement" (assignment right and obligation to operate PCN1800), DPC booked the total liability of Bt4,739m under the operation right payable as of December 31, 2007. In March 2008, the Arbitral ruled on two out of three dispute cases that DPC should pay DTAC for the total amount of USD85m plus interest of 9.5% p.a. The other dispute was pending on the Arbitration process. Consequently, on May 30, 2008, DPC agreed to pay DTAC for the settlement of Bt3,000m. The settlement agreement effectively surrendered all existing and future claims, disputes and obligations from the Unwind Agreement between DPC and DTAC. As a result, AIS booked in its financial statement as of 2Q08, other income amounted to Bt1,739m, which was subjected to 30% corporate income tax. On cash flow statement, 2Q08 AIS had a cash outflow of Bt3,000m for the DPC settlement. (detail background of dispute is available in note to financial statement) FINANCIAL RESULTS Service revenue excluded IC for 2008 grew 6.5% y-o-y from strength in upcountry coverage and improved price competition 4Q08 was exceptionally weak due to airport closure, weak sentiment and economy slowdown EBITDA margin ex-IC improved by 300bps to 48.3% while normalized profit rose 7.4% y-o-y supported by solid revenue growth and efficient cost control Service revenue exclude IC 2007 2008 y-o-y (Unit: Bt million) Voice revenue 62,693 80.1% 63,906 76.7% 1.9% Postpaid (voice) 17,201 22.0% 15,098 18.1% -12.2% Prepaid (voice) 45,491 58.1% 48,808 58.5% 7.3% Non-voice revenue 8,628 11.0% 11,061 13.3% 28.2% International roaming 3,699 4.7% 3,696 4.4% -0.1% Others (IDD, other fees) 3,261 4.2% 4,710 5.6% 44.4% 78,280 100.0% 83,373 100.0% 6.5% Service revenue exclude IC grew 6.5% y-o-y to Bt83,373m in 2008 from Bt78,280m in 2007 mainly attributed by 7.3% prepaid voice revenue growth while non-voice revenue rose 28.2% and international call (IDD) revenue surged 90% y-o-y. The revenue growth during the first nine month grew strongly at 8.6% amidst the high inflation, and was well above the guidance of 7-8%. The high-season 4Q08 revenue nevertheless was largely affected by the political instability, in particular the airport closure, as well as the weak economy and consumer confidence which dampen both domestic usage and foreign tourist traffic. Service revenue exclude IC in 4Q08 grew only 0.6% y-o-y to Bt20,222m but declined 2.1% q-o-q, with weakness shown across all revenue segments, and most prevalent in international roaming. Voice revenue slightly increased by 1.9% due mainly to the drag of postpaid service which fell 12.2% y-o-y while prepaid posted healthy 7.3% growth. The decline in postpaid revenue was the impact from effort to improve quality subscribers and bring back a healthy revenue base. During 2008, price competition continued to improve from 2007 as the implementation of IC had set the cost of off-net pricing. Mobile operators continued to adjust the various price plans during the 1H08 mainly focusing on raising off-net tariff while promoting subscription to on-net plans. However, the high inflation during mid-2008 and weak consumer spending had been an obstacle for price increase in the 2H08. Non- voice revenue rose strongly 28.2% y-o-y to Bt11,061m, from Bt8,628m in 2007. AIS recorded more than 20% y-o-y non-voice revenue growth in five consecutive quarters despite dampen consumer confidence in late 2008. The Key growth drivers were from mobile internet browsing which surged 75% y-o-y, as a result of improved data speed on EDGE capability, and 45% growth in content downloads. The more variety of smart phones at affordable prices in the market this year also helped fuel growth on data usage. Contribution of revenue from mobile data browsing (GPRS/EDGE) increased to 25% of non-voice revenue in 2008 from 19% in 2007. SMS remained the majority part of non-voice revenue, now represented 27%, from 30.4% in the previous year. The proportion of non-voice revenue to service revenue increased to 11%, from 9% in 2007. Interconnection (Bt million) 2007 2008 Revenue 16,530 16,213 Cost 14,054 15,476 Net interconnection 2,477 737 International roaming (IR) in 2008 remained flat y-o-y at Bt3,696m despite 12.9% y-o-y growth in 9M08. This was due to the impact of 10-day airport closure, slashing the numbers of incoming international tourists which are the key source of roaming revenue. Other revenue grew 44.4% y-o-y mostly contributed by the growth in international call (IDD) service which rose 90% y-o-y from the full service launch on AIN international telephone gateway (005 direct-dialing code). Interconnection (IC) revenue decreased 1.9% y-o-y while IC costs increased 10.1% y-o-y. As a result, 2008 net IC revenue dropped to Bt737m, from Bt2,477m in 2007. During the year, tariff adjustment among mobile operators was the main force that drove net IC of all operators toward neutralized zone. While other operators focused on managing down their IC cost through raising off-net tariff, AIS utilized its large-scale advantage by aiming on revenue from consumers' outgoing calls rather than incoming revenue from other operator as well as leverage up on the largest customer base through on-net packages. Sales revenues in 2008 dropped 17.9% y-o-y to Bt11,205m in 2008 from Bt13,644m in 2007 due to decrease in both handset sales and SIM card sales. Handset unit sales declined from slower demand for new handsets in the 2H08 following weak economy while average selling price also fell as consumers opt to buy the cheaper low-end handsets. Unit sales of SIM cards also dropped in 2008 following declining net additional subscribers for the year of 3.4m compared to 4.6m net adds in 2007. Cost of sales decreased 16.6% y-o-y following the decline in sales revenue. Sales gross margin declined to 6% from 7.5% in 2007. Cost of service excl. IC (Bt million) 2007 2008 y-o-y Amortization 16,686 17,898 7.3% Base station rental & utility 2,312 2,513 8.7% Maintenance 1,872 1,825 -2.5% Others 3,517 3,773 7.3% 24,387 26,008 6.6% Cost of service exclude IC increased 6.6% y-o-y to Bt26,008m, from Bt24,387m in 2007 due mainly to higher network amortization, which rose 7.3% y-o-y as a result of lessen amortization period. On the other hand, network maintenance costs dropped 2.5% y-o-y despite of network expansion with 1,500 more base station for the year. The lower maintenance cost was attributed to the success of the operational cost-efficiency program. Other cost of services increased 7.3% due mainly to additional costs associated with IDD full service launch. (Bt million) 2007 2008 y-o-y Revenue sharing 19,691 20,021 1.7% % of service revenue 25.2% 24.0% Revenue sharing to TOT and CAT in 2008 increased 1.7% y-o-y to Bt20,021m from Bt19,691m in 2007. It is now represented 24.0% of service revenue exclude IC, declined from 25.2% in 2007 as revenue proportion from postpaid was smaller. SG&A (Bt million) 2007 2008 y-o-y marketing expense 3,535 3,252 -8.0% Bad debt expense 1,347 530 -60.7% SG&A expenses 12,769 11,205 -12.2% % marketing to total revenue (excl. IC) 3.8% 3.4% % bad debt to postpaid 6.5% 2.7% % SG&A to total revenue 11.8% 10.1% SG&A expenses decreased 12.2%, mainly from ceased recognition of goodwill amortization (according to TAS43). Stripping out impact from goodwill amortization, SGA declined 3.4% y-o-y from 60.6% y-o-y fall in the provision of bad debt, 8% y-o-y drop in marketing expense, and 13.5% decline in operating expenses. Bad debt improved significantly, representing 2.7% of postpaid revenue in 2008, declined from 6.5% in 2007. The drastic improvement was due to the group's more stringent credit policy in screening new postpaid subscription. Marketing expense in 2008 was 3.4% of total revenue excluded IC, slightly declined from 3.8% in 2007 and was below the budget of 4%, despite of the brand refreshment activities on both corporate and prepaid brand. Other income in 2008 surged 288% to Bt2,570m from Bt662m in 2007, primarily from the one-time settlement gain between DPC and DTAC amounted to Bt1,739m. EBITDA (Bt million) 2007 2008 y-o-y Operating profit 24,930 27,548 Depreciation PPE 3,174 3,029 Amortization 14,413 15,815 Amortization of goodwill 1,167 Goodwill write-off 15 EBITDA 43,684 46,406 6.2% EBITDA margin 40.3% 41.9% EBITDA excl. IC 41,668 45,722 9.7% EBITDA margin excl. IC 45.3% 48.3% EBITDA margin excluded IC for 2008 improved to 48.3% from 45.3% in 2007 contributed by a higher revenue growth, lower bad debt provision as well as operating cost saving. Including IC, EBITDA margin was 41.9%, slightly increased from 40.3% in 2007. Net profit for 2008 was Bt 16,409m, flat from Bt16,290m in 2007, due mainly to the goodwill impairment of Bt3,553m. Normalized net profit, before extra items, rose 7.5% y-o-y to Bt18,760m, from Bt17,457m in 2007. The performance improvement was from solid revenue growth, healthy subscriber base which turned into lower provision for bad debt, and efficient cost control that helped reduce cash operating expenses. Consolidated (Bt million) Tax deductible Where 2007 2008 y-o-y Net income 16,290 16,409 0.7% Add: Goodwill amortization No SGA 1,167 Impairment of DPC goodwill No Impairment - 3,553 loss Goodwill write-off* No SGA - 15 Deduct: Gain on DPC settlement after tax Yes Other income - -1,217 Normalized net income 17,457 18,760 7.5% * Recognized in 1Q08 from sales of equity stake in a subsidiary, ADC Balance sheet structure % to % to Bt million 2007 total asset 2008 total asset Current Assets 20,586 16.0% 26,958 21.0% Property and Equipment 8,561 6.6% 8,144 6.4% Networks 78,527 60.9% 73,045 57.0% Intangible asset 10,593 8.2% 6,538 5.1% Defer tax asset 10,031 7.8% 10,075 7.9% Others 644 0.5% 3,321 2.6% Total Assets 128,942 100.0% 128,081 100.0% Total asset as of December 2008 was Bt128,081m, slightly decreased from Bt128,942m in 4Q07 due to the decreased in networks under agreement for operation, which caused by lower 2008 capex than the accelerated depreciation rate as a result of shorten agreement to operate lives. Intangible asset dropped 38.3% y-o-y mainly from the goodwill impairment of Bt3,553m. Other assets increased to Bt3,321m in 2008 from Bt644m in 2007 due to our hedging policy. In 2008, swap and forward contract receivable of Bt2,483.9m incurred from Baht depreciation, reversed from swap and forward contract payable of Bt382.8m in 2007. % to % to % to % to total total total total Bt million 2007 asset 2008 asset Bt million 2007 asset 2008 asset Cash 8,317 6.4% 16,301 12.7% Short-term 3,492 2.7% - - loan ST investment 123 0.1% 226 0.2% Trade accounts Trade receivable 8,054 6.2% 5,790 4.5% payable 4,218 3.3% 4,263 3.3% Inventories 1,236 1.0% 1,593 1.2% CP of LT 1,545 1.2% 7,038 5.5% loans Other current Accrued R/S assets 2,855 2.2% 3,048 2.4% expense 3,634 2.8% 2,719 2.1% Current Assets 20,586 16.0% 26,958 21.0% Operation right payable 4,739 3.7% - - Others 10,528 8.2% 10,840 8.5% Current Liabilities 28,157 21.8% 24,860 19.4% Liquidity as of December 2008 increased by a higher current ratio of 1.08, from 0.73 in 2007, due to higher cash outstanding and lower agreement to operate payable, resulted from the settlement agreement between DPC and DTAC in May 2008. The company has high level of liquidity as more than half of current assets are in cash. In 2008, trade receivable dropped 28.1% y-o-y as company received Bt2.5bn interconnection payment occurred during 2007. Bt million 2007 2008 Total interest-bearing debt 30,349 34,328 Total liabilities 53,481 54,646 Total equity 75,461 73,436 Net debt to equity 29.2% 24.5% Total liabilities to equity 70.9% 74.4% Capital structure remained strong with the debt ratio of 42.7%, slightly higher than 41.5% in 2007. Total liability to equity increased to 74.4% from 70.9% in 2007 due to the loan drawdown during the year while equity slightly dropped as the company's payout ratio exceeded 100% of net profit. However, stripping out non-cash expenses, AIS free cash flow was more than enough to pay for dividend. During the year, AIS paid cash dividend amounted Bt18,653m, equivalent to Bt6.3 per share. With the higher cash on hand, net debt to equity as of December 2008 was 24.5%, declined from 29.2% as of 2007. Debentures and loans AIS had total interest bearing debt of Bt34,328m, rose 13.1% from Bt30,348m in 2007 as the company issued the debenture amounted Bt4,000m in April 2008 and the additional long term borrowing amounted (more)