3Q09 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW 3Q09 revenue was relatively stable compared to the last quarter from normal low season offset by continued growth in non-voice revenue and better international roaming usage. The y-o-y revenue declining trend showed an improvement,suggesting signs from economic recovery and improving consumer sentiment. Also, selective marketing campaigns relieved normal 3Q seasonal effect. Lean operation and effective cost control programs contributed to higher EBITDA margin to 45.8% from 44.8% in 2Q09 and 41.8% in 3Q08. Strong growth on non-voice of 24% y-o-y and 9.6% q-o-q was from growing subscription and higher usage on mobile internet. Active users on mobile internet had been consecutively increasing since 2008 reaching 4.9m subscribers as of 3Q09 compared to 4.5m last year. Many marketing campaigns launched to capture the megatrend of smartphone and wireless internet dongle (USB-aircard). For example, "BlackBerry" package exclusively designed for BlackBerry users for unlimited data usage are gaining momentum among medium to high-end segment. The lower-end BlackBerry device and package will keep this momentum going into teenagers. Strong brand footprint on monile data and reliable would be a key to gain more customers in this segment. Cost control policy retained competitive advantage of AIS. All elements of expense was reduced to compensate economy slowdown and seasonality effect. Cash opex (including network opex, SGA, excluding amortization and depreciation) declined 13.1% y-o-y, and 5.2% q-o-q from lower maintenance and office expense. But y-o-y overall cost of services increased due to higher amortization and depreciation. Strong free cash flow generation of Bt24.8bn for 9M09, an improvement from Bt22bn in 9M08, despite of revenue softness from economic impact, due to stringent cost control. The ability to generate strong free cash flow provides the flexibility to future cash need for 3G capex and license while remain committed to shareholders return. **New guidance on 3G is available on page 6** OPERATIONAL HIGHLIGHTS Subscriber reached 28.3m, mainly from prepaid customers. ARPU fell from seasonal effect. MOU subtly improved from prepaid segment due to usage-stimulus promotion. Subscriber recorded 28.3m added 380k subscribers during the quarter, compared to 320k during the previous quarter. The growth in net addition was mostly from prepaid customers particularly from the popularity of the "Boo Lim" promotion. Postpaid subscribers continued to grow with the success of "Mix & Match" promotion that harmonizes different lifestyles. On y-o-y basis, subscriber bases increased 5.6% compared to 26.8k in 3Q08. ARPU continued to declined mainly from seasonal effect. Postpaid ARPU including net IC fell 0.8% q-o-q to Bt600 as MOU reduced 0.8% q-o-q. Prepaid ARPU including net IC fell 2.5% q-o-q to Bt191 while MOU was more stable q-o-q resulted from promotions that encouraged outgoing traffic. FINANCIAL RESULTS Service revenue excluded IC fell 3.9% y-o-y, a recovery from 5.4% y-o-y drop in 2Q09. EBITDA declined 0.5% y-o-y from lower revenue but improved 1.3% q-o-q from cost control policy. Net profit of Bt4,184m in 3Q09 fell 7.7% y-o-y from higher depreciation & amortization Service revenue 3Q08 2Q09 3Q09 y-o-y q-o-q excluding IC (Bt million) Voice revenue 15,831 76.6% 15,244 76.5% 14,868 74.9% -6.1% -2.5% Postpaid (voice) 3,728 18.0% 3,650 18.3% 3,600 18.1% -3.4% -1.4% Prepaid (voice) 12,103 58.6% 11,593 58.2% 11,268 56.7% -6.9% -2.8% Non-voice revenue 2,785 13.5% 3,151 15.8% 3,455 17.4% 24.1% 9.6% International roaming 919 4.4% 547 2.7% 571 2.9% -37.9% 4.4% Others (IDD, other fees) 1,130 5.5% 990 5.0% 970 4.9% 14.2% -2.0% Total service revenue excl. IC 20,665 100.0% 19,932 100.0% 19,863 100.0% -3.9% -0.3% Service revenue exclude IC revenue declined 0.3% q-o-q mostly from the rainy and agricultural harvesting season in Thailand while growth on non-voice relieved the seasonality impact. On y-o-y basis, the service revenue excluded IC declined 3.9% due to economic slowdown. The y-o-y drop picked up from the 2Q09 which dropped 5.4% showing signs of slight demand recovery and improving sentiment. For 9M09, service revenue excl. IC declined 4.4% y-o-y as a consequence of economic slowdown and political situation in the first half of 2009. Voice revenue declined 2.5% q-o-q on seasonal effect. Prepaid revenue declined 2.8% q-o-q while postpaid declined 1.4% q-o-q. International Roaming revenue (IR) improved 4.4% q-o-q due to a weak performance in the last quarter given the abnormal political situation and H1N1 epidemic. IR revenue still declined 37.9% y-o-y from global economic slowdown. For 9M09, IR revenue declined 35.4% compared to last year. Other revenue declined 2.2% q-o-q and 14.2% y-o-y mainly from international call (IDD) revenue which was impacted by the low tourism season and competitive market environment. Net interconnection (IC) was lower q-o-q with net receipt of Bt239m compared to Bt319m in 2Q09. The lower net IC mainly came from promotion campaign which offered attractive rate for off-net tariff to encourage overall customer's usage. Interconnection (Bt million) 3Q08 2Q09 3Q09 y-o-y q-o-q Revenue 3,958 3,621 3,517 -11.1% -2.9% Cost 3,749 3,302 3,278 -12.6% -0.7% Net Interconnection 20 319 239 14.5% -25.1% Cost of service excl.I (Bt million) Amortization 4,523 4,733 4,869 7.7% 2.9% Base station rental & utility 622 679 662 6.4% -2.5% Maintenance 50 350 328 -34.5% -6.5% Others 954 95 822 -13.9% -14.1% Cost of service excl. IC 6,599 6,719 6,681 1.2% -0.6% SG&A (Bt million) Marketing expense 769 658 612 -20.4 -6.9% Administrative expense 1,926 1,729 1,727 -10.4% -0.1% SG&A expenses 2,696 2,387 2,339 -13.2% -2.0% %marketing to total revenue 2.8% 2.6% 2.5% %bad debt to postpaid revenue 2.2% 3.9% 4.0% %SG&A to total revenue 9.8% 9.5% 9.4% EBITDA (Bt million) Operating profit 6,765 6,342 6,334 -6.4% -0.1% Depreciation PPE 763 836 842 Network amortization 3,999 4,146 4,286 Gain (loss) on disposals of PPE 8 0 0 Management benefit -23 -16 -16 Other financial cost -16 -18 -13 EBITDA 11,495 11,289 11,432 -0.5% 1.3% EBITDA margin 41.8% 44.8% 45.8% Financial Cost Interest expenses 417 478 460 10.2% -3.9% Other financial costs 16 18 13 -20.3% -29.5% Financial cost 433 497 473 9.1% -4.9% Consolidated (Bt million) Net income 4,533 4,197 4,184 -7.7% -0.3% Normalized net income 4,533 4,197 4,184 -7.7% -0.3% Non-voice revenue had a substantial growth of 9.6% q-o-q and 24.1% y-o-y. The growth was mainly from higher usage of mobile internet and growing subscription to internet SIM, GPRS/EDGE package and BlackBerry . SMS and other value added services also grew q-o-q. On y-o-y basis, nearly all segments of non-voice revenue grew except calling melody. For 9M09, total non-voice revenue increased 20.2% compared to the last year. Interestingly, subscription of data package promotion increase month over month refelcting smartphone trend and potential of upcoming 3G. Internet SIM and data card are becoming popular in mobility trend. Sales revenues, representing 6.4% portion of total revenue, declined 3.3% q-o-q and 45.3% y-o-y as consumer demand for handset remained soft following economic slowdown and high market competition from house-brand. Sales margin improved to 8.2% compared to 2.7% in 2Q09 and 6.0% in 3Q08. Inventory control policy helped better sales margin. Cost of service excluding IC cost decreased 0.6% q-o-q from cost control program. However, the cost of service exclude IC increased 1.2% y-o-y from higher amortization due to shorten period of BTO contract. On q-o-q basis, base station rental & utility, network maintenance and other expenses decreased 2.5%, 6.5% and 14.1% respectively. Maintenance expense heavily reduced 34.5% y-o-y. Only amortization expense increased 2.9% q-o-q and 7.7% y-o-y. For 9M09, cost of service exclude IC increased 3.3% y-o-y from higher amortization. Without amortization, cost of service exclude IC reduced 4.4% y-o-y due to lower maintenance expense and cost of refill cards as prepaid refill transaction has been moved toward refill-on-mobile. Revenue sharing expense increased 0.7% q-o-q but declined 2.2% y-o-y. Marketing expense declined 6.9% q-o-q and 20.4% y-o-y under cost control policy. For 9M09, Marketing spending declined 9.8% y-o-y,representing 2.3% to total revenue. Administrative expense was relatively stable q-o-q but significantly decreased 10.4% y-o-y as a result of lower staff cost and cost cutting on various office expenses. Bad debt provision was near the same level at 4.0% of postpaid revenue. For 9M09, administrative expense declined 8.1% from lower staff cost and office expenses. Other income was Bt136m, slightly declined 0.9% q-o-q. On y-o-y basis, other income fell from Bt183m in 3Q08 mainly from lower interest income. EBITDA was Bt11,432m, increased 1.3% q-o-q but lower 0.5% y-o-y following the decrease in revenue. Major contribution to EBITDA improvement was the cost control program which reduced cost of service excluded IC down 0.6% and SG&A down 2.0% q-o-q. EBITDA margin in 3Q09 was 45.8% increased from 44.8% in 2Q09 and 41.8% in 3Q08. For 9M09, EBITDA was Bt34,373m, declined 4.0% from previous year due to 5.7% decline in service revenue partly offset by cost reduction 18.3% on network maintenance, 8.5% on SG&A and lower cost of refill cards. EBITDA margin for 9M09 was 45.0%, up from 42.4% in 9M08. Financial cost declined 4.9% q-o-q but increased 9.1% y-o-y from higher outstanding debt of Bt36bn in 3Q09 compared to Bt32.5bn in 3Q08. Net profit for 3Q09 was Bt4,184m, fell 0.3% q-o-q from higher amortization and interest expense. On y-o-y basis net profit declined 7.7% due to economic downturn. For 9M09, recurring net profit was Bt12,949m, declined 12.4% from 9M08. Balance sheet structure Bt million 2Q09 %to total 3Q09 %to total asset asset Cash 27,368 20.8% 21,798 17.6% ST investment 34 0.0% 84 0.1% Trade receivable 5,479 4.2% 4,825 3.9% Inventory 907 0.7% 740 0.6% Other 2,374 1.8% 3,200 2.6% Current Asset 36,162 27.5% 30,647 24.8% Networks and PPE 76,899 58.4% 73,919 59.8% Intangible asset 6,437 4.9% 6,392 5.2% Defer tax asset 9,940 7.5% 9,950 8.0% Others 2,260 1.7% 2,771 2.2% Total Assets 131,698 100.0% 123,679 100.0% Trade accounts payable 3,990 3.0% 3,275 2.6% CP of LT loans 3,923 3.0% 498 0.4% Accrued R/S expense 5,166 3.9% 6,240 5.0% Others 9,371 7.1% 8,414 6.8% Current Liabilities 22,450 17.0% 18,428 14.9% Total interest-bearing debt 39,317 29.9% 35,887 29.0% Total Liabilities 59,203 45.0% 55,659 45.0% Total Equity 72,495 55.0% 68,021 55.0% Total asset declined 6.1% q-o-q to Bt123,679m in 3Q09 from Bt131,698m in 2Q09 as cash declined to Bt21,798m from dividend payment and repayment of debentures. Also, network, property and equipment declined 3.9% q-o-q as the amortization of assets was greater than new capex. Liquidity slightly improved as current ratio stood at 1.66 increased from 1.61 in previous quarter. Both current asset and current liability decreased as company used cash to repay debt. Inventory continued to declined from previous quarter due to continued destocking of handsets. Debentures and loans declined to Bt35,887m from Bt39,317m in 2Q09 due to Bt3,427m repayment of debenture during the period. Average cost of debt was 4.8% with all foreign debt fully hedged. Bt million 1Q09 2Q09 3Q09 Debt ratio 43% 45% 45% Net debt to equity 12% 16% 21% Total liabilities to equity 76% 82% 82% Capital structure remained strong with net debt to equity of 21%. Total liability to equity was flat at 82% compared to previous quarter. Lower equity base was due to dividend payment while liabilities decreased from repayment of debentures during the period. End of Repayment Unit: million 3Q09 4Q09 2010 2011 2012 2013 2014 Long term loan(1) 16,415 247 493 9,978 493 493 2,939 Debenture(2) 19,472 - - 4,000 5,000 8,000 2,500 Total debt 35,887 247 493 13,979 5,494 8,494 5,439 (1) includes swap contract; (2) includes bond issuing cost Cash Flow Cash flow position remained strong to supported both CAPEX and debt repayment. For 9M09, the Company generated operating cash flow before change in working capital of Bt35.3bn, a level that is sufficient for capex, debt repayment, and dividend payment. Despite of sufficient cash, additional Bt8.5bn debt was raised mainly from the issuance of Bt7.5bn debenture during 1Q09 to provide flexibility for future funding needs during the economic downturn and to be prepared for upcoming 3G license bidding. Free cash flow for 9M09 was Bt24.8bn compared to Bt22.4bn for 9M08. Source and use of fund: 9M09 9M09 Bt. Million Source of Fund Use of Fund Operating CF before change 35,303 CAPEX & Fixed assets 8,326 in working capital Proceed from LT borrowing 8,535 Dividend payment 18,664 Interest received 236 Finance cost paid 1,477 Disposal of property and equipment 15 Investment 5 Share capital and share premium 292 Cash increase 6,797 Repayment of LT borrowing 6,949 Changes in working capital 2,159 Total 44,381 Total 44,381 FY2009 MANAGEMENT OUTLOOK & STRATEGY Market subscriber forecast 5m net additions for the market Market share Maintain revenue market share Free cash flow +15% y-o-y Service revenue -3% to 0% service revenue growth Marketing expense 3% of total revenue (equivalent to 3.5% of total revenue excluding IC) Network amortization 7-8% rise (network amortization and depreciation as booked under cost of service only, exclude PPE depreciation in SGA, and amortization of operation right) EBITDA margin 41-42% Capex Bt11bn cash capex (including 3G on 900MHz) Net IC revenue Bt400-700m 9M09 financial performance was still behind from the last year. The 4Q09 will expect to encounter the situation by normal high season and resumed confident of consumers from economic depression. Service revenue growth (excluding interconnection revenue) is still keep at -3% to 0%. Voice usage, the largest contributor to revenue, is expected to remain weak with slower recovery while stable competition continued. Although international roaming and international call were significantly impacted by the decrease in tourist arrivals due to low tourism season in 3Q09 and unusaual situation in 1H09, high tourism season in 4Q09 will get international roaming and international call back. International roaming revenue is expected to decline 30% y-o-y. Data revenue remained healthy and was in-line with our expectation; its growth target is maintained at 10-15%. Non-voice service especially mobile internet and contents are focued as potential revenue growth to compensate the voice revenue stagnant. In response to virtual social network trend, variety of AIS's activities and contents will capture this high potential demand. Prospect growth in the Blackberry and mobile internet trend connected with high data usage is another value driver. Renowned AIS strong and reliable data network would gain more customers in this segment. Despite the lower revenue growth forecast, company expects to grow free cash flow by 15% y-o-y with cost efficiency program being implemented on both operating expense and capital expenditure. Consolidated EBITDA margin is expected at 41-42% albeit the lower revenue forecast due to (1) the forecasted lower proportion of revenue from handset business which usually erode consolidated margin, (2) lower gross interconnection revenue while net interconnection receipt is expected to be similar to FY08, and (3) operational cost saving on network maintenance, lower cost of refill cards as company is pushing on refill-on-mobile, as well as lower staff cost and administrative expenses. With slower demand forecast and continued stable outlook on competition, capex is revised down to Bt11bn from the previous Bt13-15bn. The cost management on both opex and capex is targeted to enhance the company's ability to deliver strong free cash flow and hence consistent return to shareholders with an expected growth on FCF of 15% y-o-y. Handset sales is expected to decline significantly from weak consumer spending as well as the change in Nokia's distribution policy starting from February which limited sales for company's distribution arm to only Bangkok area. Handset business this year is expected to contribute near-zero gross margin in a short run. In addition, we have been maintaining a conservative inventory provisioning policy. Despite the short-term negative impact and potential smaller scale of business, it remains as a vital part to support overall strategy for AIS on growing mobile service and to support the future launch of 3G service. The mobile penetration in 2H09 is expected to grow over 100% with organic demand continues from upcountry market that contributes lower ARPU. AIS's strength in rural network coverage, premium quality and distinctive brand presence will be the key to win in these markets and will serve the aim to maintain overall revenue market share. During the economy slowdown, competition outlook remains benign while mobile operators shift the focus to retaining usage from existing subscriber as well as quality customer and loyalty program rather than aggressive acquisition which would drive further multiple SIMs. 3G license will be the key milestone this year as AIS is working closely on all fronts to ensure highest possibility of attaining the new license which will allow all industry players to operate at more level-playing field under a fair cost structure. AIS expects NTC to auction 2.1GHz spectrum in 1Q10. Operationally, AIS has been preparing for readiness to ensure the shortest launch time for commercial service. Financially, AIS is also well-shaped to support the funding needs, partly reflected in the success of debenture issuance in Jan-09. While macro environment post a significant challenge this year, the operational large-scale advantage and solid financial strength will support AIS's flexibility to grow amidst this tough year. MANAGEMENT OUTLOOK & STRATEGY FOR 3G SCENARIO Market growth Mobile penetration to reach 120% in 3 years Wireless broadband penetration of 7-10% in 3 years Service revenue excl. IC 3-year CAGR of 3% Capex Bt50bn total capex on both 3G & 2G over 3 years (10% of 50bn will be on 2G) Amortization period Average 7 years for 3G assets EBITDA margin 42-43% over the next 3 years Capital structure Net debt to EBITDA of 0.55x Market Perspective Mobile subscriber penetration is expected to reach 120% in the next three years contributed by continued organic growth ?rom rural markets and multiple SIMs. Mobile service revenue is expected to have 3-year CAGR of 3% with declining voice revenue in low-single digits offset by double-digit growth in mobile data and wireless broadband. The declining voice revenue takes in the view that competition in the saturated market will pressure down revenue per minute. Mobile data contribution will continue to grow as consumer lifestyle is moving toward?onli?e/mobile access, most of the growth coming from non-messaging applications. Wireless broadband market is in an infant stage; its penetration (more)