Management's Discussion and Analysis Overview For the 2Q04, the Company and its subsidiaries (the Group) had the total of 14,434,650 mobile phone subscribers, comprising of 2,093,560 subscribers on GSM Advance and GSM 1800 and 12,341,090 subscribers on 1-2-Call!. The subscriber base grew 570,450 or 4.1% from the first quarter of 2004. During 2Q04, the Company launched a new campaign "Sawasdee" in May to serve provincial customers and light users. This campaign got strong responses immediately. As a result, new subscriber registrations have been continuously growing. In addition, small denomination refill cards (Baht40 and Baht50) were popular especially among the new customer group. Moreover, Calling Melody, launched during 1Q04, continued to have strong responses from 1-2-Call! subscribers, The Group recorded the net profit of Baht 5,044 million for 2Q04, relatively stable compared to 1Q04. The net profit for the first half-year 2004 was Baht 10,074 million, up 3.5% compared to that of 1H03 due to 1-2-Call! subscriber growth and lower allowance for doubtful accounts. Net profit for 2Q04 fell 1.6% year-on-year while pretax profit rose 14% due mainly to 58% rise in income tax. The Group paid low income tax last year by utilizing loss carried forward from a subsidiary. Operating Results Table 1: Selected financial information Amount in Million Baht 2Q04 % Change % Change 1H04 % Change QoQ YoY YoY Total Revenue 24,100 0.1% 6.5% 48,178 6.3% Total Cost 13,068 0.9% 2.7% 26,023 2.7% Gross Margin 11,032 (0.8%) 11.3% 22,155 10.9% SG&A 2,856 6.8% 7.1% 5,531 (3.1%) Net Profit 5,044 0.3% (1.6%) 10,074 3.5% Diluted EPS (Baht) 1.71 0.0% (2.3%) 3.42 3.0% Total Revenue The Group generated total revenue of Baht 24,100 million in 2Q04, up 0.1% from that of 1Q04 and 6.5% from that of 2Q03. The total revenue showed small growth from last year due mainly to falling sales on mobile phone, dragging down strong growth on service revenues. For the six-month period of this year, total revenue was Baht 48,178 million increased by 6.3% from the same period of last year as a result of: - Revenue from services and equipment rentals The mobile service revenue was a majority part of revenue from service and equipment rentals. In 2Q04, mobile service revenue was Baht 21,090 million, increased by 1.2% from that of 1Q04 and 14.6% from that of 2Q03. The slow growth from the last quarter was due to the lower usage which was also evidenced in the same period last year. The increment was mainly due to higher prepaid service revenue, increased by Baht 196 million or 1.6% from 1Q04 and increased by Baht 3,176 million or 33.9% compared to 2Q03. For the six-month period, it was Baht 4 1,925 million increased by 15.7% for this year. - Revenue from sales Handset and accessory sales were major components in revenue from sales. In 2Q04, sales were Baht 3,010 million, dropped by Baht 234 million or 7.2% from 1Q04 and dropped by Baht 1,218 million or 28.8% compared to 2Q03. For the six-month period, revenue from sales was Baht 6,253 million dropped by 31.1% from the same period of last year. The decrease in handset sales came from lower sales volume as well as lower average sell ing price, impacted from an intense competition in handset sales. Total Cost Total cost was Baht 13,068 million in 2Q04, increased by 0.9% from that of 1Q04 and 2.7% from that of 2Q03. Total cost for the six-month period was Baht 26,023 million, an increase of 2.7% for this year as a result of: - Cost of services and equipment rentals Cost of services and equipment rentals was Baht 5,466 million in 2Q04, slightly rose from last quarter. Comparing to 2Q03, the cost rose by Baht 670 million or 14.0%, and for the six-month period rose by 13.6%. The increment was principally owing to higher network amortization resulting from continuous expansion of mobile service network. - Concession fee and excise tax Concession fee and excise tax were Baht 4,971 million in 2Q04, slightly increased from previous quarter and increased by 10.2% from that of 2Q03. For the six-month period, it increased by 12.7% from the same period of last year. The increase in concession fee and excise tax was in-line with the rise in revenue from mobile services. - Cost of Sales Cost of sales was Baht 2,631 million, decreased by 0.2% from that of 1Q04 and decreased by Baht 787 million or 23.0% compared to 2Q03. For the six-month period, it dropped by 24.7% from the same period of last year. due to lower sales volume. Selling and Administrative expenses Total selling and administrative expenses (SG&A) were Baht 2,856 million in 2Q04, accounted for 11.9% of total revenue. The SG&A increased by 6.8% from that of 1Q04, and increased 7.1% from that of 2Q03. The change of SG&A was principally because: 1. Marketing expense increased by Baht 124 million from that of 1Q04 due to an increase in marketing activities for 1-2-Call! Subscribers. Compared to 2Q03, the expense was up Baht 454 million. 2. Allowance for doubtful account fell by Baht 451 million from that of 2Q03. The decrease was mainly due to the Group's efforts in strengthening collection performance. 3. Administration expense rose by Baht 101 million from that of 1Q04 and rose by Baht 108 million compared to that of 2Q03. The increment came from provision for obsolete handset inventory and an increase of repair and maintenance expenses. In 1H04, SG&A was Baht 5,531 million from Baht 5,709 million in 1H03, a decrease of 3.1%. The main reasons were due to an allowance for doubtful decreased of Baht 908 million and a write-off on mobile phone equipment of Baht 294 million in 1H03. These were offset by increase in marketing expense and staff cost at the amount of Baht 808 million and Baht 189 million respectively. Income Tax In 2Q04, corporate income tax was Baht 2,784 million, fell by Baht 247 million or 8.1% from that of 1Q04. The main reason came from a decrease in taxable income from scratch card sales. Compared to 2Q03, income tax increased by Baht 1,027 million or up 58.5%, and for the six-month period increased by 61.8% as tax shield from loss carried forward in a subsidiary was fully utilized during 2003. Net Profit As aforesaid, net profit in 2Q04 rose by 0.3% from that of 1Q04, and it fell by 1.6% compared to 2Q03. Net profit for the six-month period increased by 3.5% from the same period of last year. Financial Position 1. Assets At the end of this quarter, total assets were Baht 127,421 million, increased by Baht 2,472 million or 2.0% from YE03. As a percentage of total assets, current assets and non-current assets accounted for 19.4% and 80.6% respectively. Table 2: Major assets component 30 June 2004 31 December 2003 % of Total % of Total Million Baht Assets Million Baht Assets Current Assets 24,669 19.4% 17,896 14.3% Plant, Property 11,557 9.1% 12,120 9.7% and Equipment, net Assets under 75,664 59.4% 78,549 62.9% concession agreements, net Other non 15,531 12.1% 16,384 13.1% current assets - Current Assets As at June 2004, current assets considerably increased Baht 6,773 million or up 37.8% from YE03 by the major items: 1. The increment of cash and cash equivalent was from Baht 8,637 million as at YE03 to Baht 14,522 million mainly due to an increase in cash inflow from operation activities net of cash flow from investing activities and financing activities. 2. The rise in inventory from Baht 1,027 million to Baht 1,654 million as at 2Q04. To serve customers satisfaction, the Group stocked a variety model of mobile phones. 2. Liabilities Total liabilities were Baht 63,658 million at end of 2Q04, decreased by Baht 1,665 million or 2.5% from YE03. This was mainly due to prepayment of long-term borrowings in a subsidiary. Table 3: Major liabilities component 30 June 2004 31 December 2003 % of Total % of Total Million Baht liabilities Million Baht liabilities Other Current 17,318 27.2% 15,913 24.4% Liabilities Concession right 8,333 13.1% 6,810 10.4% payable, accrued concession fee and excise tax1 Long-term borrowings 37,993 59.7% 42,585 65.2% and debentures, net2 Other non-current 14 0.0% 15 0.0% liabilities 1 Concession right payable, Accrued Concession fee and Excise Tax including current-portion within 1 year and portion over 1 year 2 Long-term borrowings and debentures, net including current-portion within 1 year and portion over 1 year - Current Liabilities As at June 2004, current liabilities grew Baht 1,405 million or up 8.8% from YE03 mainly due to higher corporate income tax payable of Baht 1,481 million. - Concession right payable, accrued concession fee and excise tax As at June 2004, the concession right payable, accrued concession fee and excise tax comprised of current-portion within 1 year Baht 7,339 million which was up by Baht 1,755 million or 31.4% and portion over 1 year Baht 994 million which fell down by Baht 231 million. The increment was primarily due to higher revenue from mobile service. - Long-term borrowings and debentures, net During the six-month period ended June 2004, the Group made total repayments of Baht 4,615 million, comprising of long-term debentures of Baht 1,500 million,Baht 73 million for financial leasing liabilities and prepayment of long-term borrowings by a subsidiary totaling Baht 3,042 million. As at June 2004, total long-term debentures and borrowings were Baht 37,993 million of which Baht 10,036 million was current portion within 1 year and Baht 27,957 million was portion over 1 year. 3. Shareholders' Equities As at June 2004, the Group had total equity of Baht 63,763 million, grew up by Baht 4,137 million from YE03 as a result of net income for six-month period by Baht 10,074 million, comprising of Baht 5,030 million in 1Q04 and Baht 5,044 million in 2Q04. The Company made dividend payment to shareholders by Baht 6,170 million in May 2004. In addition, during this period the Company had additional issued and fully paid-up shares from exercise of ESOP totaling 4.1 million shares (included 2.3 million shares in the first quarter) worth Baht 167 million and advance receipt from shareholders by Baht 32 million. 4. Liquidity For the first half of year 2004, the Group's net cash flow increased by Baht 2,260 million, as a result of : * Net cash outflow from investing activities down by Baht 3,641 million from the same period of prior year due to slow-down in network expansion investment. * Net cash inflow from operating activities down by Baht 1,762 million from the same period of prior year, resulting from an increase in concession fee and excise tax from higher scratch card sales and a rise of marketing expenditure. * Net Cash outflow from financing activities down by Baht 381 million from the same period of prior year.