Management's Discussion and Analysis Overview For the 3Q04, the Company and its subsidiaries (the Group) had the total of 14,812,000 mobile phone subscribers, comprising of 2,084,500 postpaid subscribers on GSM Advance and GSM 1800 and 12,727,500 prepaid subscribers on 1-2-Call!. The subscriber base grew 377,300 or 2.6% due mainly to an increase in 1-2-Call! subscribers. In the seasonally low 3Q, the Group lowered its level of marketing activities focusing on preserve rather than aggressive growing its subscriber base. The Group offered more than 20 varieties of mobile content offerings (data, downloads and games) on top of EVOLUTION Mode offerings. The Group recorded the net profit of Baht 5,269 million for 3Q04, a 4.5% increase over previous quarter despite of a decline of Baht 262 million, or 1.1%, in total revenues. The profit increase was principally owing to lower income tax, lower marketing spending and better debt collection performance. In 3Q04, the Group paid Baht 497 million lower income tax due to lower taxable revenue from scratch card sales compared to 2Q04 and a tax-refund from FY2001 concession fee of prepaid revenues. For the nine-month period, the Group showed the net profit of Baht 15,343 million, up 5.3% compared to the same period of previous year. As a result of the increase in 1-2-Call! subscriber base and the decrease in allowance for doubtful account. Operating Results Table 1: Selected financial information Amount in Million Baht % % % 3Q04 Change Change 9 Months Change QoQ YoY YoY Total Revenue 23,839 (1.1%) 9.5% 72,016 7.4% Total Cost 13,229 1.2% 11.4% 39,251 5.5% Gross Margin 10,610 (3.8%) 7.3% 32,765 9.7% SG&A 2,640 (7.6%) (6.8%) 8,171 (4.4%) Net Profit 5,269 4.5% 9.0% 15,343 5.3% Diluted EPS (Baht) 1.79 4.7% 8.5% 5.21 5.0% Total Revenue The Group generated total revenue of Baht 23,839 million in 3Q04, down 1.1% from that of 2Q04 but rising 9.5% from that of 3Q03. For the nine-month period of 2004,total revenue was Baht 72,016 million, an increase of 7.4% from the same period of last year resulting from the growth in 1-2-Call! subscriber base of over than 2 million subscribers. -Revenue from services and equipment rentals The mobile service revenue was a majority part of revenue from service and equipment rentals. In 3Q04, mobile service revenue was Baht 20,944 million, decreased by 0.7% from that of 2Q04 due mainly to lower usage of both GSM ADVANCE and 1-2-Call! service. This was consistent with 2003 that 3Q also showed the softest usage in the year. When compared to 3Q03, service revenue rose by Baht 2,823 million or 15.6%.For the nine-month it was Baht 62,869 million, up 15.7% from the same period of last year mainly from an increase of 1-2-Call! revenue of Baht 9,803 million or 35.7%. Revenue from sales Handset and accessory sales were major components in revenue from sales. In 3Q04, sales were Baht 2,895 million, dropped by Baht 115 million or 3.8% from 2Q04 and dropped by Baht 750 million or 20.6% compared to 3Q03. For the nine-month period, revenue from sales was Baht 9,147 million dropped by 28.1% from the same period of last year. The decrease in handset sales came from lower sales volume as well as lower average selling price, impacted from an intense competition in handset sales and rapidly growing second-hand handset sales (not the Group's products). Total Cost Total cost was Baht 13,229 million in 3Q04, increased by Baht 161 million or 1.2% from that of 2Q04 and increased by Baht 1,354 million or 11.4% from that of 3Q03. Total cost for the nine-month period was Baht 39,251 million, an increase of 5.5% from the same period of last year as a result of: - Cost of services and equipment rentals Cost of services and equipment rentals was Baht 5,693 million in 3Q04, rose 4.2% from last quarter and rose 22.5% compared to 3Q03.The increment was due primarily to higher network amortization resulting from continuous expansion of mobile service network. For the nine-month period rose by 16.5% from the same period of last year. - Concession fee and excise tax Concession fee and excise tax were Baht 4,960 million in 3Q04, slightly decreased from previous quarter. Comparing to 3Q03, they increased by 14.4%. For the nine-month period, they increased by 13.2% 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 2,576 million, decreased by 2.1% from that of 2Q04 but decreased by Baht 314 million or 10.9% compared to 3Q03. For the nine-month period, it dropped by Baht 2,045 million or 20.7% 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 2,640 million in 3Q04, accounted for 11.1% of total revenue. The SG&A decreased by 7.6% from that of 2Q04,and decreased 6.8% from that of 3Q03. The change of SG&A was principally because: 1. Marketing expense dropped by Baht 169 million from that of 2Q04 due to a launch of Sawasdee offering under 1-2-Call! service in the previous quarter.Compared to 3Q03, the expense was down by Baht 98 million. 2. Allowance for doubtful account fell by Baht 105 million from that of 2Q04 and downed by Baht 369 million compared to 3Q03. The decrease was due mainly to the reversal of provision for bad debt reserved previous year, resulting from the Group's efforts in strengthening collection performance. For nine-month period, SG&A decreased by 4.4% from Baht 8,543 million last quarter down to Baht 8,171 million this period. The main reasons were from an allowance for doubtful decreased of Baht 1,277 million and having written off in mobile phone equipment of Baht 294 million. Moreover, marketing expense and staff cost increased by Baht 660 million and Baht 334 million respectively. Income Tax In 3Q04, corporate income tax was Baht 2,287 million fell by Baht 497 million or 17.9% from that of 2Q04. The main reason came from a decrease of a taxable income from scratch card sales and the 2001 tax-refund totaling of Baht 101 million, as a result of changing concession fee calculation from usage revenue to be revenue from scratch card sales, after the Company received the confirmation of correspondence from the Revenue Department. Compared to 3Q03, it increased by Baht 495 million or up 27.6%, and for the nine-month period increased by 50.4% due to a fully utilized tax shield from loss carried forward in a subsidiary in year 2003. Net Profit As aforesaid, net profit in 3Q04 rose by 4.5% from that of 2Q04, and 9.0% compared to 3Q03. For the nine-month period, net profit increased by 5.3% from the same period of last year. Financial Position 1. Assets At the end of this quarter, total assets were Baht 122,696 million, decreased by Baht 2,253 million or 1.8% from YE03. As a percentage of total assets, current assets and non-current assets accounted for 16.5% and 83.5% respectively. Table 2: Major assets component 30 September 2004 31 December 2003 % of % of Total Total Million Baht Assets Million Baht Assets Current Assets 20,207 16.5% 17,896 14.3% Plant, Property and Equipment, net 11,230 9.1% 12,120 9.7% Assets under concession agreements, net 76,076 62.0% 78,549 62.9% Other non current assets 15,183 12.4% 16,384 13.1% - Current Assets As at September 2004, current assets considerably increased by Baht 2,312 million or up 12.9% from YE03 by the major items: 1. The increment of cash and cash equivalent was Baht 1,728 million from Baht 8,637 million as at YE03 to Baht 10,365 million due mainly to an increase in cash inflow from operation activities net of cash outflow from investing activities and financing activities. 2. The rise in inventory was Baht 417 million from Baht 1,027 million to Baht 1,444 million as at 3Q04. To serve segmented customers satisfaction, the Group stocked a variety model of mobile phones. 3. Advance payment to supplier decreased by Baht 269 million from Baht 410 million at YE03 to Baht 141 million as higher percentage of completion in network assets. 2. Liabilities Total liabilities were Baht 59,792 million at end of 3Q04, decreased by Baht 5,531 million or 8.5% from YE03. This was due principally to repayment of long-term debenture on schedule totaling of Baht 3,000 million and prepayment of long-term borrowings in a subsidiary in 2Q04. Table 3: Major liabilities component 30 September 2004 31 December 2003 % of % of Million Total Million Total Baht liabilities Baht liabilities Other Current Liabilities 14,154 23.7% 15,913 24.4% Concession right payable, accrued concession fee and excise tax1 9,156 15.3% 6,810 10.4% Long-term borrowings and debentures, net2 36,469 61.0% 42,585 65.2% Other non-current liabilities 13 0.0% 15 0.0% 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 September 2004, current liabilities decreased by Baht 1,759 million or down 11.0% from YE03 mainly due to repayment of short-term loan in a subsidiary Baht 30 million, lower in A/P-Trade of Baht 845 million as well as lower in corporate tax payable of Baht 1,071 million. - Concession right payable, accrued concession fee and excise tax As at September 2004, the concession right payable, accrued concession fee and excise tax within 1 year presented Baht 9,156 million, up by Baht 3,572 million or 63.9%. The payment schedule will be made in November. Having no that of over 1 year portion in this quarter. - Long-term borrowings and debentures, net The Group showed net long-term borrowings and debentures of Baht 36,469 million, a decrease of Baht 6,116 million or 14.4% from YE03. During the nine-month period ended September 2004, the Group made total repayments of Baht 6,114 million, comprising of long-term debentures of Baht 3,000 million, Baht 107 million for financial leasing liabilities and prepayment of long-term borrowings by a subsidiary totaling of Baht 3,007 million. As at September 2004, the Group presented the current portion within 1 year of total long-term debentures and borrowings of Baht 10,012 million and the portion over 1 year of that amounting of Baht 26,457 million. 3. Shareholders' Equities As at September 2004, the Group had total equity of Baht 62,904 million, grew up by Baht 3,278 million from YE03. As a result, net income for nine-month period totaling of Baht 15,343 million, comprising of Baht 10,074 million in 1H04 and Baht 5,269 million in 3Q04. During the nine-month period, the Company made twice dividend payment to shareholders, first payment belonged to 2003 annually dividend payment of Baht 6,170 million in May and interim dividend paid of Baht 6,325 million in September. In addition, the Company had additional issued and fully paid-up shares from exercise of ESOP totaling 5.91 million shares worth Baht 268 million and advance receipt from shareholders in a subsidiary by Baht 118 million. A subsidiary recognized fair value reserved of available for sales-security by Baht 5.5 million as unrealized gain in Shareholder's equity. 4. Liquidity For the nine-month of year 2004, the Group's net cash flow increased by Baht 1,723 million, as a result of : - Net cash flow from operating activities was Baht 28,512 million, down by Baht 2,992 million from the same period of prior year, principally subject to the decline in concession rights payable, accrued concession fee and excise tax. - Net cash outflow from investing activities was Baht 8,528 million, down by Baht 3,089 million from the same period of prior year, resulting from slow-down in network expansion investment. - The Group had net Cash outflow from financing activities by Baht 18,261 million from the same period of prior year. The Group made total payments of Baht 6,114 million and Baht 30 million on long-term borrowings & debentures and short-term borrowings, respectively. To compensate to shareholders, the Company made payments of dividend totaling Baht 12,495 million.