Management's Discussion and Analysis Overview As at the end of year 2004, the company and its subsidiaries ("The Group") registered the total of 15,184,000 mobile phone subscribers, comprising of 2,120,300 GSM advance and GSM 1800 subscribers and 13,063,700 One-2-Call! subscribers. It represented an increase of 1,944,800 subscribers or 14.7% from the total of 13,239200 subscribers as at year-end 2003, presenting the decreasing growth rate when compared with a 24.2% rise in 2003. The Group's market share fell slightly to 57.1%, a 2.9% drop from a year before. This was due to the Group's strategy not to tap into price-sensitive segment of the market that competitors were targeting. The Group's objective is on sustainable revenues and profitability rather than market share of subscribers. In order to retain subscribers, The Group has introduced a number of measures including segmentation strategies reflected in service offerings and customer services of The Group. In additions, The Group remains focus to the core values of the mobile service business which are quality and coverage of the network. Improved profitability was a result of retaining and attracting high-quality customers. We managed to improve our margin during the year 2004 evidenced by 18% growth in our pretax profit due mainly to: 1. Growth of total revenues at 8% principally from 14% growth on service revenue. 2. A decrease in selling and administrative expenses. However, our net profit grew at 9.3% from Baht 18,529 million to Baht 20,258 million due to 41% rise in corporate income tax. Note that during 2003, The Group paid lower tax due to loss carried forward in a subsidiary company-Digital Phone Company Limited. Total Revenue Services and equipment rentals have been our primary source of income, which includes revenues associated with the mobile telecommunication business, data network communication services (Datakit Virtual Circuit Switch), and the provision of call centre services. Revenues classified by nature of activities 2003 2004 Million Baht% Million Baht% Revenues from services and equipment rentals Mobile phone 73,337 82.0 83,912 87.0 Data Communications 392 0.4 477 0.5 Call Centre 21 0.0 6 0.0 Total 73,750 82.4 84,395 87.5 Sale revenues Handsets 15,735 17.6 12,032 12.5 Data Communications 7 0.0 10 0.0 Total 15,742 17.6 15,742 12.5 Grand Total 89,492 100.0 96,437 100.0 - Revenue from services and equipment rentals Revenues from mobile phone services, the main contributor to our service and equipment rental incomes, increased from Baht 73,337 million in 2003 to Baht 83,912 million in 2004, an increase of 14.4%. As a result of continuous expansion of mobile phone users and marketing efforts, The Group's revenue showed a strong growth from previous year. Throughout the year of 2004, The Group developed new services such as "Calling Melody" as well as the attractive service offerings such as the notable "Sawasdee" and "Freedom Choice's" scheme - which address specific needs on airtime packages and charge options suitable for different segments of the market. Besides, the company has emphasised on customer relationships by providing the program suitable for each customer lifestyle. Total revenue of 2003 align with financial statements equals to Baht 89,644 million over Baht 152 million than the figure shown above. This is owing to that auditor reclassified other operating incomes to be grouped together with revenues from services and equipment rentals for comparative purpose. Breakdown of subscribers and Average Revenue Per User (ARPU) New subscriber additions NMT 900 GSM Advance One-2-Call! GSM 1800 2003 (3,400) (317,900) 2,987,600 (89,600) 2004 - 32,100 1,939,900 (27,200) Consolidated Subscribers NMT 900 GSM Advance One-2-Call! GSM 1800 2003 - 1,915,800 11,123,800 199,600 2004 - 1,947,900 13,063,700 172,400 ARPU ( Baht/month ) NMT 900 GSM Advance One-2-Call! GSM 1800 2003 - 1,187 341 1,1022004 2004 - 1,233 359 1,104 The above figures revealed a growth of One-2-Call! subscribers from 11.1 million subscribers in 2003 to 13.1 million subscribers at the end of 2004. Average revenue per user (ARPU) of GSM advance, One-2-Call! and GSM 1800 in 2004 increased to Baht 1,233, Baht 359 and Baht 1,104 respectively. These figures showed an increase from the previous year driven by higher usage on voice and value added service (VAS). The Group has introduced varieties of new value-added services and attractive promotion campaigns apt to customer behavior of each segment. - Revenue from sales Handset and accessory sales accounted for a majority of revenues from sales. In 2004, declined sales volumes pushed the Group's handset revenues down to Baht 12,032 million from Baht 15,735 million in 2003. The decrease in handset revenues was driven by lower sales volumes as well as lower selling price per unit, affected by an intense competition in handset sales and rapidly growing second-hand handset sales (not The Group's products). Total Cost Total cost constitutes cost of services and equipment rentals, concession fee and excise tax and cost of sales. In 2004 The Group incurred Baht 52,996 million of total cost, rising by 7.2% from Baht 49,419 million in 2003. - Cost of services and equipment rentals Cost of services and equipment rentals was Baht 22,415 million in 2004 which rose by 15.8% from Baht 19,352 million in 2003. The increment was due primarily to higher network amortization resulting from continued expansion of mobile service network. - Concession fee and excise tax The increment in concession fee and excise tax was in-line with the rise in revenue from mobile services. Concession fee and excise tax were Baht 19,970 million in 2004 and Baht 17,726 million in 2003.Gross profit margin calculated from service and equipment rental revenues stood at 49.8% in 2004 and 49.7% in 2003. - Cost of Sales Handset and accessory costs were major components in cost of sales. In 2004, cost of sales accounted for Baht 10,611 million, reflecting a continued reduction from Baht 12,341 million in 2003. Gross profit margin calculated from sales revenues was 11.9% in 2004, a decrease from 21.6% in 2003. The reason of the significant decline in gross profit ratio was due to the lower of average selling price, affected by more intense competition in handset sales. In addition, various new models of handsets were offered at an accelerated speed, resulting in quicker obsolescence of handsets. Selling and Administrative expenses The Group recorded a lower selling and administrative expenses from Baht 12,320 million in 2003 down to Baht 11,028 million in 2004 (or a 10.5% decrease year-on-year). The decline in SG&A of year 2004 was principally resulted from: 1. In 2004, The Group presented a sharp fall of Baht 1,512 million or 67% in bad debt and allowance for doubtful account due mainly to the Group's efforts in strengthening collection performance. On the other hand, marketing expense rose by Baht 312 million or up 10%. However, the marketing expense as a percent of total revenue was 3.6% in 2004, the same rate as that of 2003. 2. During 2003, a subsidiary wrote off Baht 294 million in technology obsolescence of network equipments, and loss from network equipment Baht 598 million. This write-off involved site preparation and network installation expenses relating to base stations, which were not operated owing to network optimisation. Interest expenses The Group showed a decrease in interest expenses from Baht 2,579 million in 2003 to Baht 2,129 million in this year, resulting from debenture redemption of Baht 8,000 million, loan repayment of Baht 1,970 million and prepayment in syndicate loan of Baht 2,957 million. Income Tax In 2004 the income tax expense considerably increased to Baht 10,601 million compared to that of 2003. The increment resulted from a growth in pre-tax profits due to the fact that: 1. In 2004 the Group achieved 7.8% growth in total revenues growth. The company, moreover, gained a tax-refund from FY2001 concession fee of prepaid revenues, as a result of concession fee calculation from the percentage of scratch card sales instead of that of usage revenues, after the company received the confirmation of correspondence from the Revenue Department. 2. In 2004 a subsidiary had fully utilised tax shield from loss carried forward in a subsidiary as mentioned above. Net Profit The Group's net profit increased from Baht 18,529 million in 2003 to Baht 20,258 million in 2004 (or an increase of 9.3%) as the reasons mentioned above. Financial Position 1. Assets As of year-end 2004 our total assets amounted to Baht 121,168 million, a 3.0% lower from Baht 124,949 million as of year-end 2003. Current assets accounted for 15.8% of total asset while non-current assets stood at 84.2%. Details of major items therein are as follows: - Cash & cash equivalents Cash and cash equivalents outstanding as of year-end 2004 were Baht 9,449 million increased by Baht 812 million from Baht 8,637 million as of year-end 2003 The increase in this year-end balance was due to net cash receipts from operating activities over net cash payment from investing activities and from financing activities. During 2004 we had upstream of service incomes from mobile phone together with lower of network investments. - Trade account receivables - net Net trade account receivables totalled Baht 5,761 million as of year-end 2004, rose by Baht 302 million or 5.5% from Baht 5,459 million as of year-end 2003. The increase in share of prepaid in service revenues and the implementation in 2002 of temporary service suspension based on subscriber's payment patterns were the factors, which also supported the minute increase in net account receivable figures despite the meaningful growth in total revenues. The improvement in trade account receivables turnover from 11.07 times in 2003 to 14.49 times in 2004 also implied an effective collection cycle. - Inventories - net As of year-end 2004, inventory level equalled to Baht 1,037 million slightly increased from Baht 1,027 million in 2003. And inventory turnover was 10.28 as at year-end 2004 improving from 8.26 as of year-end 2003. The improvement reflected an efficient inventory policy; however, it is necessary to reserve higher provision for obsolete handset inventories subject mainly to their varieties in brand and model easily out of date. - Other current assets As of year-end 2004, other current assets stood at Baht 2,382 million, increased by Baht 572 million from year-end 2003's level at Baht 1,811 million. The incremental level mainly came from A/R-Other and prepaid expense amounting Baht 244 million and Baht 210 million respectively. - Property and equipment Our property and equipment-net for year-end 2004 equalled to Baht 11,618 million decreased by Baht 502 million from year-end 2003's level at Baht 12,120 million due to depreciated and amortised recognition superior than new investments. We undertake our asset assessments and review any possibility of asset value impairment every year in order to properly adjust the relevant book value. The effort is aimed to make our balance sheet reflect, as closely as possible, the true economic value of those assets. - Assets under concession agreements Investment costs of the cellular network are the main items under the concession agreements. As of year-end 2004, the net assets under the concession agreements totalled Baht 75,658 million, a decline from Baht 78,549 million recorded as of year-end 2003. The reduction was due principally to less investments in network equipment compared to previous year's, including more amortized recognition in this period. 2. Liabilities As of year-end 2004, our total liabilities were Baht 53,080 million, lower than Baht 65,323 million in 2003. Total liabilities comprised of 22.7% current liabilities and 21.1% non-current liabilities. Details of major items therein are as follows: - Trade account payables-net As of year-end 2004, trade account payables were Baht 4,790 million, continuously declining compared with Baht 5,714 million in 2003. Turnover in trade account payables increased from 4.74 in 2003 to 6.29 in 2004. - Accrued concession fees, concession rights payable and accrued excise taxes Concession rights are paid for operational rights granted to one of our subsidiaries under the digital GSM 1800 concession agreement. As of year-end 2004, concession rights payable and accrued interest payable to Total Access Communication (Public) Ltd (TAC) amounted to Baht 4,621 million, a certain part of which was accrued in 2002 and 2003. It should be noted that the matter remains inconclusive. We have negotiated for a payment reduction; however, in 2003, TAC took the matter to arbitration and our subsidiary filed for an appeal. Concession fees, concession rights payable and accrued excise taxes increased from Baht 6,810 million in 2003 to Baht 7,017 million in 2004 or up by Baht 207 million due mainly to accrue interest payable as mentioned above. - Debentures and Loans Debentures and loans are composed of long-term debentures, short-term loans from financial institutions, long-term loans, and financial leases. As of year-end 2004, this item of liabilities was recorded at Baht 29,521 million, decreasing from Baht 42,645 million in 2003. The reduction in 2004 occurred as a result of a Baht 8,000 million debenture redemption and a Baht 1,970 million long-term loan repayment on-schedule. One of our subsidiaries repaid its short-term borrowing from financial institutions by Baht 60 million; while another subsidiary prepaid a Baht 2,957 million of syndicate loans. During the year, we settled our Baht 142 million financial lease obligations and engaged in a new financial lease arrangement worth Baht 7 million. As of year-end 2004, we recorded, in our consolidated statements, the balances of Baht 4,073 million in current portions of debentures and long-term loans, and Baht 25,448 million in debentures and long-term loans, net of the recorded current portions. - Other current liabilities Other current liabilities amounted to Baht 9,512 million in 2003, and eventually to Baht 11,213 million in 2004 which was composed of Baht 4,612 million advanced payments received from scratch cards and Baht 4,414 million accrued tax liabilities which significantly rose from last year resulting from that certain subsidiaries started to present taxable incomes in this year. 3. Shareholder's equity As of year-end 2004, our shareholder's equity totalled Baht 68,087 million, reflecting an increase when compared to Baht 59,626 million in 2003. Our paid-up capital was Baht 2,945 million, and premiums on share capital were Baht 20,471 million. Our capital base increased from the previous year due to the issuance of 6.7 million new common stocks worth Baht 308 million to provide shares for possible executions of some outstanding warrants. Payments made in advance for another 0.2 million newly issued shares amounted to Baht 11 million. A Baht 20,258 million net profit for the year contributed largely to retained earnings of Baht 43,483 million (excluded legal reserve). During the year we made Baht 12,495 million in cash dividends, of which Baht 6,170 million was paid out on May 20, 2004 at a dividend ratio of Baht 2.10 per share, Baht 6,325 million was paid out on September 8, 2004 at a dividend ratio of Baht 2.15 per share. During the year, various credit rating agencies had conducted credit reviews of our entity and subsidiaries. They were: 1. Standard & Poor's Rating Services rated our local and foreign currency at BBB+, raised from BBB in 2003. 2. TRIS Rating Agency rated our company and our unsecured debentures at AA, the same level as in 2003. 4. Capital Structure Analysis Our debt to equity ratio improved from the previous level of 1.10:1 at year-end 2003 to 0.78:1 at year-end 2004. The improvement in the balance sheet leverage, particularly in 2004, was brought about both by continual decline in total liabilities caused by repayments of due debentures and matured loans, and by improved profitability as evidenced by the impressive bottom line of Baht 20,258 million in 2004. It should be noted that it is our policy to maintain the debt to equity ratio of both our entity and our subsidiaries at a level not exceeding 2:1. 5. Liquidity Analysis At year-end 2004, consolidated net cash flow from operating activities was Baht 38,932 million, showing down size from the previous year's level. As a sustained rise in service revenues was the major underlying reason; consolidated cash outlays relating to investment activities declined from Baht 16,366 million in 2003 to Baht 13,107 million in 2004. Net cash flow from financing activities was negative at Baht 25,008 million compared to Baht 19,419 million in 2003, reflecting the use of funds for dividend payments, loan repayments and debenture redemptions. Thus, as at year-end 2004, cash and cash equivalent showed net increase of Baht 817 million. Current ratio increased from 0.53:1 in 2003 to 0.69:1 in 2004. Operating cash flow to current liability ratio, however, improved from 1.20:1 in 2003 to 1.42:1 in 2004. The collection period improved from 33 days in 2003 to 25 days in 2004. The day sales period was shortened from 44 days in 2003 to 35 days in 2004. The payment period declined from 76 days in 2003 to 57 days in 2004. As a whole, we maintained enough liquidity position to support our operations. 6. Solvency Analysis In terms of the ability to meet our long-term debt obligations, our solvency depends on both its level of future cash flows and the level of debts. The interest coverage ratio grew up from to 21.55 in 2003 to 25.75 in 2004, as a result of sustaining net cash flow from operations at the high level as well as trimming down in interest payment owing to repayment in debentures and long-term loans.