MANAGEMENT DISCUSSION & ANALYSIS OPERATIONAL HIGHLIGHTS Subscribers reached 24.1m in FY07 or 23% y-o-y growth (4.6m net additions) ARPU continued to fall due to multi-SIM and new users coming at lower ARPU q-o-q growth on ARPU in 4Q07 showed a sign of slower ARPU decline Subscriber As at end of 2007, AIS and its subsidiaries ("AIS") reported total subscribers of 24.1m, or 23% growth from last year. Of total subscriber, postpaid subscribers were 2.3m and prepaid subscribers were 21.8m. Net additions Were 4.6m in FY07. Strong net additions was driven by aggressive subscriber acquisitions to maintain the market share since 3Q06, as well as an expansion into the low penetrated areas such as in north and northeast regions. Postpaid market During 1H07, postpaid market competed aggressively on new subscriber acquisitions through aggressive SIM distribution and attractive low-end price plan. AIS postpaid subscriber base in the first half increased 18%, as well as the rising percentage of bad debt provision reflecting lower quality of postpaid subscribers. In 3Q07, to regain subscriber quality, AIS improved its acquisition strategy and introduced a stringent credit screening policy in acquiring new subscribers. As a result, postpaid subscribers declined in the second half, reflected in higher churn, while bad debt provision also improved in 3Q-4Q07. Prepaid market AIS foresees that there are potential growth areas for prepaid market, especially in remote areas such as in the north and northeast regions, where penetration remains low at 30s. In Bangkok and major cities, where penetration might have already reached 80-100%, AIS targets to penetrate to pre-teen and teen markets, the high revenue growth potentials. ARPU excl. IC continued to fall in FY07 due to increasing numbers of consumers owning multiple-SIM and additional subscribers from upcountry areas contributing lower ARPU. The q-o-q increase on both postpaid and prepaid ARPU was due to seasonal impact while rise in MOU was due to higher off-peak usage driven by off-peak promotions. SIGNIFICANT EVENTS Recognition of interconnection revenue and cost in FY07 In compliance to the National Telecommunications Commission's (NTC) interconnection regulation, AIS entered into interconnection (IC) agreement with TAC on November 30, 2006 and True Move on January 15, 2007; the IC agreements have been approved by NTC. However, during the 1Q07 to 3Q07, AIS did neither invoice the IC charges to both parties nor record any transactions related to the IC charges on the financial statements. The IC recognition was pending upon the consideration between the Company and TOT, the grantor of concession. On 31 August 2007, TOT filed a case against NTC to the Administrative Court to revoke NTC's IC regulation. TOT also informed AIS that TOT shall not recognize the company's related actions and that the company must be responsible for such actions, should the company undertake the IC agreements before the final ruling by the Administrative Court. The company's management has the opinion that non-compliance to the IC greements could be in violation to the NTC's regulation. Therefore AIS has decided to record all transactions related to the IC charges under the IC Agreements in the financial statements for the year ended 31 December 2007. The company has recorded the IC revenue of Baht 16,530 million, IC cost of Baht 14,054 million and also recorded the revenue sharing calculated from the Net IC revenue after deducting IC cost to the financial statements for the year ended 31 December 2007. FINANCIAL RESULTS Recognition of net interconnection revenue of Bt2.5bn 2.9% y-o-y service revenue growth in FY07 Pricing has stabilized after sharp decline during 2005-2006 Bad debt improved substantially in 4Q07 and expects to be 4-5%in FY08 Achieved 16.7% y-o-y net profit growth in 4Q07 Service revenue excluding interconnection revenue grew 2.9% y-o-y to Bt78,280m in FY07 from Bt76,053m in FY06 driven primarily by prepaid growth of 1.7% y-o-y and 72% higher international call (IDD) revenue. Prepaid growth was driven by the strong and good-quality net additions while pricing for new subscription was also improved. The growth of IDD was contributed by the launch of AIN GlobalComm Co., Ltd, a wholly owned subsidiary of AIS, offering the international call service through its own 005 dialing prefix. Pricing in FY07 has stabilized after a sharp decline during 2005-2006. Since the beginning of the year,tariffs for new subscription have continued to increase focusing on raising first and second minute tariff rate and imposing limit on minute per call to discourage excessive long call or buffet call, offered during 2005-2006. However, revenue per minute in FY07 continued to decline driven primarily by higher usage during the usually under-utilized off-peak hours. The off-peak tariff plans resulted in higher utilization of network capacity and thus generated additional revenue. Interconnection (IC) revenue and cost for FY07 recorded IC revenue (from incoming minutes) of Bt16,530m, and IC cost (from outgoing minutes) of Bt14,054m, representing a net IC revenue of Bt2.48bn before revenue share. The amount was in accordance with the interconnection agreements with TAC and True Move, on which traffic settlement started from Feb-07 with TAC and Apr-07 with True Move. In 4Q07, of the total consumed minutes, AIS had 48% outgoing minute, of which 70% is on-net traffic. Non-voice revenue grew 16.9% y-o-y to Bt8,628m, represented 11.0% of service revenue (excl. IC) in FY07, increased from 9.7% or Bt7,382m in FY06. Key growth areas were from data browsing and MMS which grew 42% y-o-y as a result of higher usage after network upgrade to EDGE capability. SMS remained the majority part of non-voice revenue, accounted for 4.6% of service revenues and grew 9.4% y-o-y in FY07. Sales revenues declined 11.3% y-o-y to Bt13,644m in FY07 from Bt15,375m in FY06. Despite of 9.4% y-o-y growth of handset units sales, most handsets sold were less expensive low-end models. Handset margin slightly improved to 4.3% in FY07 from 4.0% in FY06. Handset business has thin margin and does not have material impact to the consolidated net profit. The launch of house-brand Phone One earlier in the year has not yet contributed significant impact to the revenue. Cost of service increased 66% y-o-y to Bt38,441m in FY07 from Bt23,139m in FY06 due to recognition of IC cost of Bt14,054m. Excluding IC cost, cost of service increased 5.4% y-o-y mainly as a result of higher utility cost and network amortization. Amortization rose 3.6% y-o-y from a significant network investment in late 2006 and the shorter amortization period according to concession life. Concession fee was Bt19,691m in FY07, increased 5% y-o-y from Bt18,754m in FY06. The amount in FY07 also includes the revenue share calculated from net IC (IC revenue deducted by IC cost). SG&A expense increased 11.8% y-o-y to Bt12,767m in FY07 from Bt11,421m in FY06 due to higher provision of bad debt, which represented 6.5% of postpaid revenue in FY07. This significant increase of bad debt provision compared to the level of lower than 2% during 2005-2006 was a result of aggressive postpaid subscriber acquisition during 1H07 to maintain the postpaid dominant position. However, the situation has improved since 3Q07 after AIS introduced stringent credit screening policy for new subscriber acquisition. In 4Q07, bad debt provision improved to 4.1% of postpaid revenues. Going forward, AIS expects the bad debt provision to be in a range of 4-5% of postpaid revenue in FY08. Marketing expenses for FY07 were 3.8% of total revenues (excl. IC), relatively stable from that of FY06. Other income for FY07 declined to Bt662m from Bt1,015m in FY06 primarily from lower interest income as the company has kept lower cash on hand as well as lower market deposit interest rate. EBITDA margin was 40.3% in FY07, declined from 46.2% in FY06 due to recognition of IC. Excluding IC impact, EBITDA margin was 45.3%, dropped from 46.2% in FY06 due to higher bad debt provision. Net profit was Bt16,290m in FY07, relatively flat compared to Bt16,256m in FY06. Excluding IC impact, net profit was Bt14,879m in FY07, declined 8.5% y-o-y due to higher network amortization, SGA and interest expense. In 4Q07, excluding IC impact, AIS achieved a net profit growth of 16.7% y-o-y and 5.9% q-o-q after stabilized market share since 3Q06. Balance sheet structure Liquidity Current ratio slightly declined to 73% in FY07 from 74% in FY06 due to less cash outstanding and lower inventories for mobile handsets. Capital structure was strong with low financial leverage, which supported company's ability to continue high dividend payout. In FY07, total liabilities to equity improved to 71%, from 73% in FY06 due to a partially repayment of debentures. Shareholders' equity was Bt75,461m in FY07, dropped 2.8% y-o-y from Bt77,599m in FY06 as company paid dividend over 100% of its net income. AIS continued to pay high dividend, supported from profitable operations and strong balance sheet structure. In FY07, the Company paid a cash dividend of total Bt18,658m, implying a dividend per share of Bt6.30. The unappropriated retained earnings at the ending period were Bt49,999m. Benchmarking with regional telecom operators, AIS's capital structure remained sound with its debt to equity is among the lowest among the telecom peers by the comparable credit rating. Net debt to equity slightly increased to 29% in FY07 from 26% in FY06 due to lower amount of cash and cashn equivalents. Debentures and Loans As at end of 2007, AIS had total debentures and borrowings of Bt30,349m, slightly decreased from Bt33,149m in 2006. Of the total outstanding debt, 14% remained exposed to floating interest rate, the rest was either fixed rate or engaged into fixed interest swap contract. Effective interest rate was 5.31% per annum. Balance Balance Interest Repayment(1) Unit: million 2006 2007 rate 2008 2009 2010 2011 2012 2013 Short term borrowing 1,000 3,492 3.98% 3,500 - - - - - Long term loan(2) 9,485 10,681 5.07% 28 57 57 9,542 57 57 Debenture 22,602 16,111 5.74% 1,500 6,627 - 4,000 - 4,000 Financial lease 62 64 9.23% 22.6 16.2 12.4 8.6 4.4 - Total debt 33,149 30,349 5.31% 5,028 6,684 57 13,542 57 4,057 (1) includes bond issuing cost; (2) includes swap contract Cash Flow Cash flow position remained strong to support capex and dividend payment. For FY07, AIS generated cash flow from operations (after interest and tax) of Bt36, 235m and had net increase in total borrowing of Bt8,501m. Of this amount, the group spent Bt17,105m on capital expenditures, repaid Bt11,523m of debts, and paid Bt18,658m in dividend. As a result, the group had net decrease in cash of Bt4,254m for the period. Source and use of fund: FY2007 Source of Fund Bt Use of Fund Bt million million Operating CF before changes 36,235 CAPEX & Fixed assets 17,105 in working capital Share capital and share 278 Short-term investments 98 premium Disposal of property and 27 Repayment of LT borrowing & 6,523 equipment financial lease Short term borrowing 7,368 Repayment of ST borrowing 5,000 Long term borrowing 1,133 Dividend payment 18,658 Cash decrease 4,254 Change in working capital 1,910 Total 49,294 Total 49,294 FY2008 Management outlook & strategy Market subscriber 8-10m net additions for the market forecast Market share 50% revenue market share Service revenue 5-7% service revenue growth excluding IC Marketing expense 4% of total revenue Network amortization 10-12% rise in FY08 (network amortization and depreciation as booked under cost of service only, excluding PPE depreciation in SGA, goodwill, and amortization of concession right) EBITDA margin 45-46% excluding IC Capex Bt16-17bn cash capex for FY08 (no 3G) Net IC revenue Bt1bn For FY08, AIS expect industry subscribers to grow 15-20% y-o-y or a total net addition of 8-10 millions. SIM penetration could potentially get close to 95% while human penetration is expected to be around 25-30% lower given multi-SIM phenomena will remain significant in Thai mobile industry. Pricing environment will continue to be stable or have slight improvement given each operator tends to set tariff to reflect the cost of interconnection as well as to better utilize the network between peak and off-peak hours. AIS is aiming to maintain its revenue market share at 50%, and to deliver 5-7% service revenue growth in 2008, as well as continue to deliver EBITDA growth, as it had in the past two quarters. The key growth drivers to the revenue and EBITDA are (1) higher penetration in upcountry areas (2) continued improving voice revenue from stable pricing environment (3) strong 15-20% growth in non-voice services and (4) higher contribution from IDD business. In 2007, the launch of IDD business contributed additional 1.3% of service revenue, and is expected to growth 40- 50% y-o-y in FY08. For the 2G capex budget of Bt16-17bn in 2008, AIS targets its network expansion to reach 14,500 base stations focusing on (1) continued expansion into rural area to differentiate coverage gap with competitors (2) transportation route such as new roads, expressway, Bangkok transit system, (3) new residential areas, business and industrial areas, and tourist attractions. Amortization in 2008 is expected to rise 10-12% y-o-y as the network asset is amortized over the shorter remaining period of concession life which expired in 2015. Net interconnection revenue in FY08 is expected to decline to Bt1bn, due in part to the company's strategy to maximize revenue generation from outgoing minutes, as well as an attempt by other operators to reduce their net IC payment. The change in either incoming minutes or outgoing minutes may have drastic impact to the net IC amount. FINANCIAL SUMMARY Consolidated income statement Unit: Bt. million 4Q07 4Q06 3Q07 %y-o-y %q-o-q 2007 2006 %y-o-y Service revenue 20,112 18,317 19,079 9.8 5.4 78,280 76,053 2.9 excl. IC IC revenue 16,530 n/a n/a n/a n/a 16,530 n/a n/a Service revenue 36,642 18,317 19,079 100.0 92.1 94,810 76,053 24.7 Sales revenue 3,228 4,011 3,328 -19.5 -3.0 13,644 15,375 -11.3 Total revenue 39,870 22,328 22,407 78.6 77.9 108,454 91,428 18.6 Cost of service (6,326) (5,675) (6,239) 11.5 1.4 (24,387) (23,139) 5.4 excl. IC IC cost (14,054) n/a n/a n/a n/a (14,054) n/a n/a Cost of service (20,380) (5,675) (6,239) 259.1 226.6 (38,441) (23,139) 66.1 Concession & excise (5,412) (4,550) (4,627) 18.9 17.0 (19,691) (18,754) 5.0 tax Cost of sales (2,960) (3,764) (3,118) -21.4 -5.1 (12,624) (14,063) -10.2 Total cost (28,752) (13,989) (13,984) 105.5 105.6 (70,757) (55,956) 26.5 Gross profit 11,118 8,340 8,423 33.3 32.0 37,697 35,473 6.3 SG&A (3,382) (3,424) (2,959) -1.2 14.3 (12,767) (11,421) 11.8 Directors' remuneration (4) (2) (2) 99.6 108.1 (10) (8) 37.2 Operating profit 7,733 4,914 5,463 57.4 41.6 24,920 24,044 3.6 Interest expense (427) (511) (428) -16.4 -0.2 (1,721) (1,538) 11.9 Other income 163 230 142 -29.1 14.8 662 1,015 -34.8 Exchange gain/(Loss) (28) 16 (12) -278.0 136.9 (56) 48 -218.0 EBT 7,441 4,648 5,165 60.1 44.1 23,804 23,568 1.0 Minority interest 22 32 8 -33.1 155.4 48 148 -67.3 Corporate tax (2,330) (1,493) (1,661) 56.1 40.3 (7,562) (7,460) 1.4 Net income 5,132 3,187 3,512 61.0 46.1 16,290 16,256 0.2 Revenue and cost breakdown Service revenue excl. 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 IC Basic voice GSM Advance 23.4% 22.6% 21.0% 21.3% 22.5% 22.5% 20.6% 18.5% GSM 1800 1.6% 1.5% 1.3% 1.3% 1.0% 1.0% 0.9% 0.8% Postpaid 25.0% 4.1% 22.3% 22.6% 23.5% 23.5% 21.5% 19.3% Prepaid 59.7% 59.1% 60.4% 58.4% 56.3% 57.6% 59.1% 59.5% Non-voice Postpaid 3.4% 3.7% 3.8% 4.2% 4.6% 4.3% 4.5% 4.8% Prepaid 5.2% 6.2% 6.3% 6.2% 6.3% 6.2% 6.6% 6.9% International roaming 4.4% 4.2% 4.2% 5.1% 5.2% 4.2% 4.4% 5.1% Others (IDD, other fees) 2.3% 2.7% 3.0% 3.5% 4.1% 4.2% 3.9% 4.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Sales revenue 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Handset 92.4% 92.1% 95.8% 93.0% 93.7% 93.4% 94.7% 95.2% SIM 7.6% 7.9% 4.2% 7.0% 6.3% 6.6% 5.3% 4.8% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of service 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 excl. IC Amortisation 71.5% 71.2% 67.4% 68.3% 67.3% 68.4% 68.7% 69.2% Base station 7.9% 9.1% 9.1% 9.6% 9.6% 9.8% 9.3% 9.2% Maintenance 8.6% 7.7% 8.8% 8.3% 8.0% 7.3% 7.8% 7.6% Others 12.0% 12.0% 14.7% 13.8% 15.1% 14.5% 14.2% 14.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Handsets 98.1% 97.7% 98.5% 97.6% 97.6% 97.1% 96.9% 97.6% SIM 1.9% 2.3% 1.5% 2.4% 2.4% 2.9% 3.1% 2.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Consolidated balance sheet Bt. million 2007 2006 Current Assets 20,586 22,893 Property and Equipment 8,561 7,797 Networks under Concession 78,527 81,096 Intangible asset 10,593 12,197 Defer tax asset 10,031 9,763 Others 644 555 Total Assets 128,942 134,301 ST loan from financial institution 3,492 1,000 Account Payable-trade 4,218 5,760 Current Portion of LT Debt 1,545 6,507 Current Portion of Concession 8,373 7,155 Long-term Debt 25,312 25,642 Other Liabilities 10,541 10,637 Total Liabilities 53,481 56,702 Total Equity 75,461 77,599 Key ratios 4Q07 4Q06 3Q07 2007 2006 EBITDA (Bt. million) 12,698 9,305 10,199 43,684 42,284 EBITDA margin 31.8% 41.7% 45.5% 40.3% 46.2% Interest coverage (x) 18.1 9.6 12.8 14.5 15.6 DSCR (x) 5.3 2.7 2.6 4.5 3.3 Net debt / EBITDA (x) 0.43 0.55 0.64 0.50 0.48 Net debt / Equity (%) 29% 26% 37% 29% 26% Interest-bearing debt to Equity (x) 0.40 0.43 0.48 0.40 0.43 Total liabilities to Equity (x) 0.71 0.73 0.80 0.71 0.73 Free cash flow to EV (%) 8.9% 0.3% 6.6% 6.8% 4.8% OPERATIONAL DATA Subscribers 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 GSM Advance 1,790,700 1,797,100 1,868,200 2,143,700 2,534,700 2,566,300 2,349,300 2,203,500 GSM 1800 127,300 114,800 105,400 98,700 92,000 86,800 82,600 82,400 Postpaid 1,918,000 1,911,900 1,973,600 2,242,400 2,626,700 2,653,100 2,431,900 2,285,900 Prepaid 14,715,900 15,406,000 15,749,500 17,279,100 18,462,600 20,038,300 20,772,500 21,819,500 Total subscribers 16,633,900 17,317,900 17,723,100 19,521,500 21,089,300 22,691,400 23,204,400 24,105,400 Net additions 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Postpaid -81,700 -6,100 61,700 268,800 384,300 26,400 -221,200 -146,000 Prepaid 306,700 690,100 343,500 1,529,600 1,183,500 1,575,700 734,200 1,047,000 Total net additions 225,000 684,000 405,200 1,798,400 1,567,800 1,602,100 513,000 901,000 Churn rate (%) 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Postpaid 1.1% 1.1% 0.9% 1.0% 2.5% 3.9% 4.8% 4.7% Prepaid 2.8% 2.8% 3.2% 2.7% 2.9% 2.7% 3.9% 3.9% Blended 2.6% 2.6% 2.9% 2.5% 2.9% 2.9% 4.0% 4.0% Subscriber market share 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Postpaid 43% 41% 41% 43% 44% 44% 42% n/a Prepaid 53% 52% 50% 50% 50% 49% 47% n/a Total 52% 51% 48% 49% 49% 48% 46% n/a Disclosure of this definition of ARPU will be discontinued from 1Q08 onward *ARPU (Bt: net voice + 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 vas) (more)