3Q08 MANAGEMENT DISCUSSION & ANALYSIS OPERATIONAL HIGHLIGHTS *Subscribers reached 26.8m with continued penetration in upcountry *ARPU and MOU declined q-o-q on seasonality impact Subscribers as of 3Q08 grew 15.4% y-o-y and 3.1% q-o-q to 26.8m with net additions of 810k. The growth was driven by upcountry penetration. For 9M08, AIS added in total 2.7m subscribers. Prepaid was impacted by seasonality and the flood, which reflected in lower net additions during the quarter, as well as slow down usage and ARPU. Net additions were 661k for the quarter, lower from 862k in the previous quarter. The majority of net add was from higher penetration in upcountry area. ARPU excl. IC fell 7.2% y-o-y due to dilution from multiple-SIM users and lower-than-average ARPU from rural penetration. Higher usage on off-peak buffet package had push up 3Q08 MOU by 17% y-o-y. On quarterly basis, ARPU excl. IC declined by 5.5% q-o-q as MOU dropped 1.5% due to the slow usage from seasonality and the flood in several lower-north provinces. Postpaid net additions were 149k improved from 16k in the previous quarter due to stronger push after the clean-up of the low-quality subscribers. Postpaid ARPU excl. IC increased 1.6% y-o-y to Bt709 as MOU increased 8.1%. However, on quarterly comparison, ARPU excl. IC declined 4.4% q-o-q as MOU dropped 3.9% q-o-q from seasonality impact. FINANCIAL RESULTS * 9M08 service revenue ex-IC grew 8.6% y-o-y, backed by 8.3% growth in 3Q08, from prepaid, non-voice, and IDD growth * Impact from seasonality and the flooding reflected in 1.9% q-o-q drop in service revenues * Reported net profit of Bt4.53bn, grew 29% y-o-y Service revenue (Bt million) Service revenue 3Q08 3Q07 2Q08 y-o-y q-o-q excluding IC Voice revenue 15,832 76.6% 15,380 80.6% 16,288 77.3% 2.9% -2.8% Postpaid (voice) 3,728 18.0% 4,111 21.5% 3,845 18.3% -9.3% -3.0% Prepaid (voice) 12,104 58.6% 11,269 59.1% 12,443 59.1% 7.4% -2.7% Non-voice revenue 2,784 13.5% 2,109 11.1% 2,665 12.7% 32.0% 4.5% International roaming 919 4.4% 837 4.4% 952 4.5% 9.9% -3.4% Others (IDD, other fees) 1,130 5.5% 753 3.9% 1,155 5.5% 50.0% -2.2% 20,665 100.0% 19,079 100.0% 21,060 100.0% 8.3% -1.9% Service revenues excl. IC for 3Q08 increased 8.3% y-o-y, fuelled by strong growth from prepaid voice revenues, non-voice, and international calls. Comparing q-o-q, service revenues slightly declined by 1.9% mainly from soft seasonality, as well as the impact of the flood in the Northern area. However, the strong data revenue helped mitigated the seasonality effect. For 9M08, service revenue excl. IC rose 8.6% y-o-y, to Bt63,151m, from Bt58,168m, due to strong growth in prepaid voice revenues, non-voice revenues, international call and international roaming. Voice revenue in 3Q08 increased 2.9% y-o-y, from 7.4% growth in voice revenue from prepaid but was dragged by 9.3% drop from postpaid voice revenue. Postpaid revenues were abnormally high last year due to the aggressive postpaid subscriber acquisition. On q-o-q basis, voice revenue decreased by 2.8% reflected softer usage from seasonality, as voice revenue from both postpaid and prepaid dropped by 3% and 2.7% respectively. During 3Q08, AIS had increased tariffs on certain groups of existing prepaid subscribers. Non-voice revenue for 3Q08 continued its strong growth momentum of 32% y-o-y and 4.5% q-o-q. It contributed 13.5% of service revenue (excl. IC) in 3Q08, increased from 11.1% in 3Q07. The y-o-y growth was mainly from higher GPRS consumption, as well as higher GPRS subscribers which grew 50% y-o-y and 12.5% q-o-q, to 4.5m. Despite seasonality effect, non-voice revenues still grew 4.5% q-o-q from GPRS and SMS. 9M08 non-voice revenue increased 29.3% y-o-y, mainly driven by GPRS/EDGE usage. International roaming & international call in 3Q08 seasonally declined q-o-q by 3.4% but grew 9.9% y-o-y. IDD revenue surged 50% y-o-y from the full service launch on AIN international telephone gateway. For 9M08, international roaming grew 12.9% y-o-y to Bt3,018m from Bt2,674m and IDD revenue rose 49.9% y-o-y to Bt3,553m, from Bt2,371m. Interconnection revenue/cost Interconnection (Bt million) 3Q08 3Q07 2Q08 y-o-y q-o-q Revenue 3,958 4,357 4,144 -9.2% -4.5% Cost 3,749 3,842 4,080 -2.4% -8.1% Net interconnection 209 515 64 -59% 225% * Recognition of IC in 2007 was fully realized only in 4Q07 Net interconnection (IC) for 3Q08 increased to Bt209m from Bt64m in 2Q08. Both incoming and outgoing traffic were lower q-o-q as reflected in higher on-net traffic to 75% from 73% in 2Q08. The outgoing off-net minutes declined due to tariff increase, while incoming off-net minutes from the IC corresponding parties (DTAC and True Move) were also lower but at a slower rate, hence net IC increased q-o-q. For 9M08 net IC was Bt390m. Sales revenues dropped by 12.7% y-o-y and 7.5% q-o-q due to lower unit sales of handset, which dropped 8.9% y-o-y and 11.8% q-o-q to 895k in 3Q08. 9M08 sales revenues decreased 13.5%, from Bt10,416m to Bt9,012m. Cost of service Cost of service excl. IC 3Q08 3Q07 2Q08 y-o-y q-o-q (Bt million) Amortization 4,523 4,288 4,426 5.5% 2.2% Base station rental & utility 622 580 628 7.3% -1.0% Maintenance 500 488 427 2.6% 17.1% Others 954 884 929 7.9% 2.6% 6,599 6,239 6,411 5.8% 2.9% Cost of service excluding IC cost for 3Q08 was Bt6,599m, up 5.8% y-o-y and 2.9% q-o-q mainly from higher amortization which increased 5.5% y-o-y and 2.2% q-o-q as the amortization period becomes shorter according to the remaining concession life. Base station rental & utility increased 7.3% y-o-y from cell sites expansion from 12,400 in 3Q07 to 14,000 in 3Q08. Maintenance may fluctuate from quarter to quarter which caused the 17% q-o-q increase, however 9M08 maintenance dropped 3% y-o-y. For 9M08, costs of service excluding IC expense increased 7.3% y-o-y, due mainly to 8.3% rise in amortization. Cost of sales in 3Q08 decreased 12.4% y-o-y and 4.7% q-o-q, followed 12.7% y-o-y and 7.5% q-o-q drop in sales revenues. Sales margin, normally varies from quarter to quarter, were 6% in 3Q08, compared to 8.8% in 2Q08 and 6.3% in 3Q07. 9M08 cost of sales dropped 13.7% y-o-y, at the same pace to 13.5% y-o-y drop in sales revenue. Concession fee (Bt million) 3Q08 3Q07 2Q08 y-o-y q-o-q Concession fee 4,990 4,627 5,051 7.9% -1.2% %of service revenue excl.IC 24.1% 24.2% 24.0% Concession fee was 24.1% of service revenue excluding IC, remained flat from 24% in 2Q08 and 24.2% in 3Q07. SG&A (Bt million) 3Q08 3Q07 2Q08 %marketing expense to total revenue (excl. IC) 3.3% 3.3% 2.4% %bad debt to postpaid revenue 2.2% 7.0% 2.2% %SG&A to total revenue (excl. IC) 11.6% 13.2% 10.8% SG&A to total revenues excluding IC was 11.6%, increased from 10.8% in 2Q08 from higher marketing expenses, but declined from 13.2% in 3Q07 due to no amortization of goodwill, and lower bad debt provision. Marketing spending for 3Q08 was 3.3% of total revenue excluding IC, compared to 2.4% in 2Q08 as there was a prepaid brand refreshing campaign, "Freedom Enjoy" during the quarter. Bad debt to postpaid revenue remained flat at 2.2%, but significantly improved from 7.0% in 3Q07 as a result of the better quality of postpaid subscribers. For 9M08, SG&A to total revenues ex-IC went down from 13.2% in 3Q07 to 11.6% in 3Q08, due to lower bad debt provision and lower marketing expenses. For the full year, AIS maintains the marketing budget at 4% of total revenue hence, marketing expense in 4Q08 should accelerate. EBITDA margin was 41.7%, dropped from 45.5% in 3Q07 due to the impact of IC recognition. Excluding IC, EBITDA margin improved y-o-y to 47.9% due to revenue improvement and low bad debt expense. On quarterly basis, EBITDA margin excl. IC dropped from 49.2% as a result of lower revenues as well as a higher marketing expense. For 9M08, EBITDA margin excl. IC was 49%, increased from 45.2% in 9M07, mainly from solid revenue growth and lower provision for bad debt. EBITDA (Bt million) 3Q08 3Q07 2Q08 9M08 9M07 Operating profit 6,725 5,463 7,323 21,709 17,187 Depreciation PPE 763 711 752 2,269 2,216 Amortization of computer software 92 108 94 280 340 Amortization of asset under concession 3,794 3,510 3,708 11,140 10,020 Amortization of concession right 114 114 113 341 341 Amortization of goodwill 0 292 0 - 875 Impairment loss on goodwill 0 - 0 15 - EBITDA 11,491 10,199 11,994 35,765 30,986 EBITDA margin 41.7% 45.5% 42.3% 42.3% 45.2% EBITDA excl. IC 11,301 10,199 11,915 35,380 30,986 EBITDA margin excl. IC 47.9% 45.5% 49.2% 49.0% 45.2% Interest expense for the period declined 2.6% y-o-y but rose 5.7% q-o-q as a result of additional debt drawn down during the quarter. Other income dropped q-o-q to Bt184m, from Bt1,944m in the previous quarter when there was the settlement between DPC, AIS's subsidiary, and DTAC. Net profit for 3Q08 was Bt4,533m, rose 29.1% y-o-y but dropped 28.4% q-o-q as there was the one-time gain from DPC settlement in 2Q08. Stripping out non-recurring items, 3Q08 normalized net income increased 19.2% y-o-y from improving revenue and lower bad debt expenses. On q-o-q basis, normalized net profit declined by 11.4% due to seasonality drop in service revenues as well as higher network amortization and marketing expense. For 9M08, after adjusting for goodwill amortization, impairment of goodwill and DPC gain, normalized net profit was Bt14,788m, increased 22.9% y-o-y from Bt12,034m in 9M07. For comparison, the below table was developed to show the comparable net profit by quarter. Comparative net profit Consolidated Tax 3Q08 3Q07 2Q08 y-o-y q-o-q 9M08 9M07 y-o-y (Bt million) deductible Net income 4,533 3,512 6,333 29.1% -28.4% 15,990 11,159 43.3% Add: Goodwill amortization No 292 876 Impairment of goodwill No 15 Deduct: Gain on DPC after Yes (1,217) (1,217) tax Normalized net income 4,533 3,804 5,116 19.2% -11.4% 14,788 12,034 22.9% Add: Actual net IC Yes 294 1,205 Comparative net income 4,533 4,098 5,116 10.6% -11.4% 14,788 13,239 11.7% Balance sheet structure Total asset in 3Q08 was Bt127,227m, decreased from Bt128,942m in 4Q07 despite 14% increase in current assets. This was mainly due to the decreased in networks under concession, which caused by lower additional capex than the accelerated depreciation rate as a result of shorten concession lives. Total asset (Bt million) 3Q08 %of total 4Q07 %of total asset asset Current Assets 23,534 18.5% 20,586 16.0% Property and Equipment 8,018 6.3% 8,561 6.6% Networks under Concession 74,101 58.2% 78,527 60.9% Intangible asset 10,148 8.0% 10,593 8.2% Defer tax asset 10,016 7.9% 10,031 7.8% Others 1,410 1.1% 644 0.5% Total Assets 127,227 100.0% 128,942 100.0% Liquidity further improved from higher outstanding cash as well as lower concession right payable from the DPC settlement. As such, the current ratio was 84%, compared to 73% as of year end 2007. The company has high level of liquidity as more than half of current assets are in cash. Current asset (Bt million) 3Q08 %of total 4Q07 %of total asset asset Cash 13,209 10.4% 8,317 6.5% ST investment 124 0.1% 123 0.1% Trade receivable 5,306 4.2% 8,054 6.2% Inventories 2,206 1.7% 1,236 1.0% Other current assets 2,688 2.1% 2,718 2.1% Current Assets 23,534 18.5% 20,586 16.0% Current liabilities (Bt million) 3Q08 %of total 4Q07 %of total asset asset Short-term loan 0 0.0% 3,492 2.7% Trade accounts payable 4,739 3.7% 4,218 3.3% Current portion of long-term 6,907 5.4% 1,545 1.2% borrowings Accrued concession fee 7,483 5.9% 3,634 2.8% Concession right payable 0 0.0% 4,739 3.7% Others 8,926 7.0% 10,528 8.2% Current Liabilities 28,055 22.1% 28,157 21.8% Capital structure remained strong from the healthy balance sheet with low financial leverage. Total liability to equity increased to 74% from 67% in 2Q08 due to the loan drawn down during the quarter. Net debt to equity was 26% increased from 23% as of 2Q08 due to lower retained earnings after the dividend payment of Bt3 per share in Sep-08. (Bt million) 3Q07 4Q07 1Q08 2Q08 3Q08 Total interest-bearing debt 33,600 30,349 26,105 30,104 32,500 Total liabilities 56,173 53,481 51,937 51,593 54,199 Total equity 70,308 75,461 80,743 77,359 73,029 Net debt to equity 37% 29% 14% 23% 26% Total liabilities to equity 80% 71% 64% 67% 74% Debentures and Loans as of 3Q08 increased to Bt32,500m, from Bt30,104m as of 2Q08 due mainly to the additional long term borrowing amounted USD91.9m to finance capex. This loan is under the swap process as AIS maintains fully currency-hedged policy. Of the total outstanding debt, 9% remained exposed to floating interest rate, the rest was either fixed rate or engaged into fixed interest swap contract. Effective interest rate was 5.1% per annum down from 5.3% in the previous quarter as a result of lower effective interest rate from the additional loans. (Bt million) Balance Balance Repayment(1) 2Q08 3Q08 2008 2009 2010 2011 2012 2013 Long term loan(2) 10,680 13,829 134 268 268 9,753 268 268 Debenture 19,357 18,608 1,500 6,627 - 4,000 - 8,000 Financial lease 67 63 23 17 12 8 4 - Total debt 30,104 32,500 1,657 6,912 280 13,761 272 8,268 (1) includes bond issuing cost; (2) includes swap and forward contract Cash Flow Cash flow position remained strong to support capex and debt repayment. For 9M08, the group generated Bt31,251m of cash flow from operation (after working capital), spent Bt8,859m on network investment while repaid debt, short-term and long-term, amounted Bt5,024m as well as paid dividend amounted Bt18,653m. Total raised debt amounted to Bt7,058m, of which Bt4,000m was issued as debenture in 2Q08 and additional long term debt amounted USD91.9m in this quarter. The net cash increase was Bt5,078m reserved as cash and short-term B/E. Source and use of fund: 9M08 Source of Fund Bt million Use of Fund Bt million Operating CF before change in working capital 38,343 CAPEX & Fixed assets 8,859 Share capital and share premium 283 Repayment of ST borrowing 3,500 Interest received 250 Repayment of LT borrowing 1,524 Disposal of property and equipment 130 Changes in working capital 7,092 Proceed from L-T borrowing 7,058 Dividend Payment 18,653 Short-term investments & subsidiary 127 Interest paid 1,230 Cash increase 5,078 Total 46,063 Total 46,063 FY2008 Management outlook & strategy FY 2008 Guidance Market subscriber forecast 8-10m net additions for the market Market share 50% revenue market share Service revenue 7-8% service revenue growth excluding IC Marketing expense 4% of total revenue excluding IC Network amortization 10% rise EBITDA margin 46-47% of total revenue excluding IC Capex Bt14bn cash capex (no 3G) Net IC revenue Bt400-600m For FY08, AIS expect industry subscriber growth of 15-20% y-o-y or a total net addition of 8-10 millions. SIM penetration is expected to reach 93-96% while human penetration will be approximately 65-70% as multi-SIM phenomena remains a significant part in the 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. Due to strong revenue momentum in the past several quarters with 8.6% y-o-y growth for 9M08, service revenue guidance for 2008 is maintained at 7-8% despite economic slowdown. Although 9M08 EBITDA margin reached 49%, the guideline is also remained at 46-47%, as many cost items particularly on marketing spending is normally higher in 2H08 and particularly in 4Q. 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) non-voice growth which grew 29% for 9M08 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 grow 40- 50% y-o-y in FY08. AIS targets its network expansion to reach 14,500 base stations by year end from 14,000 base at the end of 9M08 with the 2G capex budget of Bt14bn 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 at 10% y-o-y as the network asset is amortized over the shorter remaining period of concession life which expired in 2015. As a largest-subscriber base operator with premium pricing, the traffic position is highly likely to be net IC receiver. Meanwhile, as the company's strategy targets on stabilizing revenue market share, the focus has been on maximizing revenue from the outgoing minutes rather than the incoming minutes. Although 9M08 net interconnection revenue reached Bt390m, the net IC for FY08 is expected at Bt400-600m. FINANCIAL SUMMARY Consolidated income statement Unit: Bt. Million 3Q08 3Q07 2Q08 y-o-y q-o-q Service revenue excl. IC 20,665 75.1% 19,079 85.1% 21,060 74.3% 8.3 -1.9 IC revenue 3,958 14.4% n/a 0.0% 4,144 14.6% n/a -4.5 Service revenue 24,623 89.4% 19,079 85.1% 25,204 88.9% 29.1 -2.3 Sales revenue 2,905 10.6% 3,328 14.9% 3,141 11.1% -12.7 -7.5 Total revenue 27,528 100.0% 22,407 100.0% 28,345 100.0% 22.9 -2.9 Cost of service excl. IC (6,599) -24.0% (6,239) -27.8% (6,411) -22.6% 5.8 2.9 IC cost (3,749) -13.6% 0 0.0% (4,080) -14.4% n/a -8.1 Cost of service (10,348) -37.6% (6,239) -27.8% (10,491) -37.0% 65.9 -1.4 Concession & excise tax (4,990) -18.1% (4,627) -20.6% (5,051) -17.8% 7.8 -1.2 Cost of sales (2,730) -9.9% (3,118) -13.9% (2,865) -10.1% -12.4 -4.7 Total cost (18,068) -65.6% (13,984) -62.4% (18,406) -64.9% 29.2 -1.8 Gross profit 9,461 34.4% 8,423 37.6% 9,939 35.1% 12.3 -4.8 SG&A (2,732) -9.9% (2,959) -13.2% (2,613) -9.2% -7.7 4.6 Directors' remuneration (4) 0.0% (2) 0.0% (3) 0.0% 95.7 15.5 Operating profit 6,725 24.4% 5,463 24.4% 7,323 25.8% 23.1 -8.2 Interest expense (417) -1.5% (428) -1.9% (394) -1.4% -2.6 5.7 Other income 184 0.7% 142 0.6% 1,944 6.9% 29.0 -90.6 Exchange gain/(Loss) (23) -0.1% (12) -0.1% 42 0.1% 105.6 -158.4 EBT 6,469 23.5% 5,165 23.0% 8,915 31.5% 25.2 -27.5 Minority interest 6 0.0% 8 0.0% (25) -0.1% -25.3 -125.0 Corporate tax (1,942) -7.1% (1,661) -7.4% (2,557) -9.0% 16.9 -24.1 Net income 4,533 16.5% 3,512 15.7% 6,333 22.3% 29.1 -28.4 Bt. million 9M08 9M07 y-o-y Service revenue excl. IC 63,151 74.7% 58,168 84.8% 8.6 IC revenue 12,359 14.6% n/a n/a n/a Service revenue 75,509 89.3% 58,168 84.8% 29.8 Sales revenue 9,012 10.7% 10,416 15.2% -13.5 Total revenue 84,521 100.0% 68,584 100.0% 23.2 (more)