MANAGEMENT DISCUSSION AND ANALYSIS 2Q09 OVERVIEW 2Q09 result was a seasonally weak quarter, added with the macro weakness from the political turmoil during Songkran (Thai New Year in April) and the outbreak of H1N1 influenza. These factors prompt the company to review the guidance for FY2009 as 1H09 came below expectation and the outlook for 2H09 appear less optimistic due to the prolonged impact from H1N1 and the pressure to consumer sentiment on renewed hike in oil price as well as political uncertainty, subsequently could delay economic recovery in 2H09. AIS expects FCF growth of 15% y-o-y, although the revenue outlook is revised down to -3% to 0% to reflect the weaker-than-expected 1H09 and slow recovery in 2H09 from both domestic usage and international roaming (-30% yoy). One of the key drivers for the growth is our success in cost control measures shown in the improved service EBITDA margin* from 44.6% to 45.2% albeit the lower revenues during 1H09. In respect to weaker demand and revenue forecast, capex is also revised down to Bt11bn, 6bn of which spent in 1H09. For the 1H09, AIS generated Bt16.7bn of free cash flow or 6% increase from 1H08. Data growth continued to be strong driven by internet SIM resulted in 39% y-o-y growth of revenue from mobile internet during 1H09. Sales of USB modem for data usage has been rising rapidly during the quarters, attributable to the mobility usage penetrated more into laptop users and partly the availability of inexpensive netbook. This suggests the strong demand for wireless internet access remained despite the weak economy. Competition continued to focus on retaining usage of existing subscribers rather than new acquisition as reflected in lower industry net additions. To help sustain usage, AIS introduced a new buffet plan with lower monthly fee from Bt199 (Buffet Day) to Bt49 (Ngan Khao - Get Job) in the event of economic difficulties Sawasdee, the brand for low usage customers, are used to penetrate further into low-utilisation areas including extended validity for small refill to encourage ongoing usage. Postpaid acquisition also came with reasonable quality and ARPU from the success of "Mixed & Match" package due to its simplicity while its tariffs are similar to prepaid level and more comparable to competitor's offering in the market. The promotion is hence attractive to both new and existing subscribers as well as those who wants to move from prepaid to postpaid. *service EBITDA margin (excluding handset business) is calculated based on separated financial statement of 1H09 and 1H08 OPERATIONAL HIGHLIGHTS Subscriber reached 27.9m, with growth mainly from upcountry market ARPU and Usage fell due to the impact of seasonality softness and weak IR revenue Subscriber recorded 27.9m,improved 1.2% q-o-q, and 7.5% y-o-y representing 320k net additions compared to 272k in 1Q09 and 877k in 2Q08. The subscriber growth was mostly from rural market particulary the North and the Northeast region. ARPU & MOU declined from seasonal softness in usage and weak international roaming revenue. Postpaid ARPU including net IC fell 4.6% q-o-q to Bt605, while MOU was more stable with a 0.8% qoq drop, sustained by usage from Mix & Match package. Prepaid ARPU including net IC contracted 3.4% q-o-q to Bt196, while its MOU declined 1.6% q-o-q. FINANCIAL RESULTS Service revenue excluded IC fell 5.4% y-o-y from weak usage especially IR revenue . EBITDA declined 6.3% y-o-y from lower revenue Net profit of Bt4,197m in 2Q09 fell 18% y-o-y from higher amortization Service revenue 2Q08 1Q09 2Q09 y-o-y q-o-q excluding IC (Bt million) Voice revenue 16,287 77.3% 15,422 75.1% 15,244 76.5% -6.4% -1.2% Postpaid (voice) 3,844 18.3% 3,674 17.9% 3,650 18.3% -5.0% -0.7% Prepaid (voice) 12,443 59.1% 11,747 57.2% 11,593 58.2% -6.8% -1.3% Non-voice revenue 2,666 12.7% 3,168 15.4% 3,151 15.8% 18.2% -0.5% International roaming 952 4.5% 832 4.0% 547 2.7% -42.5% -34.2% Others (IDD, other fees) 1,155 5.5% 1,125 5.5% 990 5.0% -14.3% -12.0% Total service revenue excl. IC 21,060 100.0% 20,546 100.0% 19,932 100.0% -5.4% -3.0% Service revenue exclude IC revenue in 2Q09 declined 3% q-o-q mostly from the drastic decline in international roaming due to the flu pandemic since beginning of May. Domestic voice usage was also weak from the seasonal effect and the exceptional lengthy Songkran holiday in April. On y-o-y basis, service revenue declined 5.4% on weak usage following economic slowdown as well as the Songkran incident and the flu impact. Voice revenue Voice revenue declined 1.2% q-o-q on seasonal weakness of usage on both prepaid and postpaid. For the 1H09, voice revenue declined 6% y-o-y due to overall economic weakness. Other revenue declined 12% q-o-q and 14% y-o-y from the weakness in international call (IDD) revenue which was also impacted by lower foreign tourists. Net interconnection (IC) was higher q-o-q with net receipt of Bt319m compared to Bt273m in 1Q09. While incoming traffic continued to decrease (-2.7%), the higher net IC was driven by the stronger decline in outgoing traffic (-4.2%). On-net traffic continued to rise to 78% from 77% in previous quarter. Sales revenues fell 19% q-o-q and 48% y-o-y as consumer demand for handset shrank following economic slowdown. In addition, the change in Nokia's distribution policy also limited company's sales starting in February only to Bangkok area. Sales margin was 2.7% compared to 2.2% in 1Q09 and 8.8% in 2Q08. The pressure to sales margin was from a conservative policy to manage handset inventory aging by actively destocking as demand outlook remains weak. Interconnection (Bt million) 2Q08 1Q09 2Q09 y-o-y q-o-q Revenue 4,144 3,721 3,621 -12.6% -2.7% Cost 4,080 3,447 3,302 -19.1% -4.2% Net Interconnection 64 273 319 396% 16.8% Cost of service excl.IC (Bt million) Amortization 4,426 4,596 4,733 6.9% 3.0% Base station rental & utility 628 651 679 8.1% 4.3% Maintenance 427 428 350 -18.0% -18.1% Others 929 944 957 2.9% 1.4% Cost of service excl. IC 6,411 6,618 6,719 4.8% 1.5% SG&A (Bt million) Marketing expense 572 519 658 15.0% 26.8% Administrative expense 2,002 1,896 1,729 -13.6% -8.8% SG&A expenses 2,574 2,415 2,387 -7.3% -1.2% %marketing to total revenue 2.0% 2.0% 2.6% %bad debt to postpaid revenue 2.2% 3.6% 3.9% %SG&A to total revenue 9.1% 9.2% 9.5% EBITDA (Bt million) 2Q08 1Q09 2Q09 y-o-y q-o-q Operating profit 7,365 6,849 6,342 -13.9% -7.4% Depreciation PPE 752 765 836 Network amortization 3,915 4,075 4,146 Gain (loss) on disposals of PPE 57 -1 0 Management benefit -26 -17 -16 Other financial cost -16 -20 -18 EBITDA 12,048 11,652 11,289 -6.3% -3.1% EBITDA margin 42.5% 44.3% 44.8% Financial Cost 2Q08 1Q09 2Q09 y-o-y q-o-q Interest expenses 394 488 478 21.3% -2.0% Other financial costs 16 20 18 17.6% -6.1% Financial cost 410 508 497 21.2% -2.1% Consolidated 2Q08 1Q09 2Q09 y-o-y q-o-q (Bt million) Net income 6,333 4,567 4,197 -33.7% -8.1% Deduct: Gain on DPC settlement after tax (1,217) Normalized net income 5,116 4,567 4,197 -18.0% -8.1% Non-voice revenue was relatively flat q-o-q as SMS fell from the New Year season in 1Q but offset by growth on mobile internet and content download. The y-o-y growth remained strong at 18% for 1H09 due to higher subscription to data plan using AIS data USB modem, attributable to the growth of mobile internet access among laptop users International roaming revenue (IR) fell 34% q-o-q compared to the usual q-o-q drop in 2Q of 16-18% as a result of lower tourist arrival affected by political insurgence in April as well as fear of H1N1 flu. For 1H09, IR revenue declined 34% y-o-y. Cost of service exclude IC cost rose 1.5% q-o-q and 4.8% y-o-y from higher amortization due to shorten period of BTO contract, this was partly offset by lower network maintenance which fell 18% both q-o-q and y-o-y as part of the effort to control operating expense. Cost of base station rental and utility rose 4.3% q-o-q and 8.1% y-o-y as number of base station rose to 15,165 from 14,900 in 1Q09 and 13,600 in 2Q08. For 1H09, cost of service excl. IC rose 4.4% from 6% higher amortization while operating saving was achieved on network maintenance and lower cost of refill cards due to the growth of refill on mobile. Revenue sharing expense declined 2.7% q-o-q and 4.0% y-o-y following the decrease in service revenue. In addition, DPC a subsidiary that operates 1800MHz has informed TOT and CAT of the concellation of access charge agreement and ceased the access charge payment (Bt200/sub/month) to TOT from 1 June 2009 onward to comply with interconnection regulation from NTC. The amount was approximately Bt48m per quarter. Marketing spending rose 27% q-o-q and 15% y-o-y due to several ongoing marketing campaigns to maintain the strong brand presence in upcountry markets in particular the "Sawasdee Luk Tung Tour Thai" concerts as well as Songkran event. For 1H09, however, marketing expense declined 3.1% y-o-y while its % to total revenue remained well under control at 2.3% below the budget of 3%. Administrative expense decreased 8.8% q-o-q and 13.6% y-o-y as a result of lower staff cost and reversed provision of handset inventory that was cleared during the quarter. Bad debt provision was slightly higher to 3.9% of postpaid revenue compared to 3.6% in 1Q09 and 2.2% in 2Q08 due to the postpaid growth into lower segment. For 1H09, administrative expense declined 6.9% y-o-y from lower staff cost and reversed provision. Other income was Bt138m, declined 25% q-o-q from lower interest income as cash position reduced. On y-o-y basis, other income fell from Bt1,944m in 2Q08 which included the one-time gain from DPC settlement. EBITDA was Bt11,289m, declined 3.1% q-o-q and 6.3% y-o-y following the decrease in revenue, partly offset by higher net IC receipt, lower maintenance and administrative expenses. EBITDA margin in 2Q09 was 44.8% slightly increased from 44.3% in 1Q09 and 42.5% in 2Q08 due to the declined in handset sales proportion which contributes minimal margin. For 1H09, EBITDA was Bt22,941m, declined 5.7% from previous year due to the decline of service revenue especially prepaid revenue and international roaming revenue but partly offset by improvement in net IC receipt, lower staff & administrative cost, as well as decline in cost of refill cards. EBITDA margin for 1H09 was 44.5%, up from 42.7% in 1H08 as the handset proportion fell. Financial cost declined 2.1% q-o-q but increased 21% y-o-y from higher outstanding debt of Bt39bn in 2Q09 compared to Bt30bn as of 2Q08. Net profit for 2Q09 was Bt4,197m, fell 8.1% q-o-q from higher amortization and interest expense. On y-o-y basis net profit declined 33.7% due to one-time gain on DPC settlement. Excluding the gain, recurring net profit declined 18.3% y-o-y due to higher amortization and interest expense. For 1H09, recurring net profit was Bt8,764m, declined 14.4% y-o-y. Balance sheet structure Bt million 1Q09 %to total 2Q09 %to total asset asset Cash 30,053 21.8% 27,368 20.8% ST investment 20 0.0% 34 0.0% Trade receivable 5,094 3.7% 5,479 4.2% Inventory 1,266 0.9% 907 0.7% Other 2,536 1.8% 2,374 1.8% Current Asset 38,968 28.3% 36,162 27.5% Networks and PPE 79,318 57.6% 76,899 58.4% Intangible asset 6,529 4.7% 6,437 4.9% Defer tax asset 10,075 7.3% 9,940 7.5% Others 2,753 2.0% 2,260 1.7% Total Assets 137,644 100.0% 131,698 100.0% Trade accounts payable 3,826 2.8% 3,990 3.0% CP of LT loans 3,889 2.8% 3,923 3.0% Accrued R/S expense 4,058 2.9% 5,166 3.9% Others 10,781 7.8% 9,371 7.1% Current Liabilities 22,553 16.4% 22,450 17.0% Total interest-bearing debt 39,084 28.4% 39,317 29.9% Total Liabilities 59,596 43.3% 59,203 45.0% Total Equity 78,048 56.7% 72,495 55.0% Total asset fell 4.3% q-o-q to Bt131,698m from Bt137,664m in 1Q09, caused by lower cash which declined to Bt27,368m in 2Q09 from Bt30,053m in 1Q09 mainly due to the dividend payment of Bt9,774m in May. Additionally, network, property and equipment declined 3.1% q-o-q as the amortization of assets was greater than new capex. Liquidity The considerable cash built up from issued debentures of Bt7.5bn during 1Q09 enhanced the company to maintain high level of liquidity with current ratio of 1.61 in 2Q09, dropped from 1.73 in 1Q09. Inventory also declined significantly from previous quarter due to active destocking of handsets, while current liabilities was relatively flat. Debentures and loans in 2Q09 slightly increased to Bt39,317m from Bt39,084m in 1Q09. Average cost of debt in 2Q09 was 4.7% compared to 4.8% in 1Q09 and 5.3% in 2Q08 with all foreign debt fully hedged. Bt million 1Q09 2Q09 Debt ratio 43% 45% Net debt to equity 12% 16% Total liabilities to equity 76% 82% Capital structure With the lower equity from dividend payment during the period, total liability to equity rose to 82% from 76% in 1Q09. The capital structure nevertheless remained strong with Net debt to equity of 16%. End of Repayment Unit: million 2Q09 2H09 2010 2011 2012 2013 2014 Long term loan(1) 16,420 247 494 9,979 494 494 2,939 Debenture(2) 22,897 3,427 - 4,000 5,000 8,000 2,500 Total debt 39,317 3,674 494 13,979 5,494 8,494 5,439 (1) includes swap contract; (2) includes bond issuing cost Cash Flow Cash flow position remained strong to supported both CAPEX and debt repayment. For 1H09, the Company generated operating cash flow before change in working capital of Bt23.6bn while spent Bt5.9bn in capex, repaid Bt3.5bn of debt, and paid Bt9.8bn in dividend. Source and use of fund: 1H09 1H09 million Source of Fund Use of Fund Operating CF before change CAPEX & Fixed assets 5,951 in working capital 23,620 Proceed from LT borrowing 8,535 Dividend payment 9,774 Interest received 157 Finance cost paid 1,010 Investment 90 Cash increase 11,273 Disposal of property and equipment 11 Repayment of LT borrowing 3,516 Share capital and share premium 69 Changes in working capital 959 Total 32,483 Total 32,483 FY2009 MANAGEMENT OUTLOOK & STRATEGY(REVISED) Market subscriber forecast 5m net additions for the market Market share Maintain revenue market share Free cash flow** +15% y-o-y Service revenue** -3% to 0% service revenue growth **revised from 3-4% Marketing expense 3% of total revenue (equivalent to 3.5% of total revenue excluding IC) Network amortization** 7-8% rise (network amortization and depreciation as booked under cost of service only, exclude PPE depreciation in SGA, and amortization of operation right) **revised from 8-10% EBITDA margin 41-42% Capex** Bt11bn cash capex (including 3G on 900MHz) **revised from 13-15bn Net IC revenue Bt400-700m FY09 guidance is revised to reflect worse-than-expected 2Q09 and company's outlook of slower economic recovery during the 2H09. 2Q09 result was negatively impacted by unexpected events from the political turmoil during Songkran (Thai New Year in April) and H1N1 influenza. For 2H09, major challenges are on the demand side that remains weak, renewed climb in oil price, political uncertainty, and the prolonged impact of H1N1 influenza. Service revenue growth (excluding interconnection revenue) is hence revised down to -3% to 0% from previously 3-4%. Voice usage, the largest contributor to revenue, is expected to remain weak with slower recovery in 2H09 while stable competition continued. International roaming and to the lesser degree international call were significantly impacted by the decrease in tourist arrivals following the H1N1 influenza. International roaming revenue is now expected to decline 30% y-o-y. Data revenue however remained healthy and was in-line with our expectation; its growth target hence is maintained at 10-15%. Despite the lower revenue growth forecast, company expects to grow free cash flow by 15% y-o-y with cost efficiency program being implemented on both operating expense and capital expenditure. Consolidated EBITDA margin is expected at 41-42% albeit the lower revenue forecast due to (1) the forecasted lower proportion of revenue from handset business which usually erode consolidated margin, (2) lower gross interconnection revenue while net interconnection receipt is expected to be similar to FY08, and (3) operational cost saving on network maintenance, lower cost of refill cards as company is pushing on refill-on-mobile, as well as lower staff cost and administrative expenses. With slower demand forecast and continued stable outlook on competition, capex is revised down to Bt11bn from the previous Bt13-15bn. The cost management on both opex and capex is targeted to enhance the company's ability to deliver strong free cash flow and hence consistent return to shareholders with an expected growth on FCF of 15% y-o-y. Handset sales is expected to decline significantly from weak consumer spending as well as the change in Nokia's distribution policy starting from February which limited sales for company's distribution arm to only Bangkok area. Handset business this year is expected to contribute near-zero gross margin in a short run. In addition, we have been maintaining a conservative inventory provisioning policy. Despite the short-term negative impact and potential smaller scale of business, it remains as a vital part to support overall strategy for AIS on growing mobile service and to support the future launch of 3G service. The mobile penetration in 2H09 is expected to grow over 100% with organic demand continues from upcountry market that contributes lower ARPU. AIS's strength in rural network coverage, premium quality and distinctive brand presence will be the key to win in these markets and will serve the aim to maintain overall revenue market share. During the economy slowdown, competition outlook remains benign while mobile operators shift the focus to retaining usage from existing subscriber as well as quality customer and loyalty program rather than aggressive acquisition which would drive further multiple SIMs. 3G license will be the key milestone this year as AIS is working closely on all fronts to ensure highest possibility of attaining the new license which will allow all industry players to operate at more level-playing field under a fair cost structure. AIS expects NTC to auction 2.1GHz spectrum in 1Q10. Operationally, AIS has been preparing for readiness to ensure the shortest launch time for commercial service. Financially, AIS is also well-shaped to support the funding needs, partly reflected in the success of debenture issuance in Jan-09. While macro environment post a significant challenge this year, the operational large-scale advantage and solid financial strength will support AIS's flexibility to grow amidst this tough year. Disclaimer "Some statements made in this presentation are forward-looking statements, which are subject to various risks and uncertainties. These include statements with respect to our corporate plans, strategies and beliefs and other statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as "may" , "will" , "expect" , "anticipate", "intend" , "estimate" , "continue" "plan" or other (more)