FY09 MANAGEMENT DISCUSSION AND ANALYSIS OVERVIEW AIS delivered a strong 28% y-o-y FCF growth for 2009 albeit the revenue decline. 2009 was a difficult year with weak global and domestic economy affected consumer demand. The company's service revenue declined 2.3% y-o-y while cost control and lower capex supported company to generate strong free cash flow of Bt31bn, a 28% y-o-y growth from Bt24.2bn in FY08, and achieve higher than the 15% growth target. Data services made a solid 24% y-o-y growth driven by the penetration of mobile internet. The mobility and the ease of access offered via smart phones like Blackberry, Nokia N series and E series,as well as aircards have well-responded to consumer's need for internet connectivity. The popularity of online/mobile social networking trend such as Facebook and Twitter also drived data user penetration. Affordability also became higher as the price of smartphones and netbooks continued to decline. AIS lead the non-voice market by posting Bt13.7bn on revenue from data, representing a 24% growth from 2008. Active mobile internet users in 2009 rose to 5.3m from 4.5m in 2008, with support of up to 100k Blackberry subscribers and 265k internet SIM subscribers. We believe the non-voice service is in a growth stage and will be a key revenue driver in mobile industry for 2010. Effective cost control was reflected in lower cash operating expense by 6.4% y-o-y (cash opex including network opex, SGA, excluding A&D), which partly lifted up EBITDA margin to 44.8%, from 41.9% in 2008. Key cost cutting areas included network maintenance which declined 24% y-o-y, cost of refill cards fell 46% due to prepaid refill-on-mobile, marketing expense dropped 17% y-o-y being discretionary. AIS target to achieve 12% FCF growth for 2010. Revenue recovery of 3% growth is expected following the economic outlook and improving sentiment. Further cost cutting will not be significant and hence EBITDA margin is expected to be 44%. While the license to operate 3G on 2.1GHz remains uncertain, capex for 2010 will decline to 6.2bn, an all-time low, given limited penetration growth, required capacity expansion for data upon EDGE technology and limited HSPA on 900MHz but not 3G on 2.1GHz. OPERATIONAL HIGHLIGHTS Subscriber reached 28.8m, mainly from prepaid but addition stagnant from economy and saturation. ARPU improved in 4Q09 mainly from economy recovery. MOU improved mainly from prepaid. Subscriber reached 28.8m, added 1.5m new subscribers from 27.3m in year 2008. However, The net addition was lower from 3.2m in 2008. This reflects saturation stage of industry and weak economy. On y-o-y basis, postpaid net addition contracted 7.2% while prepaid net addition contracted 59.7%. Launching of Blackberry and the growth of internet SIM soften the impact from weak economy. Net additions for 4Q09 was 490k, driven by prepaid plan called "Boo Lim". ARPU continued to declined from year 2008 due to weak economy that pressured consumer spending. On q-o-q basis, the ARPU in 4Q09 rebounded for the first time after a 7-straight quarters decline, reflecting the improvement in usage and demand upon economic recovery. Postpaid ARPU including net IC fell 4.3% y-o-y to Bt619 but increased 3.1% q-o-q from Bt600 in 3Q09. Also, prepaid ARPU including net IC fell 2.5% y-o-y to Bt198 but increased 3.7% q-o-q from Bt191 in 3Q09. MOU of both prepaid and postpaid also had a q-o-q improvement. Prepaid's MOU significantly grew 6.3% q-o-q to 255 minutes, and also rose 4.1% y-o-y from 242 minutes in 4Q08. Postpaid's MOU grew 2.5% q-o-q to 534 minutes but still 1.8% lower than 544 minutes in 4Q08. 4Q09 was an impressive quarter from improving economy together with healthy seasonal pickup. SIGNIFICANT EVENTS In 2009, asset impairment of ADC was booked at Bt561m on consolidated basis as its business on corporate leased-line and broadband has no investment plan and expects declining trend of customer base. The net impact to the net profit is shown under normalized profit on page 3. AIS had an 50.2% indirect investment in ADC via DPC, the impairment of ADC asset also resulted in impairment of DPC's investment in ADC. As such the impact to the net profit attributable to equity holder of AIS was in total of Bt222m consisting of (1) proportionated asset impairment on ADC equivalent to 50.2% of Bt561m, deducting (2) a defer tax gain from DPC impairment of investment on ADC equivalent to 30% of 200m. FINANCIAL RESULTS Service revenue 2008 2009 y-o-y 4Q08 3Q09 4Q09 y-o-y q-o-q excluded IC (Bt million) Voice revenue 63,906 76.7% 60,755 74.6% -4.9% 15,458 14,868 15,221 -1.5% 2.4% Postpaid (voice) 15,098 18.1% 14,432 17.7% -4.4% 3,740 3,600 3,508 -6.2% -2.6% Prepaid (voice) 48,808 58.5% 46,323 56.9% -5.1% 11,718 11,268 11,714 0.0% 4.0% Non-voice revenue 11,061 13.3% 13,738 16.9% 24.2% 2,930 3,455 3,965 35.3% 14.8% International roaming 3,696 4.4% 2,821 3.5% -23.7% 678 571 871 28.5% 52.5% Others (IDD, other fees) 4,710 5.6% 4,127 5.1% -12.4% 1,157 970 1,043 -9.8% 7.6% Total service revenue excl.IC 83,373 100.0% 81,442 100.0% -2.3% 20,222 19,863 21,100 4.3% 6.2% Service revenue excluded IC fell 2.3% y-o-y, in line with the guidance, thanks to 4Q09 recovery. EBITDA declined 1.2% y-o-y from lower revenue but protected by cost control. Normalized net profit was Bt17,277m fell 6% y-o-y from lower revenue and higher interest expense. Service revenue excluded IC revenue for 2009 declined 2.3% y-o-y from economic weakness and political instability. The aftermath impact from airport seizure at the end of 2008 and the political riot in April 2009 continued to dampen consumer's sentiment, spending and tourist arrivals. While GDP in 1H09 declined 6%, AIS service revenue excluded IC fell 5.4% y-o-y. In the 2H09, as global economy headed toward recovery and Thai economy also improved from government stimulus program, GDP turn to positive growth in 4Q09. AIS saw its service revenue excluded IC in 4Q09 grow 4.3% y-o-y, easing the 3-quarter decline and moved full year growth back in line with the guidance. Voice revenue which was considered in saturated stage, contracted 4.9% y-o-y for 2009 conformed to the economy downturn. Prepaid voice revenue declined 5.1% y-o-y while postpaid voice revenue declined 4.4% y-o-y. In 4Q09 prepaid voice revenue rose 4.0% q-o-q due to seasonality effect supplemented by economic recovery and achieved flat revenue y-o-y. On the other hand, postpaid voice revenue still dropped 2.6% q-o-q and 6.2% y-o-y. The y-o-y declining trend of postpaid voice revenue has been slower as the company focused on quality acquisition. Non-voice revenue, accounted for 17% of service revenue excluded IC, compared to 13% in 2008. It firmly grew 24% y-o-y to Bt13,738m from Bt11,061m in 2008. The growth was driven by the availability of affordable and user-friendly smartphones, popularity of online/mobile social networking, variety of contents and demand of mobile internet. In 4Q09, non-voice revenue grew 35% y-o-y and 15% q-o-q . For 2009, the mobile internet was the leader on data growth with a strong 54% y-o-y growth, including the growth of consumer's Blackberry service and internet SIM. Content was also the key to drive data revenue in 2009 with 42% y-o-y growth supported by strong content partners in delivering attractive variety of packages, particularly on news and lifestyles. Enterprise solutions also grew 52% y-o-y including, for example, corporate push-email, Blackberry service platform, VOIP, and mobile sales force. Interconnection (Bt million) 2008 2009 y-o-y Revenue 16,213 14,370 -11.4% Cost 15,476 13,416 -13.3% Net Interconnection 737 954 29.4% Cost of service excl.IC (Bt million) Amortization 17,898 19,024 6.3% Base station rental & utility 2,513 2,646 5.3% Maintenance 1,825 1,388 -23.9% Others 3,773 3,783 0.3% Cost of service excl. IC 26,008 26,842 3.2% SG&A (Bt million) 2008 2009 y-o-y Marketing expense 3,252 2,695 -17.1% Administrative expense 7,802 7,439 -4.7% SG&A expenses 11,054 10,134 -8.3% %marketing to total revenue 2.9% 2.6% %bad debt to postpaid revenue 2.7% 3.8% %SG&A to total revenue 10.0% 9.9% EBITDA (Bt million) Operating profit 27,699 26,002 -6.1% Depreciation PPE 3,029 3,337 10.2% Network amortization 15,815 16,687 5.5% Gain(loss)ondisposalsofPPE 70 7 -90.0% Write off good will 15 0 -100.0% Management benefit -82 -72 -12.2% Other financial cost -82 -68 -16.4% EBITDA 46,463 45,892 -1.2% EBITDA margin 41.9% 44.8% Financial Cost Interest expenses 1,625 1,853 14.0% Other financial costs 82 68 -16.4% Financial cost 1,707 1,921 12.6% Net profit was Bt17,055m, increased 3.9% from 2008 due to the Bt3,553m goodwill impairment recorded last year. On normalized basis, net profit was Bt17,277m decreased 7.9% from Bt18,760m in 2008. Such contraction was from weak economy and political instability during the year. In 2009, asset impairment of ADC was booked at Bt561m on consolidated basis as its business on corporate leased-line and broadband has no further expansion plan. AIS had an 50.2% indirect investment in ADC via DPC, the impairment of ADC asset also resulted in impairment of DPC's investment in ADC. As such the impact to the net profit attributable to equity holder of AIS was in total Bt222m, consisting of (1) proportionated asset impairment on ADC equivalent to 50.2% of Bt561m, deducting (2) a defer tax gain from DPC impairment of investment on ADC equivalent to 30% of 200m. International Roaming revenue (IR) declined 23.7% y-o-y from 2008 due to the plunge in tourist arrival impacted by domestic political turmoil and global poor economy, as well as higher discount to foreign counter-party (AIS books IR revenue net of portion submitted to foreign counter-party). In 4Q09, IR revenue made a strong rebound with 28.5% y-o-y and 52.5% q-o-q growth , continued improvement since 3Q09. Thailand's tourism came to vivid again given a better political climate and global economic recovery. However, the IR revenue as a proportion to revenue of 4.1% in 4Q09, was still below the usual level of around 5% during the normal economy. Other revenue declined 12.4% y-o-y mainly from the fall in international call (IDD) revenue due to economy downturn and lower tourist numbers but recovered with 16.8% q-o-q in 4Q09. The IDD business started to see aggressive price competition in 4Q09, which is expected to continue into 2010. Net interconnection (net IC) posted a positive net IC at Bt954m increased 29.4% y-o-y from Bt737m in 2008. On q-o-q basis, net IC declined to Bt122m from promotion which offered attractive rate for off-net calls to encourage overall customer's usage and induced new customers. This reflected in 4Q09 as outgoing traffic rose while incoming traffic was relatively flat. Over the year, both incoming traffic and outgoing traffic across the network continued to decline as each operators focused on maintaining its price plan to encourage on-net usage. The % on-net traffic for AIS as of 4Q09 was 79% compared to 76% as of 4Q08. Sales revenues posted Bt6,639m, representing 6.5% of total revenue in 2009, declined 40.8% y-o-y due to the change in policy of Nokia and the economic impact. Sales margin slightly improved to 6.6% for 2009, from 6% in 2008. Comparing to 3Q09, sales revenue in 4Q09 also declined -13.7% due to high competition from house-brand low-end handsets. However, sales margin in 4Q09 improved significantly to 16% from 8.2%, due to the strong sales growth of smartphones, Blackberry, and USB aircard. Cost of service excluding IC cost increased 3.2% y-o-y to Bt26,842m from Bt26,008m in 2008 due mainly to higher network amortization, which rose 6.3% y-o-y due to the shorter amortization period. Network maintenance cost declined 23.9% y-o-y from service negotiation but utility cost, including base station rental, increased 5.3% y-o-y from higher number of cell sites. Revenue sharing expense declined softly -0.3% y-o-y according to lower service revenue. Marketing expense decreased 17.1% y-o-y to Bt2,695m, which accounted for 2.6% of total revenue. Marketing expense was controlled to level below 3% stipulated in the 2009 guidance. Marketing spending in 4Q09 grew 47.9% q-o-q in response to high season and spending recovery. Administrative expense decreased 4.7% y-o-y from various cost control programs, including cost related to staff compensation and development fell 6.1% y-o-y, and general admin expense fell 23.2% y-o-y. Bad debt provision increased 47.9% y-o-y due partly to acquisition of postpaid subscribers toward lower-end users, and some economic impact. However, percentage bad debt to postpaid revenue was in controlled a range below 4.0%. EBITDA was at Bt45,892m contracted 1.2% from Bt46,463m in 2008 from lower revenue partly offset by cost control. However, EBITDA margin which indicated company efficiency improved to 44.8% from 41.9% in 2008 higher than the guided 41-42% range. This outstanding efficiency was a product of controlling several expenses. Examples of such expense reduction were network maintenance down 23.9% y-o-y, cost of refill cards down 46.3% y-o-y, marketing expense down 17.1% y-o-y, staff cost down 6.1% y-o-y and general administrative expense down 23% y-o-y. Financial cost increased 12.6% y-o-y from higher outstanding debt of Bt35.6bn at end of 2009 compared to Bt34.3bn at end of 2008. Other income declined 73.2% y-o-y to Bt687m in 2009 from Bt2,564m in 2008. This decline came mainly from the one-time DPC gain of Bt1,217m in 2Q08, and lower interest income. Consolidated (Bt million) Tax Where 2008 2009 y-o-y deductible Net income 16,409 17,055 3.9% Add:Impairment of DPC goodwill No Impairment loss 3,553 Impairment loss on ADC asset Yes Impairment loss 222 Goodwill write-off* No SGA 15 Deduct: Gain on DPC settlement after tax Yes Other income (1,217) Normalized net income 18,760 17,277 -7.9% BALANCE SHEET STRUCTURE Bt million 2008 %to total 2009 %to total asset asset Cash 16,325 12.7% 25,167 20.1% ST investment 140 0.1% 44 0.0% Trade receivable 5,790 4.5% 5,773 4.6% Inventories 1,593 1.2% 629 0.5% Others 3,048 2.4% 1,958 1.6% Current Asset 26,896 21.0% 33,571 26.9% Networks and PPE 81,189 63.4% 69,715 55.8% Intangible asset 6,538 5.1% 6,286 5.0% Defer tax asset 10,075 7.9% 10,052 8.0% Others 3,383 2.6% 5,402 4.3% Total Assets 128,081 100.0% 125,026 100.0% Trade accounts payable 4,263 3.3% 2,729 2.2% CP of LT loans 7,038 5.5% 497 0.4% Accrued R/S expense 2,719 2.1% 3,070 2.5% Others 10,839 8.5% 10,287 8.2% Current Liabilities 24,860 19.4% 16,583 13.3% Total interest-bearing debt 34,328 26.8% 35,654 28.5% Total Liabilities 54,646 42.7% 53,215 42.6% Total Equity 73,436 57.3% 71,811 57.4% Total asset declined 2.4% y-o-y to Bt125,026m as net fixed assets on network and PPE declined from higher amortization of asset than the new investment. Cash rose to Bt25,167m from strong free cash flow generation. Debentures and loans increased to Bt35,624m from Bt34,328m at the end of 2008 due to issuing of Bt7,500m debenture beginning of the year. Average cost of debt was 4.8% with all foreign debt fully hedged. Equities declined 2.2% y-o-y mainly from the decrease of retained earning from Bt73,436m in 2008 to Bt71,811m in 2009, which resulted from dividend payment exceeding the earnings during the year. The company was able to make over 100% dividend payout as the company has large retained earnings while still maintaining high free cash flow generation. Liquidity as of Dec-09 improved as current ratio increased to 2.02 compared to 1.08 as of Dec-08. Higher cash and lower current portion of long-term debt were the main factors for the higher current ratio. 2008 2009 Debt ratio 0.42 0.42 Net debt to equity 0.25 0.15 Total liabilities to equity 0.74 0.74 Capital structure remained strong with low net debt to equity of 0.15. Total liability to equity was flat at 0.74 compared to 2008. Plenty of cash enhanced net debt to equity ratio below the level last year while total debt to equity was kept at the same level. Unit: million End of End of Repayment 2008 2009 2010 2011 2012 2013 2014 Long term loan(1) 15,718 16,180 493 9,978 493 493 2,939 Debenture(2) 18,610 19,474 - 4,000 5,000 8,000 2,500 Total debt 34,328 35,654 493 13,978 5,493 8,493 5,439 (1) includes swap contract; (2) includes bond issuing cost CASH FLOW Free cash flow for 2009 was Bt31bn compared to Bt24.2bn in 2008, improving 28% y-o-y. Cash flow position in 2009 was stronger than 2008 from sustained operating cash flow and controlled CAPEX. AIS generated operating cash flow before change in net working capital at Bt47.2bn, relatively flat compared to Bt47.8bn in 2008. CAPEX in 2009 decreased to Bt9.9bn from Bt12.6bn, a 21.2% y-o-y decline, due to conservative investment theme and demand-matching capacity and coverage. The Company issued a Bt7.5bn debenture in 1Q09 with average interest cost of 4.4% which was used to refinance the three debentures retired in 2009 consisting of AIS093A of Bt2.45bn at interest cost of 6.25%, AIS093B of Bt750m at interest cost of 4.85%, and AIS099A of Bt3.427bn at interest cost of 5.8%. Source and use of fund: FY09 FY09 Bt. Million Source of Fund Use of Fund Operating CF before change CAPEX & Fixed assets 9,915 in working capital 47,225 Proceed from LT borrowing 8,535 Dividend payment 18,709 Interest received 310 Finance cost paid 1,984 Sale of property and equipment 21 Changes in working capital 6,312 Share capital and share premium 296 Repayment of LT borrowing 7,199 Investment (fixed deposit) 3,008 Cash increase 9,260 Total 56,388 Total 56,388 FY2010 MANAGEMENT OUTLOOK & STRATEGY Free cash flow (EBITDA - CAPEX) +12% y-o-y Service revenue +3% excluding interconnection revenue EBITDA margin 44% Capex Bt6.2bn cash capex (including 3G on 900MHz) Telecom industry in FY2010 will see positive 3% growth following economic recovery domestically and globally. Domestic usage is expected to improve as consumption slightly recovers while agricultural sector will again this year, similar to 2008, see a positive turn from rising farm prices which will also increase the spending from the upcountry market. International roaming traffic, majority of which comes from foreign roamers, is also expected to increase as tourist forecast rises. International call however will experience a more aggressive pricing pressure as already been witnessed during the 4Q09. Data service becomes a key growth driver while voice growth remains stagnant. Overall penetration will be over 100% with market net additional subscribers of 3-4m for 2010. With merely 5% subscriber growth, competition on voice market is hence expected to be relatively benign. Market of data or non-voice service has shown its potential rising demand particularly for personal mobile internet connectivity. Data revenue is expected to grow 20% y-o-y from increasing number of active subscribers as well as higher usage per subscriber. Key drivers are the trend of online/mobile social networking as well as the limited availability of landline internet access. Company expects to grow free cash flow by 12% y-o-y due to lower capex to 6.2bn from 9.9bn in FY09. Majority of cost efficiency programs has already (more)