Global Research Equity

Saudi Arabia

Etihad Etisalat Company - Mobily

Creating a new buzz!! October 2007
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Etihad Etisalat Company - Mobily

Reuters Code:
October, 2007
7020.SE

Listing: BUY
Saudi Stock Exchange

Current Price
SR65.5 (Oct 09, 2007)

Investment Summary

• Etihad Etisalat Company (Mobily), was founded in 2004 by the UAE-based,

Emirates Telecommunications Corporation (Etisalat), with the purpose of ownership,
operation and management of GSM and 3G mobile telephone networks; and
providing mobile internet services. Etisalat won the second GSM license as well
as a 3G license in Saudi Arabia in August 2004 for US$3.45bn, thus ending Saudi
Telecom Company’s monopoly in the wireless business segment.

• The company went public in 2004 following an IPO on the Saudi Stock Exchange in
October 2004, which raised US$267mn for 20% of its shares. The remaining shares
are held by Etisalat which owns 35% of Mobily, while 45% of the shares are held
by 6 local entities including a 15% stake held by the government of Saudi Arabia
through the General Organization for Social Insurance.

• Mobily launched its services in May 2005, and ended the year with 2.3mn subscribers,
capturing a market share of 16%. By the end of 2006, the company’s subscriber’s base
rose to 6mn subscribers, thus increasing its market share to 31%. Mobily managed
to break-even in 2006 with an EBITDA of SR2bn and net income of SR700.36mn.
The company’s strong performance has been supported by Saudi’s relatively lower
mobile penetration rates, and supportive regulatory environment.

• The company has been capitalizing on KSA’s low broadband and data penetration
rates which stood at 1% in 2006. In June 2006, Mobily launched its 3.5G services
covering 19 cities in the Kingdom, and ended the year with 500,000 users of 3G, and
3.5G, representing a market share of 58% of 3G users in 2006. In 2007, the company
doubled the broadband mobile Internet speed and introduced a 7.2 Mbps modems
and data service SIM cards based on HSDPA (high-speed downlink packet access).

• The company agreed with Bayanat Al-Oula and Integrated Telecom Company to
build, deploy and operate the Kingdom’s largest fiber optic network with a total value
of SR1bn that will cover 12,000 km of highways as well as cities Kingdom-wide.
The new network, which is scheduled for completion in 2008, will likely reduce
operational costs as the company develops its own international gateway, which will
lead to the decline in international gateway costs as well as the reduction in national
and international roaming costs as the company increases its own network coverage.
Accordingly, we expect an improvement in EBITDA margins going forward.

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• Mobily had recently signed a memorandum of understanding to buy a 99.9% stake

of the local data provider Bayanat Al-Oula for SR1.5bn (US$400mn). Bayanat had
recently entered into a strategic arrangement with Samsung to roll out the largest
WiMAX network in the region and start offering the service commercially in the
Kingdom’s three main cities Riyadh, Jeddah and Dammam in the first phase.

• In March 2007, MTC of Kuwait (Zain) won the bid for Saudi Arabia’s third mobile
license which included 2G, 3G and international licenses for a price of US$6.1bn
(SR22.9bn). We expect the entrance of a third operator to have a greater effect on
the operator with the largest market share, STC, than on Mobily. Though, we expect
further reduction in mobile tariffs with increased competition, we believe that the
focus on high quality services based on the latest technologies will be the main
differentiator between the competitors.

• With competition intensifying, we believe there would be pressure on ARPUs for

Mobily particularly since most of the company’s customers’ base (93%) is prepaid
subscribers. However, we expect the pressure to be eased in the medium term through
the expected increase in the company’s postpaid subscribers, coupled with Mobily’s
increased focus on broadband and 3.5G services.

• We initiate our coverage of Mobily with a ‘Buy’ recommendation. Based on the

combination of Discounted Cash Flow Method and Peer Group Valuation Method,
we have valued the company’s shares at an intrinsic value of SR76.8 per share, with
a 17.3% premium over the current market price of SR65.5 per share.

Investment Indicators
Price as on Shares in issue Market Cap 52-week price
October 9, 2007 (SR) (mn) (SRbn) range (SR)
65.5 500 32.75 38 - 73
Year EBITDA Net Profit EPS BVPS ROE P/E P/BV
(SR 000) (SR 000) (SR) (SR) (%) (x) (x)
2008 E 3,553,321 1,945,762 3.89 15.58 24.86 16.83 4.20
2007 E 2,786,234 1,310,797 2.62 11.69 22.43 24.98 5.60
2006 2,000,504 700,358 1.40 9.07 15.45 37.12 5.74
2005* (112,767) (1,167,379) - 7.67 - - -
Source: Annual Reports and Global Research estimates *From 14/12/2004 to 31/12/2005
* Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on
market price in the Saudi Stock Exchange as on October 9, 2007.

Chart 01: Share Price Performance

25,000 200
20,000 150
Price (SR)
Indices

15,000
100
10,000
5,000 50
0 0
01.01.06

03.04.06

26.06.06

18.09.06

19.12.06

20.03.07

12.06.07

04.09.07

Saudi General Index Saudi Telecom Index Mobily

Source: Reuters, Global Research

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Saudi Economic Overview

Strong economy driven by oil money…
After entering the WTO, the next big things coming out of the Saudi economy are the
mammoth projects of economic cities which are going to have a long-lasting impact on
the macro-economic policies and on the fundamental structure of the Saudi economy.
Saudi economy has been doing exceptionally well in the last few years led by oil-
driven growth. Saudi Arabia’s nominal Gross Domestic Product (GDP) is estimated to
have grown by 10.6% in 2006 to reach SR1,307.5bn (US$348.6bn) while real GDP is
estimated to have grown by 4.3% to SR798.8bn (US$212.9bn). Mining and quarrying
sector accounted for the major part of GDP, forming 50% of GDP in 2006, and recorded
the highest y-o-y increase, growing by 14.8%. Transport, storage and communication
sectors formed 3.2% of GDP in 2006 and grew by 7.6% on a year on year basis. Although
dominated by oil sector, the government intends to diversify the economy and use it as
a base for employment creation.

Table 01: GDP by Type of Economic Activity

(SR bn) 2001 2002 2003 2004 2005 2006*
Agriculture, Forestry & Fishing 35.7 36.1 36.5 37.2 38.3 39.4
Mining and Quarrying : 230.3 236.9 294.1 384.5 571.0 655.5
Crude Petroleum & Natural Gas 227.6 234.2 291.3 381.6 568.0 652.3
Other 2.6 2.7 2.8 2.9 3.0 3.1
Manufacturing: 69.2 73.0 86.3 95.8 110.7 123.9
Petroleum Refining 19.4 20.4 29.7 32.4 39.5 43.7
Other 49.9 52.5 56.5 63.4 71.3 80.2
Electricity, Gas and Water 8.9 9.3 9.9 10.4 11.0 11.7
Construction 43.2 44.7 47.1 51.1 54.9 59.1
Wholesale & Retail Trade, 49.8 51.7 53.9 58.1 62.8 67.9
Restaurants and Hotels
Transport, Storage & Communication 30.6 31.9 33.2 35.7 38.4 41.4
Finance, Insurance, Real Estate & 78.9 82.1 85.8 91.2 97.8 104.8
Business Services
Ownership of Dwellings 43.9 45.0 46.0 48.0 50.0 52.2
Other 34.9 37.1 39.9 43.3 47.8 52.6
Community, Social & Personal 23.1 24.1 25.1 26.5 27.9 29.2
Services
Less: Imputed Bank Services Charge 14.0 14.7 15.2 16.0 16.7 17.6
- - - - - -
SUB - TOTAL 555.6 575.2 656.6 774.6 996.0 1,115.3
Producers of Govt. Services: 123.6 124.5 139.9 155.4 176.4 181.2
- - - - - -
Total Except Import Duties 679.2 699.7 796.6 929.9 1,172.4 1,296.5
Import Duties 7.1 7.4 8.1 8.8 10.1 11.1
Gross Domestic Product (GDP) 686.3 707.1 804.6 938.8 1,182.5 1,307.5
Source : SAMA * Provisional

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More attention towards human resource development…

In 2007 budget, the government continued to pay special attention to impart quality
education and improving the technical and managerial skills of its nationals. This can be
seen in the increased allocation towards Human Resource Development which increased
to SR96.7bn as compared to SR87.2bn allocated in the 2006 budget. We believe that
increased government expenditure is a step in the right direction as it will equip the
nationals in taking up jobs or start their own business and take advantages of the growth
in the economy. This is also important in the wake of Small and Medium Enterprises
which are the booming in the country as a trickle down effect of the huge expenditure by
the government and the private sector.

Abundant liquidity…
The Saudi economy has enjoyed a strong liquidity position as can be seen in the 20% y-
o-y increase in Money supply (M2) in 2006. This was mainly on the back of the 37% in
Time and Savings Deposits. The increase in interest rates combined with the correction
in stock markets encouraged investors to move their investment in safer time deposits
in banks which led to strong rise in the time and saving deposits. But inflation has not
been a concern for the Saudi economy as according to Ministry of Finance, inflation, as
measured by the Consumer Price Index is estimated to have increased only by 1.8% in
2006.

Surplus despite heavy capital spending…

Trade balance recorded a surplus of US$146.6bn in 2006, registering an increase of
16.8%. The current account balance increased to US$98.9bn in 2006 as compared to
US$89.9bn recorded in the previous year. One thing that emerges out of the picture is the
strong growth in the imports which is indicative of the strong economic activity in the
country. With the strong growth in capital spending and industrial activity, the country
has been increasing its imports of capital goods.

Building cities to house economic growth…

The Kingdom’s ambitious plan to dramatically raise investment competitiveness under
its «10 x 10» program to put Saudi Arabia among the world’s top 10 globally competitive
investment destinations by 2010 can be best seen in the “Economic Cities” announced
in recent times. According to Saudi Arabian General Investment Authority (SAGIA),
the four cities are expected to attract investments worth more than SR300bn and create
more than a million jobs within the next 10 to 20 years. In the field of balanced regional
development, SAGIA, supported by the Custodian of the Two Holy Mosques and the
Crown Prince, launched three integrated economic cities in 2006, one each in Hail,
Madinah and Jazan. In 2005 King Abdullah Economic City in Rabegh was launched.
With the strong liquidity and increased investors’ interest to park their funds within the
country, real estate sector has got a big boost. Gross fixed capital formation has recorded
a strong increase from SR123.3bn in 2000 to SR174.3bn in 2005 and is expected to grow
at a much faster rate in 2006-08 periods.

Privatization at a rapid pace…

Privatization is going on at a rapid pace in infrastructure and utilities services and
government invited private and foreign investors to be part of country’s economic
growth. To develop Independent Water & Power Projects (IWPP), Water & Electricity

 Etihad Etisalat Company - Mobily October 2007

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Company (WEC) was established by the Supreme Economic Council to promote private
investments in the IWPPs. Marafiq is also planning an IWPP in the industrial city of
Jubail with an estimated cost of SR9.4bn (US$2.5bn). As per SAGIA, overall power
capacity in Saudi Arabia is forecasted to grow to 59,000 MW by the year 2024 requiring
an estimated investment of SR430bn (US$115bn). To achieve this target the ministry
will have to present several joint projects to the private sector, local and foreign, in order
to increase power generation capacity. Saudi Arabia’s Communications and Information
Technology Commission (CITC) has also liberalized the telecom sector through the
offering of the Kingdom’s second fixed-line phone license and third mobile phone
license to foreign investors.

(For a detailed analysis of the Saudi economy please refer to our Saudi Economic and
Strategic Outlook)

October 2007 Etihad Etisalat Company - Mobily 

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Company Overview
Background

Etihad Etisalat Company (Mobily), was founded by the UAE-based, Emirates

Telecommunications Corporation (Etisalat), in 2004 with the purpose of ownership,
operation and management of GSM and 3G mobile telephone networks; and providing
mobile internet services. In August 2004, Etisalat won the second GSM license in Saudi
Arabia for a period of 25 years, thus ending Saudi Telecom Company’s monopoly in the
wireless business segment. Etisalat paid US$3.45bn for the license which included a 3G
license as well.

Expanding strongly…
Mobily launched its services in May 2005, and ended the year with 2.3mn subscribers,
capturing a market share of 16%. By the end of 2006, the company’s subscriber’s base
rose to 6mn subscribers, thus increasing its market share to 31%. Mobily managed to
break-even in 2006 with an EBITDA of SR2bn and net income of SR700.36mn.

Speeding with the fiber optic network…

In February 2006, the company entered into a deal with Integrated Telecom Company
and Bayanat Al-Oula for Network Services to build, deploy and operate the Kingdom’s
largest fiber optic network with a total value of SR1bn (US$266mn). The fiber optic
cables are a replacement for the old copper cables, and are capable of transmitting data,
and phone services for both landline and mobile at a very high speed. The fiber optic
network is expected to cover 12,000 km of highways as well as cities, and is constructed
and deployed in several phases. In January 2007, Integrated Telecom Company and
Bayanat Al-Oula for Network Services announced the completion of the first phase of
their fiber optic network project, which covers the major three rings of central, western
and eastern regions.

Offering the latest services and technologies…

In 2007, the company launched the push-to-talk (PTT) service under the brand name
‘Mobily Hawwel’. The service is available for post-paid and pre-paid subscribers at
monthly fees. Mobily Hawwel conversations are encrypted over GPRS data or 3G
network to avoid cross-talk or listening-in. In addition, Mobily was the first company to
introduce Blackberry services in Saudi Arabia, in cooperation with Research in Motion
(RIM), and Emitac Mobile Solutions (EMS). Mobily’s list of corporate customers now
using Mobily blackberry include Saudi Arabian Agricultural Bank (SABB), Samba
Financial Group, and Saudi Pepsi Cola. Mobily was also the first mobile operator in
the Kingdom that introduced the value added services of MMS, locations based service
(LBS), international roaming for prepaid SIM cards in addition to GPRS and GPRS EDGE
roaming, as well as other services such as «kalemni» (call me), enabling disconnected
mobile to send free SMS.

Expanding broadband services…

In June 2006, Mobily launched its 3.5G services covering 19 cities in the Kingdom,
and ended the year with 500,000 users of 3G, and 3.5G, representing a market share of
58% of 3G users in 2006. The infrastructure was set up by Erikson, Nokia, and Chinese

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Huawei. In May 2007, the company announced a plan to award a SR1bn (US$266.7mn)
contract to expand its 3G network to cover more Saudi cities. In June 2007, the company
doubled the broadband mobile Internet speed on its network, with an HSDPA (high-
speed downlink packet access) speed of 3.6 Mbps. Later in September 2007, the company
introduced a 7.2 Mbps modems and data service SIM cards also based on HSDPA.

New acquisition to enhance broadband services.…

The company announced on September 19, 2007, that it had agreed under a memorandum
of understanding (MOU), to buy a 99.9% stake of the local data provider Bayanat
Al-Oula for SR1.5bn (US$400mn). The deal represents a buyout of Bayanat stake in
the 12,000 kilometer national fiber-optic network. Bayanat had recently entered into
a strategic arrangement with Samsung to roll out the largest WiMAX network in the
region and start offering the service commercially in the Kingdom’s three main cities
Riyadh, Jeddah and Dammam in the first phase. The acquisition is likely to enhance
the company’s position in the wireless broadband internet segment, with the WiMAX
technology along with Mobily’s current HSDPA technology.

Management

The company’s management is led by Mr. Khaled Al Kaf, who is the chief executive
officer and managing director of the company. Since inception, Mobily’s management
has applied the right strategies in capitalizing on the Saudi mobile market growth
potential. The company has managed to grab a market share of 16% in the first year
of operation and 31% in the second through the launch of innovative and new services
in the market. Though the company has been offering services at lower costs than the
incumbent operator, management has focused on the differentiation strategy in building
its customers base. As such, the company has attracted customers through the introduction
of new services into the market. Mobily also catered to the needs of corporate customers
through the introduction of Blackberry services in the Kingdom. Management has been
also focusing on the 3G and broadband services which cater to the young segment of the
Saudi population of which 32% are in the age of 10 to 24. At the end of 2006, Mobily
had a 58% market share of 3G users in the kingdom, higher than the incumbent’s market
share. Management’s latest decision to acquire the local service provider, Bayanat Al
Oula Company is also expected to reinforce Mobily’s market position in the 3G and data
segment.

Shareholding and Liquidity

The company underwent an IPO on the Saudi Stock Exchange in October 2004, which
raised US$267mn for 20% of its shares. The remaining shares are held by Etisalat which
owns 35% of Mobily, while 45% of the shares are held by 6 local entities including a
15% stake held by the government of Saudi Arabia through the General Organization
for Social Insurance.

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Table 02: Mobily’s Shareholders

Shareholder Holding
(%)
Emirates Telecommunications Corporation (Via Etisalat International) 35.0
General Organization for Social Insurance- Saudi Arabia 15.0
Riyadh Cables Group 7.5
Al Jomaih Holding Company 6.0
Binzagr Company 6.0
Rana Investment Company 6.0
Abdulaziz Al Saghyir Commercial Investment Company 4.5
Public 20.0
Source: Zawya

Mobily’s started with a paid-up capital of SR5bn with a par value of SR50 per share. In
April 2006, the company effected a 1:5 stock split increasing the number of outstanding
shares to 500mn shares with a par value of SR10 per share. Mobily’s shares started
trading on the Saudi Stock Exchange (Tadawul) on December 19th 2004. The stock
ended the year 2005 with turnover ratio of 156%. During 2006, trading on the stock was
affected by the wave of stock market corrections in the region with a total volume traded
of 471.1mn shares, a 39% drop from 2005. Turnover dropped to 94% in 2006.

Table 03: Stock Liquidity

year Volume Turnover Market Price Market Cap
(mn) (annualized) (yr end) (SR bn)
2005 778.54 156% 140.00 70.00
2006 471.10 94% 52.00 26.00
2007* 125.58 25% 65.50 32.75
Source: Zawya, Global Research * Till October 9, 2007.

During 2007, the total volume of shares traded YTD was 124.3mn shares. The stock
closed at SR65.5 at the end of trading on October 9, 2007 with a market cap of SR32.75bn,
forming 2.5% of the total market cap of Tadawul as on October 9, 2007. During the past
52 weeks, the stock traded within a band of SR73-38 per share.

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Regulatory Environment
CITC, the regulator
The Communication and Information Technology Commission (CITC) was established
in 2001 as a stand-alone legal entity with financial and administrative independence. Its
mandate includes regulating the Information Communication Technology (ICT) sector
in the Kingdom of Saudi Arabia, and promoting information technology (IT) adoption
in the country. The Ministry of Communications and Information Technology (MCIT)
is mainly concerned with supervising activities of the Communications and Information
Technology (IT) sector in the Kingdom of Saudi Arabia. CITC reports to MCIT, and is
responsible for licensing, numbering, setting interconnection guidelines, price regulation,
equipment approval, spectrum management , and overseeing the quality of service. CITC
is also responsible for the liberalization and the opening up of the data, mobile, and fixed
markets.

Towards a fully liberalized and open market…

In 2003, it ended Saudi Telecom Company’s (STC) full monopoly when the VSAT
market was liberalized. Subsequently, STC’s monopoly in the mobile market was
ended when the second mobile license was granted in 2004 to Etihad Etisalat Company
(Mobily). Finally, as per WTO commitments, the fixed market was liberalized when
three consortia- led by Bahrain Telecommunications (Batelco), Hong Kong’s PCCW
and US based Verizon Communications won fixed line licenses in April 2007, bringing
the total number of fixed line licenses to four and ending STC’s monopoly of fixed lines.
In March 2007, a consortium led by MTC of Kuwait (Zain) won the third mobile license
with a bid of US$6.1bn, and is expected to launch its services in 2008.

In February 2007, the Saudi government introduced a new legislation designed to boost
investment in the telecom sector. The decision entails that any company licensed to
provide mobile phone services has to float at least 40% of its capital for public subscription
while any new fixed services provider must float at least 25% of its capital. In addition, it
decided to reduce the fees levied by the government on fixed services from 15% to 10%.

3G services gaining popularity….

With the intent to attract one million digital subscriber line (DSL) high-speed internet
customers by end of 2007, Saudi Arabia initiated a 37% reduction of DSL connection and
operational fees. After getting CITC’s approval, Saudi Telecom (STC) started offering
low rates on internet connections to Internet Service Providers (ISPs) in the Kingdom.
The total number of DSL subscriptions in Saudi Arabia reached 194,000 in 2006. CITC
granted a 3G mobile license to STC in July 2005. Saudi Arabia was ranked first in the
Middle East in the usage of 3G telecommunications technology.

MNP in Saudi, the first in the Middle East…

In 2006, Saudi Arabia became the first Arab country to implement Mobile Number
Portability (MNP), when MNP service was launched at no cost to all mobile subscribers
in the Kingdom. During the year, CITC completed all the steps required to implement the
service including establishing the National Number Portability Database, interconnecting
the database with both service providers and establishing mobile number portability
processes.

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Chart 02: Sector Timeline

1998 Saudi Telecom Co. established

1999 Liberalization of ISP sector

Telecom Act
2001
CITC formed

Telecom Bylaw
2002
IPO of STC

2003 Liberalization of VSAT

Liberalization of Data & Mobile

2004 Etisalat wins 2nd mobile license
IPO of Mobily

2005 Mobily launches services

3G services launched
2006
MNP launched

Liberalization of Fixed Services

Allocation of 3 fixed line licenses
2007 to Verizon, PCCW, and Batelco.
MTC (now Zain) wins 3rd
mobile license

Source: CITC, Global Research

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Saudi Telecom Sector

The Saudi telecom sector has been one of the fastest growing sectors in the Kingdom. It
grew at a CAGR of 15.2% from 2001-2006 , and grew by 18% y-o-y to reach US$10.7bn
(SR40bn) in 2006. Telecom services revenue consisting of revenues from the fixed and
data services revenues and mobile services revenues contributed 3% of the Kingdom’s
GDP in 2006. The growth in telecom revenues has been mainly driven by the rapidly
expanding mobile services segment whose revenues grew at a CAGR of 31% from
2001-2006. The share of mobile services revenues of the total telecom services revenues
increased from 40% in 2001 to 76% in 2006.

Chart 03: KSA Telecom Service Revenues

12

10

8
US$ bn

6
6.7 8.1
4.7 5.6
4 2.1 2.8

2 3.2 2.8 2.5 2.5 2.4 2.6

0
2001 2002 2003 2004 2005 2006
Fixed & Data Mobile

Source: CITC

Saudi Arabia is one of biggest economies, and highly populated countries in the region,
a favorable environment for telecom operators. Saudi Population has been growing at a
CAGR of 2.7% from 2001-2006. During 2006, KSA population grew by 3.8% to reach a
total population of 24mn. Expatriate population form around 30% of the total population
of Saudi Arabia. The increasing young population has been one of the underlying factors
of the increasing mobile phone usage in Saudi Arabia, with around 32% of the population
in the age of 10 to 24.

Chart 04: GCC Demographic Profile

31.6%
25.0 30.8% 35.0%
28.6%
25.0% 30.0%
20.0 22.4% 22.2%
25.0%
15.0 20.0%
mn

10.0 15.0%
10.0%
5.0
5.0%
0.0 0.0%
KSA UAE Kuwait Oman Qatar Bahrain

Population 2006 Youth Age 10-24

Source: Global Research

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Fixed Market
No Longer a Monopoly…
Fixed line subscribers approached 4mn subscribers at the end of 2006, translating into
a penetration rate of 16.5% and a household teledensity of around 70% (70 residential
phones for every 100 households). Residential lines formed around 75% of the fixed
lines in Saudi. The country’s fixed market was controlled by the incumbent operator,
STC, until April 2007, when CITC liberated the market and issued three licenses to
the three consortia led by Batleco, Hong Kong’s PCCW, and US-based Verizon
Communications.

Chart 05: Fixed Lines Subscribers

4
1
0.8 0.9 0.9
3 0.7 0.7

2
mn

1
2.5 2.6 2.7 2.8 2.9 3
0
2001 2002 2003 2004 2005 2006

Residential Lines Business Lines

Source: CITC

Getting Bigger….
As per the government’s new regulation, the three groups must float 25% of their shares
to the public and 10% to the General Organization for Social Insurance (GOSI) and the
Pension Fund before the start of operations, expected in 2008. Their fixed line coverage
should reach at least three regions in three years and the whole country in seven years.
Each operator should cover at least 3% of the country by fiber optics network or 15% by
wireless network within seven years of operation.

The PCCW and Batelco consortia are planning to use wireless broadband technology,
WiMax, to offer landline services. They made 52 separate bids each for spectrums in 13
regions. Verizon didn’t go through the bid phase because it didn’t apply for a spectrum,
and will operate an optical wire fixed line service.

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Internet & Data Market

Internet users in Saudi Arabia grew at a CAGR of 36% from 2001 to 2006 to reach 4.7mn
users in 2006. The year 2006 however witnessed the highest y-o-y growth rate, growing
by 57% from 3mn users in 2005. Penetration rate stood at 19.6% in 2006 compared to
13% in 2005. KSA internet penetration rate is the fourth in the GCC region after UAE,
Kuwait, and Bahrain, however lower than an average of around 22% for the region.

Chart 06: KSA Internet Users & GCC Penetration Rates

5 20 25 48
40
4 20
36
3 13 15 26
22 20
mn

10 % 25

%
2 10 17
8
6
1 5 5 12
8

0 0 0
2001 2002 2003 2004 2005 2006 UAE Kuwait Bahrain KSA Qatar Oman
Internet Users Penetration Rates Penetration Rates

Source: CITC

Broadband subscribers grew from 14 thousand subscribers in 2001 to around 220 thousand
in 2006, with a whopping y-o-y increase of 240% in 2006. DSL subscribers which stood
at 194 thousand subscribers in 2006 formed 89% of total broadband subscribers and
grew by a remarkable 273% over the number of DSL subscribers in 2005. Despite the
remarkable growth, still KSA broadband penetration rate, which stood at 1% in 2006,
is considered a very low rate when compared to both the world average of 5% and the
developed countries average of around 20%.

Chart 07: Broadband Subscribers & Penetration Rates

240 0.91 1
210
0.8
180
150 0.6
120
‘000

90 0.27 0.4
60 0.11 0.15 0.2
0.06 0.08
30
0 0
2001 2002 2003 2004 2005 2006

BB Subsbscribers Penetration Rates

Source: CITC

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Mobile Market
Monopoly, Duopoly, Triopoly…
The Saudi mobile market has been a monopoly since STC was established in 1998,
however after Mobily won the second license and launched its operation in 2005, STC
has been losing market share to Mobily which managed to grab a market share of 16% in
the first year of operations and increased it to 31% in 2006. In March 2007, the duopoly
was broken when a consortium led by MTC of Kuwait (Zain) won the third license.

Growing Market…
KSA mobile subscribers grew at a CAGR of 51% during the period from 2001 to 2006
with penetration rates jumping from 12% in 2001 to 82% in 2006. During 2005, when
Mobily launched its operations, subscribers grew by 54% from 9.2mn subscribers in
2004 to 14.2 subscribers in 2005 compared to a y-o-y growth rate of 27% in 2004. During
2006, mobile subscribers grew by 38% on an annual basis to reach 19.6mn subscribers
of which 870,000 were 3G customers.

Chart 08: Mobile Subscribers & Penetration Rates

82
20 100
61 80
15
40 60
10

%
mn

32
23 40
5 12
20
0 0
2001 2002 2003 2004 2005 2006

Mobile Subsbscribers Penetration Rates

Source: CITC

Relatively Lower Penetration Rate…

Despite the rapidly expanding mobile market, the Saudi mobile penetration rate is still
low relative to its regional peers. Mobile penetration in Saudi stood at 81.7% in 2006,
whereas mobile penetration for example in Bahrain, another GCC country with a closer
level GDP per Capita to that of Saudi stood at 117%. The country’s penetration rate
in 2006 was way below the calculated GCC average of 102%. During the year, UAE,
Bahrain, Qatar and Kuwait surpassed the 100% penetration rate.

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Chart 09: GCC Per Capita GDP Vs Penetration Rates (2006).

70,000 62,914 126% 140%
60,000 110% 117% 120%
50,000 104% 100%
81.7% 71%
US$

40,000 33,122
30,160 80%
30,000 20,533 60%
20,000 14,528 13,696 40%
10,000 20%
- 0%
Qatar Kuwait UAE Bahrain KSA Oman

GDP per Capita Penetration Rates

Source: CITC, Global Research

Expected to increase…
We believe that mobile penetration in Saudi Arabia will cross the 100% mark in the next
few years to reach 130% in 2010.The key drivers for the growth in penetration rates will
be increasing demand for mobiles among younger generation, increasing competition
in the local market driving down the usage cost, increasing economic activities in the
country requiring telecom infrastructure support, and the government’s intention to
liberalize various sectors as part of joining WTO.

Highest Tariffs in the region…

Despite the increase in competition, KSA calling rates per minute appears to be at the
high end among its regional peers for both prepaid and postpaid tariffs. The average rate
per minute for postpaid subscribers is around 37.5 Halalah/min, higher than the GCC
average of 34 Halalah/min. Likewise, the average rate per minute for prepaid subscribers
is 70 Halalah/min, higher than the GCC average of 50 Halalah/min.

Chart 10: Mobile Call Rates in GCC

80

60
Halalah/min

40

20

0
KSA Bahrain Qatar Oman UAE Kuwait GCC
Average
Prepaid Postpaid

Source: CITC, Global Research

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Tariffs reduced but no price wars…

The increase in the competition has benefited the customer in terms of decline in the
call rates and lower initial fee to be paid to the telecom companies. With the advent of
the second mobile operator, STC slashed its rates in 2006. However, the entrance of
competition in the Saudi mobile market has not resulted in a price war since one of the
main roles of CITC is to regulate mobile pricing, ensure fair competition among service
providers and protect new market entrants. As such, the CITC have enforced strict
rules on the incumbent operator, STC so that the company would not abuse its position
as a dominant service provider. As per CITC definition, a dominant service provider
is “every service provider that earns 40% or more of the gross revenues in a specific
telecommunications market, until and unless the Commission specifies otherwise in a
decision”.

Table 04: Tariff reductions on STC’s Mobile Services (2006)

Service Type Previous Current Reduction
Rate Rate
Connection Fee Postpaid 100 50 50.0%
Average Monthly Fee Postpaid 40 35 12.5%
Average Tariff (Halalah/min) Postpaid 42 38 10.0%
Average Tariff (Halalah/min) Prepaid 85 65 24.0%
Source: CITC

Protective measures for new market entrants…

The CITC has issued a set of protective measures whereby the new entrant would be
given the opportunity to compete on an equal footing with the incumbent operator. For
example, the incumbent operator must submit a request to get the commission’s consent
before changing its tariffs, while other operators need only to notify the commission only
a few days before the change. In addition, the CITC has issued a decision in 2004 by
which the incumbent operator must offer national roaming to the new operator. National
roaming allows Mobily to use the incumbent operator’s (STC) network in areas not
covered by Mobily’s network in exchange of certain fees. As per CITC regulations,
national roaming should be provided for a maximum period of five years following the
service launch of the new operator unless the two parties decide otherwise, and provided
that the parties obtain written approval from CITC.

Mobily charges lower tariffs…

Despite the reduction in STC’s tariffs, Mobily rates are still lower than STC’s rates. For
prepaid packages, the initial card for STC’s SAWA package is SR100, whereas the initial
card for all Mobily’s packages is SR75. The average call rate for STC is SR0.75 per
minute whereas Mobily’s average call rate is SR0.66 per minute. For postpaid packages,
the activation fee for STC’s packages is SR50, whereas the activation fee for Mobily’s
packages is SR45. The average call rate for STC is SR0.41 per minute whereas Mobily’s
average call rate is SR0.38 per minute.

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Table 05: Prepaid Packages for Mobile Operators in KSA

(SR) Initial Calling rates (per min) SMS rates (per sms)
Fee To own To other Local Local Int’l
network networks (on net) (off net)
STC
SAWA 100 0.65 0.85 0.25 0.35 0.45
Mobily
7ala 75 0.55 0.55 0.25 0.25 0.50
Anees 75 0.73-0.83* 0.73-0.83* 0.25 0.25 0.50
Wafeer 75 0.69-0.79** 0.69-0.79** 0.25 0.25 0.50
Fallah 75 0.35-0.65*** 0.35-0.65*** 0.25 0.25 0.50
Source: Operators’ Corporate Websites
* First rate for off peak time, and second rate for peak times, in addition each subscriber
can choose one national number to call at SR0.63/min, and one favorite international
number with special discounted calling rate per each country.
** First rate for 1st, and 2nd minute, second rate from the 3rd minute onwards, in
addition each subscriber can choose one national number to call at SR0.63/min,
and one favorite international number with special discounted calling rate per each
country.
*** First rate for calls during (11pm-7am), second rate for all calls to Mobily and other
networks.

Table 06: Postpaid Packages for Mobile Operators in KSA

(SR) Activation Monthly Calling rates (per min) SMS rates (per sms)
Fee Subscription To own To other To Local Local Int’l
network networks landline (on net) (off net)
STC
JAWAL 25 50 25 0.45 0.50 0.45 0.25 0.35 0.45
JAWAL 35 50 35 0.40 0.45 0.40 0.25 0.35 0.45
JAWAL 45 50 45 0.30 0.45 0.30 0.25 0.35 0.45
Family Plan 50 35 0.40 0.45 0.40 0.25 0.35 0.45
Mobily
Khatty* 45 20 0.45 0.45 0.45 0.25 0.25 0.50
Khatty plus *** 45 40 0.30 0.30 0.30 0.25 0.25 0.50
Mobily 25 45 40 0.43 0.43 0.43 0.25 0.25 0.50
Mobily 100 45 65 0.37 0.37 0.41 0.25 0.25 0.50
Mobily 250 45 110 0.37 0.37 0.41 0.25 0.25 0.50
Mobily 500 45 190 0.33 0.33 0.39 0.25 0.25 0.50
Mobily 1000 45 340 0.33 0.33 0.39 0.25 0.25 0.50
Source: Operators’ Corporate Websites
* Each subscriber can choose one favorite international number to enjoy special
discounted calling rate per each country
**Khatty plus offers the favorite numbers service whereby each subscriber can choose 5
mobile numbers to call at a rate of SR0.20/min.

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Lower ARPUs in KSA…

Blended ARPU’s for the two mobile operators in Saudi are below the region’s average of
US$49, though Mobily’s ARPU of US$25 is far below that STC’s ARPU of US$39. Lower
levels of ARPUs for Mobily could be explained by the prepaid-postpaid subscribers’ mix
for Mobily. Generally, mobile operators with subscribers’ mix skewed towards postpaid
subscribers enjoy higher levels of blended ARPUs. According to Mobily’s management
postpaid subscribers constituted only 7% of the company’s subscribers’ mix. EBITDA
margin for STC stood at 50.1%, while that of Mobily stood at 32.4% compared to a GCC
average of 43% in 2006.

Chart 11: ARPUs and EBITDA margins for selected operators in GCC
80.0 60
50.3 50.1 51.3
47.3 47.1 50
60.0
40
35.5

%
US$

30.1
40.0 32.4 30

20
20.0
10

0.0 0

ily
l
C
o
a
t
TC
el

te
la

iy

lc

ST
-T

an

ob
isa

te
an
M
Q

m
Ba

M
Et

at

O
W

Blended ARPU Q4 2006 EBITDA Margin 2006

Source: Informa Telecoms & Media, Global Research

STC ranked the first among its regional peers in terms of market cap., revenues and
profit. The company’s market cap. stood at US$34.2bn on October 9, 2007. The company
recorded revenues of US$9bn for 2006, with net profit of US$3.4bn. Mobily ended its
second year of operations with revenues of US$1.6bn and a net profit of US$187mn.
Mobily’s market cap stood at US$8.8bn on October 9, 2007. During the first half of
2007, Mobily’s revenues stood at US$1bn, while net profit stood at US$148mn during
the same period.

Table 07: Key Indicators for GCC Telecom Operators

(US$ mn) Market Revenues Net Profit Revenues Net Profit
Cap. * 2006 2006 1H 2007 1H 2007
STC 34,232 9,009 3,413 4,470 1,552
Mobily 8,759 1,649 187 1,041 148
Etisalat 25,483 5,096 1,595 2,790 1,016
MTC (Zain) 28,766 4,187 1,056 2,776 517
Wataniya 4,512 1,482 253 667 152
Q-Tel 5,898 1,214 467 1,103 246
Batelco 3,169 623 237 362 139
Omantel 2,860 841 210 457 126
Source: Zawya, Global Research
*Market Cap. on October 9, 2007.

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Competitors’ Profile
Saudi Telecom Company (STC)

The Saudi Telecommunication Company was established in 1998 as a shareholding

company following a Royal decree issued to separate the facilities of Post, Telegraph
and Telephone (P.T.T) from the ministry. By the end of 2002, the Saudi government
announced that 20% of Saudi Telecom Shares will be offered for public subscription,
5% for General Organization of Social Insurance (GOSI), and 5% for Pension Fund
Organization. STC has the second largest market cap on the Saudi Stock Exchange
(Tadawul), with a market cap of SR128bn, forming around 9.7% of the total market cap
of Tadawul as on October 9, 2007.

The company reported revenues of SR33.7bn for 2006 increasing by 3.8% on a year
on year basis, while net income increased by 2.8% over the year 2005. STC’s mobile
subscribers’ base is estimated to have increased by 19% to reach 13.8mn at the end of
2006, capturing around 70% market share, while fixed line subscribers approached 4mn
subscribers by the end of 2006.

STC was awarded a 3G license in July 2005 for SR753.7mn, and launched its 3G
network in June 2006. The company selected Huawei Technologies Company, a leading
provider of next generation telecommunications network solutions to deploy the first
WiMAX 802.16e-based network in the Middle East, covering major cities including
Riyadh, Jeddah and Dammam. Under the agreement, Huawei will design and deploy an
end-to-end WiMAX 802.16e network including Base Station, Access Service Network
Gateway, Network Management System, as well as an Authorization, Authentication
and Accounting system.

STC is still playing a leading role in the internet and data markets. However, the company
operates in a very competitive environment that includes more than 50 ISP providers,
8 VSAT operators, and another 2 data service providers namely Integrated Telecom
company (ITC), and Bayanat Al Oula Co.

Following the break-up of STC’s monopoly , and increasing competition in the Saudi
telecom market, the company started considering inorganic growth opportunities. In
June 2007, STC entered into a deal to form a strategic partnership with Binariang GSM
(Binariang), the principal shareholder of Maxis Communications (Maxis), the Malaysian-
based integrated telecommunications operator, and its subsidiary PT Natrindo Telepon
Seluler (NTS). The deal is worth SR11.4bn (US$3.05bn), including a SR3.4bn credit
facility to be provided equally by the partners to finance the Indian expansion of Maxis
Indian unit, Aircel.

The Maxis Group has operations in Malaysia, Indonesia and India. STC will participate
in the recapitalization and restructuring of Binariang which, under the terms of the
current take-private offer, will hold 100% of Maxis, and will invest together with the
other shareholders of Binariang to fund the international operations of Maxis in India
and Indonesia. Upon conclusion of the deal, STC will have a 25% effective interest in
Maxis and a 51% direct stake in NTS, Maxis’ subsidiary in Indonesia.

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Maxis had 8.5mn subscribers in Malaysia at end of March 2007, a market share of 41.5%.
NTS has a license to build and operate 2G and 3G networks in Indonesia, which it plans
to launch by the end of 2007. Aircel, Maxis’ Indian subsidiary, has operations in nine
of India’s 23 telecoms regions and has obtained licenses for the rest. Aircel had 5.5mn
subscribers at end of March 2007.

(For more information please refer to our latest research update on the company)

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Mobile Telecommunications Co. (Zain)

MTC , now re-branded to Zain, won the bid for Saudi Arabia’s third mobile license in
March 2007, which included 2G, 3G and international licenses. MTC (Zain) and its
consortium partners won the bid for a price of US$6.1bn (SR22.9bn). The company is
expected to launch its operations in Saudi by 1Q-2008 under the brand name Zain.

Listed on the Kuwait Stock Exchange, MTC (Zain) market capitalization stood at
US$28.8bn as at October 9, 2007. There are no restrictions on MTC (Zain) shares as the
company’s capital is 100% free float and publicly traded. The largest shareholder is the
Kuwait Investment Authority (24.6%).

MTC (Zain) has had a partner network agreement with Vodafone in 2001 in Kuwait and
Bahrain by which management and operational know-how is shared between the two
companies.

The company moved into Lebanon in 2002 when it was awarded a five year contract by
the Lebanese government to manage and develop Mobile Interim Company (MIC2), one
of two government owned mobile telephone companies.

MTC (Zain) launched in 2003, through MTC Vodafone Bahrain, the first 3G/EDGE
nationwide network in the world. It also launched in December 2005 the first video calls
in the region between Kuwait and Bahrain.

MTC (Zain) moved into Iraq when it acquired 30% of Atheer Telecommunications in
2003. It also expanded into Jordan by acquiring Orascom’s shares in Jordan Mobile
Telephone Services (Fastlink) for US$423.9mn. Later, MTC acquired 100% of the
African operator Celtel in April 2005 for US$3.1bn. Celtel operated in 14 Sub-Saharan
countries with 8.5mn subscribers, which made up 65% of MTC total subscriber base
when it was acquired.

MTC (Zain) recorded consolidated revenues of KD1.121bn (US$4.167bn) for 2006,

an increase of 109% over 2005. Consolidated EBITDA increased by 78% over same
period last year to reach KD593.96mn (US$2.045bn), a margin of 49%. Consolidated
net income stood at KD305.3mn (US$1.051bn), an increase of 65% over 2005.

(For more information please refer to our latest research update on the company)

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Mobily Financial Overview

Airtime Usage & Interconnection revenues form the majority of revenues…
Mobily recorded service revenues of SR6.2bn for 2006, increasing by 272% over SR1.7bn
reported in the period from December 14, 2004 to December 31, 2005. The two main
components of revenues were airtime usage forming 76% of total revenues, followed
by interconnection revenues which formed 18% of total revenues. Usage revenues
increased by 264% on a y-o-y basis to reach SR4.7bn in 2006, while interconnection
revenues increased by 259% to reach SR1.1bn.

Chart 12: Revenue Breakdown (2006)

Activation Fees
Rental Fees
Usage
SR 6.2bn
Interconnect Revenues
Visitor Roaming
Others

Source: Company Reports, Global Research

Expected expansion in broadband to limit the pressure on ARPUs…

ARPU stood at SR85 in 2006 compared to SR60 in 2005, which was way below that of
STC’s and below the region’s average due to Mobily’s high ratio of prepaid subscribers’
which accounts for nearly 93% of the company’s total subscribers as mentioned earlier.
Going forward, we expect increased pressure on ARPUs following the entrance of a
third operator into the market and the expected decline in tariffs. However, the pressure
will be partially offset by the expected increase in the company’s postpaid subscribers,
coupled with the increase in revenues from the expansion in broadband, and data services
and an expected increase in rental fees following the completion of the company’s fiber
optic network in 2008. Accordingly, we expect a decline in the company’s ARPUs
in 2007 and 2008, then we except ARPUs to pick up in 2009. We expect Mobily’s
revenues to grow at CAGR of 19% during the period (2006-2010E).

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Chart 13: Revenues & ARPUs

14,000,000 90 95
12,000,000
10,000,000 90
SR’000

8,000,000 85
83 85 85

SR
6,000,000
4,000,000 81 80
2,000,000
- 75
2006 2007E 2008E 2009E 20109E

Revenues ARPU

Source: Company Reports, Global Research

Interconnection expenses formed 47% of total costs in 2006…

Total service costs stood at SR2.7bn in 2006, increasing by 175% from SR967mn
recorded in the previous period. Interconnection expenses formed 47% of total costs,
and increased by 243% over the previous period. Government revenues share formed
17% of total costs in 2006 compared to 5% in the previous period. As per the revenue
sharing agreement with the government, the company has to pay fees equivalent to
5% of net revenues in the first year of operation, 10% in the second year, and 15% in
the third year onward. In addition, the company pays annual license fees of 1% of net
revenues. National and international roaming costs formed 14% of total costs in 2006
compared to 27% in the previous period. Transmission and international gateway costs
formed 8% of total costs in 2006 compared to 15% in the previous period.

Chart 14: Costs Breakdown (2006)

Consumption of Inventories
Interconnection Expenses
National & International Roaming Costs
License Fees
SR 2.7bn Government Revenue Share
Frequency Charge & Rental
Transmission & International Gateway Cost
Technical Repair & Maintenance Cost
Sites Rental
Others

Source: Company Reports, Global Research

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Costs to decline with the completion of Mobily’s own network and increase in
coverage….
Costs to revenues ratio stood at 43% in 2006, down from 58% in the previous period.
Accordingly, Gross margin improved from 42% to 57% in 2006. Going forward, we
expect the ratio to come down after the company develops its own international gateway,
expected in 2008 which will lead to the decline in international gateway costs. In addition,
national and international roaming costs are also expected to decline in tandem with the
increase in Mobily’s network coverage. On another hand, interconnection expenses, the
major component of total costs is likely to come down with the increase in Mobily’s
market share. We expect costs to revenues ratio of 47% in 2007, then gradually declining
starting from 2008.

Chart 15: Operating Efficiency

48% 62%
59% 60%
46% 60%
56% 58%
44% 57%
53% 56%
42%
54%
40% 52%
38% 50%
36% 48%
2006 2007E 2008E 2009E 2010E

Cost to Rev. Rtio Gross Profit Margin

Source: Company Reports, Global Research

Increasing selling, general, and administrative expenses…

Selling and marketing expenses stood at SR702.7mn in 2006, increasing by 156%
from SR274.3mn in the previous period. General and administrative expenses (G&A)
increased by 45% during the same period to reach SR694.7mn in 2006. Staff expenses
formed 51% of G&A in 2006, and increased by 154% over the previous period. G&A
expenses also include annual management fees of SR37.5mn (US$10mn) paid to the
Emirates Telecommunication Corporation (Etisalat) for a period of 7 years subject to
renewal. Given the expected increase in competition and the expansion in the company’s
services, we expect further increases in marketing, and G&A expenses.

Positive EBITDA in the second year of operation, expected to improve further…

Mobily managed to achieve a positive EBITDA during the second year of operation,
with an EBITDA of SR2bn compared to a loss of SR113mn in the previous period.
EBITDA margin stood at 32.4% in 2006. Going forward, we expect EBITDA margin to
improve further, approaching the regional average of 43%. The improvement will most
likely result from the expected decline in operational costs as mentioned earlier after the
company develops its own international gateway, the potential of increasing Mobily’s
customers base and market share, and the completion of the fiber optic network. We
expect EBITDA to grow at CAGR of 25% during the period (2006-2010E).

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Chart 16: EBITDA

6,000,000 45%
38% 40%
36% 40%
5,000,000 32% 33%
35%
4,000,000 30%
SR’000

25%
3,000,000
20%
2,000,000 15%
10%
1,000,000
5%
- 0%
2006 2007E 2008E 2009E 2010E

EBITDA EBITDA margin

Source: Company Reports, Global Research

Improving Profitability…
The company reported net income of SR700.4mn in 2006 compared to a loss of SR1.2bn
in the previous period, with a net profit margin of 11.3%. Return on Equity stood at
15.5% in 2006, while Return on Assets stood at 4%. We expect Net profit to grow at
CAGR of 47% during the period (2006-2010E).

Chart 17: Profitability

26% 30% 35% 16%
3,500,000 31%
24% 30% 14%
3,000,000 25% 30% 27%
19% 25% 22% 12%
SR’000

2,500,000 16% 20% 10%

20%
2,000,000 11% 15% 15% 8%
15%
1,500,000 6%
10% 10%
1,000,000 4%
5% 5% 2%
-
0% 0% 0%
0E

0E
9E

9E
E

E
7E

7E
06

06
08

08
20

20
1

1
0

0
0

0
20

20
20

20
20

20
20

20

Net Profit NPM ROE ROA

Source: Company Reports, Global Research

Total assets of SR17.7bn…

Mobily’s total assets stood at SR17.7bn, and grew by 9% on a year on year basis. Net
license acquisition fees constituted 67% of total assets. License acquisition fees are
amortized over the license period of 25 years. Net property and equipment formed 22%
of total assets. We expect total assets to grow at CAGR of 7% during the period (2006-
2010E).

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Chart 18: Asset Structure

25.0

20.0
4.3 5.6 7.2
2.0 2.9
15.0
3.8 4.9 5.7 6.2 6.5
SR bn
10.0

5.0
11.8 11.3 10.8 10.3 9.7

-
2006 2007E 2008E 2009E 2010E

Net License Fees Property & Equipment Others

Source: Company Reports, Global Research

During 2006, capex stood at SR1.5bn, declining by 48% from SR2.8bn in 2005. Capex
to sales ratio stood at 24% in 2006. We expect a gradual decline in capex to sales ratio
to reach 8% by 2010.

Chart 19: Capex

2,000,000 24% 25%

17% 20%
1,500,000 14%
10%
SR’000

8% 15%
1,000,000
10%
500,000
5%

- 0%
2006 2007E 2008E 2009E 2010E
Capex Capex to Sales

Source: Company Reports, Global Research

Declining debt to equity ratio…

The company’s debt to equity ratio stood at 2x in 2006, declining from 2.3x in 2005.
The company’s total debt amounted to SR9.4bn in 2006, and included short term loans
of SR7.8bn and a loan of SR1.6bn from founding shareholders.

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Chart 20: Debt to Equity

14.0 12.1
12.0
9.4 9.1 9.9
10.0 8.8 7.8 7.7
8.0
SRbn

5.8 6.6
6.0
4.5
4.0
2.0
-
2006 2007E 2008E 2009E 2010E
Debt Equity

Source: Company Reports, Global Research

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1H 2007 Results

Mobily reported net income of SR554.4mn in 1H 2007, increasing by 261% from

SR153.6mn reported during the same period in 2006. Revenues increased by 52% to
reach SR3.9bn compared to SR2.6bn in 1H 2006.

Table 08:1H 2007 Income Statement

SR’000 1H 2006 1H2007 Change
(yoy)
Service Revenue 2,575,015 3,905,595 52%
Cost of Services (1,170,093) (1,806,767) 54%
Gross Margin 1,404,922 2,098,828 49%
Selling & Marketing Expenses (316,198) (270,447) -14%
General & Administrative Expenses (263,340) (452,413) 72%
Provisions (43,191) (91,054) 111%
Earnings Before Interest, Tax, Depreciation, 782,193 1,284,914 64%
Amortization (EBITDA)
Depreciation & Amortization (414,312) (484,951) 17%
Earnings Before Interest, Tax (EBIT) 367,881 799,963 117%
Financing Costs (216,949) (261,264) 20%
Other Revenues 2,682 15,756 487%
Net Profit 153,614 554,455 261%
Source: Company Reports

Cost to revenues ratio increased from 45.4% in 1H 2006 to 46.3% in 1H 2007. Gross
margin increased by 49% to reach SR2bn. EBITDA increased by 64% to reach SR1.3bn
in 1H 2007 compared to SR782mn in 1H 2006, with an EBITDA margin of 33%
compared to 30% in 1H 2006. Net profit margin for the period stood at 14.2% compared
to 6% in 1H 2006.

Total assets stood at SR17.72bn, increasing marginally by 0.2% from SR17.68bn reported
at the end of 2006. Property and Equipment increased by 8.9% from SR3.8bn at the end
of 2006 to SR4bn in 1H 2007. During 2007, Mobily signed long term Islamic financing
agreements with a group of local, regional and international banks for US$2.875bn
(SR10.78bn). The new funds were used to repay the company’s short term debt.

28 Etihad Etisalat Company - Mobily October 2007

Global Research - Saudi Arabia Global Investment House

Table 09:1H 2007 Balance Sheet

SR’000 2006 1H 2007 Change
Cash and Cash Equivalents 547,523 591,666 8.1%
Accounts Receivable (Net) 739,228 481,462 -34.9%
Inventories 38,048 26,380 -30.7%
Other Current Assets 716,688 889,622 24.1%
Total Current Assets 2,041,487 1,989,130 -2.6%
Property & Equipment (Net) 3,847,532 4,191,054 8.9%
License Acquisition Fees (Net) 11,800,160 11,543,427 -2.2%
Total Non Current Assets 15,647,692 15,734,481 0.6%
Total Assets 17,689,179 17,723,611 0.2%
Short-Term Loans 7,839,943 - -
Current portion of Long Term Loans - 693,809 -
Creditors 1,516,376 1,140,068 -24.8%
Due to Related Parties 179,335 158,417 -11.7%
Other Current Liabilities 320,294 309,120 -3.5%
Accrued Expenses 1,687,156 1,903,684 12.8%
Total Current Liabilities 11,543,104 4,205,098 -63.6%
Provision for Employees’ End of Service Benefits 13,096 18,942 44.6%
Founding Shareholders’ Loan 1,600,000 - -
Long Term Debt - 8,412,137 -
Total Non Current Liabilities 1,613,096 8,431,079 422.7%
Total Liabilities 13,156,200 12,636,177 -4.0%
Paid Up Capital 5,000,000 5,000,000 -
Retained Earnings/ Accumulated Losses (467,021) 87,434 118.7%
Total Shareholders’ Equity 4,532,979 5,087,434 12.2%
Total Liabilities and Shareholders’ Equity 17,689,179 17,723,611 0.2%
Source: Company Reports

October 2007 Etihad Etisalat Company - Mobily 29

Global Research - Saudi Arabia Global Investment House

Outlook & Future Prospects

Around 20 million people now own mobile phones in Saudi representing 82% of the
population. With most of the penetration rates in GCC countries surpassing the 100%
mark, we believe that there is a potential for more in Saudi. As such, mobile penetration
rates in Saudi Arabia are expected to increase going forward on the back of increasing
demand for mobiles among younger generation, increasing economic activities in the
country requiring telecom infrastructure support, and the government’s intention to
liberalize various sectors as part of joining WTO. In addition, a third mobile operator,
MTC (Zain) will join the market in 2008 which will force market players to strive to
offer new and innovative services at the best prices, thus attracting more demand.

Since inception, Mobily has relied on innovative services and latest technologies to attract
customers. The company was the first mobile operator in Saudi to offer services such as
Blackberry MMS, locations based service (LBS), international roaming for prepaid SIM
cards in addition to GPRS and GPRS EDGE roaming. Mobily has also made tremendous
strides in expanding broadband services. In May 2007, Mobily shifted the data service
consumption conversation from kilobytes to gigabytes when it launched the region’s
first unlimited broadband mobile internet package in the region, along with the two high-
value 5 and 1 gigabyte bundles. The company had the highest market share of 3G users
in 2006, with a market share of 58%, and is currently investing SR1bn to expand its 3G
network to cover more Saudi cities. In 2007, the company doubled the broadband mobile
Internet speed and introduced a 7.2 Mbps modems and data service SIM cards based on
HSDPA (high-speed downlink packet access).

The company’s latest acquisition of the local data provider Bayanat Al-Oula will further
enhance the company’s position in the wireless broadband internet segment, with the
WiMAX technology along with Mobily’s current HSDPA technology. Mobily had earlier
joined forces with Bayanat Al-Oula and Integrated Telecom Company to build, deploy
and operate the Kingdom’s largest fiber optic network with a total value of SR1bn that
will cover 12,000 km of highways as well as cities Kingdom-wide. The new network
will enable Mobily to provide other services with highly sophisticated technologies.

Going forward, we believe that key growth areas for the company would be broadband
and 3.5G services, especially with a penetration of only 1% in Saudi Arabia which is
lagging behind many countries. Lower mobile penetration rates compared to regional
peers offers another potential for the company. We expect the entrance of a third operator
to have a greater effect on the operator with the largest market share, STC, than on Mobily.
Though, we expect further reduction in mobile tariffs with increased competition, we
believe that the focus on high quality services based on the latest technologies will be the
main differentiator between the competitors.

With competition intensifying, we believe there would be pressure on ARPUs for Mobily
particularly since most of the company’s customers’ base (93%) is prepaid subscribers.
However, we expect the pressure to be eased in the medium term through the expected
increase in the company’s postpaid subscribers, coupled with Mobily’s increased focus
on broadband and 3.5G services.

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Global Research - Saudi Arabia Global Investment House

Valuation and Recommendation

Two valuation methods have been used to arrive at the fair value of Mobily, the Discounted
Cash Flow (DCF) – discounting the company Free Cash Flow to Firm (FCFF)- along
with the Price to Earnings (P/E) relative valuation method. We have assigned an 80%
weight to the DCF valuation and 20% to the P/BV valuation.

a) DCF Valuation – The DCF model is based on a 4-year (FY2007-FY2010) explicit

forecast period for the Free Cash Flow to Firm (FCFF). The terminal value is estimated
using the constant growth Gordon Growth Model (GGM). The forecasted cash flow and
the terminal value is then discounted at the company Weighted Average Cost of Capital
(WACC). In our DCF valuation, we have used the following assumptions:

1. Risk Free Rate (RFR) of 5.8% as per yield on the 10-year bond.
2. Equity risk premium of 5.5%.
3. Beta of 1.
4. A terminal growth rate of 4%.
5. A target cost of debt of 7%.

Using the above assumptions, we have derived a cost of equity for the company under
the Capital Assets Pricing Model of 11.3%, and a WACC of 10.0%, resulting in fair
value of SR86.8 per share.

Table 10: DCF Calculations

(SR’000) 2007 (E) 2008 (E) 2009 (E) 2010 (E)
FCFF 1,304,034 1,493,446 2,547,996 3,472,013
Discounted Cash Flow 1,278,499 1,331,608 2,066,144 2,560,462
Terminal Value 60,610,891
Primary Value 7,236,712
Terminal Value (discounted) 44,697,948
Total Enterprise Value 51,934,660
Debt (9,105,946)
Add: Investments & cash equivalents 591,666
Total Equity Value 43,420,380
Shares Outstanding (‘000) 500,000
Fair Value Per Share 86.8

Sensitivity Analysis
We provide below a sensitivity analysis table, which shows the probable value given
different growth rate assumption and WACC. The shaded area represents the most
probable outcomes.

October 2007 Etihad Etisalat Company - Mobily 31

Global Research - Saudi Arabia Global Investment House

Table 11: Sensitivity Analysis

Terminal Growth rate
86.8 3.0% 3.5% 4.0% 4.5% 5.0%
9.0% 75.7 82.1 89.6 98.5 109.3
WACC 9.5% 74.4 80.8 88.2 96.9 107.5
10.0% 73.2 79.5 86.8 95.5 105.9
10.5% 71.9 78.1 85.3 93.8 104.1
11.0% 70.7 76.8 83.9 92.3 102.4
Source: Global Research.

b) Valuations based on multiples – For relative valuation, we have used the valuation
of selected telecom operators in the GCC region. We believe that the comparative
valuation would be appropriately reflected through the earnings multiple i.e. P/E.
The price-earnings multiple of a stock is a reflection of various factors, such as the
expected profitability of the company, its growth potential as perceived by the market,
predictability and sustainability of its revenues, the quality of its earnings and the quality
of its management, among others. Based on a weighted average P/E of 14x, Mobily’s
stock valuation comes to SR36.8 based on its forecasted earning for FY 2007.

As the earnings multiples vary with time and are dependent on several factors such as
market sentiment and other qualitative factors, we have provided 20% weight to the P/E
multiple and 80% to the DCF value calculation.

Table 12: Weighted Price

Valuation Approach Fair Value/Share Weight Weighted Value
(SR) (SR)
DCF Valuation 86.8 80% 69.5
Peer Group Valuation 36.8 20% 7.4
Estimated Fair Price 76.8
Current Market Price (SR) 65.5
Premium / (Discount) 17.3%
Source: Global Research

The combination of both the methods suggests a fair value of around SR76.8 per share.
The stock currently trades at around SR65.5, which implies that the value arrived by
using above methods is 17.3% higher than the current market price. Therefore, we
initiate our coverage on Mobilly with a “BUY” recommendation.

32 Etihad Etisalat Company - Mobily October 2007

 BALANCE SHEET
Etihad Etisalat Company “Mobily”
SR’000 2005 2006 2007 (E) 2008 (E) 2009 (E) 2010 (E)
Cash and Cash Equivalents 185,172 547,523 1,158,765 2,030,176 2,795,053 4,005,215
Accounts Receivable (Net) 166,822 739,228 620,102 852,192 937,973 922,869

October 2007
Inventories 32,075 38,048 55,113 153,787 203,809 247,434
Other Current Assets 782,765 716,688 1,039,198 1,298,997 1,623,746 2,029,683
Total Current Assets 1,166,834 2,041,487 2,873,178 4,335,152 5,560,582 7,205,201
Property & Equipment (Net) 2,723,840 3,847,532 4,855,147 5,668,797 6,181,665 6,455,027
License Acquisition Fees (Net) 12,313,626 11,800,160 11,286,694 10,773,228 10,259,762 9,746,296
Total Non Current Assets 15,037,466 15,647,692 16,141,841 16,442,025 16,441,427 16,201,323
Global Research - Saudi Arabia

Total Assets 16,204,300 17,689,179 19,015,020 20,777,178 22,002,009 23,406,525

Short-Term Loans 7,348,129 7,839,943 - - - -

Current portion of Long Term Loans - - 693,809 1,081,435 1,081,435 1,081,435
Creditors 876,118 1,516,376 1,364,738 1,432,975 1,504,624 1,579,855
Due to Related Parties 193,251 179,335 188,302 197,717 207,603 217,983
Other Current Liabilities 218,017 320,294 326,700 333,234 339,899 346,697
Accrued Expenses 2,133,514 1,687,156 2,165,149 2,196,962 2,264,544 2,474,340
Total Current Liabilities 10,769,029 11,543,104 4,738,698 5,242,323 5,398,105 5,700,309
Provision for Employees’ End of Service Benefits 2,650 13,096 20,408 26,989 32,912 38,243

Etihad Etisalat Company - Mobily

Founding Shareholders’ Loan 1,600,000 1,600,000 - - - -
Long Term Debt - - 8,412,137 7,718,328 6,636,893 5,555,458
Total Non Current Liabilities 1,602,650 1,613,096 8,432,545 7,745,317 6,669,805 5,593,701
Total Liabilities 12,371,679 13,156,200 13,171,244 12,987,640 12,067,910 11,294,010

Paid Up Capital 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000

Reserves - - 131,080 325,656 588,756 911,838
Proposed Dividends - - - 486,440 1,052,401 1,615,408
Retained Earnings/ Accumulated Losses (1,167,379) (467,021) 712,696 1,977,441 3,292,942 4,585,269
Global Investment House

33
Total Shareholders’ Equity 3,832,621 4,532,979 5,843,776 7,789,538 9,934,099 12,112,515
Total Liabilities and Shareholders’ Equity 16,204,300 17,689,179 19,015,020 20,777,178 22,002,009 23,406,525
34
INCOME STATEMENT
Etihad Etisalat Company “Mobily”
SR’000 2005* 2006 2007 (E) 2008 (E) 2009 (E) 2010 (E)
Service Revenue 1,661,737 6,183,236 8,381,029 10,007,922 11,127,982 12,371,698
Cost of Services (967,240) (2,661,184) (3,936,635) (4,393,924) (4,529,089) (4,948,679)
Gross Margin 694,497 3,522,052 4,444,394 5,613,998 6,598,893 7,423,019
Selling & Marketing Expenses (274,298) (702,670) (544,767) (700,555) (778,959) (866,019)
General & Administrative Expenses (480,316) (694,704) (955,223) (1,133,367) (1,272,706) (1,361,272)
Global Research - Saudi Arabia

Provisions (52,650) (124,174) (158,171) (226,755) (272,994) (302,251)

Earnings Before Interest, Tax, Depreciation, Amortization (EBITDA) (112,767) 2,000,504 2,786,234 3,553,321 4,274,234 4,893,477
Depreciation & Amortization (739,141) (844,979) (958,471) (1,064,952) (1,154,995) (1,232,393)
Earnings Before Interest, Tax (EBIT) (851,908) 1,155,525 1,827,762 2,488,369 3,119,240 3,661,084
Financing Costs (347,641) (478,680) (546,357) (527,986) (463,100) (398,214)
Other Revenues 32,170 23,513 29,391 35,270 42,323 50,788
Net Income before Zakat (1,167,379) 700,358 1,310,797 1,995,653 2,698,463 3,313,658
Zakat - - - (49,891) (67,462) (82,841)
Net Income (1,167,379) 700,358 1,310,797 1,945,762 2,631,002 3,230,817

Etihad Etisalat Company - Mobily

* From 14/12/2004 to 31/12/2005

P&L Appropriation account

Opening Balance of Retained Earnings (1,167,379) (467,021) 712,696 1,977,441 3,292,942
Net Income /Loss (1,167,379) 700,358 1,310,797 1,945,762 2,631,002 3,230,817
Reserves - - 131,080 194,576 263,100 323,082
Proposed Dividends - - - 486,440 1,052,401 1,615,408
Closing Balance of Retained Earnings (1,167,379) (467,021) 712,696 1,977,441 3,292,942 4,585,269
Global Investment House

October 2007
 CASH FLOW STATEMENT
Etihad Etisalat Company “Mobily”
SR’000 2005* 2006 2007 (E) 2008 (E) 2009 (E) 2010 (E)
Net Income / Loss (1,167,379) 700,358 1,310,797 1,945,762 2,631,002 3,230,817
Amortization of License Acquisition Fee 665,613 513,466 513,466 513,466 513,466 513,466
Depreciation 73,528 331,513 445,005 551,486 641,529 718,927

October 2007
Provision For Employees’ End Of Service Benefits 2,650 10,698 7,312 6,581 5,923 5,331
Provision For Doubtful Accounts 50,000 113,476 150,859 220,174 267,072 296,921
Changes in Working Capital 2,389,238 (343,769) (29,579) (694,739) (571,842) (429,174)
Accounts Receivable (216,822) (685,882) (31,733) (452,263) (352,853) (281,817)
Inventories (32,075) (5,973) (17,065) (98,674) (50,022) (43,625)
Other Current Assets (782,765) 66,077 (322,510) (259,799) (324,749) (405,937)
Global Research - Saudi Arabia

Creditors 876,118 640,258 (151,638) 68,237 71,649 75,231

Due to Related Parties 193,251 (13,916) 8,967 9,415 9,886 10,380
Other Current Liabilities 218,017 102,277 6,406 6,534 6,665 6,798
Accrued Expenses 2,133,514 (446,358) 477,993 31,812 67,583 209,795
Payment of Employees’ End of Service Benefits - (252) - - - -
Net Cash From Operating Activities 2,013,650 1,325,742 2,397,860 2,542,730 3,487,148 4,336,287

Purchase of Property and Equipment (2,797,368) (1,455,205) (1,452,620) (1,365,136) (1,154,396) (992,290)
Payment for license Fees (12,979,239) - - - - -

Etihad Etisalat Company - Mobily

Net Cash From Investing Activities (15,776,607) (1,455,205) (1,452,620) (1,365,136) (1,154,396) (992,290)

Share Capital 5,000,000 - - - - -

Short Term Debt 7,348,129 491,814 (7,839,943) - - -
Founding Shareholders’ Loan 1,600,000 - (1,600,000) - - -
Long Term Debt - - 9,105,946 (306,183) (1,081,435) (1,081,435)
Dividends Paid - - (486,440) (1,052,401)
Net Cash From Financing Activities 13,948,129 491,814 (333,997) (306,183) (1,567,875) (2,133,836)
Net Cash Flows during the year 185,172 362,351 611,242 871,411 764,877 1,210,162
Cash & Cash equivalents at the beginning of the year - 185,172 547,523 1,158,765 2,030,176 2,795,053
Global Investment House

35
Cash & Cash equivalents at the end of the year 185,172 547,523 1,158,765 2,030,176 2,795,053 4,005,215a
 Global Research - Saudi Arabia Global Investment House

FACT SHEET
Etihad Etisalat Company “Mobily”
2005 2006 2007 (E) 2008 (E) 2009 (E) 2010 (E)
Liquidity Ratios
Current ratio (times) 0.11 0.18 0.61 0.83 1.03 1.26
Quick ratio (times) 0.11 0.17 0.59 0.80 0.99 1.22
Cash ratio (times) 0.02 0.05 0.24 0.39 0.52 0.70

Profitability Ratios
Gross Margin % 41.8% 57.0% 53.0% 56.1% 59.3% 60.0%
EBITDA Margin % -6.8% 32.4% 33.2% 35.5% 38.4% 39.6%
EBIT Margin % -51.3% 18.7% 21.8% 24.9% 28.0% 29.6%
Net Profit Margin -70.3% 11.3% 15.6% 19.4% 23.6% 26.1%
ROE % -30.5% 15.5% 22.4% 26.6% 29.6% 30.8%
ROA % -7.2% 4.0% 6.9% 9.4% 12.0% 13.8%
ROS % -70.3% 11.3% 15.6% 19.4% 23.6% 26.1%

Efficiency Ratios
A/R Turnover (times) NA 13.65 12.33 13.60 12.43 13.30
Inventory Turnover (times) NA 75.90 84.51 42.07 25.33 21.93
A/P Turnover (times) NA 2.22 2.73 3.14 3.08 3.21
COGS/Sales 58.2% 43.0% 47.0% 43.9% 40.7% 40.0%
S,G&A /Sales 45.4% 22.6% 17.9% 18.3% 18.4% 18.0%

Financing Ratios
Debt to equity (times) 2.33 2.08 1.56 1.13 0.78 0.55
Debt to total assets % 55.2% 53.4% 47.9% 42.4% 35.1% 28.4%
Dividends payout ratio % - - - 25% 40% 50%

Growth Rates
Revenue growth rate NA 272% 36% 19% 11% 11%
Net income growth rate NA -160% 87% 48% 35% 23%
Equity growth rate NA 18% 29% 33% 28% 22%
Total assets growth rate NA 9% 7% 9% 6% 6%
Sustainable growth rate NA 15.5% 22.4% 20.0% 17.8% 15.4%

Share Valuation Ratios

Number of shares (in 000)* 500,000 500,000 500,000 500,000 500,000 500,000
Par Value per share (SR)* 10 10 10 10 10 10
BV per share (SR) 7.7 9.1 11.7 15.6 19.9 24.2
EPS (SR) NA 1.40 2.62 3.89 5.26 6.46
Market price share (SR) 140.00 52.00 65.50 65.50 65.50 65.50
Market capitalization (SR 000) 70,000,000 26,000,000 32,750,000 32,750,000 32,750,000 32,750,000
Enterprise Value (EV SR 000) 78,762,957 34,892,420 40,697,181 39,519,587 37,673,275 35,381,678
EV / EBITDA NA 17.4 14.6 11.1 8.8 7.2
P/E ratio NA 37.1 25.0 16.8 12.4 10.1
P/BV ratio - 5.7 5.6 4.2 3.3 2.7
* Adjusted for Stock Split
Market price for 2007 and subsequent years as on October 9, 2007

36 Etihad Etisalat Company - Mobily October 2007

 Global Research
Global Investment House
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[email protected]
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Only the relevant disclosures which apply to this particular research has been mentioned in the table
below under the heading of disclosure.
Disclosure Checklist
Company Recommendation Ticker Price Disclosure
Etihad Etisalat Company Buy 7020.SE SR65.5 1,10

1. Global Investment House did not receive and will not receive any compensation from the company
or anyone else for the preparation of this report.
2. The company being researched holds more than 5% stake in Global Investment House.
3. Global Investment House makes a market in securities issued by this company.
4. Global Investment House acts as a corporate broker or sponsor to this company.
5. The author of or an individual who assisted in the preparation of this report (or a member of his/her
household) has a direct ownership position in securities issued by this company.
6. An employee of Global Investment House serves on the board of directors of this company.
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8. Global Investment House has received compensation from this company for the provision of
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9. Global Investment House expects to receive or intends to seek compensation for investment banking
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10. Please see special footnote below for other relevant disclosures.

Global Research: Equity Ratings Definitions

Global Rarting Definition
Buy Fair value of the stock is >10% from the current market price
Hold Fair value of the stock is between +10% and -10% from the current market price
Reduce Fair value of the stock is between -10% and -20% from the current market price
Sell Fair value of the stock is < -20% from the current market price

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