30 January 2017 EEMEA/Russia Equity Research Teleservices

Russian CIS TMT Themes Research Analysts THEME Olga Bystrova, CFA 7 495 967 8871 [email protected] Mobile pricing trends and digital strategies Mobile pricing and digital strategies are one of the key topics in the Russian mobile sector in 2017. In this report, we provide an update on mobile pricing trends in Russia which we continue to see improving, and take a first look into the digital strategy theme. Mobile pricing: The #1 and #2 mobile operators already effectively increased prices in Russia. Our analysis of other cases in some European countries suggests that revenue growth could increase in the low- to mid-single digits over the 12 months following price increases, ceteris paribus. We currently forecast mobile sector revenue growth at the lower end of that range and are waiting for a more explicit follow-through in price increases from the #3 and #4 mobile operators. Digital strategies: Digital strategies are being addressed in many ways globally already, but evidence of the potential impact on revenues/valuations is still limited. The MegaFon/Mail.Ru deal is more specific, targeting monetisation of social media users new to MegaFon and the quality of subscriber segmentation via BigData. Our initial analysis of the valuation impact from this deal suggests that, for it to be material, MegaFon’s market share gain among Mail.Ru’s users needs to be material and the revenue sharing agreement needs to be strongly in favour of MegaFon. A similar argument holds for Mail.Ru, although the company seems to be more levered to the additional cash flow opportunity.

Figure 1: Increase in average price per GB in Russian during 2016

2.5

2.0

1.5

1.0

0.5

0.0 Ave price per GB, Moscow (US$*) Ave price per GB, regions (US$*)

Mar-16 Oct-16 Jan-17

* at Rbls/US$60 for all periods. Source: Company data, Credit Suisse estimates.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 30 January 2017

Price increases: Evidence and potential impact Pricing in Russia has on balance been improving since April 2016. We wrote about our expectations for pricing trends in Russia extensively in two previous sector notes. In a June 2016 report we expected that after a 2 year period of significant price deterioration prices were likely to go up. ■ Russian and CIS Telecoms: Inflection point for macro and competition?, dated 20 June 2016 ■ Russian Mobile: Downgrading on risks in 2014-15E dated 9 January 2014 There have been front book price increases by the two main players since October 2016. Tele2 also increased prices in April 2016. Since then, there has been limited action from either Tele2 or Vimpelcom on pricing. There has also been the introduction of unlimited tariffs by several players. We expect slow withdrawal of old tariffs by #1 and #2, and we expect select price improvements from Vimpelcom and Tele2 as well, although this still remains an uncertainty. High, although likely declining, churn coupled with slow improvement in consumer trends (wages and consumption), will most likely lead to recovering revenue trends. This is supported by evidence in some European countries. Based on cases in select European countries, revenues in Russia could increase low to mid single digits over 12 months, even with mostly frontbook price increases. We think the revenue recovery could be stronger if and when operators eliminate old tariffs and #3 and #4 participate. Mobile pricing in 2H 2016 in year-to-date 2017 MegaFon made changes to its tariff line at the end of December 2016 decreasing the amount of data allowances on lower end bundles without changing the bundle price and increasing prices on the higher end bundles. ■ The lowest data bundle, which costs Rbls 300, was reduced from 2GB to 1GB and additionally now has 50% less off-net minutes (off-net minutes were reduced from 300 to 200); ■ The medium bundle now also has a lower data allowance – 3GB down from 5GB – and smaller voice package with minutes reduced from 550 to 500; ■ Furthermore, MegaFon excluded unlimited on-net domestic calls from its cheapest tariffs in several regions. ■ MegaFon also withdrew its unlimited Yota tariffs in January 2017 for smartphone users only (unlimited tariffs for modems remained). Some of the companies still offer an Unlimited data bundle but we think it is likely they will consider departing from this strategy as well. Vimpelcom and Tele2 have not reacted in Moscow since initial price increases, but there were several price changes in the regions late in the year. MTS further increased its medium bundle price in St. Petersburg (from Rbls 300 to 350), and MegaFon reduced data offering and increased prices for its cheapest tariffs in several regions (Samara and Nizhniy Novgorod). Tele2 increased the price for its lowest bundle in some regions (from Rbls 75 to 99 in Samara, for example). We have not seen material changes from Vimpelcom yet. Tele2 recently (Vedomosti, 25 January 2017) said that it is planning changes to its tariff line in the near future.

Russian CIS TMT Themes2 30 January 2017

Besides that, Rostelecom launched its B2C MVNO project on Tele2 network in September 2016 with presence in 60 regions (incl. Moscow) by mid-October. The tariffs now are identical to ones offered by Tele2 and we therefore do not see an incremental threat to the market from this. The company plans to have 15% of their client base using mobile services.

Figure 2: Mobile pricing trends 2016-ytd 2017 in Moscow

Small bundle MTS MegaFon Vimpelcom Tele2 / RTKM

Data of latest changes Mar-16 Oct-16 Jan-17 Mar-16 Oct-16 Jan-17 Mar-16 Oct-16 Jan-17 Mar-16 Apr-16 Jan-17 Price (Rbls) 300 300 300 300 300 300 300 300 300 99 199 199 Minutes off-net local 250 250 250 300 300 200 300 300 300 0 200 200 Minutes off-net domestic 0 0 0 0 0 0 0 0 0 0 200 200 GB 2 GB 1 GB 1 GB 2 GB 2 GB 1 GB 2 GB 2 GB 2 GB 2 GB 2 GB 2 GB

Medium bundle

Data of latest changes Mar-16 Oct-16 Jan-17 Mar-16 Oct-16 Jan-17 Mar-16 Oct-16 Jan-17 Mar-16 Apr-16 Jan-17 Price (Rbls) 450 550 550 500 500 500 500 500 500 299 399* 399* Minutes off-net local 500 600 600 550 550 500 550 550 550 400 500 500 Minutes off-net domestic 0 0 0 0 0 0 0 0 0 400 500 500 GB 3 GB 3 GB 3 GB 5 GB 5 GB 3 GB 5 GB 5 GB 5 GB 4 GB 10 GB 10 GB

Large bundle

Data of latest changes Mar-16 Oct-16 Jan-17 Mar-16 Oct-16 Jan-17 Mar-16 Oct-16 Jan-17 Mar-16 Apr-16 Jan-17 Price (Rbls) 900 900 900 800 800 900 800 800 800 599 599 599 Minutes off-net local 1100 1100 1100 1000 1000 1100 1000 1000 1000 1000 1000 1000 Minutes off-net domestic 1100 1100 1100 1000 1000 1100 0 0 0 1000 1000 1000 GB 5 GB 10 GB 10 GB 7 GB 7 GB 7 GB 7 GB 7 GB 7 GB 10 GB 10 GB 10 GB

Source: Company data, Credit Suisse

Figure 4: Average data pricing has been increasing in Moscow and the regions Figure 3: Data bundles have been decreasing in US$ per GB

10.0 2.5

9.0

8.0 2.0 7.0

6.0 1.5 5.0

4.0 1.0 3.0

2.0 0.5 1.0

0.0 1Q16 3Q16 1Q17 1Q16 3Q16 1Q17 0.0 Lowest data bundle offering 2nd lowest data bundle offering Ave price per GB, Moscow (US$*) Ave price per GB, regions (US$*)

MTS MegaFon Vimpelcom T2 RTK Mar-16 Oct-16 Jan-17

Source: Company data, Credit Suisse Note: US$ per GB at Rbls/US$60 exchange rate for all quarters

Source: Company data, Credit Suisse

Russian CIS TMT Themes3 30 January 2017

With average smartphone usage in Russia currently at c1.5-2GB per month, the pricing strategy of reducing data allowance from min 2GB to min 1GB will likely incentivise new and returning subscribers of MTS and MegaFon to 3GB plans which are priced 70%-80% higher than the lowest bundle. There is a risk that those would shop with Vimpelcom and Tele2, but we continue to believe the network quality of the #3 and #4 mobile operators is still inferior and more advanced data users are likely to be sensitive to that.

Figure 5: Data tiering, Moscow, January 2017

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800.0

600.0

400.0

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0.0 1.0 2.0 3.0 5.0 7.0 10.0 >10.0

MTS MegaFon Vimpelcom T2 RTKM

Source: Company data, Credit Suisse Improving macro could provide positive backdrop for price hikes According to Rosstat’s preliminary estimates, the pace of contraction in real GDP slowed to 0.4% yoy in 3Q from 0.6% yoy in 2Q, with positive sequential real GDP growth at 0.2% qoq in 3Q (seasonally adjusted) for the first time in almost two years. Real GDP growth seems to be driven by investment rather than consumer demand or net exports. Credit Suisse economists expect real GDP to decline 0.4% in 2016, followed by 1.5% growth in 2017 and +1.7% in 2018, with both consumer and investment demand improving on the back of higher oil prices. The recovery in oil prices, after the agreement on 30 November between OPEC and non-OPEC countries to cut oil output, may have positive implications for medium-term economic growth in Russia. Also, given the upcoming presidential elections in early 2018, we think budget spending might increase further than what is penciled in the 2017-2019 budget if oil prices exceed the government’s assumption of $40/bbl.

Russian CIS TMT Themes4 30 January 2017

Figure 6: Average monthly real wage per employee Figure 7: Real disposable income Year-over-year in roubles Year-over-year in roubles

4% 2% 2%

0%

-2% -2% -1.5% -2.0% -1.7% -2.2% -2.3% -3.1% -2.9% -4% -3.6%

-6% -4.9%-4.7% -4.6% -6% -5.2% -6.1% -8% -6.5% -6.2% -6.4% -7.3% -7.3% -10% -7.8% -8.5% -10% l t r r -12% r r y v c y y n n n n b b g p g p l c u l l l a a p p r r r a a o e v v v y y y a u a u e e u e u e n n n p p p J u u u u a a a A O A J J J J a a a o o o a a a e e e M M F F J N D A S A S J J J M M J J J M M M N N N S S S M M M 2014 2015 2016 2015 2016

Source: Company data, Rosstat Source: Company data, Rosstat

Figure 8: Consumer confidence index

5

0 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 -5

-10

-15

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-25

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-35

Source: Company data, Rosstat Improving smartphone usage is also supportive According to a number of reports released recently – both operators’ and multi-brand retailers' – the market for smartphones has started to stabilize and there are some positive signs driven by stronger demand for higher end and more expensive models. Sales of smartphones priced above Rbls 30,000 increased 1.5 times in 2016, those priced in the range of Rbls 20,000-30,000 increased by 80%, and this drove average price of smartphones sold in 2016 c20-25% depending on the channel (Figure 9). Svyaznoi also

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specifically noted positive consumption trends in 2016 – the number of people sensitive to the price/quality factor is still high but is decreasing and customers are more and more willing to buy more expensive equipment. Wider availability of handset financing options to customers is one of the reasons, according to Svyaznoi. These trends in our view are also supportive of the fact that customers may be becoming less sensitive to price and more sensitive to quality, which would imply demand for higher and now more expensive data bundles, and better quality networks.

Figure 9: Smartphone sales trends in 2016 Year-over-year increase in units sold and average prices in roubles

18% 30% 16% 16% 26% 25% 25% 14%

12% 21% 21% 20%

10% 15% 8%

6% 10%

4% 3% 3% 5% 2% 1% 0% 0% MTS Vimpelcom Svyaznoy Euroset

Smartphone units Ave price (Rbls)

Source: Company data, Vedomosti, RBC, Credit Suisse Price increases and impact on revenues: evidence from European telcos One of the questions investors have been asking us since our report in June 2016 is how much and how quickly revenues of the Russian mobile players could improve if and when tariffs increase. Below we look at evidence from 3 European countries – Denmark, France and Italy - where we think price increases may be relevant to Russian situation. We use extensive analysis of pricing in Europe conducted by our European team. We note that most cases involve backbook rather than frontbook price increases. Within the same time period, however, improvement in revenue was similar in both situations – 5- 10pp improvement in revenue trends. In some cases price improvements were driven by pure price increases (Denmark) that were followed through by all operators and in some cases they were driven mostly by network quality differential and ability to price 4G at a premium. Macro was supportive in most cases but in Italy the relationship between macro and revenue trends broke down in 2016. We think that, in Russia, if price increases continue we are likely to see revenue growth at the lower end of this range (low- to mid-single digits) due to: 1) slow backbook tariff changes, 2) less follow-through by other operators, 3) other regulatory factors that played a role in Europe.

Russian CIS TMT Themes6 30 January 2017

Figure 10: Summary of European cases with price hikes and impact on revenue trends Country % price Front / Operator Operators followed % change in # of Market structure Macro Corporate increase Backbook initiated revenues quarters events

Denmark +10%*2 Frontbook #1 #2 & #3 both times by raising prices, 5-10% 3 3 incumbents and 1 Positive New #4 raised prices the first round and challenger backdrop management, decreased data the second round cash flow oriented strategy ~5% Backbook #1 #2 & #3 by raising prices, #4 decreased data

France Various, c10% Backbook #2 & #3 #1 5-10% 1st 12 3 incumbents, 1 Mostly months challenger, MVNOs; positive 80% contract market backdrop 5-10% 2nd 12 months

Italy Various Backbook #3 in 1st stage 2-3% 12 2 incumbents, 2 Mostly months challengers, 30% positive contract backdrop #1 & #2 in 2nd 5-10% per year stage for 2 years Source: Company data, Credit Suisse estimates Denmark Background In September 2015, an attempt for market consolidation failed in Denmark as the Telenor (#2) and Telia (#3) deal didn’t go through. During the same period, Denmark's mobile market had one of the lowest pricing in Europe. The consumer mobile market turned the corner in November 2015 when TDC (#1) put through two rounds of ~10% front book price hikes and further implemented a ~10% backbook price hike on its no-frills tariff plans. In November 2015, TDC put through its first round of frontbook price hikes (c10%) for its entry level no-frills tariff plans. Post this move, all operators including 3’s oister followed suit and hiked prices in line with TDC. In December 2015, TDC put through its second price hike of about 10%. Telia and Telenor followed suit with c10% entry level tariff hikes. This time, however, 3 Denmark did not participate in the second round of price hikes, keeping oister tariffs unchanged at c25% discount to TDC, but it did reduce its data allowance (from 12GB to 10GB) and increased the number of minutes (from 480 to 600) in the bundle. In March/April 2016, TDC initiated a backbook price hike by raising prices on its Fullrate and Telemore brands. This was followed by other operators with Telenor raising its prices while 3’s oister further shrunk its data allowance and compensated subscribers by providing more voice minutes. Impact on market structure and mobile revenues The period from November 2015 to June 2016 saw all operators raising prices with the exception of oister which instead shrank its data allowance. As a result, the market share has remained flat for the Big 3 in Denmark. Oister’s more disciplined pricing strategy led to slight market share increase (0.4% by 4Q 2015).

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The recovery in consumer mobile pricing in Denmark was followed by a material recovery in revenue trends by 1Q 2016 – only one quarter after the first, frontbook, price hike. Although revenue trends remained negative, TDC’s revenues decline improved to -5% by 1Q 2016 and further to -1% by 2Q 2016 vs -11% in 4Q 2015 and -12% in 1Q 2015). This has also been true for other operators as the market revenue growth improved to -1%-2% in 1Q 2016 vs -8% in 1Q 2015.

Figure 12: Denmark Mobile service revenue growth Figure 11: Denmark mobile subscriber market share yoy In local currency

50.0% 0.0%

45.0% -2.0% 40.0% -4.0% 35.0%

30.0% -6.0%

25.0% -8.0% 20.0% -10.0% 15.0%

10.0% -12.0%

5.0% -14.0% 0.0% 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 -16.0% 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 TDC Telenor TeliaSonera Hutchison Denmark TDC Telenor TeliaSonera

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Macro improvement was supportive Macroeconomic growth for Denmark had been the strongest between 2014 and 2015 and the hike in mobile tariffs also coincided with the quarter which had the highest nominal GDP growth (Q4 2015). Change in TDC management TDC also went through two big management changes in 2015 with new CEO and new CFO appointments. In addition, there was a change in strategy, communicated during their capital market day in January 2016, essentially focused on generating cash generation. Cross read into Russia The market structure in Denmark is similar to that in Russia, with three big operators and one challenger. In Russia, similar to Denmark, the #1 operator has led price increases and was followed by #2 within three months to a similar extent and #4 kept price discounts. The difference in Russia currently is the #3, which does not seem to participate in price hikes to the full extent (although we think Vimpelcom did raise prices in some regions earlier this year). Given limited market share gains by #4 in Denmark we are not concerned that Tele2’s price discounts will trigger the reversal in price trends. However, we would like to see more aggressive price improvements from Vimpelcom at this stage. In Russia, other factors are also likely to be in favour of price hikes translating into improvements in revenue trends. Macro and the smartphone market, as we showed above, are both supportive. The change in MegaFon’s management in early 2016, with in

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our view a more rational and conservative operating and management style, could continue to be a trigger and a message to other players, and we think MegaFon’s new management could have triggered a move on price increases within the sector. France Background The French mobile market suffered from intensified competition from 2012 when Iliad (#4 player) entered the market and launched its €20 bundle offers. This resulted in other operators reducing their tariffs to defend market share. The last major round of price cuts was in January 2013 with SFR (#2) and Orange (#1) and Bouygues (#3) following. In December 2013, Iliad offered 4G for the same price (€20) as for 3G, with a bigger (20GB vs 3GB) bundle. As Iliad's 4G coverage was limited and was ultimately constrained by lack of low-frequency spectrum for LTE, it had limited impact on the market. At the same time 4G with higher speeds was only available on the premium/incumbent brands (Orange, SFR, Bouygues) and it had become one of the reasons for justifying a higher priced 4G offers of the latter. By 3Q 2014, both Bouygues and Orange moved benchmark tariffs up, driven by the fact both were then well ahead with 4G rollout (Orange and Bouygues had rolled out 3-5x as many 4G sites as SFR and Iliad at the time). The situation in France has been less relevant to Russia from the point of view of types of price increases. However, we found it relevant from the point of view of incumbent players vs challenger, network/spectrum quality and pricing power. Impact on market structure and service revenues Before the launch of 4G, Iliad had been the major beneficiary of price declines. However, 4G operators with better 4G networks - Orange and Bouygues - were able to regain their market shares, while SFR suffered initially from SAC saving and were slower to deploy 4G initially. This market dynamic resulted in improving revenue trends for all three premium/incumbent operators, aided by backbook price improvements, easing of competitive dynamics and also with customers favouring premium network coverage and quality. Revenue growth has increased from deep negative 20% in early 2013 / -15% end 2013 to negative mid single digits and in some cases recovered to c0% by 2Q 2016.

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Figure 14: France Mobile service revenue growth Figure 13: France mobile subscriber market share yoy In local currency

45.0% 5.0%

40.0% 0.0% 35.0%

30.0% -5.0% 25.0%

20.0% -10.0%

15.0% -15.0% 10.0%

5.0% -20.0%

0.0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q -25.0% 13 13 13 13 14 14 14 14 15 15 15 15 16 16 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 13 13 13 13 14 14 14 14 15 15 15 15 16 16 Orange France SFR Bouygues Telecom Iliad Orange France SFR Bouygues Telecom

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Other factors The macro economy also mostly improved during the period of price hikes, although in 1Q 2015 macro did weaken before recovering again in the remainder of 2015 and into 2016. The tariff plans have been more or less stable with backbook price improvement in the range of 10%. In France and also in Sweden, we have seen meaningful hikes taking place in periods during which the macro-economic situation improved. Italy Background The Italian market has seen a recovery in mobile pricing from the lows of summer 2013 when it was one of the lower priced mobile markets in Europe. The recovery in mobile pricing was driven by Wind’s balance sheet constraints and expectation for consolidation (merger discussions between Wind and 3), and the ability of TIM and Vodafone to price 4G at a premium may have also contributed to this. Price increases in Italy happened in two stages. The first stage occurred in summer of 2013, when Wind increased backbook pricing on its entry level plans. This was followed by other operators. It was short lived and in June 2014 Wind increased data bundles, although the implied pricing was still above the trough levels. The second stage of price increases started with 4G pricing from TIM and Vodafone at the end of 2014. Utilising their 4G network quality and coverage, TIM and Vodafone were able to price at a premium and it aided TIM and Vodafone to win back some share with higher end 4G customers. This pricing power continued through 2015. Impact on market shares and mobile service revenues Telecom Italia, Hutchison and to a lesser extent Wind have been market share gainers. TI has been able to attract customers wanting to shift to a more efficient, high speed 4G network while Hutchison benefitted from the low value customers intake. Vodafone has

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been the market share donor. It was able to achieve significant growth in its mobile service revenues by charging a premium for its 4G services and focusing on high value customers, thereby offsetting any losses due to loss of market share. The increase in pricing since 2013 has translated into revenue growth and it is noteworthy that revenue recovery did follow stages and sustainability of price increases, with the first stage of price increases resulting in less pronounced improvement in revenue trends than the second one. During the first stage of price increases, the revenue trend improved mere 2-3pp during the first year while the second stage resulted in revenue improvement by 5- 10pp per year for 2 years and finally resulted in positive revenue trend.

Figure 15: Italian mobile subscriber market share Figure 16: Italian mobile service revenue growth yoy In local currency 5.0% 40.0%

35.0% 0.0%

30.0% -5.0% 25.0%

-10.0% 20.0%

15.0% -15.0%

10.0% -20.0% 5.0%

-25.0% 0.0% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 13 13 13 13 14 14 14 14 15 15 15 15 16 16 13 13 13 13 14 14 14 14 15 15 15 15 16 16

TIM Vodafone Wind Hutchison TIM Vodafone Wind

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Macro impact For part of the period following the second price hike macro was supportive, we think. However, during 2016 macro and mobile revenue trends de-coupled.

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Digital Strategy A number of operators, globally and in Russia, are now explicitly talking about their increased focus on digital strategy and some – MegaFon, Verizon, AT&T, Telenor – have actually turned to M&A in the media/internet space to execute that. The ambitions in the digital strategy in general are: ■ Acquisition of digital subscribers with potentially higher ARPU. ■ More targeted promotion of data and value added (for example financial, medical services to name a few) services via utilization of big data. Both MegaFon and Vimpelcom in Russia are talking about unsatisfied demand in some customer groups such as the young digital savvy audience using internet, messengers, various content including video – hence Mail.Ru acquisition. ■ Digitalization of local content and distribution of popular online content: Vimpelcom is suggesting that in many countries that has not yet happened and presents an opportunity. Verizon also stated that with the AOL acquisition in 2015 it has benefitted from popular online content availability. AT&T said that, through DIRECTV and Time Warner, it has positioned itself as the next-generation TV provider, and content agreements combined with telecom networks are proving to be a strong combination. AT&T can now deliver entertainment packages over traditional TV or stream over the Internet to essentially any mobile device. ■ Participation in selective digital verticals, like Internet of Things, classifieds, advertising technologies: Telenor, for example, is executing this strategy, among other initiatives, via cooperation with Schibsted in South America and Southeast Asia via a 50%/50% JV in online classifieds (VJ was formed in 2013), as well as the acquisition of 95% of Tapad, which has digital advertising technology business in the US and is expanding into other markets (Europe). Verizon also benefitted from the acquisition of a mobile advertising platform via the purchase of AOL. Verizon’s IoT strategy has created a new revenue stream for Verizon, with revenues of about $690m in 2015 (+18% yoy but only 0.5% of its revenues). IoT services can include among other things monitoring of vehicle fleets, various utility grids, agricultural crops. Other operators are also increasingly targeting this area. ■ Digitalization of operating costs – such as distribution, customer service - online, as well as use of targeted contextual marketing: Telenor, for example, is executing this via an acquisition of Tapad, which was done to get access to competence and to platforms to better handle data analytics. Rogers Communications in Canada also suggested that it sees cost savings from migrating call centers online and to messengers. ■ Social: Verizon, for example, launched a mobile-first social entertainment platform called go90, with content aimed at the millennial customer with content deals with such partners as the NFL, the NBA, Awesomeness TV, Vice Media and major advertisers who are interested in reaching the young, highly mobile viewer who may not subscribe to traditional video services. Russian operators are addressing digital strategy in various forms already, mostly expanding into areas that we would call organic and adjacent to traditional mobile services. MegaFon’s recent acquisition of Mail.Ru, however, is in a way conceptually transformational and we look into it in more detail below. MegaFon + Mail.Ru According to the company, by buying a controlling stake in Mail.Ru MegaFon is planning to address the following strategic areas:

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■ Monetise social networking sites (SNS) users via VKMobile: Target mobile offer to Vkontakte / SNS customers, who are young, mobile, digitally savvy and are heavy users of 4G/LTE services. ■ Better customer segmentation: Utilise BigData concept (which would be significantly improved by access to users of Mail.Ru properties) for predictive analytics to better segment customers and offer higher quality services, as well as develop and offer targeted advertising. Precedents of special offers for social network and other site users Before we know details of MegaFon’s strategy towards Mail.Ru – such as specifics of offers to VKontakte and Odnoklassniki subscribers or/and other initiatives – the exercise is quite theoretical. Nevertheless, in attempt to estimate potential valuation impact of this deal, we looked at current offers that other operators have in the market that address heavy users of social networks and messengers for example. We found that many operators already run or have run various promotions offering unlimited social network traffic and messengers to their existing subscribers. We think MegaFon will need to offer a tariff either significantly cheaper or free with add-ons, such as video and audio content, in order to stimulate churn in its favour. ■ According to MTS' website, MTS has a “Social Networks” option for Rbls 90 a month offering unlimited (up to 10 GB of high speed internet) traffic in SNS (VK, OK, Facebook) on all tariffs except for Smart Unlimited / Smart Bezlimitishche and corporate tariffs. ■ VimpelCom in the beginning of 2016 had options for FB, VK, Gazeta.ru, Livejournal.ru, although this promotion is now over. They continue to run various messenger (WhatsApp, Skype, ICQ) promotions for Rbls 2/day. ■ MegaFon has for a long time - since 2010 - had an option of unlimited traffic on VKontakte only for North West subscribers for Rbls3/day, but with an important caveat with high speed data usage limit of up to 100MB/month, which has become an irrelevant bundle in Russia. ■ Yota has an option for Rbls 150/month for unlimited apps traffic (VK, Instagram, FB, OK, Telegram, WhatsApp, Viber, Skype, Twitter). What if the strategy works? Assuming the potential new MegaFon offers are successful, we attempt to calculate the potential market and value opportunity to MegaFon and Mail.Ru. We use the following assumptions in our calculations: ■ New market opportunity for MegaFon from new VK users: VK unique users of 46m based on TNS December 2016 Webindex, Pan-Russia 12-64 years of age, and 30% subscriber market share of MegaFon of the entire market. Caveats to this are: 1) multiple sim cards in Russia imply that mobile subscribers may overlap making MegaFon’s penetration of VK users potentially higher, and 2) Possibility that due to common shareholder and natural synergies before the MegaFon/Mail.Ru deal MegaFon’s market share among VK users can already be larger than 30%. ■ Potential market share gain: We look at several scenarios for potential subscriber market share gain by MegaFon among VK users – from 2.5% which implies c1m new mobile subscriber up to arbitrarily 30%, although we think 15% is a more realistic although very optimistic ceiling (merely as a reference point, this is a typical market share a challenger achieves). We think that closer to 2.5% rather than 15% market share gain reflects a more realistic scenario.

Russian CIS TMT Themes 13 30 January 2017

■ Potential tariff plans: Given what competitors already offer, in order to deliver any market share gains we believe that MegaFon will have to offer VK subscribers a stand- alone data bundle at least a 30% bundle discount to its current offers – this is a discount that a new entrant typically offers. As all VK subscribers most likely already have SIM cards from either MegaFon or its competitors, we think that the new subs will likely be interested in lower end tariffs and quite possibly current 1GB tariff with Rbls 300 regular price. For our analysis, we take both the 1GB bundle that currently costs Rbls 300 per month and the next-up 3GB bundle that currently costs Rbls 500 per month and assume an new offer from MegaFon with a 30% discount. ■ EBITDA margins: We assume cost allocation to MegaFon is the same and thus MegaFon’s current EBITDA margins are relevant. ■ Revenue sharing: We look at 3 hypothetical scenarios for a revenue sharing arrangement between MegaFon and Mail.Ru: 90%/10%, 75%/25% and 50%/50%, although it could potentially also be 100%/0%. ■ FCF: EBITDA after tax assuming that all depreciation and net investments are already allocated to core businesses. ■ NPV: Terminal value of EBITDA with no growth and respective company WACCs of 10.4% for MegaFon and 11.4% for Mail.Ru. We conclude that for this offer to make a noticeable difference to valuations of MegaFon, the revenue sharing arrangement has to be strongly in favour of MegaFon and market share gains among VK subscribers have to be quite material – closer to 15% than 2.5%. This argument holds for Mail.Ru as well, although Mail.Ru seems to be more levered to any additional cash flow opportunity from this arrangement.

Figure 17: Potential market opportunity scenarios from new mobile offers to SNS users VK monthly unique users (December 2016, m) 46.0 MegaFon market share, Russia 30% MegaFon subscribers that use VK (m) 13.8 Market share gain among VK subscribers 2.5% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% New MegaFon Subscribers (m) 1.1 2.3 4.6 6.9 9.2 11.5 13.8 Low end tariff 1 New tariff plan cost plan per month (Rbls) 210.0 210.0 210.0 210.0 210.0 210.0 210.0 Revenue opportunity per annum (Rbls m) 2,897.4 5,794.7 11,589.5 17,384.2 23,179.0 28,973.7 34,768.4 Revenue opportunity per annum (US$m @ 60 Rbls/US$) 48.3 96.6 193.2 289.7 386.3 482.9 579.5 EBITDA margin 41% 41% 41% 41% 41% 41% 41% EBITDA opportunity per annum (Rbls m) 1,193.3 2,386.6 4,773.3 7,159.9 9,546.6 11,933.2 14,319.9 EBITDA opportunity per annum (US$m @ 60 Rbls/US$) 19.9 39.8 79.6 119.3 159.1 198.9 238.7 Low end tariff 2 New tariff plan cost plan per month (Rbls) 350.0 350.0 350.0 350.0 350.0 350.0 350.0 Revenue opportunity per annum (Rbls m) 4,829.0 9,657.9 19,315.8 28,973.7 38,631.6 48,289.5 57,947.4 Revenue opportunity per annum (US$m @ 60 Rbls/US$) 80.5 161.0 321.9 482.9 643.9 804.8 965.8 EBITDA margin 41% 41% 41% 41% 41% 41% 41% EBITDA opportunity per annum (Rbls m) 1,988.9 3,977.7 7,955.5 11,933.2 15,911.0 19,888.7 23,866.5 EBITDA opportunity per annum (US$m @ 60 Rbls/US$) 33.1 66.3 132.6 198.9 265.2 331.5 397.8

Source: Credit Suisse estimates

Russian CIS TMT Themes 14 30 January 2017

Figure 18: Potential value opportunity scenarios from new mobile offers to SNS users Market share gain among VK subscribers 2.5% 2.5% 2.5% 15.0% 15.0% 15.0% Revenue sharing arrangement MegaFon 90% 75% 50% 90% 75% 50% Mail.Ru 10% 25% 50% 10% 25% 50% Tariff option 1 Contribution to MegaFon EBITDA (US$m) 17.9 14.9 9.9 107.4 89.5 59.7 FCF (US$m) 14.3 11.9 8.0 85.9 71.6 47.7 NPV (US$m) 138.8 115.6 77.1 832.6 693.8 462.5 % of current market cap 2% 2% 1% 12% 10% 7% Contribution to Mail.Ru EBITDA (US$m) 2.0 5.0 9.9 11.9 29.8 59.7 FCF (US$m) 1.6 4.0 8.0 9.5 23.9 47.7 NPV (US$m) 14.0 34.9 69.8 83.7 209.4 418.7 % of current market cap 0% 1% 2% 2% 5% 11% Tariff option 2 Contribution to MegaFon EBITDA (US$m) 29.8 24.9 16.6 179.0 149.2 99.4 FCF (US$m) 23.9 19.9 13.3 143.2 119.3 79.6 NPV (US$m) 231.3 192.7 128.5 1,387.6 1,156.3 770.9 % of current market cap 3% 3% 2% 21% 17% 12% Contribution to Mail.Ru EBITDA (US$m) 3.3 8.3 16.6 19.9 49.7 99.4 FCF (US$m) 2.7 6.6 13.3 15.9 39.8 79.6 NPV (US$m) 23.3 58.2 116.3 139.6 348.9 697.9 % of current market cap 1% 2% 3% 4% 9% 18%

Source: Credit Suisse estimates

Russian CIS TMT Themes 15 30 January 2017

Russian mobile operating stats

Figure 20: Total Fixed + Mobile revenue market Figure 19: Total Fixed + Mobile revenue growth yoy share In local currency

15.0% 30.0% 26.9% 29.1% 28.5% 25.0% 10.0% 22.8% 22.4% 22.5% 22.5% 20.5% 20.0% 5.0% 20.4% 20.1% 19.9% 15.0%

0.0% 10.0% 7.6% 7.7% -5.0% 5.0% 6.7%

-10.0% 0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016

MTS Vimpelcom MegaFon MTS Vimpelcom MegaFon Rostelecom T2 RTK Total T2 RTK Rostelecom

Source: Company data, Credit Suisse research, Vedomosti for T2 RTK Source: Company data, Credit Suisse research, Vedomosti for T2 RTK

Note: T2 RTK 2014 revenues are based on pro-forma Rostelecom + Tele2 mobile revenues Note: Market share for Big 3 + Rostelecom total revenues

Russian CIS TMT Themes 16 30 January 2017

Figure 21: Mobile service revenue growth yoy Figure 22: Mobile service revenue market share In local currency

15.0% 35.0% 32.4% 33.7% 33.3% 10.0% 30.0% 30.5% 30.2% 29.3%

5.0% 25.0% 25.4% 25.0% 25.4% 0.0% 20.0%

-5.0% 15.0%

-10.0% 12.0% 10.0% 11.9% 10.7% -15.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 5.0% 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 MTS Vimpelcom MegaFon T2 RTK Total MTS Vimpelcom MegaFon T2 RTK

Source: Company data, Credit Suisse research, Vedomosti for T2 RTK Source: Company data, Credit Suisse research, Vedomosti for T2 RTK

Note: T2 RTK 2014 revenues are based on pro-forma Rostelecom + Tele2 mobile revenues

Figure 23: Mobile data revenue growth yoy Figure 24: Mobile data revenue market share In local currency

50.0% 45.0% 40.8% 45.0% 39.5% 40.0% 38.4% 40.0% 37.4% 35.0% 37.6% 35.0% 36.7%

30.0% 30.0%

25.0% 24.0% 25.0% 20.0%

15.0% 20.0% 22.4% 23.1%

10.0% 15.0% 5.0%

0.0% 10.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016

MTS Vimpelcom MegaFon Total MTS Vimpelcom MegaFon

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Russian CIS TMT Themes 17 30 January 2017

Figure 25: Mobile voice + SMS + VAS revenue growth yoy Figure 26: Handset sales growth yoy In local currency In local currency

4.0% 100.0%

80.0% 2.0%

60.0% 0.0% 40.0%

-2.0% 20.0%

-4.0% 0.0%

-20.0% -6.0% -40.0% -8.0% -60.0%

-10.0% -80.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016

MTS Vimpelcom MegaFon MTS Vimpelcom MegaFon

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates for Vimpelcom

Note: Calculated as mobile service revenues less data revenues implying Voice + SMS +VAS Note: Vimpelcom handset revenues are calculated as total mobile revenues less mobile revenues service revenues

Figure 27: Fixed line revenue growth yoy Figure 28: Fixed broadband revenue growth yoy in local currency in local currency

25.0% 15.0%

20.0% 10.0%

15.0% 5.0% 10.0% 0.0% 5.0% -5.0% 0.0% -10.0% -5.0% -15.0% -10.0% -20.0% -15.0%

-20.0% -25.0%

-25.0% -30.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016

MTS Vimpelcom MegaFon Rostelecom Vimpelcom Rostelecom

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Russian CIS TMT Themes 18 30 January 2017

Figure 29: EBITDA growth yoy Figure 30: EBITDA margins in local currency 50.0% 20.0% 45.0%

10.0% 40.0%

0.0% 35.0%

-10.0% 30.0%

25.0% -20.0%

20.0% -30.0% 15.0% -40.0% 10.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -50.0% 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 MTS Vimpelcom MegaFon MTS Vimpelcom MegaFon T2 RTK Rostelecom Total

T2 RTK Rostelecom Total

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 31: Ukraine: Mobile service revenue growth Figure 32: Ukraine: EBITDA growth in local currency in local currency

20.0% 50.0%

40.0% 15.0% 30.0%

10.0% 20.0%

10.0% 5.0% 0.0%

0.0% -10.0%

-20.0% -5.0% -30.0%

-10.0% -40.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016

Vimpelcom MTS Lifecell Vimpelcom MTS Lifecell

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Russian CIS TMT Themes 19 30 January 2017

Figure 33: Net debt to EBITDA (LTM) Figure 34: FCF to sales (LTM)

2.5 5.0 50.0%

4.5 40.0% 2.0 4.0 30.0% 3.5 1.5

3.0 20.0%

1.0 2.5 10.0% 2.0 0.5 0.0% 1.5

0.0 1.0 -10.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016

MTS (LHS) MegaFon (LHS) Rostelecom (LHS) MTS MegaFon Rostelecom Rostelecom (LHS) Vimpelcom (RHS) Kcell Vimpelcom

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Note: FCF is calculated as Operating cash flow less tangible and intangible capex

Russian CIS TMT Themes 20 30 January 2017

Global Telecom valuation comps

Figure 35: Global telco valuation comps

EMEA Telcos Company PE EV/EBITDA FCF Yield Dividend Yield 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 Kcell 11.8 11.4 9.2 5.0 4.7 4.2 4.1% 8.2% 9.0% 9.9% 5.9% 6.1% MegaFon 16.5 9.8 8.7 5.2 4.8 4.5 3.4% 8.1% 10.5% 12.5% 10.0% 10.0% MTN Group 18.5 14.7 12.8 5.5 5.3 4.9 2.2% 2.4% 2.5% 6.3% 6.8% 6.1% Rostelecom 35.0 15.1 8.9 4.0 3.7 3.4 7.8% 10.3% 12.6% 7.1% 6.3% 6.3% Turk Telekom 16.2 10.5 8.8 5.6 5.1 4.7 -0.9% 5.3% 8.7% 2.4% 8.2% 10.1% Turkcell 14.2 12.2 10.8 6.1 5.5 5.1 -10.9% -0.3% 6.6% 1.6% 4.6% 5.3% Vimpelcom 11.3 22.3 12.1 4.4 4.0 3.6 10.7% 9.2% 12.9% 0.8% 0.8% 0.8% Vodacom Group 16.0 14.4 13.2 7.8 7.2 6.7 5.6% 6.2% 6.9% Sum/Average 17.4 13.8 10.5 5.4 5.0 4.6 2.3% 6.2% 9.0% 5.8% 6.1% 6.4%

LATAM Telcos Company PE EV/EBITDA FCF Yield Dividend Yield 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 America Movil 40.1 14.2 12.9 5.5 5.5 5.4 7.8% 5.7% 6.0% 1.1% 0.9% 1.8% Entel Chile 51.2 38.3 19.6 8.4 7.6 6.4 -2.3% -0.7% 3.1% 0.0% 0.0% 2.0% Telefonica BR 19.3 16.5 14.0 6.0 5.7 5.2 6.5% 7.6% 9.1% 4.2% 5.9% 6.8% TIM Brazil 33.9 27.0 20.4 5.2 5.0 4.6 -0.8% 2.0% 4.5% 2.4% 1.0% 2.9% Sum/Average 36.1 24.0 16.8 6.3 5.9 5.4 2.8% 3.7% 5.7% 1.9% 1.9% 3.4%

NJA Telcos Company PE EV/EBITDA FCF Yield Dividend Yield 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 AIS 15.7 15.7 14.8 8.8 8.1 8.0 2.3% 3.8% 5.1% 6.4% 6.4% 6.8% Axiata 23.4 20.4 18.9 7.3 6.4 6.1 -8.7% 6.8% 7.8% 3.4% 3.9% 4.2% Bharti 30.2 26.9 20.8 6.6 6.4 5.9 -5.3% 12.0% 12.4% 1.0% 1.1% 1.4% IDEA 38.4 60.1 82.4 6.4 6.1 5.7 22.2% 23.5% 24.1% 0.3% 0.2% 0.1% CH Mobile 13.9 12.9 12.1 4.3 3.9 3.6 3.7% 5.7% 7.1% 3.1% 3.9% 4.9% ChungHwa Tel 19.8 20.4 20.1 9.3 9.4 9.4 6.2% 5.3% 5.9% 5.0% 4.9% 5.0% Hutch 11.8 10.4 9.2 5.8 5.2 4.6 9.4% 10.2% 11.2% 2.8% 3.2% 3.6% KT 8.5 7.7 6.5 2.6 2.3 2.0 23.2% 25.3% 28.0% 2.8% 4.1% 5.2% PLDT 12.3 18.0 19.2 7.5 7.8 7.8 1.8% 3.2% 3.0% 4.9% 3.4% 3.1% Tel Indo 19.5 16.4 15.2 6.7 6.0 5.5 5.3% 6.8% 8.4% 3.1% 3.6% 4.0% Sing Tel 16.5 15.7 15.1 14.7 14.3 14.2 5.1% 5.3% 5.6% 4.5% 4.7% 4.9% Sum/Average 19.1 20.4 21.3 7.3 6.9 6.6 5.9% 9.8% 10.8% 3.4% 3.6% 3.9%

Developed Market Telcos Company PE EV/EBITDA FCF Yield Dividend Yield 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 Proximus 16.0 18.2 20.3 6.0 6.0 6.1 6.9% 4.9% 4.4% 5.6% 5.6% 5.6% BT Group 10.2 9.5 9.5 5.1 4.9 4.8 11.3% 12.4% 12.6% 5.1% 5.6% 6.2% Deutsche Telekom 13.1 22.7 19.3 5.8 5.7 5.5 10.1% 10.4% 11.0% 3.6% 3.9% 4.2% Orange 12.8 13.5 12.2 4.7 4.0 3.3 6.5% 5.8% 6.4% 4.2% 4.4% 4.6% KPN 29.5 27.4 24.2 8.0 7.8 7.7 5.7% 6.4% 7.0% 3.7% 4.1% 4.6% Swisscom 15.0 15.7 16.2 7.3 7.3 7.4 5.7% 5.6% 5.3% 5.0% 5.0% 5.3% Telekom Austria 11.5 15.9 13.9 4.6 4.3 3.9 10.2% 9.3% 10.6% 0.9% 0.9% 0.9% TDC 14.4 19.3 16.0 7.0 7.1 6.8 7.1% 6.7% 7.5% 2.7% 2.8% 2.9% Telefonica 12.2 13.9 13.0 6.4 6.3 6.2 5.9% 8.9% 9.4% 0.0% 0.0% 0.0% Telecom Italia 11.7 11.9 12.8 6.0 6.0 6.0 2.7% 3.4% -0.8% 0.0% 0.0% 0.0% TeliaSonera 11.5 10.9 10.8 8.2 8.2 7.9 5.0% 8.8% 8.7% 5.6% 5.6% 5.6% Telenor 12.7 13.2 13.4 6.8 6.6 6.7 2.1% 6.3% -2.0% 5.6% 5.6% 5.6% Vodafone Group 29.4 28.0 28.3 6.9 6.7 6.6 6.8% 8.6% 8.9% 0.0% 0.0% 0.0% Sum/Average 15.4 16.9 16.1 6.4 6.2 6.1 6.6% 7.5% 6.9% 3.2% 3.4% 3.5%

Source: Credit Suisse estimates, IBES

Note: Valuations for Turk Telekom, Turkcell, MTN and Vodacom are based on IBES estimates. Price date 27 January 2017

The authors of this report wish to acknowledge the contribution made by Rahim K Dhanani, employee of CRISIL Global Research and Analytics, a business division of CRISIL Limited, a third-party provider of research services to Credit Suisse.

Russian CIS TMT Themes 21 30 January 2017

Companies Mentioned (Price as of 27-Jan-2017) AT&T (T.N, $42.01) Advanced Info Service PCL (ADVANC.BK, Bt163.0) Altice (ATCA.AS, €20.3) America Movil (AMX.N, $12.8) Axiata Group Berhad (AXIA.KL, RM4.84) BT Group (BT.L, 302.8p) Bharti Airtel Ltd (BRTI.BO, Rs323.45) Bouygues (BOUY.PA, €34.69) CK Hutchison Holdings Limited (0001.HK, HK$93.45) China Mobile Limited (0941.HK, HK$87.85) ChungHwa Telecom (2412.TW, NT$102.0) Deutsche Telekom (DTEGn.F, €16.32) Entel Chile (ENT.SN, CLP$7104.7) Idea Cellular Ltd (IDEA.BO, Rs77.8) Iliad (ILD.PA, €197.6) KPN (KPN.AS, €2.71) KT Corp (030200.KS, W28,950) Kcell (KCELq.L, $3.6) MTN Group (MTNJ.J, R128.45) MegaFon (MFONq.L, $10.8) Mobile Telesystems (MBT.N, $10.78) Orange (ORAN.PA, €14.45) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp3,890) Philippine Long Distance Telephone Company (TEL.PS, P1495.0) Proximus (PROX.BR, €26.8) Rogers Wrels Com (RCMrvb.TO^A05) Rogers Wrels Com (RCMrvb.TO^A05) Rostelecom (RTKM.MM, Rbl83.86) SFR (SFRGR.PA, €27.7) Schibsted (SBSTA.OL, Nkr215.5) Singapore Telecom (STEL.SI, S$3.89) Swisscom (SCMN.S, SFr437.0) TDC (TDC.CO, Dkr36.58) TIM Participacoes (TIMP3.SA, R$8.99) Telecom Italia (TLIT.MI, €0.8) Telefonica (TEF.MC, €9.05) Telefonica Brasil (VIVT4.SA, R$46.34) Telekom Austria (TELA.VI, €5.7) Telenor (TEL.OL, Nkr133.2) Telia Company (TELIA.ST, Skr35.79) Turk Telekom (TTKOM.IS, TL5.64) Turkcell (TCELL.IS, TL11.2) Verizon Communications Inc (VZ.N, $49.6) VimpelCom (VIP.OQ, $4.28) Vivendi (VIV.PA, €17.29) Vodacom Group (VODJ.J, R151.15) Vodafone Group (VOD.L, 193.35p)

Disclosure Appendix Analyst Certification I, Olga Bystrova, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for KT Corp (030200.KS) 45,000

030200.KS Closing Price Target Price Target Price Closing Price 030200.KS Date (W) (W) Rating 40,000 28-Jan-14 31,200 35,000 N 08-Apr-14 31,250 37,000 08-Jul-14 30,700 36,000 35,000 13-Feb-15 29,200 36,000 O 04-May-15 32,250 40,000 30,000 07-May-15 31,100 37,000 30-Oct-15 29,550 37,000 * 25,000 07-Mar-16 28,500 36,000 * 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 30-Jun-16 29,650 37,000 01-Aug-16 32,600 38,000 N EU T RA L O U T PERFO RM * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

Russian CIS TMT Themes 22 30 January 2017

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names The subject company (RTKM.MM, VIP.OQ, MFONq.L, MBT.N, KCELq.L, TIMP3.SA, AMX.N, ENT.SN, STEL.SI, TEL.PS, ADVANC.BK, AXIA.KL, TLKM.JK, 030200.KS, 0001.HK, TELIA.ST, BT.L, TEL.OL, TELA.VI, TEF.MC, KPN.AS, VOD.L, ORAN.PA, TLIT.MI, DTEGn.F, TDC.CO, PROX.BR, SCMN.S, ATCA.AS, VIV.PA, BOUY.PA, ILD.PA, SFRGR.PA, VZ.N, T.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (VIP.OQ, MFONq.L, TIMP3.SA, AMX.N, STEL.SI, TEL.PS, ADVANC.BK, AXIA.KL, TLKM.JK, TEL.OL, TELA.VI, KPN.AS, TLIT.MI, DTEGn.F, PROX.BR, SCMN.S, ATCA.AS, VIV.PA, ILD.PA, SFRGR.PA, VZ.N, T.N) within the past 12 months.

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Credit Suisse has managed or co-managed a public offering of securities for the subject company (TIMP3.SA, STEL.SI, TLKM.JK, TEL.OL, KPN.AS, TLIT.MI, DTEGn.F, SCMN.S, ATCA.AS) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (VIP.OQ, MFONq.L, TIMP3.SA, AMX.N, STEL.SI, TEL.PS, ADVANC.BK, AXIA.KL, TLKM.JK, TEL.OL, TELA.VI, KPN.AS, TLIT.MI, DTEGn.F, PROX.BR, SCMN.S, ATCA.AS, VIV.PA, ILD.PA, SFRGR.PA, VZ.N, T.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (RTKM.MM, VIP.OQ, MFONq.L, MBT.N, KCELq.L, TIMP3.SA, AMX.N, ENT.SN, STEL.SI, BRTI.BO, TEL.PS, ADVANC.BK, AXIA.KL, TLKM.JK, 2412.TW, 030200.KS, IDEA.BO, 0001.HK, TELIA.ST, BT.L, TEL.OL, TELA.VI, TEF.MC, KPN.AS, VOD.L, ORAN.PA, TLIT.MI, DTEGn.F, TDC.CO, PROX.BR, SCMN.S, ATCA.AS, VIV.PA, BOUY.PA, ILD.PA, SFRGR.PA, VZ.N, T.N) within the next 3 months. Credit Suisse may have interest in (AXIA.KL) Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (BRTI.BO, IDEA.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (TIMP3.SA, TEF.MC, TDC.CO). As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (SCMN.S). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (030200.KS). Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (BOUY.PA). Credit Suisse has a material conflict of interest with the subject company (DTEGn.F) . Detusche Telekom AG - Wulf Bernotat, a Senior Advisor of Credit Suisse, is a supervisory board member of Deutsche Telekom AG (DTE) For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=277983&v=e6sp919g7rujx4cmntvge2q9 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (RTKM.MM, VIP.OQ, MBT.N, ENT.SN, 0001.HK, TELIA.ST, BT.L, TEL.OL, TELA.VI, TEF.MC, KPN.AS, VOD.L, ORAN.PA, TLIT.MI, DTEGn.F, TDC.CO, PROX.BR, SCMN.S, VIV.PA, BOUY.PA, ILD.PA). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (TIMP3.SA, AMX.N, STEL.SI, TLKM.JK, TEL.OL, TEF.MC, KPN.AS, TLIT.MI, DTEGn.F, SCMN.S, ATCA.AS, SFRGR.PA, VZ.N, T.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2014 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Advanced Info Service PCL (Excellent) This research report is authored by: Bank Credit Suisse (Moscow) ...... Olga Bystrova, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. 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