SECTOR RESEARCH: Inside this Report:

Executive Summary Page 3

Sector Overview Page 4

Sector Drivers

Growing Population Base Drives Usage Page 5

Transformation into Knowledge‐based Society Page 6

Foreign Investment: Boon for Telecommunication Services Page 7

Rapidly Developing Information and Communications Technology (ICT) Page 8

Population  Rising Domestic Demand Page 9

Sector Performance and Outlook

Fixed Line: Dwindling Growth As Consumers Prefer Mobility Page 12

Mobile: Nearing Saturation as Competition Heats Up! Page 13

Internet and Data: The New Drivers of Growth Page 14

Potential Growth Areas

New Age of Communication via Long‐term Evolution Networks Page 16

Harnessing the Power of Smart Devices Page 17

Multi‐play Services Bring Competition to a New Level Page 18

Telecommunications Regulatory Framework Page 19

Competitive Landscape

Etisalat Page 22

Du Page 24

Product Differentiation Page 26

Peer Comparison

Key Market Data Page 30

Key Financial Metrics Page 31

Market Backdrop Page 32

Valuation Page 33

Glossary of Terms Page 35

Certification and Disclaimer

Page 2 UAE Telecommunications Sector Report Executive Summary

UAE Aggregate Earnings The UAE telecommunications (telecom) sector is among the strongest and well‐advanced in the Arab 10,000 9,000 world. The operators are well supported by the 9,000 Profits (AEDmn) 8,000 government’s initiatives and established policies. Population ('000) 8,000 7,000 7,000 Growth in the sector continues to be fueled by the 6,000 6,000 growth in customer base. The UAE recorded a five‐ 5,000 5,000 year population CAGR of 15%, making it one of the 4,000 4,000 fastest growing nations in the world. Customers’ purchasing power is also on the rise as indicated by 3,000 3,000 an uptrend in its GDP per capita. A growing 2,000 2,000 population base as well as high purchasing power and 1,000 1,000 advanced infrastructure, among other things will 2005 2006 2007 2008 2009 2010 d for telecom services. Source: Etisalat, Du, National Bureau of Statistics‐Dubai continue to fuel the deman

UAE:Technology Adoption However, over the long‐term, the make‐up of the (Penetration Rates of Telecom Services) telecom industry is changing in reaction to 150% 50% advancements both in technology and consumer 145% 45% patterns. Voice services (landline and mobile), which 40% 140% have been the traditional bread and butter of the 35% sector, have shown a consistent downtrend in the last 135% 30% six years. Instead, other services which include 130% 25% and data services have persistently increased 125% 20% their share of the sector’s business. 120% 15% As heightened competition, financial risk and 115% Mobile Fixed Line 10% Internet Broadband consumer sophistication came to the fore, the 110% 5% telecom sector has evolved from a growth play into a 105% 0% semi‐defensive play. Earnings are still steady but not 2007 2008 2009 2010 2011 2012 2013 2014 2015 as dynamic as they used to be but dividend yields Source: Du, Etisalat, TRA remain attractive.

Financial Metrics Valuation Market Statistics

Telecom 5Y EBITDA DE Ratio Interest EV/ PE Dividend 30d Ave. 6mo Ave. Annualized Operators Revenue Margin (LFY) Coverage Revenue (LTM) Yield Daily Daily Return Growth (LTM) (LFY) (LTM) (LFY) Volume Volume (‘000) (‘000)

ETISALAT 14.90% 27.37% 17.15% 22.71x 2.73x 11.37x 5.85% 2,258.68 1,662.88 7.94%

ZAIN 7.01% 53.21% 8.30% 13.02x 3.13x 12.52x 20.20% 880.42 2,511.30 ‐9.55%

QTEL 55.39% 45.16% 258.29% 5.57x 2.31x 26.23x 2.82% 24.60 49.73 5.14%

ORASCOM ‐14.36% 46.09% 228.19% 3.80x 1.78x 20.86x ‐ 4,126.14 5,689.44 ‐31.89%

STC 11.06% 37.89% 67.09% 11.02x 1.97x 7.22x 7.33% 642.79 990.31 ‐8.72%

VODAFONE 16.64% 31.97% 43.80% 34.19x 2.67x 6.83x 6.07% 123,374.60 107,434.80 7.56%

PTCL 4.87% 45.16% 12.03% 15.39x 0.80x 5.53x 15.36% 1,542.79 1,469.34 ‐32.33%

FRANCE ‐2.09% 33.60% 131.67% 7.22x 1.58x 8.53x 11.37% 15,299.30 10,327.97 ‐16.10%

MTN GROUP 25.40% 41.38% 49.17% 7.69x 2.69x ‐ 3.42% 6,999.89 6,272.55 23.20%

TELKOM SA 21.65% 23.69% 28.19% 5.74x 0.73x ‐ 4.16% 1,137.97 1,105.80 8.58%

DU ‐ 28.43% 79.64% 19.68x 1.90x 8.69x ‐ 1,133.13 2,005.23 28.81%

Multiples were computed based on prices as of 08 September 2011. Price and volume data are courtesy of Bloomberg. Page 3 UAE Telecommunications Sector Report

Sector Overview

Currently there are two operators in the UAE market, the Emirates Telecommunications Corporation (Etisalat), and Emirates Integrated Monopoly Telecommunications Company (EITC), which operates under the trade name of ´Du´.

Back in 2004 when liberalization was sweeping the Middle East, the UAE decided to follow the World Trade Organization (WTO) advice and opened the domestic telecommunications market to competition. By early 2007, Etisalat’s monopoly of the industry ended with the arrival of Du. 2007: In 2006, the General Policy for the Telecommunication Sector (GTP) was released by the Supreme Committee for the Supervision of the Telecom Sector (SCSTS), the goal being, among other things, to encourage competition between operating companies, foster innovation through research and development, develop a state‐ of‐the‐art telecommunications infrastructure, and contribute to economic diversification by promoting the UAE as an information and communications technology (ICT) hub. As a result, the UAE’s telecommunications market has demonstrated marked growth over the past few years, and the UAE, which has one Duopoly of the most advanced telecom infrastructures in the Gulf, ranked number one among Arab Countries in Network Readiness, according to the Global Information Technology Report, published in 2011 by the World Economic Forum.

One of the most wired nations in the region, the UAE has penetration figures of key services that are comparable to the most developed markets worldwide. As of June this year, mobile penetration reached 146.35%, with 12.28mn subscribers. Fixed line penetration has settled to 20.55%. Growth in fixed line subscribers has slowed in the previous years as new technologies came to the fore, and as mobile usage pose more convenience to the population and the business community. A residence visa is required to get a fixed line installed in the home, but a SIM card for the can be purchased without residency.

The demand for internet services has also been on the increase. The UAE internet market, which is currently one of the most developed in the Middle East region, witnessed a growth of more than a 100% from 2005 to 2010. As of May 2011, there are approximately 1.42mn subscribers. Up until the end of 2010, the majority of internet subscriptions were dial‐ up. However, broadband subscriptions are increasing in popularity, and by May 2011, 63% all internet connections were broadband. Broadband connections now account for a solid majority of internet subscriptions – having increased in proportion from 32.44% of total net subscriptions in 2007 to 57.45% by end‐2010.

Note: 1. Fixed line and Mobile penetration rates, as of June 2011, were calculated based on the disclosed subscriber data from Du and Etisalat and using the interpolated population base for the same period. 2. Internet and broadband subscriber data were sourced from the TRA, based on their latest published report.

Page 4 UAE Telecommunications Sector Report

Sector Drivers

Growing Population Base Drives Telecommunications Usage

GDP per Capita and UAE Population

Data from UAE’s National Bureau of Statistics, put the 12,000 20,000 Popul ati on ('000) latest estimate of the emirates’ population at around 18,000 10,000 GDP per Ca pi ta 8.26mn1, representing a growth of 101.25% from the 16,000 14,000 population data recorded during the last census 8,000 conducted in 2005. 12,000 6,000 10,000 With a five‐year CAGR of over 15%, the UAE is one of 8,000 4,000 the fastest growing nations in the world. Though 6,000 population growth slowed during the peak of the 4,000 10), it is expected that 2,000 economic crisis years (2008‐20 2,000 both local population and migrants will see stronger 0 0 growth rates as the macro‐economy recovers. 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Source: UAE Central Bank, National Statistics Bureau, IM F

74.8% are aged 15‐64 ye ars A very significant portion (~75%, based on the latest Labor Force Survey) of the nation’s population is made up of persons aged 15‐64 years. Also, about 72% of the population (based on the same survey) is economically active. To these groupings belong students and employed UAE Population: persons – those with the highest propensity to use 8.26mn telecoms services and those with the most capacity in GDP pe r telecoms‐related devices such as smart phones. 72.4% are Capita 5Y Econo mically CAG R: Active 2.27%

Source: Na tio na l Statistics Bureau

Population and Annual Voice Usage Apart from the growing number of population which translates to an expanding consumer base, the UAE 8,500 UAE Population Voice Minutes 24,000 has a steadily improving standard of living, as 8,000 represented by its rising GDP per capita. These factors 7,500 combined drive the sales of telecom and other ICT 21,500 devices and consequently fuel the usage of 7,000 6,500 telecommunications services. 19,000 6,000 5,500 1 16,500 Estimated figure for mid‐2010 according to data released 31 March 5,000 2011 by the UAE National Statistics Bureau. Calculated according to 4,500 the formula Current Estimate = 2005 Census population + Births ‐ Deaths + Immigrants ‐ Emigrants since 2005 Census. Figures for 4,000 14,000 Births and Deaths from the UAE Ministry of Health, figures for 2007 2008 2009 2010 Immigrants and Emigrants based on residence visas issued, renewed, and cancelled from the UAE Ministry of the Interior. Source: TRA,National Statistics Bureau

Page 5 UAE Telecommunications Sector Report

Sector Drivers

Transformation into “Knowledge‐Based” Society

In recent years, UAE has started to move on from a pre‐ dominantly oil‐based economy to laying the foundation for Oil‐based innovative and diversified knowledge‐based society. Instead of Economy hydrocarbon, knowledge is becoming the new “fuel” for future emerging economies; a fuel, which is significantly supported by Knowledge‐based higher education, innovative research, and state‐of‐the‐art ICT. Economy

The UAE is very progressive in its policies towards an adoption of ICT. The government sees an advanced ICT infrastructure as a way to attract foreign investments and to diversify the economy of the country. The country has an established National Telecom Policy in place to advance development and innovation within the UAE. In 2005 the Government also sponsored an ICT Development Fund, the first of its kind in the Middle East specifically geared towards the promotion of ICT in the country. Finally the government has supported the development of ICT through investment in infrastructure like the Dubai Technology E‐Commerce and Media Freezone (TECOM).

The UAE has a General Policy for the Telecommunication Sector (GTP). The GTP is designed to function as a catalyst towards accelerating the growth and development of the telecommunication sector in its efforts to support the Government’s goal of developing the country as the premier ICT hub in the region and beyond. The policy recognized the government’s view that a world‐class competitive telecommunication infrastructure is of critical importance to the economic development of the country. It acknowledges that ICT forms the backbone of industries such as trade, financial services, technology‐based services, tourism, media, education, oil, manufacturing, transportation and health services.

The UAE has been one of the leading proponents of e‐Governance in the Middle East and globally, having been ranked as among the world's top five countries in terms of transactional services during the “2008 United Nations Department of Economic and Social Affairs (UNDESA) e‐Government Survey”. The country's e‐Government initiatives have played a key role in improving the rate of technology adoption in the UAE as citizens and residents are being attracted by the convenience and simplicity of the growing number of e‐Services offered.

With the government of the UAE as the prime proponent of transforming the economy to the digital age, and with the private sector lending its complete support, the nation has risen to be the region’s top ranked economy, in terms of ICT competitiveness according to the Global Information Technology Report of 2011 by the World Economic Fund.

Regulatory and Infrastruc‐ Overall ICT Readiness Overall Usage Countries ture Readiness MENA World MENA MENA Score Score Score Rank Rank Rank Rank UAE 1 24 4.80 1 4.77 2 4.27 Qatar 2 25 4.79 2 4.73 3 4.16 Bahrain 3 30 4.64 3 4.59 1 4.45 Saudi 4 33 4.44 4 4.53 4 3.88 Tunisia 5 35 4.35 6 4.15 5 3.81 Oman 6 41 4.25 5 4.17 6 3.76 Jordan 7 50 4.00 7 4.04 7 3.57 Egypt 8 74 3.76 9 3.79 8 3.37 Kuwait 9 75 3.74 8 3.99 9 3.27 Morocco 10 83 3.57 9 3.79 10 3.10 Lebanon 11 95 3.49 11 3.62 11 2.82 Algeria 12 117 3.17 14 3.05 13 2.42 Syria 13 124 3.06 12 3.09 14 2.35 Mauritania 14 130 2.98 13 3.06 12 2.43

Source: World Economic Forum, The Global Technology Report 2010‐2011

Page 6 UAE Telecommunications Sector Report

Sector Drivers

Foreign Investments in UAE: Boon for Telecommunication Services

Inflows of investments to the country spur business activities; hence, driving demand for telecommunications services, among other things. The UAE enjoyed tremendous growths in the inflows of foreign direct investments (FDI) from the early 2000s up until the global economic crisis took its toll starting mid‐2008. FDI inflows dropped drastically between 2008 and 2009 but in 2010, FDI inflows to the UAE dropped only slightly by over 1% to USD3.95bn, with early signs of a comeback in 2011.

FDI Inflows, 2000 ‐ 2010 With a backdrop of stable political environment, 16,000 50.00% improving regulatory framework and ambitious 14,000 infrastructure developments, UAE could likely see that 40.00% 12,000 declines in FDI inflows to bottom out. According to the 10,000 30.00% latest World Investment Report by UNCTAD, global 8,000 foreign direct investments will return to pre‐crisis 20.00% 6,000 levels of USD1.4tn to USD1.6tn by 2011. Global FDIs (USD m n) are further expected to rise to USD1.7tn in 2012 and to 4,000 10.00% USD1.9tn in 2013. These expectations imply that, UAE 2,000 0.00% could see its FDI inflows rise to USD4.91bn this year 0 and to USD6.23bn by 2013, assuming that its (2,000) ‐10.00% percentage to Global FDIs remain at the average two‐ 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 year ratio of about 0.33%.

UAE UAE as % of Fixed Capita l Source: UNCTAD ‐ WIR July 2011

Regional FDI In flo w s 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

UAE GCC Other Mid‐ East

Source: UNCTAD ‐ WIR July 2011

In early August of this year, the UAE received an Emerging Market status from global fund manager, Russell Investments (having also joined the FTSE Emerging Markets Index in late 2010). This made the UAE the first and only GCC country to obtain the emerging market status within the Russell Global Index series, as of this writing. Similarly, the UAE is up for potential upgrades from S&P (consultation process said to be completed by end‐August) and MSCI (which delayed its decision to December). An upgrade of the UAE status to an emerging market will also help spur the inflow of foreign direct and indirect investments into the UAE as the new status puts UAE more on the radar screen of major global investors.

Page 7 UAE Telecommunications Sector Report

Sector Drivers

Rapidly Developing Information and Communications Technology (ICT) Infrastructure

UAE Network Readiness

The UAE ICT sector is one of the advanced 4.90 20 markets in the Arab World. NRI Score 4.85 NRI World Rank 22 The UAE leads in terms of mobile teledensity, 4.80 which has reached over 146% penetration rate 4.75 by the end of June 2011 as well as sector 24 readiness and regulatory environment. 4.70 4.65 26 In the past few years, UAE has been ranked as 4.60 the leading Arab country in terms of network 28 readiness, an ICT indicator which takes account 4.55 of several factors, including ICT infrastructure 4.50 30 development. 2007 2008 2009 2010

Source: The Global Information Report WEF

Annual Investments on ICT Infrastructure The overall improving scores in network 10,000.00 readiness were largely supported by an evolving network infrastructure. UAE in the last several years has invested serious amounts of 8,000.00 money to develop its ICT infrastructure. 6,000.00 The growing investments in the sector remained unabated from 2005 until 2009. A 4,000.00 significant chunk of these spending was earmarked for the operators’ upgrade of their network systems to networks. 2,000.00

0.00 2005 2006 2007 2008 2009 2010

Source: RAM Z, Etisalat and Du

After a slight slowdown in 2010, investments in ICT development could pick up once again, especially as the government through the ICT Fund leads the two telecom players in additional investments. The ICT Fund is earmarking some AED80mn to support education, research and development, as well as start‐ups to spur further growth in the UAE’s ICT infrastructure. On the part of the operators, as there is an anticipated burgeoning demand for mobile broadband services as well as data services, infrastructure investments are expected to increase as they move from 3G networks to long‐term evolution (LTE) networks. Based on the latest guidance, Du is earmarking some AED1.5bn to AED1.7bn for its capital expenditure in 2011. For its part, Etisalat announced in February that it could be spending about 7.5% of its revenue for this year’s capex. Based on consensus estimate from Bloomberg (~ sales of AED32.51bn), potential capex for 2011 could be AED2.4bn.

Page 8 UAE Telecommunications Sector Report

Sector Drivers

 Population  Rising Domestic Demand

Growing Population

Brighter Outlook for Relatively Sectors such as Strong Purchasing Financial, Tourism, Power etc. Rise in Domestic Demand for Telecom Services

Increasing Exposure Rising Consumer to Digital Age – Awareness network technology and speed

The Digital Frontier Domestic demand for telecom services in the UAE continually grows as a confluence of several factors comes into play. A 2010 survey by Oracle noted that 62% of mobile users said that they use two or more mobiles, and

that they increasingly use the devices for much more As discussed in the earlier section of this report, a growing than voice calls. population base is one of the major growth drivers for the telecom sector. Combined with a relatively strong purchasing power of the These other uses include not just the ordinary surfing, consumer base, their growing awareness thanks to an increasing uploading and downloading data but also social exposure to the digital age – demand for telecom services is on the networking, advertising, applications, service sales, rise. among others. According to a study by Gartner, each of these additional uses could be significant businesses worth several billions of dollars per year.

Further, with business sectors such as (but not limited to) Financial and Tourism touted to have bright outlook – there is an even a greater potential for telecom service demand to accelerate.

Page 9 UAE Telecommunications Sector Report

Sector Performance and Outlook

In a Nutshell Revenue Profile Fixed Line Mobile Others

Over the long‐term, the make‐up of the country’s 100% telecom industry has changed – in reaction to advancements in technology and changing consumer 80% patterns. Voice services (landline and mobile), which have been the traditional bread and butter of the sector, 60% have shown a consistent downtrend in the last six years.

40% Instead, other services which include internet and data services have persistently increased their share of the sector’s business. Industry experts say this trend will 20% continue with further improvements in network capacity and technological applications. 0% 2005 2006 2007 2008 2009 2010

Revenue Profile: 2009 Revenue Profile: 2010 Fixed Line Fixed Line 9% 12%

Others Others 33% 35%

Mobile Mobile 56% 55%

Intense Competition Driving ARPU Direction Historical ARPU Stiff competition between Etisalat and Du ultimately 250.00 favored the consumers – who benefitted from slashed 225.00 prices in telecoms services.

200.00 On the flipside however, the operators witnessed their 175.00 overall average revenue per user (ARPU) decline due to lower charges per service (voice call, SMS, etc.) and 150.00 discounts. This has been particularly true for mobile ARPU – which appears to have plateaud in the last three 125.00 years. 100.00 Fixed Line Mobile For Fixed ARPU, the decline could be partially explained 75.00 by the more popular usage of mobile phones in lieu of 2005 2006 2007 2008 2009 2010 the traditional landlines.

Page 10 UAE Telecommunications Sector Report

Sector Performance and Outlook

UAE:Technology Adoption (Penetration Rates of Telecom Services)

150% 50%

145% 45% As a developing ICT infrastructure makes way for faster and more effective access to 40% telecom services and as customers become 140% more and more sophisticated in their usage 35% patterns, , the shape of the country’s 135% telecom sector changes.

30% Legacy services such as voice and SMS (as 130% represented in the chart by the penetration 25% rates of Fixed Line and Mobile) are being overtaken by other types of telecom 125% services such as those which are tightly‐ 20% linked to internet and data (e.g., mobile 120% Internet, instant messaging applications 15% from smart devices, VoIP, e‐commerce, etc.). 115% Mobi l e Fixed Line 10% Internet Broadband 110% 5%

105% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Du, Etisalat, TRA

Page 11 UAE Telecommunications Sector Report

Sector Performance and Outlook

Fixed Line Services: Dwindling Growth As Consumers Prefer Mobility

Subscriber Growth 2,100 Over the last three years, the number of fixed 5y CAGR =7.77% (alternatively referred to as landline or wireline) subscribers have seen slowing growth rates. 1,600

Last year, total subscribers increased by less than 1,100 5%, a far cry from the double‐digit growth enjoyed in the earlier part of the decade. 600

100 2005 2006 2007 2008 2009 2010

Most of the increase came from Du’s attracting fresh subscribers, which the charts below support – Du’s market share of the sub‐sector improved to 31% from 24%, the previous year.

Fixed Line Subscribers Market Share: 2009 Fixed Line Subscribers Market Share: 2010

DU 23.67% DU 31.20% Etisalat Etisalat 68.80% 76.33%

Fixed Line ARPU Overall average revenue per user (ARPU) is dropping for the sector, even ahead of the infrastructure 3,500.00 sharing scheduled to be implemented by December 3,000.00 2011. 2,500.00 Fixed ARPUs are falling as usage have not grown 2,000.00 much with consumers preferring the convenience of 1,500.00 mobile phones and VoIP and also as competition between the operators eat up margins because of 1,000.00 discount service rate offerings. Dwindling growth of 500.00 the fixed line sub‐sector is seen to continue, in line with global and regional trends. 0.00 2007 2008 2009 2010 Etisalat DU

Page 12 UAE Telecommunications Sector Report

Sector Performance and Outlook

Mobile Services: Nearing Saturation as Competition Heats Up!

Subscriber Growth UAE has one of the highest mobile penetration rates not only in the region but in the world. As of 12,000 3y CAGR = June 2011, penetration rate was at more than 11,000 16.78% 146%. The large number though is artificially 10,000 skewed as this includes inactive users (Etisalat does not disclose active users). 9,000

8,000 Penetration rate for mobile is high as UAE sees 7,000 higher than usual usage of multiple SIM cards (as 6,000 per TRA representatives, consumers seem to have 5,000 the propensity to assign SIM cards according to 2007 2008 2009 2010 lifestyle, i.e. one for business, one for personal, etc.).

Also, the high traffic of tourists, businessmen and temporary residents that pass through the country further explains the high penetration rate. However, this high level of teledensity is indicative too of a saturating market.

Mobile Market Share: 2009 Mobile Market Share: 2010

DU DU 30.99% 35.82% Etisalat Etisalat 64.18% 69.01%

With an already oversold market and intensifying Mobile ARPU competition (especially with number portability 2,500.00 expected by 3Q11) between the two operators, overall mobile ARPUs could stagnate at the very 2,000.00 least and could possibly drop at worst.

1,500.00 And though subscriptions are expected to further increase – as population modestly rises and as 1,000.00 technology advances enable consumer to move towards mobile Internet – the same cannot be 500.00 said for ARPUs.

0.00 As with the case for fixed line ARPUs, mobile 2007 2008 2009 2010 ARPUs could be disrupted in favor of internet Etisalat DU and/or data revenues.

Page 13 UAE Telecommunications Sector Report

Sector Performance and Outlook

Internet and Data Services: The New Drivers of Growth

Internet: Subscribers vs. Teledensity

1,600 20% Subscribers ('000) 19% By end‐2010, UAE has about 1.37mn internet 1,400 Penetration Rate subscribers, translating to an internet user 18% penetration rate* of 41.59%. 1,200 17%

1,000 16%

15% 800 * Internet user penetration rate is calculated using the ITU 14% methodology, which assumes that there are 2.5 Internet 600 13% users per Internet subscription. 400 12% 2007 2008 2009 2010

Internet Subscription by Type ('000)

Clearly, the sub‐sector is not fully‐served yet – 1,600 implying growth opportunities for both Broadband 1,400 telecom operators, especially with the Dial Up 1,200 implementation of infrastructure sharing. More so for Du, which would now have the 1,000 opportunity to operate on a national presence. 800

600

400 The overall growth in internet subscription 200 followed the growing number of broadband 0 subscribers. By end‐2010, broadband 2007 2008 2009 2010 subscribers made up 57% of the total. This came about as both networks improved their network technologies along with the advent of Internet ARPU smart and media devices.

2,500 ARPU 3Y CAGR = What is broadband?

2,000 23.11% The term broadband refers to a telecommunications signal or device of greater , in some sense, 1,500 than another standard or usual signal or device (and the broader the band, the greater the capacity for traffic). Broadband Internet access, often shortened 1,000 to just "broadband", is a high data rate connection to the Internet— typically contrasted with dial‐up access 500 using a 56 Kbps modem. Dial‐up modems are limited to a bitrate of about 60 Kbps and require the 0 dedicated use of a line — whereas broadband technologies supply more than this rate 2007 2008 2009 2010 and generally without disrupting telephone use.

Page 14 UAE Telecommunications Sector Report

Sector Performance and Outlook

Internet and Data Services: The New Drivers of Growth

Data Subscribers

45,000 The onset of smart devices, which have 40,000 3y CAGR = 35.39% become less expensive to boot in recent years 35,000 has promoted the popularity of internet and 30,000 data services – so much so that even traditional 25,000 voice services (both fixed line and mobile) saw 20,000 disruption in usage and revenues. 15,000 10,000 5,000 0 2007 2008 2009 2010

Last year, data subscribers more than doubled to 38,271 with the inclusion of virtual leased line services. The government and the private sector, being major proponents of ICT are also leading the demand for data services – as they enable their organizations for electronic transactions.

Meanwhile on the retail side, the unique make‐up of the UAE population – high youth population, expat‐dominated, and strong purchasing power enable the demand for high‐tech data and multi‐media devices. In turn, these devices imply higher yield on internet and data traffic for operators.

Global Data Traffic Forecast and 5Y CAGR

ME: 133.37% 100% C/E Europe: 114.25% 90% LatAm: 111.36% 80% JP: 79.90% 70% AsiaPac: 119.41% 60% 50% 40% W. Europe: 105.68% 30% 20% NorthAm: 117.14% 10% 0% 2009 2010 2011 2012 2013 2014

North America Western Europe Asia Pacific Japan Source: Cisco Latin America Central/Eastern Europe M iddle East and

Internet and data traffic will likely continue to see rapid growth, driven by device sophistication and more efficient connectivity (especially when both Du and Etisalat launch their LTE infrastructures). A report by global technology firm Cisco noted that by region, the Middle East and Africa will experience the highest 2009‐2014 CAGR for data traffic at 133%.

Page 15 UAE Telecommunications Sector Report

Potential Growth Areas

New Age of Communication via Long‐term Evolution (LTE) Networks

As solid and up‐to‐date infrastructure is a major cornerstone to delivering telecom services, local players are now moving to achieve superfast broadband connections. This is critical especially in light of the success of mobile broadband. Faced with a 200% increase (according to Global Mobile Suppliers Association) in online mobile demand for voice, data and video services, video‐based content is becoming increasingly important which existing and new services will rely on. HSPA+ (HSPA Evolution) is currently delivering the needed capacity and performance requirements for a good user experience of mobile broadband. It has become mainstream in just two years and operators in the Middle East were again pioneers in its introduction. Some countries in the region offer the highest data throughput speeds and lowest latency that can be experienced anywhere in the world today.

LTE is the next step in the evolution, and one which is essential What will LTE bring to Du and Etisalat? to deliver an even better mobile broadband experience to the mass market. LTE allows the operators to re‐use many existing resources, saving on capital and operating expenditure and deployment LTE also means new spectrum in potentially larger and time. contiguous blocks, in 2.6 GHz for capacity in the cities, and LTE has one single global standard, supporting FDD and TDD sub‐1 GHz for the most economic area coverage and improved modes*, which in turn will secure and drive even higher building penetration. economies of scale and also simplify roaming.

The momentum is with LTE, and the growing political and * stands for Frequency Division Duplex (FDD) and Time Division industry commitment is likely to lead to huge economies of Duplex (TDD). Both are employed by Worldwide scale and eventually system deployments throughout the Interoperability for Microwave Access or WiMAX to separate world. Increasingly governments are also allowing the re‐ uplink (UL) and downlink (DL) communication signals. farming of existing spectrum to support LTE deployments.

The 1800 MHz will very likely be a prime band for LTE deployments, especially in Europe, Middle East, and Asia Pacific. For a Mobile User, why is a LTE better than a 3G network?

The first LTE1800 systems have now been commercially LTE delivers a much improved mobile broadband experience launched and [there are] several others in the deployment or for the user. It should be remembered that LTE technology is planning stages. optimized for data.

Du and Etisalat have been conducting trials on new long‐term Depending upon network configuration and device availability, evolution (LTE) before implementing the 4G technology by average throughput speeds can be up to 10x what is experi‐ enced with 3G. the year end . Of equal or even higher importance is the huge difference that is experienced in the uplink data speeds, and also the much‐ reduced latency. Overall the user benefits with an excellent experience of mobile broadband when using LTE.

Page 16 UAE Telecommunications Sector Report

Potential Growth Areas

Harnessing the Power of Smart Devices

As telecom consumers mature, the sale Mobile Phone Sales (mn) of smart devices or more popularly 3.40 6.30 3.77 6.60 known as smart phones continue to rise. 0 Local data are not currently available 5 but according to Gartner, MENA sales of 10 smart phones in 2Q11 rose 75.07% YoY. 15 They accounted for 16.10% of total

20 29.42 mobile devices sold, up from its 15.87% 31.70 33.40 contribution in 1Q11. 25 34.40 30 Gartner expects sales to grow 35 continuously, with regional mobile 40 Smart phones Basic phones phone sales to reach between 175mn to 45 180mn units in 2011, of which around 1Q10 1Q11 2Q10 2Q11 26mn correspond to smart phone sales. Source: Gartner, August 2011

All about the Smart Phone With these numbers in the backdrop, telecom operators need to go beyond simple voice and traditional messaging services to generate It is a high‐end mobile phone. A smart phone combines additional traffic and revenues. the functions of a personal digital assistant (PDA) and a mobile phone. Now, they have the opportunity to harness instant messaging (IM)

Today's models typically also serve as portable media and social networking. To achieve this, mobile operators need to players and camera phones with high‐resolution touch‐ maintain a primary role in how their subscribers access IM screens, web browsers that can access and properly platforms. display standard web pages rather than only mobile‐ optimized sites, GPS navigation, Wi‐Fi and mobile For many operators, this means implementing network‐based broadband access. address book services, which will be the starting point for all of their subscribers’ mobile communications.

With a smart phone now more powerful and much less expensive at the same time that networks have become faster and more broadly accessible (better coverage), the potential for telecom operators to profit from mobile enterprise is also multiplied.

Tourists Influx and their Smart Phone Usage Tourist vs. UAE Population ('000) 16,000 200% Historically, tourist arrivals have been on an uptrend and experts say that this uptrend will likely continue 14,000 Tourist 180% in the medium‐term. This has both positive and risky Arri val s 160% 12,000 implications on the local telecoms market. UAE 140% 10,000 Population 120% The inherent risk (unsustainability) is that high 8,000 100% mobile penetration rate is significantly driven by Tourist to foreign arrivals (mostly pre‐paid customers—which 6,000 Population 80% also partly explains Du’s exponential mobile growth). Ratio 60% 4,000 40% On the flipside, foreigners provide the local operators 2,000 20% a niche for selected services such as international 0 0% voice calls and SMS as well mobile broadband services (VoIP, , IM, etc.). 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: IMF, WTO, Statistical Center

Page 17 UAE Telecommunications Sector Report

Potential Growth Areas

Multi‐play Services Bring Competition to a New Level

+

+ +

Dual Play Triple Play

Quad Play

Multi‐play or service bundling refers to offering a combination of two or more telecom services as part of the same package. Typical bundling offers include dual‐play (landline and internet), triple‐play (landline, internet and TV) and quad‐play (landline, internet, TV and mobile) packages. To the consumers, these bundles offer cheaper prices and convenience of use. To the service providers, such bundles reduce the cost of marketing multiple services and thus the overall acquisition and retention (A&R) costs.

Multi‐play service in the UAE is still considered to be in the nascent stage. Etisalat started offering customers its bundled service, elife, only in early 2010. Rival Du followed suit with its DuTV thereafter.

Once the infrastructure sharing agreement is fully implemented in the country, both telecom operators will be brought to a new level of competition, which will include multi‐play services. But as it turns out, when the first phase of network sharing is launched in December, IPTV services may not be included – watering down the level of competition between Du and Etisalat.

Du’s potential to attract market share away from Etisalat might be scaled down, as the first phase of the infrastructure sharing may not include IPTV. Consumers will be hard‐pressed to switch networks unless a TV package is included in the deal.

Though Du will be presented with the opportunity to grow its fixed‐line market share (the company is currently restricted to offering landline services in a few high‐density areas of Dubai), it may be limited as it is not able to compete yet on TV services. Consumers may be reluctant to switch operators until a TV package can be included in a deal.

Page 18 UAE Telecommunications Sector Report

Telecommunications Regulatory Framework

UAE Telecoms Sector to Remain a Duopoly Still

According to the Director General of TRA, Mohammed Nasser Al Ghanim, the UAE telecom sector will remain a duopoly for now. In a January 2011 interview, the director general intimated that UAE cannot handle a third operator, ruling out further liberalization of the sector. However, the UAE government had previously indicated its intention to comply with the World Trade Organization’s (WTO) requirements by fully liberalizing the domestic telecom sector by 2015.

In the last few years, there have been few significant changes, which include: (1) licensing of the country’s first satellite operator, (2) reaching an infrastructure sharing agreement, and (3) legislation to introduce Voice over Internet Protocol (VoIP).

The licensing of Al Yah Satellite, the first satellite operator, is not really going to increase the level of competition in the country. Satellite telecoms services tend to be used at times when traditional telecoms services are not available or suitable. The availability of satellite services will probably help increase the spread of broadband and help mobile service reach remote places. However, it is not likely to affect the market shares of Etisalat and Du very much, nor is it likely to compress prices, except perhaps on wholesale bandwidth. Since Al Yah was granted a license in February 2010, two more satellite operators received licenses in August 2010.

Etisalat and Du, under the umbrella of TRA, have reached an infrastructure sharing agreement. Though not much details of the agreement have emerged, when it finally is implemented by December 2011, the arrangement should help Du extend the range of its services, and perhaps gain a greater market share of the fixed‐line and broadband segments. For its part, Etisalat will now be able to expand its reach within Dubai free zones like Dubai Internet City, TECOM and the new residential areas.

Voice over Internet Protocol (VoIP) The third development was the introduction of new legislation that takes many of the present limitations off VoIP service in the UAE. It will VoIP basically means voice transmitted over a now become possible for consumers to use VoIP service to make digital network. VoIP is often referred to as IP international calls, which was not allowed before. telephony (IPT) because it uses Internet protocols to make possible enhanced voice communications. The Internet protocols are the However, it is still just the licensed telecoms providers, Etisalat and du basis of IP networking, which supports that are allowed to offer these services. Skype and its peers will only be corporate, private, public, cable, and even able to bring their service to the UAE if they form partnerships with the wireless networks. operator. Furthermore, the biggest potential impact has been warded off, so the effect on competition will be muted.

Page 19 UAE Telecommunications Sector Report

Telecommunications Regulatory Framework

Latest Developments in the Sector

Mobile Number Portability Mobile Number Portability (MNP) Since it was first announced in 2009, the launching of the service has hit several delays. The delays were understood to have occurred MNP enables mobile phone users to retain their because of the time taken to resolve several technical issues between mobile phone numbers when switching from the regulator, TRA and the telecom operators, Etisalat and Du. one mobile network operator to another.

In April this year, the TRA announced a new launch date for the service, which shall be by 3Q11.

The implementation of MNP offers Du (the younger telecom player) to attract Etisalat customers who are reluctant to give up their existing mobile numbers, and vice‐versa. By end‐2010, industry experts estimate that Etisalat had about 900K active post‐paid mobile subscribers – the customer group which generates a high ARPU. Ahead of the implementation of MNP and in an effort to retain its high ARPU‐generating customer base, Etisalat has been offering per second billing to VIP mobile subscribers since the start of 2011.

At the end of the day, the success of the implementation of MNP depends on a smooth switching process. If a customer should find it a tedious process to transfer his or her existing line, then there would be less incentive to change the network operator.

Lower International Roaming Rates within GCC Countries In June 2010, the Arab Telecommunications and Information Council of Ministers in its 19th Ministerial Committee Meeting formally adopted the position that GCC‐based providers of mobile services shall align their respective tariffs and reduce intra‐GCC call charges by an average of 60%. The Council of Ministers agreed that the reduced rates be implemented by July 2011. However, TRA representatives have shared that while both Etisalat and Du are ready to comply, not all of their GCC counterparts could comply with the July deadline. So far, no new schedule has been published.

Page 20 UAE Telecommunications Sector Report

Competitive Landscape

Fast Facts: Etisalat and Du

Etisalat Du

Incorporation 1976 2005

Initial Public Offering June 2002 March 2006

Float 21.20% Float EIA 39.97% 39.50% Ownership UA E (as of end‐2010) Govt EIT 60.03% 19 . 5 0 % M ubadal a 19 . 8 0 %

2010 Highlights

Mobile Subscribers (mn) 7,764 4,333 Fixed Line Subscribers (mn) 1,237 561

Mobile ARPU/mo 174.78 102.16

Fixed Line ARPU/mo 172.08 170.23

2010 Revenues (AEDmn) 31,929.49 7,074.10

% International 23.28% 0.00%

% Mobile 51.00% 75.09%

% Fixed Line 8.00% 16.20%

EBITDA Margin % 52.52% 28.52%

Net Profit Margin % 23.90% 17.33%

ROA 10.09% 9.79%

ROE 19.71% 24.06%

Net Debt/Equity ‐8.41% 24.98%

CAPEX as % of Revenues 17.33% 21.22%

Source: Etisalat, Du, TRA Note: Ratios and percentages were calculated based on financial data as of 31 December 2010.

Page 21 UAE Telecommunications Sector Report Emirates Telecommunications Corporation (Etisalat)

Etisalat, , headquartered in the capital city of UAE, is one of the largest telecommunications companies in the world and the leading operator in the Middle East and Africa. Etisalat operates in 18 countries across Asia, the Middle East and Africa, servicing over 100mn customers out of a total population of approximately 1.9bn people.

Etisalat is a comprehensive telecommunications provider offering a one‐stop shop for mobile and fixed‐line voice and data services to individuals, enterprises and international telecommunications companies, ISPs, content providers and mobile operators. It offers a variety of high‐tech complimentary services to the telecommunications industry including managerial and technical training, SIM card manufacturing, payment solutions, clearing house services, peering, voice and data transit, and submarine and land cable services.

Etisalat has a reputation for launching the right service to the right audience in the right market at the right time. This has been seen time and again, with the introduction of mobile, GSM, Internet, NGN fixed and mobile broadband services into the Middle East, Asia and Africa.

Etisalat is also the major hub in the Middle East, for internet, voice, mobile broadband, broadcast, roaming and corporate data services, with an extensive regional and intercontinental network. It is the largest carrier of international voice traffic in the Middle East and Africa and the 12th largest voice carrier in the world. Etisalat is the largest comprehensive provider of carrier and wholesale services in the region with Points of Presence (PoP) in New York, London, Amsterdam, Frankfurt, Paris and Singapore providing a truly global reach. Etisalat has 525 roaming agreements connecting 185 countries enabling BlackBerry, 3G and voice roaming. Etisalat is a major investor in Thuraya, one of the world’s leading satellite geo‐mobile communication systems covering approximately two thirds of the planet’s surface.

2Q11 Performance Highlights

Local Competition Eats Up Voice and SMS Revenues Intense competition in the domestic market has eaten up into Etisalat’s traditional revenue streams (voice and SMS). Local mobile and fixed line revenues declined 18 % YoY to AED2.48bn (from AED3.02bn) and 11% YoY AED551mn (from AED622mn), respectively. Consequently, consolidated revenues for 2Q11 dropped 6% to AED5.79bn (from AED6.16bn). At the same time, the company has witnessed a rebalancing of its revenue portfolio in favor of internet and data services. Revenues from internet services improved 22% YoY to AED889mn (from AED731mn) while data revenues increased 25% YoY to AED1.11bn from AED887mn.

Foreign Operations Offset Some of the Domestic Market’s Weakness Despite the political upheavals in the region, revenues from international operations jumped by 18% to AED2.04bn from AED1.72bn driven by the contributions of Etisalat Misr (Egypt) and Atlantique Telecom (Africa). EBITDA grew 23% to AED595mn. After adjusting for provisions of AED318mn for Etisalat Misr, EBITDA grew 45% to AED913mn.

One‐Off Charges Negatively Impacted Consolidated EBITDA 2Q11 consolidated EBITDA of AED3.67bn (from AED4.39bn) was negatively impacted by (1) provisions worth AED318mn for an estimated tax liability related to certain products launched by Etisalat Misr and (2) charges of AED210mn related to changes in the international operations and optimizing costs. Etisalat had budgeted AED325mn in 2011 for these changes and should see the benefit from 2012 onwards. Meanwhile, Etisalat is in discussions with Egyptian authorities for the estimated taxes in Egypt and these provisions may be reversed in future.

Page 22 UAE Telecommunications Sector Report Emirates Telecommunications Corporation (Etisalat)

Latest Developments  Etisalat is in talks with Helios Towers Ltd. to buy Multi‐Links, which Ltd. agreed to sell to Helios, Lagos‐based Technology Times reported, citing unidentified people with knowledge of the discussion.  The operator has recently appointed Ahmad Abdul Karim Julfar as group chief executive officer, a newly created role, which comes as part of the telecom operator’s expansion plans to strengthen its global position.  Etisalat plans to launch its LTE by the third quarter of this year. The first phase of the LTE launch will cover all key Emirates in the UAE through 800 base stations. Etisalat announced in February contracts with Huawei and Alcatel‐ Lucent to roll out the LTE network.  Etisalat has signed a co‐operation agreement with Spain's Telefonica that will allow the two telecoms to strengthen their capabilities and improve efficiency. Telefonica operates in 25 markets in Europe and Latin America.  Etisalat has renewed its management agreement with Saudi’s Mobily for another five (5) years. The new contract takes effect on 23 December 2011.  Etisalat declared interim (for 1H11) cash dividends of AED0.25 per share.  Etisalat signed a strategic cooperation deal with China’s Export‐Import Bank and telecom giant, Huawei. Under the agreement, Huawei and Etisalat will continue to work together to provide innovative new technologies and services across Middle East, Africa and Asia to enrich people's life with emerging telecom technologies. China EXIM Bank will extend finance support to the cooperation of the two companies.  In July, Etisalat faced war of words with its JV partner in India, Majestic Infracon, in relation to alleged issues of mismanagement of rolling‐out telecom services, which led to Majestic filing a petition versus Etisalat before India’s Company Law Board. Meanwhile, Majestic’s top proponents were charged in India, for their alleged involvement in the telecoms licensing scandal.

SWOC Analysis

Strengths Opportunities

 One of the most technologically advanced network in  Entry to lowly penetrated yet highly populous markets the region. such as Sudan.

 Government ownership and support.  Growing demand for internet and data services.

 Strong balance sheet, with a net cash of about  Potential change in royalty fees. AED4.50bn, as of 30 June 2011.

 International operations will drive the future growth. The international operations contributed 24% in 2010, growing from just 8% in 2008.

 Geographical diversification offsets dependency risk on domestic operations.

Weaknesses Challenges

 Declining market share in the domestic market.  MNP and network sharing agreement with DU will further fire up competition and bring down pricing.  Maturing domestic mobile market.  Geo‐political risks that could affect regional revenues.  Ineffective control over well‐spread investments.  Vulnerable to currency risks and/or high hedging costs.

Page 23 UAE Telecommunications Sector Report Emirates Integrated Telecommunications Company (Du)

In February 2006, Du was awarded a 20‐year license for AED124.5mn (USD33.9mn) to provide fixed‐line, mobile, internet and Dubai Footprints: international connectivity services in the Internet City country. The company was built from the Media City Knowledge Village ground up by an entrepreneurial DIFC management team led by Osman Sultan, Jumeirah former CEO of MobiNil, a leading Egyptian Al Barsha mobile operator. It launched mobile services Emirates Hills The Greens in February 2007, breaking Etisalat’s 30‐year International City monopoly, and fixed line services in July 2007. Healthcare City From day one, the company offered its Meadows, Springs services on a GSM/GPRS/EDGE and W‐CDMA Downtown Dubai Arabian Ranches 3G network. At the time of launch, the Marina country’s active mobile penetration was in Emirates Hills excess of 100%. At the end of 2010, Du’s active mobile subscribers reached 4.3mn for an estimated 38% market share. Du went public on the Dubai Financial Market (DFM) in April 2006. It floated 20% of its shares at a price of AED 2.90 per share (adjusted for 2010 rights issue) and raised AED 2.4bn (USD660mn).

2Q11 Performance Highlights

2Q11 Bottomline Up 51% to AED207mn Continuous strong uptake in mobile services plus growth in fixed line and services fueled Du’s profits for the quarter. The operator reported a 51% jump in profits to AED207mn despite incurring non‐recurring charges and higher depreciation and amortization. Du incurred two one‐off charges; (1) a AED41mn favorable adjustment for a dispute settlement and (2) AED23mn charge in overheads. Depreciation and amortization also materially increased to AED257mn from AED206mn in 1Q11.

More Mobile Subscribers and Sustained ARPU Underpin Growth In the last quarter, Du added 171,100 mobile subscribers, bringing the total active customer base to 4.78mn. Mobile ARPU also increased by 8% to AED118 in 2Q11. Meanwhile, Du also increased its fixed services subscribers by 42,100 to bring the total to 623,600.

Topline grew 28% to AED2.18bn, driven by the strong contribution of the mobile segment (~77% of the total). Mobile revenues increased 32%, fueled by the net additions and higher ARPU. Data revenues jumped 74% and maintained its 9% share of the total. Wholesale revenues increased 20% QoQ to AED102mn (but still down 10% YoY).

Page 24 UAE Telecommunications Sector Report Emirates Integrated Telecommunications Company (Du)

Latest Developments  The operator is planning to pump some AED1.7bn into new mobile and fixed line network projects this year after paying back debt to banks. Du will focus on developing 3G and 4G systems, updating mobile phone internet facility and boosting network coverage.  Du completed the first phase of its optical transport network expansion and backbone upgrade project valued at USd65mn and aimed at enhancing network performance. The project is set to extend from Abu Dhabi to Dubai and the Northern Emirates, reaching the operator's submarine cable landing station in Fujairah in the East. The overall project will be completed by mid‐2012, with the second phase, which has already started, to cover the Northern Emirates area connecting Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, Fujairah and the east coast.  Du has repaid a AED3bn (USD817mn) facility, which matured on 30 June, to the syndicate of 16 banks, using a combination of existing financing facilities and cash. Earlier, Du secured a three‐year USD220mn club loan, which helped in the payment of the June 30 maturity.  Du also entered into a USD255mn financing agreement with The Export‐Import Bank of China. The financing agreement was backed by the Chinese export credit agency Sinosure. The export credit facility will be used in part to repay an existing short‐term USD85mn facility. The remainder will be used to purchase equipment to further the expansion of the Company’s 3G network. The agreement will enable the Company to turn its three year short‐term borrowings into a more efficient seven year facility, based on a two year draw down and five year repayment plan.

SWOC Analysis

Strengths Opportunities

 Experienced management team.  Infrastructure sharing with Etisalat provides growth opportunity in another segment.  Institutional ownership (Mubadala).  MNP offers an opportunity for Du to lure Etisalat  Strong balance sheet – No leverage. customers reluctant to give up their old numbers.  State‐of‐the‐art technology.  Growing demand for internet and data services.  Monopolistic fixed line provider in selected area in  Regional expansion. Dubai, these areas are attracting expats with high disposable income.

 Locally‐focused. Weaknesses Challenges

 Heavily dependent on the mobile segment, with  Highly saturated domestic mobile market. revenues and profits contributing ~ 70% of totals.  Stiff competition.  Dominated by pre‐paid customers; post‐paid not  Regulatory changes. exceeding 6%.

 Not allowed yet to offer its fixed line services across the

Page 25 UAE Telecommunications Sector Report Product Differentiation

The series of tables in this section attempts to differentiate selected service offerings from both telecom operators. There are two major segmentations: (1) Services typically geared to Home or Personal Use, and (2) Services Commonly Employed by Business Enterprises. There are sub‐categories under each major segmentation, such as Fixed Line, Mobile, and Internet Data services.

Categorizing by typical telecom service user profile, the tables compare the service offerings of Etisalat and Du – with the aim of distinguishing which company provides a smarter choice for the target customer. Please note that only fixed service offerings (i.e., not including seasonal promotional offers) were considered for this section.

Where Al Ramz thinks the operators offer the better value . . .

For expats who frequently call their home countries using their fixed line and for other fixed line users who make heavy IDD calls.

For mobile users who have heavy usages of local and NDD calls and mobile surfing, as well as for frequent travelers (outside of the UAE).

For light to heavy users of Internet and ETISALAT data services.

For customers who opt for multi‐play Al Ramz’s services. Choice

For fixed line customers who make heavy local and NDD calls. DU

For mobile users with heavy usages of SMS and IDD calls as well as for frequent travelers (outside of the UAE).

For travelers to UAE and for those who have limited stay in the country.

H Home and Personal Use: Landline Services o User Profile Etisalat Du Al Ramz’s Choice Why Do We Think So? m

e Free local calls Free local calls Bills per second so calls are effectively / Landline ‐ Heavy NDD Calls at cheaper. E.g. for a 75‐second call, Etisalat P Local/NDD NDD Calls: ≤0.25/ 0.25/sec flat will charge AED0.50 versus Du’s AED0.1875 min e rate r s Lower all around rates because of Favorite o Landline ‐ Heavy IDD IDD Rates Off‐peak rates Country Plan and Super off‐peak plans. For n Calls (Mostly to Up to 60% dis‐ round the clock instance, a minute call to UK will cost a Home Country) count AED0.76 versus Du’s AED1.91 l

Page 26 UAE Telecommunications Sector Report Product Differentiation

Home and Personal Use: Mobile Services

User Profile Etisalat Du Al Ramz’s Choice Why Do We Think So?

Plans from Plans from Tariff rates are mostly the same. But Mobile – Heavy AED99 to AED100 to Etisalat’s plans provide more free local Local/NDD AED449 AED750 minutes. H

o m Tariff rates are mostly the same. But Du’s Plans from Plans from e plans provide more free international Mobile – Heavy IDD AED99 to AED100 to / minutes and additional reward bonus of up AED449 AED750 P to 100%. e r s Plans from Plans from Tariff rates are mostly the same. But Du’s o Mobile – Heavy SMS AED99 to AED100 to plans provide more free local and n AED449 AED750 international SMS. a l Plans from AED99 to Get any plan and add at least AED100/mo AED449 + Add‐on Plans from Mobile – Heavy Net and there is an additional 1GB of data of AED100/mo AED100 to Surfing usage, whereas even by Du’s plan 750, for 1GB data or AED750 maximum data included is only 750MB. AED150/mo for unlimited data

Home and Personal Use: Internet and Data Services

H User Profile Etisalat Du Al Ramz’s Choice Why Do We Think So? o m Broadband Broadband e Packages and rates are similar but Etisalat Internet Light Internet Light / Data – Light Net has lower installation charge (AED200 vs. User Package: User Package: P Surfing AED300) and also offers up to 4 hours of 256 kbps – 256 kbps – e free hotspot usage 2Mbps 2Mbps r s o Though rates are similar, package features n Broadband Broadband Data – Heavy Net such as data storage is superior (i.e. For the a Internet Heavy Internet Heavy Surfing, DL and 16 Mbps, storage is at 3GB versus Du’s 1GB) l User Package: 4 User Package: 8 Video Chat and there is also up to 8 hours of free Mbps – 16 Mbps Mbps – 24 Mbps hotspot usage

Page 27 UAE Telecommunications Sector Report Product Differentiation

Home and Personal Use: Multi‐play Services User Profile Etisalat Du Al Ramz’s Choice Why Do We Think So? H o More options on packages, with each m Internet + TV e‐life Double Play Talk n Surf package offering more data storage plus 20 e minutes free international calls.

/ P Plan rates are mostly similar but Etisalat e include choice of basic channel service vs. r Talk, Surf n VOD for Du. The broadband component for Line + Internet + TV e‐life Triple Play s Watch Etisalat also pose an advantage for bigger

o storage and free hotspot use. There are also n free international minutes. a l The tariffs are mostly cheaper and Du offers Travelers – Limited/ AED60 Prepaid AED49 Prepaid lower first time cost of AED49, which also Extended UAE Stay Card Card includes AED20 free charge.

Home and Personal Use: Traveler Services

H User Profile Etisalat Du Al Ramz’s Choice Why Do We Think So? o m e The tariffs and international partners are / My Plan Mobile – Frequent Postpaid Plan mostly similar. Although free add‐on P International / Traveling With Roaming features such as call forwarding and barring e Roaming

r give Etisalat a slight edge. s o n a The tariffs are mostly cheaper and DU offers Travelers – Limited/ AED60 Prepaid AED49 Prepaid l lower first time cost of AED49, which also Extended UAE Stay Card Card includes AED20 free charge.

Al Ramz Choice for Business Services

Unfortunately, as of this writing, we cannot fairly compare the service offerings of Etisalat and Du for business enterprises. Though Etisalat’s business solutions and applicable rates are publicly available, we do not have the applicable charges for similar services from Du.

Page 28 UAE Telecommunications Sector Report

Peer Comparison

In this section, the domestic telecom operators, Etisalat and Du, are compared to their peers as pre‐selected by Bloomberg. These are companies operating in the Middle East and Africa and share similar business models with the local operators. Below are their corporate overviews:

Mobile Telecommunications Company KSC (Zain) is a Kuwait‐based public shareholding company engaged, together with its subsidiaries, in the provision of mobile telecommunication and data services, including operation, purchase, delivery, installation, management and maintenance of mobile and paging systems in Kuwait and 22 other countries in MENA. Zain also invests surplus funds in investment securities. Its wholly owned subsidiaries include Zain International BV, The Netherlands; Mobile Telecommunications Company Lebanon (MTC) SARL, Lebanon; Sudanese Mobile Telephone (Zain) Company Limited, Sudan, and Athir National Co. W.L.L., Bahrain. Qatar Telecom (Qtel) QSC. is a Qatar‐based provider of domestic and international telecommunication services to residential and business users in Qatar, and wireless telecommunication services in Asia, as well as in the MENA regionQtel operates through a number of wholly owned subsidiaries including, among others, Qtel Investment Holdings SPC, Qtel International Investments LLC and Qtel International LLC. Orascom Telecom Holding SAE (OTH) is a telecommunications company engaged primarily in network operation activities in the Middle East, Africa and South Asia. Its segments include global system for mobile communications, which covers mobile telecommunications services activities, telecom services, which includes the sale of handsets, including ring tones and other cell phone products and activities relating to the rental of portals to allow satellite roaming calls and value added service activities, and Internet and fixed line, which includes the Internet and fixed telecommunications services. Saudi Telecom Company (STC) is a Saudi Arabia‐based joint stock integrated telecommunications company that offers, together with its subsidiaries, mobile and fixed local national and international telephone services, and data services, such as data transmission, leased lines, internet services and e‐commerce.

Vodafone Group Plc (Vodafone) offers services, including voice, messaging, data and fixed‐ line solutions and . Vodafone has a significant global presence, with equity interests in over 30 countries and over 40 partner markets worldwide. It operates in three geographic regions: Europe, Africa and Central Europe; Asia Pacific, and the Middle East, and has an investment in Verizon Wireless in the US. Pakistan Telecommunication Company Limited (PTCL) is a Pakistan‐based company which operates telecommunication facilities and provides domestic and international telephone services and other communication facilities throughout Pakistan. The Company has also been licensed to provide such services to territories in Azad Jammu and Kashmir and northern areas. France Telecom SA is a France‐based telecommunications operator. It offers services covering fixed and mobile communications, data transmission, the Internet and multimedia, and other value‐added services for individuals, businesses and other telecommunications and operators. It operates six segments: France, Spain, Poland, Rest of the World, Enterprise, and International Carriers & Shared Services. The company operates various subsidiaries, including wholly owned and operating under the brand name Orange: Orange France, FT Espana, FT Marine, Orange Tunisia, and Orange Assistance, among others. MTN Group Limited (MTN) is a multinational telecommunications company. Its principal activities include the provision of network information technology (IT) services; local, national and international communications services; broadband and Internet products and services, and converged fixed/mobile products and services. MTN operates in three regions: South and East Africa (SEA), West and Central Africa (WECA), and the Middle East and North Africa (MENA). Telkom SA Limited (Telkom) is an integrated communications service provider in South Africa and on the African continent. It offers packaged voice, data, broadband and Internet services to business and residential customers. Telkom operates in three segments: Telkom South Africa, and Multi‐Links.

Source: Thomson

Page 29 UAE Telecommunications Sector Report

Peer Analysis

Market Data (as of 08 September 2011) FRANCE TELKOM SA Company ETISALAT ZAIN QTEL ORASCOM STC VODAFONE PTCL MTN GROUP DU TELECOM LTD

Domicile UAE Kuwait Qatar Egypt Saudi Arabia UK Pakistan France South Africa South Africa UAE

Current Price (Local 10.30 990.00 147.60 3.61 34.10 162.90 11.39 12.32 14,609.00 3,488.00 3.04 Currency)

52‐week High 12.00 1,560.00 165.00 5.88 44.20 185.00 20.65 17.45 14,799.00 3,920.00 3.36

52‐week Low 9.99 920.00 117.50 3.08 33.00 153.95 10.05 11.91 11,700.00 3,317.00 2.35

52w High % ‐14.17% ‐36.54% ‐10.55% ‐38.61% ‐22.85% ‐11.95% ‐44.84% ‐29.41% ‐1.28% ‐11.02% ‐9.52% Change 52w Low % 3.10% 7.61% 25.62% 17.21% 3.33% 5.81% 13.33% 3.44% 24.86% 5.16% 29.36% Change

30d Average Volume 2,258.68 880.42 24.60 4,126.14 642.79 123,374.60 1,542.79 15,299.30 6,999.89 1,137.97 1,133.13 (‘000)

6m Average Volume 1,662.88 2,511.30 49.73 5,689.44 990.31 107,434.80 1,469.34 10,327.97 6,272.55 1,105.80 2,005.23 (‘000)

Annualized 7.94% ‐9.55% 5.14% ‐31.89% ‐8.72% 7.56% ‐32.33% ‐16.10% 23.20% 8.58% 28.81% Return Common 7,906.10 3,871.72 176.00 5,229.17 2,000.00 51,577.53 5,100.00 2,648.85 1,884.51 520.78 4,571.43 Shares (mn) Market Capitalization 22,173.79 15,586.47 7,134.56 3,169.36 18,184.73 51,776.23 664.25 23,146.97 38,670.20 2,551.26 3,784.11 (USDmn)

Source: Bloomberg

Page 30 UAE Telecommunications Sector Report

Peer Analysis

Key Financial Metrics (Figures in USDmn, except ratios) FRANCE MTN TELKOM SA Company ETISALAT ZAIN QTEL ORASCOM STC VODAFONE PTCL DU TELECOM GROUP LTD Revenue 8,683.18 4,892.35 8,107.53 2,805.11 14,300.32 28,702.61 631.84 32,589.23 16,184.97 4,698.60 2,178.46 (LTM) EBITDA 2,329.66 2,225.22 3,625.27 1,700.08 5,481.22 9,175.53 490.49 10,286.67 NA NA 679.23 (LTM) Enterprise Peer 21,968.12 16,163.18 18,453.23 6,196.64 26,929.63 71,434.69 606.45 47,091.48 44,089.72 3,293.39 4,062.16 Value Average 1Y Revenue 3.56% 7.02% 13.13% ‐23.33% 1.98% 3.18% ‐44.13% 1.47% 2.44% ‐10.62% 32.51% ‐1.16% Growth 1Y EBITDA ‐18.09% ‐14.91% 14.04% ‐16.91% ‐4.81% ‐1.03% ‐ 5.60% 2.72% ‐ 68.34% 3.89% Growth EBITDA Margin 27.37% 53.21% 45.16% 46.09% 37.89% 31.97% 45.16% 33.60% 41.38% 23.69% 28.43% 37.63% (LTM)

Debt/Equity 17.15% 8.30% 258.29% 228.19% 67.09% 43.80% 12.03% 131.67% 49.17% 28.19% 79.64% 83.96%

Net Debt/ ‐0.42x ‐0.60x 1.92x 2.31x 1.23x 2.14x ‐0.24x 2.17x ‐0.01x 0.68x 0.63x 0.89x EBITDA EBITDA/ Interest 22.71x 13.02x 5.57x 3.80x 11.02x 34.19x 15.39x 7.22x 7.69x 5.74x 19.68x 13.27x Expense S&P LT Credit AA‐ ‐ A NR ‐ A‐ ‐ A‐ ‐ BBB ‐ Rating Moody's LT Credit ‐ ‐ ‐ ‐ ‐ A3 ‐ A3 ‐ WR ‐ Rating

Source: Bloomberg

Page 31 UAE Telecommunications Sector Report

Market Backdrop

Since there the sector no longer MSCI Telecom s vs. MSCI World (January 1995 ‐ August 2011) enjoys dynamic growth expectations, volatility and returns versus the TELECOMS WORLD world markets have lagged back 180 during this time. The emergence of 1800 social media and its impact on 2 traditional telecom services are 160 1 changing the sector’s landscape. By this time, the sector has 1600 Telecom shares’ growth quite matured, with many 140 in the mid ‐90’s to early other operators putting up 2000 was fueled by the shop and so—the sector has 3 dotcom popularity. At turned into a semi ‐defensive 1400 this stage of the cycle, play with growth and outlook 120 telecom shares were still positive but not outperforming the world exponential any longer. markets. 100 1200

80 1000

60

800 40

20 600 01/06/95 04/21/95 08/04/95 11/17/95 03/01/96 06/14/96 09/27/96 01/10/97 04/25/97 08/08/97 11/21/97 03/06/98 06/19/98 10/02/98 01/15/99 04/30/99 08/13/99 11/26/99 03/10/00 06/23/00 10/06/00 01/19/01 05/04/01 08/17/01 11/30/01 03/15/02 06/28/02 10/11/02 01/24/03 05/09/03 08/22/03 12/05/03 03/19/04 07/02/04 10/15/04 01/28/05 05/13/05 08/26/05 12/09/05 03/24/06 07/07/06 10/20/06 02/02/07 05/18/07 08/31/07 12/14/07 03/28/08 07/11/08 10/24/08 02/06/09 05/22/09 09/04/09 12/18/09 04/02/10 07/16/10 10/29/10 02/11/11 05/27/11

Source: Bloomberg

Risk Timelines: MSCI Telecoms Index Risk Timelines: MSCI World Index

First Cycle: Second Cycle: Third Cycle: First Cycle: Second Cycle: Third Cycle: 1995‐2000 2002—2007 2009—To date 1995‐2000 2002—2007 2009—To date

Annualized Return 29.25% 15.58% 19.16% Annualized Return 12.47% 17.93% 22.93% Standard Deviation 2.18% 2.02% 2.03% Standard Deviation 1.89% 1.68% 2.66% Coefficient of Variation 13.44 7.72 9.42 Coefficient of Variation 6.59 10.70 8.63

Page 32 UAE Telecommunications Sector Report

Peer Comparison

Valuation

Telecom Peers by EV/Revenues (LTM)

3.50x

3.00x 3.13x 2.73x 2.69x 2.50x 2.67x Peer Average, 2.03x 2.31x 2.00x 1.97x 1.90x 1.78x 1.50x 1.58x

1.00x 0.80x 0.50x 0.73x SA

DU STC ZAIN QTEL PTCL GROUP LTD

FRANCE ETISALAT TELECOM ORASCOM VODAFONE TELKOM MTN

Source: Bloomberg

Telecom Peers by PE (LTM)

30.50x

25.50x 25.79x

20.50x 19.99x 15.50x Peer Average, 11.80x

10.50x 11.89x 11.31x 9.12x 8.66x 7.25x

5.50x 6.81x 5.41x

0.50x DU STC ZAIN PTCL QTEL FRANCE ETISALAT TELECOM ORASCOM VODAFONE

Source: Bloomberg

Page 33 UAE Telecommunications Sector Report

Peer Analysis

Valuation

FRANCE MTN TELKOM SA Peer Company ETISALAT ZAIN QTEL ORASCOM STC VODAFONE PTCL DU TELECOM GROUP LTD Average

EV/Revenue 2.73x 3.13x 2.31x 1.78x 1.97x 2.67x 0.80x 1.58x 2.69x 0.73x 1.90x 2.03x (LTM)

EV/EBITDA 10.17x 6.89x 5.16x 4.03x 5.14x 8.35x 1.90x 5.01x ‐ ‐ 6.11x 5.86x (LTM)

PE 11.37x 12.52x 26.23x 20.86x 7.22x 6.83x 5.53x 8.53x ‐ ‐ 8.69x 11.97x (LTM) PE 10.86x 10.00x 8.78x 1.59x 8.22x 10.18x 5.08x 7.72x 13.61x 8.23x 14.83x 9.01x (Forward) PB 2.08x 2.01x 1.25x 1.06x 1.47x 0.96x 0.50x 1.16x 3.52x 0.61x 2.52x 1.56x (LFI)

Dividend 5.85% 20.20% 2.82% ‐ 7.33% 6.07% 15.36% 11.37% 3.42% 4.16% ‐ 8.51% Yield (LTM)

Source: Bloomberg

Zain distributed 200% cash dividends for the year 2010, a sweet pill for shareholders as the operator became a target of takeover bids from other regional telcos such as Etisalat. However, the much‐publicized bid by Etisalat fell through and coupled with Zain’s disappointing quarterly results, the share price has been on a downward trajectory. YTD its annualized return was at –49.91% (as of 08 September 2011). The extremely high cash dividend payout and the huge decline in share price justify the high dividend yield of the operator.

Multiples were computed based on prices as of 08 September 2011.

Page 34 UAE Telecommunications Sector Report

Glossary of Terms

UAE United Arab Emirates

TRA Telecommunications Regulatory Authority

AED UAE Dirham

GDP Gross Domestic Product

ARPU Average Revenue per User

SMS Short Message Service

MMS Multimedia Message Service

FTTH Fiber to the Home

ISDN Integrated Services Digital Network

ADSL Asymmetric

Kbps Kilobits per second

Mbps Megabits per second

IDD International Direct Dial

NDD National Direct Dial

PoP Point of Presence

Bandwidth The capacity of a telecom line to carry signals. The necessary bandwidth is the amount of spectrum

Bitrate in a bit stream, the number of bits occurring per unit time, usually expressed in bits per second.

DL Download—To receive a copy of a file residing on a remote computer to a user’s computer.

UL Upload—Opposite of DL; to send a file from a user’s computer to another system.

ISP Internet Service Provider

SIM Subscriber Identity Module

WiMAX Worldwide Interoperability for Microwave Access

LTE Long‐term Evolution

3G Third Generation Mobile Communications

4G Fourth Generation Mobile Communications

HSPA

GHz Gigahertz

MHz Megahertz

FDD Frequency Division Duplexing

TDD Time Division Duplexing

Throughput (1) The number of bits, characters, or blocks passing through a system, or portion

Re‐farming The abolition of existing band allocations in the radio spectrum and the more efficient reallocation of

Page 35 UAE Telecommunications Sector Report Al Gaith Tower Sheikh Hamdan Street Abu Dhabi United Arab Emirates

Phone: +971 2 6262626 : +971 2 6262444 E‐mail: [email protected] Website: www.alramz.ae

Analyst Certification

The research analyst (s) of this report hereby certify that :(1) the views expressed in this document accurately reflect their personal views regarding the securities and companies that are the subject of this report ;(2) neither they nor their respective spouses or dependants (if relevant) hold a legal or beneficial interest in the securities that are the subject of this document and (3) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst (s) in this report.

Al Ramz Securities LLC hereby certifies that neither it nor any of its subsidiaries (if any) owns any of the securities that are the subject of this report. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion."

Disclaimer

The information provided in this report has been prepared without taking account of your objectives, financial situation or needs. You should, therefore before acting on the advice, consider the appropriateness of the advice having regards to these matters and, if appropriate, seek professional financial and investment advice.

All observations, conclusions and opinions expressed in this report reflect the personal views of the Al Ramz Securities, LLC. analyst and are subject to change without notice. The information in this report has been obtained from sources Al Ramz Securities, LLC. believes to be reliable. However, Al Ramz Securities, LLC. does not warrant the accuracy, completeness or currency of, and will not be liable for any inaccuracies, omissions or errors in, or for any loss or damage (including any consequential loss) arising from reliance on the information in this report.

Al Ramz Securities, LLC. does not guarantee the performance of any investment discussed or recommended in this report. Any information in this report relating to the distribution history or performance history of any investment, should not be taken as indication of the future performance of the relevant investment.

In this report, Al Ramz Securities, LLC. may express an expectation or belief as to future events , results or returns generally or in respect of particular investments. Al Ramz Securities, LLC. makes such statement in good faith and believes them to be have a reasonable basis. However, such forward‐looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from such forward‐looking statements. No guarantee of future returns is given or implied by Al Ramz Securities, LLC.